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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 30, 1996 Commission file number 1-5522
STERLING ELECTRONICS CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
NEVADA 74-1261194
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
4201 Southwest Freeway, Houston, TX 77027
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (713) 627-9800
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each Exchange on Which Registered
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Common Stock--Par Value $.50 New York Stock Exchange
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 of 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 Regulations S-K (Par. 229.405) 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. ( )
Aggregate market value of voting stock held by nonaffiliates as of June 1,
1996 was $99,207,945.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period of this report:
6,933,004 Common Shares Outstanding as of June 1, 1996
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List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K into which the document is incorporated: (1) Any
annual report to security holders; (2) Any proxy or information statement, and
(3) Any prospectus filed pursuant to Rule 424(b) or 6 under the Securities Act
of 1933.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's 1996 annual shareholders' report are
incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders' meeting
to be held August 27, 1996 are incorporated by reference into Part III.
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PART I.
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ITEM 1. BUSINESS
Sterling Electronics Corporation was incorporated under the laws of
the State of Nevada on July 6, 1967. It succeeded to the business of Sterling
Electronics, Inc., a Texas corporation, by merger in October 1967. The term
"Company" as used herein refers to Sterling Electronics Corporation and, unless
the text indicates otherwise, its subsidiaries and its predecessors.
Sterling Electronics Corporation has been engaged in the distribution
of electronic parts since inception. In April 1988, when the Company was
operating from thirteen geographic locations, Sterling began an expansion
program to place its distribution operations in additional geographic markets.
These expansion moves bring Sterling's distribution network, as of June 1996,
to 33 locations covering over 75% of the United States' geographic markets for
electronic components.
Customers are principally manufacturers of capital goods containing
electronic circuitry such as electronic measurement devices, personal
computers, computer workstations, computer peripherals, process control
systems, medical monitoring equipment and telecommunications devices. Products
purchased by these manufacturers are part of their raw material requirements
and quantities purchased are usually less than the order minimums established
for direct sales by manufacturers of such components. Total sales to
governmental units in the last fiscal year were less than 1% of sales.
Distribution business is solicited by a force of field sales and telephone
sales personnel. On March 30, 1996, the total backlog of confirmed, unshipped
orders was $95,842,000 compared with $66,034,000 at April 1, 1995. Backlog is
generated by scheduled orders as well as merchandise ordered for shipment to
customers immediately upon receipt from the Company's suppliers.
Operations are conducted from three regional service
centers/warehouses and 33 sales offices in office- warehouse type buildings
generally located in industrial park sites. Each sales location has an array
of product franchises granted by approximately 40 total suppliers. Most
franchises are common to several or all sales branches. Each service center
supplies products to customers in all geographic areas the Company covers.
Sales locations are in Boston, Massachusetts; Parsippany and Mt. Laurel, New
Jersey; Richmond, Virginia; Houston, Austin and Dallas, Texas; Albuquerque,
New Mexico; Phoenix, Arizona; Wallingford, Connecticut; Tulsa, Oklahoma;
Denver, Colorado; Kansas City, Kansas; Minneapolis, Minnesota; Irvine,
Westlake Village, San Diego and San Jose, California; Salt Lake City, Utah;
Columbia, Maryland; Chicago, Illinois; Cleveland, Ohio; Raleigh, North
Carolina; Atlanta, Georgia; Portland, Oregon; Orlando, Florida; Calgary,
Alberta; Vancouver, British Columbia; Ottawa and Toronto, Ontario; Montreal,
Quebec; Seattle, Washington and Huntsville, Alabama.
All locations are connected by a data communications network to a
computerized on-line, real-time order entry, inventory management system
developed in-house several years ago. The host computer is in Houston, Texas.
The system allows Sterling to provide rapid customer service to all geographic
locations from central inventories concentrated in three service centers.
Products consisting of approximately 80,000 items include connectors,
integrated circuits, microprocessors, power supplies, resistors, capacitors,
relays, switches, and liquid crystal displays. Products are purchased from
approximately 40 vendors and distributed to approximately 14,000 customers; no
single customer's volume accounted for as much as 3% of the sales of the
Company during the last fiscal year. Sterling assembles connectors to
customers' specifications and fabricates custom flat and round cable
assemblies. Dallas, the largest of the assembly centers, provides design
support and fast turnaround of customer requirements for both connectors and
cable assemblies. In addition, other products requiring added value are
produced at the Dallas assembly center.
A substantial portion of the products sold are purchased pursuant to
distributor-manufacturer franchise agreements; the agreements are largely
nonexclusive, provide for a specified amount of inventory to be carried and may
be canceled by either party on short notice. They provide, in most instances,
for return of the manufacturers' inventory in the event of cancellation. In
the opinion of the Company, cancellation of any particular agreement would not
have a material adverse effect upon its business.
The ten largest suppliers providing merchandise to the Company are AMP
Special Products, Dallas Semiconductor, Hitachi America Ltd., Kemet Electronics
Corporation, Molex Connector Co., Murata Erie North America, NEC Electronics,
Inc., Seiko Instruments, Sharp Electronics Corporation and Toshiba America,
Inc. During fiscal 1996,
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Toshiba America, Inc. supplied approximately 15% and Hitachi America Ltd.
supplied approximately 10% of the products sold. No other single manufacturer
supplied more than 10% of the products sold.
In the business of distributing electronic components, the Company
competes with many concerns in each market area, including its own suppliers in
certain quantities. A number of them are significantly larger and possess
greater financial resources than the Company. The Company's sales volume
places it among the fifteen largest industrial electronic parts distributing
firms in the United States.
EMPLOYEES
At March 30, 1996, the Company and its subsidiaries employed 655
persons. None are employed subject to a collective bargaining agreement. In
the opinion of the Company, it enjoys a good relationship with its employees.
The Company provides its full time employees with group health, dental, life
insurance and disability income benefits.
BACKLOG
At March 30, 1996, the Company's total backlog of confirmed, unfilled
orders was approximately $95,842,000. The Company expects almost all of this
backlog to be shipped before the end of fiscal 1997. Backlog for the same
operations at April 1, 1995 was $66,034,000. The backlog at year end is not
necessarily indicative of sales for any specific subsequent period.
COMPETITION
In each of the fields of business engaged in by the Company, it is
subject to intense competition from many firms of varying size and resources,
including many which are larger and financially stronger than the Company.
INDUSTRY SEGMENT DATA
Industry segment data included on page 26 in the Company's 1996 annual
shareholders' report is incorporated herein by reference.
ITEM 2. PROPERTIES
At March 30, 1996, the Company utilized facilities containing a total
of approximately 307,000 square feet of floor space which are well maintained
and satisfactory for the purpose used. All properties are leased for varying
terms. Pertinent details with respect to the properties considered by the
Company to be its principal operating facilities are as follows:
<TABLE>
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LOCATION Square Lease Expires
Feet Fiscal Year
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Houston, Texas - Corporate Offices 63,540 2002
Dallas, Texas 45,507 2000
Phoenix, Arizona 23,000 2000
Woburn, Massachusetts 18,400 1998
Minneapolis, Minnesota 14,844 2004
San Jose, California 11,502 1998
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There are no significant active legal proceedings against the Company
or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
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PART II.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company had approximately 1,887, 2,259 and 2,366 shareholders of
record at March 30, 1996, April 1, 1995 and April 2, 1994, respectively. Pages
16 and 18 of the Company's 1996 annual shareholders' report are incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data included on page 12 of the Company's 1996
annual shareholders' report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of the Financial Condition and
Results of Operations included on pages 13 through 15 of the Company's 1996
annual shareholders' report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and its
subsidiaries, included on pages 16 through 27 of the Company's 1996 annual
shareholders' report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III.
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ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management", "Election of Directors" and
"Executive Officers" in the Company's annual proxy statement dated July 15,
1996 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the heading "Directors Compensation"
and "Executive Compensation and Other Matters" in the Company's annual proxy
statement dated July 15, 1996 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management" and "Election of Directors" in the
Company's annual proxy statement dated July 15, 1996 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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PART IV.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. 1. FINANCIAL STATEMENTS AND OTHER FINANCIAL DATA (incorporated by
reference to the pages shown below of the Sterling Electronics Corporation
1996 annual report to shareholders):
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<CAPTION>
Page No.
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Consolidated statements of financial position -March 30, 1996 and April 1, 1995 17
Consolidated statements of operations - Fiscal years ended March 30, 1996,
April 1, 1995 and April 2, 1994 18
Consolidated statements of shareholders' equity-March 30, 1996,
April 1, 1995 and April 2, 1994 19
Consolidated statements of cash flows - Fiscal years ended March 30, 1996,
April 1, 1995 and April 2, 1994 20
Notes to consolidated financial statements 21-26
Report of Independent Auditors 27
</TABLE>
With the exception of the financial statements and other financial data
listed above or incorporated under items 1, 5, 6, 7 and 8 of this form
10-K, the Sterling Electronics Corporation 1996 annual report to
shareholders is not deemed filed as part of this report. The financial
statement Schedule II listed below should be read in conjunction with the
financial statements listed above.
2. FINANCIAL STATEMENT SCHEDULE :
Schedule II - Valuation and Qualifying Accounts - fiscal years ended
March 30, 1996, April 1, 1995 and April 2, 1994
All other schedules have been omitted because the required information is
not present in amounts sufficient to require submission of the schedule
or because the information required is included in the financial
statements including the notes thereto.
3. EXHIBITS:
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3.1* -- Articles of Incorporation of Sterling Electronics
Corporation, incorporated by reference to Exhibit 3.1 on
Form S-1, Registration No. 33-28665.
3.2* -- Amended Bylaws of Sterling Electronics Corporation,
incorporated by reference to Exhibit 3.2 on Form S-1,
Registration No. 33-28665.
10.1* -- 1967 Stock Option Plan of Sterling Electronics Corporation
incorporated by reference on Form S-8, Registration No.
33-48097. (1)
10.2* -- 1968 Stock Option Plan of Sterling Electronics Corporation
incorporated by reference on Form S-8, Registration No.
33-48097. (1)
10.3* -- Incentive Bonus Plan of Sterling Electronics Corporation
incorporated by reference on Form S-8, Registration No.
33-48097. (1)
10.4* -- Sterling Electronics Corporation 1992 Incentive Stock
Option Plan, incorporated by reference on Form S-8,
Registration No. 33-81140. (1)
</TABLE>
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<TABLE>
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10.5* -- Sterling Electronics Corporation 1993 Directors'
Non-Qualified Stock Option Plan, incorporated by
reference on Form S-8, Registration No. 33-81140. (1)
10.6* -- Sterling Electronics Corporation Non-Qualified Stock
Option Grant dated August 2, 1993, incorporated by
reference on Form S-8, Registration No. 33-81140. (1)
10.7* -- Sterling Electronics Corporation Non-Qualified Stock
Option Grant dated February 16, 1994, incorporated by
reference on Form S-8, Registration No. 33-81140. (1)
10.8* -- Incentive Bonus Plan of Sterling Electronics Corporation,
incorporated by reference on Form S-8, Registration No.
33-81138. (1)
10.9* -- Sterling Electronics Corporation 1994 Stock Option Plan,
incorporated by reference on Form S-8, Registration
No. 33-60777. (1)
10.10 -- Employment Agreement dated September 18, 1995 between
Ronald S. Spolane and Sterling Electronics Corporation.
(1)
10.11 -- Employment Agreement dated September 18, 1995 between
David S. Spolane and Sterling Electronics Corporation.
(1)
10.12 -- Sterling Electronics Corporation Broad Base Severance
Plan dated November 14, 1995. (1)
10.13 -- Sterling Electronics Corporation Upper Management
Severance Plan dated November 14, 1995. (1)
10.14 -- Bank Agreement dated February 16, 1996 between Sterling
Electronics Corporation and NationsBank of Texas, N.A.
11 -- Statement Re: Computation of Per Share Earnings.
13 -- Pages 12 through 27 of the Sterling Electronics
Corporation 1996 annual report to shareholders.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Ernst & Young LLP.
27 -- Financial Data Schedule.
</TABLE>
___________________________________________________
* Incorporated by reference.
(1) Management contract or compensatory plan or agreement.
B. REPORTS ON FORM 8-K:
None.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STERLING ELECTRONICS CORPORATION
ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS
FISCAL YEARS ENDED MARCH 30, 1996,
APRIL 1, 1995 AND APRIL 2, 1994
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COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
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ADDITIONS DEDUCTIONS
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BALANCE CHARGED UNCOLLECTABLE BALANCE
DESCRIPTION AT BEGINNING TO COSTS ACCOUNTS AT END
OF PERIOD & EXPENSES WRITTEN OFF OF PERIOD
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For the period ended
March 30, 1996 $ 653,669 $ 614,240 $ 359,606 $ 908,303
For the period ended
April 1, 1995 $ 691,901 $ 527,770 $ 566,002 $ 653,669
For the period ended
April 2, 1994 $ 517,233 $ 856,036 $ 681,368 $ 691,901
</TABLE>
Note: Balances exclude those of discontinued operations.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STERLING ELECTRONICS CORPORATION
Date: June 27, 1996 By: /s/ R. S. Spolane
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R. S. Spolane, Chairman, President
and Chief Executive Officer
/s/ Mac McConnell
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Mac McConnell, Vice President and Chief
Financial Officer
MAJORITY OF THE BOARD OF DIRECTORS
/s/ Jay H. Golding
---------------------------------------
Jay H. Golding
/s/ S. M. Lambert
---------------------------------------
S. M. Lambert
/s/ H. G. Maltz
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H. G. Maltz
/s/ D. A. Spolane
---------------------------------------
D. A. Spolane
/s/ R. S. Spolane
---------------------------------------
R. S. Spolane
/s/ D. R. Toomim
---------------------------------------
D. R. Toomim
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. ITEM NUMBERED PAGES
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10.10 Employment Agreement dated September 18, 1995
between Ronald S. Spolane and Sterling Electronics
Corporation.
10.11 Employment Agreement dated September 18, 1995
between David S. Spolane and Sterling Electronics
Corporation.
10.12 Sterling Electronics Corporation Broad Base
Severance Plan dated November 14, 1995.
10.13 Sterling Electronics Corporation Upper
Management Severance Plan dated November 14, 1995.
10.14 Bank Agreement dated February 16, 1996
between Sterling Electronics Corporation and Nations
Bank of Texas, N.A.
11 Statement Re: Computation of Per Share Earnings.
13 Pages 12 through 27 of the Sterling Electronics
Corporation 1996 annual report to shareholders.
21.1 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of this 18th day of
September, 1995 (the "Effective Date"), by and between STERLING ELECTRONICS
CORPORATION, a Nevada corporation (the "Company"), and RONALD S. SPOLANE,
hereinafter referred to as the "Executive". The Company and the Executive may
be referred to herein collectively as the "Parties" and individually as a
"Party".
W I T N E S S E T H :
WHEREAS, the Executive is currently the Chairman of the Board,
President and Chief Executive Officer of the Company and a member of the Board
of Directors of the Company (the "Board of Directors"); and
WHEREAS, the Executive and the Company desire to provide for the
continued employment of the Executive on the terms and conditions set forth in
this Agreement;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and promises set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Parties, intending to be legally bound, hereby contract and agree as
follows:
ARTICLE I
TERM
Pursuant to the terms of this Agreement, the Executive is hereby
employed by the Company for a period (the "Initial Term") beginning on the
Effective Date and ending on the fifth anniversary of the Effective Date (the
"Initial Expiration Date"). The term of this Agreement shall automatically
extend for an additional one year term and the expiration date of this
Agreement will be also extended by such one year period (the Initial Expiration
Date as modified is hereinafter referred to as the "Expiration Date") on each
anniversary of the Effective Date unless either the Executive or the Company
gives the other Party written notice at least ninety (90) days prior to such
anniversary of the Effective Date, that such Party does not desire for this
Agreement to extend beyond the current term and thereafter this Agreement shall
terminate on the Expiration Date, as then in effect. The Initial Term as
extended by any additional one year terms as set forth above is hereinafter
referred to as the "Term."
ARTICLE II
DUTIES OF THE EXECUTIVE
2.01 Duties. The Executive is engaged to be the Chairman of the
Board, President and Chief Executive Officer of the Company and a member of the
Board of Directors. The Executive's duties and powers as Chairman of the
Board, President and Chief Executive Officer shall be determined from time to
time by the Board of Directors consistent with such office(s). The Executive
shall
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perform and discharge such duties well, and faithfully as an executive officer
of Company, and shall be subject to the supervision and direction of the Board
of Directors.
2.02 Full Time Employment. Subject to the provisions set forth
below, the Employee shall devote his entire productive time, ability, and
attention to the business of the Company during the Term. The Employee shall
not, directly or indirectly, during the Term render any services of a business,
commercial or professional nature to any other person, corporation, firm or
organization, whether for compensation or otherwise, without the prior written
consent of the Company.
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
the Executive's covenants and agreements under this Agreement, the Executive
shall be entitled to receive from the Company a base salary of $237,000 per
year, payable in equal semi-monthly installments. The salary of the Executive
may be increased (but not decreased) from time to time at the sole discretion
of the Board of Directors.
3.02 Bonus. The Executive will be entitled to a bonus based on
the earnings and results of the Company as set forth on Exhibit "A" attached
hereto. The Parties agree that the formula for determining the Executive's
annual bonus as set forth Exhibit "A" may be amended from time to time by the
mutual consent of the Parties. In addition, the Executive shall be entitled to
an annual bonus paid by the Company as determined in the sole discretion of the
Board of Directors.
3.03 Additional Benefits. In addition to the benefits set forth
above, the Executive shall be entitled to the benefits (the "Other Benefits")
described on Exhibit "B" attached hereto. The Parties agree that Other
Benefits may be amended from time to time by the mutual consent of the Parties.
3.04 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan, the Company agrees to include the Executive in
any retirement, insurance or health benefit plans adopted by the Company for
the benefit of the senior employees of Company.
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3.05 Expenses. The Company, in accordance with the rules and
regulations that the Board of Directors shall issue and revise from time to
time, shall reimburse the Executive for business expenses directly and
reasonably incurred in the performance of his duties. Company shall provide
the Executive an allowance for automobile usage and expense consistent with
Company's plan as set by the Board of Directors.
3.06 Change of Control Payments. In the event that Section 4.04 of
this Agreement is triggered by the occurrence of a "Change of Control Event"
(as defined below), then the Executive shall be entitled to the following:
(a) Termination Payment. In recognition of past services
and contributions to the Company by the Executive and in consideration
for the undertaking by the Executive to provide services to the
Company, the Company shall pay to the Executive within twenty (20)
days of the Termination Date (as hereinafter defined) an amount equal
to the product of (i) the sum of (a) the Base Salary Amount (as
hereinafter defined), (b) the Bonus Amount (as hereinafter defined)
and (c) the Other Benefits Amount (as hereinafter defined) multiplied
by (ii) three (3). For the purposes of this Agreement, the term "Base
Salary Amount" means the Executive's current salary as of the
Termination Date, on an annual basis, the term "Bonus Amount" means
the greater of (i) the Executive's bonus calculated in accordance with
the provisions of Exhibit "A" for the current year in question through
the Termination Date and then annualized or (ii) the Executive's bonus
for the prior year, and the term "Other Benefit Amount" means $38,000
(which is the agreed value of the Other Benefits as of the Effective
Date). The Parties agree that the Other Benefit Amount may be amended
by the Parties from time to time. The term "Termination Date" means
the date that the Executive's employment is terminated pursuant to
Section 4.04 of this Agreement.
(b) Welfare Plan Benefits. The Company will continue to
cover the Executive under, or provide the Executive with insurance
coverage no less favorable than, the Company's existing life,
disability, health, dental or any other executive welfare benefit
plans or programs (as in effect on the date of the Change of Control
Event or, at the option of the Executive, on the Termination Date) for
a period equal to the lesser of (i) three years from the Termination
Date or (ii) until the Executive is provided by another employer with
benefits substantially comparable to the benefits provided by such
plans or programs.
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(c) Pension Plan Benefits. The Company shall continue
the participation and benefit accruals of the Executive under any
existing Company retirement plan (as in effect on the date of the
Change of Control event or, at the option of the Executive, on the
date of Termination) for a period equal to the lesser of (i) three (3)
years following the date of Termination, or (ii) until the Executive
is employed by another employer, or (iii) the Company provides an
equivalent benefit outside the Company's retirement plan. If the
continuation provided for under this Section 3(e)(iii) fails to give
the Executive sufficient service under the Company's retirement plan
to vest the Executive in benefits under such plan, then an equivalent
benefit (calculated as if the Executive were one hundred percent
(100%) vested) shall be provided by the Company outside such plan.
(d) Vesting of Stock Options. All stock options held by
the Executive immediately prior to the Termination Date shall become
vested and exercisable by the Executive on the Termination Date. If
the acceleration of the vesting of or the ability to exercise such
options shall cause any stock options that were intended to be
"Incentive Stock Options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") to no longer meet the
requirements for "Incentive Stock Options" under the Code, then such
options shall be deemed to be converted to non-qualified stock
options.
(e) Gross Up of Payments and Benefits After a Change of
Control Event.
(i) In the event any payments or benefits under this
Agreement or any benefit plan or program of the Company are
subject to the tax (the "Excise Tax") imposed by Sections 4999
and/or 280G of the Code (or any similar tax that may
hereinafter be imposed) or any payroll or other tax, the
Company shall pay to the Executive an additional amount or
amounts (each, a "Gross Up Payment") such that the net amount
or amounts retained by the Executive, after deduction of any
Excise Tax on any of the above described payments or benefits
and any federal, state and local income and payroll tax and
Excise Tax upon the payments provided for by this Section
3.06(e)(i), shall be equal to the amount of such payments or
benefits prior to the imposition of such Excise Tax.
(ii) For purposes of determining the amount of a
Gross Up Payment, the Executive shall be deemed to pay federal
income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Gross Up Payment is
payable and state and local
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income taxes at the highest marginal rate of taxation in the
state and locality of the Executive's residence on the date
the Gross Up Payment is payable, net of the maximum reduction
in federal income taxes which could be obtained from any
available deduction of such state and local taxes. If the
Parties are unable to agree as to the amount of the Gross Up
Payment, then such amount shall be determined by an
independent public accounting firm or other tax professional
selected by the Executive but reasonably acceptable to the
Company. The determination of such account firm or tax
professional shall be conclusive and binding upon the Parties
absent fraud or manifest error. The Company shall pay all of
the fees and expenses of such public accounting firm or tax
professional.
(iii) In the event that the amount of the Excise
Tax is subsequently determined to be less than the amount
taken into account in calculating a Gross Up Payment
hereunder, the Executive shall repay to the Company (to the
extent actually paid to the Executive), at the time that the
amount of such reduction in Excise Tax is finally determined,
the portion of the Gross Up Payment attributable to such
reduction (plus the portion of the Gross Up Payment
attributable to the Excise Tax and federal and state and local
income tax imposed on the Gross Up Payment being repaid by the
Executive if such repayment results in a reduction in, or a
refund of, Excise Tax and/or federal and state and local
income tax) plus interest on the amount of such repayment at
the rate provided in Section 1274(b((2)(B) of the Code.
(iv) In the event that the amount of the Excise
Tax is determined to exceed the amount taken into account in
calculating a Gross Up Payment hereunder (including by reason
of any payment the existence or amount of which cannot be
determined at the time of the Gross Up Payment), the Company
shall make an additional Gross Up Payment in respect of such
excess (plus any interest payable with respect to such excess)
at the time that the amount of such excess is finally
determined.
(v) Each Gross Up Payment shall be payable, and
shall be paid, by the Company on the date on which the
Executive becomes entitled to the payment or benefits giving
rise to such Gross Up Payment.
(f) No Mitigation. All payments and benefits to which
the Executive is entitled under this Agreement shall be made and
provided without offset, deduction, or mitigation on
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account of income the Executive may receive from other employment or
otherwise.
(g) Death of the Executive. In the event of the
Executive's death, all payments and benefits required by this
Agreement shall be paid to the Executive's designated beneficiary or
beneficiaries set forth in Exhibit "C" attached hereto and
incorporated herein by reference, or, if he has not designated a
beneficiary or beneficiaries, to his estate.
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term upon
the occurrence of any one of the following events:
4.01 Disability. In the event that the Executive is unable fully
to perform his duties and responsibilities hereunder to the full extent
required by the Board of Directors of Company by reason of illness, injury or
incapacity for one hundred-eighty (180) consecutive days (during such one
hundred-eighty (180) day period the Executive shall continue to be compensated
as provided in Sections 3.01 and 3.02 hereof), this Agreement may be terminated
by Company, and Company shall have no further liability or obligation to the
Executive for compensation hereunder; provided, however, that (a) the Executive
will be entitled to receive the payments prescribed under any disability
benefits plan in which the Executive was participating and (b) the Executive
shall be entitled to a pro rata portion of any incentive compensation earned
under any plans described in Sections 3.02 and 3.03 above for the period prior
to the date the Executive became disabled, subject to any limitations and
conditions set forth in the plan in question. In the event of any dispute
under this Section 4.01, the Executive shall submit to a physical examination
by a licensed physician selected by Company.
4.02 Death. In the event that the Executive dies during the Term,
Company shall pay to the Executive's executors, legal representatives or
administrators an amount equal to the installment of the Executive's salary and
bonuses set forth in Sections 3.01 and 3.02 hereof earned as of the period in
question for the month in which the Executive dies, and thereafter Company
shall have no further liability or obligation hereunder to the Executive's
executors, legal representatives, administrators, heirs or assigns or any other
person claiming under or through the Executive; provided, however, that (a) the
Executive will be entitled to receive the payments prescribed under any death
or disability benefits plan in which the Executive was participating and (b)
the Executive shall be entitled, subject to any limitations and conditions set
forth in such plans, to a pro rata
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portion of any incentive compensation earned under any of the plans described
in Sections 3.02 and 3.03 above for the period prior to the Executive's death.
4.03 Cause. Nothing in this Agreement shall be construed to
prevent the termination of this Agreement by Company at any time for Cause (as
hereinafter defined). For purposes of this Agreement, "Cause" shall mean (i)
the willful failure of the Executive to perform or observe (other than by
reason of illness, injury or incapacity) any of the material terms or
provisions of this Agreement, including the willful failure of the Executive to
follow the reasonable directions of the Board of Directors or gross negligence,
or (ii) conviction of a felony. Upon termination for Cause, Company shall pay
to the Executive all sums due to the Executive through the date of such
termination. Notwithstanding any provision of this Agreement to the contrary,
the Company may not terminate this Agreement for Cause unless the Company shall
have first given written notification to the Executive of the grounds for
termination, the Board of Directors shall have determined that grounds for
termination for Cause exists and the Executive shall have been given a
reasonable opportunity to cure or remedied any violations of this Agreement.
Following such a termination, Company shall have no further duty or obligation
to the Executive; provided, however, the Executive shall continue to be bound
by the restrictions set forth in Article V of this Agreement.
4.04 Change of Control Provisions. (a) This Section 4.04 shall become
effective immediately upon the occurrence of a Change of Control Event (as
hereinafter defined), provided that the Executive is employed by the Company
immediately prior to such Change of Control Event. Once it becomes effective,
this Section 4.04 shall not terminate in the event that the Executive's
employment by the Company ceases because of termination of such employment (i)
by the Company without "Cause" at any time within thirty-six months following
the Change of Control Event; or (ii) by the Executive for "Good Reason" at any
time within thirty-six months following the Change of Control Event; provided,
however, that this Section 4.04 shall terminate (subject to Section 4.04(c) of
this Agreement) if the Executive's employment with the Company is terminated
because of the Executive's death or permanent disability pursuant to Section
4.01 or 4.02 of this Agreement or retirement on or after his "Normal Retirement
Date" (as hereinafter defined).
(b) Definitions. As used in this Agreement, and unless the
contest requires a different meaning, the following terms have the meanings
indicated:
(i) "Change of Control Event" means any one of the
following: (I) Continuing Directors (as hereinafter defined) no longer
constitute at least two thirds (2/3) of the total
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number of directors of the Company; (II) any person or group of persons
(as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as
amended), together with its affiliates, become the beneficial owner,
directly or indirectly, of twenty-five percent (25%) of the Company's
then outstanding Common Stock, $0.50 par value, or twenty-five percent
(25%) or more the total voting power of the Company's then outstanding
securities entitled generally to vote for the election of the Company's
directors; (III) the approval by the Company's shareholders of the
merger or consolidation of the Company with any other corporation or
business organization, the sale of substantially all of the assets of
the Company or the liquidation or dissolution of the Company, unless,
in the case of a merger or consolidation, the Continuing Directors in
office immediately prior to such merger or consolidation will
constitute at least two-thirds (2/3) of the directors of the surviving
corporation or business organization of such merger or consolidation
and any parent (as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) of such corporation or
business organization; or (IV) at least two-thirds (2/3) of the
Continuing Directors in office immediately prior to any other action
proposed to be taken by the Company's shareholders or by the Company's
Board of Directors determine that such proposed action, if taken, would
constitute a change of control of the Company and such action is taken.
(ii) "Continuing Director" means any individual who is a
member of the Company's Board of Directors on the date hereof or was
designated (before such person's initial election as a director) as a
Continuing Director by two-thirds (2/3) of the then Continuing
Directors.
(iii) "Good Reason" means (I) without the Executive's
express written consent, (A) the assignment to the Executive of any
duties, or any limitation of the Executive's responsibilities,
inconsistent with the Executive's positions, duties, responsibilities
and status with the Company immediately prior to the date of the Change
of Control Event, or (B) any removal of the Executive from, or any
failure to re-elect the Executive to, any of the Executive's positions
with the Company immediately prior to the Change of Control Event,
except in connection with the termination of the employment of the
Executive by the Company for Cause or on the death or "permanent
disability" of the Executive, and (C) the continuance thereof for a
period of twenty (20) days after written notice thereof to the Company
from the Executive; (II) any failure by the Company to pay, or any
reduction by the Company of, the Executive's base annual salary in
effect immediately prior to the date of the Change of Control Event;
(III) any failure by the Company to
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(A) continue to provide the Executive with the opportunity to
participate, on terms no less favorable than those in effect
immediately prior to the date of the Change of Control Event, in any
benefit plans and programs, including, but not limited to, the
Company's life, disability, health, dental, bonus savings and
retirement plans in which the Executive was participating immediately
prior to the date of the Change of Control Event, or their equivalent,
or (B) provide the Executive with all other fringe benefits or their
equivalent from time to time in effect for the benefit of any executive
which customarily includes a person holding the employment position
with the Company then held by the Executive; or (IV) the relocation of
the principal place of business of the Executive's employment to a
location that is more than 50 miles further from the Executive's
principal residence than such principal place of employment immediately
prior to the date of the Change of Control Event, or the imposition of
travel requirements on the Executive not substantially consistent with
such travel requirements existing immediately prior to the date of the
Change of Control Event.
(iv) "Normal Retirement Date" means the normal retirement
date as defined in the Company's pension plan as in effect immediately
prior to the Change in Control Event or, if such plan is not then in
existence, the date upon which the Executive attains age sixty-five
(65).
(v) "Termination" means any termination of the employment
of the Executive following the occurrence of any Change of Control
Event, (I) by the Company without Cause at any time within thirty-six
months following a Change of Control Event, or (II) by the Executive
for Good Reason at any time within thirty-six months following a Change
of Control Event; provided, however, that Termination shall not include
any termination of the employment of the Executive by the Company as a
result of permanent disability of the Executive (as provided in Section
4.01 of this Agreement) or as a result of the death of the Executive
(as set forth in Section 4.02 of this Agreement), or the retirement of
the Executive on or after his Normal Retirement Date.
(c) Effectiveness. The provisions of this Section 4.04 shall not
apply to any termination of the employment of the Executive which occurs after
the expiration of a thirty-six (36) month period following the occurrence of a
Change of Control Event.
ARTICLE V
PROPERTY RIGHTS
5.01 Non-Competition. For a period of (i) one year
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following the Termination of his employment under this Agreement following a
Change of Control Event (other than a termination for "Cause"), or (ii) two
years following any other Termination of his employment under this Agreement
(such period is hereinafter referred to as the "Non-Competitive Period"),
whether by wrongful discharge, discharge for cause, or otherwise, the Executive
shall not, directly or indirectly, either as an employee, employer, consultant,
agent, lender, principal, partner, stockholder, corporate officer, director, or
in any other individual or representative capacity, engage or participate in
any business that is in competition in any manner whatsoever with the
electronics distribution business engaged in by the Company at the time of such
termination.
5.02 Solicitation. During the Non-Competitive Period, the
Executive agrees not to, directly or indirectly, (i) call on or solicit, with
respect to the activities prohibited by Section 5.01 of this Agreement, any
person, firm, corporation or other entity who or which at the time of such
termination, or within two years prior thereto, was or had been a customer,
referral source or distributor of the Company or any of its affiliates or (ii)
solicit the employment of any person who was employed by the Company on a full
or part-time basis at the time of Executive's termination of employment.
