================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the period ended
June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from
To
------------------- --------------------
Commission File Number: 1-8984
WEDGESTONE FINANCIAL
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-26950000
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
5200 N. Irwindale Avenue
Suite 168
Irwindale, California 91706
(818) 338-3555
(Address, including zip code and telephone number, including
area code of registrant's principal executive offices)
---------------------------
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports and (2) has been subject to filing requirements for the
past 90 days.
[ X ] Yes [ ] No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ X ] Yes [ ] No
As of August 13, 1997, 21,885,668 shares of beneficial interest
were outstanding.
Total number of pages in this document: 41 Exhibits start on page: 14
================================================================================
WEDGESTONE FINANCIAL & SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - June 30, 1997 (unaudited) and
December 31, 1996.........................................................................2
Consolidated Statements of Operations (unaudited) for
the Three Months and Six Months Ended June 30, 1997 and 1996..............................3
Consolidated Statements of Shareholders' Equity (unaudited) for
the Six Months Ended June 30, 1997 and 1996...............................................4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months and Six Months Ended June 30, 1997 and 1996..............................5
Notes to Unaudited Consolidated Financial Statements......................................6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................8
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................................12
Item 2 Changes in Securities....................................................................12
Item 3 Defaults upon Senior Securities..........................................................12
Item 4 Submission of Matters to a Vote of Security Holders......................................12
Item 5 Other Information........................................................................12
Item 6 Exhibits and Reports on Form 8-K.........................................................12
Signatures.................................................................................................13
-1-
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1997 and December 31, 1996
(Amounts in Thousands - except share data)
(Unaudited)
1997 1996
-------- --------
ASSETS
Current Assets:
Cash $ 156 $ 344
Accounts and other receivables - (net of allowances of $290 and $333
in 1997 and 1996, respectively) 6,859 7,282
Inventories 5,572 4,619
Prepaid expenses and other current assets 602 565
Deferred income taxes 500 476
-------- --------
Total Current Assets 13,689 13,286
-------- --------
Notes receivable - net 1,752 81
Real estate acquired by foreclosure - net 217 1,086
Property, plant and equipment - net 3,291 3,237
Goodwill 108 130
Deferred income taxes 1,573 2,196
Other assets 198 334
-------- --------
7,139 7,064
-------- --------
Total Assets $ 20,828 $ 20,350
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and current portion of long-term debt $ 1,008 $ 1,952
Accounts payable 3,705 3,882
Accrued payroll and related expenses 430 593
Other accrued expenses 1,407 1,535
-------- --------
Total Current Liabilities 6,550 7,962
Long-term debt 5,898 5,269
-------- --------
Total Liabilities 12,448 13,231
Commitments and contingencies
Shareholders' Equity:
Shares of Beneficial Interest-par value
$1.00 per share: authorized - unlimited shares:
issued and outstanding - 21,885,668 shares 21,886 21,886
Additional paid-in capital 31,396 31,396
Accumulated deficit (44,902) (46,163)
-------- --------
Total Shareholders' Equity 8,380 7,119
-------- --------
Total Liabilities and Shareholders' Equity $ 20,828 $ 20,350
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
-2-
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1997 and 1996
(Unaudited)
(Amounts in Thousands - except per share data)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $ 13,369 $ 11,718 $ 24,925 $ 22,948
Cost of sales 8,410 7,950 16,217 16,059
-------- -------- -------- --------
Gross profit 4,959 3,768 8,708 6,889
Selling, general and administrative expenses 3,166 2,864 6,630 5,613
-------- -------- -------- --------
Operating income 1,793 904 2,078 1,276
Goodwill amortization 11 11 22 27
Other income -- -- (418) --
Interest expense 187 248 472 609
-------- -------- -------- --------
Income before taxes 1,595 645 2,002 640
Provision for income taxes 596 355 741 202
-------- -------- -------- --------
Net income $ 999 $ 290 $ 1,261 $ 438
======== ======== ======== ========
Net income per share of beneficial interest $ .05 $ .01 $ .06 $ .02
======== ======== ======== ========
Weighted average number of shares outstanding 21,886 21,886 21,886 21,886
======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
-3-
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
(Amounts in Thousands)
Additional
Shares of Beneficial paid-in Accumulated
Interest capital deficit Total
------------------------- -------- -------- --------
Shares Amount
Balance at December 31, 1995 21,886 $ 21,886 $ 31,396 ($47,535) $ 5,747
Net income 438 438
-------- -------- -------- -------- --------
Balance at June 30, 1996 21,886 $ 21,886 $ 31,396 ($47,097) $ 6,185
======== ======== ======== ======== ========
Balance at December 31, 1996 21,886 $ 21,886 $ 31,396 ($46,163) $ 7,119
Net income 1,261 1,261
-------- -------- -------- -------- --------
Balance at June 30, 1997 21,886 $ 21,886 $ 31,396 ($44,902) $ 8,380
======== ======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
-4-
WEDGESTONE FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months and Six Months Ended June 30, 1997 and 1996
(Unaudited)
(Amounts in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------- ------- ------- -------
Cash Flows from Operating Activities:
Net income $ 999 $ 290 $ 1,261 $ 438
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 226 252 434 473
Gain on sale of real estate -- -- (418) --
Gain on disposal of assets -- (205) -- (202)
Deferred income taxes 470 52 599 52
Changes in operating assets and liabilities:
Accounts and other receivables (476) (966) 423 (1,358)
Inventories (558) (72) (953) (334)
Prepaid expenses and other current assets (80) (53) (37) (128)
Accounts payable (254) 584 (177) 721
Accrued payroll and related expenses (13) (11) (163) (17)
Other accrued expenses (77) (211) (128) (435)
Other assets (2) (1) 24 (1)
------- ------- ------- -------
Net cash provided by (used in) operating activities 235 (341) 865 (791)
------- ------- ------- -------
Cash Flows from Investing Activities:
Proceeds from sale of equipment -- 215 -- 232
Proceeds from sale of real estate -- -- 1,328 --
Capital expenditures (183) (165) (416) (346)
Investment in notes receivable (1,650) -- (1,650) --
Investment in real estate -- -- -- 5
------- ------- ------- -------
Net cash provided by (used in) investing activities (1,833) 50 (738) (109)
------- ------- ------- -------
Cash Flows from Financing Activities:
Borrowings on term debt -- -- 841 --
Borrowings (repayments) of term debt (69) (225) (179) (436)
Net borrowings (repayments) on revolving debt 243 537 (977) 1,428
------- ------- ------- -------
Net cash provided by (used in) financing activities 174 312 (315) 992
------- ------- ------- -------
Net increase (decrease) in cash (1,424) 21 (188) 92
Cash at beginning of period 1,580 248 344 365
------- ------- ------- -------
Cash at end of period $ 156 $ 269 $ 156 $ 457
======= ======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
-5-
WEDGESTONE FINANCIAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months and Six Months Ended June 30, 1996 and 1995
NOTE 1. Background and Basis of Presentation
Background - Wedgestone Financial ("Wedgestone" or the "Company") was
formed in 1980 as a real estate investment trust ("REIT") and, on August 9,
1991, filed for bankruptcy. Wedgestone's plan of reorganization (the "Plan")
became effective on August 3, 1992.
Wedgestone's primary business is now the manufacture and distribution
of automotive aftermarket products for the light duty truck market. Its
principal products include rear bumpers; tubular products such as grille guards,
push bars, and step rails; and various other related aftermarket products. The
Company's automotive products are marketed in traditional, original equipment
dealer and retail automotive aftermarkets. The automotive segment manufactures
and sells its products at two locations in California, and one in Minnesota.
Sales are also made from distribution centers in Texas and Utah.
Acquisitions - Since May 1992, Wedgestone has acquired three
manufacturing operations. On June 15, 1992, Wedgestone acquired St. James
Automotive Corp. ("St. James") in exchange for 6,795,220 shares of beneficial
interest of Wedgestone and accounted for this acquisition as a purchase. On
November 18, 1994, Wedgestone acquired the Automotive Segment of Standun, Inc.
("Standun"), which consisted of the Fey Automotive Products Division ("Fey") and
Sigma Plating Co., Inc. ("Sigma") in exchange for 6,795,223 shares of beneficial
interest of Wedgestone and the assumption of approximately $1,104,000 of
outstanding debt due to a related party of Wedgestone, and certain other
liabilities. The shareholders of Standun owned, directly or indirectly,
approximately 48% of Wedgestone prior to the acquisition and, as a result, this
acquisition was accounted for as a "put-together" which is similar to the
pooling of interest method of accounting. As a result of the acquisition,
Standun owned 31% of the outstanding shares of beneficial interest of
Wedgestone. On January 9, 1995, Wedgestone acquired substantially all of the
assets of Hercules Bumpers, Inc. ("Hercules"). The purchase price for the assets
acquired was the assumption of certain debt and other liabilities approximating
$5.1 million. In addition, certain debt was guaranteed jointly and severally by
Charles W. Brady ("Brady"), the former principal shareholder of Hercules, and
Chattahoochee Leasing Corporation ("CLC"), a corporation controlled by Brady. In
exchange for this guarantee, Brady received a promissory note in the amount of
$300,000 and 1,200,000 shares of beneficial interest of Wedgestone. In
consideration for an agreement to pay a liability of Hercules, CLC received a
promissory note for $100,000 which was secured by 100,000 shares of beneficial
interest of Wedgestone. In June, 1995, the Company exercised its right under the
CLC Agreement and acquired the note by issuing these shares to CLC. (See Note 3
- - Sale of Subsidiary.)
Basis of Presentation and Principles of Consolidation The consolidated
financial statements include the accounts of Wedgestone and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
The financial statements included in this Form 10-Q have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to such
rules and regulations. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations.
Income Per Share of Beneficial Interest - Income per share of
beneficial interest is calculated based on weighted average outstanding shares
of beneficial interest.
-6-
NOTE 2. Inventories
Inventories consist of the following: (In Thousands)
June 30, December 31,
1997 1996
------- -------
Finished goods $ 2,947 $ 2,474
Work in progress 1,468 1,239
Raw materials 1,336 1,025
------- -------
5,751 4,738
Less allowances (179) (119)
------- -------
$ 5,572 $ 4,619
======= =======
NOTE 3. Sale of Subsidiary
On March 5, 1996, Hercules closed its manufacturing plant in Pelham,
Georgia. The market for the bumpers produced in the Pelham facility
significantly changed during 1995. Historically, a significant percentage of
Hercules business was for sales to dealers of domestic original equipment
manufacturers. A new program implemented by one of these manufacturers in late
1994 made it extremely difficult for Hercules to remain competitive in this
market segment. Hercules incurred a net loss of $125,000 in 1995 and continued
to incur losses in 1996 through the date of sale totaling $966,000. As a result,
management determined that closing the Pelham facility was appropriate.
On April 18, 1996, the Board of Directors authorized and completed the
sale of the Company's stock ownership in Hercules to MBC Corporation for $1.00
and the assumption of certain debt and other liabilities approximating $4.5
million, pursuant to a Stock Purchase Agreement.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
On June 15, 1992, Wedgestone acquired St. James Automotive Corp. This
subsidiary manufactures and sells tubular products for the light-duty truck
market such as grille guards, push bars and step bars. On November 18, 1994,
Wedgestone acquired the Automotive Segment of Standun, Inc. ("Standun") which
consisted of Sigma and the Fey Automotive Products division. The assets of the
Fey division, which included the stock of Sigma, were merged into Wedgestone's
wholly owned subsidiary Fey Automotive Products, Inc. In conjunction with the
acquisition of the Automotive Segment of Standun, Wedgestone placed St. James,
Fey and Sigma under the common ownership of its wholly owned subsidiary,
Wedgestone Automotive. Collectively, these companies comprise the Automotive
Products business segment which, unless the context requires otherwise, will be
hereinafter referred to as Wedgestone Automotive.
On January 5, 1995, Wedgestone Automotive, through its wholly owned
subsidiary Hercules Automotive Products, Inc. acquired substantially all of the
assets of Hercules Bumpers, Inc., a Georgia company. This acquisition was
intended to provide access to a new business segment for Wedgestone Automotive.
