UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2019
OR
☐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 1-3834
Continental Materials Corporation
(Exact name of registrant as specified in its charter)
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Delaware |
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36-2274391 |
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(State or other jurisdiction |
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(I.R.S. Employer Identification No.) |
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of incorporation or organization) |
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440 South La Salle Street, Suite 3100, Chicago, Illinois |
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60605 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code 312-541-7200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Common Stock - $0.25 par value |
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NYSE American |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☒ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value (based on the June 28, 2019 closing price) of voting stock held by non-affiliates of registrant was approximately $8,816,000. As of March 13, 2020, there were 1,675,484 shares of the registrant’s common stock outstanding.
Incorporation by reference: The information contained in Part III hereof is hereby incorporated by reference from the earlier filed of: (i) an amendment to this Annual Report on Form 10 K or (ii) a definitive proxy statement filed pursuant to Regulation 14A, within 120 days of December 28, 2019.
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of Continental Materials Corporation’s (Company) management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Annual Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors including but not limited to: the impact of the novel coronavirus on the workforce, the Company’s supply chain and customer demand, the amount of new construction, weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in the income tax code, income tax rates as well as accounting pronouncements could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. Forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update them.
(References to a “Note” are to the Notes to Consolidated Financial Statements contained elsewhere in this report.)
The Company is a Delaware corporation, incorporated in 1954. The Company is a holding company with operations in the Building Products industry group, although it may look to expand outside of that market. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.
HVAC Segment
The HVAC segment is comprised of four operating companies and sells a variety of products including residential and commercial wall furnaces, fan coils, evaporative coolers, boiler room equipment, dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC), Phoenix Manufacturing, Inc. (PMI) Global Flow Products (GFP) and InOvate Dryer Technologies (InOvate).
•WFC manufactures residential gas furnaces and commercial fan coil systems. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Colton, California location. WFC is one of three domestic companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas-fired console heaters, which comprise only a small component of the heating industry, and is one of nine domestic companies producing fan coils.
•PMI manufactures residential and commercial evaporative coolers. Activities covering the full cycle of product manufacturing, from design to production, are all performed in-house at its Phoenix, Arizona location. PMI is one of two primary domestic manufacturers of evaporative coolers, although there are other small domestic competitors as well as a number of foreign producers that also distribute evaporative cooling products in the U.S.
•GFP manufactures American Society of Mechanical Engineers (ASME) certified tanks, pressure vessels, valves and other accessories typically found in commercial hydronic systems at its Broken Arrow, Oklahoma locations. GFP is one of many companies manufacturing and distributing valves, accessories and ASME certified tanks to the hydronics market.
•InOvate designs and manufactures a range of air venting and handling products focused on dryer exhaust safety and efficiency. InOvate partners with its supply chain to leverage manufacturing excellence from its location in Jupiter, Florida. InOvate is, we believe, the market leader in manufacturing metal air handling products for the dryer venting marketplace, as the limited competition generally manufactures lower quality products made out of plastic materials, albeit at a lower price point.
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The HVAC segment group markets its products throughout North America through plumbing, heating and air conditioning wholesale distributors as well as directly to major retail home-centers and other retail outlets. Some of the products are also sold to contractors that install HVAC components and equipment manufacturers for commercial applications. The Company contracts with independent manufacturers’ representatives for all of its products while also employing a staff of sales and sales support personnel.
The HVAC segment group maintains several parts departments and help lines to assist its customers in servicing the products. The Company does not currently perform installation services, nor are maintenance or service contracts offered. The HVAC segment group does not derive any revenue from after-sales service and support other than from parts sales. Training and product information sessions for the furnace, fan coil and evaporative cooler product lines are offered at our plants and other sites for distributors, contractors, engineers, utility company employees and other customers.
The heating and cooling industry is dominated by a few manufacturers which are substantially larger than the Company. These manufacturers sell diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. Competition in this industry is primarily on a basis of price, product features and performance, service and timeliness of delivery.
The HVAC segment has few direct competitors but there are multiple competitors for each product line.
Door Segment
The Door segment is comprised of three operating companies and sells and installs hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries, McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity).
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MDHI is an authorized distributor of a major manufacturer of hollow metal doors and hardware operating from locations in Colorado Springs, Colorado and Pueblo, Colorado. MDHI has a leading position in the manufacturing of door components, including internal framing components (stile and rails), glass inserts, door core, interior door facings (molded and veneer) and exterior door facings. MDHI is one of many competitors in a fragmented, primarily regional market. |
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Fastrac is the architect, builder, facility owner, and wholesale distributor's nationwide source for commercial doors, frames, hardware, and millwork, in particular for healthcare, hospitality, and commercial office interior construction and design projects. Fastrac supplies and installs products from its Colorado Springs, Colorado location, and is one of many competitors in a fragmented market. |
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Serenity manufactures sliding barn door systems and sliding door systems for healthcare, hospitality, and commercial office interior building and design projects. Serenity provides a turn-key sliding barn door design that allows for additional floor space and versatility with a system that is ADA compliant, fully sealed for sight and sound, and is capable of reducing noise by up to 35 decibels. It operates from its location in Colorado Springs, Colorado and is one of only three competitors that have certified sound attenuating products, although it is one of many sliding door system manufacturers. |
The Door segment’s sales are primarily for commercial and institutional buildings such as schools, healthcare facilities and hospitality buildings. Sales are made to independent installers, general contractors or building owners. Sales include metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems. Certain projects include on site installation services. The Door Segment markets throughout North America primarily through its own staff of industry professionals who specialize in medical, healthcare, hospitality, assisted living and commercial office interior building products.
The acquisition of Fastrac and Serenity in 2019 has increased the range of products and services and expanded its customer base. See Note 18.
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The Door segment sells hollow metal and wood doors, door frames and related hardware, lavatory fixtures and electronic access and security systems throughout the United States. The door industry is highly fragmented and competitive, and includes a number of regional and international competitors. Competition is largely based on the functional and aesthetic quality of products, service quality, distribution capability and price.
Construction Materials Segment
The Construction Materials segment offers a variety of construction related products including limestone, gravel, sand, steel rebar and consumable construction products from facilities in Pueblo and Colorado Springs, Colorado operated by the Company’s wholly-owned subsidiaries, Castle Concrete Company (Aggregates) and Castle Rebar & Supply (Rebar) and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.).
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Aggregates has ceased mining operations at all of its properties. It previously operated limestone, gravel and sand operations at multiple locations in or near Colorado Springs and Pueblo, Colorado. Aggregates expects to conduct property reclamation over the next few years, sell off its remaining assets and exit the market.
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Rebar provides custom steel rebar shaping operations and sells consumable construction supplies to construction trade professionals from its locations in Colorado Springs, Colorado and Pueblo, Colorado. The Company’s sales of rebar and other construction supplies are subject to intense competition from three larger companies in Denver and one company in Colorado Springs as well as a number of small local competitors. |
The Construction Materials segment group markets its products primarily through its own direct sales personnel and confines its sales largely in southern Colorado. The Company competes on price, product availability and customer service.
During 2019, no customer accounted for 10% or more of the total sales of the Company.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
The Company sold substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. See Note 19. During the second quarter of 2019, the Company acquired the assets of four operating businesses through three separate transactions. See Note 18 for additional discussion of these acquisitions. In conjunction with these transactions, management reviewed its segment reporting structure and determined it was no longer appropriate for the consolidated business going forward. The segment reporting was revised to align with the way the Company’s decision makers evaluate, manage and allocate resources to the operating businesses after the sale of the concrete and sand operation assets and the acquisitions discussed in Note 18. Segment information for prior periods has been reclassified to conform to current segment reporting structure.
EMPLOYEES
The Company employed 460 people as of December 28, 2019. Employment varies throughout the year due to the seasonal nature of its businesses. The number of employees was significantly reduced due to the sale of substantially all of the assets of its ready mix concrete and Daniels Sand operations in the first quarter of 2019. This transaction also caused the Company to re-align its segment reporting to align with the way management will measure and evaluate operations going forward. A breakdown of the current and prior year’s employment at year-end by segment was:
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2019 |
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2018 |
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HVAC Segment |
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350 |
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337 |
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Door Segment |
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73 |
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43 |
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Construction Materials Segment |
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25 |
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221 |
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Corporate Office and Other |
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12 |
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11 |
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Total |
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460 |
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612 |
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The factory employees at the WFC plant are represented by the Carpenters Local 721 Union under a contract that expires December 31, 2022. The Company considers relations with its employees and with their union to be good. There are no unions at any of the Company’s other operations.
ENVIRONMENTAL MATTERS
Our operations involve the use, release, discharge, disposal and clean-up of substances regulated under federal, state and/or local environmental protection laws and regulations, including those related to reclamation of mined areas. Some laws impose obligations on us with respect to the management of waste products. We strive not only to maintain compliance with all applicable environmental laws and regulations, but to exceed the minimum requirements of those laws and regulations where practicable. However, there can be no assurance that the Company will be in compliance with all applicable environmental laws and regulations in the future.
In 2019, our capital expenditures and remediation expenses for environmental matters, except those expenses related to our mining reclamation efforts, were not material to our financial condition. Because of the complexity and ever-changing nature of environmental laws and regulations, it is difficult to predict total reclamation costs.
TENDER OFFER
On February 18, 2020 Bee Street Holdings LLC, an entity controlled by James G. Gidwitz, the Chairman of our board of directors and our Chief Executive Officer, ("Bee Street"), commenced an unsolicited tender offer to acquire all of the outstanding shares of common stock for $9.50 per share in cash.
On March 3, 2020 the Company filed Schedule 14D-9 stating that the Board of Directors had unanimously decided to express no opinion and remain neutral with respect to the offer.
On March 17, 2020, the Bee Street tender offer expired. On March 18, 2020 Bee Street extended the tender offer until April 3, 2020 to allow additional time for stockholders to consider the offer in the light of recent market activity and the developing economic situation stemming from the COVID-19 coronavirus pandemic.
AVAILABLE INFORMATION
The Company electronically files various reports and other information with the Securities and Exchange Commission (SEC) including this annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding the Company. Access to this information is available free of charge at the SEC’s website at http://www.sec.gov. In addition to the SEC site, the Company maintains an internet site which contains SEC filings, SEC filings in XBRL format, Governance documents and Annual Reports. Access to this site and the information therein is available free of charge at www.continental-materials.com. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such, is not required to provide information in response to this item. However, in light of recent events, stockholders should be aware of the following risks associated with an investment in the Company:
If Bee Street fails to complete its tender offer for our common stock, our stock price, business, results of operations and financial condition could be adversely affected.
We cannot assure that Bee Street will complete its tender offer for our common stock. If the tender offer is not completed, we will be subject to several risks. Because the current trading price of our common stock may reflect a market assumption that the tender offer will be completed, failure to complete the tender offer could adversely affect the price of our common stock. Also, we have incurred significant, and may incur additional, costs in connection with the tender offer, including the diversion of management resources, for which we will have received little or no benefit if the
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tender offer is not completed. A failed transaction may also result in a negative impression of the Company in the investment community.
The tender offer by Bee Street may increase the volatility of the price of our common stock, which may could result in substantial losses by investors.
The tender offer by Bee Street could affect the trading price of our common stock and increase its volatility, as well as reduce the market liquidity for our common stock. Securities class action litigation is commonly instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us in the future could result in substantial costs and a diversion of management’s attention and resources.