5.03 Confidential Information. The Executive recognizes and
acknowledges that the Company's trade secrets and proprietary information and
processes, as they may exist from time to time, are confidential information
and are valuable, special and unique assets of the Company's business, access
to and knowledge of which are essential to the performance of the Executive's
duties hereunder. Except as required by law, the Executive will not, during or
after the termination of this Agreement, disclose any such confidential
information to any person, firm, corporation, association or other entity for
any reason or purpose whatsoever, (except as his duties may require while
employed by the Company) nor shall the Executive make use of any such
confidential information for his own purposes or for the benefit of any person,
firm, corporation or other entity (except the Company) under any circumstances
during the Term, or after the termination, of this Agreement. If the Executive
proposes to make disclosure of any confidential information in reliance on the
foregoing exception, the Executive shall (a) immediately notify the Company in
writing concerning the proposed disclosure, (b) provide the Company with copies
of any information the Executive proposes to disclose as well as the facts and
circumstances requiring such disclosure and (c) use his best efforts (at the
Company's sole cost and expense) to assist the Company in obtaining a
protective order or other protection if requested by the Company. The
Executive agrees that such confidential information shall include (but not be
limited to) all information contained in any memoranda, books, papers, client
lists, files, letters, formulas and other printed or
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written material, and all copies thereof and therefrom, in any way relating to
the Company's business and affairs, whether made by the Executive or otherwise
coming into the Executive's possession, and the Executive agrees that, upon
termination of this Agreement or on demand of the Company, at any time, he
shall immediately deliver all such printed or written material and copies
thereof to the Company. Notwithstanding the above, confidential information
shall not include any information in the public domain that was not disclosed
by the Executive in breach of this Section 5.03.
5.04 Reasonableness of Restrictions. The Executive agrees that (a)
the covenants contained in Sections 5.01, 5.02, and 5.03 hereof are necessary
for the protection of the Company's business goodwill and trade secrets, (b) a
portion of the compensation paid to the Executive under this Agreement is paid
in consideration of the covenants herein contained, the sufficiency of which
consideration is hereby acknowledged, (c) the Executive is not, and under this
Agreement, will not be engaged in a common calling, and (d) if the scope of any
restriction contained in Sections 5.01, 5.02 or 5.03 hereof is too broad to
permit enforcement of such restriction to its full extent, then such
restriction shall be enforced to the maximum permitted by law, and the Parties
hereto hereby consent that such scope may be judicially modified accordingly in
any proceeding brought to enforce such restriction. The existence of any claim
or cause of action of the Executive against the Company, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of these covenants.
5.05 Enforcement. The Executive acknowledges that the restrictions
contained in Sections 5.01, 5.02 or 5.03 hereof are reasonable and necessary to
protect the legitimate interests of the Company and its affiliates, that the
Company would not have entered into this Agreement in the absence of such
restrictions, and that any violation of any provision of the covenants
contained in Sections 5.01, 5.02 or 5.03 hereof will result in irreparable
injury to the Company. The Executive also acknowledges that the Company shall
be entitled to preliminary and permanent injunctive relief, without the
necessity of proving actual damages as well as an equitable accounting of all
earnings, profits and other benefits arising from any such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled.
ARTICLE VI
GENERAL PROVISIONS
6.01 Notices. Any notices to be given hereunder by either Party to
the other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested:
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If to the Company:
Sterling Electronics Corporation
4201 Southwest Freeway
Houston, Texas 77027
Attention: Board of Directors
with a copy to:
Schlanger, Mills, Mayer & Grossberg, L.L.P.
5847 San Felipe, Suite 1700
Houston, TX 77057
Attn: Kyle Longhofer
If to the Executive:
Ronald S. Spolane
4201 Southwest Freeway
Houston, TX 77027
Mailed notices shall be addressed to the Parties at the addresses set forth
above, but each Party may change his address by written notice in accordance
with this Section 6.01. Notices delivered personally shall be deemed
communicated as of actual receipt; mailed notices shall be deemed communicated
as of ten (10) days after mailing.
6.02 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Company, and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever.
6.03 Certain Acknowledgments. The Executive by his execution and
delivery of this Agreement represents to the Company as follows:
(i) That the Executive has been advised by the Company to
have this Agreement reviewed by an attorney
representing the Executive, and the Executive has
either had this Agreement reviewed by such attorney
or has chosen not to have this Agreement reviewed
because the Executive, after reading the entire
Agreement, fully and completely understands each
provision and has determined not to obtain the
services of an attorney.
(ii) The Executive, either on his own or with the
assistance and advice of his attorney, has in
particular reviewed Article V and understands and
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accepts (a) the restrictions imposed by Article V and
Sections 5.01, 5.02, and 5.03, and (b) the
restrictions imposed upon the Executive pursuant to
these sections are reasonable and necessary for the
protection of the property rights of the Company and
its affiliates.
6.04 Headings. The headings or titles to Sections or Articles in
this Agreement are intended solely for convenience of the Parties and no
provision of this Agreement is to be construed by reference to the heading or
title of any section.
6.05 No Set-Off. There shall be no right of set-off or
counterclaim, in respect of any claim, debt or obligation, against the payments
or benefits to be made or provided for in this Agreement.
6.06 Amendment or Modification; Waiver. No provision of this
Agreement may be amended, modified or waived unless such amendment,
modification or waiver is authorized by the Board of Directors of the Company
and is agreed to in writing, signed by the Executive and by an officer of the
Company (other than the Executive) thereunto duly authorized. Except as
otherwise specifically provided in this Agreement, no waiver by any Party
hereto of any breach by any other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
a similar or dissimilar provision or condition at the same or at any prior or
subsequent time; nor shall the receipt or acceptance of the Executive's
employment be deemed a waiver of any condition or provision hereof. The
Executive acknowledges that from time to time, the Company may establish,
maintain and distribute employee manuals or handbooks or personnel policy
manuals, and officers or other representatives of the Company may make written
or oral statements relating to personnel policies and procedures. Such
manuals, handbooks and statements are intended only for general guidance. No
policies, procedures or statements of any nature by or on behalf of the Company
(whether written or oral, and whether or not contained in any employee manual
or handbook or personnel policy manual), and no acts or practices of any
nature, shall be construed to modify this Agreement or to create express or
implied obligations of any nature to the Executive.
6.07 Assignability. The Executive shall not assign, pledge or
encumber any interest in this Agreement or any part thereof without the express
written consent of the Company, this Agreement being personal to the Executive.
This Agreement shall, however, inure to the benefit of the Executive's estate,
dependents, beneficiaries and legal representatives. This Agreement shall not
be assignable by the Company without the written consent of the Executive, but
if the Company shall merge or consolidate with or into, or transfer
substantially all of its assets to, another
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corporation or other form of business organization, then this Agreement shall
bind the successor of the Company resulting from such merger, consolidation or
transfer. No such merger, consolidation or transfer, however, shall relieve
the Company or the Executive from liability and responsibility for the
performance of their respective duties and obligations hereunder.
6.08 Governing Law. This Agreement has been negotiated, executed
and delivered in the State of Texas, and shall in all respects be interpreted,
construed and governed by and in accordance with the internal substantive law
of the State of Texas.
6.09 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the Parties
hereto to the maximum extent permissible under law.
6.10 No Duress. The Executive acknowledges that no force, fear or
threats or duress of any kind have been used to obtain the agreements and
covenants contained in this Agreement.
6.11 Legal Fees. In addition to any other benefit provided under this
Agreement, the Company agrees to pay all of the Executive's out of pocket
expenses including legal and accounting fees and expenses incurred or paid by
the Executive in enforcing or construing any of the provisions of this
Agreement
EXECUTED at Houston, Texas, on the day and year first above written.
"COMPANY"
STERLING ELECTRONICS CORPORATION
By: Herschel G. Maltz
Name: Herschel G. Maltz
---------------------------
Title: Chairman of Compensation
Committee
"EXECUTIVE"
RONALD S. SPOLANE
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EXHIBIT "D"
BONUS FORMULA
The term "Earnings Before Taxes" means the consolidated net income of
the Company determined in accordance with generally accepted accounting
principles consistently applied before deduction of federal and state income
taxes and before deduction of the Formula Bonus described herein. The Company
shall pay the Executive a bonus (the "Formula Bonus") based on agreed target of
Earnings Before Taxes of $15,000,000. To the extent that Earnings Before
Taxes of the Company are equal to or in excess of $12,000,000 for any fiscal
year, then the Company will pay to the Executive a bonus equal to 1.75% of such
Earnings Before Taxes of the Company. If the Earnings Before Taxes of the
Company are less than $12,000,000, then the Company shall pay to the Executive
a bonus equal to 1.75% multiplied by the Earnings Before Taxes of the Company
multiplied by the Reduction Factor (as hereinafter defined). The Reduction
Factor is an amount equal to the Earnings Before Taxes of the Company for the
fiscal year in question divided by $15,000,000 and then squared.
Set forth below are examples of the Formula Bonus that would be owed
by the Company:
Assumed Earnings
Before Taxes Percentage Bonus
- ---------------- ---------- -----
$15,000,000 1.75% $262,500
16,000,000 1.75% 280,000
12,000,000 1.75% 210,000
11,000,000 0.94%* 103,522
* [($11,000,000 15,000,000) (2) X 1.75]
Such bonus shall be based on the financial statements of the Company, including
the annual financial statements of the Company as audited by the Company's
independent accountants. The Company's financial statements as audited by the
Company's independent accountants shall be conclusive and binding on the
parties absent fraud or willful misconduct.
The Formula Bonus will be paid quarterly as follows: (i) an amount
equal to one-third of the estimated bonus shall be paid to the Executive, (ii)
at the end of the second and third quarter an amount equal to one-half of the
estimated Formula Bonus for that quarter shall be paid to the Executive, and
(iii) after completion of the audit of the Company's annual financial
statements, the balance shall be paid to the Executive. The estimated amount
for
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the first three fiscal quarters will be based on an annualization of the
results for such quarter and such Formula Bonus shall be paid within forty (40)
days after the end of such quarter. The annual bonus shall be paid the earlier
of thirty (30) days after the completion of the Company audit for such fiscal
year or ninety (90) days after the end of such fiscal year.
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EXHIBIT "B"
EXECUTIVE PERQUISITE VALUES
Description Annual Values
- ----------- -------------
Company Car $10,000
Secretarial Support 25,000
Home Computer 1,000
Cellular Phone 1,000
Educational Seminars 1,000
------
TOTAL $38,000
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EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made as of this 18th day of
September, 1995 (the "Effective Date"), by and between STERLING ELECTRONICS
CORPORATION, a Nevada corporation (the "Company"), and DAVID A. SPOLANE,
hereinafter referred to as the "Executive". The Company and the Executive may
be referred to herein collectively as the "Parties" and individually as a
"Party".
W I T N E S S E T H :
WHEREAS, the Executive is currently the Executive Vice President and
Chief Operating Officer of the Company and a member of the Board of Directors
of the Company (the "Board of Directors"); and
WHEREAS, the Executive and the Company desire to provide for the
continued employment of the Executive on the terms and conditions set forth in
this Agreement;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and promises set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Parties, intending to be legally bound, hereby contract and agree as
follows:
ARTICLE I
TERM
Pursuant to the terms of this Agreement, the Executive is hereby
employed by the Company for a period (the "Initial Term") beginning on the
Effective Date and ending on the fifth anniversary of the Effective Date (the
"Initial Expiration Date"). The term of this Agreement shall automatically
extend for an additional one year term and the expiration date of this
Agreement will be also extended by such one year period (the Initial Expiration
Date as modified is hereinafter referred to as the "Expiration Date") on each
anniversary of the Effective Date unless either the Executive or the Company
gives the other Party written notice at least ninety (90) days prior to such
anniversary of the Effective Date, that such Party does not desire for this
Agreement to extend beyond the current term and thereafter this Agreement shall
terminate on the Expiration Date, as then in effect. The Initial Term as
extended by any additional one year terms as set forth above is hereinafter
referred to as the "Term."
ARTICLE II
DUTIES OF THE EXECUTIVE
2.01 Duties. The Executive is engaged to be the Executive Vice
President and Chief Operating Officer of the Company and a member of the Board
of Directors. The Executive's duties and powers as Executive Vice President
and Chief Operating Officer shall be determined from time to time by the Board
of Directors consistent with such office(s). The Executive shall perform and
<PAGE> 2
discharge such duties well, and faithfully as an executive officer of Company,
and shall be subject to the supervision and direction of the Board of
Directors.
2.02 Full Time Employment. Subject to the provisions set forth
below, the Employee shall devote his entire productive time, ability, and
attention to the business of the Company during the Term. The Employee shall
not, directly or indirectly, during the Term render any services of a business,
commercial or professional nature to any other person, corporation, firm or
organization, whether for compensation or otherwise, without the prior written
consent of the Company.
ARTICLE III
COMPENSATION AND BENEFITS
3.01 Base Compensation. As compensation for services rendered and
the Executive's covenants and agreements under this Agreement, the Executive
shall be entitled to receive from the Company a base salary of $135,000 per
year, payable in equal semi-monthly installments. The salary of the Executive
may be increased (but not decreased) from time to time at the sole discretion
of the Board of Directors.
3.02 Bonus. The Executive will be entitled to a bonus based on
the earnings and results of the Company as set forth on Exhibit "A" attached
hereto. The Parties agree that the formula for determining the Executive's
annual bonus as set forth Exhibit "A" may be amended from time to time by the
mutual consent of the Parties. In addition, the Executive shall be entitled to
an annual bonus paid by the Company as determined in the sole discretion of the
Board of Directors.
3.03 Additional Benefits. In addition to the benefits set forth
above, the Executive shall be entitled to the benefits (the "Other Benefits")
described on Exhibit "B" attached hereto. The Parties agree that Other
Benefits may be amended from time to time by the mutual consent of the Parties.
3.04 Benefit Plans. During the Term, and thereafter, to the extent
provided in the applicable plan, the Company agrees to include the Executive in
any retirement, insurance or health benefit plans adopted by the Company for
the benefit of the senior employees of Company.
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3.05 Expenses. The Company, in accordance with the rules and
regulations that the Board of Directors shall issue and revise from time to
time, shall reimburse the Executive for business expenses directly and
reasonably incurred in the performance of his duties. Company shall provide
the Executive an allowance for automobile usage and expense consistent with
Company's plan as set by the Board of Directors.
3.06 Change of Control Payments. In the event that Section 4.04 of
this Agreement is triggered by the occurrence of a "Change of Control Event"
(as defined below), then the Executive shall be entitled to the following:
(a) Termination Payment. In recognition of past services
and contributions to the Company by the Executive and in consideration
for the undertaking by the Executive to provide services to the
Company, the Company shall pay to the Executive within twenty (20)
days of the Termination Date (as hereinafter defined) an amount equal
to the product of (i) the sum of (a) the Base Salary Amount (as
hereinafter defined), (b) the Bonus Amount (as hereinafter defined)
and (c) the Other Benefits Amount (as hereinafter defined) multiplied
by (ii) three (3). For the purposes of this Agreement, the term "Base
Salary Amount" means the Executive's current salary as of the
Termination Date, on an annual basis, the term "Bonus Amount" means
the greater of (i) the Executive's bonus calculated in accordance with
the provisions of Exhibit "A" for the current year in question through
the Termination Date and then annualized or (ii) the Executive's bonus
for the prior year, and the term "Other Benefit Amount" means $38,000
(which is the agreed value of the Other Benefits as of the Effective
Date). The Parties agree that the Other Benefit Amount may be amended
by the Parties from time to time. The term "Termination Date" means
the date that the Executive's employment is terminated pursuant to
Section 4.04 of this Agreement.
(b) Welfare Plan Benefits. The Company will continue to
cover the Executive under, or provide the Executive with insurance
coverage no less favorable than, the Company's existing life,
disability, health, dental or any other executive welfare benefit
plans or programs (as in effect on the date of the Change of Control
Event or, at the option of the Executive, on the Termination Date) for
a period equal to the lesser of (i) three years from the Termination
Date or (ii) until the Executive is provided by another employer with
benefits substantially comparable to the benefits provided by such
plans or programs.
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(c) Pension Plan Benefits. The Company shall continue
the participation and benefit accruals of the Executive under any
existing Company retirement plan (as in effect on the date of the
Change of Control event or, at the option of the Executive, on the
date of Termination) for a period equal to the lesser of (i) three (3)
years following the date of Termination, or (ii) until the Executive
is employed by another employer, or (iii) the Company provides an
equivalent benefit outside the Company's retirement plan. If the
continuation provided for under this Section 3(e)(iii) fails to give
the Executive sufficient service under the Company's retirement plan
to vest the Executive in benefits under such plan, then an equivalent
benefit (calculated as if the Executive were one hundred percent
(100%) vested) shall be provided by the Company outside such plan.
(d) Vesting of Stock Options. All stock options held by
the Executive immediately prior to the Termination Date shall become
vested and exercisable by the Executive on the Termination Date. If
the acceleration of the vesting of or the ability to exercise such
options shall cause any stock options that were intended to be
"Incentive Stock Options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") to no longer meet the
requirements for "Incentive Stock Options" under the Code, then such
options shall be deemed to be converted to non-qualified stock
options.
(e) Gross Up of Payments and Benefits After a Change of
Control Event.
(i) In the event any payments or benefits under this
Agreement or any benefit plan or program of the Company are
subject to the tax (the "Excise Tax") imposed by Sections 4999
and/or 280G of the Code (or any similar tax that may
hereinafter be imposed) or any payroll or other tax, the
Company shall pay to the Executive an additional amount or
amounts (each, a "Gross Up Payment") such that the net amount
or amounts retained by the Executive, after deduction of any
Excise Tax on any of the above described payments or benefits
and any federal, state and local income and payroll tax and
Excise Tax upon the payments provided for by this Section
3.06(e)(i), shall be equal to the amount of such payments or
benefits prior to the imposition of such Excise Tax.
(ii) For purposes of determining the amount of a
Gross Up Payment, the Executive shall be deemed to pay federal
income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Gross Up Payment is
payable and state and local
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<PAGE> 5
income taxes at the highest marginal rate of taxation in the
state and locality of the Executive's residence on the date
the Gross Up Payment is payable, net of the maximum reduction
in federal income taxes which could be obtained from any
available deduction of such state and local taxes. If the
Parties are unable to agree as to the amount of the Gross Up
Payment, then such amount shall be determined by an
independent public accounting firm or other tax professional
selected by the Executive but reasonably acceptable to the
Company. The determination of such account firm or tax
professional shall be conclusive and binding upon the Parties
absent fraud or manifest error. The Company shall pay all of
the fees and expenses of such public accounting firm or tax
professional.
(iii) In the event that the amount of the Excise
Tax is subsequently determined to be less than the amount
taken into account in calculating a Gross Up Payment
hereunder, the Executive shall repay to the Company (to the
extent actually paid to the Executive), at the time that the
amount of such reduction in Excise Tax is finally determined,
the portion of the Gross Up Payment attributable to such
reduction (plus the portion of the Gross Up Payment
attributable to the Excise Tax and federal and state and local
income tax imposed on the Gross Up Payment being repaid by the
Executive if such repayment results in a reduction in, or a
refund of, Excise Tax and/or federal and state and local
income tax) plus interest on the amount of such repayment at
the rate provided in Section 1274(b((2)(B) of the Code.
(iv) In the event that the amount of the Excise
Tax is determined to exceed the amount taken into account in
calculating a Gross Up Payment hereunder (including by reason
of any payment the existence or amount of which cannot be
determined at the time of the Gross Up Payment), the Company
shall make an additional Gross Up Payment in respect of such
excess (plus any interest payable with respect to such excess)
at the time that the amount of such excess is finally
determined.
(v) Each Gross Up Payment shall be payable, and
shall be paid, by the Company on the date on which the
Executive becomes entitled to the payment or benefits giving
rise to such Gross Up Payment.
(f) No Mitigation. All payments and benefits to which
the Executive is entitled under this Agreement shall be made and
provided without offset, deduction, or mitigation on
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<PAGE> 6
account of income the Executive may receive from other employment or
otherwise.
(g) Death of the Executive. In the event of the
Executive's death, all payments and benefits required by this
Agreement shall be paid to the Executive's designated beneficiary or
beneficiaries set forth in Exhibit "C" attached hereto and
incorporated herein by reference, or, if he has not designated a
beneficiary or beneficiaries, to his estate.
ARTICLE IV
TERMINATION
This Agreement shall terminate prior to the expiration of its Term upon
the occurrence of any one of the following events:
4.01 Disability. In the event that the Executive is unable fully
to perform his duties and responsibilities hereunder to the full extent
required by the Board of Directors of Company by reason of illness, injury or
incapacity for one hundred-eighty (180) consecutive days (during such one
hundred-eighty (180) day period the Executive shall continue to be compensated
as provided in Sections 3.01 and 3.02 hereof), this Agreement may be terminated
by Company, and Company shall have no further liability or obligation to the
Executive for compensation hereunder; provided, however, that (a) the Executive
will be entitled to receive the payments prescribed under any disability
benefits plan in which the Executive was participating and (b) the Executive
shall be entitled to a pro rata portion of any incentive compensation earned
under any plans described in Sections 3.02 and 3.03 above for the period prior
to the date the Executive became disabled, subject to any limitations and
conditions set forth in the plan in question. In the event of any dispute
under this Section 4.01, the Executive shall submit to a physical examination
by a licensed physician selected by Company.
4.02 Death. In the event that the Executive dies during the Term,
Company shall pay to the Executive's executors, legal representatives or
administrators an amount equal to the installment of the Executive's salary and
bonuses set forth in Sections 3.01 and 3.02 hereof earned as of the period in
question for the month in which the Executive dies, and thereafter Company
shall have no further liability or obligation hereunder to the Executive's
executors, legal representatives, administrators, heirs or assigns or any other
person claiming under or through the Executive; provided, however, that (a) the
Executive will be entitled to receive the payments prescribed under any death
or disability benefits plan in which the Executive was participating and (b)
the Executive shall be entitled, subject to any limitations and conditions set
forth in such plans, to a pro rata
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<PAGE> 7
portion of any incentive compensation earned under any of the plans described
in Sections 3.02 and 3.03 above for the period prior to the Executive's death.
4.03 Cause. Nothing in this Agreement shall be construed to
prevent the termination of this Agreement by Company at any time for Cause (as
hereinafter defined). For purposes of this Agreement, "Cause" shall mean (i)
the willful failure of the Executive to perform or observe (other than by
reason of illness, injury or incapacity) any of the material terms or
provisions of this Agreement, including the willful failure of the Executive to
follow the reasonable directions of the Board of Directors or gross negligence,
or (ii) conviction of a felony. Upon termination for Cause, Company shall pay
to the Executive all sums due to the Executive through the date of such
termination. Notwithstanding any provision of this Agreement to the contrary,
the Company may not terminate this Agreement for Cause unless the Company shall
have first given written notification to the Executive of the grounds for
termination, the Board of Directors shall have determined that grounds for
termination for Cause exists and the Executive shall have been given a
reasonable opportunity to cure or remedied any violations of this Agreement.
Following such a termination, Company shall have no further duty or obligation
to the Executive; provided, however, the Executive shall continue to be bound
by the restrictions set forth in Article V of this Agreement.
4.04 Change of Control Provisions. (a) This Section 4.04 shall become
effective immediately upon the occurrence of a Change of Control Event (as
hereinafter defined), provided that the Executive is employed by the Company
immediately prior to such Change of Control Event. Once it becomes effective,
this Section 4.04 shall not terminate in the event that the Executive's
employment by the Company ceases because of termination of such employment (i)
by the Company without "Cause" at any time within thirty-six months following
the Change of Control Event; or (ii) by the Executive for "Good Reason" at any
time within thirty-six months following the Change of Control Event; provided,
however, that this Section 4.04 shall terminate (subject to Section 4.04(c) of
this Agreement) if the Executive's employment with the Company is terminated
because of the Executive's death or permanent disability pursuant to Section
4.01 or 4.02 of this Agreement or retirement on or after his "Normal Retirement
Date" (as hereinafter defined).
(b) Definitions. As used in this Agreement, and unless the
contest requires a different meaning, the following terms have the meanings
indicated:
(i) "Change of Control Event" means any one of the
following: (I) Continuing Directors (as hereinafter defined) no longer
constitute at least two thirds (2/3) of the total
7
<PAGE> 8
number of directors of the Company; (II) any person or group of persons
(as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as
amended), together with its affiliates, become the beneficial owner,
directly or indirectly, of twenty-five percent (25%) of the Company's
then outstanding Common Stock, $0.50 par value, or twenty-five percent
(25%) or more the total voting power of the Company's then outstanding
securities entitled generally to vote for the election of the Company's
directors; (III) the approval by the Company's shareholders of the
merger or consolidation of the Company with any other corporation or
business organization, the sale of substantially all of the assets of
the Company or the liquidation or dissolution of the Company, unless,
in the case of a merger or consolidation, the Continuing Directors in
office immediately prior to such merger or consolidation will
constitute at least two-thirds (2/3) of the directors of the surviving
corporation or business organization of such merger or consolidation
and any parent (as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) of such corporation or
business organization; or (IV) at least two-thirds (2/3) of the
Continuing Directors in office immediately prior to any other action
proposed to be taken by the Company's shareholders or by the Company's
Board of Directors determine that such proposed action, if taken, would
constitute a change of control of the Company and such action is taken.
(ii) "Continuing Director" means any individual who is a
member of the Company's Board of Directors on the date hereof or was
designated (before such person's initial election as a director) as a
Continuing Director by two-thirds (2/3) of the then Continuing
Directors.
(iii) "Good Reason" means (I) without the Executive's
express written consent, (A) the assignment to the Executive of any
duties, or any limitation of the Executive's responsibilities,
inconsistent with the Executive's positions, duties, responsibilities
and status with the Company immediately prior to the date of the Change
of Control Event, or (B) any removal of the Executive from, or any
failure to re-elect the Executive to, any of the Executive's positions
with the Company immediately prior to the Change of Control Event,
except in connection with the termination of the employment of the
Executive by the Company for Cause or on the death or "permanent
disability" of the Executive, and (C) the continuance thereof for a
period of twenty (20) days after written notice thereof to the Company
from the Executive; (II) any failure by the Company to pay, or any
reduction by the Company of, the Executive's base annual salary in
effect immediately prior to the date of the Change of Control Event;
(III) any failure by the Company to
8
<PAGE> 9
(A) continue to provide the Executive with the opportunity to
participate, on terms no less favorable than those in effect
immediately prior to the date of the Change of Control Event, in any
benefit plans and programs, including, but not limited to, the
Company's life, disability, health, dental, bonus savings and
retirement plans in which the Executive was participating immediately
prior to the date of the Change of Control Event, or their equivalent,
or (B) provide the Executive with all other fringe benefits or their
equivalent from time to time in effect for the benefit of any executive
which customarily includes a person holding the employment position
with the Company then held by the Executive; or (IV) the relocation of
the principal place of business of the Executive's employment to a
location that is more than 50 miles further from the Executive's
principal residence than such principal place of employment immediately
prior to the date of the Change of Control Event, or the imposition of
travel requirements on the Executive not substantially consistent with
such travel requirements existing immediately prior to the date of the
Change of Control Event.
(iv) "Normal Retirement Date" means the normal retirement
date as defined in the Company's pension plan as in effect immediately
prior to the Change in Control Event or, if such plan is not then in
existence, the date upon which the Executive attains age sixty-five
(65).
(v) "Termination" means any termination of the employment
of the Executive following the occurrence of any Change of Control
Event, (I) by the Company without Cause at any time within thirty-six
months following a Change of Control Event, or (II) by the Executive
for Good Reason at any time within thirty-six months following a Change
of Control Event; provided, however, that Termination shall not include
any termination of the employment of the Executive by the Company as a
result of permanent disability of the Executive (as provided in Section
4.01 of this Agreement) or as a result of the death of the Executive
(as set forth in Section 4.02 of this Agreement), or the retirement of
the Executive on or after his Normal Retirement Date.
(c) Effectiveness. The provisions of this Section 4.04 shall not
apply to any termination of the employment of the Executive which occurs after
the expiration of a thirty-six (36) month period following the occurrence of a
Change of Control Event.
ARTICLE V
PROPERTY RIGHTS
5.01 Non-Competition. For a period of (i) one year
9
<PAGE> 10
following the Termination of his employment under this Agreement following a
Change of Control Event (other than a termination for "Cause"), or (ii) two
years following any other Termination of his employment under this Agreement
(such period is hereinafter referred to as the "Non-Competitive Period"),
whether by wrongful discharge, discharge for cause, or otherwise, the Executive
shall not, directly or indirectly, either as an employee, employer, consultant,
agent, lender, principal, partner, stockholder, corporate officer, director, or
in any other individual or representative capacity, engage or participate in
any business that is in competition in any manner whatsoever with the
electronics distribution business engaged in by the Company at the time of such
termination.
5.02 Solicitation. During the Non-Competitive Period, the
Executive agrees not to, directly or indirectly, (i) call on or solicit, with
respect to the activities prohibited by Section 5.01 of this Agreement, any
person, firm, corporation or other entity who or which at the time of such
termination, or within two years prior thereto, was or had been a customer,
referral source or distributor of the Company or any of its affiliates or (ii)
solicit the employment of any person who was employed by the Company on a full
or part-time basis at the time of Executive's termination of employment.
5.03 Confidential Information. The Executive recognizes and
acknowledges that the Company's trade secrets and proprietary information and
processes, as they may exist from time to time, are confidential information
and are valuable, special and unique assets of the Company's business, access
to and knowledge of which are essential to the performance of the Executive's
duties hereunder. Except as required by law, the Executive will not, during or
after the termination of this Agreement, disclose any such confidential
information to any person, firm, corporation, association or other entity for
any reason or purpose whatsoever, (except as his duties may require while
employed by the Company) nor shall the Executive make use of any such
confidential information for his own purposes or for the benefit of any person,
firm, corporation or other entity (except the Company) under any circumstances
during the Term, or after the termination, of this Agreement. If the Executive
proposes to make disclosure of any confidential information in reliance on the
foregoing exception, the Executive shall (a) immediately notify the Company in
writing concerning the proposed disclosure, (b) provide the Company with copies
of any information the Executive proposes to disclose as well as the facts and
circumstances requiring such disclosure and (c) use his best efforts (at the
Company's sole cost and expense) to assist the Company in obtaining a
protective order or other protection if requested by the Company. The
Executive agrees that such confidential information shall include (but not be
limited to) all information contained in any memoranda, books, papers, client
lists, files, letters, formulas and other printed or
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<PAGE> 11
written material, and all copies thereof and therefrom, in any way relating to
the Company's business and affairs, whether made by the Executive or otherwise
coming into the Executive's possession, and the Executive agrees that, upon
termination of this Agreement or on demand of the Company, at any time, he
shall immediately deliver all such printed or written material and copies
thereof to the Company. Notwithstanding the above, confidential information
shall not include any information in the public domain that was not disclosed
by the Executive in breach of this Section 5.03.
5.04 Reasonableness of Restrictions. The Executive agrees that (a)
the covenants contained in Sections 5.01, 5.02, and 5.03 hereof are necessary
for the protection of the Company's business goodwill and trade secrets, (b) a
portion of the compensation paid to the Executive under this Agreement is paid
in consideration of the covenants herein contained, the sufficiency of which
consideration is hereby acknowledged, (c) the Executive is not, and under this
Agreement, will not be engaged in a common calling, and (d) if the scope of any
restriction contained in Sections 5.01, 5.02 or 5.03 hereof is too broad to
permit enforcement of such restriction to its full extent, then such
restriction shall be enforced to the maximum permitted by law, and the Parties
hereto hereby consent that such scope may be judicially modified accordingly in
any proceeding brought to enforce such restriction. The existence of any claim
or cause of action of the Executive against the Company, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of these covenants.
5.05 Enforcement. The Executive acknowledges that the restrictions
contained in Sections 5.01, 5.02 or 5.03 hereof are reasonable and necessary to
protect the legitimate interests of the Company and its affiliates, that the
Company would not have entered into this Agreement in the absence of such
restrictions, and that any violation of any provision of the covenants
contained in Sections 5.01, 5.02 or 5.03 hereof will result in irreparable
injury to the Company. The Executive also acknowledges that the Company shall
be entitled to preliminary and permanent injunctive relief, without the
necessity of proving actual damages as well as an equitable accounting of all
earnings, profits and other benefits arising from any such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled.
ARTICLE VI
GENERAL PROVISIONS
6.01 Notices. Any notices to be given hereunder by either Party to
the other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested:
11
<PAGE> 12
If to the Company:
Sterling Electronics Corporation
4201 Southwest Freeway
Houston, Texas 77027
Attention: Chairman
with a copy to:
Schlanger, Mills, Mayer & Grossberg, L.L.P.
5847 San Felipe, Suite 1700
Houston, TX 77057
Attn: Kyle Longhofer
If to the Executive:
David A. Spolane
4201 Southwest Freeway
Houston, TX 77027
Mailed notices shall be addressed to the Parties at the addresses set forth
above, but each Party may change his address by written notice in accordance
with this Section 6.01. Notices delivered personally shall be deemed
communicated as of actual receipt; mailed notices shall be deemed communicated
as of ten (10) days after mailing.
6.02 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Company, and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever.
6.03 Certain Acknowledgments. The Executive by his execution and
delivery of this Agreement represents to the Company as follows:
(i) That the Executive has been advised by the Company to have
this Agreement reviewed by an attorney representing the
Executive, and the Executive has either had this Agreement
reviewed by such attorney or has chosen not to have this
Agreement reviewed because the Executive, after reading the
entire Agreement, fully and completely understands each
provision and has determined not to obtain the services of an
attorney.