The segment, known as dealer direct, involves the sale of rear step bumpers for
light-duty trucks to new vehicle dealers as an alternative to the factory
supplied bumper. Hercules Bumpers, Inc., was the largest domestic supplier in
this dealer direct segment offering dealers a line of specialty bumpers. During
1994, a major OE manufacturer initiated a program to secure a greater portion of
rear step bumper sales. The program, which involved severe price competition and
program buying, eroded a substantial portion of Hercules' sales base and placed
Hercules in a loss position for the fourth quarter of 1995. In response to the
likely prospect of continued losses, Wedgestone Automotive ceased manufacturing
operations at Hercules on March 5, 1996. In a further decision to exit this
segment, Wedgestone Automotive sold its ownership in Hercules to MBC Corporation
for $1.00 and the assumption of certain debt and other liabilities approximating
$4.5 million pursuant to a Stock Purchase Agreement. The Pelham manufacturing
plant along with its inventory and accounts receivable constituted all of the
material assets of Hercules.
Liquidity and Capital Resources
To date, Wedgestone has financed its business activities through cash
flows from operations. Additional debt has been incurred primarily for working
capital and acquisitions.
For the six months ended June 30, 1997, cash flows from operations
totaling $1,876,000 were supplemented by a reduction in trade receivables and
other assets totaling $423,000 and $24,000, respectively. These funds were used
to acquire $953,000 in additional inventories, $37,000 in other current assets
and repay $468,000 in unsecured creditor advances, resulting in net cash
provided by operations totaling $865,000 for the first six months of 1997
compared to cash consumed by operations totaling $791,000 for this same period
in 1996. Net cash flows from operations were further supplemented during the
period by net proceeds from the sale of real estate totaling $1,328,000 and net
borrowings on long-term debt totaling $662,000. During 1997, the Company
invested $416,000 in new equipment, invested in notes receivable from a related
party totaling $1,650,000 and made payments on revolving debt totaling $977,000
resulting in a net decrease in cash for the six months ended June 30, 1997
totaling $188,000 compared to a $92,000 increase in cash for the same period in
1996.
On May 20, 1997 Wedgestone advanced Stockwood, LLC. ("Stockwood")
$1,650,000 under a one year secured note with interest at 12 percent. The note
is secured by 3,500,000 shares of beneficial interest of Wedgestone Financial
with principal and interest due at maturity. Stockwood is a related party
through common ownership by certain Wedgestone Financial shareholders.
In November 1994 Wedgestone entered into a three-year, $7.5 million
credit facility, which provided for a revolving credit line and term loan with
CIT / Credit Finance ("CIT"), and was collateralized by substantially all of the
assets of the Company. On March 18, 1997, the Company amended and restated the
agreement with CIT resulting in a five-year $10 million credit facility
providing a revolving credit line and term loan under terms substantially
similar to the original agreement. The amended and restated agreement provides
for borrowings based on a percentage of inventory and receivables and includes
an equipment term loan, at the lender's prime rate plus 1.375% (11% at June 30,
1997).
-8-
In connection with the acquisition of Hercules on January 9, 1995, a
wholly-owned subsidiary of Wedgestone assumed certain debt consisting of a term
loan of $4.0 million, and an industrial revenue bond of $285,000 due March 1,
1999. On March 5, 1996, the Company closed the Hercules facility in Pelham,
Georgia, as a result of unfavorable market conditions. On April 18, 1996, the
Company sold its stock ownership in Hercules to MBC Corporation for $1.00 and
the assumption of certain debt and other liabilities, including the outstanding
borrowings on the term loan and industrial revenue bond. The total debt and
liabilities assumed by MBC Corporation approximated $4.5 million.
Capital projects to increase production capacity have been authorized
totaling approximately $1,000,000 in response to new production awards. These
expenditures will culminate by the end of the first quarter of 1998. The company
believes that it will be able to secure satisfactory financing arrangements for
these capital expenditures. Management is continuing to review the capital needs
of the Company.
The Company continues to actively seek acquisition opportunities in the
Automotive Products Business Segment. While there are no specific opportunities
identified at this time, to the extent that Wedgestone expands its operations
and makes additional acquisitions, it will need to obtain additional funding
from institutional lenders and other sources. Wedgestone's ability to use equity
in obtaining funding may be limited by its desire to preserve certain tax
attributes including its net operating loss carry forwards.
Results Of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Net sales increased $1,651,000 or 14% to $13,369,000 for the three
months ended June 30, 1997 compared to $11,718,000 for the same period in 1996.
This reflects a decrease of $804,000 or 13% in sales of bumpers offset by a
$2,455,000 or 39% increase in the sales of tubular and other products. The
increase in tubular sales reflects a continuing acceptance of the Company's line
of Westin tubular truck accessories in the light duty pickup and sport utility
aftermarket. The decline in bumper sales reflects a general decline in the
demand for aftermarket bumpers. This decline is mostly due to efforts of the
original equipment ("OE") manufacturers to integrate the rear step bumpers on
light duty pickup trucks into the overall design of each new vehicle. With the
release of new OE bumper designs on 1997 models the Company is losing its
competitive advantage afforded by its current line of aftermarket bumpers.
Management believes that the Company will continue to experience significant
erosion in bumper sales in the remaining six months of 1997 and that the decline
in bumper sales will accelerate in 1998 as new OE light duty truck models are
released. Slowing this decline will be a continued demand for Wedgestone bumpers
in the crash replacement market. The crash replacement business, however, will
also decline unless the Company makes significant investments in new tooling to
replicate the new OE bumper designs. The Company is currently examining these
investments in light of their potential future value. Sales of bumpers for the
year ended December 31, 1996 represented 48% or $21,688,000 of total Company
sales.
The Company continues to pursue sales of its products directly to the
OE manufacturers. For the quarter ended June 30, 1997 sales to OE customers
increased 39% to $639,000 compared to $459,000 for the same period in 1996. In
response to OE quality requirements the Company received its ISO 9001 / QS 9000
rating on June 9, 1997. During the quarter ended June 30, 1997, the Company
received new production awards from Mercedes Benz, Subaru, and Nissan for
products to be made in its Irwindale, California facility. Initial releases on
these agreements total approximately $1,250,000 in sales for the third quarter
ending September 30, 1997. The Company also received a production award from
Ford in the quarter ended June 30, 1997 for product to be delivered in 1998. An
investment approximating $1,000,000 in equipment will be required to fulfill
this award. Initial purchase commitments for certain components of this
equipment were made in July 1997. All of the OE production awards are for
tubular products. These products are not a functional part of the vehicle.
Future procurement of them by the OE manufacturers is conditional upon market
acceptance of the products as designed and upon the public's continued interest
in the general appearance of tubular accessories on their vehicles.
Gross margins increased $1,191,000 or 32% to $4,959,000 or 37% of sales
for the three months ended June 30, 1997 compared to $3,768,000 or 32% of sales
in 1996 which included $451,000 in gross margin losses on the sales of Hercules'
products.
-9-
Sales and marketing costs increased by $15,000 or 1% to $1,746,000 or
13% of sales for the three months ended June 30, 1997 compared to $1,732,000 or
13% of sales in 1996. The increase is due to additional advertising and
promotional costs incurred by the Company to further penetrate the traditional
and retail market segments for Westin tubular products. The Company believes
that further expenditures in this area are required to maintain the market
growth achieved and expand these markets further.
Administrative costs increased by $288,000 or 25% to $1,420,000 for the
three months ended June 30, 1997 compared to $1,132,000 in 1996. Product design
and development costs account for this increase. Included in these costs are
salaries, benefits and overhead costs for additions to the Company's engineering
staff. The Company believes that its future competitive position in the
automotive aftermarket will require significant increases in engineering and
development costs over the next several years.
Interest expense decreased $61,000 or 25% to $187,000 for the three
months ended June 30, 1997 compared to $248,000 in 1996. This decrease is
attributable to the decrease in interest rates in 1997 compared to 1996.
Interest rates were further reduced in the quarter as a result of the amended
and restated CIT credit facility.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net sales increased $1,977,000 or 9% to $24,925,000 for the six months
ended June 30, 1997 compared to $22,948,000 for the same period in 1996. This
reflects a decrease of $2,373,000 or 18% in sales of bumpers offset by a
$4,350,000 or 44% increase in the sales of tubular and other products. The
increase in tubular sales reflects a continuing acceptance of the Company's line
of Westin tubular truck accessories in the light duty pickup and sport utility
aftermarket. The decline in bumper sales reflects a general decline in the
demand for aftermarket bumpers. This decline is mostly due to efforts of the
original equipment ("OE") manufacturers to integrate the rear step bumpers on
light duty pickup trucks into the overall design of each new vehicle. With the
release of new OE bumper designs on 1997 models the Company is losing its
competitive advantage afforded by its current line of aftermarket bumpers.
Management believes that the Company will continue to experience significant
erosion in bumper sales in the remaining six months of 1997 and that the decline
in bumper sales will accelerate in 1998 as new OE light duty truck models are
released. Slowing this decline will be a continued demand for Wedgestone bumpers
in the crash replacement market. The crash replacement business, however, will
also decline unless the Company makes significant investments in new tooling to
replicate the new OE bumper designs. The Company is currently examining these
investments in light of their potential future value. Sales of bumpers for the
year ended December 31, 1996 represented 48% or $21,688,000 of total Company
sales. Bumper sales for the first six months of 1997 totaled $10,637,000
compared to $13,010,000 in 1996.
The Company continues to pursue sales of its products directly to the
OE manufacturers. For the six months ended June 30, 1997 sales to OE customers
increased 10% to $1,234,000 compared to $1,121,000 for the same period in 1996.
In response to OE quality requirements the Company received its ISO 9001 / QS
9000 rating on June 9, 1997. During the quarter ended June 30, 1997, the Company
received new production awards from Mercedes Benz, Subaru, and Nissan for
products to be made in its Irwindale, California facility. Initial releases on
these agreements total approximately $1,250,000 in sales for the third quarter
ending September 30, 1997. The Company also received a production award from
Ford in the quarter ended June 30, 1997 for product to be delivered in 1998. An
investment approximating $1,000,000 in equipment will be required to fulfill
this award. Purchase commitments for a portion of this equipment were made in
July 1997. All of the OE production awards are for tubular products. These
products are not a functional part of the vehicle. Future procurement of them by
the OE manufacturers is conditional upon market acceptance of the products as
designed and upon the public's continued interest in the general appearance of
tubular accessories on their vehicles.
Gross margins increased $1,819,000 or 26% to $8,708,000 or 35% of sales
for the six months ended June 30, 1997 compared to $6,889,000 or 30% of sales in
1996 which included $609,000 in gross margin losses on the sales of Hercules'
products.
-10-
Sales and marketing costs increased by $325,000 or 10% to $3,658,000 or
14% of sales for the six months ended June 30, 1997 compared to $3,326,000 or
15% of sales in 1996. The increase is due to additional advertising and
promotional costs incurred by the Company to further penetrate the traditional
and retail market segments for Westin tubular products. The Company believes
that further expenditures in this area are required to maintain the market
growth achieved and expand these markets further.
Administrative costs increased by $685,000 or 30% to $2,972,000 for the
six months ended June 30, 1997 compared to $2,287,000 in 1996. Product design
and development costs account for this increase. Included in these costs are
salaries, benefits and overhead costs for additions to the Company's engineering
staff. The Company believes that its future competitive position in the
automotive aftermarket will require significant increases in engineering and
development costs over the next several years.
Other income for the six months ended June 30, 1997 consists of the
gain on the sale of the Company's 21 acres of land known as the College Point
property.
Interest expense decreased $137,000 or 22% to $472,000 for the six
months ended June 30, 1997 compared to $609,000 in 1996. This decrease is
attributable the decrease in debt associated with Hercules and to the decrease
in interest rates in 1997 compared to 1996. Interest rates were further reduced
in the second quarter as a result of the amended and restated CIT credit
facility.
Forward Looking Information
Information contained in this Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate or "continue" or the
negative thereof or other variations thereon or comparable terminology. There
are certain important factors that could cause results to differ materially from
those anticipated by some of these forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainty. The
factors, among others, that could cause actual results to differ materially
include: pricing and merchandising policies from the major automotive
manufacturers; the Company's ability to execute its business plan; the
acceptance of the Company's merchandising strategies by its target customers;
competitive pressures on sales and pricing; and increases in other costs which
cannot be recovered through improved pricing of merchandise.
-11-
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10. (xxii) Amended and Restated Loan and Security Agreement dated March 18, 1997 between
the Company and The CIT Group/Credit Finance, Inc.
10. (xxiii) $1,650,000 Secured Promissory Note dated May 20, 1997 payable by Stockwood,
LLC.
10. (xxiv) Pledge and Security Agreement dated May 20, 1997 for the benefit of Wedgestone
Financial from Stockwood, LLC.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on July 2, 1997, relating to changes
to the Company's management.