The spread of a new strain of coronavirus (also known as COVID-19) may adversely affect our business operations.
In December 2019, a new strain of coronavirus (also known as, and hereinafter referred to as “COVID-19”) originated in Wuhan, China, and quickly spread to infect many people in the city and surrounding area. In some cases, COVID-19 causes severe illness and even death. Since its discovery, COVID-19 has spread throughout China and to several other countries, significantly impacting their economies. Various measures may be taken by countries, including the United States, both on a macro country-wide level and a local level, to combat the virus and its spread. These may include quarantines or bans on public events.
The continued spread of COVID-19 may adversely affect our supply chain, results of operations and business generally, depending on the extent of its spread of the virus, the rate of infection, the severity of illness and the probability of lethality, the relative effect on various portions of the population (such as the aged), the measures taken to combat the virus and their effectiveness, the effect on international trade of any measures taken to combat the virus, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, the timing and availability of any vaccine for the virus, and other factors.
The Centers for Disease Control and Prevention has stated a risk exists of a pandemic in the United States, which would mean that the current methods in place to control of the spread of the virus have been ineffective. In such a situation, the effect on the economy and on the public may be severe. There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a potential pandemic, and, as a result, there is considerable uncertainty of its potential effect on our business and results of operations.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
The HVAC segment operates out of owned facilities in Colton, California and Broken Arrow, Oklahoma. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs. Production capacity exists at the Colton plant such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. There is sufficient capacity in Broken Arrow, Oklahoma for the current level of business, however, expansion may be required to support increased business activity levels in future years. Additional facilities include leased facilities in Phoenix, Arizona, Jupiter, Florida and Broken Arrow, Oklahoma. Production capacity exists at the Phoenix facilities such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.
The Door segment operates out of an owned facility in Colorado Springs and leased facilities in Colorado Springs, Colorado and Pueblo, Colorado. Product volumes at all of the facilities of the Company are subject to market fluctuations, but in the opinion of management, the facilities are generally well utilized. The facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs.
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The Construction Materials segment comprises six aggregates locations including Grisenti Farms, Pikeview, Black Canyon (Synder), Pueblo East, Pueblo West, and Barnhart Pit, which are all located in southern Colorado. The previously leased properties of Pueblo East, Pueblo West and Barnhart Pit were part of the legal dispute with Valco, Inc. that was settled in October 2019 (see Note 2) and are now owned by the Company. Following the decision in 2019 to cease mining operations at Pikeview, none of the remaining properties are active in the production of aggregates and are in various states of reclamation under their respective mining permits.
The corporate office operates out of leased office space in Chicago, Illinois.
As previously disclosed, on January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was approximately $218,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.
On October 9, 2019, the Company and Valco filed a Joint Notice of Settlement, regarding the Company’s previously disclosed litigation, stating that the parties had reached a settlement agreement resolving all claims. As part of the $9,000,000 settlement, paid by the Company, we agreed to purchase the previously leased property from Valco. On October 16, 2019, the Company and Valco filed a Stipulated Motion for Dismissal with Prejudice which stated: the parties “agree that this matter, including all claims and counterclaims, dismissed with prejudice and without costs, each party to bear its own attorneys’ fees.” The Court entered the Order of Dismissal with Prejudice on October 16, 2019.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6.
Item 4. MINE SAFETY DISCLOSURES
The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Annual Report.
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Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Continental Materials Corporation is traded on the NYSE American stock exchange under the symbol CUO.
The Company currently has fewer than 300 shareholders.
The Company has never paid, nor does it currently intend to declare, any dividends. The Company’s policy of reinvesting earnings from operations is reviewed periodically by the Board of Directors of the Company (the “Board”).
The following sets forth information regarding the Company’s equity plans as of December 28, 2019:
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Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
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Weighted-average exercise price of outstanding options, warrants and rights |
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
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Equity compensation plans approved by security holders |
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2 |
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Equity compensation plans not approved by security holders |
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Total |
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The Company has an open-ended program to repurchase its common stock under which the Board authorized purchases up to a maximum amount of $1,000,000. Repurchases may be made on the open market or in block trades at the discretion of management. During the 2019 fiscal year, 22,499 shares were repurchased and as of December 28, 2019, $743,467 of the authorized amount remained available for stock repurchases.
On March 16, 2020, the Company entered into a credit agreement with a bank which contains certain restrictions on the Company’s ability to repurchase its stock. See further discussion in the “Financial Condition, Liquidity and Capital Resources” section of Item 7 below.
Item 6. SELECTED FINANCIAL DATA
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company experienced various changes in 2019 including the sale of substantially all the assets of its ready-mix concrete and Daniels Sand operations in the first quarter, the acquisition of four new operating businesses in the second quarter, the cessation of mining at Pikeview quarry in the third quarter and the settlement of the Valco litigation in the fourth quarter. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward, including revisions to the Company’s reporting segments. Segment information for prior periods has been reclassified to conform to current segment reporting structure.
The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment, dryer boxes, and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona, Global Flow Products /American HVAC (GFP) of Broken Arrow, Oklahoma, and InOvate Dryer Technologies (InOvate) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems, and electronic access/security systems from the Company’s wholly-owned subsidiaries, McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers aggregates and construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries, Castle Aggregates and Castle Rebar & Supply of Colorado Springs, and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance, property and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office. This classification also holds one property owned by the Company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations during 2019 was $2,573,000. The increased cash flow compared to 2018 was primarily due to receipt of $14,782,000 from a legal settlement in the first quarter of 2019 offset by a decrease in operating results. See Note 17 for further discussion. Cash used by discontinued operations in 2019 was $2,138,000. The increased use of cash compared to the prior year was mainly due to reduced operating results.
Cash provided by continuing operations in 2018 was $2,061,000. The decline from prior year cash flow was attributable mainly to less favorable operating results partially offset by changes in working capital items, including receivables and inventory. Cash provided by discontinued operations was $631,000 in 2018.
Investing activities provided $886,000 during 2019 compared to $1,270,000 used during 2018. In 2019, the Company received $23,679,000 from the sale of its discontinued operations and used $22,521,000 to acquire assets of four operating businesses. See Note 19 for discussion of the sales of assets and Note 18 for discussion of acquisitions. In 2019, capital expenditures by continuing operations of $2,693,000, primarily in the Construction Materials segment, were offset by $2,593,000 received from the sale of property and equipment, mainly in the Construction Materials segment. Capital expenditures by discontinued operations were $172,000 in 2019. In 2018, capital expenditures by continuing operations were $1,409,000, primarily in the HVAC segment. Capital expenditures by discontinued operations of $1,291,000 were offset by $1,430,000 received for the sale of property and equipment.
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During 2019, the Company repaid $1,400,000 on its revolving credit line while $257,000 was used to repurchase stock of the Company. During 2018, the Company repaid $1,300,000 on its revolving credit line while $5,000 was used to repurchase stock of the Company.
Certain products within the Company’s portfolio are seasonal, primarily furnaces and evaporative coolers in the HVAC segment which are sensitive to weather conditions particularly during their respective peak selling seasons. Other products within the HVAC segment, specifically fan-coils and dryer boxes, and Door segment sales are, to a significant extent, dependent on construction activity. Historically, the Company has experienced operating losses during the first quarter and typically improved in the second and third quarters reflecting more favorable weather conditions for legacy products. Fourth quarter results have typically varied based on weather conditions affecting the Company’s discontinued operations as well as in the principal markets for the Company’s heating equipment. The sale of the Company’s ready-mix and Daniels Sand operations along with the acquisitions completed in the current year are expected to reduce the seasonality of the Company’s operations.
Historically, the Company would typically experience operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the HVAC segment and payment of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tended to peak during the second quarter and then decline over the remainder of the year. In the current year, a legal settlement and the sale of TMC assets in the first quarter provided sufficient cash reserves such that borrowings against the revolving credit facility were significantly less than historical experience. The cash reserves allowed the Company to complete the acquisitions of four operating businesses without taking on additional debt. The divestiture and acquisition activity is expected to smooth cash flow over the course of the fiscal year and result in more consistent levels of borrowings throughout future years.
Revolving Credit and Term Loan Agreement
The Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) effective March 16, 2020. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.
The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.
The Credit Agreement as amended provides for the following:
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The Revolving Commitment is $20,000,000. |
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Borrowings under the Revolving Commitment are limited to (a) 85% of eligible accounts receivable, (b) the lesser of 60% of eligible inventories and $8,500,000. |
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Financial Covenants include: |
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Minimum EBITDA for the three months ending March 31, 2020 must exceed $(525,000) |
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Minimum EBITDA for the three months ending June 30, 2020 must exceed $265,000 |
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The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each computation period measured at the end of each fiscal quarter, provided that the Fixed Charge Coverage Ratio shall not be tested if the average daily Excess Availability during the Fiscal Quarter exceeds $5,000,000. A computation period is the nine months ending September 30, 2020 or twelve months for all subsequent fiscal quarters. |
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The maturity date of the credit facility is May 1, 2023. |
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|
· |
|
Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.0% or the prime rate. |
11
Definitions under the Credit Agreement as amended are as follows:
|
|
· |
|
Fixed Charge Coverage Ratio means, for any Computation Period, the ratio of (a) the sum (without duplication) for such period of (i) EBITDA, minus (ii) income taxes paid in cash by the Loan Parties, minus (iii) all unfinanced Capital Expenditures, minus (iv) all amounts paid in cash in respect of any Permitted Capital Securities Repurchase, to (b) the sum for such period of (i) cash Interest Expense, plus (ii) scheduled payments of principal of Funded Debt (excluding the Revolving Loans), plus (iii) cash payments made in respect of Capital Leases, plus (iv) the amount by which reclamation or similar costs paid in such period exceed the cash proceeds received from the sale of quarry assets and cash refunds of escrow balances; provided, however that for purposes hereof, to the extent during any period there are excess cash proceeds from the sale of quarry assets after netting such proceeds against the reclamation or similar costs in such period, such excess cash proceeds may be carried forward and netted against the reclamation or similar costs in a later period, plus (v) all amounts paid in respect of any earnout or other deferred payment in connection with any Permitted Acquisition. |
|
|
· |
|
EBITDA means, for any Computation Period (or another time period to the extent expressly provided herein), the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: |
|
|
· |
|
Consolidated Net Income, plus (without duplication) each of the following items to the extent deducted in determining such Consolidated Net Income: |
|
|
i. |
|
federal, state and other income taxes deducted in the determination of Consolidated Net Income; |
|
|
ii. |
|
Interest Expense deducted in the determination of Consolidated Net Income; |
|
|
iii. |
|
depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income; |
|
|
iv. |
|
non-recurring fees and costs paid by the Company and its Subsidiaries in respect of the following: (i) fees, expenses (including legal fees and expenses) and due diligence costs associated with Permitted Acquisitions, whether or not consummated; (ii) legal fees and costs associated with the Valco trial preparation; (iii) fees, costs and expenses (including legal fees and expenses) in connection with the amendment and restatement of this agreement and all matters reasonably related thereto; (iv) fees, costs and expenses (including legal fees and expenses) in connection with the purchase of Capital Securities of the Company by Bee Street Holdings LLC or a Subsidiary thereof and transactions and other matters reasonably related thereto; (v) additional fees and costs associated with the exploration of the Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the sustainability for mining and the pursuit of mining permits; and (vi) fees, costs and expenses in connection with reclamation or similar transactions related to the sale of quarry assets; |
|
|
v. |
|
any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill); and |
|
|
vi. |
|
the amount of any earnout or other deferred payment paid in connection with any Permitted Acquisition; minus |
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|
· |
|
any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income |
Outstanding funded revolving debt was $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019 and 2018 was $3,700,000 and $9,800,000, respectively. Average outstanding funded debt was $313,000 and $6,058,000 for 2019 and 2018, respectively. At December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future. The Company was not in compliance with the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.