(ii) The Executive, either on his own or with the assistance and
advice of his attorney, has in particular reviewed Article V
and understands and
12
<PAGE> 13
accepts (a) the restrictions imposed by Article V and Sections
5.01, 5.02, and 5.03, and (b) the restrictions imposed upon
the Executive pursuant to these sections are reasonable and
necessary for the protection of the property rights of the
Company and its affiliates.
6.04 Headings. The headings or titles to Sections or Articles in
this Agreement are intended solely for convenience of the Parties and no
provision of this Agreement is to be construed by reference to the heading or
title of any section.
6.05 No Set-Off. There shall be no right of set-off or
counterclaim, in respect of any claim, debt or obligation, against the payments
or benefits to be made or provided for in this Agreement.
6.06 Amendment or Modification; Waiver. No provision of this
Agreement may be amended, modified or waived unless such amendment,
modification or waiver is authorized by the Board of Directors of the Company
and is agreed to in writing, signed by the Executive and by an officer of the
Company (other than the Executive) thereunto duly authorized. Except as
otherwise specifically provided in this Agreement, no waiver by any Party
hereto of any breach by any other party hereto of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
a similar or dissimilar provision or condition at the same or at any prior or
subsequent time; nor shall the receipt or acceptance of the Executive's
employment be deemed a waiver of any condition or provision hereof. The
Executive acknowledges that from time to time, the Company may establish,
maintain and distribute employee manuals or handbooks or personnel policy
manuals, and officers or other representatives of the Company may make written
or oral statements relating to personnel policies and procedures. Such
manuals, handbooks and statements are intended only for general guidance. No
policies, procedures or statements of any nature by or on behalf of the Company
(whether written or oral, and whether or not contained in any employee manual
or handbook or personnel policy manual), and no acts or practices of any
nature, shall be construed to modify this Agreement or to create express or
implied obligations of any nature to the Executive.
6.07 Assignability. The Executive shall not assign, pledge or
encumber any interest in this Agreement or any part thereof without the express
written consent of the Company, this Agreement being personal to the Executive.
This Agreement shall, however, inure to the benefit of the Executive's estate,
dependents, beneficiaries and legal representatives. This Agreement shall not
be assignable by the Company without the written consent of the Executive, but
if the Company shall merge or consolidate with or into, or transfer
substantially all of its assets to, another
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<PAGE> 14
corporation or other form of business organization, then this Agreement shall
bind the successor of the Company resulting from such merger, consolidation or
transfer. No such merger, consolidation or transfer, however, shall relieve
the Company or the Executive from liability and responsibility for the
performance of their respective duties and obligations hereunder.
6.08 Governing Law. This Agreement has been negotiated, executed
and delivered in the State of Texas, and shall in all respects be interpreted,
construed and governed by and in accordance with the internal substantive law
of the State of Texas.
6.09 Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the Parties
hereto to the maximum extent permissible under law.
6.10 No Duress. The Executive acknowledges that no force, fear or
threats or duress of any kind have been used to obtain the agreements and
covenants contained in this Agreement.
6.11 Legal Fees. In addition to any other benefit provided under this
Agreement, the Company agrees to pay all of the Executive's out of pocket
expenses including legal and accounting fees and expenses incurred or paid by
the Executive in enforcing or construing any of the provisions of this
Agreement
EXECUTED at Houston, Texas, on the day and year first above written.
"COMPANY"
STERLING ELECTRONICS CORPORATION
By: Herschel G. Maltz_
Name: Herschel G. Maltz
---------------------------
Title: Chairman of Compensation
Committee
"EXECUTIVE"
DAVID A. SPOLANE
14
<PAGE> 15
BONUS FORMULA
The term "Industrial Distribution Group's Operating Income" means the
net income of Industrial Distribution Group (as hereinafter defined) determined
in accordance with generally accepted accounting principles consistently
applied before deduction of any corporate overhead or corporate expenses and
before deduction of the Formula Bonus described in this Exhibit "A". The term
"Industrial Distribution Group" means the distribution group of the Company;
i.e., all of the Company's operations other than corporate overhead and the
discontinued Phaostron manufacturing business. The Company shall pay a bonus
to the Executive equal to two percent (2%) of the Industrial Distribution
Group's Operating Income in excess of $8,500,000 for each fiscal year. The
Formula Bonus will be based on the financial statements of the Company,
including the annual financial statements of the Company as audited by the
Company's independent accountants. Such financial statements as audited will
be deemed conclusive and binding on the parties absent fraud or willful
misconduct.
The Formula Bonus will be paid quarterly as follows: (i) an amount
equal to one-third of the estimated bonus shall be paid to the Executive, (ii)
at the end of the second and third quarter an amount equal to one-half of the
estimated Formula Bonus for that quarter shall be paid to the Executive, and
(iii) after completion of the audit of the Company's annual financial
statements, the balance shall be paid to the Executive. The estimated amount
for the first three fiscal quarters will be based on an annualization of the
results for such quarter and such Formula Bonus shall be paid within forty (40)
days after the end of such quarter. The annual bonus shall be paid the earlier
of thirty (30) days after the completion of the Company audit for such fiscal
year or ninety (90) days after the end of such fiscal year.
15
<PAGE> 16
EXHIBIT "B"
EXECUTIVE PERQUISITE VALUES
<TABLE>
<CAPTION>
Description Annual Values
- ----------- -------------
<S> <C>
Company Car $10,000
Secretarial Support 25,000
Home Computer 1,000
Cellular Phone 1,000
Educational Seminars 1,000
-------
TOTAL $38,000
</TABLE>
16
<PAGE> 1
EXHIBIT 10.12
STERLING ELECTRONIC CORPORATION
BROAD BASE SEVERANCE PLAN
This Sterling Electronics Corporation Broad Base Severance Plan
("Plan") is hereby adopted as of this 14TH day of November, 1995, by STERLING
ELECTRONICS CORPORATION, a Nevada corporation (the "Company"), for the benefit
of its eligible employees.
WITNESSETH
Whereas, the Covered Employees (as defined below) are currently
employed by the Company or an Affiliate or Associate (as defined below); and
Whereas, the Company desires to establish the Plan to provide security
to the Covered Employees in connection with the Covered Employees' employment
with the Company or an Affiliate or Associate in the event of a Change in
Control affecting the Company;
Now, Therefore, the Company hereby establishes the Plan as set forth
below.
1. Definitions. For purposes of this Plan:
(a) "Affiliate" or "Associate" shall have the meaning set
forth in Rule 12b-2 under the Securities Exchange Act
of 1934, as amended.
(b) "Beneficiary" shall mean the person or entity
designated by a Covered Employee, by written
instrument delivered to the Company, to receive the
benefits payable under this Plan in the event of his
death. If a Covered Employee fails to designate a
Beneficiary, or if no Beneficiary survives the
Covered Employee, such death benefits shall be paid:
(1) to his surviving spouse; or
(2) if there is no surviving spouse, to his
living descendants per stirpes; or
(3) if there is neither a surviving spouse nor
descendants, to his duly appointed and
qualified executor or personal representative.
(c) A "Change in Control" shall be deemed to take place
on the occurrence of any of the following events
without the prior written approval of a majority of
the entire Board of Directors of the Company as it
exists immediately prior to such event; provided
that, in the case of an event described in (1) or (3)
below, such approval occurs before the time of such
event and, in the case of an event described in (2)
below, such approval occurs prior to the time that
any other party to the event described in (2) (or any
<PAGE> 2
Affiliate or Associate thereof) acquires 25% or more
of the outstanding shares of Common Stock of the
Company:
(1) the Continuing Directors no
longer constitute at least two thirds (2/3)
of the total number of directors of the
Company;
(2) any person or group of persons
(as defined in Rule 13d-5 under the
Securities Exchange Act of 1934, as amended),
together with its Affiliates, become the
beneficial owner, directly or indirectly, of
twenty-five percent (25%) of the Company's
then outstanding Common Stock, $0.50 par
value, or twenty-five percent (25%) or more
the total voting power of the Company's then
outstanding securities entitled generally to
vote for the election of the Company's
directors;
(3) the approval by the Company's
shareholders of the merger or consolidation
of the Company with any other corporation or
business organization, the sale of
substantially all of the assets of the
Company or the liquidation or dissolution of
the Company, unless, in the case of a merger
or consolidation, the continuing Directors in
office immediately prior to such merger or
consolidation will constitute at least
two-thirds (2/3) of the directors of the
surviving corporation or business
organization of such merger or consolidation
and any parent (as such term is defined in
Rule 12b-2 under the Securities Exchange Act
of 1934, as amended) of such corporation or
business organization; or
(4) at least two-thirds (2/3) of
the continuing Directors in office
immediately prior to any other action
proposed to be taken by the Company's
shareholders or by the Company's Board of
Directors determine that such proposed
action, if taken, would constitute a change
of control of the Company and such action is
taken.
(d) "Continuing Director" means any individual who is a
member of the Company's Board of Directors on the
date hereof or was designated (before such person's
initial election as a director) as a Continuing
Director by two-thirds (2/3) of the
-2-
<PAGE> 3
then Continuing Directors.
(e) "Covered Employee" shall mean a common-law employee
of the Company or an Affiliate or Associate who (i)
is compensated on salaried basis and (ii) has been
employed by the Company or an Affiliate or Associate
for at least twelve months prior to a Change of
Control, other than an employee who is covered by an
agreement providing payments and benefits upon a
Change in Control that are at least as valuable, in
the aggregate, as the payments and benefits provided
under this Plan (including the Company's Upper
Management Severance Plan). The Chief Executive
Officer of the Company shall be responsible for
determining which employees of the Company are
subject to the provisions of this Plan and the
determination of the Chief Executive Officer shall be
binding and conclusive.
(f) "Good Cause" shall be deemed to exist with respect to
a Covered Employee if, and only if:
(1) The Covered Employee engages in acts or
omissions constituting dishonesty,
intentional breach of fiduciary obligation or
intention wrongdoing, in each case that
results in substantial harm to the business
or property of the Company or any Affiliate;
or
(2) The Covered Employee is convicted of a
criminal violation involving fraud or
dishonesty.
(g) "Retirement Plan" shall mean any qualified or
supplemental employee pension benefit plan, as
defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"),
currently or hereinafter made available by the
Company or an Affiliate or Associate in which a
Covered Employee is eligible to participate.
(h) "Salary" shall mean the Covered Employee's annual
base salary rate at the greater of (1) the date of
the Change in Control, or (2) the date the Covered
Employee's employment with the Company or an
Affiliate or Associate terminates.
(i) "Severance Period" shall mean the period beginning on
the date a Covered Employee's employment with the
Company or an Affiliate or Associate terminates under
circumstances described in
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<PAGE> 4
subsection 2(a) and ending after the expiration of
period equal to one week for each full year of
service or employment with the Company or its
Affiliate or Associate prior to the date of such
termination.
(j) "Welfare Plan" shall mean any health and dental plan,
disability plan, survivor income plan or life
insurance plan, as defined in Section 3(1) of ERISA,
currently or hereafter made available by the Company
or an Affiliate or Associate in which a Covered
Employee is eligible to participate.
2. Benefits Upon Termination of Employment.
(a) The following provisions will apply if, at any time
within the twelve months after a Change in Control
occurs, (i) the employment of a Covered Employee with
the Company and all Affiliates or Associates is
terminated by the Company or such Affiliates or
Associates for any reason other than Good Cause, or
(ii) the Covered Employee terminates his employment
with the Company and all Affiliates or Associates for
any reason:
(1) the Company shall, within thirty (30) days of
such Covered Employee's termination, make a
lump sum cash payment to the Covered Employee
or his or her Beneficiary in an amount equal
to the one week's Salary for each full year
of service or employment with the Company or
its Affiliate or Associate prior to the date
of such termination.
(2) The Covered Employee or his Beneficiary, or
any other person entitled to receive benefits
with respect to the Covered Employee under
any Retirement Plan, Welfare Plan, or other
plan or program maintained by the Company or
any Affiliate or Associate in which he
participates at the date of termination of
employment, shall receive any and all
benefits accrued under any such Plan or other
plan or program to the date of termination of
employment, the amount, form and time of
payment of such benefits to be determined by
the terms of such Retirement Plan, Welfare
Plan or other plan or program, and the
Covered Employee's employment shall be deemed
to have terminated by reason of retirement,
and without regard to vesting limitations in
all such Plans and other plans or programs,
under circumstances that have the most
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<PAGE> 5
favorable result for the Covered Employee
thereunder. Payment shall be made at the
earliest date permitted under any such Plan
or other plan or program.
(b) If the employment of a Covered Employee with the
Company and all Affiliates and Associates is
terminated by the Company, such Affiliates,
Associates or the Covered Employee other than under
circumstances set forth in subsection 2(a), the
Covered Employee's compensation shall be paid through
the date of his termination, and the Company shall
have no further obligation with respect to the
Covered Employee under this Plan. Such termination
shall have no effect upon a Covered Employee's other
rights, including but not limited to rights under any
Retirement Plan, any Welfare Plan or any other
employer plan or program.
(c) Notwithstanding anything herein to the contrary, in
the event that, at any time within twelve months
after a Change in Control occurs, the Company or an
Affiliate or Associate shall terminate the employment
of a Covered Employee for Good Cause, the Company or
such Affiliate or Associate shall give the Covered
Employee at least thirty (30) days' prior written
notice specifying in detail the reason or reasons for
the Covered Employee's termination.
(d) This Plan shall have no effect, and the Company shall
have no obligations hereunder, with respect to a
Covered Employee whose employment terminates for any
reason at any time other than within twelve months
after a Change in Control.
3. Setoff. No payments or benefits payable to or with respect to
a Covered Employee pursuant to this Plan shall be reduced by
any amount the Covered Employee or his spouse or Beneficiary
may owe to the Company or any Affiliate or Associate, or any
amount the Covered Employee may earn or receive from
employment with another employer or from any other source.
4. Death. If a Covered Employee's employment with the Company
and all Affiliates or Associates terminates under
circumstances described in subsection 2(a) or (b), then upon
the Covered Employee's subsequent death, all unpaid amounts
payable to the Covered Employee under subsection 2(a)(1) shall
be paid to his Beneficiary. Such death shall not affect the
right of a Beneficiary of a Covered Employee to participate in
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<PAGE> 6
the benefits under any Welfare Plan or Benefit Plan to the
extent such participation is provided for under such plan.
5. No Solicitation of Representatives and Employees. During the
Severance Period, no Covered Employee shall, directly
or indirectly, in his individual capacity or otherwise,
induce, cause, persuade, or attempt to induce, cause or
persuade any representative, agent or employee of the Company
or any of its Affiliates and Associates to terminate such
person's employment relationship with the Company or any of
its Affiliates and Associates, or to violate the terms of any
agreement between said representative, agent or employee and
the Company or any of its Affiliates or Associates.
6. Confidentiality. Preservation of a continuing business
relationship between the Company or its Affiliates and
Associates and their respective customers, representatives,
and employees is of critical importance to the continued
business success of the Company, its Affiliates and Associates
and it is the active policy of the Company, its Affiliates and
Associates to guard as confidential certain information not
available to the public relating to the business affairs of
the Company, its Affiliates and Associates. In view of the
foregoing, no Covered Employee shall, without the prior
written consent of the Company, disclose to any person or
entity any such confidential information that was obtained by
the Covered Employee in the course of his employment by the
Company or any of its Affiliates or Associates. This section
shall not be applicable if and to the extent the Covered
Employee is required to testify in a legislative, judicial or
regulatory proceeding pursuant to an order of Congress, any
state or local legislature, a judge, or an administrative law
judge or is otherwise required by law to disclose such
information.
7. Forfeiture. If a Covered Employee shall at any time violate
any obligation of his under Section 5 or 6 in a manner
that results in material damage to the Company, any Affiliate
or Associate, or its business, he shall immediately forfeit
his right to any benefits under this Plan, and the Company and
its Affiliates and Associates shall thereafter have no further
obligation hereunder to the Covered Employee or his spouse,
Beneficiary or any other person.
8. Employee Assignment. No interest of any Covered Employee, his
spouse or any Beneficiary under this Plan, or any right
to receive any payment or
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<PAGE> 7
distribution hereunder, shall be subject in any manner
to sale, transfer, assignment, pledge, attachment,
garnishment, or other alienation or encumbrance of any kind,
nor may such interest or right to receive a payment or
distribution be taken, voluntarily or involuntarily, for the
satisfaction of the obligations or debts of, or other claims
against, the Covered Employee or his spouse or Beneficiary,
including claims for alimony, support, separate maintenance,
and claims in bankruptcy proceedings.
9. Benefits Unfunded. All rights under this Plan of the Covered
Employees and their spouses and Beneficiaries shall at
all times be entirely unfunded, and no provision shall at any
time be made with respect to segregating any assets of the
Company for payment of any amounts due hereunder. The Covered
Employees, their spouses and Beneficiaries shall have only the
rights of general unsecured creditors of the Company and its
Affiliates and Associates.
10. Applicable Law. This Plan shall be construed and interpreted
pursuant to the laws of Texas.
11. No Employment Contract. Nothing contained in this Plan shall
be construed to be an employment contract between a
Covered Employee and the Company or any Affiliate or
Associate.
12. Severability. In the event any provision of this Plan is held
illegal or invalid, the remaining provisions of this
Plan shall not be affected thereby.
13. Successors. The Plan shall be binding upon and inure to the
benefit of the Company, the Covered Employees and their
respective heirs, representatives and successors.
14. Litigation Expenses. The Company shall pay the litigation
expenses, including reasonable attorneys' fees,
incurred by any Covered Employee, spouse or Beneficiary in a
suit against the Company or any Affiliate or Associate in
which such Covered Employee, spouse or Beneficiary
successfully sues to enforce his rights under the Plan.
15. Amendment and Termination. the Company shall have the right
to amend the Plan from time to time and may terminate
the Plan at any time; provided that within twelve months
following a Change in Control (i) no amendment may be made
that diminishes any Covered Employee's right in the event of a
termination of employment, following such Change in Control,
and (ii)
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<PAGE> 8
the Plan may not be terminated.
16. Notice. Notices under this Plan shall be in writing and sent
by registered mail, return receipt requested, to the
following addresses or to such other address as the party
being notified may have previously furnished to the other
party by written notice:
If to the Company:
Sterling Electronics Corporation
4201 Southwest Freeway
Houston, Texas 77027
Attention:
with a copy to:
Schlanger, Mills, Mayer & Grossberg, L.L.P.
5847 San Felipe, Suite 1700
Houston, TX 77057
Attn: Kyle Longhofer
If to a Covered Employee: The address last indicated on the
records of the Company.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed in its name by its duly authorized officer, all of the day and year
first above written.
STERLING ELECTRONICS CORPORATION
By: RONALD SPOLANE
-----------------------------
Attest:
DAVID SPOLANE
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<PAGE> 1
EXHIBIT 10.13
STERLING ELECTRONIC CORPORATION
UPPER MANAGEMENT SEVERANCE PLAN
This Sterling Electronics Corporation Upper Management Severance Plan
("Plan") is hereby adopted as of this 14th day of November, 1995, by STERLING
ELECTRONICS CORPORATION, a Nevada corporation (the "Company"), for the benefit
of its eligible senior employees.
WITNESSETH
Whereas, the Senior Employees (as defined below) are currently
employed by the Company or an Affiliate or Associate (as defined below) as part
of the upper management of the Company; and
Whereas, the Company desires to establish the Plan to provide security
to the Senior Employees in connection with the Senior Employees' employment
with the Company or an Affiliate or Associate in the event of either a Hostile
Change in Control or an Approved Change of Control affecting the Company;
Now, Therefore, the Company hereby establishes this Plan as set forth
below.
1. Definitions. For purposes of this Plan:
(a) "Affiliate" or "Associate" shall have the meaning set
forth in Rule 12b-2 under the Securities Exchange Act
of 1934, as amended.
(b) "Approved Change of Control" means Change of Control
that is not a Hostile Change of Control.
(c) "Beneficiary" shall mean the person or entity
designated by a Senior Employee, by written
instrument delivered to the Company, to receive the
benefits payable under this Plan in the event of his
death. If a Senior Employee fails to designate a
Beneficiary, or if no Beneficiary survives the Senior
Employee, such death benefits shall be paid:
(1) to his surviving spouse; or
(2) if there is no surviving spouse, to his
living descendants per stirpes; or
(3) if there is neither a surviving spouse nor
descendants, to his duly appointed and
qualified executor or personal
representative.
(d) "Bonus Amount" shall mean an amount equal to the
greater of (i) such Senior Employee's bonus for the
year preceding such Senior Employee's termination or
(ii) the average of such Senior Employee's bonus for
the three years preceding such Senior Employee's
termination.
(e) A "Change in Control" shall be deemed to take
<PAGE> 2
place on the occurrence of any of the following
events:
(1) the Continuing Directors no
longer constitute at least two thirds (2/3)
of the total number of directors of the
Company;
(2) any person or group of persons
(as defined in Rule 13d-5 under the
Securities Exchange Act of 1934, as amended),
together with its Affiliates, become the
beneficial owner, directly or indirectly, of
twenty-five percent (25%) of the Company's
then outstanding Common Stock, $0.50 par
value, or twenty-five percent (25%) or more
the total voting power of the Company's then
outstanding securities entitled generally to
vote for the election of the Company's
directors;
(3) the approval by the Company's
shareholders of the merger or consolidation
of the Company with any other corporation or
business organization, the sale of
substantially all of the assets of the
Company or the liquidation or dissolution of
the Company, unless, in the case of a merger
or consolidation, the continuing Directors in
office immediately prior to such merger or
consolidation will constitute at least
two-thirds (2/3) of the directors of the
surviving corporation or business
organization of such merger or consolidation
and any parent (as such term is defined in
Rule 12b-2 under the Securities Exchange Act
of 1934, as amended) of such corporation or
business organization; or
(4) at least two-thirds (2/3) of
the continuing Directors in office
immediately prior to any other action
proposed to be taken by the Company's
shareholders or by the Company's Board of
Directors determine that such proposed
action, if taken, would constitute a change
of control of the Company and such action is
taken.
(f) "Compensation Committee" means the Compensation
Committee of the Board of Directors of the Company
which currently consists of Herschel Maltz and S. M.
Lambert.
(g) "Continuing Director" means any individual who is
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<PAGE> 3
a member of the Company's Board of Directors on the
date hereof or was designated (before such person's
initial election as a director) as a Continuing
Director by two-thirds (2/3) of the then Continuing
Directors.
(h) "Good Cause" shall be deemed to exist with respect to
a Senior Employee if, and only if:
(1) The Senior Employee engages in acts or
omissions constituting dishonesty,
intentional breach of fiduciary obligation or
intention wrongdoing, in each case that
results in substantial harm to the business
or property of the Company or any Affiliate;
or
(2) The Senior Employee is convicted of a
criminal violation involving fraud or
dishonesty.
(i) "Good Reason" shall exist with respect to a Senior
Employee if and only if, without the Senior
Employee's express written consent:
(1) the Senior Employee is assigned duties
materially inconsistent with his present
duties, responsibilities and status;
(2) there is a reduction in the Senior Employee's
rate of base salary or bonus; or
(3) the Company or any Affiliate or Associate
changes by 50 miles or more the principal
location in which the Senior Employee is
required to perform services.
(j) "Hostile Change of Control" means a Change of Control
that occurs without the prior written approval of a
majority of the entire Board of Directors of the
Company as it exists immediately prior to such event;
provided that, in the case of an event described in
Subparagraphs 1(e)(1) or (3) of this Agreement, such
approval occurs before the time of such event and, in
the case of an event described in Subparagraph
1(e)(2) of this Agreement, such approval occurs prior
to the time that any other party to the event
described in Subparagraph 1(e)(2) of this Agreement
(or any Affiliate or Associate thereof) acquires 25%
or more of the outstanding shares of Common Stock of
the Company.
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<PAGE> 4
(k) "Retirement Plan" shall mean any qualified or
supplemental employee pension benefit plan, as
defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"),
currently or hereinafter made available by the
Company or an Affiliate or Associate in which a
Senior Employee is eligible to participate.
(l) "Salary" shall mean the Senior Employee's annual base
salary rate at the greater of (1) the date of the
Change in Control, or (2) the date the Senior
Employee's employment with the Company or an
Affiliate or Associate terminates.
(m) "Senior Employee" shall mean a common-law employee of
the Company or an Affiliate or Associate who has been
designated by the Chief Executive Officer of the
Company and approved by the Compensation Committee as
a Senior Employee of the Company and who has been
employed by the Company for at least six months prior
to such designation, other than an employee who is
covered by an agreement providing payments and
benefits upon a Change in Control that are at least
as valuable, in the aggregate, as the payments and
benefits provided under this Plan. The determination
of the Chief Executive Officer and Compensation
Committee as to the status of a person as a Senior
Employee shall be final and conclusive. The Company
shall maintain a list of all Senior Employees.
(n) "Severance Period" shall mean the period beginning on
the date a Senior Employee's employment with the
Company or an Affiliate or Associate terminates under
circumstances described in subsection 2(a) and ending
on the date twelve (12) months thereafter.
(o) "Welfare Plan" shall mean any health and dental plan,
disability plan, survivor income plan or life
insurance plan, as defined in Section 3(1) of ERISA,
currently or hereafter made available by the Company
or an Affiliate or Associate in which a Senior
Employee is eligible to participate.
2. Benefits Upon Termination of Employment.
(a) The following provisions will apply if, (i) at any
time within the twelve months after any Change in
Control occurs, the employment of a Senior Employee
with the Company and all Affiliates or Associates is
terminated by the Company or its Affiliate or
Associate for any reason other than
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<PAGE> 5
Good Cause, (ii) at any time within twelve months
after a Hostile Change of Control, the Senior
Employee terminates his employment with the Company
or its Affiliate or Associate for any reason, or
(iii) at any time within twelve months after an
Approved Change of Control, the Senior Employee
terminates his employment with the Company or its
Affiliate or Associate for Good Reason, then:
(1) The Company shall make a lump sum cash
payment to the Senior Employee or his
Beneficiary in an amount (the "Severance
Amount") equal to the sum of one years Salary
plus the Bonus Amount. One-half of the
Severance Amount shall be paid to the Senior
Employee within 30 days after the Employee's
date of termination of employment and the
balance of the Severance Amount will be paid
to the Senior Employee one year from the date
of termination.
(2) The Senior Employee or his Beneficiary, or
any other person entitled to receive benefits
with respect to the Senior Employee under any
Retirement Plan, Welfare Plan, or other plan
or program maintained by the Company or any
Affiliate or Associate in which he
participates at the date of termination of
employment, shall receive any and all
benefits accrued under any such Plan or other
plan or program to the date of termination of
employment, the amount, form and time of
payment of such benefits to be determined by
the terms of such Retirement Plan, Welfare
Plan or other plan or program, and the Senior
Employee's employment shall be deemed to have
terminated by reason of retirement, and
without regard to vesting limitations in all
such Plans and other plans or programs, under
circumstances that have the most favorable
result for the Senior Employee thereunder.
Payment shall be made at the earliest date
permitted under any such Plan or other plan
or program.
(3) As a condition to the receipt of any payment
of the Severance Amount, the Company may
require any Senior Employee to sign an
agreement acknowledging that such Senior
Employee is subject to the restrictions set
forth in Sections 5, 6, and 7 of this Plan.
Such Senior Employee shall also acknowledge
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<PAGE> 6
that the restrictions contained in Sections
5, 6, and 7 hereof are reasonable and
necessary to protect the legitimate interests
of the Company and its Affiliates, that the
Company would not have entered into this
Plan in the absence of such restrictions, and
that any violation of any provision of
Sections 5, 6, and 7 hereof will result in
irreparable injury to the Company . Each
such Senior Employee shall also acknowledge
that the Company shall be entitled to
preliminary and permanent injunctive relief,
without the necessity of proving actual
damages as well as an equitable accounting of
all earnings, profits and other benefits
arising from any such violation, which rights
shall be cumulative and in addition to any
other rights or remedies to which the Company
may be entitled.
(b) If the employment of a Senior Employee with the
Company and all Affiliates and Associates is
terminated by the Company, such Affiliates,
Associates or the Senior Employee other than under
circumstances set forth in subsection 2(a), the
Senior Employee's compensation shall be paid through
the date of his termination, and the Company shall
have no further obligation with respect to the Senior
Employee under this Plan. Such termination shall
have no effect upon a Senior Employee's other rights,
including but not limited to rights under any
Retirement Plan, any Welfare Plan or any other
employer plan or program.
(c) Notwithstanding anything herein to the contrary, in
the event that, at any time within twelve months
after a Change in Control occurs, the Company or an
Affiliate or Associate shall terminate the employment
of a Senior Employee for Good Cause, the Company or
such Affiliate or Associate shall give the Senior
Employee at least thirty (30) days' prior written
notice specifying in detail the reason or reasons for
the Senior Employee's termination.
(d) This Plan shall have no effect, and the Company shall
have no obligations hereunder, with respect to a
Senior Employee whose employment terminates for any
reason at any time other than within twelve months
after a Change in Control.
3. Setoff. No payments or benefits payable to or with
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<PAGE> 7
respect to a Senior Employee pursuant to this Plan shall be
reduced by any amount the Senior Employee or his spouse or
Beneficiary may owe to the Company or any Affiliate or
Associate, or any amount the Senior Employee may earn or
receive from employment with another employer or from any
other source.
4. Death. If a Senior Employee's employment with the Company and
all Affiliates or Associates terminates under circumstances
described in subsection 2(a) or (b), then upon the Senior
Employee's subsequent death, all unpaid amounts payable to the
Senior Employee under subsection 2(a)(1) shall be paid to his
Beneficiary. Such death shall not affect the right of a
Beneficiary of a Senior Employee to participate in the
benefits under any Welfare Plan or Benefit Plan to the extent
such participation is provided for under such plan.
5. Non-Competition. During the Severance Period, no Senior
Employee shall, directly or indirectly, either as an employee,
employer, consultant, agent, lender, principal, partner,
stockholder, corporate officer, director, or in any other
individual or representative capacity, engage or participate
in any business that is in competition with the business of
the Company or any Affiliate or Associate of the Company in
their respective trade territories as of the date of
termination or those trade territories in which the Company or
its Affiliates or Associates plan to conduct their business as
of the date of termination, except as approved in writing by
the Company.
6. No Solicitation of Representatives and Employees. During the
Severance Period, no Senior Employee shall, directly or
indirectly, in his individual capacity or otherwise, induce,
cause, persuade, or attempt to induce, cause or persuade any
representative, agent or employee of the Company or any of its
Affiliates and Associates to terminate such person's
employment relationship with the Company or any of its
Affiliates and Associates, or to violate the terms of any
agreement between said representative, agent or employee and
the Company or any of its Affiliates or Associates.
7. Confidentiality. Preservation of a continuing business
relationship between the Company or its Affiliates and
Associates and their respective customers, representatives,
and employees is of critical importance to the continued
business success of the Company, its Affiliates and Associates
and it is the active policy of the Company, its Affiliates and
Associates to guard as confidential certain information
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<PAGE> 8
not available to the public relating to the business affairs
of the Company, its Affiliates and Associates. In view of the
foregoing, no Senior Employee shall, without the prior written
consent of the Company, disclose to any person or entity any
such confidential information that was obtained by the Senior
Employee in the course of his employment by the Company or any
of its Affiliates or Associates. This section shall not be
applicable if and to the extent the Senior Employee is
required to testify in a legislative, judicial or regulatory
proceeding pursuant to an order of Congress, any state or
local legislature, a judge, or an administrative law judge or
is otherwise required by law to disclose such information.
8. Forfeiture and Enforcement. If a Senior Employee shall at any
time violate any of such Senior Employee's obligation under
Section 5, 6 or 7 in a manner that results in material damage
to the Company, any Affiliate or Associate, or its business,
such Senior Employee shall immediately forfeit such Senior
Employee's right to any benefits under this Plan, and the
Company and its Affiliates and Associates shall thereafter
have no further obligation hereunder to the Senior Employee or
his spouse, Beneficiary or any other person.
9. Senior Employee Assignment. No interest of any Senior
Employee, his spouse or any Beneficiary under this Plan, or
any right to receive any payment or distribution hereunder,
shall be subject in any manner to sale, transfer, assignment,
pledge, attachment, garnishment, or other alienation or
encumbrance of any kind, nor may such interest or right to
receive a payment or distribution be taken, voluntarily or
involuntarily, for the satisfaction of the obligations or
debts of, or other claims against, the Senior Employee or his
spouse or Beneficiary, including claims for alimony, support,
separate maintenance, and claims in bankruptcy proceedings.
10. Benefits Unfunded. All rights under this Plan of the Senior
Employees and their spouses and Beneficiaries shall at all
times be entirely unfunded, and no provision shall at any time
be made with respect to segregating any assets of the Company
for payment of any amounts due hereunder. The Senior
Employees, their spouses and Beneficiaries shall have only the
rights of general unsecured creditors of the Company and its
Affiliates and Associates.
11. Applicable Law. This Plan shall be construed and interpreted
pursuant to the laws of Texas.
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<PAGE> 9
12. No Employment Contract. Nothing contained in this Plan shall
be construed to be an employment contract between a Senior
Employee and the Company or any Affiliate or Associate.