-12-
PART II
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Wedgestone Financial
Date: August 14, 1997 By: /s/ Eric H. Lee
--------------------
Chief Financial Officer
(Principal Financial Officer)
The name "Wedgestone Financial" (Formerly Wedgestone Realty Investors Trust) is
the designation of the Trustees under a Declaration of Trust dated March 12,
1980, as amended, and in accordance with such Declaration of Trust notice is
hereby given that all persons dealing with Wedgestone Financial by so acting
acknowledge and agree that such persons must look solely to the Trust property
for the enforcement of any claims against Wedgestone Financial and that neither
Trustees, Officers, employees, agents nor shareholders assume any personal
liability for claims against the Trust or obligations entered into on behalf of
Wedgestone Financial, and that respective properties shall not be subject to
claims of any other person in respect of any such liability.
-13-
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
WEDGESTONE AUTOMOTIVE CORPORATION ("Wedgestone")
FEY AUTOMOTIVE PRODUCTS, INC. ("Fey")
ST. JAMES AUTOMOTIVE CORPORATION ("St. James")
SIGMA PLATING CO., INC. ("Sigma")
This Agreement is between the undersigned Borrower and the undersigned Lender
concerning loans and other credit accommodations to be made by Lender to
Borrower. This Agreement amends and restates in full those certain Loan and
Security Agreements between Lender and each of Fey, St. James and Sigma, each
dated as of November 17, 1994.
SECTION 1. PARTIES
1.1 The "Borrower" is the person, firm, corporation or other entity identified
as the Borrower in Section 10 and its successors and assigns. If more than one
Borrower is specified in Section 10, all references to Borrower shall mean each
of them, jointly and severally, individually and collectively, and the
successors and assigns of each.
1.2 The "Lender" is The CIT Group/Credit Finance, Inc., and its successors and
assigns.
SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS
2.1 Revolving Loans. Lender shall, subject to the terms and conditions contained
herein, make revolving loans to Borrower ("Revolving Loans") in amounts
requested by Borrower from time to time, but not in excess of the Net
Availability existing immediately prior to the making of the requested Revolving
Loan and provided the requested Revolving Loan, Accommodations and the Term Loan
would not cause the outstanding Obligations to exceed the Maximum Credit.
Revolving Loans shall be made to each Borrower separately based upon such
Borrower's Net Availability.
(a) The "Maximum Credit" is set forth in Section 10.1(a) hereof.
(b) The "Gross Availability" shall be calculated at any time as the sum of (i)
the product obtained by multiplying the then-outstanding amount of Eligible
Accounts, net of all taxes, discounts, allowances and credits given or claimed,
by the Eligible Accounts Percentage set forth in Section 10.1(b),
plus: (ii) the product obtained by multiplying the applicable Eligible
Inventory Percentages, if any, set forth in Section 10.1(b) by the values (as
determined by Lender based on the lower of cost or market) of Eligible
Inventory, but the amount so added shall not exceed any sublimits set forth in
Section 10.1(c), minus: (iii) any Reserves.
(c) The "Net Availability" shall be calculated at any time as an amount equal to
the Gross Availability minus the aggregate amount of all then-outstanding
Obligations of Borrower to Lender, other than the then-outstanding principal
balance of the Term Loan.
(d) "Eligible Accounts" are accounts created by Borrower in the ordinary course
of its business which are and remain acceptable to Lender for lending purposes.
General criteria for Eligible Accounts are set
-14-
forth below but may be revised from time to time by Lender, in its sole
judgment, on fifteen (15) days' prior written notice to Borrower. Lender shall,
in general, deem accounts to be Eligible Accounts if: (1) such accounts arise
from bona fide completed transactions and have not remained unpaid for more than
the number of days after the invoice date or the number of days past due set
forth in Section 10.1(d); (2) the amounts of the accounts reported to Lender are
absolutely owing to Borrower and do not arise from sales on consignment,
guaranteed sale or other terms under which payment by the account debtors may be
conditional or contingent; (3) the account debtor's chief executive office or
principal place of business is located in the United States or Canada or payment
of the account is fully supported by a letter of credit assigned to Lender and
in form and substance acceptable to Lender; (4) such accounts do not arise from
progress billings, consignments, retainages or bill and hold sales; (5) there
are no contra relationships, setoffs, counterclaims or disputes existing with
respect thereto and, where Lender deems appropriate, it is furnished with a
non-offset letter in form and substance satisfactory to Lender, and there are no
other facts existing or threatened which would impair or delay the
collectability of all or any portion thereof; (6) the goods giving rise thereto
were not at the time of the sale subject to any liens except those permitted in
this Agreement; (7) such accounts are not accounts with respect to which the
account debtor or any officer or employee thereof is an officer, employee or
agent of or is affiliated with Borrower, directly or indirectly, whether by
virtue of family membership, ownership, control, management or otherwise; (8)
such accounts are not accounts with respect to which the account debtor is the
United States or any State or political subdivision thereof or any department,
agency or instrumentality of the United States, any State or political
subdivision, unless there has been compliance with the Assignment of Claims Act
or any similar State or local law, if applicable; (9) Borrower has delivered to
Lender or Lender's representative such documents as Lender may have requested
pursuant to Section 5.8 hereof in connection with such accounts and Lender shall
have received a verification of such account, satisfactory to it, if sent to the
account debtor or any other obligor or any bailee pursuant to Section 5.4
hereof; (10) there are no facts, existing or threatened, which might result in
any adverse change in the account debtor's financial condition; (11) such
accounts owed by a single account debtor or its affiliates do not represent more
than twenty-five percent (25%) of all otherwise Eligible Accounts (provided that
accounts excluded from Eligible Accounts solely by reason of this subsection
(11) shall nevertheless be considered Eligible Accounts to the extent of the
amount of such accounts which does not exceed twenty-five percent (25%) of all
otherwise Eligible Accounts); (12) such accounts are not owed by an account
debtor whose accounts or whose affiliates' accounts greater than ninety (90)
days past invoice date or sixty (60) days past due comprise more than fifty
percent (50%) of the accounts of such account debtor or its affiliates owed to
Borrower; (13) such accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the amount of any customer credit
limits as established, and changed, from time to time by Lender on notice to
Borrower (accounts excluded from Eligible Accounts solely by reason of this
subsection (13) shall nevertheless be considered Eligible Accounts to the extent
the amount of such accounts does not exceed such customer credit limit); and
(14) such accounts are owed by account debtors deemed creditworthy at all times
by Lender.
(e) "Eligible Inventory" is raw material (consisting of raw steel and
virgin/unprocessed nickel) and finished goods inventory owned by Fey which is
and remains acceptable to Lender for lending purposes and is located at one of
the addresses set forth in Section 10.6(d).
(f) Lender shall have a continuing right to deduct reserves in determining the
Gross Availability ("Reserves"), and to increase and decrease such Reserves from
time to time, if and to the extent that, in Lender's reasonable credit judgment,
such Reserves are necessary to protect Lender against any state of facts which
does, or would, with notice or passage of time or both, constitute an Event of
Default or have an adverse effect on any Collateral. Lender may, at its option,
implement Reserves by designating as
-15-
ineligible a sufficient amount of accounts or inventory which would otherwise be
Eligible Accounts or Eligible Inventory so as to reduce Gross Availability by
the amount of the intended Reserve. Lender shall use reasonable efforts to give
Borrower notice prior to establishing any Reserves, other than reserves
established against the amount of Eligible Accounts; provided, that Lender shall
have no liability for any failure to give such notice.
(g) Subject to the terms and conditions hereof, including, but not limited to,
the existence of sufficient Gross and Net Availability, Borrower agrees to
borrow amounts from time to time such that the aggregate outstanding principal
amount of all Revolving Loans and the Term Loan shall at all times equal or
exceed the principal amount set forth in Section 10.1(e) as the Minimum
Borrowing; provided, that the only consequence of a breach of the foregoing
shall be the required payment set forth in the following sentence. If the
average aggregate outstanding principal amount of Revolving Loans and the Term
Loan for any month is less than the Minimum Borrowing, Borrower shall also pay
Lender a fee equal to the amount of interest that would have accrued during such
month on such difference. Such fee shall be payable at the rate and in the
manner provided herein for the payment of interest.
2.2 Term Loan. The amount of any term loan being made by Lender to Borrower is
set forth in Section 10.2 ("Term Loan"). Such Term Loan shall be evidenced by a
Promissory Note delivered by Borrower to Lender and shall be repaid, together
with interest and other amounts, in accordance with this Agreement and the
Promissory Note.
2.3 Accommodations.(a)Subject to the terms and conditions contained herein,
Lender may, in its sole discretion, issue or cause to be issued, from time to
time at Borrower's request and on terms and conditions and for purposes
satisfactory to Lender, credit accommodations consisting of letters of credit,
bankers' acceptances, merchandise purchase guaranties or other guaranties or
indemnities for Borrower's account (collectively, "Accommodations"). Borrower
shall execute and perform additional agreements relating to the Accommodations
in form and substance acceptable to Lender and the issuer of any Accommodations,
all of which shall supplement the rights and remedies granted herein. Any
payments made by Lender or any affiliate of Lender in connection with the
Accommodations shall constitute additional Revolving Loans to Borrower.
(b) In addition to the fees and costs of any issuer in connection with issuing
or administering Accommodations, Borrower shall pay monthly to Lender, on the
first day of each month, a charge on the face amount of all outstanding
Accommodations computed daily from the date of issuance until termination or
payment, at the rate set forth in Section 10.3(a) (the "Accommodation Charges").
(c) No Accommodation will be issued unless the full amount of the Accommodation
requested, plus fees and costs for issuance, is less than the Net Availability
existing immediately prior to the issuance of the requested Accommodation, or if
the requested Accommodation would cause the sum of the outstanding Obligations
to exceed the Maximum Credit, or cause the sum of the open amount of
Accommodations to exceed, at any time, the Accommodation sublimit set forth in
Section 10.3(b).
(d) All indebtedness, liabilities and obligations of any sort whatsoever,
however arising, whether present or future, fixed or contingent, secured or
unsecured, due or to become due, paid or incurred or otherwise arising in
connection with any Accommodation shall be included in the term "Obligations" as
defined herein, and shall include, without limitation, (i) all amounts due or
which may become due under any Accommodation; (ii) all amounts charged or
chargeable to Borrower or to Lender by any bank, other financial institution or
correspondent bank which opens, issues or is involved with such
-16-
Accommodations; (iii) Lender's Accommodation Charges and all fees, costs and
other charges of any issuer of any Accommodation; and (iv) all duties, freight,
taxes, costs, insurance and all such other charges and expenses which may
pertain directly or indirectly to any Obligations or Accommodations or to the
goods or documents relating thereto.
(e) Borrower unconditionally agrees to indemnify and hold Lender harmless from
any and all loss, claim or liability (including reasonable attorneys' fees)
arising from any transactions or occurrences relating to any Accommodation
established or opened for Borrower's account, the Collateral relating thereto
and any drafts or acceptance thereunder, including any such loss or claim due to
any action taken by an issuer of any Accommodation. Borrower further agrees to
indemnify and hold Lender harmless for any errors or omissions in connection
with the Accommodations, whether caused by Lender, by the issuer of any
Accommodation or otherwise. Borrower's unconditional obligation to indemnify and
hold Lender harmless under this provision shall not be modified or diminished
for any reason or in any manner whatsoever, except for Lender's gross negligence
or wilful misconduct. Borrower agrees that any charges made to Lender by any
issuer of any Accommodation shall be conclusive on Borrower and may be charged
to Borrower's account.
(f) Lender shall not be responsible for the conformity of any goods to the
documents presented, the validity or genuineness of any documents or delay,
default, or fraud by the Borrower or shipper and/or anyone else in connection
with the Accommodations or any underlying transaction.
(g) Borrower agrees that any action taken by Lender, if taken in good faith, or
any action taken by an issuer of any Accommodation, under or in connection with
any Accommodation, shall be binding on Borrower and shall not create any
resulting liability to Lender. In furtherance thereof Lender shall have the full
right and authority to clear and resolve any questions of non-compliance of
documents; to give any instructions as to acceptance or rejection of any
documents or goods; to execute for Borrower's account any and all applications
for steamship or airway guarantees, indemnities or delivery orders; to grant any
extensions of the maturity of, time of payment for, or time of presentation of,
any drafts, acceptances, or documents; and to agree to any amendments, renewals,
extensions, modifications, changes or cancellations of any of the terms or
conditions of any of the applications or Accommodations. All of the foregoing
actions may be taken in Lender's sole name, and the issuer thereof shall be
entitled to comply with and honor any and all such documents or instruments
executed by or received solely from Lender, all without notice to or any consent
from Borrower. None of the foregoing actions described in this subsection 2.3
(g) may be taken by Borrower without Lender's express written consent.