The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for
12
the next twelve months. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.
Insurance Policies
The Company maintains insurance policies with the following per incident deductibles and policy limits:
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Per Occurrence |
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Policy Aggregate |
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||
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Deductible |
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Limits |
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Limits |
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|||
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Product liability |
|
$ |
250,000 |
|
$ |
1,000,000 |
|
$ |
2,000,000 |
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|
General liability |
|
|
250,000 |
|
|
1,000,000 |
|
|
5,000,000 |
|
|
Workers’ compensation |
|
|
350,000 |
|
|
350,000 |
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|
Statutory |
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|
Auto and truck liability |
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|
100,000 |
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|
2,000,000 |
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|
No limit |
|
Should any or all policy limits be exceeded, the Company maintains umbrella policies which cover the next $25,000,000 of claims.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements that are likely to have a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources other than the effect, during the first quarter of 2019, from the implementation of ASU No. 2016-02, Leases (Topic 842). The implementation of the ASU resulted in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000 as of the adoption date. See Note 9.
Cybersecurity Risks and Incidents
The Company is dependent upon the capacity, reliability and security of our information technology (IT) systems for our manufacturing, sales, financial and administrative functions. We also face the challenge of supporting our IT systems and implementing upgrades when necessary, including the prompt detection and remediation of any cybersecurity breaches.
Our IT systems’ security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disaster, unauthorized access, cyber-attack and other similar disruptions. However, our IT systems remain vulnerable to intrusion and damage despite our implementation of security measures that we feel protect our IT systems. To date, we are not aware of any cybersecurity breaches that have negatively impacted our manufacturing operations, sales or financial and administrative functions or that resulted in the compromise of personal information of our employees, customers or suppliers. Should we learn of such a breach, the Company would promptly notify the SEC by filing a Form 8-K and notify all insiders that the purchase or sale of the Company’s stock is forbidden until such information has been given adequate time to become available to the trading public.
RESULTS OF OPERATIONS
In the ensuing discussions of the results of operations, we define the term gross profit as the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS
2019 vs. 2018
Consolidated sales in 2019 were $113,276,000, an increase of 12,389,000 or 12.3%, compared to 2018 after adjusting for discontinued operations. The increase was directly attributable to the higher sales in the HVAC and Doors segment reflecting the impact of acquisitions in the second quarter of 2019. The HVAC segment reported sales increases of $8,671,000 (11.8%) primarily due to the acquisitions of GFP and InOvate. The Door segment reported a sales increase of
13
$4,211,000 (20.9%) primarily due to the acquisitions of Fastrac and Serenity. The Construction Materials segment reported a small decrease in sales of $399,000 (5.6%) not including approximately $7,156,000 of 2018 former intercompany sales to the ready-mix business that was sold in the first quarter of 2019.
The consolidated gross profit ratio in 2019 was 21.7% compared to 22.7% for 2018. The Door Segment and HVAC segments reported increases in gross profit while the Construction Material segment reported a decrease in gross profit primarily due to the charges associated with the decision to cease mining operations at the Pikeview quarry.
Selling and administrative expenses were $9,483,000 higher in 2019 compared to 2018. The increases were reported primarily in the HVAC segment (up 27.6%) due to the impact of acquisitions and in the Unallocated Corporate expenses (up 33.5%) primarily due to professional services related to acquisition activity. As a percentage of consolidated sales, selling and administrative expenses increased to 28.1% in 2019 compared to 22.5% in 2018.
Depreciation and amortization charges were $1,962,000 in 2019 compared to $1,472,000 in 2018. The increase between years is attributed to the acquisition of the assets of four operating business during the second quarter of 2019.
2019 included an aggregated charge of $22,492,000 to impair mining assets related to the final asset retirement obligations recorded in the Construction Materials segment. 2018 included charges of $6,840,000 and $627,000 to write off deferred development costs and an overpayment of prepaid royalties, also in the Construction Materials segment.
The Company recognized a net $14,781,000 gain from a legal settlement and a $6,800,000 loss on legal settlement for the year ended December 28, 2019. See Note 2 and Note 17 for additional discussion.
2019 included $1,237,000 of gains from the sale of equipment in the Construction Materials segment discussed below. There were no gains or losses from the sale of equipment of continuing operations in 2018. There were $919,000 of gains from the sales of equipment of discontinued operations in 2018.
The Company reported an operating loss in 2019 of $22,845,000 compared to operating loss of $8,764,000 in 2018. Increased selling and administrative costs and impairment costs are driving the overall decrease in operating results.
Interest income in 2019 was $362,000 compared to $76,000 in 2018. The increase was due to interest earned on cash reserves in the first half of 2019. Interest expense in 2019 and 2018 was $371,000 and $539,000, respectively. The decrease was due to lower average borrowings in 2019 compared to 2018. Average outstanding funded debt in 2019 was $313,000 compared to $6,058,000 in 2018.
The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The effective income tax rate related to the net loss for 2019 and 2018 was a benefit of 23.7% and 27.2%, respectively.
The Company operates businesses within the Building Products industry group. The businesses are grouped into three reportable segments. The following addresses various aspects of operating performance focusing on the reportable segments.
DISCUSSION OF CONSOLIDATED RESULTS OF DISCONTINUED OPERATIONS
The results of discontinued operations reflect the operations of the ready-mix and Daniels Sand businesses of the Company’s former subsidiary, TMC. The Company sold the assets of these business units on February 1, 2019. The 2019 income realized from discontinued operations included a pre-tax loss from operations of $724,000 and a pre-tax gain on the sale of assets of $5,283,000. The pre-tax income from discontinued operations for the year ended December 28, 2018 was $1,161,000.
14
HVAC Segment Group
The table below presents a summary of operating information for the HVAC segment group for the fiscal years 2019 and 2018 (amounts in thousands).
|
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|
|
|
|
|
|
|
|
|
Year Ended |
|
||||
|
|
|
DECEMBER 28, |
|
DECEMBER 29, |
|
||
|
|
|
|
2019 |
|
2018 |
||
|
Revenues from external customers |
|
$ |
82,149 |
|
$ |
73,478 |
|
|
Segment gross profit |
|
|
19,706 |
|
|
14,876 |
|
|
Gross profit as percent of sales |
|
|
24.0 |
% |
|
20.2 |
% |
|
Segment operating income |
|
$ |
948 |
|
$ |
931 |
|
|
Operating income as a percent of sales |
|
|
1.2 |
% |
|
1.3 |
% |
|
Segment assets |
|
$ |
50,822 |
|
$ |
29,003 |
|
|
Return on assets |
|
|
1.9 |
% |
|
3.2 |
% |
2019 vs. 2018
Sales in the HVAC segment increased $8,671,000 (11.8%) between 2019 and 2018 reflecting the impact of the acquisitions of GFP and InOvate. The two acquisitions, combined, contributed 14.8% of current year revenue. Sales of furnaces and fan-coils were consistent between years while sales of cooling related equipment declined in the current year from the prior year.
The HVAC segment’s gross profit ratio increased to 24.0% in 2019 from 20.2% in 2018. The increase was primarily due to impact of the acquisitions noted above.
Selling and administrative expenses in 2019 were $4,494,000 higher than the prior year. The acquisition activity noted above was the primary driver behind the increased expense between the two years. Additional investment spending on personnel and processes to stimulate future growth in previously owned lines of business also contributed to the increase between years. As a percentage of sales, such expenses were 21.3% in 2019 compared to 17.7% in 2018.
Certain businesses in the HVAC group are sensitive to changes in the prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.
Door Segment Group
The table below presents a summary of operating information for the Door Segment group for the fiscal years 2019 and 2018 (amounts in thousands).
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|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
||||
|
|
|
|
DECEMBER 28, |
|
DECEMBER 29, |
|
||
|
|
|
|
2019 |
|
2018 |
|
||
|
Revenues from external customers |
|
|
$ |
24,369 |
|
|
20,158 |
|
|
Segment gross profit |
|
|
|
7,062 |
|
|
5,656 |
|
|
Gross profit as percent of sales |
|
|
|
29.0 |
% |
|
28.1 |
% |
|
Segment operating income |
|
|
$ |
2,174 |
|
|
2,233 |
|
|
Operating income as a percent of sales |
|
|
|
8.9 |
% |
|
11.1 |
% |
|
Segment assets |
|
|
$ |
14,248 |
|
|
8,003 |
|
|
Return on assets |
|
|
|
15.3 |
% |
|
27.9 |
% |
15
2019 vs. 2018
The Door segment sells hollow metal doors, door frames and related hardware, wood doors, sliding door systems, lavatory fixtures and electronic access and security systems. Nearly all of the Door segments sales are for commercial and institutional buildings such as schools, hotels, and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting, but instead tracks gross profit by job. Management relies on the trend in sales and the gross profit rate by job and in the aggregate in managing the business.
Door sales in 2019 were $4,211,000, or 20.9% higher than in 2018. The increase is primarily due to the acquisition of Fastrac and Serenity in the second quarter of the current year. The gross profit ratio in 2019 was 29.0% compared to 28.1% in 2018.
Selling and administrative expenses increased by $1,353,000 (41.6%) in 2019 compared to 2018. The increase was primarily due to acquisition activity noted previously. As a percentage of sales, these expenses were 18.9% and 16.1% in 2019 and 2018, respectively.
Construction Materials Segment Group
The table below presents a summary of operating information for the Construction Materials segment group for the fiscal years 2019 and 2018 (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|||||
|
|
|
DECEMBER 28, |
DECEMBER 29, |
||||
|
|
|
2019 |
|
2018 |
|
||
|
Revenues from external customers |
|
$ |
6,751 |
|
$ |
7,150 |
|
|
Segment gross (loss) profit |
|
|
(2,222) |
|
|
2,220 |
|
|
Gross (loss) profit as percent of sales |
|
|
(32.9) |
% |
|
31.0 |
% |
|
Segment operating loss |
|
$ |
(18,492) |
|
$ |
(7,878) |
|
|
Operating loss as a percent of sales |
|
|
(273.9) |
% |
|
(110.2) |
% |
|
Segment assets |
|
$ |
10,463 |
|
$ |
11,315 |
|
|
Return on assets |
|
|
(176.7) |
% |
|
(69.6) |
% |
The ready-mix concrete and Daniels Sand operational assets of TMC were sold on February 1, 2019. The operations of the ready-mix and Daniels Sand businesses were classified as discontinued operations and assets held for sale for all periods presented. The discontinued operations, together with the continuing operations formerly known as the Concrete, Aggregate and Construction Supply (CACS) segment, were reclassified to the Construction Materials segment for current reporting. The product offerings of continuing operations of the former CACS segment consisted of aggregates and construction supplies. Aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades, particularly concrete sub-contractors.