13. Severability. In the event any provision of this Plan is held
illegal or invalid, the remaining provisions of this Plan
shall not be affected thereby. It is the intent of the
Company that the covenant not to compete, no solicitation and
confidentiality obligations contained in Sections 5, 6, and 7
of this Plan will be enforce to the maximum extent permitted
under applicable law. If the scope of any restriction
contained in Sections 5, 6 or 7 is too broad to permit
enforcement of such restriction to its full extent, then such
restriction shall be enforced to the maximum extent permitted
by law, and the Company and each participating Senior Employee
hereby consent that such scope may be judicially modified
accordingly in any proceeding brought to enforce such
restriction.
14. Successors. The Plan shall be binding upon and inure to the
benefit of the Company, the Senior Employees and their
respective heirs, representatives and successors.
15. Litigation Expenses. The Company shall pay the litigation
expenses, including reasonable attorneys' fees, incurred by
any Senior Employee, spouse or Beneficiary in a suit against
the Company or any Affiliate or Associate in which such Senior
Employee, spouse or Beneficiary successfully sues to enforce
his rights under the Plan.
16. Amendment and Termination. The Company shall have the right
to amend the Plan from time to time and may terminate the Plan
at any time; provided that within twelve months following a
Change in Control (i) no amendment may be made that diminishes
any Senior Employee's right in the event of a termination of
employment, following such Change in Control, and (ii) the
Plan may not be terminated.
17. Notice. Notices under this Plan shall be in writing and sent
by registered mail, return receipt requested, to the following
addresses or to such other address as the party being notified
may have previously furnished to the other party by written
notice:
If to the Company:
Sterling Electronics Corporation
4201 Southwest Freeway
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<PAGE> 10
Houston, Texas 77027
Attention: Chairman and President
with a copy to:
Schlanger, Mills, Mayer & Grossberg, L.L.P.
5847 San Felipe, Suite 1700
Houston, TX 77057
Attn: Kyle Longhofer
If to an Senior Employee: The address last indicated on the
records of the Company.
18. Excise Tax. If the payments and benefits provided under the
Plan to or with respect to a Senior Employee, either alone or
with other payments and benefits, would constitute "parachute
payments" within the meaning of Section 280G of the Internal
Revenue Code, then the payments and/or benefits under the Plan
shall be reduced to the extent necessary so that no portion
thereof shall be subject to the excise tax imposed by Section
4999 of the Code. Either the Company or the party entitled to
receive the payment or benefit may request a determination as
to whether the payment or benefit would constitute a parachute
payment and, if requested, such determination shall be made by
independent tax counsel selected by the Company and approved
by such party. "Independent tax counsel" shall mean a law
firm of recognized expertise in Federal income tax matters
that has not previously advised the Company or an Affiliate or
Associate.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed in its name by its duly authorized officer, all of the day and year
first above written.
STERLING ELECTRONICS CORPORATION
By: RONALD SPOLANE
-----------------------------
Attest:
DAVID SPOLANE
- -------------
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<PAGE> 1
EXHIBIT 10.14
CREDIT AGREEMENT
Dated as of February 16, 1996
Among
STERLING ELECTRONICS CORPORATION,
as Borrower,
THE FINANCIAL INSTITUTIONS
WHICH ARE PARTIES HERETO,
as Banks,
and
NATIONSBANK OF TEXAS, N.A.,
as Agent for the Banks
$40,000,000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . 1
Section 1.02. Computation of Time Periods . . . . . . . . . . . . . . . 14
Section 1.03. Accounting Terms; Changes in GAAP . . . . . . . . . . . . 14
Section 1.04. Types of Advances . . . . . . . . . . . . . . . . . . . . 15
Section 1.05. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE II
THE ADVANCES AND THE LETTERS OF CREDIT
Section 2.01. The Advances and Swing Loans . . . . . . . . . . . . . . . 15
Section 2.02. Method of Borrowing . . . . . . . . . . . . . . . . . . . 16
Section 2.03. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.04. Termination of Commitments . . . . . . . . . . . . . . . . 20
Section 2.05. Repayment . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2.06. Interest . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2.07. Prepayments . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.08. Breakage Costs . . . . . . . . . . . . . . . . . . . . . . 24
Section 2.09. Increased Costs . . . . . . . . . . . . . . . . . . . . . 25
Section 2.10. Payments and Computations . . . . . . . . . . . . . . . . 27
Section 2.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.12. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . 29
Section 2.13. Letters of Credit . . . . . . . . . . . . . . . . . . . . 30
ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Initial Borrowings and Issuance
of Letters of Credit . . . . . . . . . . . . . . . . . . 33
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 3.02. Conditions Precedent to all Borrowings and Issuances of
Letters of Credit . . . . . . . . . . . . . . . . . . . . 34
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Organization, Standing and Qualification . . . . . . . . . 35
Section 4.02. Authority . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 4.03. Financial Condition . . . . . . . . . . . . . . . . . . . 36
Section 4.04. Litigation . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 4.05. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 36
Section 4.06. No Violation or Conflicts . . . . . . . . . . . . . . . . 36
Section 4.07. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 4.08. Investment Company Act . . . . . . . . . . . . . . . . . . 37
Section 4.09. Public Utility Holding Company Act . . . . . . . . . . . . 37
Section 4.10. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . 37
Section 4.11 True and Complete Disclosure . . . . . . . . . . . . . . . 37
ARTICLE V
AFFIRMATIVE COVENANTS
Section 5.01. Information . . . . . . . . . . . . . . . . . . . . . . . 38
Section 5.02. Notification of Adverse Events . . . . . . . . . . . . . . 39
Section 5.03. Inspection . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 5.04. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . 39
Section 5.05. Conduct of Business and Financial Affairs . . . . . . . . 40
Section 5.06. Insurance . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 5.07. Guaranties; Pledge Agreements . . . . . . . . . . . . . . 40
ARTICLE VI
NEGATIVE COVENANTS
Section 6.01. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 6.02. Other Obligations . . . . . . . . . . . . . . . . . . . . 42
Section 6.03. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 6.04. Negative Pledge . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
Section 6.05. Corporate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 6.06. Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 6.07. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 6.08. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 6.09. Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 6.10. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 6.11. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 6.12. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE VII
DEFAULT AND REMEDIES
Section 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 7.02. Optional Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . 49
Section 7.03. Automatic Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . 49
Section 7.04. Cash Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 7.05. Non-exclusivity of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 7.06. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE VIII
THE AGENT AND THE ISSUING BANK
Section 8.01. Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 8.02. Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 8.03. The Agent and Its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 8.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 8.05. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 8.06. Successor Agent and Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . 53
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 9.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 9.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
Section 9.05. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 9.06. Bank Assignments and Participations . . . . . . . . . . . . . . . . . . . . . . 56
Section 9.07. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 9.08. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 9.09. Survival of Representations, Etc . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 9.11. Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 9.12. Usury Not Intended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 9.13. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
</TABLE>
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<PAGE> 6
CREDIT AGREEMENT
This Credit Agreement dated as of February 16, 1996 is among Sterling
Electronics Corporation, a Nevada corporation, as Borrower, the financial
institutions which are parties hereto, as Banks, and NationsBank of Texas,
N.A., as Agent for the Banks.
The Borrower, the Banks, and the Agent agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings (unless otherwise
indicated, such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
"Adjusted Base Rate" means, for any day, the fluctuating rate per
annum of interest equal to the greater of (a) the Base Rate in effect on such
day and (b) the Federal Funds Rate in effect on such day plus 0.50%.
"Advance" means any advance by a Bank to the Borrower as part of a
Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such Person or any Subsidiary of such Person.
The term "control" (including the terms "controlled by" or "under common
control with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of a Control Percentage, by contract or otherwise.
"Agent" means NationsBank of Texas, N.A. in its capacity as an agent
pursuant to Article VIII and any successor agent pursuant to Section 8.06.
"Agent's Letter" means the letter agreement dated as of February 16,
1996 between the Borrower and the Agent designating itself as the Agent's
Letter.
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<PAGE> 7
"Agreement" means this Credit Agreement dated as of February 16, 1996
among the Borrower, the Agent, and the Banks.
"Applicable Law" means all applicable provisions of all constitutions,
statutes, rules, regulations, and orders of all governmental bodies, all
Governmental Requirements, and all orders, judgments, and decrees of all
courts, administrative law judges, and arbitrators.
"Applicable Lending Office" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of a Base Rate Advance and such
Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
"Applicable Margin" means, as of any date of its determination and
with respect to the interest rates, commitment fees, and letter of credit fees
payable by the Borrower hereunder, the respective rates per annum set forth
below in the applicable row in the column corresponding to the Pricing Level in
effect as of such date:
<TABLE>
<CAPTION>
Pricing Pricing Pricing
Level I Level II Level III
------- -------- ---------
<S> <C> <C> <C>
Eurodollar Rate Advances 0.75% 1.125% 1.50%
Base Rate Advances 0.00% 0.00% 0.25%
Commitment Fee 0.25% 0.30% 0.35%
Letter of Credit Fee 0.75% 1.125% 1.50%
</TABLE>
The foregoing Pricing Levels shall be determined from the consolidated
financial statements of the Borrower most recently delivered pursuant to
Section 5.01(b), and any change in the Applicable Margin shall be retroactively
effective as of the date of such financial statements. Upon any retroactive
decrease in the Pricing Levels, if the Borrower has overpaid interest or fees
based upon the previous higher Pricing Level then the excess interest or fees
shall be credited against the next payment of such interest or fees,
respectively, due under this Agreement (or if this Agreement has expired, the
excess interest or fees shall be promptly refunded to the Borrower by the
applicable parties). Upon any retroactive increase in the Pricing Levels, if
the Borrower has underpaid interest or fees based upon the previous lower
Pricing Level then the unpaid interest or fees shall be paid by the Borrower to
applicable parties when the next payment of such interest or fees,
respectively, are due and payable under this Agreement.
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<PAGE> 8
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Bank and an Eligible Assignee, and accepted by the Agent, in
substantially the form of the attached Exhibit A.
"Banks" means the lenders listed on the signature pages of this
Agreement and each Eligible Assignee that shall become a party to this
Agreement pursuant to Section 9.06.
"Base Rate" means a fluctuating interest rate per annum as shall be in
effect from time to time equal to the rate of interest publicly announced by
NationsBank of Texas, N.A. as its prime rate, whether or not the Borrower has
notice thereof.
"Base Rate Advance" means an Advance which bears interest as provided
in Section 2.06(a).
"Borrower" means Sterling Electronics Corporation, a Nevada
corporation.
"Borrowing" means a borrowing consisting of simultaneous Advances of
the same Type made by each Bank pursuant to Section 2.01(a) or Converted by
each Bank to Advances of a different Type pursuant to Section 2.02(b).
"Borrowing Base" means, as of any date of its determination by the
Agent, the sum of (a) 85% of the Borrower's consolidated Eligible Receivables
as of such date, plus (b) 50% of the difference between (i) the Borrower's
consolidated Eligible Inventory as of such date and (ii) the Borrower's
consolidated trade payables as of such date, minus (c) 67% of the outstanding
principal amount of the Borrower's consolidated long-term indebtedness for
borrowed money described in Section 6.01(c) as of such date. The Borrowing
Base shall be based upon the most recent Borrowing Base Certificate delivered
to the Agent pursuant to Section 5.01(c).
"Borrowing Base Certificate" means a borrowing base certificate in the
form of the attached Exhibit B-1.
"Business Day" means a day of the year on which banks are not required
or authorized to close in Dallas, Texas and, if the applicable Business Day
relates to any Eurodollar Rate Advances, on which dealings are carried on by
banks in the London interbank market.
"Canadian Subsidiaries" means any Subsidiary of the Borrower formed
under the laws of Canada or any jurisdiction of Canada.
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<PAGE> 9
"Cash Collateral Account" means a special interest bearing cash
collateral account containing cash deposited pursuant to Section 7.02(b) or
7.03(b) to be maintained at the Agent's office in accordance with Section 7.04.
"Change of Control" means (a) the direct or indirect acquisition by
any Person or group of Persons acting together which would constitute a "group"
for purposes of Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), together with any Affiliates thereof, of
beneficial ownership (as defined in Rule 13-d-3 under the Exchange Act) or
control of 40% or more of the total voting power of all of the classes of
capital stock of the Borrower entitled to vote generally in the election of
directors of the Borrower or (b) during any period of 12 consecutive months,
beginning with and after the date of this Agreement, individuals who at the
beginning of such 12- month period were directors of the Borrower shall cease
for any reason to constitute a majority of the board of directors of the
Borrower at any time during such period.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Commitment" means, with respect to each Bank, the amount set opposite
such Bank's name on the signature pages hereof as its Commitment, or if such
Bank has entered into any Assignment and Acceptance, set forth for such Bank as
its Commitment in the Register maintained by the Agent pursuant to Section
9.06(c), as such amount may be reduced pursuant to Section 2.04.
"Compliance Certificate" means a compliance certificate in the form of
the attached Exhibit B-2.
"Consolidated EBITDA" means, with respect to any Person and for any
period of its determination, the Person's consolidated net income for such
period, plus the Person's consolidated interest expense, taxes, and
depreciation and amortization for such period.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person and for any period of its determination, the ratio of (a) the Person's
Consolidated EBITDA less the Person's consolidated tax expense for such period
plus the Person's consolidated operating lease expense for such period to (b)
the Person's consolidated interest expense and operating lease expense for such
period plus the Person's consolidated scheduled principal payments on long-
term Consolidated Funded Debt (other than, with respect to the Borrower,
scheduled principal payments on the Advances) for such period plus the Person's
scheduled redemptions on mandatorily redeemable preferred stock during such
period.
-4-
<PAGE> 10
"Consolidated Funded Debt" means, with respect to any Person and as of
any date of its determination, without duplication, the Person's consolidated
Debt of the types described in clauses (a) through (d) and (g) of the
definition of Debt.
"Consolidated Leverage Ratio" means, with respect to any Person and as
of any date of its determination, the ratio of (a) the Person's consolidated
Debt as of such date to (b) the Person's Consolidated Total Capital as of such
date.
"Consolidated Net Worth" means, with respect to any Person and as of
any date of its determination, the Person's consolidated total assets as of
such date minus the Person's consolidated total liabilities as of such date.
"Consolidated Quick Ratio" means, with respect to any Person and as of
any date of its determination, the ratio of (a) the Person's consolidated cash,
Liquid Investments, and accounts receivable as of such date to (b) the Person's
consolidated current liabilities (excluding the Advances, to the extend the
Advances are current liabilities) as of such date.
"Consolidated Tangible Net Worth" means, with respect to any Person
and as of any date of its determination, the Person's Consolidated Net Worth as
of such date, except that the sum of the following shall be excluded therefrom:
goodwill, patents, trademarks, copyrights, deferred credits, and any other
intangible assets.
"Consolidated Total Capital" means, for any Person and as of any date
of its determination, the sum of, without duplication, (a) the Person's
consolidated Debt as of such date plus (b) such Person's consolidated common
and preferred stockholders' equity as of such date.
"Control Percentage" means, with respect to any Person, the percentage
of the outstanding capital stock or other ownership interests of such Person
having ordinary voting power which gives the direct or indirect holder of such
stock or interests the power to elect a majority of the Board of Directors or
similar governing body of such Person.
"Convert," "Conversion," and "Converted" each refers to a conversion
of Advances of one Type into Advances of another Type pursuant to Section
2.02(b).
"Credit Documents" means this Agreement, the Notes, the Swing Note,
the Guaranties, the Security Documents, the Interest Hedge Agreements, the
Agent's Letter, and
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<PAGE> 11
each other agreement, instrument, or document executed by the Borrower or any
of its Subsidiaries at any time in connection with this Agreement.
"Credit Obligations" means all Advances, Swing Loans, Reimbursement
Obligations, and other amounts payable by the Borrower or any Guarantor to the
Agent or the Banks under the Credit Documents.
"Credit Parties" means the Borrower and each Subsidiary of the
Borrower.
"Debt" means, in the case of any Person, without duplication (a)
indebtedness of such Person for borrowed money, (b) obligations of such Person
evidenced by bonds, debentures, notes, or other similar instruments, (c)
obligations of such Person to pay the deferred purchase price of property or
services, other than trade payables outstanding in the ordinary course of
business, (d) obligations of such Person as lessee under leases which are, in
accordance with GAAP, recorded as capital leases, (e) obligations of such
Person under or relating to letters of credit or guaranties in respect of, and
obligations (contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clauses (a) through (d) of
this definition, (f) indebtedness or obligations of others of the kinds
referred to in clauses (a) through (e) of this definition secured by any Lien
on or in respect of any property of such Person (limited, however, to the
lesser of the amount of its liability or the value of such property), and (g)
any mandatorily redeemable preferred stock issued by such Person.
"Default" means (a) an Event of Default or (b) any event or condition
which with notice or lapse of time or both would, unless cured or waived,
become an Event of Default.
"Dollar Equivalent" means the equivalent in another currency of an
amount in Dollars to be determined by reference to the rate of exchange quoted
by NationsBank of Texas, N.A., at 10:00 a.m. (Dallas, Texas, time) on the date
of determination, for the spot purchase in the foreign exchange market of such
amount of Dollars with such other currency.
"Dollars" and "$" means lawful money of the United States of America.
"Domestic Lending Office" means, with respect to any Bank, the office
of such Bank specified as its "Domestic Lending Office" opposite its name on
Schedule 1 or such other office of such Bank as such Bank may from time to time
specify to the Borrower and the Agent.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
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<PAGE> 12
"Eligible Assignee" means (a) a commercial bank organized under the
laws of the United States, or any State thereof, and having primary capital of
not less than $500,000,000 and approved by the Agent and the Borrower, which
approval shall not be unreasonably withheld, (b) a commercial bank organized
under the laws of any other country which is a member of the Organization for
Economic Cooperation and Development and having primary capital (or its
equivalent) of not less than $500,000,000 (or its Dollar Equivalent) and
approved by the Agent and the Borrower, which approval shall not be
unreasonably withheld, or (c) any other Person that has been approved by the
Borrower in its sole discretion and the Agent, which approval by the Agent
shall not be unreasonably withheld.
"Eligible Inventory" means, with respect to any Person and as of any
date of its determination, the inventory of such Person reflected on the most
recent balance sheet of such Person that does not represent work in process.
"Eligible Receivables" means, with respect to any Person and as of any
date of its determination, the accounts receivable of such Person reflected on
the most recent balance sheet of such Person that has not been outstanding more
than 90 days from the invoice date.
"Environmental Law" means all federal, state, and local laws, rules,
regulations, ordinances, orders, decisions, agreements, and other requirements
now or hereafter in effect relating to the pollution, destruction, loss, or
injury of the environment, the presence of any contaminant in the environment,
the protection, cleanup, remediation, or restoration of the environment, the
creation, handling, transportation, use, or disposal of any waste product in
the environment, exposure of Persons to any contaminant, waste, or hazardous
substance in the environment, and the health and safety of employees in
relation to its environment.
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Federal Reserve Board, as in effect from time to time.
"Eurodollar Lending Office" means, with respect to any Bank, the
office of such Bank specified as its "Eurodollar Lending Office" opposite its
name on Schedule 1 (or, if no such office is specified, its Domestic Lending
Office) or such other office of such Bank as such Bank may from time to time
specify to the Borrower and the Agent.
"Eurodollar Rate" means, for the Interest Period for each Eurodollar
Rate Advance comprising part of the same Borrowing, an interest rate per annum
(rounded upward to the nearest whole multiple of 1/16 of 1.00% per annum) equal
to the rate per annum at which deposits in Dollars are offered by the principal
office of NationsBank of Texas, N.A. in London, England to prime banks in the
London interbank market at 11:00 a.m. (London
-7-
<PAGE> 13
time) two Business Days before the first day of such Interest Period in an
amount substantially equal to NationsBank of Texas, N.A.'s Eurodollar Rate
Advance comprising part of such Borrowing and for a period equal to such
Interest Period.
"Eurodollar Rate Advance" means an Advance which bears interest as
provided in Section 2.06(b).
"Eurodollar Rate Reserve Percentage" of any Bank for the Interest
Period for any Eurodollar Rate Advance means the reserve percentage applicable
during such Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any such percentage shall be so applicable) under
regulations issued from time to time by the Federal Reserve Board for
determining the maximum reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for such Bank
with respect to liabilities or assets consisting of or including Eurocurrency
Liabilities having a term equal to such Interest Period.
"Events of Default" has the meaning set forth in Section 7.01.
"Existing Credit Agreement" means the Credit Agreement dated as of
December 31, 1993 among the Borrower, the Agent, and NationsBank as amended
through the date of this Agreement.
"Expiration Date" means, with respect to any Letter of Credit, the
date on which such Letter of Credit shall expire or terminate in accordance
with its terms.
"Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to 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 Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for any such day
on such transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any of its successors.
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"Financial Statements" means the audited balance sheet and income,
retained earnings, and cash flow statements dated April 1, 1995, referred to in
Section 4.03, copies of which have been delivered to the Agent and the Banks.
"Fiscal Year" means the fiscal year of the Borrower ending on the
Saturday closest to March 31 of each year.
"Fiscal Quarter" means a thirteen or fourteen week fiscal quarter of
the Borrower, with the first Fiscal Quarter ending the Saturday closest to June
30, the second Fiscal Quarter ending the Saturday closest to September 30, the
third Fiscal Quarter ending the Saturday closest to December 31, and the fourth
Fiscal Quarter ending the Saturday closest to March 31.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time, applied on a basis consistent with the
requirements of Section 1.03.
"Government Authority" means any foreign government authority, the
United States of America, any state of the United States of America and any
subdivision of any of the foregoing, and any agency, department, commission,
board, authority or instrumentality, bureau or court having jurisdiction over
any Bank, the Borrower, or the Borrower's Subsidiaries or any of their
respective Properties.
"Guarantor" means any Person that has executed or hereafter executes a
Guaranty, including Kann-Ellert Electronics, Inc., a Maryland corporation;
Meridian Electronics, Incorporated, a Virginia corporation; Airmark Plastics
Corporation, a California corporation; Passive Technology Sales, Inc., a
California corporation; Sterling Partners, Inc., a Nevada corporation; Sterling
Electronics Partners, L.P., a Texas limited partnership; and any other
Subsidiary of the Borrower which hereafter executes a Guaranty.
"Guaranty" means (a) the Guaranties dated as of February 16, 1996 made
by certain Subsidiaries of the Borrower in favor of the Agent for the benefit
of the Agent and the ratable benefit of the Banks guaranteeing the Credit
Obligations and (b) any additional Guaranties made by Subsidiaries of the
Borrower in favor of the Agent for the benefit of the Agent and the ratable
benefit of the Banks guaranteeing the Credit Obligations, including those
executed under Section 5.07.
"Interest Hedge Agreement" means an interest hedge, rate swap, or cap,
or similar arrangement between the Borrower and a Bank providing for the
exchange of nominal
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interest obligations or the cap of the interest rate on the Advances made under
this Agreement.
"Interest Period" means, for each Eurodollar Rate Advance comprising
part of the same Borrowing, the period commencing on the date of such Advance
or the date of the Conversion of any Base Rate Advance into such an Advance and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below and Section 2.02 and, thereafter, each subsequent period
commencing on the last day of the immediately preceding Interest Period and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below and Section 2.02. The duration of each such Interest Period
shall be one, two, three, or six months, in each case as the Borrower may, upon
notice received by the Agent not later than 11:00 a.m. (Dallas, Texas, time)
on, the second Business Day prior to the first day of such Interest Period
select; provided, however, that:
(a) Interest Periods commencing on the same date for Advances
comprising part of the same Borrowing shall be of the same duration;
(b) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding Business Day, provided that
if such extension would cause the last day of such Interest Period to occur in
the next following calendar month, the last day of such Interest Period shall
occur on the next preceding Business Day; and
(c) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall end on the last
Business Day of the calendar month in which it would have ended if there were a
numerically corresponding day in such calendar month.
"Interim Financial Statements" means the unaudited balance sheet and
income and cash flow statements dated September 30, 1995, referred to in
Section 4.03, copies of which have been delivered to the Agent and the Banks.
"Issuing Bank" means NationsBank of Texas, N.A. and any successor
issuing bank pursuant to Section 8.06.
"Letter of Credit" means, individually, each letter of credit issued
under the Existing Agreement and any other letter of credit issued by the
Issuing Bank which is subject to this Agreement, and "Letters of Credit" means
all such letters of credit collectively.
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"Letter of Credit Documents" means, with respect to any Letter of
Credit, such Letter of Credit and any agreements, documents, and instruments
entered into in connection with or relating to such Letter of Credit.
"Letter of Credit Exposure" means, at any time, the sum of (a) the
aggregate undrawn maximum face amount of each Letter of Credit at such time and
(b) the aggregate unpaid amount of all Reimbursement Obligations at such time.
"Letter of Credit Obligations" means any obligations of the Borrower
under this Agreement in connection with the Letters of Credit.
"Lien" means any mortgage, lien, pledge, charge, deed of trust,
security interest, or encumbrance to secure or provide for the payment of any
obligation of any Person, whether arising by contract, operation of law or
otherwise (including, without limitation, the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement).
"Liquid Investments" means (a) certificates of deposit of or demand
deposits with commercial banks organized under the laws of the United States of
America having capital resources in excess of $100,000,000; (b) certificates of
deposit which are fully insured by the Federal Deposit Insurance Corporation or
its successors; (c) commercial paper issued by any Bank or an Affiliate of any
Bank or any commercial banking institutions or corporations rated at least P-1
by Moody's Investors Services, Inc., or A-1 by Standard & Poor's Corporation;
(d) obligations of the United States of America or any agency thereof and
obligations guaranteed by the United States of America or any agency thereof;
(e) repurchase agreements fully collateralized by obligations of the types
described above which are entered into with banks or trust companies having
net worth in excess of $500,000,000; and (f) investments in money market funds
which invest solely in the types of investments described above; provided that
in each case the above obligations are due within one year from the date of
purchase and payable in U.S. Dollars.
"Majority Banks" means, at any time, Banks holding at least 66-2/3% of
the then aggregate unpaid principal amount of the Notes held by the Banks and
the Letter of Credit Exposure of the Banks at such time, or, if no such
principal amount and Letter of Credit Exposure is then outstanding, Banks
having at least 66-2/3% of the aggregate amount of the Commitments at such
time.
"Material Adverse Effect" means a material adverse change in the
assets, liabilities, properties, business or condition, financial or otherwise,
of the Borrower and its Subsidiaries
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taken as a whole, including, but not limited to, any event or circumstance
which would have a material adverse effect on the Borrower's ability to perform
its obligations under the Credit Documents.
"Maturity Date" means February 16, 1999.
"Maximum Rate" means the maximum nonusurious interest rate under
applicable law.
"NationsBank" means NationsBank of Texas, N.A.
"Note" means a promissory note of the Borrower payable to the order of
any Bank, in substantially the form of the attached Exhibit E, evidencing
indebtedness of the Borrower to such Bank resulting from Advances owing to such
Bank.
"Notice of Borrowing" means a notice of borrowing in the form of the
attached Exhibit F signed by a Responsible Officer of the Borrower.
"Notice of Conversion or Continuation" means a notice of conversion or
continuation in the form of the attached Exhibit G signed by a Responsible
Officer of the Borrower.
"Permits" means any and all permits, authorizations, approvals,
registrations, rights of way, orders or other approvals and licenses (a) under
any (i) federal, state, local, or foreign statute, ordinance, or regulation,
(ii) final judgment, order, directive, injunction, decree or award of any
Government Authority or (iii) agreement or other obligations with or to any
Government Authority relating to compliance with matters described in (i) or
(ii) above or (b) granted by any Government Authority.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof or any trustee, receiver, custodian or similar official.
"Pledge Agreements" means (a) the Pledge Agreement dated as of
February 16, 1996, made by the Borrower in favor of the Agent pledging 65% of
the common stock of DGW Electronics Corporation to the Agent for the benefit of
the Agent and the ratable benefit of the Banks to secure the Credit Obligations
and (b) any other Pledge Agreements made by the Borrower or any of its
Subsidiaries pledging securities to the Agent for the benefit of the
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Agent and the ratable benefit of the Banks to secure the Credit Obligations,
including those executed under Section 5.07.
"Pricing Level" means any one of the three pricing levels described
below as Pricing Level I, Pricing Level II, or Pricing Level III. The
applicable Pricing Level for any period shall be the Pricing Level giving the
most favorable Applicable Margins to the Borrower for which each of the
specified financial ratio tests described for that Pricing Level are met:
"Pricing Level I" applies on any date, if, as of the last day of the
Fiscal Quarter of the Borrower most recently ended, both (a) the
Consolidated Fixed Charge Coverage Ratio of the Borrower for the
preceding four Fiscal Quarters is greater than or equal to 2.00 to
1.00 and (b) the Consolidated Leverage Ratio of the Borrower as of
such date is less than or equal to 0.45 to 1.00. If either of these
two test are not met, then the Pricing Level must be either Pricing
Level II or Pricing Level III.
"Pricing Level II" applies on any date, if, as of the last day of the
Fiscal Quarter of the Borrower most recently ended, the Consolidated
Leverage Ratio of the Borrower as of such date is less than or equal
to 0.50 to 1.00, but greater than 0.45 to 1.00. If this test is not
met, then the Pricing Level must be Pricing Level III.
"Pricing Level III" applies on any date, if, as of the last day of the
Fiscal Quarter of the Borrower most recently ended, neither Pricing
Level I nor Pricing Level II applies.
"Property" of any Person means any property or assets (whether real,
personal, or mixed, tangible or intangible) of such Person.
"Pro Rata Share" means, at any time with respect to any Bank, either
(a) the ratio (expressed as a percentage) of such Bank's Commitments at such
time to the aggregate Commitments at such time or (b) if the Commitments have
been terminated, the ratio (expressed as a percentage) of such Bank's aggregate
outstanding Advances and Letter of Credit Exposure at such time to the
aggregate outstanding Advances and Letter of Credit Exposure of all the Banks
at such time.
"Register" has the meaning set forth in paragraph (c) of Section 9.06.
"Regulation G, T, U, or X" means Regulation G, T, U, or X of the
Federal Reserve Board, as the same is from time to time in effect, and all
official rulings and interpretations thereunder or thereof.
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"Reimbursement Obligations" means all of the obligations of the
Borrower set forth in paragraph (c) of Section 2.13.
"Responsible Officer" means the Chief Executive Officer, President,
Executive or Senior Vice President, Chief Financial Officer, or Secretary of
any Person.
"Security Documents means the Pledge Agreements, any financing
statements, and any other documents and agreements executed by the Borrower or
any Guarantor which secures repayment of the Credit Obligations.
"Subsidiary" of a Person means any corporation or other entity of
which more than 50% of the outstanding capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or similar governing body of such corporation or other entity
(irrespective of whether at such time capital stock or other ownership
interests of any other class or classes of such corporation or other entity
shall or might have voting power upon the occurrence of any contingency) is at
the time directly or indirectly owned by such Person, by such Person and one or
more Subsidiaries of such Person or by one or more Subsidiaries of such Person.
"Swing Loan" has the meaning set forth in Section 2.01(b).
"Swing Note" means the $3,000,000 Promissory Note dated as of February
16, 1996, made by the Borrower and payable to the order of NationsBank, in
substantially the form of the attached Exhibit H, evidencing indebtedness of
the Borrower to NationsBank under the line of credit created thereunder.
"Type" has the meaning set forth in Section 1.04.
Section 1.02. Computation of Time Periods. In this Agreement in
the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each means "to but excluding".
Section 1.03. Accounting Terms; Changes in GAAP.
(a) All accounting terms not specifically defined in this
Agreement shall be construed in accordance with GAAP applied on a consistent
basis with those applied in the preparation of the Financial Statements (except
for changes to which the Borrower's independent public accountants take no
exception).
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(b) Unless otherwise indicated, all financial statements of the
Borrower, all calculations for compliance with covenants in this Agreement, all
determinations of the Applicable Margin, and all calculations of any amounts to
be calculated under the definitions in Section 1.01 shall be based upon the
consolidated accounts of the Borrower and its Subsidiaries in accordance with
GAAP and consistent with the principles of consolidation applied in preparing
the Financial Statements (except for changes in the principles of consolidation
to which the Borrower's independent public accountants take no exception).
Section 1.04. Types of Advances. The "Type" of an Advance refers
to the determination whether such Advance is a Eurodollar Rate Advance or Base
Rate Advance, each of which constitutes a Type.
Section 1.05. Miscellaneous. Article, Section, Schedule, and
Exhibit references are to Articles and Sections of and Schedules and Exhibits
to this Agreement, unless otherwise specified. All references to documents,
instruments, and agreements shall refer to such documents, instruments, and
agreements as amended supplemented, or otherwise modified from time to time
unless otherwise noted.
ARTICLE II
THE ADVANCES AND THE LETTERS OF CREDIT
Section 2.01. The Advances and Swing Loans.
(a) Each Bank severally agrees, on the terms and conditions set
forth in this Agreement, to make Advances to the Borrower from time to time on
any Business Day during the period from the date of this Agreement until the
Maturity Date provided that the aggregate outstanding amount of Advances made
by such Bank plus such Bank's Pro Rata Share of the Letter of Credit Exposure
plus such Bank's Pro Rata Share of the aggregate outstanding amount of the
Swing Loans may not exceed the lesser of (i) such Bank's Commitment or (ii)
such Bank's Pro Rata Share of the Borrowing Base. Each Borrowing shall consist
of Advances of the same Type made on the same day by the Banks ratably
according to their respective Commitments. Borrowings comprised of Eurodollar
Rate Advances shall be in an aggregate amount not less than $5,000,000 and in
integral multiples of $1,000,000. At no time shall there be more than ten
Interest Periods applicable to outstanding Eurodollar Rate Advances. Within
the limits of each Bank's Commitment, the Borrower may from time to time
borrow, prepay pursuant to Section 2.07 and reborrow under this Section
2.01(a).