2.4 Obligations In Excess of Limitations; Certain Amounts Due Without Demand.
Lender may, in the exercise of its reasonable credit judgment, make or permit
Revolving Loans and Accommodations or other Obligations in excess of the Maximum
Credit, Gross Availability or applicable sublimits. To the extent such excess is
permitted by Lender, all or any portion of such excess shall become due and
payable upon Lender's demand therefor. To the extent the aggregate amount of
Revolving Loans and Accommodations or other Obligations at any time exceeds,
without the consent of Lender, the Maximum Credit, Gross Availability or
applicable sublimits, all of such excess shall be immediately due and payable,
whether or not Lender makes a demand therefor.
-17-
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Interest on all Obligations shall be payable by Borrower on the first day of
each month, calculated upon the closing daily outstanding principal balances in
the loan account(s) of Borrower for each day during the immediately preceding
month, at the per annum rate set forth as the Interest Rate in Section 10.4(a).
The Interest Rate shall increase or decrease by an amount equal to each increase
or decrease, respectively, in the Prime Rate (as defined below), effective as of
the date of each such change. On and after any Event of Default or termination
or non-renewal hereof, interest on all unpaid Obligations shall accrue at a rate
equal to two percent (2%) per annum in excess of the Interest Rate otherwise
payable until such time as all Obligations are indefeasibly paid in full in
immediately available funds (notwithstanding entry of any judgment against
Borrower or the exercise of any other right or remedy by Lender), and all such
interest shall be payable on demand. Interest, including interest charged upon
the occurrence of an Event of Default, shall be calculated on the basis of
actual days elapsed over a 360-day year. In no event shall charges constituting
interest exceed the rate permitted under any applicable law or regulation.
However, if any interest or other charges paid or payable in connection with
this Agreement or the Promissory Note are ever determined to exceed the maximum
amount or rate permitted by law, Borrower and Lender understand and agree that:
(A) the amount or rate of interest or other charges payable by Borrower pursuant
to this lending transaction shall be reduced to the maximum amount permitted by
law; and (B) any excess amount previously collected from Borrower in connection
with this lending transaction which exceeded the maximum amount permitted by law
will be credited against the outstanding principal balance. If the outstanding
principal balance has already been paid, the excess amount paid will be refunded
to Borrower.
(b) The "Prime Rate" is the rate of interest publicly announced by Chase
Manhattan Bank in New York, New York as its prime rate or similar such
designation (such rate is not intended to be the lowest rate of interest charged
by such bank to its borrowers).
3.2 Facility Fee. Borrower shall pay Lender a Facility Fee on the dates and in
the amounts set forth in Section 10.4(b), which fee shall be fully earned on
each due date thereof.
3.3 Intentionally Deleted
3.4 Intentionally Deleted
3.5 Charges to Loan Account. At Lender's option, all payments of principal,
interest, fees, costs, expenses and other charges provided for in this
Agreement, or in any other agreement now or hereafter existing between Lender
and Borrower, may be charged on the date when due as principal to any loan
account of Borrower maintained by Lender, and shall thereafter bear interest at
the rate and payable in the manner provided herein for the accrual and payment
of interest on outstanding Obligations.
SECTION 4. GRANT OF SECURITY INTEREST
4.1 Grant of Security Interest. To secure the payment and performance in full of
all Obligations, Borrower hereby grants to Lender a continuing security interest
in and lien upon, and a right of setoff against, and Borrower hereby assigns and
pledges to Lender, all of the Collateral, including any Collateral not deemed
eligible for lending purposes.
-18-
4.2 Obligations. "Obligations" shall mean any and all Revolving Loans, Term
Loans, Accommodations and all other indebtedness, liabilities and obligations of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees and expenses, however
evidenced, whether as principal, surety, endorser, guarantor or otherwise,
whether arising under this Agreement or otherwise, whether now existing or
hereafter arising, whether arising before, during or after the initial or any
renewal Term or after the commencement of any case with respect to Borrower
under the United States Bankruptcy Code or any similar statute, whether direct
or indirect, absolute or contingent, joint or several, due or not due, primary
or secondary, liquidated or unliquidated, secured or unsecured, original,
renewed or extended and whether arising directly or howsoever acquired by Lender
including from any other entity outright, conditionally or as collateral
security, by assignment, merger with any other entity, participations or
interests of Lender in the obligations of Borrower to others, assumption,
operation of law, subrogation or otherwise and shall also include all amounts
chargeable to Borrower under this Agreement or in connection with any of the
foregoing.
4.3 Collateral. "Collateral" shall mean all of the following property of
Borrower:
(a) All now owned and hereafter acquired right, title and interest of Borrower
in, to and in respect of all: accounts, including without limitation all
interests in goods represented by accounts, returned, reclaimed or repossessed
goods with respect thereto and rights as an unpaid vendor; chattel paper;
investment property; general intangibles (including, but not limited to, tax and
duty claims and refunds, registered and unregistered patents, trademarks,
service marks, copyrights, trade names, applications for the foregoing, trade
secrets, goodwill, processes, drawings, blueprints, customer lists, license
agreements and licenses, whether as licensor or licensee, computer software
programs and systems, choses in action and other claims, and existing and future
leasehold interests in equipment, real estate and fixtures); documents;
instruments; letters of credit, bankers' acceptances or guaranties; cash monies,
deposits, securities, bank accounts, deposit accounts, credits and other
property now or hereafter held in any capacity by Lender, its affiliates or any
entity which, at any time, participates in Lender's financing of Borrower or at
any other depository or other institution; and agreements or property securing
or relating to any of the items referred to above;
(b) All now owned and hereafter acquired right, title and interest of Borrower
in, to and in respect of goods, including, but not limited to: (i)All inventory,
wherever located, whether now owned or hereafter acquired, of whatever kind,
nature or description, including all raw materials, work-in-process, finished
goods and materials to be used or consumed in Borrower's business; and all names
or marks affixed to or to be affixed thereto for purposes of selling same by the
seller, manufacturer, lessor or licensor thereof; (ii)All equipment and
fixtures, wherever located, whether now owned or hereafter acquired, including,
without limitation, all machinery, equipment, motor vehicles, furniture and
fixtures, and any and all additions, substitutions, replacements (including
spare parts) and accessions thereof and thereto; (iii) All consumer goods, farm
products, crops, timber, minerals or the like (including oil and gas), wherever
located, whether now owned or hereafter acquired, of whatever kind, nature or
description;
(c) All now owned and hereafter acquired right, title and interest of Borrower
in, to and in respect of any other personal property or any fixtures in or upon
which Lender has or may hereafter have a security interest, lien or right of
setoff;
(d) All present and future books and records relating to any of the above,
including, without limitation, all computer programs, printed output and
computer readable data, in any media, in the possession or control of the
Borrower, any computer service bureau or other third party;
-19-
(e) All notes, security interests and deeds of trust or mortgages in favor of
Borrower; and
(f) All products and proceeds of the foregoing in whatever form and wherever
located, including, without limitation, all insurance proceeds and all claims
against third parties for loss or destruction of or damage to any of the
foregoing.
SECTION 5. COLLECTION AND ADMINISTRATION
5.1 Collections. Borrower shall, at Borrower's expense and in the manner
requested by Lender from time to time, direct that remittances and all other
proceeds of accounts and other Collateral shall be sent to a lock box designated
by and/or maintained in the name of Lender, and deposited into a bank account
maintained in the name of Lender under arrangements with the depository bank
under which all funds deposited to such bank account are required to be
transferred solely to Lender. Borrower shall bear all risk of loss of any funds
deposited into such account. In connection therewith, Borrower shall execute
such lock box and bank account agreements as Lender shall specify. Any
collections or other proceeds received by Borrower shall be held in trust for
Lender and immediately remitted to Lender, in kind.
5.2 Payments. All Obligations shall be payable at Lender's office set forth
below or at Bank of America, NT & SA, in Los Angeles, California, or such
substitute bank as Lender may determine ("Lender's Bank") or such other place as
Lender may designate from time to time. For purposes of determining Gross and
Net Availability, remittances and other payments with respect to the Collateral
and Obligations will be treated as credited to the loan account of Borrower
maintained by Lender and Collateral balances to which they relate, upon the date
of Lender's receipt of advice from Lender's Bank that such remittances or other
payments have been credited to Lender's account or in the case of remittances or
other payments, received directly in kind by Lender, upon the date of Lender's
deposit thereof at Lender's Bank, subject to final payment and collection. In
computing interest charges, the loan account of Borrower maintained by Lender
will be credited with remittances and other payments two and one-half (2.5)
Business Days after Lender has received advice of receipt of remittances in
Lender's account at Lender's Bank. For purposes of this Agreement, "Business
Day" shall mean any day other than a Saturday, Sunday or any other day on which
either Lender or banks located in Los Angeles, California, or New York, New York
are authorized to close.
5.3 Loan Account Statements. Lender shall deliver to Borrower monthly a loan
account statement. Each statement shall be considered correct and binding upon
Borrower as an account stated, except to the extent that Lender receives, within
sixty (60) days after the mailing of such statement, written notice from
Borrower of any specific exceptions by Borrower to that statement.
5.4 Direct Collections. Lender may, at any time, whether or not an Event of
Default has occurred, without notice to or consent of Borrower, except as
provided herein, (a) notify any account debtor that the accounts and other
Collateral which includes a monetary obligation have been assigned to Lender by
Borrower and that payment thereof is to be made to the order of and directly to
Lender, or require Borrower to state on all invoices and statements sent to any
account debtor, other obligor or bailee, that the accounts and such other
Collateral have been assigned to Lender and are payable directly and only to
Lender; provided, that for so long as no Event of Default is continuing, Lender
shall only be permitted to notify account debtors as provided herein (or require
Borrower to notify account debtors as provided above) if Lender reasonably
believes that there exists a threat to the Collateral or the value or proceeds
thereof, or to the collectability or existence of the accounts or the proceeds
thereof, and in such event Lender shall give Borrower notice prior to so
notifying any account debtor; provided further, however,
-20-
that Lender shall have no liability for any failure to give such notice; (b)
send, or cause to be sent by its designee, requests (which may identify the
sender by a pseudonym) for verification of accounts and other Collateral
directly to any account debtor or any other obligor or any bailee with respect
thereto; and (c) demand, collect or enforce payment of any accounts or such
other Collateral, but without any duty to do so; provided, that for so long as
no Event of Default is continuing, Lender shall only be permitted to demand,
collect or enforce payment of accounts or other Collateral as provided herein if
Lender reasonably believes that there exists a threat to the Collateral or the
value or proceeds thereof, or to the collectability or existence of the accounts
or the proceeds thereof, and in such event Lender shall give Borrower notice
prior to so demanding, collecting or enforcing payment of any accounts or other
Collateral; provided further, however that Lender shall not be liable for any
failure to collect or enforce payment of accounts or other Collateral or for
failure to give such notice.
5.5 Attorney-in-Fact. Borrower hereby appoints Lender and any designee of Lender
as Borrower's attorney-in-fact and authorizes Lender or such designee, at
Borrower's sole expense, to exercise at any time (except as specifically limited
below) in Lender's or such designee's discretion all or any of the following
powers, which powers of attorney, being coupled with an interest, shall be
irrevocable until all Obligations have been paid in full: (a) receive, take,
endorse, assign, deliver, accept and deposit, in the name of Lender or Borrower,
any and all cash, checks, commercial paper, drafts, remittances and other
instruments and documents relating to the Collateral or the proceeds thereof;
(b) transmit to account debtors, other obligors or any bailees notice of the
interest of Lender in the Collateral or request from account debtors or such
other obligors or bailees at any time information concerning the Collateral and
any amounts owing with respect thereto, and so long as no Event of Default has
occurred and is continuing, such requests will not identify Lender to any
account debtor on any Collateral, provided that Lender shall have no liability
if it inadvertently does identify itself in any such notice; (c) after notice
from Lender to Borrower, notify account debtors or other obligors to make
payment directly to Lender, or notify bailees as to the disposition of
Collateral, provided, that Lender shall have no liability for any failure to
give such notice; (d) after notice from Lender to Borrower, take or bring, in
the name of Lender or Borrower, all steps, actions, suits or proceedings deemed
by Lender necessary or desirable to effect collection of or other realization
upon the accounts and other Collateral, provided, that Lender shall have no
liability for any failure to give such notice; (e) after an Event of Default,
change the address for delivery of mail to Borrower and to receive and open mail
addressed to Borrower; (f) after an Event of Default, extend the time of payment
of, compromise or settle for cash, credit, return of merchandise, and upon any
terms or conditions, any and all accounts or other Collateral which includes a
monetary obligation and discharge or release the account debtor or other
obligor, without affecting any of the Obligations; and (g) execute in the name
of Borrower and file against Borrower in favor of Lender financing statements or
amendments with respect to the Collateral (but only after Lender has reasonably
requested the same of Borrower and Borrower has failed to promptly execute and
deliver the same to Lender).