Management made a strategic decision to cease mining operations at the Pikeview quarry at the end of the third quarter of 2019 when it was determined that continued mining was not in the best economic interests of the consolidated portfolio. The third quarter 2019 included a $20,217,000 impairment charge related to the cessation of mining. In the fourth quarter of 2019 the Company, by way of a legal settlement, purchased land it previously leased in Pueblo, Colorado. See Note 2. The Company does not plan to resume mining of the Pueblo property and has recorded an impairment charge of $2,230,000 related to reclamation liabilities associated with the property for the fiscal year ended December 28, 2019. See Note 20. The quarries may continue to report some revenue from dumping fees or for remaining inventory sales, but otherwise will turn to full reclamation status.
Prior to the decision to cease mining operations, the CACS segment produced and sold sand, crushed limestone and gravel (collectively “aggregates”) from deposits in and around Colorado Springs, Colorado. Sales volume of aggregates
16
decreased in 2019 compared to 2018 primarily attributable to the Grisenti pit being fully mined and the ensuing work to complete reclamation with minimal sales. Sales at the Pikeview quarry were nominal in 2019 as the Company prioritized completing the reclamation at Grisenti. In 2018, the aggregate operations supplied the ready-mix business with $7,156,000 of product. These sales reduced with the sale of the ready-mix operations. The reduced sales volumes and additional reclamation related costs, in part, led management to its decision to cease mining operations at the remaining quarries in the current year.
Selling and administrative expenses were $232,000 higher in 2019 compared to 2018. The increase is primarily due to litigation related costs. Legal expenses, including those related to the Pueblo aggregate lease litigation, were $1,757,000 in 2019 compared to $1,603,000 in 2018. As a percentage of sales, selling and administrative expenses were 38.0% in 2019 compared to 32.6% in 2018.
The fiscal year ended December 28, 2019 included a $14,781,000 net gain on legal settlement and a $6,800,000 legal settlement expense related to previously disclosed litigation. See Note 2 and Note 17. The fiscal year ended December 29, 2018 included charges of $6,840,000 and $627,000 related to the write-off of deferred development and prepaid royalties, respectively. See Note 16.
Gains on disposition of assets were $1,231,000 in 2019 due to the disposition of equipment no longer considered useful upon the cessation of mining operations. There were no gains or losses on disposition of assets in 2018.
In connection with the movement to full reclamation status at all mining properties in 2019, management completed an assessment to determine if certain assets should be considered held for sale. Based on this assessment, $896,000 of property previously included in Machinery and equipment on the Consolidated Balance Sheet was classified as Assets held for sale as of December 28, 2019.
OUTLOOK
The Company’s HVAC segment anticipates growth in 2020 sales due to the impact of a full year of the operations acquired in 2019. Fan coil sales are expected to increase due to continued construction spending in the lodging industry and investments made in sales and marketing during 2019. Sales of furnaces, heaters and evaporative coolers are primarily for replacement purposes and therefore are not heavily reliant on new construction. Sales of these products are generally dependent on the overall strength of the economy, especially employment levels. Sales of ASME tanks, hydronics accessories and dryer related products are dependent on construction levels, which are expected to grow in 2020.
Sales in the Door segment are expected to increase in 2020 due to full year impact of the operations acquired in 2019. Sales are somewhat dependent on the level of commercial construction activity, which is also expected to grow in 2020.
Sales in the Construction Materials segment are expected to remain consistent with 2019. Sales are dependent upon the level of commercial construction activity in the Colorado Springs, Colorado area. As the Company has ceased mining operations it intends to sell off its excess assets, over a period of the next few years, as reclamation is completed. The proceeds from these sales are expected to be available to reduce borrowings by the Company.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission requires all registrants, including the Company, to include a discussion of “critical” accounting policies or methods used in the preparation of financial statements. We believe the following are our critical accounting policies and methods.
Goodwill and Other Intangible Assets
The Company annually assesses goodwill for potential impairment as of the last day of its fiscal year. In addition, to the extent that events occur, either involving the relevant reporting unit or in their industries, the Company revisits its assessment of the recorded goodwill to determine if impairment has occurred and should be recognized. As of December
17
28, 2019, the Company had recorded $5,932,000 of goodwill consisting of $3,198,000 related to the Door segment and $2,734,000 related to the HVAC segment.
In connection with acquisition activity in 2019, the Company recorded $12,809,000 of amortizable intangible assets related to customers, trade names and intellectual property. Recorded amounts were based on valuations performed by an independent business advisory firm. These intangible assets are amortized over their estimated useful lives on a straight-line basis. See Note 4 and Note 18.
The Company follows ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) which simplified the test for goodwill impairment by eliminating the calculation of implied goodwill fair value. Instead, companies compare the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Management prepared a discounted cash flow (DCF) valuation to estimate the fair value of each reporting unit. The DCF valuation was calculated using an appropriate discount rate. The calculated fair values were compared to the reporting unit’s carrying value including goodwill. In each case the fair value exceeded carrying costs resulting in no impairment. See additional discussion in Note 1.
Long-lived Assets (other than Goodwill and Intangible Assets)
The Company reviews long-lived assets by asset group for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the amount and useful life over which cash flows will occur and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available given the Company’s historical experience and internal business plans. In 2019, the Company recognized $22,492,000 of impairment charges related to mining assets in the Construction Materials segment that were simultaneously recorded and impaired as the future undiscounted cash outflows were expected to exceed the current carrying value. See Note 20. In the first two quarters of 2018, the Company wrote off a net $6,840,000 of deferred development costs, previously reported in Property, plant and equipment in the Consolidated Balance Sheet, related to an aggregates property after the necessary mining permits were denied by the State of Colorado for the second time. See Note 16 for further discussion. During the fourth quarter of 2018 the Company wrote-off $627,000 of royalty overpayments related to the aggregate property in that was under litigation at the time.
Liabilities
The Company purchases insurance coverage for workers’ compensation, general product and automobile liability, retaining certain levels of risk (self-insured portion). See the above section titled “Insurance Policies” for information related to per incident deductibles and policy limits. Provision for workers’ compensation claims is estimated by management based on information provided by the independent third party administrator and periodic review of all outstanding claims. The Company’s independent claims administrator tracks all claims and assigns a liability to each individual claim based upon facts known at the time of estimation. In addition, management periodically reviews each individual claim with both the third party claims administrator and legal counsel and the third party administrator revises the estimated liability accordingly. The Company also retains an independent expert who applies actuarial methodology to the claims data provided by the Company’s independent claims administrator to estimate the ultimate aggregate settlement amount of the claims using specific loss development factors based on the Company’s prior experience. The Company then establishes its reserve for workers’ compensation claims based upon the actuarial evaluation and management’s knowledge of the outstanding claims. Management tracks changes to the incurred and paid amounts of individual workers compensation claims up to the date of final closure. In recent years, the net amounts that the claims have ultimately settled for have indicated that the reserve recorded by the Company has been sufficient.
With regard to product liability, provisions for both claims and un-asserted claims that would be covered under the self-insured portion of the policies are reviewed as circumstances dictate, at least annually, and are recorded in accordance
18
with accounting guidance on contingent liabilities provided in the FASB Accounting Standards Codification (Codification). Management also incorporates information from discussions with legal counsel handling the individual claims when revising its estimates. Provision for automobile claims is estimated based upon information provided by the Company’s independent claims administrator and the Company’s own experience. The number of automobile claims and the amounts involved are generally not material. Historically, there have not been many instances of significant variances between actual final settlements and our estimates regarding automobile and product liability claims.
The Company has recorded an estimate of liability for final reclamation of its mining properties in the Colorado Springs, Colorado area per ASC 410-20 guidance on accounting for Asset Retirement Obligations (AROs). An ARO is defined in ASC 410-20-20 as an “obligation associated with the retirement of a tangible long-lived asset”. An ARO should be measured at fair value and should be recognized at the time the obligation is incurred if a reasonable estimate of fair value can be made. ASC 410-20 also says that upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. Prior to the third quarter of 2019, the Company had performed reclamation concurrently with mining operations and recognized the related costs in operations. The decision to cease mining operations at Pikeview in the third quarter of 2019 and the acquisition of Valco property in the fourth quarter of 2019 allowed the Company to reasonably estimate the cost of final reclamation at these mining properties. To estimate the fair value of the liabilities, the Company used an expected present value technique. The Company compared its estimates to those prepared by an independent expert to ensure the estimates were reasonable. The related ARO mining assets were considered fully impaired as expected undiscounted future cash outflows exceeded carrying value. Going forward, changes in the ARO due to passage of time will be recognized as an increase in the carrying amount of the liability and as an expense classified as accretion expense. The assessment of adequacy of the ARO is based on management’s assumptions with the assistance of the independent professional. The analysis requires the use of significant assumptions and estimates about timing, third party costs to perform work and method of reclamation to be used.
Management believes that the assumptions and estimates used to determine the reserve are reasonable; however, changes in the aforementioned assumptions and estimates, as well as the effects of unknown future events or circumstances, including legislative requirements, could materially affect estimated costs.
Sales
The Company recognizes revenue as performance obligations to customers are met. Sales are recorded net of estimates of applicable provisions for discounts, volume incentives, returns and allowances based upon current program terms and historical experience. At the time of revenue recognition, the Company also provides an estimate of potential bad debt and warranty expense as well as an amount anticipated to be granted to customers under cooperative advertising programs based upon current program terms and historical experience. Additionally, certain HVAC companies offer discounts for early payment of amounts due under dating and other extended payment programs. The Company records reserves for these items based upon historical experience.
Guidance provided by the Codification mandates that cash consideration (including sales incentives) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services unless both of the following conditions are met: a) the vendor receives an identifiable benefit in exchange for the consideration and b) the vendor can reasonably estimate the fair value of the benefit. Under this guidance, volume incentives and customer discounts provided to our customers are presumed to be a reduction in the selling price of our products and accordingly we record these as a reduction of gross sales. We require that our customers submit proof of both the advertisement and the cost of the advertising expenditure before we allow a deduction for cooperative advertising. Since the Company receives an identifiable and quantifiable benefit, these costs are recorded as selling and administrative expenses. These programs did not have a material effect on operations in 2019 or 2018.
Recently Issued Accounting Standards
The “Recently Issued Accounting Pronouncements” section of Note 1 discusses new accounting policies adopted by the Company since 2018 and the expected impact of accounting pronouncements recently issued but not yet required to be
19
adopted. To the extent the adoption of new accounting standards has an effect on our financial condition, results of operations or liquidity, the impacts are discussed in the applicable notes to the Consolidated Financial Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and, as such, is not required to provide information in response to this item.