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(b) (i) On the terms and conditions set forth in this
Agreement and in the Swing Note, NationsBank may, in its discretion,
from time to time on any Business Day during the period from the date
of this Agreement until the Maturity Date make loans under the Swing
Note ("Swing Loans") to the Borrower in an aggregate outstanding
principal amount not to exceed the face amount of the Swing Note. No
Swing Loan shall be made if the making of such Swing Loan would cause
the aggregate outstanding amount of the Advances plus the Letter of
Credit Exposure plus the aggregate outstanding amount of the Swing
Loans to exceed the lesser of (A) the aggregate outstanding
Commitments or (B) the Borrowing Base.
(ii) Swing Loans shall be made with such payment terms and
interest rates as the Agent and the Borrower may agree in accordance
with the terms of the Swing Note, provided that at any time when a
Default or Event of Default exists, upon demand of NationsBank, the
Borrower shall repay the Swing Loans. In the event that the Borrower
does not promptly repay the Swing Loans upon such demand, NationsBank
shall give notice of such failure to the Agent and the Banks, and each
Bank shall promptly pay to NationsBank such Bank's Pro Rata Share of
such payment, and such payment shall be deemed for all purposes of
this Agreement to constitute a Base Rate Advance to the Borrower from
such Bank. If such payment is not made by any Bank to NationsBank on
the same day on which notice of such failure is received, such Bank
shall pay interest thereon to NationsBank at a rate per annum equal to
the Federal Funds Rate. The Borrower hereby unconditionally and
irrevocably authorizes, empowers, and directs the Agent and the Banks
to record and otherwise treat such payments as a Borrowing comprised
of Base Rate Advances to the Borrower.
Section 2.02. Method of Borrowing.
(a) Notice. Each Borrowing shall be made pursuant to a Notice of
Borrowing, given not later than (i) 11:00 a.m. (Dallas, Texas, time) on the
third Business Day before the date of the proposed Borrowing, in the case of a
Eurodollar Rate Advance or (ii) 10:00 a.m. (Dallas, Texas, time) on the
Business Day of the proposed Borrowing, in the case of a Base Rate Advance, by
the Borrower to the Agent, which shall give to each Bank prompt notice and use
best efforts to give notice not later than 12:00 p.m. (Dallas, Texas, time) on
the day of receipt of timely Notice of Borrowing of such proposed Borrowing by
telecopier or telex. Each Notice of a Borrowing shall be by telecopier or
telex, confirmed immediately in writing specifying the requested (i) date of
such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii)
aggregate amount of such Borrowing, and (iv) if such Borrowing is to be
comprised of Eurodollar Rate Advances, Interest Period for each such Advance.
In the case
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of a proposed Borrowing comprised of Eurodollar Rate Advances, the Agent shall
promptly notify each Bank of the applicable interest rate under Section
2.06(b). Each Bank shall (i) in the case of all Borrowings other than
Borrowings made on the same day as the day the Notice of Borrowing is received,
before 11:00 a.m. (Dallas, Texas, time) on the date of such Borrowing and (ii)
in the case of Borrowings made on the same day as the date of the Notice of
Borrowing, before 1:00 p.m. (Dallas, Texas, time), make available for the
account of its Applicable Lending Office to the Agent at its address referred
to in Section 9.02, or such other location as the Agent may specify by notice
to the Banks, in same day funds, in the case of a Borrowing, such Bank's Pro
Rata Share of such Borrowing. After the Agent's receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article III, the Agent
shall make such funds available to the Borrower at its account with the Agent.
(b) Conversions and Continuations. In order to elect to Convert
or continue an Advance under this Section, the Borrower shall deliver an
irrevocable Notice of Conversion or Continuation to the Agent at the Agent's
office no later than 11:00 a.m. (Dallas, Texas, time) (i) the Business Day of
the proposed conversion date in the case of a Conversion to a Base Rate Advance
and (ii) at least two Business Days in advance of the proposed Conversion or
continuation date in the case of a Conversion to, or a continuation of, a
Eurodollar Rate Advance. Each such Notice of Conversion or Continuation shall
be in writing or by telex or telecopier, confirmed immediately in writing
specifying (i) the requested Conversion or continuation date (which shall be a
Business Day), (ii) the amount and Type of the Advance to be Converted or
continued, (iii) whether a Conversion or continuation is requested, and if a
Conversion, into what Type of Advance, and (iv) in the case of a Conversion to,
or a continuation of, a Eurodollar Rate Advance, the requested Interest Period.
Promptly after receipt of a Notice of Conversion or Continuation under this
paragraph, the Agent shall provide each Bank with a copy thereof and, in the
case of a Conversion to or a Continuation of a Eurodollar Rate Advance, notify
each Bank of the applicable interest rate under Section 2.06(b). If the
Borrower fails to elect to continue or Convert any Borrowing comprised of
Eurodollar Advances at the end of the applicable Interest Period therefor, or
the Borrower is unable to satisfy the requirements for the making of a
Borrowing comprised of Eurodollar Advances under the terms and conditions of
this Agreement for any reason at such time, such Borrowing shall be Converted
to a Borrowing comprised of Base Rate Advances on the last day of the
applicable Interest Period for such Borrowing. For purposes of this Agreement,
any continuation of or Conversion into a Borrowing comprised of Eurodollar
Advances shall constitute a new Borrowing hereunder.
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(c) Certain Limitations. Notwithstanding anything in paragraphs
(a) and (b) above:
(i) (A) if any Bank shall, at least one Business Day
before the date of any requested Borrowing, notify the Agent that the
introduction of or any change in or in the interpretation of any law
or regulation makes it unlawful, or that any central bank or other
governmental authority asserts that it is unlawful, for such Bank or
its Eurodollar Lending Office to perform its obligations under this
Agreement to make Eurodollar Rate Advances or to fund or maintain
Eurodollar Rate Advances, the right of the Borrower to select
Eurodollar Rate Advances for such Borrowing or for any subsequent
Borrowing shall be suspended until such Bank shall notify the Agent
that the circumstances causing such suspension no longer exist, and
each Advance comprising such Borrowing shall be a Base Rate Advance;
and (B) such Bank agrees to use commercially reasonable efforts
(consistent with its internal policies and legal and regulatory
restrictions) to designate a different Applicable Lending Office if
the making of such designation would avoid the effect of this
paragraph and would not, in the reasonable judgment of such Bank, be
otherwise disadvantageous to such Bank;
(ii) if the Agent is unable to determine the Eurodollar
Rate for Eurodollar Rate Advances comprising any requested Borrowing,
the right of the Borrower to select Eurodollar Rate Advances for such
Borrowing or for any subsequent Borrowing shall be suspended until the
Agent shall notify the Borrower and the Banks that the circumstances
causing such suspension no longer exist, and each Advance comprising
such Borrowing shall be a Base Rate Advance;
(iii) if the Majority Banks shall, at least one Business
Day before the date of any requested Borrowing, notify the Agent that
the Eurodollar Rate for Eurodollar Rate Advances comprising such
Borrowing shall not adequately reflect the cost to such Banks of
making or funding their respective Eurodollar Rate Advances, as the
case may be, for such Borrowing, the right of the Borrower to select
Eurodollar Rate Advances for such Borrowing or for any subsequent
Borrowing shall be suspended until the Agent shall notify the Borrower
and the Banks that the circumstances causing such suspension no longer
exist, and each Advance comprising such Borrowing shall be a Base Rate
Advance; and
(iv) if the Borrower shall fail to select the duration or
continuation of any Interest Period for any Eurodollar Rate Advances
in accordance with the provisions contained in the definition of
"Interest Period" in Section 1.01 and paragraph (b)
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above, the Agent shall forthwith so notify the Borrower and the Banks
and such Advances shall be made available to the Borrower on the date
of such Borrowing as Base Rate Advances or, if an existing Advance,
Convert into Base Rate Advances.
(d) Notices Irrevocable. Each Notice of Borrowing and Notice of
Conversion or Continuation shall be irrevocable and binding on the Borrower.
In the case of any Borrowing which the related Notice of Borrowing specifies is
to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each
Bank against any loss, out-of-pocket cost or expense actually incurred by such
Bank as a result of any failure to fulfill on or before the date specified in
such Notice of Borrowing for such Borrowing the applicable conditions set forth
in Article III, including, without limitation, any loss cost or expense
actually incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by such Bank to fund the Advance to be made by such Bank
as part of such Borrowing when such Advance, as a result of such failure, is
not made on such date.
(e) Agent Reliance. Unless the Agent shall have received notice
from a Bank before the date of any Borrowing that such Bank shall not make
available to the Agent such Bank's Pro Rata Share of a Borrowing, the Agent may
assume that such Bank has made its Pro Rata Share of such Borrowing available
to the Agent on the date of such Borrowing in accordance with paragraph (a) of
this Section 2.02 and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent that such Bank shall not have so made its Pro Rata Share of such
Borrowing available to the Agent, such Bank and the Borrower severally agree to
immediately repay to the Agent on demand such corresponding amount, together
with interest on such amount, for each day from the date such amount is made
available to the Borrower until the date such amount is repaid to the Agent, at
(i) in the case of the Borrower, the interest rate applicable on such day to
Advances comprising such Borrowing and (ii) in the case of such Bank, the
Federal Funds Rate for such day. If such Bank shall repay to the Agent such
corresponding amount and interest as provided above, such corresponding amount
so repaid shall constitute such Bank's Advance as part of such Borrowing for
purposes of this Agreement even though not made on the same day as the other
Advances comprising such Borrowing.
(f) Bank Obligations Several. The failure of any Bank to make the
Advance to be made by it as part of any Borrowing shall not relieve any other
Bank of its obligation, if any, to make its Advance on the date of such
Borrowing. No Bank shall be responsible for the failure of any other Bank to
make the Advance to be made by such other Bank on the date of any Borrowing.
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(g) Notes. The indebtedness of the Borrower to each Bank
resulting from Advances owing to such Bank shall be evidenced by a Note and the
indebtedness of the Borrower resulting from Swing Loans shall be evidenced by
the Swing Note.
Section 2.03. Fees.
(a) Commitment Fee. The Borrower agrees to pay to the Agent for
the account of each Bank a commitment fee on the average daily amount by which
such Bank's Commitment exceeds the sum of such Bank's outstanding Advances, Pro
Rata Share of the Letter of Credit Exposure, and Pro Rata Share of the
aggregate outstanding principal amount of the Swing Loans from the date of this
Agreement until the Maturity Date at the rate per annum equal to the Applicable
Margin specified for the commitment fee. The commitment fee described above
shall be due and payable quarterly in arrears on the last day of each calendar
quarter and on the Maturity Date.
(b) Letter of Credit Fees.
(i) For each Letter of Credit issued by the Issuing Bank,
the Borrower shall pay to the Agent for the benefit of the Issuing Bank a
letter of credit fee equal to 0.125% per annum on the face amount of such
Letter of Credit for the term of such Letter of Credit, with a minimum fee of
$500.
(ii) For each Letter of Credit issued by the Issuing Bank,
the Borrower shall pay to the Agent for the ratable benefit of the Banks a
letter of credit fee equal to the Applicable Margin per annum for Letters of
Credit less 0.125% per annum on the face amount of such Letter of Credit for
the term of such Letter of Credit.
(iii) Each such fee shall be payable in arrears on the last
day of each calendar quarter and on the Maturity Date.
Section 2.04. Termination of Commitments. The Borrower may
terminate the aggregate of the Commitments in increments of $5,000,000 or more
in integral multiples of $1,000,000 provided that the aggregate of the
Commitments may not be less than the sum of the aggregate outstanding principal
amount of Advances plus the Letter of Credit Exposure plus the aggregate
outstanding principal amount of the Swing Loans. All requests to terminate any
portion of the aggregate of the Commitments shall be made by Borrower to the
Agent, and the Agent shall promptly inform each Bank of such request. Three
Business Days after the Agent receives the request, subject to the terms of
this Section 2.04, each Bank's Commitment shall be proportionately terminated.
Any reduction or termination
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of the Commitments pursuant to this Section 2.04 shall be permanent, with no
obligation of the Banks to reinstate such Commitments and the commitment fees
provided for in Section 2.03(a) shall thereafter be computed on the basis of
the Commitments, as so reduced.
Section 2.05. Repayment. The Borrower shall pay to the Agent for
the benefit of the Banks the outstanding principal amount of each Advance on
the Maturity Date and shall pay to NationsBank the outstanding principal amount
of the Swing Loans on the Maturity Date.
Section 2.06. Interest. The Borrower shall pay interest on the
unpaid principal amount of each Advance made by each Bank from the date of such
Advance until such principal amount shall be paid in full, at the following
rates per annum:
(a) Base Rate Advances. If such Advance is a Base Rate Advance, a
rate per annum equal at all times to the lesser of (i) the Adjusted Base Rate
in effect from time to time plus the Applicable Margin for Base Rate Advances
and (ii) the Maximum Rate, payable in arrears on the last day of each calendar
quarter and on the date such Base Rate Advance shall be paid in full.
(b) Eurodollar Rate Advances. If such Advance is a Eurodollar
Rate Advance, a rate per annum equal at all times during the Interest Period
for such Advance to the lesser of (i) the Eurodollar Rate for such Interest
Period plus the Applicable Margin for Eurodollar Rate Advances and (ii) the
Maximum Rate, payable on the last day of such Interest Period, and, in the case
of six-month Interest Periods, on the day which occurs during such Interest
Period three months from the first day of such Interest Period.
(c) Additional Interest on Eurodollar Rate Advances. The Borrower
shall pay to each Bank, so long as any such Bank shall be required under
regulations of the Federal Reserve Board to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities,
additional interest on the unpaid principal amount of each Eurodollar Rate
Advance of such Bank, from the later of (i) the date of such Advance and (ii)
the date such reserve requirement is imposed until the earlier of (A) the date
such principal amount is paid in full and (B) the date such reserve requirement
is suspended, at an interest rate per annum equal at all times to the remainder
obtained by subtracting (1) the Eurodollar Rate for the Interest Period for
such Advance from (2) the rate obtained by dividing such Eurodollar Rate by a
percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such
Bank for such Interest Period, payable on each date on which interest is
payable on such Advance. Such additional interest payable to any Bank shall be
determined by such Bank and notified to the Borrower through the Agent (such
notice to
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include the calculation of such additional interest, which calculation shall be
conclusive in the absence of manifest error). Each Bank agrees to use
commercially reasonable efforts (consistent with its internal policy and legal
and regulatory restrictions) to designate a different Applicable Lending Office
if the making of such a designation would avoid the effect of this paragraph
and would not, in the reasonable judgment of such Bank, be otherwise
disadvantageous to such Bank.
(d) Default Interest. Upon the occurrence and during the
continuance of an Event of Default, (i) all Base Rate Advances shall bear
interest, payable on demand, at a rate per annum equal at all times to the
lesser of (A) the Adjusted Base Rate in effect from time to time plus the
Applicable Margin for Base Rate Advances plus 2.00% and (B) the Maximum Rate
and (ii) all Eurodollar Rate Advances shall bear interest, payable on demand,
at a rate per annum equal at all times to the lesser of (A) the greater of (1)
the Adjusted Base Rate in effect from time to time plus 2.00% plus the
Applicable Margin for Base Rate Advances and (2) the rate required to be paid
on such Advance immediately prior to the date on which such amount became due
plus 2.00% and (B) the Maximum Rate.
(e) Usury Recapture. In the event the rate of interest chargeable
by a Bank under this Agreement or the Notes held by such Bank at any time is
greater than the Maximum Rate for such Bank, the unpaid principal amount of
such Notes shall bear interest at the Maximum Rate for such Bank until the
total amount of interest paid or accrued on such Notes equals the amount of
interest which would have been paid or accrued on such Notes if the stated
rates of interest set forth in this Agreement had at all times been in effect.
In the event, upon payment in full of such Notes, the total amount of
interest paid or accrued under the terms of this Agreement and such Notes is
less than the total amount of interest which would have been paid or accrued if
the rates of interest set forth in this Agreement had, at all times, been in
effect, then the Borrower shall, to the extent permitted by applicable law, pay
the Agent for the account of such Bank an amount equal to the difference
between (i) the lesser of (A) the amount of interest which would have been
charged on such Notes if the Maximum Rate for such Bank had, at all times, been
in effect and (B) the amount of interest which would have accrued on such Notes
if the rates of interest set forth in this Agreement had at all times been in
effect and (ii) the amount of interest actually paid or accrued under this
Agreement on such Notes.
In the event any Bank ever receives, collects or applies as interest
any sum in excess of the Maximum Rate for such Bank, such excess amount shall,
to the extent permitted by law, be applied to the reduction of the principal
balance of the Notes held by such Bank, and
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if no such principal is then outstanding, such excess or part thereof remaining
shall be paid to the Borrower.
Section 2.07. Prepayments.
(a) Right to Prepay. The Borrower shall have no right to prepay
any principal amount of any Advance except as provided in this Section 2.07.
(b) Optional. The Borrower may elect to prepay any of the
Advances, after giving by 11:00 a.m. (Dallas, Texas, time) (i) in the case of
Eurodollar Rate Advances, at least three Business Days' or (ii) in case of Base
Rate Advances, same Business Day's prior written notice to the Agent stating
the proposed date and aggregate principal amount of such prepayment. If any
such notice is given, the Borrower shall prepay Advances comprising part of the
same Borrowing in whole or ratably in part in an aggregate principal amount
equal to the amount specified in such notice, together with accrued interest to
the date of such prepayment on the principal amount prepaid and amounts, if
any, required to be paid pursuant to Section 2.08 as a result of such
prepayment being made on such date. Each partial prepayment of Eurodollar
Advances shall be in an aggregate principal amount not less than $1,000,000.
(c) Mandatory.
(i) On the date of each reduction of the aggregate
Commitments pursuant to Section 2.04, the Borrower agrees to make a
prepayment in respect of the outstanding amount of Advances to the
extent, if any, that the aggregate unpaid principal amount of all
Advances plus the Letter of Credit Exposure plus the aggregate
outstanding principal amount of the Swing Loans exceeds the
Commitment, as so reduced.
(ii) If at any time during the term of this Agreement, the
aggregate outstanding principal amount of Advances plus the Letter of
Credit Exposure plus the aggregate outstanding principal amount of the
Swing Loans exceeds the Borrowing Base, the Borrower shall immediately
upon demand pay to the Agent for the benefit of the Banks for
application against the Advances as directed by the Borrower an amount
equal to the amount of such excess, including any unpaid accrued
interest on the principal amount prepaid.
(iii) Each prepayment pursuant to this Section 2.07(c)
shall be accompanied by accrued interest on the amount prepaid to the
date of such
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prepayment and amounts, if any, required to be paid pursuant to
Section 2.08 as a result of such prepayment being made on such date.
(d) Illegality. If any Bank shall notify the Agent and the
Borrower that the introduction of or any change in or in the interpretation of
any law or regulation makes it unlawful, or that any central bank or other
governmental authority asserts that it is unlawful for such Bank or its
Eurodollar Lending Office to perform its obligations under this Agreement to
maintain any Eurodollar Rate Advances of such Bank then outstanding hereunder,
(i) the Borrower shall, no later than 11:00 a.m. (Dallas, Texas, time), (A) if
not prohibited by law or regulation to maintain such Eurodollar Rate Advances
for the duration of the Interest Period, on the last day of the Interest Period
for each outstanding Eurodollar Rate Advance or (B) if prohibited by law or
regulation to maintain such Eurodollar Rate Advances for the duration of the
Interest Period, on the second Business Day following its receipt of such
notice prepay all of the Eurodollar Rate Advances of all of the Banks then
outstanding, together with accrued interest on the principal amount prepaid to
the date of such prepayment and amounts, if any, required to be paid pursuant
to Section 2.08 as a result of such prepayment being made on such date, (ii)
each Bank shall simultaneously make a Base Rate Advance to the Borrower on such
date in an amount equal to the aggregate principal amount of the Eurodollar
Rate Advances prepaid to such Bank, and (iii) the right of the Borrower to
select Eurodollar Rate Advances for any subsequent Borrowing shall be suspended
until the Bank which gave notice referred to above shall notify the Agent that
the circumstances causing such suspension no longer exist. Each Bank agrees to
use commercially reasonable efforts (consistent with its internal policies and
legal and regulatory restrictions) to designate a different Applicable Lending
Office if the making of such designation would avoid the effect of this
paragraph and would not, in the reasonable judgment of such Bank, be otherwise
disadvantageous to such Bank.
(e) Ratable Payments; Effect of Notice. Each payment of any
Advance pursuant to this Section 2.07 or any other provision of this Agreement
shall be made in a manner such that all Advances comprising part of the same
Borrowing are paid in whole or ratably in part. All notices given pursuant to
this Section 2.07 shall be irrevocable and binding upon the Borrower.
Section 2.08. Breakage Costs. If (a) any payment of principal of
any Eurodollar Rate Advance is made other than on the last day of the Interest
Period for such Advance as a result of any payment pursuant to Section 2.07 or
the acceleration of the maturity of the Notes pursuant to Article VII or (b)
the Borrower fails to make a principal or interest payment with respect to any
Eurodollar Rate Advance on the date such payment is due and payable, the
Borrower shall, within 10 days of any written demand sent by any Bank to the
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Borrower through the Agent, pay to the Agent for the account of such Bank any
amounts (without duplication of any other amounts payable in respect of
breakage costs) required to compensate such Bank for any additional losses,
out-of-pocket costs or expenses which it may reasonably incur as a result of
such payment or nonpayment, including, without limitation, any loss, cost or
expense actually incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by any Bank to fund or maintain such Advance.
Each Bank shall give the Agent and the Borrower a written notice detailing its
calculation of any costs payable under this Section 2.08 and such calculation
shall be conclusive and binding, absent manifest error.
Section 2.09. Increased Costs.
(a) Eurodollar Rate Advances. If, due to either (i) the
introduction of or any change (other than any change by way of imposition or
increase of reserve requirements included in the Eurodollar Rate Reserve
Percentage) in or in the interpretation of any law or regulation or (ii) the
compliance with any guideline or request from any central bank or other
governmental authority (whether or not having the force of law), there shall be
any increase in the cost to any Bank of agreeing to make or making, funding or
maintaining Eurodollar Rate Advances, then the Borrower shall from time to
time, upon demand by such Bank (with a copy of such demand to the Agent),
immediately pay to the Agent for the account of such Bank additional amounts
(without duplication of any other amounts payable in respect of increased
costs) sufficient to compensate such Bank for such increased cost; provided,
however, that, before making any such demand, each Bank agrees to use
commercially reasonable efforts (consistent with its internal policy and legal
and regulatory restrictions) to designate a different Applicable Lending Office
if the making of such a designation would avoid the need for, or reduce the
amount of, such increased cost and would not, in the reasonable judgment of
such Bank, be otherwise disadvantageous to such Bank. A certificate as to the
amount of such increased cost and detailing the calculation of such cost
submitted to the Borrower and the Agent by such Bank shall be conclusive and
binding for all purposes, absent manifest error.
(b) Capital Adequacy. If any Bank or the Issuing Bank determines
in good faith that compliance with any law or regulation or any guideline or
request from any central bank or other governmental authority (whether or not
having the force of law) implemented or effective after the date of this
Agreement affects or would affect the amount of capital required or expected to
be maintained by such Bank or the Issuing Bank or any corporation controlling
such Bank or the Issuing Bank and that the amount of such capital is increased
by or based upon the existence of such Bank's commitment to lend or the Issuing
Bank's commitment to issue the Letters of Credit and other commitments of this
type, then, upon
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30 days prior written notice by such Bank or the Issuing Bank (with a copy of
any such demand to the Agent), the Borrower shall immediately pay to the Agent
for the account of such Bank or to the Issuing Bank, as the case may be, from
time to time as specified by such Bank or the Issuing Bank, additional amounts
(without duplication of any other amounts payable in respect of increased
costs) sufficient to compensate such Bank or the Issuing Bank, in light of such
circumstances, (i) with respect to such Bank, to the extent that such Bank
reasonably determines such increase in capital to be allocable to the existence
of such Bank's commitment to lend under this Agreement and (ii) with respect to
the Issuing Bank, to the extent that the Issuing Bank reasonably determines
such increase in capital to be allocable to the issuance or maintenance of the
Letters of Credit. A certificate as to such amounts and detailing the
calculation of such amounts submitted to the Borrower by such Bank or the
Issuing Bank shall be conclusive and binding for all purposes, absent manifest
error. The Borrower shall not be obligated to compensate any Bank or the
Issuing Bank pursuant to this paragraph (b) for reduced return accruing prior
to the date which is 90 days before such Bank or the Issuing Bank requests
compensation; provided that if any law, rule or regulation, or interpretation
or administration thereof, or any request or directive giving rise to reduced
returns has retroactive effect, such Bank or the Issuing Bank shall be entitled
to claim compensation under this paragraph for the period commencing on such
date of retroactive effect through the date of adoption or change or
promulgation thereof without regard to the foregoing limitation.
(c) Letters of Credit. If any change in any law or regulation or
in the interpretation thereof by any court or administrative or governmental
authority charged with the administration thereof shall either (i) impose,
modify, or deem applicable any reserve, special deposit, or similar requirement
against letters of credit issued by, or assets held by, or deposits in or for
the account of, the Issuing Bank or (ii) impose on the Issuing Bank any other
condition regarding the provisions of this Agreement relating to the Letters of
Credit or any Letter of Credit Obligations, and the result of any event
referred to in the preceding clause (i) or (ii) shall be to increase the cost
to the Issuing Bank of issuing or maintaining any Letter of Credit (which
increase in cost shall be determined by the Issuing Bank's reasonable
allocation of the aggregate of such cost increases resulting from such event),
then, upon demand by the Issuing Bank, the Borrower shall pay to the Issuing
Bank, from time to time as specified by the Issuing Bank, additional amounts
which shall be sufficient to compensate the Issuing Bank for such increased
cost. The Issuing Bank agrees to use commercially reasonable efforts
(consistent with internal policy and legal and regulatory restrictions) to
designate a different Applicable Lending Office for the booking of its Letters
of Credit if the making of such designation would avoid the effect of this
paragraph and would not, in the reasonable judgment of the Issuing Bank, be
otherwise disadvantageous to the Issuing Bank. A certificate as to such
increased cost incurred by the Issuing Bank, as a result of any event
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mentioned in clause (i) or (ii) above, and detailing the calculation of such
increased costs submitted by the Issuing Bank to the Borrower, shall be
conclusive and binding for all purposes, absent manifest error.
Section 2.10. Payments and Computations.
(a) Payment Procedures. The Borrower shall make each payment
under this Agreement and under the Notes not later than 11:00 a.m. (Dallas,
Texas, time) on the day when due in Dollars to the Agent at the location
referred to in the Notes (or such other location as the Agent shall designate
in writing to the Borrower) in same day funds. The Agent shall promptly
thereafter, and in any event prior to the close of business on the day any
timely payment is made, cause to be distributed like funds relating to the
payment of principal, interest or fees ratably (other than amounts payable
solely to the Agent, the Issuing Bank, NationsBank, or a specific Bank pursuant
to Section 2.01(b), 2.03(b), 2.06(c), 2.08, 2.09, 2.11, or 2.13, but after
taking into account payments effected pursuant to Section 9.04) in accordance
with each Bank's Pro Rata Share to the Banks for the account of their
respective Applicable Lending Offices, and like funds relating to the payment
of any other amount payable to any Bank or the Issuing Bank to such Bank for
the account of its Applicable Lending Office, in each case to be applied in
accordance with the terms of this Agreement.
(b) Computations. All computations of interest based on the Base
Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as
the case may be, and all computations of interest based on the Eurodollar Rate,
the Federal Funds Rate, and of fees shall be made by the Agent, on the basis of
a year of 360 days, in each case for the actual number of days (including the
first day, but excluding the last day) occurring in the period for which such
interest or fees are payable. Each determination by the Agent of an interest
rate shall be conclusive and binding for all purposes, absent manifest error.
(c) Non-Business Day Payments. Whenever any payment shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest or fees, as the case
may be; provided, however, that if such extension would cause payment of
interest on or principal of Eurodollar Rate Advances to be made in the next
following calendar month, such payment shall be made on the next preceding
Business Day.
(d) Agent Reliance. Unless the Agent shall have received written
notice from the Borrower prior to the date on which any payment is due to the
Banks that the Borrower shall
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not make such payment in full, the Agent may assume that the Borrower has made
such payment in full to the Agent on such date and the Agent may, in reliance
upon such assumption, cause to be distributed to each Bank on such date an
amount equal to the amount then due such Bank. If and to the extent the
Borrower shall not have so made such payment in full to the Agent, each Bank
shall repay to the Agent forthwith on demand such amount distributed to such
Bank, together with interest, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate for such day.
Section 2.11. Taxes.
(a) No Deduction for Certain Taxes. Any and all payments by the
Borrower shall be made, in accordance with Section 2.10, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Bank, the Issuing Bank, and the Agent, taxes
imposed on its income, and franchise taxes imposed on it, by the jurisdiction
under the laws of which such Bank, the Issuing Bank, or the Agent (as the case
may be) is organized or any political subdivision of the jurisdiction (all such
nonexcluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes") and, in the case of each
Bank and the Issuing Bank, Taxes by the jurisdiction of such Bank's Applicable
Lending Office or any political subdivision of such jurisdiction. If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable to any Bank, the Issuing Bank, or the Agent, (i) the sum payable
shall be increased as may be necessary so that, after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.11), such Bank, the Issuing Bank, or the Agent (as the case may
be) receives an amount equal to the sum it would have received had no such
deductions been made; provided, however, that if the Borrower's obligation to
deduct or withhold Taxes is caused solely by such Bank's, the Issuing Bank's,
or the Agent's failure to provide the forms described in paragraph (e) of this
Section 2.11 and such Bank, the Issuing Bank, or the Agent could have provided
such forms, no such increase shall be required; (ii) the Borrower shall make
such deductions; and (iii) the Borrower shall pay the full amount deducted to
the relevant taxation authority or other authority in accordance with
applicable law.
(b) Other Taxes. In addition, the Borrower agrees to pay any
present or future stamp or documentary taxes or any other excise or property
taxes, charges or similar levies which arise from any payment made or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement, the Notes, or the other Credit Documents (hereinafter referred to as
"Other Taxes").
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(c) Indemnification. The Borrower indemnifies each Bank, the
Issuing Bank, and the Agent for the full amount of Taxes or Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed by any
jurisdiction on amounts payable under this Section 2.11) paid by such Bank, the
Issuing Bank, or the Agent (as the case may be) and any liability (including
interest and expenses) arising therefrom or with respect thereto, whether or
not such Taxes or Other Taxes were correctly or legally asserted. Each payment
required to be made by the Borrower in respect of this indemnification shall be
made to the Agent for the benefit of any party claiming such indemnification
within 30 days from the date the Borrower receives written demand detailing the
calculation of such amounts therefor from the Agent on behalf of itself as
Agent, the Issuing Bank, or any such Bank. If any Bank, the Agent, or the
Issuing Bank receives a refund in respect of any taxes paid by the Borrower
under this paragraph (c), such Bank, the Agent, or the Issuing Bank, as the
case may be, shall promptly pay to the Borrower the Borrower's share of such
refund.
(d) Evidence of Tax Payments. The Borrower shall pay prior to
delinquency all Taxes payable in respect of any payment. Within 30 days after
the date of any payment of Taxes, the Borrower shall furnish to the Agent, at
its address referred to in Section 9.02, the original or a certified copy of a
receipt evidencing payment of such Taxes.
Section 2.12. Sharing of Payments, Etc. If any Bank shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off or otherwise) on account of the Advances made by it in excess of its
Pro Rata Share of payments on account of the Advances or Letter of Credit
Obligations obtained by all the Banks, such Bank shall notify the Agent and
forthwith purchase from the other Banks such participations in the Advances
made by them or Letter of Credit Obligations held by them as shall be necessary
to cause such purchasing Bank to share the excess payment ratably in accordance
with the requirements of this Agreement with each of them; provided, however,
that if all or any portion of such excess payment is thereafter recovered from
such purchasing Bank, such purchase from each Bank shall be rescinded and such
Bank shall repay to the purchasing Bank the purchase price to the extent of
such Bank's ratable share (according to the proportion of (a) the amount of the
participation sold by such Bank to the purchasing Bank as a result of such
excess payment to (b) the total amount of such excess payment) of such
recovery, together with an amount equal to such Bank's ratable share (according
to the proportion of (a) the amount of such Bank's required repayment to the
purchasing Bank to (b) the total amount of all such required repayments to the
purchasing Bank) of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Borrower
agrees that any Bank so purchasing a participation from another Bank pursuant
to this Section 2.12 may, to the fullest extent permitted by law, unless and
until rescinded as provided above, exercise all its rights of payment
(including the right of
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set-off) with respect to such participation as fully as if such Bank were the
direct creditor of the Borrower in the amount of such participation.
Section 2.13. Letters of Credit.