5.6 Liability. Borrower hereby releases and exculpates Lender, its officers,
employees and designees, from any liability arising from any acts under this
Agreement or in furtherance thereof, whether as attorney-in-fact or otherwise,
whether of omission or commission, and whether based upon any error of judgment
or mistake of law or fact, except for gross negligence or wilful misconduct. In
no event will Lender have any liability to Borrower for lost profits or other
special or consequential damages.
5.7 Administration of Accounts. After written notice by Lender to Borrower prior
to an Event of Default (but only if Lender has notified one or more account
debtors as permitted in Section 5.4), and automatically, without notice, after
an Event of Default, Borrower shall not, without the prior written
-21-
consent of Lender in each instance, (a) grant any extension of time of payment
of any of the accounts or any other Collateral which includes a monetary
obligation; (b) compromise or settle any of the accounts or any such other
Collateral for less than the full amount thereof; (c) release in whole or in
part any account debtor or other person liable for the payment of any of the
accounts or any such other Collateral; or (d) grant any credits, discounts,
allowances, deductions, return authorizations or the like with respect to any of
the accounts or any such other Collateral.
5.8 Documents. No less frequently than weekly, and in the manner specified by
Lender, Borrower shall deliver to Lender or Lender's representative, as Lender
shall designate, copies or originals of invoices, agreements, proofs of
rendition of services and delivery of goods and other documents evidencing or
relating to the transactions which gave rise to accounts or other Collateral,
together with customer statements, schedules describing the accounts or other
Collateral and/or statements of account and confirmatory assignments to Lender
of the accounts or other Collateral, in form and substance satisfactory to
Lender and duly executed by Borrower. Without limiting the provisions of Section
5.7, Borrower's granting of credits, discounts, allowances, deductions, return
authorizations or the like will promptly be reported to Lender in writing. In no
event shall any such schedule or confirmatory assignment (or the absence thereof
or omission of any of the accounts or other Collateral therefrom) limit or in
any way be construed as a waiver, limitation or modification of the security
interests or rights of Lender or the warranties, representations and covenants
of Borrower under this Agreement. Any documents, schedules, invoices or other
paper delivered to Lender by Borrower may be destroyed or otherwise disposed of
by Lender six (6) months after receipt by Lender, unless Borrower requests their
return in writing in advance and makes prior arrangements for their return, at
its expense.
5.9 Access. From time to time as requested by Lender after prior reasonable
notice from Lender to Borrower, at the sole expense of Borrower, Lender or its
designee shall have complete access to all of the premises where Collateral is
located for the purposes of inspecting the Collateral, including Borrower's
books and records, and Borrower shall permit Lender or its designee to make such
copies of such books and records or extracts therefrom as Lender may request;
provided that Lender shall not be required to give such prior notice to Borrower
if Lender reasonably believes that any of the Collateral or the value thereof
may be impaired, or at any time during the continuation of an Event of Default.
Without expense to Lender, Lender may use such of Borrower's personnel,
equipment, including computer equipment, programs, printed output and computer
readable media, supplies and premises as Lender shall request for the collection
of accounts and realization on other Collateral. Borrower hereby irrevocably
authorizes all accountants and third parties, with the exception of Borrower's
attorneys with respect to information for which a privilege is asserted, to
disclose and deliver to Lender at Borrower's expense all financial information,
books and records, work papers, management reports and other information in
their possession regarding Borrower.
5.10 Environmental Audits. From time to time, as requested by Lender, at the
sole expense of Borrower, Borrower shall provide Lender, or its designee,
complete access to all of Borrower's facilities for the purpose of conducting an
environmental audit of such facilities as Lender or its designees may deem
necessary. Borrower agrees to cooperate with Lender with respect to any
environmental audit conducted by Lender or its designee pursuant to this Section
5.10.
-22-
SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Borrower hereby represents, warrants and covenants to Lender the following, the
truth and accuracy of which, and compliance with which, shall be continuing
conditions of the making of loans or other credit accommodations by Lender to
Borrower:
6.1 Financial and Other Reports. Borrower shall keep and maintain its books and
records in accordance with generally accepted accounting principles,
consistently applied. Borrower shall, at its sole expense, deliver to Lender (a)
accurate and complete perpetual inventory reports, monthly; (b) monthly, on or
before the tenth (10th) day of each month for the previous month, accurate and
complete accounts receivable and accounts and notes payable agings and a monthly
inventory report; (c) monthly, on or before the thirtieth (30th) day of each
month for the previous month, internally prepared consolidated and consolidating
interim financial statements; (d) annually, as soon as available, but in no
event later than ninety (90) days after the end of Borrower's fiscal year,
audited consolidated and consolidating financial statements of Borrower
accompanied by the report and opinion thereon of independent certified public
accountants acceptable to Lender; and (e) with such frequency as Lender shall
request, cash flow projections in a form acceptable to Lender. All of the
foregoing shall be in such form and together with such information with respect
to the business of Borrower or any guarantor, as Lender may in each case
request. Borrower shall also provide Lender with accurate and complete copies of
any reports, forms or other documents prepared or delivered by Borrower to any
agency or authority pursuant to the requirements of any governmental statutes,
regulations or ordinances. In addition, Borrower shall provide Lender with
accurate and complete copies of any and all documents delivered by Wedgestone
Financial to the United States Securities and Exchange Commission ("SEC")
promptly after delivery thereof to the SEC, including without limitation,
quarterly 10-Qs and annual 10-Ks. Notwithstanding any of the foregoing, Lender
may in its reasonable credit judgment require more frequent reporting than is
provided for in Section 5.8 and this Section 6.1.
6.2 Trade Names. Borrower may from time to time render invoices to account
debtors under its trade name(s) set forth in Section 10.6(f) after Lender has
received prior written notice from Borrower of the use of such trade name(s) and
as to which, Borrower agrees that: (a) such trade name does not refer to another
corporation or other legal entity; (b) all accounts and proceeds thereof
(including any returned merchandise) invoiced under any such trade names are
owned exclusively by Borrower and are subject to the security interest of Lender
and the other terms of this Agreement; and (c) all schedules of accounts and
confirmatory assignments including any sales made or services rendered using the
trade name shall show Borrower's name as assignor and Lender is authorized to
receive, endorse and deposit to any loan account of Borrower maintained by
Lender all checks or other remittances made payable to any trade name of
Borrower representing payment with respect to such sales or services.
6.3 Losses. Borrower shall promptly notify Lender in writing of any loss,
damage, investigation, action, suit, proceeding or claim relating to a material
portion of the Collateral or which may result in any material adverse change in
Borrower's business, assets, liabilities or condition, financial or otherwise.
6.4 Books and Records. Borrower's books and records concerning accounts and its
chief executive office are and shall be maintained only at the address set forth
in Section 10.6(c). Borrower's only other places of business and the only other
locations of Collateral, if any, are and shall be the addresses set forth in
Sections 10.6(d) and 10.6(e) hereof, provided that Borrower may change such
locations or open a new place of business with Lender's prior written approval,
which approval shall not be unreasonably withheld. Prior to any change in
location or opening of any new place of business, Borrower shall
-23-
execute and deliver or cause to be executed and delivered to Lender such
financing statements, financing documents and security and other agreements as
Lender may require, including, without limitation, those described in Section
6.14.
6.5 Title. (i) Borrower has and at all times will continue to have good and
marketable title, free from defects, to all of the Collateral, and (ii) the
Collateral is and will at all times remain free and clear of all liens, security
interests, claims or encumbrances of any kind except in favor of Lender and
except, if any, those set forth on Schedule "A" hereto.
6.6 Disposition of Assets. Borrower shall not directly or indirectly: (a) sell,
lease, transfer, assign, abandon or otherwise dispose of any part of the
Collateral or any material portion of its other assets (other than sales of
inventory to buyers in the ordinary course of business); or (b) consolidate with
or merge with or into any other entity, or permit any other entity to
consolidate with or merge with or into Borrower; or (c) form or acquire any
interest in any firm, corporation or other entity.
6.7 Insurance. Borrower shall at all times maintain, with financially sound and
reputable insurers, casualty insurance with respect to the Collateral and other
assets. All such insurance policies shall be in such form, substance, amounts
and coverage as may be satisfactory to Lender and shall provide for thirty (30)
days' prior written notice to Lender of cancellation or reduction of coverage.
Borrower hereby irrevocably appoints Lender and any designee of Lender as
attorney-in-fact for Borrower to obtain such insurance at Borrower's expense, if
Borrower does not do so, and, after an Event of Default, to adjust or settle any
claim or other matter under or arising pursuant to such insurance or to amend or
replace such insurance. Borrower shall deliver to Lender evidence of such
insurance and a lender's loss payable endorsement satisfactory to Lender as to
all existing and future insurance policies with respect to the Collateral.
Borrower shall deliver to Lender, in kind, all instruments representing proceeds
of insurance received by Borrower. If the aggregate amount of such proceeds is
less than $250,000 for any one episode of casualty, Lender shall, if no Event of
Default has occurred, remit such proceeds to Borrower, but only if, and to the
extent, Borrower will promptly use such proceeds to repair or replace the
damaged Collateral. Otherwise, Lender may apply any insurance proceeds received
at any time to the cost of repairs to or replacement of any portion of the
Collateral and/or, at Lender's option, to payment of or as security for any of
the Obligations, whether or not due, in any order or manner as Lender
determines.
6.8 Compliance With Laws. Borrower is and at all times will continue to be in
compliance with the requirements of all applicable and material laws, rules,
regulations and orders of any governmental authority relating to its business
(including laws, rules, regulations and orders relating to taxes, payment and
withholding of payroll taxes, employer and employee contributions and similar
items, securities, employee retirement and welfare benefits, employee health and
safety or environmental matters) and all material agreements or other
instruments binding on Borrower or its property, except as disclosed on Schedule
"E". All of Borrower's inventory shall be produced in accordance with the
requirements of the Federal Fair Labor Standards Act of 1938, as amended, and
all rules, regulations and orders related thereto. Borrower shall pay and
discharge all taxes, assessments and governmental charges against Borrower or
any Collateral prior to the date on which penalties are imposed or liens attach
with respect thereto, unless the same are being contested in good faith and, at
Lender's option, Reserves are established for the amount contested and penalties
which may accrue thereon.
6.9 Accounts. With respect to each account deemed an Eligible Account, except as
reported in writing to Lender, Borrower has no knowledge that any of the
criteria for eligibility are not or are no longer
-24-
satisfied. As to each account, except as disclosed in writing to Lender at the
time such account arises (a) each is valid and legally enforceable and
represents an undisputed bona fide indebtedness incurred by the account debtor
for the sum reported to Lender; (b) each arises from an absolute and
unconditional sale of goods, without any right of return or consignment, or from
a completed rendition of services; (c) each is not, at the time such account
arises, subject to any defense, offset, dispute, contra relationship,
counterclaim, or any given or claimed credit, allowance or discount; and (d) all
statements made and all unpaid balances and other information appearing in the
invoices, agreements, proofs of rendition of services and delivery of goods and
other documentation relating to the accounts, and all confirmatory assignments,
schedules, statements of account and books and records with respect thereto, are
true and correct and in all respects what they purport to be.
6.10 Equipment. With respect to Borrower's equipment, Borrower shall keep the
equipment in good order and repair, and in running and marketable condition,
normal wear and tear excepted, and except for obsolete or worn out equipment
replaced in the ordinary course of business.
6.11 Change in Management. Borrower shall give Lender written notice prior to
any change in Borrower's senior management.