20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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PAGE |
|
Financial Statements and Financial Statement Schedule of Continental Materials Corporation and Report of Independent Registered Public Accounting Firm thereon: |
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|
|
Consolidated Statements of Operations for fiscal years 2019 and 2018 |
|
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|
|
|
|
|
Consolidated Statements of Cash Flows for fiscal years 2019 and 2018 |
|
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|
|
|
|
|
Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018 |
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|
|
|
Consolidated Statements of Shareholders’ Equity for fiscal years 2019 and 2018 |
|
|
|
|
|
|
|
|
26-46 |
|
|
|
|
|
|
|
|
21
Continental Materials Corporation
Consolidated Statements of Operations
For Fiscal Years 2019 and 2018
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
113,276 |
|
$ |
100,887 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization) |
|
|
88,723 |
|
|
78,033 |
|
|
Depreciation and amortization |
|
|
1,962 |
|
|
1,472 |
|
|
Selling and administrative |
|
|
32,162 |
|
|
22,679 |
|
|
Charges related to write off of deferred development |
|
|
— |
|
|
6,840 |
|
|
Charges related to write off of overpayment of prepaid royalties |
|
|
— |
|
|
627 |
|
|
Mining asset impairment |
|
|
22,492 |
|
|
— |
|
|
Gain on legal settlement |
|
|
(14,781) |
|
|
— |
|
|
Loss on legal settlement |
|
|
6,800 |
|
|
— |
|
|
Gain on disposition of property and equipment |
|
|
(1,237) |
|
|
— |
|
|
Operating loss |
|
|
(22,845) |
|
|
(8,764) |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
362 |
|
|
76 |
|
|
Interest expense |
|
|
(371) |
|
|
(539) |
|
|
Other income, net |
|
|
80 |
|
|
25 |
|
|
Loss from continuing operations before income taxes |
|
|
(22,774) |
|
|
(9,202) |
|
|
Benefit for income taxes |
|
|
5,396 |
|
|
2,500 |
|
|
Loss from continuing operations |
|
|
(17,378) |
|
|
(6,702) |
|
|
Income from discontinued operations net of income tax provision of $1,080 and $315 |
|
|
3,479 |
|
|
846 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(13,899) |
|
$ |
(5,856) |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(10.15) |
|
$ |
(3.95) |
|
|
Income from discontinued operations |
|
|
2.03 |
|
|
0.50 |
|
|
Basic and diluted loss per share |
|
|
(8.12) |
|
|
(3.45) |
|
|
Average shares outstanding |
|
|
1,711 |
|
|
1,697 |
|
The accompanying notes are an integral part of the consolidated financial statements.
22
Continental Materials Corporation
Consolidated Statements of Cash Flows
For Fiscal Years 2019 and 2018
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
||
|
Operating activities |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
$ |
(13,899) |
|
$ |
(5,856) |
|
|
Discontinued operations, net of income tax |
|
|
|
(3,479) |
|
|
(846) |
|
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
1,962 |
|
|
1,472 |
|
|
Write-off of deferred development costs |
|
|
|
— |
|
|
5,409 |
|
|
Impairment of mining property assets |
|
|
|
22,492 |
|
|
— |
|
|
Write-off of overpayment of prepaid royalties |
|
|
|
— |
|
|
627 |
|
|
Deferred income tax provision |
|
|
|
(4,253) |
|
|
(1,798) |
|
|
Stock based compensation |
|
|
|
204 |
|
|
— |
|
|
Compensation of Board of Directors paid by issuance of treasury shares |
|
|
|
568 |
|
|
315 |
|
|
Provision for doubtful accounts |
|
|
|
189 |
|
|
165 |
|
|
Gain on disposition of property and equipment |
|
|
|
(1,237) |
|
|
— |
|
|
Changes in working capital items: |
|
|
|
|
|
|
|
|
|
Receivables |
|
|
|
(3,096) |
|
|
(1,091) |
|
|
Inventories |
|
|
|
2,995 |
|
|
3,961 |
|
|
Prepaid expenses |
|
|
|
(256) |
|
|
116 |
|
|
Accounts payable and accrued expenses |
|
|
|
5,251 |
|
|
(282) |
|
|
Income taxes payable and refundable |
|
|
|
(1,903) |
|
|
(436) |
|
|
Other |
|
|
|
(2,965) |
|
|
305 |
|
|
Net cash provided by continuing operations |
|
|
|
2,573 |
|
|
2,061 |
|
|
Net cash (used) provided by discontinued operations |
|
|
|
(2,138) |
|
|
631 |
|
|
Net cash provided by operating activities |
|
|
|
435 |
|
|
2,692 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures by continuing operations |
|
|
|
(2,693) |
|
|
(1,409) |
|
|
Capital expenditures by discontinued operations |
|
|
|
(172) |
|
|
(1,291) |
|
|
Payments for acquisitions |
|
|
|
(22,521) |
|
|
— |
|
|
Cash proceeds from sale of discontinued operations |
|
|
|
23,679 |
|
|
— |
|
|
Cash proceeds from sale of continuing operations property and equipment |
|
|
|
2,593 |
|
|
— |
|
|
Cash proceeds from sale of discontinued operations property and equipment |
|
|
|
— |
|
|
1,430 |
|
|
Net cash provided (used) by investing activities |
|
|
|
886 |
|
|
(1,270) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
Borrowings on the revolving bank loan |
|
|
|
21,750 |
|
|
33,100 |
|
|
Repayments on the revolving bank loan |
|
|
|
(23,150) |
|
|
(34,400) |
|
|
Repayments of finance lease obligations |
|
|
|
(80) |
|
|
(30) |
|
|
Payments to acquire treasury stock |
|
|
|
(257) |
|
|
(5) |
|
|
Net cash used by financing activities |
|
|
|
(1,737) |
|
|
(1,335) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
|
(416) |
|
|
87 |
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
|
594 |
|
|
507 |
|
|
End of period |
|
|
$ |
178 |
|
$ |
594 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow items: |
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
$ |
333 |
|
$ |
468 |
|
|
Income taxes, net |
|
|
|
1,840 |
|
|
50 |
|
|
Other Information: |
|
|
|
|
|
|
|
|
|
Contingent consideration from acquisitions |
|
|
|
1,540 |
|
|
— |
|
|
ARO liabilities and assets recognized |
|
|
|
22,492 |
|
|
— |
|
|
Capital expenditures purchased through capital lease obligation |
|
|
|
— |
|
|
200 |
|
|
Assets reclassified as held for sale |
|
|
|
896 |
|
|
24,036 |
|
|
Liabilities reclassified as held for sale |
|
|
|
— |
|
|
4,092 |
|
|
Right of use assets obtained in exchange for operating lease liabilities |
|
|
|
587 |
|
|
— |
|
The accompanying notes are an integral part of the consolidated financial statements.
23
Continental Materials Corporation
Consolidated Balance Sheets As of December 28, 2019 and December 29, 2018
(Amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019 |
|
December 29, 2018 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
178 |
|
$ |
594 |
|
|
Receivables less allowance of $494 and $410 for fiscal 2019 and 2018, respectively |
|
|
21,555 |
|
|
15,321 |
|
|
Receivable for insured losses |
|
|
911 |
|
|
874 |
|
|
Inventories |
|
|
13,953 |
|
|
14,806 |
|
|
Prepaid expenses |
|
|
2,171 |
|
|
1,785 |
|
|
Refundable income taxes |
|
|
2,397 |
|
|
494 |
|
|
Other current assets |
|
|
4,229 |
|
|
2,500 |
|
|
Other current assets held for sale |
|
|
896 |
|
|
10,968 |
|
|
Total current assets |
|
|
46,290 |
|
|
47,342 |
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Land and improvements |
|
|
4,072 |
|
|
1,409 |
|
|
Buildings and improvements |
|
|
14,939 |
|
|
13,451 |
|
|
Machinery and equipment |
|
|
48,269 |
|
|
48,569 |
|
|
Mining properties |
|
|
3,770 |
|
|
5,015 |
|
|
Less accumulated depreciation and depletion |
|
|
(59,025) |
|
|
(58,013) |
|
|
|
|
|
12,025 |
|
|
10,431 |
|
|
Other assets |
|
|
|
|
|
|
|
|
Right-of use assets |
|
|
|
|
|
— |
|
|
Goodwill |
|
|
|
|
|
1,000 |
|
|
Intangible assets |
|
|
12,437 |
|
|
— |
|
|
Deferred income taxes |
|
|
7,667 |
|
|
3,414 |
|
|
Other long-term assets |
|
|
654 |
|
|
448 |
|
|
Other long-term assets held for sale |
|
|
— |
|
|
13,068 |
|
|
|
|
$ |
89,983 |
|
$ |
75,703 |
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Revolving bank loan payable |
|
$ |
800 |
|
$ |
2,200 |
|
|
Accounts payable |
|
|
8,490 |
|
|
3,234 |
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
Compensation |
|
|
2,181 |
|
|
2,638 |
|
|
Reserve for self-insured losses |
|
|
1,967 |
|
|
2,451 |
|
|
Liability for unpaid claims covered by insurance |
|
|
911 |
|
|
874 |
|
|
Profit sharing |
|
|
710 |
|
|
1,065 |
|
|
Short-term asset retirement obligation |
|
|
4,200 |
|
|
1,017 |
|
|
Other |
|
|
3,377 |
|
|
2,911 |
|
|
Short-term lease liabilities |
|
|
1,170 |
|
|
— |
|
|
Other current liabilities held for sale |
|
|
— |
|
|
3,800 |
|
|
Total current liabilities |
|
|
23,806 |
|
|
20,190 |
|
|
|
|
|
|
|
|
|
|
|
Long-term lease liabilities |
|
|
3,991 |
|
|
— |
|
|
Long-term compensation liabilities |
|
|
1,842 |
|
|
959 |
|
|
Asset retirement obligation |
|
|
23,713 |
|
|
5,252 |
|
|
Other long-term liabilities |
|
|
1,442 |
|
|
234 |
|
|
Other long-term liabilities held for sale |
|
|
— |
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |
|
|
643 |
|
|
643 |
|
|
Capital in excess of par value |
|
|
1,853 |
|
|
1,930 |
|
|
Retained earnings |
|
|
47,232 |
|
|
61,131 |
|
|
Treasury shares, 860,910 and 876,409 at cost |
|
|
(14,539) |
|
|
(14,928) |
|
|
|
|
|
35,189 |
|
|
48,776 |
|
|
|
|
$ |
89,983 |
|
$ |
75,703 |
|
The accompanying notes are an integral part of the consolidated financial statements.
24
Continental Materials Corporation
Consolidated Statements of Shareholders’ Equity
For Fiscal Years 2019 and 2018
(Amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
Capital |
|
|
|
|
|
|
|
||||
|
|
|
Common |
|
shares |
|
in excess |
|
Retained |
|
Treasury |
|
Treasury |
|
||||
|
|
|
shares |
|
amount |
|
of par |
|
earnings |
|
shares |
|
shares cost |
|
||||
|
Balance at December 30, 2017 |
|
2,574,264 |
|
$ |
643 |
|
$ |
1,887 |
|
$ |
66,987 |
|
892,097 |
|
$ |
15,195 |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(5,856) |
|
— |
|
|
— |
|
|
Compensation of Board of Directors by issuance of treasury shares |
|
— |
|
|
— |
|
|
43 |
|
|
— |
|
(16,000) |
|
|
(272) |
|
|
Purchase of treasury shares |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
312 |
|
|
5 |
|
|
Balance at December 29, 2018 |
|
2,574,264 |
|
|
643 |
|
|
1,930 |
|
|
61,131 |
|
876,409 |
|
|
14,928 |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(13,899) |
|
— |
|
|
— |
|
|
Compensation of Board of Directors by issuance of treasury shares |
|
— |
|
|
— |
|
|
(77) |
|
|
— |
|
(37,998) |
|
|
(645) |
|
|
Purchase of treasury shares |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
22,499 |
|
|
256 |
|
|
Balance at December 28, 2019 |
|
2,574,264 |
|
$ |
643 |
|
$ |
1,853 |
|
$ |
47,232 |
|
860,910 |
|
$ |
14,539 |
|
The accompanying notes are an integral part of the consolidated financial statements.