(a) Issuance. From time to time from the date of this Agreement
until three months before the Maturity Date, at the request of the Borrower,
the Issuing Bank shall, on the terms and conditions hereinafter set forth,
issue, increase, or extend the expiration date of Letters of Credit for the
account of the Borrower on any Business Day. No Letter of Credit shall be
issued, increased, or extended if such issuance, increase, or extension would
cause the Letter of Credit Exposure to exceed $5,000,000 or the aggregate
outstanding amount of the Advances plus the Letter of Credit Exposure plus the
aggregate outstanding amount of the Swing Loans to exceed the lesser of (i) the
aggregate outstanding Commitments or (ii) the Borrowing Base. No Letter of
Credit shall be issued, increased, or extended (A) if such Letter of Credit has
an Expiration Date later than the earlier of 18 months after the date of
issuance thereof or the Maturity Date; (B) if such Letter of Credit is not in
form and substance acceptable to the Issuing Bank in its sole discretion; (C)
unless the Borrower has delivered to the Issuing Bank a completed and executed
letter of credit application on the Issuing Bank's standard form; and (D)
unless such Letter of Credit is governed by the Uniform Customs and Practice
for Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500 ("UCP") or any successor to the UCP. If the terms of any
letter of credit application referred to in the foregoing clause (D) conflicts
with the terms of this Agreement, the terms of this Agreement shall control.
On the date of the making of the initial Advance under this Agreement, each
letter of credit issued and outstanding under the Existing Agreement shall be
deemed to be a Letter of Credit issued and outstanding under this Agreement.
(b) Participations. On the date of the making of the initial
Advance under this Agreement and upon the date of the issuance or increase of a
Letter of Credit, the Issuing Bank shall be deemed to have sold to each other
Bank and each other Bank shall have been deemed to have purchased from the
Issuing Bank a participation in the related Letter of Credit Obligations equal
to such Bank's Pro Rata Share at such date and such sale and purchase shall
otherwise be in accordance with the terms of this Agreement. The Issuing Bank
shall promptly notify each such participant Bank by telex, telephone, or
telecopy of each Letter of Credit issued or increased and the actual dollar
amount of such Bank's participation in such Letter of Credit.
(c) Reimbursement. The Borrower hereby agrees to pay on demand to
the Issuing Bank for the benefit of the Banks in respect of each Letter of
Credit an amount equal
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to any amount paid by the Issuing Bank under or in respect of such Letter of
Credit. In the event the Issuing Bank makes a payment pursuant to a request
for draw presented under a Letter of Credit and such payment is not promptly
reimbursed by the Borrower upon demand, the Issuing Bank shall give notice of
such payment to the Agent and the Banks, and each Bank shall promptly reimburse
the Issuing Bank for such Bank's Pro Rata Share of such payment, and such
reimbursement shall be deemed for all purposes of this Agreement to constitute
a Base Rate Advance to the Borrower from such Bank. If such reimbursement is
not made by any Bank to the Issuing Bank on the same day on which the Issuing
Bank shall have made payment on any such draw, such Bank shall pay interest
thereon to the Issuing Bank at a rate per annum equal to the Federal Funds
Rate. The Borrower hereby unconditionally and irrevocably authorizes,
empowers, and directs the Agent and the Banks to record and otherwise treat
such payment under a Letter of Credit not immediately reimbursed by the
Borrower as a Borrowing comprised of Base Rate Advances to the Borrower.
(d) Obligations Unconditional. The obligations of the Borrower
under this Agreement in respect of each Letter of Credit shall be unconditional
and irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement under all circumstances, notwithstanding the following
circumstances:
(i) any lack of validity or enforceability of any Letter of
Credit Documents;
(ii) any amendment or waiver of or any consent to departure
from any Letter of Credit Documents;
(iii) the existence of any claim, set-off, defense or other
right which the Borrower may have at any time against any beneficiary
or transferee of such Letter of Credit (or any Persons for whom any
such beneficiary or any such transferee may be acting), the Issuing
Bank or any other person or entity, whether in connection with this
Agreement, the transactions contemplated in this Agreement or in any
Letter of Credit Documents or any unrelated transaction;
(iv) any statement or any other document presented under
such Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect to the extent the Issuing Bank would not be
liable therefor pursuant to the following paragraph (e);
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(v) payment by the Issuing Bank under such Letter of
Credit against presentation of a draft or certificate which does not
comply with the terms of such Letter of Credit; or
(vi) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing;
provided, however, that nothing contained in this paragraph (d) shall be deemed
to constitute a waiver of any remedies of the Borrower in connection with the
Letters of Credit.
(e) Liability of Issuing Bank. The Borrower assumes all risks of
the acts or omissions of any beneficiary or transferee of any Letter of Credit
with respect to its use of such Letter of Credit. Neither the Issuing Bank nor
any of its officers or directors shall be liable or responsible for:
(i) the use which may be made of any Letter of Credit or
any acts or omissions of any beneficiary or transferee in connection
therewith;
(ii) the validity, sufficiency or genuineness of
documents, or of any endorsement thereon, even if such documents
should prove to be in any or all respects invalid, insufficient,
fraudulent or forged;
(iii) payment by the Issuing Bank against presentation of
documents which do not comply with the terms of a Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to the relevant Letter of Credit; or
(iv) any other circumstances whatsoever in making or
failing to make payment under any Letter of Credit (INCLUDING THE
ISSUING BANK'S OWN NEGLIGENCE),
except that the Borrower shall have a claim against the Issuing Bank, and the
Issuing Bank shall be liable to, and shall promptly pay to, the Borrower, to
the extent of any direct, as opposed to consequential, damages suffered by the
Borrower which the Borrower proves were caused by (A) the Issuing Bank's
willful misconduct or gross negligence in determining whether documents
presented under a Letter of Credit comply with the terms of such Letter of
Credit or (B) the Issuing Bank's willful failure to make lawful payment under
any Letter of Credit after the presentation to it of a draft and certificate
strictly complying with the terms and conditions of such Letter of Credit.
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In furtherance and not in limitation of the foregoing, the Issuing Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary.
ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Initial Borrowings and
Issuance of Letters of Credit. The obligation of each Bank to make its initial
Advance as part of the initial Borrowing and of the Issuing Bank to issue the
initial Letters of Credit is subject to the conditions precedent that:
(a) Documentation. On or before the day on which the initial
Borrowing is made or the initial Letters of Credit are issued, the Agent shall
have received the following duly executed by all the parties thereto, in form
and substance satisfactory to the Agent and (except for the Notes) in
sufficient copies for each Bank:
(i) this Agreement with all exhibits and schedules
attached hereto;
(ii) the Notes dated as of the date hereof payable to the
order of each of the Banks, respectively, and the Swing Note dated as
of the date hereof payable to the order of NationsBank;
(iii) a Guaranty executed by each of the Borrower's
Subsidiaries (other than its Canadian Subsidiaries);
(iv) the Pledge Agreement dated as of the date hereof made
by the Borrower in favor of the Agent pledging 65% of the common stock
of DGW Electronics Corporation to the Agent for the benefit of the
Agent and the ratable benefit of the Banks, the stock certificates
evidencing such common stock, and stock powers in blank in form
acceptable to the Agent;
(v) a certificate from the Chief Executive Officer,
President or Chief Financial Officer of the Borrower dated as of the
date of the initial Advance under this Agreement stating that as of
such date (A) all representations and warranties of the Borrower set
forth in this Agreement are true and correct in all material respects
and (B) no Default has occurred and is continuing;
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(vi) copies, each certified as of the date of this
Agreement by a Secretary or Assistant Secretary of the Borrower and
each Guarantor (A) of the resolutions of the Board of Directors of the
Borrower or such Guarantor, as the case may be, and authorizing the
execution and delivery of each Credit Document to which such Person is
a party and (B) of the certificate of incorporation and bylaws of the
Borrower or such Guarantor, as the case may be;
(vii) a certificate of the Secretary or an Assistant
Secretary of the Borrower and each Guarantor dated as of the date of
this Agreement certifying as of such date the names and true
signatures of officers of the Borrower or such Guarantor, as the case
may be, authorized to sign the Credit Documents to which such Person
is a party;
(viii) a favorable opinion of Schlanger, Mills, Moyer &
Grossberg, L.L.P., counsel to the Borrower and the Guarantors, dated
as of the date of this Agreement, in form and substance satisfactory
to the Agent; and
(ix) such other documents, governmental certificates,
agreements, licenses, lien searches as the Agent or any Bank may
reasonably request.
(b) No Material Adverse Effect. No event or events which,
individually or in the aggregate has had or is reasonably likely to cause a
Material Adverse Effect shall have occurred.
(c) Payment of Fees. The Borrower shall have paid the fees
required by paragraph (b) of Section 2.03 when required by such paragraph and
all costs and expenses which have been invoiced and are payable pursuant to
Section 9.04.
(d) Termination of Existing Credit Agreement. The Existing Credit
Agreement shall have been terminated in a manner reasonably satisfactory to the
Agent and all of the Borrower's obligations thereunder and under the $5,000,000
Promissory Note dated December 15, 1995 by the Borrower payable to NationsBank
shall have been repaid in full.
Section 3.02. Conditions Precedent to all Borrowings and Issuances
of Letters of Credit. The obligation of each Bank to fund an Advance on the
occasion of each Borrowing
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'and of the Issuing Bank to issue, increase, or extend any Letter of Credit
shall be subject to the further conditions precedent that on the date of such
Borrowing or the issuance, increase, or extension of such Letter of Credit:
(a) the following statements shall be true (and each of the giving
of the applicable Notice of Borrowing and the acceptance by the Borrower of the
proceeds of such Borrowing or the issuance, increase, or extension of such
Letter of Credit shall constitute a representation and warranty by the Borrower
that on the date of such Borrowing or the issuance, increase, or extension of
such Letter of Credit such statements are true):
(i) the representations and warranties contained in
Article IV of this Agreement and in the Guaranties and Security
Documents are correct in all material respects on and as of the date of
such Borrowing or the issuance or increase of such Letter of Credit,
before and after giving effect to such Borrowing or to the issuance,
increase, or extension of such Letter of Credit and to the application
of the proceeds from such Borrowing, as though made on and as of such
date and
(ii) no Default has occurred and is continuing or would
result from such Borrowing or from the application of the proceeds
therefrom; and
(b) the Agent shall have received such other approvals, opinions
or documents deemed necessary or desirable by any Bank as a result of
circumstances occurring after the date of this Agreement, as any Bank through
the Agent may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
Section 4.01. Organization, Standing and Qualification. Each
Credit Party which is a corporation is duly and validly organized and existing
and in good standing under the laws of its state of incorporation, and is
authorized to do business and is in good standing in all jurisdictions in which
such qualification or authorization is necessary or where the failure to be so
qualified would not have a Material Adverse Effect. Each Credit Party which is
a partnership is duly and validly formed and existing and, if applicable, in
good standing under the laws of its state of formation, and is authorized to do
business and, if applicable, is in
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good standing in all jurisdictions in which such qualification or authorization
is necessary or where the failure to be so qualified would not have a Material
Adverse Effect.
Section 4.02. Authority. Each Credit Party has all corporate or
partnership power and permits required to own and operate its properties and to
carry on its businesses as it now conducted. The Credit Documents have each
been duly authorized, executed, and delivered by and constitute legal, valid,
and binding obligations of each Credit Party, enforceable in accordance with
their respective terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws at the time in effect affecting the
rights of creditors generally.
Section 4.03. Financial Condition. The Borrower has delivered to
the Agent and the Banks the Financial Statements and the Interim Financial
Statements. The Financial Statements and Interim Financial Statements are
accurate in all material respects and present fairly in accordance with GAAP
the financial condition of the Borrower as of their respective dates, except as
set forth in the Financial Statements and Interim Financial Statements. Except
as disclosed in Schedule 2 under "Contingent Liabilities", as of the date of
this Agreement there are no material contingent obligations, liabilities for
taxes, unusual forward or long-term commitments, or material unrealized or
anticipated losses of any Credit Party except as disclosed in the Financial
Statements and Interim Financial Statements or notes thereto which are not
either reserved against on, or disclosed in the notes to, the Financial
Statements and Interim Financial Statements. No Material Adverse Effect has
occurred since the date of the Financial Statements or the Interim Financial
Statements.
Section 4.04. Litigation. Except as specifically disclosed in
Schedule 2 under "Litigation," there are no actions, suits, or proceedings
pending or, to the knowledge of the Borrower, threatened against any Credit
Party at law, in equity, or in admiralty, or by or before any governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, or any arbitrator, which could result in the occurrence of a Material
Adverse Effect.
Section 4.05. Subsidiaries. The Borrower has no Subsidiaries other
than those specifically disclosed in Schedule 2 under "Subsidiaries" and
Subsidiaries formed after the date hereof in compliance with Section 5.07.
Section 4.06. No Violation or Conflicts. No Credit Party is in
violation of any provision of any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other agreement or instrument
evidencing or pertaining to any Debt of such Credit Party, and the execution
and delivery of this Agreement, the consummation of the
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transactions and the execution and delivery of the instruments contemplated
hereby, and fulfillment of the terms and compliance with the provisions hereof
and thereof, shall not result in any violation or breach of any provisions of,
or constitute a default under, any such agreement or instrument. No Credit
Party is bound by any contract which could reasonably be expected to cause a
Material Adverse Effect.
Section 4.07. Defaults. No Default or Event of Default exists, and
no Credit Party is in default under, nor has any event or circumstance occurred
which, but for the passage of time or the giving of notice, or both, would
constitute a default under (a) any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement, or other agreement or instrument
evidencing or pertaining to any Debt of any Credit Party or (b) any other
material agreement or instrument to which any Credit Party is a party or by
which any Credit Party is bound.
Section 4.08. Investment Company Act. No Credit Party is an
investment company within the meaning of the Investment Company Act of 1940, as
amended, nor is, directly or indirectly, controlled by or acting on behalf of
any Person which is an investment company, within the meaning of said Act.
Section 4.09. Public Utility Holding Company Act. No Credit Party
is a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company," or a "subsidiary company" of an "affiliate"
of a "holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.
Section 4.10. Compliance with Laws, Etc. Each Credit Party (a) has
been and is in compliance in all material respects with all applicable laws,
rules, regulations, and orders applicable to such Credit Party, including ERISA
and Environmental Laws, (b) has paid and discharged all applicable taxes,
assessments, and governmental charges or levies imposed upon such Credit Party
or any property of such Credit Party, and (c) has paid all lawful claims which
if unpaid might become a Lien upon any property of such Credit Party, except
and to the extent that the same are being contested in good faith by proper
proceedings and for which reserves in conformity with GAAP, if required by such
principles, have been provided for on the books of such Credit Party.
Section 4.11 True and Complete Disclosure. All factual
information furnished by or on behalf of any Credit Party in writing to the
Agent or any Bank in connection with the Credit Documents and the transactions
contemplated thereby is true and accurate in all material respects on the date
as of which such information was dated or certified and does not contain any
untrue statement of material fact or omit to state any material fact necessary
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to make the statements contained therein not misleading. All projections,
estimates, and pro forma financial information furnished by any Credit Party
were prepared on the basis of assumptions, data, information, tests, or
conditions believed to be reasonable at the time such projections, estimates,
and pro forma financial information were furnished.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as any Note or the Swing Note or any amount under any Credit Document
shall remain unpaid, any Letter of Credit shall remain outstanding, or any Bank
shall have any Commitment hereunder, the Borrower shall and shall cause each
other Credit Party to comply with the following covenants.
Section 5.01 Information. The Borrower shall deliver to the Agent
and the Banks:
(a) as soon as available, but in any event within 90 days after
the conclusion of each fiscal year of the Borrower, the audited consolidated
financial statements of the Borrower including a balance sheet as of the end of
such fiscal year and the related statements of income, retained earnings, and
cash flow prepared in conformity with GAAP consistently applied, setting forth
in each case in comparative form the figures for the previous fiscal year,
together with a report thereon by independent certified public accountants of
nationally recognized standing selected by the Borrower acceptable to the Agent
and a certificate of such accountants stating that, in making the examination
necessary for their above described report, they obtained no knowledge, except
as specifically stated, of any Default or Event of Default;
(b) as soon as available, but in any event within 45 days after
the end of each Fiscal Quarter (or, with respect to each fourth Fiscal Quarter,
within 90 days after the end of such Fiscal Quarter) an unaudited consolidated
balance sheet of the Borrower as at the close of such Fiscal Quarter and the
related consolidated statements of income, retained earnings, and cash flow for
such Fiscal Quarter and for the three prior Fiscal Quarters setting forth in
each case in comparative form the figures for the corresponding Fiscal Quarter
in the previous fiscal year, all of which shall be certified as accurate by an
officer of the Borrower, together with a duly completed Compliance Certificate
as of the end of such Fiscal Quarter;
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(c) as soon as available, but in any event within 30 days after
the end of each calendar month, a listing and aging summary of all accounts
receivable of each Credit Party for such month, and a duly completed Borrowing
Base Certificate for such month;
(d) promptly following the filing of any document with the
Securities and Exchange Commission, a copy of the document filed with the
Securities and Exchange Commission; and
(e) from time to time, such other information concerning any
Credit Party, its business, assets, properties, condition and operations as the
Agent or any Bank may reasonably request.
Section 5.02. Notification of Adverse Events. The Borrower shall
give the Agent and the Banks prompt and full notice of:
(a) all disputes, asserted claims, suits, or controversies if the
aggregate potential loss by the Credit Parties not covered by insurance exceeds
$1,000,000;
(b) the occurrence of any Default or Event of Default;
(c) (i) any default by any Credit Party under any other agreement
in which such Credit Party's liability or potential liability exceeds
$1,000,000 and involving the potential exercise of foreclosure rights upon the
assets of any Credit Party or (ii) the forfeiture by a Credit Party of any
earnest money or escrow deposit in excess of $1,000,000 or the incurrence of
liquidated damages in excess of $1,000,000; and
(d) any other event or occurrence which would cause a Material Adverse
Effect.
Section 5.03. Inspection. The Agent and any Bank, or its their
representatives, may during normal business hours and upon 24 hours advance
notice, inspect the books, records, assets, and properties of any Credit Party
and, with respect to financial and accounting records, make copies thereof and
take extracts therefrom, and each Credit Party agrees to assist in any such
inspections.
Section 5.04. Compliance with Laws, Etc. Each Credit Party shall
(a) comply in all material respects with all applicable laws, rules,
regulations, and orders applicable to such Credit Party, including ERISA and
Environmental Laws, (b) pay and discharge all applicable taxes, assessments,
and governmental charges or levies imposed upon such Credit Party or any
property of such Credit Party, and (c) pay all lawful claims which if unpaid
might
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become a Lien upon any property of such Credit Party; provided that no Credit
Party shall be required to comply with any laws, pay any taxes, or pay any
claims which are being contested in good faith by proper proceedings and for
which reserves in conformity with GAAP, if required by such principles, have
been provided for on the books of such Credit Party.
Section 5.05. Conduct of Business and Financial Affairs. Except
for mergers, consolidations, or liquidations permitted by Section 6.05, each
Credit Party shall (a) take all such actions as from time to time may be
necessary to preserve and keep in full force and effect the existence of and
all rights, franchises and privileges material to the business of any Credit
Party; (b) remain qualified in each jurisdiction in which such qualification is
necessary in view of its business and operations and the ownership of its
properties, except where the failure to be so qualified would not have a
Material Adverse Effect; and (c) continue to conduct and operate its business
and financial affairs substantially as such affairs are presently conducted and
operated.
Section 5.06. Insurance. Each Credit Party shall maintain
insurance with responsible companies in such amounts and against such risks as
is usually carried by owners of similar businesses and properties in the same
general areas where such Credit Party operates.
Section 5.07. Guaranties; Pledge Agreements. The Borrower shall
cause each of its Subsidiaries, other than the Canadian Subsidiaries, to
promptly execute and deliver to the Agent a Guaranty in substantially the form
of Exhibit C with such modifications thereto as the Agent may reasonably
request. The Borrower shall cause 65% of the stock of each of the Canadian
Subsidiaries to be pledged to the Agent under a Pledge Agreement in
substantially the form of Exhibit D with such modifications thereto as the
Agent may reasonably request to the extent such interests can be pledged to the
Agent without causing deemed distributions of the income of the Canadian
Subsidiaries to the Borrower under the Code. In connection with the subsequent
execution of any Guaranties or the pledging additional securities under the
Pledge Agreements, the Borrower shall provide corporate documentation and
opinion letters reasonably satisfactory to the Agent reflecting the corporate
status of any new Subsidiaries of the Borrower and the enforceability of
documents.
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ARTICLE VI
NEGATIVE COVENANTS
So long as any Note or the Swing Note or any amount under any Credit
Document shall remain unpaid, any Letter of Credit remain outstanding, or any
Bank shall have any Commitment, the Borrower shall and shall cause each other
Credit Party to comply with the following covenants.
Section 6.01. Debt. No Credit Party shall create, assume, incur,
suffer to exist, or in any manner become liable, directly or indirectly, in
respect to any Debt other than:
(a) Debt in the form of indebtedness to the Agent and the Banks
under this Agreement and the Credit Documents and Debt owed to NationsBank
under the Swing Note;
(b) Debt in the form of indebtedness listed in Schedule 2 under
"Debt and Liens" and any extensions, rearrangements, and refinancings thereof
which do not increase the principal amount thereof;
(c) (i) unsecured term Debt not otherwise permitted under this
Section 6.01 in an original principal amount not to exceed $15,000,000;
provided that (A) if any such Debt includes a negative pledge, such negative
pledge shall be no more restrictive than Section 6.03, (B) the average life of
any such Debt is not less than five years on the date of incurrence of such
Debt, (C) on the date of incurrence of such Debt no Default shall have occurred
and be continuing or be caused thereby, and (D) the other terms and conditions
of any such Debt shall otherwise be reasonably satisfactory to the Agent and
the Majority Banks (but such terms may include guaranties by the Borrower's
Subsidiaries that are pari passu with the Guaranties) and (ii) guaranties by
the Borrower's Subsidiaries who are Guarantors of the Debt permitted under the
foregoing clause (i) that are pari passu with the Guaranties;
(d) Debt not otherwise permitted by this Section 6.01 in the form
of long-term indebtedness of the Borrower for borrowed money provided that (i)
the terms of such Debt are no more restrictive than this Agreement; (ii) the
aggregate principal amount of such Debt outstanding at any time does not exceed
the greater of (A) $10,000,000 or (B) 20% of the Consolidated Net Worth of the
Borrower at such time; and (iii) on the date of incurrence of such Debt no
Default shall have occurred and be continuing or be caused by the incurrence
thereof;
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(e) Debt not otherwise permitted by this Section 6.01 in the form
of capitalized leases and purchase money indebtedness, provided that (i) the
aggregate principal amount of such Debt outstanding at any time does not exceed
the greater of (A) $10,000,000 or (B) 20% of the Consolidated Net Worth of the
Borrower at such time and (ii) on the date of incurrence of such Debt no
Default shall have occurred and be continuing or be caused by the incurrence
thereof;
(f) Debt in the form of indebtedness owed by wholly-owned
Subsidiaries of the Borrower to the Borrower; provided that any such Debt owed
by a Canadian Subsidiary shall be incurred and maintained in compliance with
Section 6.07; and
(g) Debt (i) existing at the time a Person becomes a Subsidiary of
the Borrower or (ii) assumed in connection with the acquisition of assets from
another Person, other than Debt incurred in connection with, or in
contemplation of such Person becoming a Subsidiary or such acquisition, as the
case may be; provided that no Default shall have occurred and be continuing or
be caused by such Person becoming a Subsidiary or by such assumption.
Section 6.02. Other Obligations. No Credit Party shall create,
assume, incur, suffer to exist, or in any manner become liable, directly or
indirectly, in respect to any unfunded vested benefits under any deferred
compensation plan, pension plan, or other similar obligation except for such
obligations of the Borrower not to exceed an aggregate outstanding amount of
$10,000,000.
Section 6.03. Liens. No Credit Party shall create, assume, incur,
or suffer to exist any Lien on any of its assets whether now owned or hereafter
acquired except:
(a) Liens securing the Credit Obligations;
(b) Liens disclosed in Schedule 2 under "Debt and Liens" provided
that each such Lien secures only the Debt described to be secured by such Lien
in such Schedule and such Lien is not spread to cover any additional property;
(c) Liens securing the Debt permitted by Section 6.01(c); provided
that (i) such Liens only encumber assets also securing the Credit Obligations
and are pari passu with, or junior in priority to, the Liens securing the
Credit Obligations, (ii) the Agent has the right to share for its benefit and
the ratable benefit of the Banks such Lien and the proceeds therefrom pro rata
based on the outstanding amount of the Debt secured, and (iii) the Agent for
its benefit and the ratable benefit of the Banks and the lender of such Debt
have entered into an intercreditor agreement reasonably satisfactory to the
Agent;
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(d) Liens securing capitalized leases and purchase money
indebtedness permitted under Section 6.01(e); provided that each such Lien
secures only the Debt incurred in connection with the acquisition of the
Property covered by such Lien and such Lien is not spread to cover any
additional property;
(e) Liens securing the Debt permitted by Section 6.01(g); provided
that such Liens only secure such Debt and do not spread to cover any property
other than the Property of the new Subsidiary or the assets acquired; and
(f) Liens imposed by law, such as materialmen's, mechanics',
carriers', workmen's and repairmen's liens, and other similar liens arising in
the ordinary course of business securing obligations which are not overdue for
a period of more than 30 days, Liens for taxes, assessments, or other
governmental charges which are not yet due or which are being actively
contested in good faith by appropriate proceedings, and other Liens arising in
the ordinary course of business which are not incurred in connection with the
borrowing of money or the obtaining of advances or credit and which do not
materially detract from the value of its property or its assets or materially
impair the use thereof in the operation of its business.
Section 6.04. Negative Pledge. No Credit Party shall (a) except
with respect to specific property encumbered to secure payment of Debt related
to such property and permitted by this Agreement, make any promise or agreement
that imposes restrictions greater than those under this Agreement upon the
creation or assumption of any Lien upon its properties, revenues or assets,
whether now owned or hereafter acquired, or (b) make any promise or agreement
with another Person promising or agreeing to restrict its ability to make
payments of money, whether in the form of dividends, principal, interest,
loans, investments, or any other form, to any shareholder of such Credit Party
which is a Credit Party.
Section 6.05. Corporate Transactions. No Credit Party shall (a)
enter into any merger, consolidation, or amalgamation, or liquidate, wind up,
or dissolve itself (or suffer any liquidation or dissolution), (b) convey,
sell, lease, assign, transfer, or otherwise dispose of any of its property,
business, or assets (other than inventory in the ordinary course or business),
or (c) make any material change in its present method of conducting business,
except that any Credit Party may merge or consolidate with or into any Person,
any Credit Party may sell, lease, assign, transfer, or otherwise dispose of its
property, business, or assets
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to any Person, and any Subsidiary of the Borrower may liquidate so long as such
transaction does not:
(i) cause the Borrower to be merged or consolidated with
or into any Person if the Borrower is not the continuing or surviving
Person;
(ii) cause any Subsidiary to be merged or consolidated
with or into any Person or liquidate if the Borrower or any Subsidiary
is not the continuing or surviving Person or if the Borrower does not
receive the proceeds or assets in connection with a liquidation;
(iii) cause the Borrower or any Subsidiary to be merged or
consolidated with or into any Person that is not the Borrower or any
Subsidiary unless the Agent is given advance written notice thereof;
(iv) cause the sale, lease, assignment, transfer, or other
disposition of property or assets of the Borrower and its Subsidiaries
to any Person other than the Borrower in any fiscal year of the
Borrower with a fair market value of more than the greater of (A)
$5,000,000 or (B) 10% of the Borrower's Consolidated Net Worth as of
the beginning of such fiscal year;
(v) cause the Borrower or any Subsidiary or all or
substantially all of the assets of the Borrower or any Subsidiary to
be subject to liabilities which would reasonably be expected to cause
any Material Adverse Effect; or
(vi) occur when a Default or an Event of Default has
occurred and is continuing or cause any Default or Event of Default or
any circumstances which would reasonably be expected to cause any
Default or Event of Default.
Section 6.06. Acquisitions. No Credit Party shall directly or
indirectly purchase or acquire, whether in one or more related transactions all
or substantially all of the assets, liabilities, or securities of a Person, a
division or business unit of a Person, or any related group of the foregoing or
any related group of assets, liabilities, or securities of any Person unless
(a) no Default or Event of Default exists and the making the purchase or
acquisition would not cause a Default or Event of Default, (b) the purchased or
acquired Person is in the same business as the purchasing or acquiring Credit
Party, and (c) the purchase or acquisition is not hostile, as reasonably
determined by the Agent.
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Section 6.07. Investments. No Credit Party shall purchase or
otherwise acquire, hold, or invest in the securities (whether capital stock or
instruments evidencing debt) of, or make loans or advances to, or enter into
any arrangement for the purpose of providing funds or credit to any other
Person (any such investment, loan, advance, or arrangement, being an
"Investment"), except:
(a) Investments in the Borrower and Subsidiaries (including any
Subsidiaries created or acquired by the Borrower after the date of this
Agreement) of the Borrower organized under a jurisdiction of the United States
and having all material assets in the United States ;
(b) Investments in the Canadian Subsidiaries in an aggregate
amount outstanding at any time not to exceed $12,000,000;
(c) Liquid Investments;
(d) investments in the form of accounts receivable from customers
of any Credit Party arising in the ordinary course of business;
(e) Investments disclosed in Schedule 2 under "Investments"; and
(f) Investments selected by the Borrower (other than Investments
in the Canadian Subsidiaries) in an aggregate amount outstanding at any time
not to exceed $5,000,000.
Section 6.08. Transactions with Affiliates. No Credit Party shall
enter into any transaction directly or indirectly with or for the benefit of an
Affiliate except that any Credit Party may enter into a transaction with an
Affiliate for the leasing of property, the rendering or receipt of services, or
the purchase or sale of inventory or other assets in the ordinary course of
business if the monetary or business consideration arising from such a
transaction would be substantially as advantageous to such Credit Party as the
monetary or business consideration which it would obtain in a comparable arm's
length transaction.
Section 6.09. Lines of Business. Each Credit Party shall not
change the character of its business as conducted on the date of this
Agreement, or engage in any type of business not reasonably related to its
business as presently and normally conducted except a Credit Party may acquire
a business or entity with an unrelated line of business so long as the
unrelated line of business is not a material part of the acquired business or
entity or such Credit Party divests the unrelated line of business within a
reasonable period of time not to exceed 12 months.
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Section 6.10. Use of Proceeds. The proceeds of the Advances and
the Letters of Credit shall be used by the Borrower only for acquisitions,
general corporate and working capital purposes. The Borrower shall not,
directly or indirectly, use any part of such proceeds for any purpose which
violates, or is inconsistent with, Regulations G, T, U, or X of the Board of
Governors of the Federal Reserve System.
Section 6.11. Financial Covenants.
(a) The Borrower shall not permit, as of the last day of any
Fiscal Quarter, the Consolidated Tangible Net Worth of the Borrower to be less
than the sum of (i) $30,045,750, plus (ii) 50% of the cumulative quarterly
consolidated net earnings of the Borrower determined at the end of each Fiscal
Quarter during which the Borrower has positive consolidated net earnings (and
therefore without reduction for any quarterly consolidated net losses) since
September 30, 1995, plus (iii) 75% of the net proceeds or net increase in
equity resulting from any sale or issuance of any stock of the Borrower or its
Subsidiaries, net (but not less than zero) of any repurchases of any common
stock of the Borrower, since September 30, 1995 (including the value added to
the Borrower's balance sheet from any conversion of convertible Debt).
(b) The Borrower shall not permit, as of the last day of any
Fiscal Quarter, the Consolidated Leverage Ratio of the Borrower to be greater
than 0.55 to 1.00.
(c) The Borrower shall not permit, as of the last day of any
Fiscal Quarter, the Consolidated Quick Ratio of the Borrower to be less than
1.00 to 1.00.
(d) The Borrower shall not permit, as of the last day of any
Fiscal Quarter, the Consolidated Fixed Charge Coverage Ratio of the Borrower
for the preceding four Fiscal Quarters to be less than 1.50 to 1.00.
Section 6.12. Restricted Payments. The Borrower will not make or
pay any dividend or other distribution (in cash, property, or otherwise) on, or
any payment for the purchase, redemption or other acquisition of, any shares of
its capital stock (any "Restricted Payment"), other than dividends payable in
the Borrower's common stock, if (a) the amount of such Restricted Payments
after September 30, 1995 would exceed $6,500,000 plus the net cash proceeds the
Borrower receives from the issuance of any common stock after the date hereof
plus 25% of the Borrower's cumulative consolidated net income from September
30, 1995 or (b) a Default exists or would result therefrom.