6.12 Affiliate Transactions. Borrower will not, directly or indirectly: (a) lend
or advance money or property to, guarantee or assume indebtedness of, or invest
(by capital contribution or otherwise) in any person, firm, corporation or other
entity; or (b) declare, pay or make any dividend or other distribution on
account of any shares of any class of stock of Borrower now or hereafter
outstanding; or (c) make any payment of the principal amount of or interest on
any indebtedness owing to any officer, director, shareholder or affiliate of
Borrower except (1) as set forth in any subordination agreement between Lender
and the applicable party, (2) so long as no Event of Default has occurred and is
continuing, intercompany loans among Wedgestone, Fey, St. James and Sigma, and
(3) management and debt payments to Wedgestone Financial in accordance with the
schedule previously approved by Lender in writing; provided that, with respect
to clause (3) above, (i) Borrower has Net Availability in excess of $500,000
both before and after any such payment, (ii) Wedgestone's net income (determined
in accordance with generally accepted accounting principles, consistently
applied) is not less than zero dollars ($0) on a six (6) month rolling average
basis at the time of any such payment, and (iii) no Event of Default has
occurred and is continuing or would result from any such payment; or (d) make
any loans or advances to any officer, director, employee, shareholder or
affiliate of Borrower (other than travel advances of up to $5,000 in the
ordinary course of Borrower's business, not to exceed $20,000 in the aggregate
at any time); or (e) enter into any sale, lease or other transaction with any
officer, director, employee, shareholder or affiliate of Borrower on terms that
are less favorable to Borrower than those which might be obtained at the time
from persons who are not an officer, director, employee, shareholder or
affiliate of Borrower. In addition, (a) Borrower may make payments to Wedgestone
Financial for payments in lieu of the amount of income taxes which would
otherwise be payable by Borrower attributable to the income of Borrower,
regardless of the ultimate tax liability of Wedgestone Financial and for wages
of corporate officers, legal bills, audit fees, insurance and other corporate
costs to the extent attributable to Borrower, (b) St. James may make payments to
Resource Holdings, up to $62,500.00 per year in the aggregate, and to PFG Corp.,
up to $62,500.00 per year in the aggregate, all for management fees, and (c) Fey
may make payments to Resource Holdings, up to $137,500.00 per year in the
aggregate, and to PFG Corp., up to $137,500.00 per year in the aggregate, all
for management fees; provided in each case that no Event of Default has occurred
and is continuing or would result from any such payment, and Borrower's Net
Availability both before and after any such payment is at least $500,000.
-25-
6.13 Fees and Expenses. Borrower shall pay, on Lender's demand, all reasonable
costs and expenses, reasonable fees, filing fees and taxes payable in connection
with the preparation, execution, delivery, recording, administration (including
Lender's standard wire transfer and returned check fees as Lender shall, from
time to time, advise Borrower), collection, liquidation, enforcement and defense
of the Obligations, Lender's rights in the Collateral, this Agreement and all
other existing and future agreements or documents contemplated herein or related
hereto, including any amendments, waivers, supplements or consents which may
hereafter be made or entered into in respect hereof, or in any way involving
claims by or against Lender directly or indirectly arising out of or related to
the relationship between Borrower and Lender or any guarantor and Lender,
including, but not limited to, the following, whether incurred before, during or
after the initial or any renewal Term or after the commencement of any case with
respect to Borrower or any guarantor under the United States Bankruptcy Code or
any similar statute: (a) all costs and expenses of filing or recording
(including Uniform Commercial Code financing statement filing taxes and fees,
documentary taxes, intangibles taxes and mortgage recording taxes and fees, if
applicable); (b) all title insurance and other insurance premiums, appraisal
fees, search fees and fees incurred in connection with any environmental report,
audit, survey, or remediation; (c) all fees as then in effect relating to the
wire transfer of loan proceeds and all other funds and fees then in effect for
returned checks and credit reports; (d) all out-of-pocket expenses and costs
heretofore and from time to time hereafter incurred by Lender during the course
of periodic, field examinations of the Collateral and Borrower's operations,
plus a per diem charge at the then prevailing rate (currently $650.00 per person
per day) for Lender's examiners in the field and office; and (e) the reasonable
costs and reasonable fees and disbursements of in-house and outside counsel to
Lender, including but not limited to such fees and disbursements incurred as a
result of litigation between the parties hereto, any third party and in any
appeals arising therefrom.
6.14 Further Assurances. At the request of Lender, at any time and from time to
time, at Borrower's sole expense, Borrower shall execute and deliver or cause to
be executed and delivered to Lender, such agreements, documents and instruments,
including waivers, consents and subordination agreements from landlords,
bailees, mortgagees or other holders of property of Borrower or of loans due
from Borrower or security interests or liens in the Collateral, and do or cause
to be done such further acts as Lender, in its discretion, deems necessary or
desirable to create, preserve, perfect or validate any security interest of
Lender or the priority thereof in the Collateral and otherwise to effectuate the
provisions and purposes of this Agreement. Subject to Section 5.5(g) hereof,
Borrower hereby authorizes Lender to file financing statements or amendments
against Borrower in favor of Lender with respect to the Collateral, without
Borrower's signature and to file as financing statements any carbon,
photographic or other reproductions of this Agreement or any financing
statements signed by Borrower.
6.15 Environmental Condition. None of Borrower's properties or assets has ever
been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute, except
as disclosed on Schedule "E" hereto. No lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower. Borrower has not received a summons, citation,
notice, or directive from the Environmental Protection Agency or any other
federal or state governmental agency concerning any action or omission by
Borrower resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment. Borrower is in compliance in all
material respects with all statutes, regulations, ordinances and other legal
requirements pertaining to the production, storage, handling, treatment,
release, transportation or disposal of any hazardous waste or hazardous
substance.
-26-
SECTION 7. EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. All Obligations shall be immediately due and payable,
without notice or demand, and any provisions of this Agreement as to future
loans and credit accommodations by Lender shall terminate automatically, upon
the termination or non-renewal of this Agreement or, at Lender's option, upon or
at any time after the occurrence or existence of any one or more of the
following (each, an "Event of Default"):
(a) Borrower fails to perform within ten (10) days of when required any covenant
contained in Sections 6.1, 6.4, 6.5, 6.10 or 6.14 of this Agreement;
(b) Borrower fails to pay when due any of the Obligations or fails to perform
any of the other terms of this Agreement, any deeds of trust or mortgages
executed in favor of Lender, any note or any other existing or future agreement
between Borrower and Lender or any affiliate of Lender;
(c) Any representation, warranty or statement of fact made by Borrower to Lender
in this Agreement or any other agreement, schedule, confirmatory assignment or
otherwise, or to any affiliate of Lender, shall prove inaccurate or misleading;
(d) Any guarantor or subordinated creditor of Borrower revokes, terminates or
fails to perform any of the terms of any guaranty, endorsement, subordination
agreement or other agreement of such party with or in favor of Lender or any
affiliate of Lender;
(e) Any judgment(s) in excess of $100,000 in the aggregate or any injunction or
attachment is obtained against Borrower or any guarantor and is either enforced
or remains unstayed for a period of ten (10) days;
(f) Any guarantor which is a natural person dies, or Borrower or any guarantor
which is a partnership or corporation is dissolved, or Borrower or any guarantor
which is a corporation is not in good standing and fails to cure such status
within seven (7) days of the date on which it lost its status in good standing,
or the usual business of Borrower or any guarantor ceases or is suspended;
(g) Any change occurs in the controlling ownership of Borrower or any guarantor
which is a partnership or corporation and such change is not consented to by
Lender in its reasonable business judgment;
(h) Borrower or any guarantor becomes insolvent, makes an assignment for the
benefit of creditors, makes or sends notice of a bulk transfer or calls a
general meeting of its creditors or principal creditors;
(i) Any petition or application for any relief under the bankruptcy laws of the
United States now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed by or against Borrower or any guarantor and in the case of
an involuntary petition in bankruptcy, is not dismissed within thirty (30) days
from the date of the filing thereof;
(j) Any indictment or threatened indictment of Borrower or any guarantor occurs
under any criminal statute, or criminal or civil proceedings are commenced or
threatened against Borrower or any guarantor, pursuant to which statute or
proceedings the penalties or remedies sought or available include forfeiture of
any of the property of Borrower or any guarantor;
-27-
(k) Lender in its reasonable credit judgment believes that either (i) the
prospect of payment or performance of the Obligations is impaired; or (ii) the
Collateral is not sufficient to fully secure the Obligations;
(l) Any material change occurs in the nature or conduct of Borrower's business
from that previously conducted by it; or
(m) Any default or event of default occurs on the part of Borrower under any
agreement, document or instrument to which Borrower is a party or by which
Borrower or any of its property is bound, creating or relating to any
indebtedness of Borrower to any person or entity other than Lender in a
principal amount exceeding $100,000, if the effect of such default is to
accelerate, or to permit the acceleration of, the maturity of all or any part of
such indebtedness, or all or any part of any such indebtedness shall be declared
to be due and payable or required to be prepaid for any other reason, in either
event prior to the stated maturity thereof and such default or event of default
is not cured within ten (10) days.
7.2 Remedies. Upon the occurrence of an Event of Default and at any time
thereafter, Lender shall have all the default rights and remedies provided in
this Agreement, any other agreements between Borrower and Lender, the Uniform
Commercial Code or other applicable law, all of which rights and remedies may be
exercised without notice to Borrower, all such notices being hereby waived,
except such notice as is expressly provided for hereunder or is not waivable
under applicable law. All rights and remedies of Lender are cumulative and not
exclusive and are enforceable, in Lender's discretion, alternatively,
successively or concurrently on any one or more occasions and in any order
Lender may determine. Without limiting the foregoing, Lender may (a) accelerate
the payment of all Obligations and demand immediate payment thereof to Lender;
(b) with or without judicial process or the aid or assistance of others, enter
upon any premises on or in which any of the Collateral may be located and take
possession of the Collateral or complete processing, manufacturing and repair of
all or any portion of the Collateral; (c) require Borrower, at Borrower's
expense, to assemble and make available to Lender any part or all of the
Collateral at any place and time designated by Lender; (d) collect, foreclose,
receive, appropriate, set off and realize upon any and all Collateral; (e)
extend the time of payment of, compromise or settle for cash, credit, return of
merchandise, and upon any terms or conditions, any and all accounts or other
Collateral which includes a monetary obligation and discharge or release the
account debtor or other obligor, without affecting any of the Obligations; and
(f) sell, lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral (including, without limitation, entering into contracts with respect
thereto, by public or private sales at any exchange, broker's board, any office
of Lender or elsewhere) at such prices or terms as Lender may deem reasonable,
for cash, upon credit or for future delivery, with the Lender having the right
to purchase the whole or any part of the Collateral at any such public sale, all
of the foregoing being free from any right or equity of redemption of Borrower,
which right or equity of redemption is hereby expressly waived and released by
Borrower. If any of the Collateral is sold or leased by Lender upon credit terms
or for future delivery, the Obligations shall not be reduced as a result thereof
until payment therefor is finally collected by Lender. If notice of disposition
of Collateral is required by law, five (5) days' prior notice by Lender to
Borrower designating the time and place of any public sale or the time after
which any private sale or other intended disposition of Collateral is to be made
shall be deemed to be reasonable notice thereof and Borrower waives any other
notice. If Lender institutes an action to recover any Collateral or seeks
recovery of any Collateral by way of prejudgment remedy, Borrower waives the
posting of any bond which might otherwise be required.
7.3 Application of Proceeds. Lender may apply the cash proceeds of Collateral
actually received by Lender from any sale, lease, foreclosure or other
disposition of the Collateral to payment of any of the
-28-
Obligations, in whole or in part (including reasonable attorneys' fees and legal
expenses incurred by Lender with respect thereto or otherwise chargeable to
Borrower) and in such order as Lender may elect, whether or not then due.
Borrower shall remain liable to Lender for the payment of any deficiency
together with interest at the highest rate provided for herein and all costs and
expenses of collection or enforcement, including reasonable attorneys' fees and
legal expenses.
7.4 Lender's Cure of Third Party Agreement Default. Lender may, at its option
after the occurrence and during the continuation of an Event of Default, cure
any default by Borrower under any agreement with a third party or pay or bond or
appeal any judgment entered against Borrower, discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and pay any amount, incur any expense or perform any act
which, in Lender's sole judgment, is necessary or appropriate to preserve,
protect, insure, maintain or realize upon the Collateral. Lender may charge
Borrower's loan account for any amounts so expended, such amounts to be
repayable by Borrower on demand. Lender shall be under no obligation to effect
such cure, payment, bonding or discharge, and shall not, by doing so, be deemed
to have assumed any obligation or liability of Borrower.
SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS
8.1 Jury Trial Waiver. BORROWER AND LENDER EACH WAIVE ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST THE OTHER
WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE OBLIGATIONS, THE
COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR LENDER, OR, IN ANY WAY,
DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN
BORROWER AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR LOST PROFITS OR OTHER
SPECIAL OR CONSEQUENTIAL DAMAGES.