25
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Continental Materials Corporation (the Company) is a Delaware corporation, incorporated in 1954. The Company experienced various changes in 2019 with the sale of substantially all assets of its ready-mix concrete and Daniels Sand operations in the first quarter of 2019, the acquisition of four new operating businesses in the second quarter of 2019 and the cessation of mining at Pikeview quarry in the third quarter of 2019. In conjunction with this activity, management reviewed its operating and reporting structure and made adjustments to align the structure with how operations will be measured and evaluated going forward including revisions to the Company’s reporting segments. Segment information for prior periods has been reclassified to conform to current segment reporting structure. The Company operates primarily in the Building Products industry group. Within this industry group the Company has identified three reportable segments: the HVAC segment, the Door segment and the Construction Materials segment.
The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment and dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona, Global Flow Products /American HVAC (GFP) of Broken Arrow, Oklahoma, and InOvate Dryer Technologies (InOvate) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries: McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries, Castle Aggregates and Castle Rebar & Supply of Colorado Springs, and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado (the three companies collectively are referred to as the Castle Companies).
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include Continental Materials Corporation and all of its subsidiaries. Intercompany transactions and balances have been eliminated. All subsidiaries of the Company are wholly-owned.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which removed the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss should not exceed the total amount of goodwill allocated to that reporting unit. The pronouncement was adopted by the Company in the fourth quarter of 2017 in connection with annual impairment testing. No impairment charges resulted from our impairment testing.
Effective December 31, 2017 (the beginning of fiscal 2018), the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which created a single source of
26
revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), requiring that the statement of cash flows explain the change in total cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard was adopted by the Company in the first quarter of 2018 and did not have a material impact to the consolidated statement of cash flows.
Effective December 30, 2018 (the beginning of fiscal 2019) the Company adopted ASU No. 2016-02, Leases (Topic 842), which superseded Topic 840, “Leases”. As allowed under the new accounting standard, the Company elected to apply practical expedients to carry forward the original lease determinations, lease classifications and accounting of initial direct costs for all asset classes at the time of adoption. The Company also elected not to separate lease components from non-lease components for asset categories, except office space, and to exclude short-term leases from its Consolidated Balance Sheet. For the office space lease category the election was made to report lease and non-lease components separately as the non-lease components are billed and paid separately and are not a fixed amount over the lease term. The implicit discount rate of leases is used to calculate present values when available. When an implicit discount rate is not readily available an incremental borrowing rate is used to calculate present values.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 28, 2019 and December 29, 2018 and the reported amounts of revenues and expenses during both of the two fiscal years in the period ended December 28, 2019. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value. The Company has reclassified negative cash balances to Accounts Payable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.
The following methods were used to estimate the fair value of the financial instruments recognized in the accompanying balance sheet:
27
Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.
Revolving Bank Loan Payable: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Revolving Bank Loan Payable represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.
Lease liabilities: Fair value was estimated based on the borrowing rates then available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Lease liabilities represents a reasonable estimate of the corresponding fair value and was valued as Level 2.
Phantom equity and phantom equity appreciation liability awards: Fair value is estimated based on the use of a Black-Scholes option pricing model based on publicly available inputs. The carrying amount of the liability represents a reasonable estimate of the vested portion of the corresponding fair value of the awards granted and was valued as Level 3.
Contingent consideration: Fair value is estimated based on the use of a Monte Carlo Simulation model based on significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.
ARO liability: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.
ARO for asset impairment: Fair value is estimated using an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate using significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820.
There were no transfers between fair value measurement levels of any financial instruments in the current year.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value and are reviewed periodically for excess or obsolete stock with a provision recorded, where appropriate. Cost for certain inventory at WFC and PMI is determined using the last-in, first-out (LIFO) method. These inventories represent approximately 71% of total inventories at December 28, 2019 and 65% at December 29, 2018. The cost of all other inventory is determined by the first-in, first-out (FIFO) or average cost methods. Some commodity prices such as copper and steel have experienced significant fluctuations in recent years which is principally relevant to the four HVAC businesses. The general effect of using LIFO is that higher prices are not reflected in the inventory carrying value. Current costs are reflected in the cost of sales. Due to the nature of our products, obsolescence is not typically a significant exposure, however certain HVAC businesses will from time to time contend with some slow-moving inventories or parts that are no longer used due to engineering changes. At December 28, 2019 and December 29, 2018, inventory reserves were approximately 6.8% of the total FIFO inventory value.
28
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows:
|
|
|
|
|
Land improvements |
|
5 to 31 years |
|
Buildings and improvements |
|
10 to 31 years |
|
Leasehold improvements |
|
Shorter of the term of the lease or useful life |
|
Machinery and equipment |
|
3 to 20 years |
The cost of property sold or retired and the related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss is reflected in operating income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their estimated useful lives.
OTHER ASSETS
The Company annually assesses goodwill for potential impairment at the end of each year. In accordance with ASU 2017-04, the fair value of each reporting unit is compared to its carrying value. Impairment expense would be recognized, limited to the value of the reporting unit’s goodwill, should carrying value exceed fair value. In addition to annual assessment, the Company will reassess the recorded goodwill to determine if impairment has occurred if events arise or circumstances change in the relevant reporting segments or in their industries. No goodwill impairment was recognized for any of the periods presented.
The Company had previously paid $2,500,000 related to an aggregate property near Colorado Springs. During fiscal year 2019, the Company decided to cease negotiations with the State of Colorado to obtain mining permits for the property. The amount, less $325,000 that was not expected to be recovered, was included in other current assets as of December 28, 2019.
Intangible assets with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value.
RETIREMENT PLANS
The Company and its subsidiaries have a contributory profit sharing retirement plan for specific employees. The plan allows qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company may make annual contributions, at its discretion, based primarily on profitability. In addition, any individuals whose compensation was in excess of the amount eligible for the Company matching contribution to the 401(k) plan as established by Section 401 of the Internal Revenue Code are eligible to participate in an unfunded Deferred Compensation Plan. This plan accrues an amount equal to the difference between the amount the person would have received as Company contributions to his/her account under the 401(k) plan had there been no limitations and the amount the person would receive under the 401(k) plan giving effect to the limitations. Costs under the plans are charged to operations as incurred. As of December 28, 2019 and December 29, 2018, the unfunded liabilities related to the Deferred Compensation Plan were $1,250,000 and $1,001,000 respectively.
RESERVE FOR SELF-INSURED AND INSURED LOSSES
The Company’s risk management program provides for certain levels of loss retention for workers’ compensation, automobile liability, healthcare plan coverage and general and product liability claims. The components of the reserve for self-insured losses have been recorded in accordance with GAAP requirements that an estimated loss from a loss contingency shall be accrued if information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of loss can be reasonably
29
estimated. The recorded reserve represents management’s best estimate of the future liability related to these claims up to the associated deductible.
GAAP also requires an entity to accrue the gross amount of a loss even if the entity has purchased insurance to cover the loss. Therefore the Company has recorded losses for workers’ compensation, automobile liability, medical plan coverage and general and product liability claims in excess of the deductible amounts, i.e., amounts covered by insurance contracts, in “Liability for unpaid claims covered by insurance” with a corresponding “Receivable for insured losses” on the balance sheet. The components of the liability represent both unpaid settlements and management’s best estimate of the future liability related to open claims. Management has evaluated the creditworthiness of our insurance carriers and determined that recovery of the recorded losses is probable and, therefore, the receivable from insurance has been recorded for the full amount of the insured losses. The amount of claims and related insured losses at December 28, 2019 and December 29, 2018 was $911,000 and $874,000, respectively.
RECLAMATION
In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas whether the property is owned or leased. The Company had recorded asset retirement obligations (ARO) and offsetting assets for future reclamation work to be performed at its various aggregate operations based upon an estimate of the total expense that would be paid to a third party to reclaim the properties. The assessment of the reclamation liability may be done more frequently if events or circumstances arise that may indicate a change in estimated costs. The Company has engaged an independent specialist to assist in evaluating the estimates of the cost of reclamation. Prior to the current fiscal year, the reclamation of mining properties was performed concurrently with mining or soon after each section of the deposit was mined. In the current year, in connection with the decision to cease mining operations at its Pikeview quarry and purchase of formerly leased mining property in Pueblo, the Company was able to reasonably estimate the cost of final reclamation of these properties and has recorded ARO liabilities of $27,913,000 at December 28, 2019. Reclamation liabilities were estimated at $6,269,000 as of December 29, 2018. The Company classifies a portion of the reserve as a current liability, specifically $4,200,000 at December 28, 2019 and $1,017,000 at December 29, 2018 based upon anticipated reclamation timeframe. See Note 2 for discussion of acquisition of Pueblo property and Note 20 for additional discussion of AROs.
TREASURY STOCK
Treasury stock is valued at the aggregated average cost that the Company paid for each transaction.
REVENUE RECOGNITION
Effective December 31, 2017, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments, which creates a single source of revenue guidance for all companies in all industries and is more principles-based than previous revenue guidance. The Company adopted the standard using the modified retrospective approach. The adoption of this standard did not result in significant changes to the Company’s accounting policies, business processes, systems or controls, or have a material impact on its financial position, consolidated results of operations or consolidated cash flows. As such, prior period financial statements were not recast and there was no cumulative effect adjustment upon adoption.
The Company is applying Topic 606 to the customer contracts in each industry segment to provide assurance of compliance. Using the five-step model the customer contracts in each segment were evaluated on critical aspects of how revenue is reported and recognized in the financial statements i.e. 1) Identify the contract(s) with the customer; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue as each performance obligation is satisfied. In applying the model to each reporting segment level, the Company is using a portfolio approach which is acceptable because the contracts within each segment are similar with respect to contract attributes, performance obligations, and revenue recognition.
Sales are recognized when control of the promised goods or services transfers to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The
30
Company’s payment terms generally range between 30 to 90 days after invoice is billed to the customer. Sales are reported net of sales tax. Shipping and other transportation costs paid by the Company and rebilled to the buyer are recorded gross (as both sales and cost of sales). The Company generally recognizes revenue from the sale of products at the time the products are shipped.
While the return of products is generally not allowed, some large customers have been granted the right to return a certain amount at the end of the normal selling season for seasonal products. Sales returns and allowances are estimated based on current program terms and historical experience. Provisions for estimated returns, discounts, volume rebates and other price adjustments are provided for in the same period the related revenues are recognized and are netted against revenues.
The Company is responsible for warranties related to the manufacture of its HVAC products and estimates the future warranty claims based upon historical experience and management estimates. The Company reviews warranty and related claims activities and records provisions, as necessary. Changes in the aggregated product warranty liability for the fiscal years 2019 and 2018 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
||
|
Beginning balance |
|
$ |
104 |
|
$ |
132 |
|
|
Warranty related expenditures |
|
|
(148) |
|
|
(148) |
|
|
Warranty expense accrued |
|
|
120 |
|
|
120 |
|
|
Ending balance |
|
$ |
76 |
|
$ |
104 |
|
The majority of sales within the Door division do not include extended installation components. Most of the sales of MDHI that contain installation are completed within 30 days and contain two specific components, the product and the installation service. The transaction price for these contracts is allocated to each performance obligation based on its stated stand-alone price. Revenue is recognized at a point in time as each performance obligation is completed. The Company does not offer maintenance or service contracts. The acquisition of Fastrac and Serenity in mid-2019 expanded the type of contracts that require analysis under Topic 606 guidelines as these operations may include extended installation services within the contracts. The company negotiates the terms of the contract and prepares a detailed project quote that might include number and type of doors, number and style of hardware, locks, electronic items and estimated installation cost. Contract price for each item of the quote is negotiated and stated in the contract. Modifications are treated as adjustments to an existing contract and are part of the changes in billing invoices. Revenue is recognized as performance obligations, per the contract agreement, are completed. Revenue for product is recognized as shipped. Revenue for installation services is recognized on a percentage of completion method with costs in excess of billings and/or billings in excess of costs being recorded as an asset or liability until recognized. Costs in excess of billings, of approximately $420,000, are included in Prepaid expenses and retainage on contracts of approximately $345,000 is included in Receivables on the Consolidated Balance Sheet as of December 28, 2019.