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ARTICLE VII
DEFAULT AND REMEDIES
Section 7.01. Events of Default. The occurrence of any of the
following events shall constitute an "Event of Default" under any Credit
Document:
(a) (i) The Borrower defaults in the payment when due of any
principal amount due under this Agreement, the Notes, or the Swing Note or (ii)
the Borrower shall not pay within five days of when due interest or any other
amount due and payable to the Agent or any Bank under the Credit Documents;
(b) Any representation or warranty made by the Borrower in any
Credit Document proves to have been in any material respect false or erroneous
at the time it was made or deemed made;
(c) The Borrower or any other Credit Party (i) fails to perform or
observe any covenant contained in Article VI of this Agreement or any negative
covenant or agreement contained in any other Credit Document or (ii) fails to
perform any covenant contained in Article V this Agreement or any affirmative
covenant or agreement in any other Credit Document and any such failure under
this clause (ii) shall exist for 30 consecutive days after the earlier of the
Borrower's receipt of notice from the Agent or any Bank of such failure or the
date the Borrower has actual knowledge of such failure;
(d) The Borrower shall fail to pay any principal of or premium or
interest on any of its Debt which is outstanding in a principal amount of at
least $1,000,000 in the aggregate (excluding Debt under the Credit Documents)
when the same becomes due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; or any other event shall occur or condition
shall exist under any agreement or instrument relating to any such Debt and
shall continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such event or condition is to
accelerate, or to permit the acceleration of, the maturity of such Debt; or any
such Debt shall be declared to be due and payable, or required to be prepaid
(other than by a regularly scheduled required prepayment), prior to the stated
maturity thereof;
(e) Any Guaranty shall at any time and for any reason cease to be
in full force and effect or shall be contested by any party thereto, or any
party thereto shall deny it has any
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further liability or obligation thereunder, or any provision of any Guaranty
shall be breached by any party thereto;
(f) Any Security Document shall at any time and for any reason
cease to create a first priority Lien on the property purported to be subject
to such agreement subject only to the Liens permitted thereunder securing the
obligations purported to be secured by such agreement, or cease to be in full
force and effect, or shall be contested by any party thereto, and any such
occurrence shall exist for 30 consecutive days after the earlier of the
Borrower's receipt of notice from the Agent or any Bank of such occurrence or
the date the Borrower has actual knowledge of such occurrence;
(g) The Borrower or any Guarantor suffers a final judgment against
it which, within 30 days from the date such judgment is entered, shall not have
been discharged or execution thereof stayed pending appeal, unless such
judgment is adequately covered by insurance or is for an amount less than
$1,000,000;
(h) The Borrower or any Guarantor (i) admits in writing its
inability to pay its debts generally as they become due; (ii) files a petition
in bankruptcy or a petition to take advantage of any insolvency act or other
act for the relief or aid of debtors; (iii) makes an assignment for the benefit
of its creditors; (iv) consents to or acquiesces in the appointment of a
receiver, liquidator, fiscal agent or trustee of itself or of the whole or any
substantial part of its property and assets; or (v) files a petition or answer
seeking for itself, consenting to or acquiescing in any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the Federal bankruptcy laws or any other applicable law, or fails
to deny the material allegations of, or to contest and cause to be dismissed
within 60 days of the filing of any such petition filed against it;
(i) A court of competent jurisdiction enters an order, judgment,
or decree appointing, without the consent or acquiescence of the Borrower or
any Guarantor, a receiver, liquidator, fiscal agent, or trustee for any such
Person or the whole or any substantial part of its properties or assets, or
approving a petition filed against it seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief under
the Federal bankruptcy laws or any other applicable law or adjudicating the
Borrower or such Guarantor as bankrupt, and such order, judgment, or decree
shall remain unvacated or not set aside or unstayed for an aggregate of 60
days, whether or not consecutive;
(j) The occurrence of any Change of Control; or
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(k) The occurrence of any material adverse change in the business,
financial condition, or results of operations of the Borrower since the date of
the Interim Financial Statements.
Section 7.02. Optional Acceleration of Maturity. If any Event of Default
(other than an Event of Default pursuant to paragraphs (h) or (i) of Section
7.01) shall have occurred and be continuing, then, and in any such event,
(a) the Agent (i) shall at the request, or may with the consent,
of the Majority Banks, by notice to the Borrower, declare the obligation of
each Bank to make Advances and the obligation of the Issuing Bank to issue,
increase, or extend Letters of Credit to be terminated, whereupon the same
shall forthwith terminate, and (ii) shall at the request, or may with the
consent, of the Majority Banks, by notice to the Borrower, declare the Notes,
the Swing Note, all interest on the Notes and the Swing Note, the Letter of
Credit Obligations, and all other amounts payable under the Credit Documents to
be forthwith due and payable, whereupon the Notes, the Swing Note, all such
interest, all such Letter of Credit Obligations and all other amounts under the
Credit Documents shall become and be forthwith due and payable in full, without
presentment, demand, protest or further notice of any kind (including, without
limitation, any notice of intent to accelerate or notice of acceleration), all
of which are hereby expressly waived by the Borrower;
(b) the Borrower shall, on demand of the Agent at the request or
with the consent of the Majority Banks, deposit with the Agent into the Cash
Collateral Account an amount of cash equal to the Letter of Credit Exposure as
security for the Credit Obligations to the extent the Letter of Credit
Obligations are not otherwise paid at such time; and
(c) the Agent shall at the request, or may with the consent, of
the Majority Banks proceed to enforce its rights under the Security Documents
for the ratable benefit of the Banks by appropriate proceedings.
Section 7.03. Automatic Acceleration of Maturity. If any Event of
Default pursuant to paragraphs (h) or (i) of Section 7.01 shall occur,
(a) the obligation of each Bank to make Advances and the
obligation of the Issuing Bank to issue, increase, or extend Letters of Credit
shall immediately and automatically be terminated and the Notes, the Swing
Note, all interest on the Notes and the Swing Note, all Letter of Credit
Obligations, and all other amounts payable under the Credit Documents shall
immediately and automatically become and be due and payable in full, without
presentment, demand, protest or any notice of any kind (including, without
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limitation, any notice of intent to accelerate or notice of acceleration), all
of which are hereby expressly waived by the Borrower;
(b) the Borrower shall deposit with the Agent into the Cash
Collateral Account an amount of cash equal to the outstanding Letter of Credit
Exposure as security for the Credit Obligations to the extent the Letter of
Credit Obligations are not otherwise paid at such time; and
(c) the Agent shall at the request, or may with the consent, of
the Majority Banks proceed to enforce its rights under the Security Documents
for the ratable benefit of the Banks by appropriate proceedings.
Section 7.04. Cash Collateral Account.
(a) Pledge. The Borrower hereby pledges, and grants to the Agent
for the benefit of the Banks, a security interest in all funds held in the Cash
Collateral Account from time to time and all proceeds thereof, as security for
the payment of the Credit Obligations, including all Letter of Credit
Obligations owing to the Issuing Bank or any other Bank due and to become due
from the Borrower to the Issuing Bank or any other Bank under this Agreement in
connection with the Letters of Credit. Nothing in this Section 7.04, however,
shall either obligate the Agent to require any funds to be deposited in the
Cash Collateral Account or limit the right of the Agent, which it may exercise
at any time and from time to time, to release to the Borrower any funds held in
the Cash Collateral Account pursuant to the other provisions of this Section
7.04.
(b) Application against Letter of Credit Obligations; Release of
Funds. The Agent may, at any time or from time to time apply funds then held
in the Cash Collateral Account to the payment of any Letter of Credit
Obligations owing to the Issuing Bank, in such order as the Agent may elect, as
shall have become or shall become due and payable by the Borrower to the
Issuing Bank under this Agreement in connection with the Letters of Credit. So
long as no Event of Default shall have occurred and be continuing, the Agent
shall release to the Borrower at the Borrower's written request funds held in
the Cash Collateral Account in an amount up to but not exceeding the excess, if
any (immediately prior to the release of any such funds), of (i) the total
amount of funds held in the Cash Collateral Account over (ii) the Letter of
Credit Exposure.
(c) Duty of Care. The Agent shall exercise reasonable care in the
custody and preservation of any funds held in the Cash Collateral Account and
shall be deemed to have exercised such care if such funds are accorded
treatment substantially equivalent to that
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which the Agent accords its own property, it being understood that the Agent
shall not have any responsibility for taking any necessary steps to preserve
rights against any parties with respect to any such funds.
Section 7.-05. Non-exclusivity of Remedies. No remedy conferred
upon the Agent is intended to be exclusive of any other remedy, and each remedy
shall be cumulative of all other remedies existing by contract, at law, in
equity, by statute or otherwise.
Section 7.06. Right of Set-off. Upon (a) the occurrence and during
the continuance of any Event of Default and (b) the making of the request or
the granting of the consent, if any, specified by Section 7.02 to authorize the
Agent to declare the Notes and any other amount payable hereunder due and
payable pursuant to the provisions of Section 7.02 or the automatic
acceleration of the Notes and all amounts payable under this Agreement pursuant
to Section 7.03, each Bank is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Bank to or for the credit
or the account of the Borrower against any and all of the obligations of the
Borrower now or hereafter existing under this Agreement, the Note held by such
Bank, and the other Credit Documents, irrespective of whether or not such Bank
shall have made any demand under this Agreement, such Note, or such other
Credit Documents, and although such obligations may be unmatured. Each Bank
agrees to promptly notify the Borrower after any such set-off and application
made by such Bank, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of each Bank
under this Section are in addition to any other rights and remedies (including,
without limitation, other rights of set-off) which such Bank may have.
ARTICLE VIII
THE AGENT AND THE ISSUING BANK
Section 8.01. Authorization and Action. Each Bank hereby appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof and of the other Credit Documents, together with such powers as
are reasonably incidental thereto. As to any matters not expressly provided
for by this Agreement or any other Credit Document (including, without
limitation, enforcement or collection of the Notes), the Agent shall not be
required to exercise any discretion or take any action, but shall be required
to act or to
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refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Majority Banks, and such instructions
shall be binding upon all Banks and all holders of Notes; provided, however,
that the Agent shall not be required to take any action which exposes the Agent
to personal liability or which is contrary to this Agreement, any other Credit
Document, or applicable law.
Section 8.02. Agent's Reliance, Etc. Neither the Agent nor any of
its directors, officers, agents or employees shall be liable for any action
taken or omitted to be taken (INCLUDING THE AGENT'S OWN NEGLIGENCE) by it or
them under or in connection with this Agreement or the other Credit Documents,
except for its or their own gross negligence or willful misconduct. Without
limitation of the generality of the foregoing, the Agent: (a) may treat the
payee of any Note as the holder thereof until the Agent receives written notice
of the assignment or transfer thereof signed by such payee and in form
satisfactory to the Agent; (b) may consult with legal counsel (including
counsel for the Borrower), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (c) makes no warranty or representation to any Bank and
shall not be responsible to any Bank for any statements, warranties or
representations made in or in connection with this Agreement or the other
Credit Documents; (d) shall not have any duty to ascertain or to inquire as to
the performance or observance of any of the terms, covenants or conditions of
this Agreement or any other Credit Document on the part of the Borrower or its
Subsidiaries or to inspect the property (including the books and records) of
the Borrower or its Subsidiaries; (e) shall not be responsible to any Bank for
the due execution, legality, validity, enforceability, genuineness, sufficiency
or value of this Agreement or any other Credit Document; and (f) shall incur no
liability under or in respect of this Agreement or any other Credit Document by
acting upon any notice, consent, certificate or other instrument or writing
(which may be by telecopier, telegram, cable or telex) believed by it to be
genuine and signed or sent by the proper party or parties.
Section 8.03. The Agent and Its Affiliates. With respect to its
Commitment, the Advances made by it and the Note issued to it, the Agent shall
have the same rights and powers under this Agreement as any other Bank and may
exercise the same as though it were not the Agent. The term "Bank" or "Banks"
shall, unless otherwise expressly indicated, include the Agent in its
individual capacity. The Agent and its Affiliates may accept deposits from,
lend money to, act as trustee under indentures of, and generally engage in any
kind of business with, the Borrower or any of its Subsidiaries, and any Person
who may do business with or own securities of the Borrower or any such
Subsidiary, all as if the Agent were not an agent hereunder and without any
duty to account therefor to the Banks.
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Section 8.04. Bank Credit Decision. Each Bank acknowledges that it
has, independently and without reliance upon the Agent or any other Bank and
based on the financial statements referred to in Section 4.03 and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
Section 8.05. Indemnification. The Banks severally agree to
indemnify the Agent and the Issuing Bank and each affiliate thereof and their
respective directors, officers, employees and agents (to the extent not
reimbursed by the Borrower), according to their respective Pro Rata Shares,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against the Agent and the Issuing Bank in any way relating to or arising out of
this Agreement or any action taken or omitted by the Agent or the Issuing Bank
under this Agreement or any other Credit Document (INCLUDING THE AGENT'S AND
THE ISSUING BANK'S OWN NEGLIGENCE), provided that no Bank shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
Agent's and the Issuing Bank's gross negligence or willful misconduct. Without
limitation of the foregoing, each Bank agrees to reimburse the Agent promptly
upon demand for its ratable share of any out-of-pocket expenses (including
counsel fees) incurred by the Agent in connection with the preparation,
execution, delivery, administration, modification, amendment or enforcement
(whether through negotiations, legal proceedings or otherwise) of, or legal
advice in respect of rights or responsibilities under, this Agreement or any
other Credit Document, to the extent that the Agent is not reimbursed for such
expenses by the Borrower.
Section 8.06. Successor Agent and Issuing Bank. The Agent or the
Issuing Bank may resign at any time by giving written notice thereof to the
Banks and the Borrower and may be removed at any time with or without cause by
the Majority Banks upon receipt of written notice from the Majority Banks to
such effect. Upon receipt of notice of any such resignation or removal, the
Majority Banks shall have the right to appoint a successor Agent or Issuing
Bank with, if an Event of Default has not occurred and is not continuing, the
consent of the Borrower, which consent shall not be unreasonably withheld. If
no successor Agent or Issuing Bank shall have been so appointed, and shall have
accepted such appointment, within 30 days after the retiring Agent's or Issuing
Bank's giving of notice of resignation or the Majority Banks' removal of the
retiring Agent or Issuing Bank, then the
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retiring Agent or Issuing Bank may, on behalf of the Banks and the Borrower,
appoint a successor Agent or Issuing Bank, which shall be a commercial bank
meeting the financial requirements of an Eligible Assignee and, in the case of
the Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or
Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or
Issuing Bank shall thereupon succeed to and become vested with all the rights,
powers, privileges and duties of the retiring Agent or Issuing Bank, and the
retiring Agent or Issuing Bank shall be discharged from its duties and
obligations under this Agreement and the other Credit Documents, except that
the retiring Issuing Bank shall remain the Issuing Bank with respect to any
Letters of Credit outstanding on the effective date of its resignation or
removal and the provisions affecting the Issuing Bank with respect to such
Letters of Credit shall inure to the benefit of the retiring Issuing Bank until
the termination of all such Letters of Credit. After any retiring Agent's or
Issuing Bank's resignation or removal hereunder as Agent or Issuing Bank, the
provisions of this Article VIII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent or Issuing Bank under
this Agreement and the other Credit Documents.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, the Notes, or any other Credit Document, nor
consent to any departure by the Borrower or any Guarantor therefrom, shall in
any event be effective unless the same shall be in writing and signed by the
Majority Banks and the Borrower, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
writing and signed by all the Banks and the Borrower, do any of the following:
(a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase
the Commitments of the Banks, (c) reduce the principal of, or interest on, the
Notes or any fees or other amounts payable hereunder or under any other Credit
Document, (d) postpone any date fixed for any payment of principal of, or
interest on, the Notes or any fees or other amounts payable hereunder, (e)
change the number of Banks which shall be required for the Banks or any of them
to take any action hereunder or under any other Credit Document, (f) amend
Section 2.12 or this Section 9.01, (g) release any Guarantor from its
obligations under any Guaranty; or (h) amend the definition of "Majority
Banks"; and provided, further, that no amendment, waiver or consent shall,
unless in writing and signed by the Agent or the Issuing Bank in addition to
the Banks required above to take such action, affect the rights or duties of
the
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Agent or the Issuing Bank, as the case may be, under this Agreement or any
other Credit Document.
Section 9.02. Notices, Etc. All notices and other communications
shall be in writing (including telecopy or telex) and mailed, telecopied,
telexed, hand delivered or delivered by a nationally recognized overnight
courier, if to the Borrower, at its address at 4201 Southwest Freeway, Houston,
Texas 77027, Attention: Chief Financial Officer (telecopy: (713) 629-3949;
telephone: (713) 627-9800); if to any Bank at its Domestic Lending Office
specified opposite its name on Schedule 1; if to the Agent or the Issuing Bank,
at its address at 700 Louisiana, Houston, Texas 77002, Attention: Mr. F.
Scott Singhoff, Senior Vice President (telecopy: (713) 247-6719; telephone:
(713) 247-6961); and if a Notice of Borrowing or a Notice of Conversion or
Continuation to the Agent at the Domestic Lending Office for the Agent
specified opposite its name on Schedule 1 or, as to each party, at such other
address or teletransmission number as shall be designated by such party in a
written notice to the other parties. All such notices and communications
shall, when mailed, telecopied, telexed or hand delivered or delivered by
overnight courier, be effective three days after deposited in the mails, when
telecopy transmission is completed, when confirmed by telex answer-back or when
delivered, respectively, except that notices and communications to the Agent
pursuant to Article II or VIII shall not be effective until received by the
Agent.
Section 9.03. No Waiver; Remedies. No failure on the part of any
Bank, the Agent, or the Issuing Bank to exercise, and no delay in exercising,
any right hereunder or under any Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right preclude any other or
further exercise thereof or the exercise of any other right. The remedies
provided in this Agreement are cumulative and not exclusive of any remedies
provided by law.
Section 9.04. Costs and Expenses. The Borrower agrees to pay on
demand all out-of-pocket costs and expenses of the Agent in connection with the
preparation, execution, delivery, administration, modification and amendment of
this Agreement, the Notes and the other Credit Documents including, without
limitation, the reasonable fees and out-of-pocket expenses of counsel for the
Agent and with respect to advising the Agent as to its rights and
responsibilities under this Agreement, and all reasonable out-of-pocket costs
and expenses, if any, of Agent the Issuing Bank, and each Bank (including,
without limitation, reasonable counsel fees and expenses of the Agent, the
Issuing Bank, and each Bank) in connection with the enforcement (whether
through negotiations, legal proceedings or otherwise) of this Agreement, the
Notes and the other Credit Documents.
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Section 9.05. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the Agent, and
when the Agent shall have, as to each Bank, either received a counterpart
hereof executed by such Bank or been notified by such Bank that such Bank has
executed it and thereafter shall be binding upon and inure to the benefit of
the Borrower, the Agent, the Issuing Bank, and each Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights or delegate its duties under this Agreement or any interest
in this Agreement without the prior written consent of each Bank.
Section 9.06. Bank Assignments and Participations.
(a) Assignments. Any Bank may assign to one or more banks or
other entities all or any portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of its Commitment,
the Advances owing to it, the Notes held by it, and the participation interest
in the Letter of Credit Obligations held by it); provided, however, that (i)
each such assignment shall be of a constant, and not a varying, percentage of
all of such Bank's rights and obligations under this Agreement, (ii) the amount
of the Commitments and Advances of such Bank being assigned pursuant to each
such assignment (determined as of the date of the Assignment and Acceptance
with respect to such assignment) shall in no event be less than $5,000,000 and
shall be an integral multiple of $5,000,000, (iii) each such assignment shall
be to an Eligible Assignee, (iv) the parties to each such assignment shall
execute and deliver to the Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance, together with the Notes subject to such
assignment, and (v) each Eligible Assignee (other than the Eligible Assignee of
the Agent) shall pay to the Agent a $2,500 administrative fee. Upon such
execution, delivery, acceptance and recording, from and after the effective
date specified in each Assignment and Acceptance, which effective date shall be
at least three Business Days after the execution thereof, (A) the assignee
thereunder shall be a party hereto for all purposes and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, have the rights and obligations of a Bank hereunder
and (B) such Bank thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights and be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of such Bank's rights and obligations under this Agreement, such Bank
shall cease to be a party hereto).
(b) Term of Assignments. By executing and delivering an
Assignment and Acceptance, the Bank thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as follows:
(i) other than as provided in such Assignment
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and Acceptance, such Bank makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency of value of this Agreement
or any other instrument or document furnished pursuant hereto; (ii) such Bank
makes no representation or warranty and assumes no responsibility with respect
to the financial condition of the Borrower or the Guarantors or the performance
or observance by the Borrower or the Guarantors of any of their obligations
under this Agreement or any other instrument or document furnished pursuant
hereto; (iii) such assignee confirms that it has received a copy of this
Agreement, together with copies of the financial statements referred to in
Section 4.03 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such assignee will, independently and without
reliance upon the Agent, such Bank or any other Bank and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement; (v) such assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this Agreement
as are delegated to the Agent by the terms hereof, together with such powers as
are reasonably incidental thereto; and (vi) such assignee agrees that it shall
perform in accordance with their terms all of the obligations which by the
terms of this Agreement are required to be performed by it as a Bank.
(c) The Register. The Agent shall maintain at its address
referred to in Section 9.02 a copy of each Assignment and Acceptance delivered
to and accepted by it and a register for the recordation of the names and
addresses of the Banks and the Commitments of, and principal amount of the
Advances owing to, each Bank from time to time (the "Register"). The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Agent, the Issuing Bank, and the Banks
may treat each Person whose name is recorded in the Register as a Bank
hereunder for all purposes of this Agreement. The Register shall be available
for inspection by the Borrower or any Bank at any reasonable time and from time
to time upon reasonable prior notice.
(d) Procedures. Upon its receipt of an Assignment and Acceptance
executed by a Bank and an Eligible Assignee, together with the Notes subject to
such assignment, the Agent shall, if such Assignment and Acceptance has been
completed, (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register, and (iii) give prompt notice
thereof to the Borrower. Within five Business Days after its receipt of such
notice, the Borrower, at its own expense, shall execute and deliver to the
Agent in exchange for the surrendered Notes a new Note to the order of such
Eligible Assignee in an amount equal to the Commitment assumed by it pursuant
to such Assignment
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and Acceptance and, if such Bank has retained any Commitment hereunder, a new
Note to the order of such Bank in an amount equal to the Commitment retained by
it hereunder. Such new Notes shall be dated the effective date of such
Assignment and Acceptance and shall otherwise be in substantially the form of
the attached Exhibit E.
(e) Participations. Each Bank may sell participations to one or
more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Commitments, the Advances owing to it, its participation
interest in the Letter of Credit Obligations, and the Notes held by it);
provided, however, that (i) such Bank's obligations under this Agreement
(including, without limitation, its Commitments to the Borrower hereunder)
shall remain unchanged, (ii) such Bank shall remain solely responsible to the
other parties hereto for the performance of such obligations, (iii) such Bank
shall remain the holder of any such Notes for all purposes of this Agreement,
(iv) the Borrower, the Agent, and the Issuing Bank and the other Banks shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Agreement, and (v) such Bank shall not
require the participant's consent to any matter under this Agreement, except
for change in the principal amount of the Notes, reductions in fees or
interest, or extending the Maturity Date. The Borrower hereby agrees that a
Bank may pass through to any of its participants the same rights under Sections
2.08, 2.09, 2.11(c), and 9.07 to the extent of their respective participations,
provided that no participant shall be able to collect in excess of amounts
payable to the Bank selling to such participant under such Sections in respect
of the interest sold to such participant or to collect any such amounts from
the Borrower.
(f) Confidentiality. Each Bank may furnish any information
concerning the Borrower and its Subsidiaries in the possession of such Bank
from time to time to assignees and participants (including prospective
assignees and participants); provided that, prior to any such disclosure, the
assignee or participant or proposed assignee or participant shall agree in
writing to preserve the confidentiality of any confidential information
relating to the Borrower and its Subsidiaries received by it from such Bank.
Such Bank shall promptly deliver a signed copy of any such confidentiality
agreement to the Borrower.
(g) Compliance with Securities Laws. All transfers of any
interests in the Notes shall be in compliance with all applicable Federal and
state securities laws.
Section 9.07. Indemnification. The Borrower shall indemnify the
Agent, the Banks, the Issuing Bank, and each affiliate thereof and their
respective directors, officers, employees and agents from, and discharge,
release, and hold each of them harmless against, any and all losses,
liabilities, claims or damages to which any of them may become subject, insofar
as
-58-
<PAGE> 64
such losses, liabilities, claims or damages arise out of or result from (i) any
actual or proposed use by the Borrower or any Affiliate of the Borrower of the
proceeds of any Advance, (ii) any breach by the Borrower of any provision of
this Agreement or any other Credit Document, (iii) any investigation,
litigation or other proceeding (including any threatened investigation or
proceeding) relating to the foregoing, or (iv) any requirement of Environmental
Laws concerning or relating to the present or previously-owned or operated
properties, or the operations or business, of the Borrower or any of its
Subsidiaries, and the Borrower shall reimburse the Agent, the Issuing Bank, and
each Bank, and each affiliate thereof and their respective directors, officers,
employees and agents, upon demand for any reasonable out-of-pocket expenses
(including legal fees) incurred in connection with any such investigation,
litigation or other proceeding; AND EXPRESSLY INCLUDING ANY SUCH LOSSES,
LIABILITIES, CLAIMS, DAMAGES, OR EXPENSES INCURRED BY REASON OF THE PERSON
BEING INDEMNIFIED'S OWN NEGLIGENCE, but excluding any such losses, liabilities,
claims, damages or expenses incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified.
Section 9.08. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
Section 9.09. Survival of Representations, Etc. All
representations and warranties contained in this Agreement or made in writing
by or on behalf of the Borrower in connection herewith shall survive the
execution and delivery of this Agreement and the Credit Documents, the making
of the Advances and any investigation made by or on behalf of the Banks, none
of which investigations shall diminish any Bank's right to rely on such
representations and warranties. All obligations of the Borrower provided for
in Sections 2.08, 2.09, 2.11(c), and 9.07 shall survive any termination of this
Agreement and repayment in full of the Credit Obligations.
Section 9.10. Severability. In case one or more provisions of this
Agreement or the other Credit Documents shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality
and enforceability of the remaining provisions contained herein or therein
shall not be affected or impaired thereby.
Section 9.11. Business Loans. The Borrower warrants and represents
that the Loans evidenced by the Notes are and shall be for business,
commercial, investment or other similar purposes and not primarily for
personal, family, household or agricultural use, as such terms are used in
Chapter One ("Chapter One") of the Texas Credit Code. At all such times, if
any,
-59-
<PAGE> 65
as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be the
"indicated rate ceiling" (as such term is defined in Chapter One) from time to
time in effect.
Section 9.12. Usury Not Intended. It is the intent of the Borrower
and each Bank in the execution and performance of this Agreement and the other
Credit Documents to contract in strict compliance with applicable usury laws,
including, without limitation, conflicts of law concepts, governing the Advances
of each Bank including, without limitation, such applicable laws of the State of
Texas and the United States of America from time to time in effect. In
furtherance thereof, each Bank and the Borrower stipulate and agree that none of
the terms and provisions contained in this Agreement or the other Credit
Documents shall ever be construed to create a contract to pay, as consideration
for the use, forbearance or detention of money, interest at a rate in excess of
the Maximum Rate applicable to such Bank or in excess of the maximum amount
allowed by applicable usury laws (the "Maximum Amount") and that for purposes
hereof "interest" shall include the aggregate of all charges which constitute
interest under such laws that are contracted for, charged or received under this
Agreement; and in the event that, notwithstanding the foregoing, under any
circumstances the aggregate amounts taken, reserved, charged, received or paid
on the Advances, include amounts which by applicable law are deemed interest
which would exceed the Maximum Rate applicable to such Bank or the Maximum
Amount, then such excess shall be deemed to be a mistake and such Bank shall
credit the same on the principal of its Note (or if such Note shall have been
paid in full, refund said excess to the Borrower). In the event that the
maturity of the Notes are accelerated by reason of any election of the Majority
Banks resulting from any Event of Default under this Agreement or otherwise, or
in the event of any required or permitted prepayment, then such consideration to
any Bank that constitutes interest may never include more than the Maximum Rate
for such Bank or the Maximum Amount and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically as of the date of
such acceleration or prepayment and, if theretofore paid, shall be credited by
such Bank on its Notes (or, if its Notes shall have been paid in full, refunded
to the Borrower of such interest). The provisions of this Section shall control
over all other provisions of this Agreement or the other Credit Documents which
may be in apparent conflict herewith. In determining whether or not the
interest paid or payable under any specific contingencies exceeds the Maximum
Rate or the Maximum Amount, the Borrower and each Banks shall to the maximum
permitted under applicable law amortize, prorate, allocate and spread in equal
parts during the period of the full stated term of the Notes held by such Bank
all amounts considered to be interest under applicable law at any time
contracted for, charged, received or reserved in connection with the Credit
Obligations.
-60-
<PAGE> 66
Section 9.13. Governing Law. This Agreement, the Notes and the other
Credit Documents shall be governed by, and construed and enforced in accordance
with, the laws of the State of Texas.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS DEFINED IN THIS AGREEMENT,
REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
-61-
<PAGE> 67
EXECUTED as of the date first above written.
BORROWER:
STERLING ELECTRONICS CORPORATION
By: /s/ MAC MCCONNELL
-----------------------------------
Mac McConnell
Chief Financial Officer
AGENT:
NATIONSBANK OF TEXAS, N.A., as Agent
By: /s/ F. SCOTT SINGHOFF
-----------------------------------
F. Scott Singhoff
Senior Vice President
COMMITMENT: BANKS:
$25,000,000 NATIONSBANK OF TEXAS, N.A.
By: /s/ F. SCOTT SINGHOFF
-----------------------------------
F. Scott Singhoff
Senior Vice President
$15,000,000 TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: /s/ C.D. KARGES
-----------------------------------
C. D. Karges
Senior Vice President
-62-
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
Year Ended
---------------------------------------------
March 30, April 1, April 2,
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 6,891 6,851 5,836
Net effect of dilutive stock options -- based on the
treasury stock method using average market price 177 123 95
---------------------------------------------
Total shares 7,068 6,974 5,931
=============================================
Income from continuing operations before cumulative
effect of change in accounting principle $10,373 $7,761 $ 5,634
Income (loss) from discontinued operations (534) 31 12
Cumulative effect of change in accounting principle 0 0 (1,742)
---------------------------------------------
Net income $ 9,839 $7,792 $ 3,904
=============================================
Per share amounts
Income from continuing operations before cumulative
effect of change in accounting principle $ 1.47 $ 1.11 $ 0.95
Income (loss) from discontinued operations (0.08) 0.01 0.00
Cumulative effect of change in accounting principle 0.00 0.00 (0.29)
---------------------------------------------
Net income $ 1.39 $ 1.12 $ 0.66
=============================================
</TABLE>
S-1
<PAGE> 2
<TABLE>
<CAPTION>
(Amounts in thousands, except per share date)
Year Ended
------------------------------------------
March 30, April 1, April 2,
1996 1995 1994
==========================================
<S> <C> <C> <C>
FULLY DILUTED
Average shares outstanding 6,891 6,851 5,836
Net effect of dilutive stock options -- based on the
treasury stock method using the year-end market
price, if higher than average market price 195 126 117
Assumed conversion of 10.75% convertible
subordinated debentures 0 0 959
------------------------------------------
Total 7,086 6,977 6,912
==========================================
Net income applicable to common stock
Income from continuing operations before cumulative
effect of change in accounting principle $10,373 $7,761 $ 5,634
Add 10.75% convertible subordinated debentures
interest, net of federal income tax effect 0 0 313
------------------------------------------
$10,373 $7,761 $ 5,947
Income (loss) from discontinued operations (534) 31 12
Cumulative effect of change in accounting principle 0 0 (1,742)
------------------------------------------
Total $ 9,839 $7,792 $ 4,217
==========================================
Per share amount
Income from continuing operations before cumulative
effect of change in accounting principle $ 1.46 $ 1.11 $ 0.86
Income (loss) from discontinued operations (0.07) 0.01 0.00
Cumulative effect of change in accounting principle 0.00 0.00 (0.25)
------------------------------------------
$ 1.39 $ 1.12 $ 0.61
==========================================
</TABLE>
S-2
<PAGE> 1
EXHIBIT 13
FIVE-YEAR REVIEW OF SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
<TABLE>
<CAPTION>
Fiscal Year Ended (Note A)
-----------------------------------------------------------------------------------
MARCH 30, April 1, April 2, April 3, March 28,
1996 (NOTE B) 1995 1994 1993 (Note C) 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 322,135 $ 239,024 $ 196,987 $ 144,892 $ 113,150
Income from continuing operations
and before cumulative effect
of change in accounting principle $ 10,373 $ 7,761 $ 5,634 $ 2,124 $ 1,039
Discontinued operations (534) 31 12 41 134
Cumulative effect of change
in accounting principle -0- -0- (1,742) -0- 191
------------- ------------- ------------- ------------- -------------
Net income $ 9,839 $ 7,792 $ 3,904 $ 2,165 $ 1,364
Income per common share:
Primary
Continuing operations $ 1.47 $ 1.11 $ .95 $ .48 $ .25
Discontinued operations (.08) .01 -0- .03 .03
Cumulative effect of change
in accounting principle -0- -0- (0.29) -0- .04
------------- ------------- ------------- ------------- -------------
Net income $ 1.39 $ 1.12 $ .66 $ .51 $ .32
Fully diluted
Continuing operations $ 1.46 $ 1.11 $ .86 $ .44 $ .24
Discontinued operations (.07) .01 -0- .01 .03
Cumulative effect of change
in accounting principle -0- -0- (.25) -0- .05
------------- ------------- ------------- ------------- -------------
Net income $ 1.39 $ 1.12 $ .61 $ .45 $ .32
Total assets $ 126,838 $ 86,348 $ 76,307 $ 57,217 $ 47,200
Working capital $ 71,391 $ 47,343 $ 41,960 $ 31,816 $ 26,386
Ratio of current assets
to current liabilities 2.8 2.6 2.6 2.7 2.8
Long-term debt $ 33,719 $ 12,950 $ 15,058 $ 21,249 $ 18,586
Shareholders' equity $ 48,453 $ 39,497 $ 31,364 $ 16,863 $ 14,032
</TABLE>
Note A: Restated for discontinued operations and five percent stock dividend
paid to shareholders of record on January 11, 1996.