8.2 Counterclaims. Borrower waives all rights to interpose any claims,
deductions, setoffs or counterclaims of any kind, nature or description in any
action or proceeding instituted by Lender with respect to this Agreement, the
Obligations, the Collateral or any matter arising therefrom or relating thereto,
except compulsory counterclaims.
8.3 Jurisdiction. Borrower hereby irrevocably submits and consents to the
non-exclusive jurisdiction of the State and Federal Courts located in the State
of California and any other State where any Collateral is located, with respect
to any action or proceeding arising out of this Agreement, the Obligations, the
Collateral or any matter arising therefrom or relating thereto. In any such
action or proceeding, Borrower waives personal service of the summons and
complaint or other process and papers therein and agrees that the service
thereof may be made by mail directed to Borrower at its chief executive office
set forth herein or other address thereof of which Lender has received notice as
provided herein or as otherwise permitted by law, service to be deemed complete
five (5) days after mailing, or as permitted under the rules of either of said
Courts. Any such action or proceeding commenced by Borrower against Lender will
be litigated only in a federal court located in the Central District of
California, or a state court in the County of Los Angeles, California.
-29-
8.4 No Waiver by Lender. Lender shall not, by any act, delay, omission or
otherwise be deemed to have expressly or impliedly waived any of its rights or
remedies unless such waiver shall be in writing and signed by an authorized
officer of Lender. A waiver by Lender of any right or remedy on any one occasion
shall not be construed as a bar to or waiver of any such right or remedy which
Lender would otherwise have on any future occasion, whether similar in kind or
otherwise.
SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS
9.1 Term. This Agreement shall only become effective upon execution and delivery
by Borrower and Lender and shall continue in full force and effect until
November 30, 2001, and shall be deemed automatically renewed for successive
terms of two (2) years thereafter unless terminated as of the end of the initial
or any renewal term (each a "Term") by either party giving the other written
notice at least sixty (60) days prior to the end of the then-current Term.
9.2 Early Termination. Borrower may also terminate this Agreement by giving
Lender at least thirty (30) days' prior written notice at any time upon payment
in full of all of the Obligations as provided herein, including the early
termination fee provided below. Lender shall also have the right to terminate
this Agreement at any time upon or after the occurrence of an Event of Default.
If Lender terminates this Agreement upon or after the occurrence of an Event of
Default, or if Borrower shall terminate this Agreement as permitted herein
effective prior to the end of the then current Term, in addition to all other
Obligations, Borrower shall pay to Lender, upon the effective date of
termination, in view of the impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits, an early termination fee equal
to (i) three percent (3%) of the Maximum Credit if such early termination occurs
on or prior to the first anniversary of this Agreement, (ii) two percent (2%) of
the Maximum Credit if such early termination occurs after the first anniversary
of this Agreement but on or prior to the second anniversary of this Agreement,
and (iii) one percent (1%) of the Maximum Credit if such early termination
occurs after the second anniversary of this Agreement but on or prior to the
third anniversary of this Agreement. No early termination fee shall be payable
after the third anniversary of this Agreement or during any renewal term of this
Agreement. Moreover, no early termination fee shall be payable if at any time
during the continuation of an Event of Default the assets of Borrower are
liquidated; provided that this sentence shall not apply (i) to a sale of
substantially all of the stock or assets of Borrower, (ii) if the Obligations
are refinanced, or (iii) if Borrower merges or consolidates with another
corporation or other entity.
9.3 Additional Cash Collateral. Upon any termination of this Agreement by
Borrower as permitted herein, in addition to payment of all Obligations which
are not contingent, Borrower shall deposit such amount of cash collateral as
Lender determines is necessary to secure Lender from loss, cost, damage or
expense, including reasonable attorneys' fees, in connection with any open
Accommodations or remittance items or other payments provisionally credited to
the Obligations or with respect to which Lender has not yet received final and
indefeasible payment.
9.4 Notices. Except as otherwise provided, all notices, requests and demands
hereunder shall be (a) made to Lender at its address set forth in Section
10.6(a) and to Borrower at the chief executive office of any Borrower set forth
in Section 10.6(c), or to such other address as either party may designate by
written notice to the other in accordance with this provision; and (b) deemed to
have been given or made: if by hand, immediately upon delivery; if by telex,
telegram or facsimile, immediately upon receipt; if by overnight delivery
service, one (1) day after dispatch; and if by first class or certified mail,
three (3) days after deposit in the U.S. Mail, postage prepaid and addressed as
set forth herein.
-30-
9.5 Severability. If any provision of this Agreement is held to be invalid or
unenforceable, such provision shall not affect this Agreement as a whole, but
this Agreement shall be construed as though it did not contain the particular
provision held to be invalid or unenforceable.
9.6 Entire Agreement; Amendments; Assignments. This Agreement and the Promissory
Note referred to in Section 2.2 hereof contain the entire agreement of the
parties as to the subject matter hereof, all prior commitments, proposals and
negotiations concerning the subject matter hereof being merged herein. Neither
this Agreement nor the Promissory Note nor any provision hereof or thereof shall
be amended, modified or discharged orally or by course of conduct, but only by a
written agreement signed by an authorized officer of Lender. This Agreement
shall be binding upon and inure to the benefit of each of the parties hereto and
their respective successors and assigns, except that any obligation of Lender
under this Agreement shall not be assignable or inure to the successors and
assigns of Borrower.
9.7 Discharge of Borrower. No termination of this Agreement shall relieve or
discharge Borrower of its obligations, grants of Collateral, duties and
covenants hereunder or otherwise until such time as all Obligations to Lender
have been indefeasibly paid and satisfied in full, including, without
limitation, the continuation and survival in full force and effect of all
security interests and liens of Lender in and upon all then existing and
thereafter-arising or acquired Collateral and all warranties and waivers of
Borrower.
9.8 Usage. All terms used herein which are defined in the Uniform Commercial
Code shall have the meanings given therein unless otherwise defined in this
Agreement and all references to the singular or plural herein shall also mean
the plural or singular, respectively.
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
SECTION 10. ADDITIONAL DEFINITIONS AND TERMS
10.1 (a) Maximum Credit: $10,000,000
(b) Gross Availability Formulas:
Eligible Accounts Percentage: 85%
Eligible Inventory Percentage: 60%
(c) Aggregate Inventory Sublimit: $3,500,000
-31-
Additional Inventory Sublimits
(i) Raw Steel Inventory: $750,000
(ii) Virgin/Unprocessed Nickel: $100,000
(d) Maximum days after Invoice
Date for Eligible Accounts: 90
Maximum days past due for
Eligible Accounts: 60
(e) Minimum Borrowing: $4,000,000
10.2 Term Loan:
Fey: $760,000
St. James: $674,605
Sigma: $137,750
10.3 Accommodations:
(a) Lender's Charge for Accommodations: 1.375%*/ over a
360-day
year
(b) Sublimit for Accommodations: $500,000
10.4 Fees:
(a) Interest Rate: Prime Rate
plus 1.375%**/
over a
360-day
year
(b) Facility Fee: $50,000 (less the amount
of any facility fee paid by
Borrower to Lender in November 1996)
on the date hereof; and $25,000
on the first anniversary of the date hereof
10.5 Intentionally Omitted.
<FN>
- --------
// This percentage will increase to 2.375% if Borrower suffers losses (as
determined in accordance with generally accepted accounting principles,
consistently applied) in excess of $500,000, determined on a rolling
six month average. Such increase shall remain in effect until such time
as Borrower achieves positive net income (as determined in accordance
with generally accepted accounting principles, consistently applied),
determined on a rolling six month average.
/*/ This percentage will increase to 2.375% if Borrower suffers losses (as
determined in accordance with generally accepted accounting principles,
consistently applied) in excess of $500,000, determined on a rolling
six month average. Such increase shall remain in effect until such time
as Borrower achieves positive net income (as determined in accordance
with generally accepted accounting principles, consistently applied),
determined on a rolling six month average.
</FN>
-32-
10.6 (a) Lender's Office: 300 South Grand Avenue
Third Floor
Los Angeles, CA 90071
(b) Borrower: Wedgestone Automotive Corporation
Fey Automotive Products, Inc.
St. James Automotive Corporation
Sigma Plating Co., Inc.
(c) Borrower's Chief
Executive Office: Wedgestone Automotive Corporation
5200 N. Irwindale Avenue, Suite 168
Irwindale, California 91706
Fey Automotive Products, Inc.
15854 Ornelas Street
Irwindale, California 91706
St. James Automotive Corporation
240 S. Fifteenth Street
St. James, Minnesota 56081
Sigma Plating Co., Inc.
1040 Otterbein Avenue
La Puente, California 91748
(d) Locations of
Eligible Inventory
Collateral: See Schedule "B".
(e) Borrower's Other Offices and Locations of Collateral: See Schedule "C".
(f) Borrower's Trade Names for Invoicing: See Schedule "D".
IN WITNESS WHEREOF, Borrower and Lender have duly executed
this Agreement this 18th day of March, 1997.
LENDER: BORROWER:
THE CIT GROUP/CREDIT WEDGESTONE AUTOMOTIVE
FINANCE, INC. CORPORATION
By:___________________________ By:_______________________________
Title:_________________________ Title:____________________________
-33-
SECURED
PROMISSORY NOTE
$1,650,000 May 20, 1997
Irwindale, California
FOR VALUE RECEIVED, the undersigned, Stockwood LLC, a Minnesota
limited liability company (the"Company"), promises to pay to the order of
Wedgestone Financial, a Massachusetts business trust (the "Lender"), and its
successors and assigns, at its principal office in Irwindale, California or such
other place as the holder may designate in writing from time to time, the
principal sum of One Million Six Hundred Fifty Thousand Dollars ($1,650,000), in
lawful money of the United States, together with interest from the date hereof
on the unpaid principal balance outstanding from time to time at a rate of
twelve percent (12%) per annum calculated on the basis of the actual number of
days elapsed in a 360-day year.
The principal indebtedness evidenced hereby, and any accrued and unpaid
interest, shall be payable in one installment on May 20, 1998.
Interest payments on the principal indebtedness evidenced hereby shall
accrue commencing from the date hereof and be payable on May 20, 1998.
This Note may be prepaid in whole or in part at any time and from time
to time without premium or penalty, provided, however, the Company shall give
the Lender not less than ten (10) days advance written notice of its intention
to make any such prepayment. All prepayments on this Note shall be applied first
to the payment of accrued interest, if any, and the balance shall be applied to
principal.
This Note is secured by that certain Pledge and Security Agreement,
dated as of the date of this Note, between the Company and the Lender.
The Company shall be in default under this Note if the Company fails to
pay any principal or interest due under this Note within seven (7) days of the
due date thereof, or is in default under that certain Pledge and Security
Agreement, dated as of the date of this Note, between the Company and the
Lender. Upon default, all unpaid principal and interest due under this Note
shall be immediately due and payable.
The Company agrees upon demand to pay or reimburse the Lender for all
reasonable out-of-pocket expenses, including fees and expenses of counsel for
the Lender arising in connection with the enforcement of this Note.
This Note may not be changed or terminated orally. This Note shall bind
the successors and assigns of the undersigned and shall enure to the benefit of
the Lender and its successors and assigns. This Note shall be governed by the
internal law of the State of New York without giving effect to the conflict of
laws thereof. The Company waives presentment, demand, notice of demand, protest,
notice of protest, and all other notices except relating to payment default in
connection with the delivery, acceptance, performance, default or enforcement of
this Note. If any provision of this Note shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of remaining
provisions of this Note.
-34-
IN WITNESS WHEREOF, the Company has caused this Note to be
executed on its behalf by a duly authorized officer on the day and year first
above written.
STOCKWOOD LLC
By:
-------------------------------------
John C. Shaw
Its Chief Manager
-35-
PLEDGE AND SECURITY AGREEMENT
This Pledge and Security Agreement ("Agreement"), dated as of May 20,
1997, is by and between Stockwood LLC ("Pledgor") and Wedgestone Financial, a
Massachusetts business trust ("Secured Party").
A. Pledgor has outstanding liabilities to Connecticut General Life
Insurance Company and The Morgan Stanley Leveraged Senior Debt Fund, L.P.
(collectively, the "Debtholders") in the form of the 12% Senior Notes due
January 31, 1996 in the aggregate principal amount of $9,500,000 as amended by
that certain Allonge dated as of February 29, 1996 (the "Senior Notes") which
are secured by that certain Pledge and Security Agreement dated as of November
18, 1994 to and for the benefit of the Debtholders.
B. Pledgor has requested that the Secured Party make a loan to Pledgor
in the amount of One Million Six Hundred Fifty Thousand Dollars ($1,650,000)
(the "Loan") pursuant to a Secured Promissory note of even date (the "Note").