SHARE-BASED COMPENSATION
Share-based compensation expense is recognized using the fair value method of accounting. Share-based awards are recognized ratably over the requisite service period.
INCOME TAXES
Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.
The 2017 Tax Cuts and Jobs Act (Tax Act) repealed the corporate alternative minimum tax (AMT) and allows for all existing credit carryforwards to be used to offset regular tax liability for tax years beginning after December 31, 2017.
31
Additionally, for tax years 2018, 2019 and 2020, to the extent that the AMT credit carryover exceeds the regular tax liability, 50% of the excess AMT credit is refundable. Any remaining credits will be fully refundable in 2021. For state tax purposes, net operating losses can be carried forward for various periods for the states that the Company is required to file in. California Enterprise Zone credits can be used through 2023 while Colorado credits can be carried forward for 7 years. The Company has established a valuation reserve related to a portion of the California Enterprise Zone credit not expected to be utilized prior to expiration.
The Company’s income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns. The Company did not identify any such uncertain tax positions as of December 28, 2019 or December 29, 2018.
CONCENTRATIONS
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company did not have any temporary cash investments in either fiscal 2019 or 2018.
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. In some Door segment and HVAC segment (as it relates to the fan coil product line) transactions, the Company retains lien rights on the properties served until the receivable is collected. The Company writes off accounts when all efforts to collect the receivable have been exhausted. The Company maintains allowances for potential credit losses based upon the aging of accounts receivable, management’s assessment of individual accounts and historical experience. Such losses have been within management’s expectations. See Note 15 for a description of the Company’s customer base.
All long-lived assets are in the United States. No customer accounted for 10% or more of total sales of the Company in fiscal 2019 or 2018. One customer in the HVAC segment accounted for 15.9% and 16.1% of consolidated accounts receivable at December 28, 2019 and at December 29, 2018, respectively.
Substantially all of the HVAC Segment’s factory employees are covered by a collective bargaining agreement through the Carpenters Local 721 Union under a contract that expires on December 31, 2022. The Company considers relations with its employees and with their union to be good.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to fair value is required. In the fiscal quarters ended March 31, 2018 and June 30, 2018 the Company wrote off a total of $6,840,000 of deferred development related to a granite mining property south of Colorado Springs. See Note 16 for additional discussion.
In the third quarter of 2019 the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company recorded an ARO liability and offsetting asset of $20,715,000 which represented the estimated fair value of the total reclamation costs. The related ARO asset was considered fully impaired as the total future estimated cash flows exceeded the carrying value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset. In the fourth quarter of 2019, the Pikeview ARO was increased by a $45,000 change in estimate. The related ARO asset was considered fully impaired due to the same reason noted in the third quarter of 2019. Additionally in the fourth quarter, the Company purchased formerly leased mining property in Pueblo, Colorado as part of a legal settlement. See Note 2. With no intention to resume mining of this property, the Company was able to reasonably estimate the cost of final reclamation and recorded an ARO liability and offsetting asset of $6,660,000 related to this property. The related mining asset was considered fully impaired as total estimated cash flows exceeded the
32
carrying value. Therefore, the Company recorded a net impairment charge, related to the Pueblo property, of $2,230,000 for the year ended December 28, 2019. See Note 20.
FISCAL YEAR END
The Company’s fiscal year-end is the Saturday nearest December 31. Fiscal 2019 and fiscal 2018 each consisted of 52 weeks.
2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE
Subsequent to the end of the third quarter, on October 9, 2019, the Company and Valco filed a Joint Notice of Settlement regarding the Company’s previously disclosed litigation, Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, filed in the United States District Court for the District of Colorado. The Settlement stated that the parties had reached a settlement agreement resolving all claims. Trial had previously been scheduled for October 21, 2019. On October 16, 2019, the Company and Valco filed a Stipulated Motion for Dismissal with Prejudice which stated: the parties “agree that this matter, including all claims and counterclaims, dismissed with prejudice and without costs, each party to bear its own attorneys’ fees.” The Court entered the Order of Dismissal with Prejudice on October 16, 2019.
As part of the Settlement, the Company agreed to pay Valco $9,000,000, which included purchase of previously leased land. There is no intention to resume mining of the property that ceased several years prior when litigation began. As the litigation claim was a known event prior to the third quarter balance sheet date, the Company recognized the portion of the agreement related to the legal settlement in its financial statements for the period ended September 28, 2019. Since the asset purchase agreement was not a known event prior to the balance sheet date it was not recorded in the financial statements for the period ended September 28, 2019. The Company used its best estimate, based on currently available information, to record an estimated loss on litigation settlement of $6,400,000 for the third quarter of 2019. During the fourth quarter of 2019, a third-party appraisal of the property was obtained which valued the land at $2,200,000. Using this valuation, the Company recorded the property purchase in the fourth quarter and revised the loss on litigation settlement to $6,800,000 for the year-ended December 28, 2019. See Note 20 for discussion of asset retirement obligation and related asset impairment related to the purchased property.
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019 |
|
December 29, 2018 |
|
||
|
Finished goods |
|
$ |
6,419 |
|
$ |
5,448 |
|
|
Work in process |
|
|
1,061 |
|
|
1,365 |
|
|
Raw materials and supplies |
|
|
6,473 |
|
|
7,993 |
|
|
|
|
$ |
13,953 |
|
$ |
14,806 |
|
If inventories valued on the LIFO basis were valued at current costs, inventories would be higher by $6,618,000 and $7,176,000 at December 28, 2019 and December 29, 2018, respectively. Reductions in inventories during 2018 resulted in liquidations of LIFO quantities by charging cost of goods sold with LIFO costs significantly below current costs. By matching these older costs with current revenues, 2018 net loss decreased by approximately $968,000, net of tax. There was not a similar significant reduction in inventory levels in 2019.
Inventory valuation reserves at December 28, 2019 and December 29, 2018 were $1,023,000 and $1,747,000, respectively. The decrease between years is due to progress made in streamlining products sold reducing the risk of excess and obsolete inventory.
33
4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS
As of December 29, 2018 the Company had recorded $1,000,000 of goodwill, not including discontinued operations goodwill of $6,229,000 that was eliminated with the sale of the ready-mix and Daniels Sand operations, related to the Door segment. During the second quarter of 2019, the Company recorded approximately $4,932,000 of goodwill related to the acquisitions of four operating businesses. See Note 18. As of December 28, 2019, the Company has recorded $5,932,000 of goodwill comprised of $3,198,000 or 54% related to the Door segment and $2,734,000 or 46% related to the HVAC segment. The Company assesses goodwill for potential impairment at the end of each year. The Company prepared a discounted cash flow analysis, based on a third party valuation of the Company’s operating units, to estimate the fair value of each reporting unit. The fair value was compared to the carrying value for each reporting unit. There was no goodwill impairment recorded, for any of the periods reported, as fair value exceeded carrying cost for each unit. If events occur or circumstances change in the relevant reporting segments or in their industries, the Company will reassess the recorded goodwill to determine if impairment has occurred. The valuation of goodwill and other intangibles is considered a significant estimate. Future economic conditions could negatively impact the value of the business which could trigger an impairment that would materially impact earnings.
Intangible assets with definite lives include trade names, intellectual property, and customer relationships. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. There were no amortizable intangible assets as of December 29, 2018. See Note 18 for additional discussion of intangible assets acquired during the current fiscal year. Amortizable intangible assets on the Consolidated Balance Sheet as of December 28, 2019 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
||
|
|
|
Amount |
|
Amortization |
|
Useful Life |
|
|||
|
Trade names |
|
$ |
3,590 |
|
|
119 |
|
|
15 years |
|
|
Intellectual property |
|
|
1,449 |
|
|
102 |
|
|
11.5 and 12.5 years |
|
|
Customer related intangible |
|
|
7,769 |
|
|
150 |
|
|
10.5 and 30.5 years |
|
|
|
|
$ |
12,808 |
|
$ |
371 |
|
|
|
|
Amortization Expense for the fiscal year ended December 28, 2019 was $371,000. The estimated amortization expense for each of the next five years is $664,000.
5. REVOLVING BANK LOAN
The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective March 16 2020. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.
The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period.
The Credit Agreement as amended provides for the following:
|
|
· |
|
The Revolving Commitment is $20,000,000. |
|
|
· |
|
Borrowings under the Revolving Commitment are limited to (a) 85% of eligible accounts receivable, (b) the lesser of 60% of eligible inventories and $8,500,000. |
|
|
· |
|
Financial Covenants include: |
|
|
o |
|
Minimum EBITDA for the three months ending March 31, 2020 must exceed $(525,000) |
34
|
|
o |
|
Minimum EBITDA for the three months ending June 30, 2020 must exceed $265,000 |
|
|
o |
|
The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.06 to 1.0 for each computation period measured at the end of each fiscal quarter, provided that the Fixed Charge Coverage Ratio shall not be tested if the average daily Excess Availability during the Fiscal Quarter exceeds $5,000,000. A computation period is the nine months ending September 30, 2020 or twelve months for all subsequent fiscal quarters. |
|
|
· |
|
The maturity date of the credit facility is May 1, 2023. |
|
|
· |
|
Interest rate pricing for the revolving credit facility is currently LIBOR plus 2.0% or the prime rate. |
Definitions under the Credit Agreement as amended are as follows:
|
|
· |
|
Fixed Charge Coverage Ratio means, for any Computation Period, the ratio of (a) the sum (without duplication) for such period of (i) EBITDA, minus (ii) income taxes paid in cash by the Loan Parties, minus (iii) all unfinanced Capital Expenditures, minus (iv) all amounts paid in cash in respect of any Permitted Capital Securities Repurchase, to (b) the sum for such period of (i) cash Interest Expense, plus (ii) scheduled payments of principal of Funded Debt (excluding the Revolving Loans), plus (iii) cash payments made in respect of Capital Leases, plus (iv) the amount by which reclamation or similar costs paid in such period exceed the cash proceeds received from the sale of quarry assets and cash refunds of escrow balances; provided, however that for purposes hereof, to the extent during any period there are excess cash proceeds from the sale of quarry assets after netting such proceeds against the reclamation or similar costs in such period, such excess cash proceeds may be carried forward and netted against the reclamation or similar costs in a later period, plus (v) all amounts paid in respect of any earnout or other deferred payment in connection with any Permitted Acquisition. |
|
|
· |
|
EBITDA means, for any Computation Period (or another time period to the extent expressly provided herein), the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP: |
|
|
· |
|
Consolidated Net Income, plus (without duplication) each of the following items to the extent deducted in determining such Consolidated Net Income: |
|
|
i. |
|
federal, state and other income taxes deducted in the determination of Consolidated Net Income; |
|
|
ii. |
|
Interest Expense deducted in the determination of Consolidated Net Income; |
|
|
iii. |
|
depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income; |
|
|
iv. |
|
non-recurring fees and costs paid by the Company and its Subsidiaries in respect of the following: (i) fees, expenses (including legal fees and expenses) and due diligence costs associated with Permitted Acquisitions, whether or not consummated; (ii) legal fees and costs associated with the Valco trial preparation; (iii) fees, costs and expenses (including legal fees and expenses) in connection with the amendment and restatement of this agreement and all matters reasonably related thereto; (iv) fees, costs and expenses (including legal fees and expenses) in connection with the purchase of Capital Securities of the Company by Bee Street Holdings LLC or a Subsidiary thereof and transactions and other matters reasonably related thereto; (v) additional fees and costs associated with the exploration of the Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the sustainability for mining and the pursuit of mining permits; and (vi) fees, costs and expenses in connection with reclamation or similar transactions related to the sale of quarry assets; |
|
|
v. |
|
any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill); and |
|
|
vi. |
|
the amount of any earnout or other deferred payment paid in connection with any Permitted Acquisition; minus |
|
|
· |
|
any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income |
Outstanding funded revolving debt was $800,000 as of December 28, 2019 compared to $2,200,000 as of December 29, 2018. The highest balance outstanding during 2019 and 2018 was $3,700,000 and $9,800,000 respectively. Average outstanding funded debt was $313,000 and $6,058,000 for 2019 and 2018, respectively. At
35
December 28, 2019, the Company had outstanding letters of credit (LOC) totaling $5,620,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future. The Company was not in compliance with the Fixed Coverage Charge Ratio as of December 28, 2019. The lender provided a waiver of the covenant violation for the period ended December 28, 2019.