Note B: Includes Canadian operations acquired August 22, 1995.
Note C: Fifty-three-week year
12
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES Fiscal 1996 record sales of $322.1 million were 35 percent ahead of
the prior year's sales of $239.0 million. This increase is the result of
improved market conditions, especially increased demand for semiconductor
products. Semiconductor product, connector product and passive and
electromechanical product sales increased 45%, 26% and 25%, respectively, in
fiscal 1996 over fiscal 1995. Fiscal 1996 includes $13.2 million of sales from
the operations in Canada which were acquired on August 22, 1995.
Backlog on March 30, 1996 was $95.8 million, a 45 percent increase over the
beginning of the year backlog of $66.0 million. Strong bookings in each of the
Company's product segments accounted for the increase in backlog.
GROSS MARGIN Consolidated gross margins of 21.4 percent reflect a 0.9 point
decrease from 22.3 percent a year ago. The decline stems principally from
competitive pricing pressures in all product segments, and semiconductor sales
increasing more rapidly than sales of higher margin passive and connector
products.
SELLING AND ADMINISTRATIVE COSTS Consolidated operating expenses as a
percentage of sales declined to 15.5 percent, the lowest in the Company's
history, compared to 16.5 percent a year ago. This improvement resulted from
economies of scale from sales growth (fixed costs were spread over an
increasing sales base) coupled with continuing cost controls.
OPERATING INCOME As a result of gross margin dollars increasing more rapidly
than selling and administrative expenses, operating income increased
$5,144,000, a 37 percent improvement over the previous fiscal year.
INTEREST Interest costs increased by $648,000 (60 percent). The increase in
interest expense is primarily the result of the $10 million (63 percent)
increase in average indebtedness outstanding under the Company's bank credit
line. Outstanding indebtedness increased as a result of the $29 million
increase in accounts receivable and inventories during fiscal 1996, the $7.4
million used to purchase the Company's Canadian operations and $2.9 million of
capital expenditures.
13
<PAGE> 3
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a high level of current assets, primarily accounts
receivable and inventories. Current assets as a percentage of total assets were
approximately 88% and 89% at the end of fiscal 1996 and 1995, respectively.
At fiscal year end, Sterling's current assets were 2.8 times current
liabilities and working capital was $71.4 million, compared to current assets
of 2.6 times current liabilities and $47.3 million in working capital a year
ago. Working capital continues to increase, reflected principally in greater
inventories and receivables required to support increasing sales, partially
offset by increased accounts payable and accrued expenses. Even though
inventories have increased, average inventory turnover for fiscal 1996 was 5.4,
the same as for fiscal 1995.
Cash flow from operations, along with $21 million of proceeds from the bank
credit line, were sufficient to fund the $29 million fiscal 1996 increase in
accounts receivable and inventories, the August 22, 1995 acquisition of the
Company's Canadian subsidiary for $7.4 million and $2.9 million of capital
expenditures, principally for computer hardware and software.
The Company's need for additional investment in receivables and inventories
is expected to continue in connection with anticipated sales growth and planned
geographic expansion.
At March 30, 1996, the Company had $6.8 million in available credit under
the $40 million bank credit line which matures on February 16, 1999. Management
believes that internal generation of cash flow (net income plus non-cash items
such as depreciation and amortization), the $15 million long-term loan
described below, available equipment financing, funds available under the bank
credit line, plus possible increases in the bank credit line should be
sufficient to meet liquidity needs over the next two fiscal years.
On April 15, 1996 the Company borrowed $15 million at a fixed interest rate
of 6.45% from an insurance company under a ten year agreement with a seven year
average maturity. Proceeds from this loan were used to reduce amounts borrowed
under the bank credit line.
The Company's net deferred tax asset is expected to be recovered from
future taxable income. This asset is expected to grow modestly for the next
three fiscal years because cash outlays for income taxes are expected to exceed
income tax expense.
On June 5, 1996, the Company agreed to lease a 181,000 square foot
warehouse to be constructed adjacent to the Dallas/Fort Worth International
Airport. The lease term is ten years with monthly rental payments of
approximately $82,000, plus the Company is responsible for all property taxes,
insurance and maintenance. The Company intends to purchase and/or lease $4
million to $6 million of material handling equipment, computer equipment and
material management software for this warehouse and distribution center. The
Company intends to consolidate the distribution operations of its three
existing regional distribution centers into this new state-of-the-art facility
during the fourth quarter of fiscal 1997 and the first quarter of fiscal 1998.
Management believes that the capital resources described above should be
adequate to fund the cost of this consolidation and the operation of the new
distribution center.
14
<PAGE> 4
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES Fiscal 1995 record sales of $239.0 million were 21 percent ahead of
the prior year's sales of $197.0 million. This increase is the result of
improved market conditions, especially increased demand for semiconductor
products.
Backlog on April 1, 1995 was $66.0 million, a 36 percent increase over the
beginning of the year backlog of $48.7 million. Strong bookings in the
Company's distribution business accounted for the increase in backlog.
GROSS MARGIN Consolidated gross margins of 22.3 percent reflect a 1.5 point
decrease from 23.8 percent a year ago. The decline stems principally from
competitive pressures on semiconductor pricing and semiconductor sales
increasing more rapidly than sales of higher margin passive and connector
products.
SELLING AND ADMINISTRATIVE COSTS Consolidated operating expenses as a
percentage of sales declined to 16.5 percent compared to 18.5 percent a year
ago. This improvement resulted from economies of scale from sales growth (fixed
costs were spread over an increasing sales base) coupled with continuing cost
controls. OPERATING INCOME As a result of gross margin dollars increasing more
rapidly than selling and administrative expenses, operating income increased
$3,458,000, a 33 percent improvement over the previous fiscal year.
INTEREST Interest costs decreased by $324,000 (23 percent). The decrease in
interest expense is primarily the result of the conversion of the 10.75%
convertible subordinated debentures into common stock during fiscal 1994.
Interest expense on the debentures during fiscal 1994 was $530,000. Interest
expense on loans other than the convertible debentures increased by $206,000
(23 percent) as a result of higher interest rates combined with the $1.9
million increase in average indebtedness under the bank credit line.
15
<PAGE> 5
QUARTERLY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
FOR FISCAL YEARS ENDED MARCH 30, 1996 AND APRIL 1, 1995
<TABLE>
<CAPTION>
April-June July-September
1995+ 1994+ 1995 1994+
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 70,423 $ 56,265 $ 80,383 $ 57,539
Gross profit $ 15,122 $ 12,822 $ 17,203 $ 12,899
Income from continuing operations $ 2,273 $ 1,833 $ 2,522 $ 1,730
Income (loss) from discontinued operations 24 22 (558) 2
----------- ----------- ----------- -----------
Net income $ 2,297 $ 1,855 $ 1,964 $ 1,732
=========== =========== =========== ===========
Income per common share:*
Primary
o Continuing operations $ .32 $ .27 $ .35 $ .25
o Discontinued operations -0- -0- (.08) -0-
----------- ----------- ----------- -----------
o Net income $ .32 $ .27 $ .27 $ .25
=========== =========== =========== ===========
Fully diluted
o Continuing operations $ .32 $ .27 $ .35 $ .25
o Discontinued operations -0- -0- (.08) -0-
----------- ----------- ----------- -----------
o Net income $ .32 $ .27 $ .27 $ .25
=========== =========== =========== ===========
Price range of common stock per share*
HIGH $ 16.071 $ 13.452 $ 19.286 $ 12.619
LOW 11.190 10.119 15.357 10.357
</TABLE>
<TABLE>
<CAPTION>
October-December January-March
1995 1994+ 1996 1995+
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 79,347 $ 58,143 $ 91,982 $ 67,077
Gross profit $ 17,051 $ 13,050 $ 19,449 $ 14,498
Income from continuing operations $ 2,503 $ 1,799 $ 3,075 $ 2,400
Income (loss) from discontinued operations -0- 12 -0- (6)
----------- ----------- ----------- -----------
Net income $ 2,503 $ 1,811 $ 3,075 $ 2,394
=========== =========== =========== ===========
Income per common share:*
Primary
o Continuing operations $ .35 $ .26 $ .44 $ .34
o Discontinued operations -0- -0- -0- -0-
----------- ----------- ----------- -----------
o Net income $ .35 $ .26 $ .44 $ .34
=========== ========== =========== ===========
Fully diluted
o Continuing operations $ .35 $ .26 $ .44 $ .34
o Discontinued operations -0- -0- -0- -0-
----------- ----------- ----------- -----------
o Net income $ .35 $ .26 $ .44 $ .34
=========== =========== =========== ===========
Price range of common stock per share*
HIGH $ 18.333 $ 11.905 $ 19.125 $ 11.905
LOW 15.000 9.286 14.500 10.714
</TABLE>
* Traded on the New York Stock Exchange (symbol - SEC). Amounts have been
restated for a five percent common stock dividend paid to shareholders of
record on January 11, 1996.
+ Restated for discontinued operations.
16
<PAGE> 6
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
(Dollars in thousands)
Sterling Electronics Corporation
<TABLE>
<CAPTION>
MARCH 30, 1996 April 1, 1995
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,377 $ 3,110
Receivables-net of reserve for doubtful accounts of $908 in
1996 and $654 in 1995 50,083 34,595
Inventories 56,759 36,968
Deferred income taxes 230 486
Prepaid expenses and other current assets 416 215
Net assets of discontinued operations -0- 1,813
-------------- --------------
Total current assets 111,865 77,187
PROPERTY AND EQUIPMENT
Capitalized leases 1,227 1,227
Furniture, fixtures and equipment 9,061 6,136
Leasehold improvements 1,401 1,345
-------------- --------------
11,689 8,708
Less: accumulated depreciation 4,780 3,653
-------------- --------------
6,909 5,055
EXCESS OF COST OVER FAIR VALUE of net assets acquired net of accumulated
amortization of $451 in 1996
and $315 in 1995 4,141 1,757
OTHER ASSETS 3,923 2,349
-------------- --------------
$ 126,838 $ 86,348
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 29,843 $ 22,938
Accrued compensation 5,816 4,258
Other accrued expenses 3,719 2,345
Current portion of long term debt 291 303
Income taxes 805 -0-
-------------- --------------
Total current liabilities 40,474 29,844
LONG-TERM DEBT 33,719 12,950
POSTEMPLOYMENT BENEFITS and other non-current liabilities 4,192 4,057
SHAREHOLDERS' EQUITY
Common stock 3,517 3,343
Additional paid-in capital 22,054 16,410
Retained earnings 24,984 20,535
-------------- --------------
50,555 40,288
Less common stock in treasury, at cost - 180,881 in 1996
and 165,094 in 1995 2,102 791
-------------- --------------
48,453 39,497
-------------- --------------
$ 126,838 $ 86,348
============== ==============
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 7
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
Fiscal years ended March 30, 1996, April 1, 1995 and April 2, 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 322,135 $ 239,024 $ 196,987
Cost of sales 253,310 185,754 150,122
Selling and administrative costs 49,775 39,364 36,417
-------------- ------------- -------------
303,085 225,118 186,539
Operating income 19,050 13,906 10,448
Interest expense 1,735 1,087 1,411
-------------- ------------- -------------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 17,315 12,819 9,037
Provision for income taxes 6,942 5,058 3,403
-------------- ------------- -------------
Income from continuing operations before cumulative effect
of change in accounting principle 10,373 7,761 5,634
Discontinued operations:
Income (loss) from operations, net of income taxes of
$(378), $8 and $(3), respectively (522) 31 12
Loss on disposition (12) -0- -0-
Cumulative effect of change in accounting principle
(net of $898 of income taxes) -0- -0- (1,742)
-------------- ------------- -------------
Net income $ 9,839 $ 7,792 $ 3,904
============== ============= =============
Income per common share and common share equivalent:
Primary
Continuing operations $ 1.47 $ 1.11 $ .95
Discontinued operations (.08) .01 -0-
Cumulative effect of change in accounting principle -0- -0- (.29)
-------------- ------------- -------------
$ 1.39 $ 1.12 $ .66
============== ============= =============
Fully diluted
Continuing operations $ 1.46 $ 1.11 $ .86
Discontinued operations (.07) .01 -0-
Cumulative effect of change in accounting principle -0- -0- (.25)
-------------- ------------- -------------
$ 1.39 $ 1.12 $ .61
============== ============= =============
Number of common shares and common share
equivalents used in computing per share amounts
Primary 7,068,000 6,974,000 5,931,000
Fully diluted 7,086,000 6,977,000 6,912,000
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollars in thousands)
Sterling Electronics Corporation
Fiscal years ended March 30, 1996, April 1, 1995 and April 2, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,839 $ 7,792 $ 3,904
Adjustments needed to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,320 994 1,008
Loss on disposals of property and equipment -0- 46 547
Provision for losses on accounts receivable 614 527 856
Deferred taxes (297) 305 (1,370)
----------- ---------- ----------
11,476 9,664 4,945
Changes in operating assets and liabilities net of effects of acquisition:
(Increase) in accounts receivable (13,461) (4,883) (9,610)
(Increase) in inventories (15,499) (4,923) (9,203)
Decrease in prepaid and other current assets 1,125 108 926
Increase in accounts payable and accrued expenses 9,324 4,690 7,497
Increase (decrease) in postemployment benefits and other
non-current liabilities 101 (68) 3,583
----------- ---------- ----------
Net cash (used) provided by operating activities (6,934) 4,588 (1,862)
INVESTING ACTIVITIES
Purchases of property and equipment (2,883) (1,820) (2,395)
Acquisition of Canadian operations (7,416) -0- -0-
(Increase) decrease in other assets (511) (146) 465
----------- ---------- ----------
Net cash used in investing activities (10,810) (1,966) (1,930)
FINANCING ACTIVITIES
Proceeds from borrowings under revolving line of credit 90,237 40,600 50,582
Repayments of borrowings under revolving line of credit (69,203) (42,440) (47,028)
----------- ---------- ----------
Net increase (decrease) in revolving line of credit 21,034 (1,840) 3,554
Proceeds from other long-term borrowings -0- -0- 913
Principal payments on other long-term debt (279) (273) (249)
Dividends paid on preferred stock -0- -0- (2)
Purchases of treasury stock (2,052) (406) -0-
Issuance of common stock under option plans 308 147 -0-
Debenture conversion costs -0- -0- (145)
----------- ---------- ----------
Net cash provided (used) by financing activities 19,011 (2,372) 4,071
INCREASE IN CASH AND CASH EQUIVALENTS 1,267 250 279
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,110 2,860 2,581
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,377 $ 3,110 $ 2,860
=========== ========== ==========
</TABLE>
During fiscal 1996, 1995 and 1994 the Company issued $862, $600 and $269,
respectively, of common stock under the Company's Incentive Bonus Plan and
401(k) Plan.
See notes to consolidated financial statements.
20
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
Sterling Electronics Corporation
NOTE A -- SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sterling Electronics Corporation (the Company) and its majority-owned
subsidiaries after elimination of all significant intercompany accounts and
transactions.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to the end of March. The
fiscal years ended March 30, 1996, April 1, 1995 and April 2, 1994 each
consisted of 52 weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company's presentation of cash includes cash equivalents. Cash equivalents
are defined as short-term investments with maturity dates of ninety days or
less at time of purchase. The carrying amount reported in the balance sheet for
short-term investments approximates fair value.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
PROPERTY AND DEPRECIATION
Property and equipment are stated at cost. For financial reporting purposes
depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets and over the term of the lease
for capitalized leases. Leasehold improvements are amortized over the life of
the lease or the service life of the improvements, whichever is shorter. For
income tax purposes depreciation is computed principally by accelerated
methods.
EXCESS OF COST OVER FAIR VALUE
The excess of the purchase price over the fair value of assets acquired in
business acquisitions is amortized on a straight line basis over 40 years.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred taxes
reflect the tax consequences on future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an excercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and accordingly recognizes no
compensation expense for the stock option grants.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Canadian subsidiary have been translated into
U.S. dollars in accordance with FASB Statement No. 52, Foreign Currency
Translation. All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported separately as a component of shareholders' equity.
The effect on the statements of operations of transaction gains and losses
was not significant.
21
<PAGE> 10
EARNINGS PER SHARE
Primary: Primary earnings per common share are determined by dividing net
income reduced by dividends on preferred stock by the weighted average number
of common shares outstanding plus the effect of dilution using the treasury
stock method for stock options. Fully Dilutive: Earnings per common share
assuming full dilution are determined from the primary earnings per share
computation. Net income applicable to common shares is increased by preferred
dividends and interest on debentures (net of taxes) and then divided by the
average outstanding common shares and equivalents, plus shares issued in
exchange for convertible securities when dilutive.
RESTATEMENT
Previous years' results were restated for the effect of the stock dividend (see
Note E) and as a result of discontinued operations (see Note J).
RECENTLY ISSUED ACCOUNTING STANDARD
FASB Statement No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
Company will adopt FAS 121 in the first quarter of fiscal 1997 and, based on
current circumstances, such adoption will not have a material effect on its
financial position or results of operations.
NOTE B -- ACQUISITION
On August 22, 1995 the Company acquired all of the outstanding common stock of
DGW Electronics Corporation, a Canadian electronic parts distributor with five
sales offices in Canada. The $7.4 million cost of the acquisition was paid in
cash and was financed through borrowings under the Company's bank revolving
line of credit. This acquisition was accounted for using the purchase method of
accounting. The excess of cost over the fair value of the net assets acquired
at the date of acquisition was $2.5 million.
The Company's consolidated statements of operations include the revenues
and expenses of the Canadian operations subsequent to August 22, 1995. The
following pro forma results assume the acquisition had occurred at the
beginning of the earliest period presented.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Pro Forma Year Ended
(Unaudited) March 30, 1996 April 1, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 329,409 $ 254,577
Net earnings 9,852 7,791
Earnings per share $ 1.39 $ 1.12
- -------------------------------------------------------------------------------
</TABLE>
This unaudited pro forma sales and earnings information is not necessarily
indicative of the combined results that would have occurred had the acquisition
taken place on April 3, 1994, nor are they necessarily indicative of results
that may occur in the future.
NOTE C -- FEDERAL AND
STATE INCOME TAXES
Under the liability method, deferred taxes are determined by applying the
marginal tax rate to the temporary differences between the financial statement
and tax bases of assets and liabilities. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities
Tax over book depreciation $ 453 $ 398
Other - net 2 -0-
---------- ----------
Total deferred tax liabilities 455 398
---------- ----------
Deferred tax assets
Employee benefit accruals 1,426 1,369
Allowance for doubtful accounts 328 240
Reserves 471 246
Other - net -0- 16
---------- ----------
Total deferred tax assets 2,225 1,871
---------- ----------
Net deferred tax assets $ 1,770 $ 1,473
========== ==========
</TABLE>
22
<PAGE> 11
The differences between the consolidated effective income tax rate and the
federal statutory rate are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Taxes on income at
statutory rate $ 6,060 $ 4,358 $ 3,073
State income taxes, net
of federal benefit 548 453 483
Expenses not deductible
for tax purposes 84 112 50
Nontaxable life
insurance proceeds -0- -0- (299)
Other - net 250 135 96
-------- -------- --------
Income tax provision $ 6,942 $ 5,058 $ 3,403
======== ======== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Current
Federal $ 6,398 $ 4,066 $ 3,109
State 841 687 766
--------- --------- --------
7,239 4,753 3,875
Deferred (297) 305 (472)
--------- --------- --------
Income tax provision $ 6,942 $ 5,058 $ 3,403
========= ========= ========
</TABLE>
Total income tax payments made in fiscal years 1996, 1995 and 1994 were
$6,258, $5,132 and $4,392, respectively.
NOTE D -- LONG-TERM DEBT
Long-term debt at March 30, 1996 and April 1, 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Bank revolving credit line $ 33,194 $ 12,160
7.3% notes payable to bank 554 712
Capitalized leases 262 381
--------- ---------
34,010 13,253
--------- ---------
Less: amounts due within
one year 291 303
--------- ---------
Long-term debt $ 33,719 $ 12,950
========= =========
</TABLE>
The maturity schedule of debt due after one year is as follows: $221 in
fiscal 1998, $33,391 in fiscal 1999, $85 in fiscal 2000, and $22 in fiscal
2001.
Effective February 16, 1996, the Company entered into a revolving credit
agreement with two banks (the "Banks") to provide a $40 million revolving line
of credit through February 16, 1999. At the Company's option, the interest rate
is at the Banks' prime rate (8.25% at March 30, 1996) or at the Banks' U.S.
dollar LIBOR (5.4375% at March 30, 1996) plus 0.75% to 1.5%, adjusted
quarterly, depending on the debt to capitalization ratio and the fixed charge
coverage ratio. These ratios resulted in an addition to LIBOR of 0.75% at March
30, 1996.
23
<PAGE> 12
To reduce the impact of potential increases in interest rates on the
floating rate revolving credit debt, effective December 9, 1993, the Company
entered into an interest rate swap agreement with one of the Banks. The
agreement effectively fixes the interest rate through December 9, 1996 on $12
million of the revolving credit debt at 4.79% plus the addition to LIBOR
described above. The Company entered into an additional interest rate swap
agreement with one of the Banks which effectively fixes the interest rate on
$15 million of the revolving credit debt from December 6, 1996 through December
6, 2000 at 5.98% plus the addition to LIBOR described above. The differential
to be paid or received as interest rates change is recognized as an adjustment
to interest expense related to the floating rate debt. The fair value of the
swap agreements is not recognized in the financial statements. The Company is
exposed to credit loss in the event of nonperformance of the Banks, but the
Company does not anticipate nonperformance by either of these parties. The
amount of such exposure is generally the unrealized gain in the agreements.
The borrowings under the revolving credit agreement are unsecured. The
borrowing base for the agreement is 85% of the qualified trade receivables of
the Company, which exceeded $40 million at March 30, 1996. The agreement
requires a commitment fee of 1/4 of 1% per annum on the unused portion of the
line. Covenants of the agreement require maintenance of working capital and
tangible net worth in excess of specified dollar amounts. The agreement
restricts liens on the Company's assets and limits additional capital leases.
Other conditions provided in the agreement require the Company to be in
compliance with regard to quick ratio, fixed charge coverage and debt to total
capital. At March 30, 1996, the Company was in compliance with all covenants of
the agreement.
During the years ended March 30, 1996, April 1, 1995 and April 2, 1994,
average indebtedness outstanding under the revolving credit line was $26,160,
$16,036 and $14,144 at an average interest rate of 6.5%, 6.5% and 5.2%,
respectively.
Total interest paid on long-term debt was $1,696 in fiscal 1996, $1,090 in
fiscal 1995 and $1,646 in fiscal 1994.
The estimated market value of the interest rate swap agreements at March
30, 1996 was approximately $277. The balance of the Company's borrowings
approximate their fair value.
On April 15, 1996 the Company borrowed $15 million from an insurance
company under a ten year agreement with a fixed interest rate of 6.45%. The
loan agreement requires semiannual interest payments with seven equal annual
principal payments of $2,143 commencing on April 15, 2000. Proceeds from this
loan were used to reduce amounts borrowed under the revolving credit line.
24
<PAGE> 13
NOTE E -- SHAREHOLDERS' EQUITY
CUMULATIVE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of Cumulative Convertible
Preferred Stock and 2,000,000 shares of Preferred Stock, par value $2.50 per
share, which may be issued in series with terms and conditions determined by
the Board of Directors. At March 30, 1996 and April 1, 1995, none of these
shares were issued.
COMMON STOCK
The Company is authorized to issue 9,000,000 shares of Common Stock, par value
$.50 per share, of which 7,034,423 and 7,020,311 shares were issued at March
30, 1996 and April 1, 1995, respectively.
On December 4, 1995, the Company announced a five percent common stock
dividend. The new shares were distributed on February 1, 1996 to shareholders
of record on January 11, 1996. All share and per share data for all periods
presented have been restated for the five percent common stock dividend.
At March 30, 1996, 1,082,463 shares of common stock were reserved for issuance
as follows:
<TABLE>
<CAPTION>
<S> <C>
Exercise of stock options granted or reserved for
future grant (see Note G -- Employee Stock Plans) 753,794
Stock grants under incentive bonus plan 238,371
401(k) matching contributions 90,298
</TABLE>
NOTE F -- COMMITMENTS AND
CONTINGENT LIABILITIES
The Company conducts all of its operations from leased facilities. In addition,
the Company leases various types of equipment under operating leases of varying
lengths. Lease rental expense was approximately $2,461 in fiscal 1996, $2,270
in fiscal 1995 and $2,187 in fiscal 1994. Rental expense was offset in 1996,
1995 and 1994 by sublease rental income of $87, $106 and $158, respectively.
Below are amounts of future minimum lease payments under operating leases and
future minimum sublease income amounts:
<TABLE>
<CAPTION>
Fiscal Future Lease Future Sublease
Year Payments Rental Income
---- ------------ ---------------
<C> <C> <C>
1997 $ 1,843 $ 90
1998 1,515 63
1999 1,121 61
2000 743 61
2001 245 15
2002 and thereafter 260 -0-
------------ ------------
$ 5,727 $ 290
============ ============
</TABLE>
NOTE G -- EMPLOYEE STOCK PLANS
Options granted under the 1992 and 1994 Stock Option Plans are at fair market
value at the date of grant and, subject to termination of employment, expire
five years from date of grant; are not transferable other than on death; and
become exercisable in two equal annual installments commencing one year from
date of grant.
Options granted under the 1993 Directors' Non-Qualified Stock Option Plan
are at fair market value at the date of grant and, subject to termination of
directorship, expire five years from the date of grant; are not transferrable
other than on death; and are exercisable immediately upon grant.
25
<PAGE> 14
The following is a summary of transactions for fiscal years 1994, 1995 and
1996 for all Company stock option plans:
<TABLE>
<CAPTION>
Number of shares Option price
under option range per share
- -----------------------------------------------------------------
<S> <C> <C>
Outstanding at April 3, 1993 190,050 $ 4.762
Granted 101,850 $ 4.762- 10.352
Exercised (525) $ 4.762
Lapsed (17,325) $ 4.762
- -----------------------------------------------------------------
Outstanding at April 2, 1994 274,050 $ 4.762- 10.352
Granted 250,950 $10.352- 10.952
Exercised (43,943) $ 4.762
- -----------------------------------------------------------------
Outstanding at April 1,1995 481,057 $ 4.762- 10.952
Granted 31,500 $15.375
Exercised (69,668) $ 4.762- 10.952
Lapsed (40,950) $10.952- 15.375
- -----------------------------------------------------------------
Outstanding at March 30, 1996 401,939 $ 4.762- 10.952
=================================================================
Exercisable at March 30, 1996 293,003 $ 4.762- 10.952
Available for grant
April 1, 1995 342,405
March 30, 1996 351,855
</TABLE>
The Company has a defined contribution plan for eligible employees, which
qualifies under Section 401(k) of the Internal Revenue Code. The Company's
contribution to the plan, which is based on a specified percentage of employees
contributions, amounted to $473, $415 and $392 in fiscal years 1996, 1995 and
1994, respectively. The Company may elect to make its contribution to the plan
in the form of the Company's common stock. During fiscal 1996 the Company
contributed 14,702 shares of common stock.
NOTE H -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is engaged in one business, the distribution of electronic parts
and components. The Company purchases a wide variety of electronic components,
including semiconductors, connector products and passive and electromechanical
components, and distributes these products to manufacturers of electronic
instruments, computers, computer peripherals, telecommunication equipment,
medical monitoring instruments and other electronic subsystems.
The distribution of semiconductors accounted for approximately 51%, 48%
and 46% of total Company sales in fiscal years 1996, 1995 and 1994,
respectively. Connector products accounted for approximately 20%, 21%, and 23%,
and passive and electromechanical products accounted for approximately 29%, 31%
and 31% of total Company sales in fiscal years 1996, 1995, and 1994,
respectively.
Prior to the acquisition of its Canadian operations on August 22, 1995 the
Company did not conduct operations outside the United States. Sales in Canada
during fiscal 1996 were $13.2 million. Identifiable assets in Canada at March
30, 1996 were approximately $12.2 million.
NOTE I -- POSTEMPLOYMENT BENEFITS
Effective April 4, 1993, the Company adopted Statement of Financial Accounting
Standards No. 112 (FAS 112), "Employers' Accounting for Postemployment
Benefits." FAS 112 requires that the estimated costs of postemployment benefits
provided to employees be recognized as an expense as employees render service
instead of when benefits are paid. The cumulative effect as of April 4, 1993 of
this change in accounting was to decrease net income by $1,742 ($.25 per fully
diluted share) in the first quarter of fiscal 1994. The effect of the change on
fiscal 1994 income before the cumulative effect of the change was not material.
Prior to April 4, 1993, the Company recognized the cost of providing these
benefits on a cash basis. As required by FAS 112, prior year financial
statements were not restated to reflect the change in accounting method.
NOTE J -- DISCONTINUED OPERATIONS
The Company completed the sale of its manufacturing subsidiary, Phaostron
Instrument and Electronic Company ("Phaostron") to the management of Phaostron
in September 1995. The Company accepted a note receivable with a recorded value
of approximately $700 as the total consideration for the sale. The recorded
value of the note approximates the fair value. The operating results, assets
and liabilities of Phaostron have been classified as discontinued operations
for all periods presented. Previously reported amounts have been restated to
conform to this presentation. Phaostron manufactures and markets a broad line
of flight instruments, instrumentation light assemblies, analog panel meters
and avionic mechanisms. Phaostron sales which are included in discontinued
operations were $1,398, $3,246 and $3,575, respectively, in fiscal years 1996,
1995 and 1994.
26
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Sterling Electronics Corporation
We have audited the accompanying consolidated statements of financial position
of Sterling Electronics Corporation as of March 30, 1996 and April 1, 1995 the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years in the period ended March 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling
Electronics Corporation at March 30, 1996 and April 1, 1995, the consolidated
results of its operations and its cash flows for each of the three fiscal years
in the period ended March 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note I to the financial statements, in the year ended
April 2, 1994 the Company changed its method of accounting for postemployment
benefits.
/s/ ERNST & YOUNG LLP
Houston, Texas
May 10, 1996
27
<PAGE> 1
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
Following is a list of all subsidiaries of Sterling Electronics Corporation
<TABLE>
<CAPTION> Jurisdiction Percentage
or State of of Voting
Name of Subsidiary (2) Notes Incorporation Stock Owned
------------------ ----- -------------- -----------
<S> <C> <C> <C>
Sterling Partners, Inc. (1) Nevada 100.0
Sterling Electronics (Canada) Corporation (1) Canada 100.0
(1) Included in consolidated financial statements of the Company.
No separate financial statements filed.
(2) Certain subsidiaries are omitted since the aggregate
of such subsidiaries is not material.
</TABLE>
S-3
<PAGE> 1
- --------------------------------------------------------------------------------
EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Sterling Electronics Corporation of our report dated May 10,
1996, included in the 1996 Annual Report to Shareholders of Sterling
Electronics Corporation.
Our audits also included the financial statement schedule of Sterling
Electronics Corporation listed in item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-48097) pertaining to the 1967 Stock Option Plan,
1968 Stock Option Plan and Incentive Bonus Plan of Sterling Electronics
Corporation; the incorporation by reference in the Registration Statement (Form
S-8 No. 33-81138) pertaining to the Incentive Bonus Plan of Sterling
Electronics Corporation; the incorporation by reference in the Registration
Statement (Form S-8 No. 33-81140) pertaining to the 1992 Incentive Stock Option
Plan of Sterling Electronics Corporation; and the incorporation by reference in
the Registration Statement (Form S-8 No. 33-60777) pertaining to the Sterling
Electronics Corporation 1994 Stock Option Plan of our report dated May 10,
1996, with respect to the consolidated financial statements incorporated herein
by reference, and our report included in the preceding paragraph with respect
to the financial statement schedule included in this Annual Report (Form 10-K)
of Sterling Electronics Corporation for the fiscal year ended March 30, 1996.
ERNST & YOUNG LLP
Houston, Texas
June 27, 1996
S-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE YEAR ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> MAR-30-1996
<CASH> 4,377
<SECURITIES> 0
<RECEIVABLES> 50,991
<ALLOWANCES> 908
<INVENTORY> 56,759
<CURRENT-ASSETS> 111,865
<PP&E> 11,689
<DEPRECIATION> 4,780
<TOTAL-ASSETS> 126,838
<CURRENT-LIABILITIES> 40,474
<BONDS> 33,719
<COMMON> 0
0
3,517
<OTHER-SE> 44,936
<TOTAL-LIABILITY-AND-EQUITY> 126,838
<SALES> 322,135
<TOTAL-REVENUES> 322,135
<CGS> 253,310
<TOTAL-COSTS> 303,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 614
<INTEREST-EXPENSE> 1,735
<INCOME-PRETAX> 17,315
<INCOME-TAX> 6,942
<INCOME-CONTINUING> 10,373
<DISCONTINUED> (534)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,839
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