C. Pledgor will use the proceeds from the Note to pay to the
Debtholders accrued interest on, and reduce the principal on, the Senior Notes.
D. Pledgor is the owner of 6,795,223 shares of beneficial interest, of
which 3,500,000 shares are the subject of a pledge hereunder as evidenced by
certificate no U26571 (the "Pledged Shares") of the Secured Party.
E. Pledgor and Secured Party desire to have Pledgor grant to Secured
Party a security interest in the Pledged Collateral (as hereinafter defined) to
secure the payment of the Note.
Agreement:
In order to induce the Secured Party to make the Loan and in
consideration and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Pledgor and Secured Party hereby
agree as follows:
ARTICLE I
Security Interest and Pledge
1.01. Security Interest and Pledge. Pledgor hereby pledges to Secured
Party, and grants to Secured Party a security interest in, the Pledged Shares
and the certificates representing the Pledged Shares (the "Pledged Collateral").
1.02. Security for Obligations. This Agreement secures the payment of
all obligations and liabilities of Pledgor now or hereafter existing under the
Note, whether for principal, interest, costs and expenses (including, but not
limited to, expenses incurred by Secured Party to preserve and maintain the
Pledged Collateral, collect any of the obligations herein described or enforce
this Agreement), or otherwise, and all obligations of Pledgor now or hereafter
existing under this Agreement (all such obligations of Pledgor being herein
referred to as the "Obligations").
-36-
ARTICLE II
Representations and Warranties
Pledgor represents and warrants to Secured Party that:
2.01. Title. Subject to the liens of the Debtholders, Pledgor is the
legal and beneficial owner of the Pledged Collateral free and clear of any lien,
security interest (other than the security interest granted herein), option or
other charge or encumbrance.
2.02. Authorized Pledge. Pledgor's execution and delivery of, and
performance of its obligations under, this Agreement does not contravene any law
or contractual restriction binding on or affecting either the Pledged Collateral
or Pledgor. Further, no authorization, approval, or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for either (i) the pledge of the Pledged Collateral pursuant to this
Agreement or (ii) the execution, delivery or performance of this Agreement by
Pledgor.
2.03. Legal, Valid and Binding Obligation. This Agreement is
enforceable in accordance with its terms and is the legal, valid and binding
obligation of Pledgor.
2.04. First Priority Perfected Security Interest. The pledge of the
Pledged Collateral pursuant to this Agreement creates a valid and perfected
first security interest in the Pledged Collateral, securing the payment and
performance of the Obligations.
ARTICLE III
Affirmative and Negative Covenants
Pledgor covenants and agrees as follows:
3.01. Delivery of the Pledged Collateral. All certificates or
instruments representing or evidencing the Pledged Shares are hereby delivered
to Secured Party and are either in suitable form for transfer by delivery, or
are accompanied by instruments of transfer or assignment duly executed in blank.
3.02. Transfers and Other Liens. Without the prior written consent of
Secured Party, Pledgor shall not (a) sell or otherwise dispose of, or grant any
option with respect to, any of the Pledged Collateral, or (b) create or permit
to exist any lien, security interest, or other charge or encumbrance upon or
with respect to any of the Pledged Collateral, except for the security interest
granted under this Agreement.
3.03. Distributions. If Pledgor should become entitled to receive or
shall receive (a) any stock certificate or voting trust certificate, or (b) any
certificate representing a stock dividend or a distribution in connection with
any reclassification, increase or reduction of capital or issued in connection
with any liquidation, reorganization, option or rights, whether as an addition
to, in substitution of, or in exchange for any Pledged Collateral, Pledgor shall
(i) accept the same as Secured Party's agent, (ii) hold the same in trust for
Secured Party, and (iii) deliver the same immediately to Secured Party in the
exact form received, with an appropriate endorsement of Pledgor and/or
appropriate
-37-
undated stock powers or assignment of stock certificate or voting trust
certificate, duly executed in blank, to be held by Secured Party as Pledged
Collateral, subject to the terms hereof.
3.04. Further Assurances. Pledgor agrees that, at any time and from
time to time after the date of this Agreement, at the expense of Pledgor,
Pledgor will promptly execute and deliver all further instruments and documents,
and take all further actions, that may be necessary in order to perfect and
protect any security interest granted or purported to be granted hereby.
3.05. Taxes. Pledgor agrees to pay or discharge prior to delinquency
all taxes, assessments, levies, and other governmental charges imposed on it or
its property, except Pledgor shall not be required to pay or discharge any tax,
assessment, levy, or other governmental charge if (a) the amount or validity
thereof is being contested by the Pledgor in good faith by appropriate
proceedings diligently pursued, (b) such proceedings do not involve any danger
of sale, forfeiture, or loss of the Pledged Collateral or any part or interest
therein, and (c) adequate reserves therefor have been established in conformity
with generally accepted accounting principles.
3.06. Notification. Pledgor shall promptly notify Secured Party of (a)
any lien, security interest, encumbrance or claim made or threatened against the
Pledged Collateral, and (b) the occurrence or existence of any Event of Default
(as hereinafter defined) or the occurrence or existence of any condition or
event that, with the giving of notice or lapse of time or both, would be an
Event of Default.
ARTICLE IV
Rights of Secured Party and Pledgor
4.01. Voting Rights and Dividends. Except as otherwise provided in
Section 5.02, Pledgor shall be entitled to:
(a) exercise any and all voting and other consensual
rights pertaining to the Pledged Collateral or any
part thereof for any purpose not inconsistent with
the terms of this Agreement; and
(b) receive and retain all cash dividends paid on or in
respect of the Pledged Collateral.
4.02. Secured Party May Perform. If Pledgor fails to perform any
agreement contained herein, Secured Party may perform, or cause performance of,
such agreement, and the reasonable out-of-pocket expenses of Secured Party
incurred in connection therewith shall be payable by Pledgor.
4.03. Secured Party's Duty of Care. Other than the exercise of due care
in the physical custody of the Pledged Collateral while held by Secured Party
hereunder, Secured Party shall have no responsibility for, or obligation or duty
with respect to, all or any part of the Pledged Collateral or any matter or
proceeding arising out of or relating thereto, including, without limitation,
any obligation or duty to collect any sums due with respect thereto or to
protect or preserve any rights against prior parties or any other rights
pertaining thereto, it being understood and agreed that Pledgor shall be
responsible for preservation of all rights in the Pledged Collateral.
-38-
ARTICLE V
Default
5.01. Event of Default. As used herein, the term "event of Default"
shall mean (i) a default by Pledgor under the terms of the Note or (ii) a
default which remains uncured for thirty (30) days after a thirty (30) day
notice from the Secured Party.
5.02. Voting Rights and Dividends After an Event of Default. Upon the
occurrence and during the continuance of an Event of Default, all rights of
Pledgor to exercise the voting and other consensual rights, if any, and to
receive cash dividends in respect of the Pledged Collateral, which Pledgor would
otherwise be entitled to exercise or receive pursuant to Section 4.01, shall
thereupon become vested in Secured Party who shall thereupon have the sole right
to exercise such voting and other consensual rights and to receive and hold as
Pledged Collateral such dividends.
5.03. Remedies Upon Default. If any Event of Default shall have
occurred and be continuing:
(a) Secured Party may exercise in respect of the Pledged
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under any applicable New York commercial laws, in effect at that time,
and Secured Party may also, without notice except as specified below, sell the
Pledged Collateral or any part thereof in one or more parcels at public or
private sale, at any exchange, broker's board or at any other place chosen by
Secured party, for cash, on credit or for future delivery, and at such price or
prices and upon such other terms as Secured Party may deem commercially
reasonable. Pledgor agrees that, to the extent notice of sale shall be required
by law, ten days' notice to Pledgor of the time and place of any public sale or
the time after which any private sale is to be made shall constitute reasonable
notification. Secured Party shall not be obligated to make any sale of the
Pledged Collateral regardless of notice of sale having been given. Secured Party
may adjourn any public or private sale from time to time by announcement at the
time and place fixed therefore, and such sale may, without further notice, be
made at the time and place to which it was so adjourned. Any sale or disposition
of the Pledged Collateral must be effected in accordance with all applicable
securities laws.
(b) Any cash held by Secured Party as Pledged Collateral and
all cash proceeds received by Secured Party in respect of any sale of,
collection from, or other realization upon all or any part of the Pledged
Collateral may, in the discretion of Secured Party, be held by Secured Party as
collateral for, and/or then or at any time thereafter applied in whole or in
part by Secured Party against, all or any part of the Obligations in such order
as Secured Party shall elect. Any surplus of such cash or cash proceeds held by
Secured Party and remaining after payment in full if all the Obligations shall
be paid over to Pledgor or to whomsoever may be lawfully entitled to receive
such surplus.
(c) If the proceeds of the sale, collection or other
realization of or upon the Pledged Collateral are insufficient to cover the
costs and expenses of such sale, collection or realization and the payment in
full of the Obligations, Pledgor shall remain liable for any deficiency.
-39-
ARTICLE VI
Miscellaneous
6.01. Right to Sell. If secured Party shall determine to exercise its
right to sell (other than in a public or other non-exempt offering) all or any
of the Pledged Collateral pursuant to Section 5.03, Pledgor agrees that, upon
request of Secured Party, Pledgor will, at its own expense, do or cause to be
done all such other acts and things as may be necessary to make such sale of the
Pledged Collateral or any part thereof valid and binding and in compliance with
applicable law.
6.02. Continuing Security Interest: Transfer of the Note. This
Agreement shall create a continuing security interest in the Pledged Collateral
and shall (a) remain in full force and effect until payment in full of the
Obligations, (b) be binding upon Pledgor, its successors and assigns, and (c)
inure to the benefit of Secured Party and its successors, transferees and
assigns. Without limiting the generality of the foregoing clause (c), Secured
Party may assign or otherwise transfer the Note to any other person or entity,
and such other person or entity shall thereupon become vested with all the
benefits and obligations in respect thereof granted to Secured Party herein or
otherwise. Upon the payment in full of the Obligations, Pledgor shall be
entitled to the return, upon its request and at its expense, of such of the
Pledged Collateral as shall not have been sold or otherwise applied pursuant to
the terms hereof.
6.03. Amendments and Waivers. No amendment or waiver of any provision
of this Agreement, nor consent to any departure by Pledgor here from, shall in
any event be effective unless the same shall be in writing and signed by Secured
Party, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
6.04. Addresses for Notices. Any notice, consent, demand, request,
approval or other communication to be given under this Agreement by either party
to the other shall be in writing and shall be either (a) delivered in person,
(b) mailed by registered or certified mail, return receipt requested, postage
prepaid, (c) delivered by overnight express delivery service or same-day local
courier service, or (d) delivered by facsimile transmission, to the address set
forth below, or to such other address as may be designated by the parties from
time to time in accordance with this Section.
If to Pledgor:
Stockwood LLC
520 Madison Avenue, 40th Floor
New York, New York 10022
Attn: John C. Shaw
If to Secured Party:
Wedgestone Financial
520 Madison Avenue, 40th Floor
New York, New York 10022
Attn: Jeffrey S. Goldstein
Notices delivered personally, by overnight express delivery service or by local
courier service shall be deemed given as of actual receipt. Mailed notices shall
be deemed given three business days after
-40-
mailing. Any such notice, consent or other communication shall be deemed given
when delivered in person or, if mailed, when duly deposited in the mails.
6.05. Termination. When all Obligations shall have been paid in full,
or at such earlier time as Secured Party may specify in writing, this Agreement
shall terminate, and Secured Party shall forthwith cause to be assigned,
transferred and delivered any remaining Pledged Collateral to Pledgor.
6.06. Headings. The headings, captions, and arrangements used herein
are for convenience only and shall not affect the interpretation of this
Agreement.
6.07. Survival of Representations and Warranties. All representations
and warranties made in this Agreement or in any certificate delivered pursuant
hereto shall survive the execution and delivery of this Agreement.
6.08. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.09. Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement.
6.10. GOVERNING LAW AND VENUE. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IF ANY ACTION
IS BROUGHT TO ENFORCE OR INTERPRET THIS AGREEMENT, VENUE FOR SUCH ACTION SHALL
BE EXCLUSIVELY IN THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PLEDGOR:
STOCKWOOD LLC
By:
-------------------------------------
John C, Shaw
Its: Chief Manager
SECURED PARTY:
WEDGESTONE FINANCIAL
By:
-------------------------------------
Jeffrey S. Goldstein
Its: President
-41-