The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including planned capital expenditures, for the next twelve months. The Company expects to be in compliance with all debt covenants, as amended, throughout the facility’s remaining term.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters related to its business. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations, cash flows or financial condition as the Company has established adequate accruals for matters that are probable and estimable. The Company does not accrue estimated future legal costs related to the defense of these matters but rather expenses legal costs as incurred. Also see Note 2 for discussion of litigation settlement regarding the Pueblo sand and gravel lease.
7. SHAREHOLDERS’ EQUITY
Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued.
Under the 2010 Non-Employee Directors Stock Plan (the “Plan”) the Company reserved 150,000 treasury shares representing the maximum number of shares allowed to be granted to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 16,998 shares to the six eligible board members effective December 13, 2019 as partial payment for their 2020 retainer fee. The Company issued a total of 21,000 shares to the seven eligible board members effective February 7, 2019 as full payment for their 2019 retainer fee. The Company issued a total of 16,000 shares to the eight eligible board members effective January 16, 2018 as full payment for their 2018 retainer fee.
8. EARNINGS PER SHARE
The Company does not have any common stock equivalents, warrants or other convertible securities outstanding; therefore, there are no differences between the calculation of basic and diluted EPS for the reported fiscal years 2019 or 2018.
9. RENTAL EXPENSE, LEASES AND COMMITMENTS
The Company adopted ASU No. 2016-02 Leases (Topic 842) on December 30, 2018 (the beginning of fiscal 2019), resulting in the recognition of operating right-of-use assets of $5,353,000 and operating lease liabilities of $5,427,000. The Company has entered into lease arrangements for office space, manufacturing facilities, water rights and certain equipment. A number of the leases include one or more options to renew the lease terms, purchase the leased property or terminate the lease. The exercise of these options is at the Company’s discretion and is therefore recognized on the balance sheet when it is reasonably certain the Company will exercise such options.
Substantially all of the Company’s leases are considered operating leases. Finance leases were not material as of December 28, 2019 or for the year ended December 28, 2019. The following table displays the undiscounted cash flows
36
related to operating leases as of December 28, 2019, along with a reconciliation to the discounted amount recorded on the December 28, 2019 Consolidated Balance Sheet (amounts in thousands):
|
|
|
|
|
|
|
|
|
OPERATING |
|
|
|
|
|
LEASE |
|
|
|
|
|
LIABILITIES |
|
|
|
2020 |
|
$ |
1,402 |
|
|
2021 |
|
|
1,389 |
|
|
2022 |
|
|
1,307 |
|
|
2023 |
|
|
761 |
|
|
2024 |
|
|
255 |
|
|
Thereafter |
|
|
655 |
|
|
Total lease payments |
|
|
5,769 |
|
|
Less: interest |
|
|
(608) |
|
|
Present value of operating lease liabilities |
|
$ |
5,161 |
|
Short-term lease cost represents the Company’s cost with respect to leases with a duration of 12 months or less and are not reflected on the Company’s Consolidated Balance Sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For the year ended December 28, 2019 operating lease cost was $1,979,000, including $623,000 of short-term lease costs.
New leases entered into during the year ended December 28, 2019 resulted in the recognition of operating right-of-use assets and lease liabilities of $665,000 and $572,000, respectively. At December 28, 2019 the weighted-average remaining lease term and discount rate for operating leases was 4.65 years and 6.02%, respectively.
The commitments include amounts expected to be reimbursed to the Company by related party tenants as discussed in Note 13. These related party amounts for 2020 through 2024 are as follows: 2020 – $67,000; 2021 – $68,000; 2022 – $69,000; 2023 – $70,000 and 2024 - $71,000.
10. RETIREMENT PLANS
As discussed in Note 1, the Company maintains a defined contribution retirement benefit plan for eligible employees. Total plan expenses charged to continuing operations were $945,000 and $951,000 in 2019 and 2018, respectively.
11. CURRENT ECONOMIC CONDITIONS
The markets for products manufactured or fabricated by the HVAC and Door segments are expected to remain fairly constant compared with the 2019 levels although sales of fan coils in the HVAC segment are anticipated to grow as construction spending continues to increase during 2020. While general economic indicators are favorable for growth there are significant uncertainties around global trade and public health, particularly with COVID-19 impact uncertainties, which may adversely impact 2020 sales.
As has historically been the case, sales of all segments, other than the Door segment, are influenced by weather conditions.
12. INCOME TAXES
Income taxes are accounted for under the asset and liability method which requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and
37
negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.
The (benefit) provision for income taxes is summarized as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
||
|
Federal: Current |
|
$ |
(66) |
|
$ |
(387) |
|
|
Deferred |
|
|
(3,449) |
|
|
(1,454) |
|
|
State: Current |
|
|
3 |
|
|
1 |
|
|
Deferred |
|
|
(804) |
|
|
(345) |
|
|
|
|
$ |
(4,316) |
|
$ |
(2,185) |
|
The benefit for income taxes for 2019 and 2018 included a benefit of $5,396,000 and $2,500,000 for continuing operations and a provision of $1,080,000 and $315,000, respectively, for discontinued operations.
The percentage effect of an item on the statutory tax rate in a given year will fluctuate based upon the magnitude of the pre-tax profit or loss in that year. The difference between the tax rate on income for financial statement purposes and the federal statutory tax rate was as follows:
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
|
Statutory tax rate |
|
(21.0) |
% |
(21.0) |
% |
|
Percentage depletion |
|
— |
|
(0.9) |
|
|
Non-deductible expenses |
|
0.1 |
|
0.4 |
|
|
Valuation allowance for tax assets |
|
0.5 |
|
1.2 |
|
|
State income taxes, net of federal benefit |
|
(4.5) |
|
(4.5) |
|
|
Other |
|
1.2 |
|
(2.4) |
|
|
|
|
(23.7) |
% |
(27.2) |
% |
38
For financial statement purposes, deferred tax assets and liabilities are recorded at 25.74%, which represents a blend of the current statutory federal and states’ tax rates. The principal temporary differences and their related deferred taxes are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
2018 |
|
||
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Reserves for self-insured losses |
|
$ |
417 |
|
$ |
466 |
|
|
Accrued reclamation |
|
|
1,972 |
|
|
1,445 |
|
|
Unfunded supplemental profit sharing plan liability |
|
|
431 |
|
|
263 |
|
|
Asset valuation reserves |
|
|
439 |
|
|
685 |
|
|
Future state tax credits |
|
|
833 |
|
|
833 |
|
|
Net state operating loss carryforwards |
|
|
812 |
|
|
226 |
|
|
Federal AMT carryforward |
|
|
116 |
|
|
387 |
|
|
Federal NOL carryforward |
|
|
3,226 |
|
|
468 |
|
|
Other |
|
|
939 |
|
|
700 |
|
|
|
|
|
9,185 |
|
|
5,473 |
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
833 |
|
|
1,200 |
|
|
Deferred development |
|
|
— |
|
|
116 |
|
|
Other |
|
|
285 |
|
|
443 |
|
|
|
|
|
1,118 |
|
|
1,759 |
|
|
Net deferred tax asset before valuation allowance |
|
|
8,067 |
|
|
3,714 |
|
|
Valuation allowance |
|
|
|
|
|
|
|
|
Beginning balance |
|
|
(300) |
|
|
(200) |
|
|
(Increase) decrease during the period |
|
|
(100) |
|
|
(100) |
|
|
Ending Balance |
|
|
(400) |
|
|
(300) |
|
|
Net deferred tax asset |
|
$ |
7,667 |
|
$ |
3,414 |
|
The deduction of charitable contributions made during 2019 and 2018 was limited by the level of taxable income; however, no valuation reserve was established for the amount carried forward as the Company expects to be able to utilize these deductions in future years. The Tax Act repealed AMT and allows any existing AMT credit carryforwards to be used to offset regular tax obligations for a three year period beginning in 2018. Any AMT credit carryforwards that are not utilized to offset regular tax obligations will be 100 percent refundable by 2021. For State purposes, net operating losses can be carried forward for various periods for the states that the Company is required to file in. Of the $833,000 of state tax credits recorded by the Company at December 28, 2019 and December 29, 2018, $797,000 relates to California Enterprise Zone hiring credits earned in prior years. California has repealed the credit and limited its use to tax years through 2023. At December 28, 2019 and December 29, 2018 the Company carried a valuation reserve of $556,000 ($400,000 tax effected) and $430,000 ($300,000 tax effected), respectively, related to the carry forward of the California Enterprise Zone hiring credits due to the uncertainty that the Company will be able to utilize the credits prior to their expiration in 2023.
The realization of the deferred tax assets is subject to our ability to generate sufficient taxable income during the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, we consider all available positive and negative evidence, including prior operating results, the nature and reason of any losses, our forecast of future taxable income and the dates, if any, on which any deferred tax assets are expected to expire. These assumptions require a significant amount of judgment, including estimates of future taxable income. The estimates are based on our best judgment at the time made based on current and projected circumstances and conditions.
As a result of the evaluation of the ability to realize our deferred tax assets as of December 28, 2019, we concluded that it was more likely than not that all of our deferred tax assets would be realized to the extent not reserved for by a valuation allowance.
The Company accounts for uncertainty in income taxes recognized in its financial statements by applying GAAP’s recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax
39
position taken or expected to be taken in a tax return. The financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold should initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon effective settlement with a taxing authority. There were no unrecognized tax benefits at either December 28, 2019 or December 29, 2018.
We file income tax returns in the United States at the Federal level and with various state jurisdictions. Federal and state income tax returns are subject to examination based upon the statute of limitations in effect for the various jurisdictions.
13. RELATED PARTY TRANSACTIONS
A director of the Company is a partner in a law firm engaged to represent the Company in various legal matters including the lawsuit filed by the Company related to the sand and gravel lease which settled in October 2019. See Note 2. For the year ending December 28, 2019 the Company paid the director’s firm $826,000 for services rendered. During fiscal 2018 the same director’s firm was paid $474,000 for services rendered.
The corporate office leases space in Chicago, Illinois that is shared with another organization related to the Company’s principal shareholders. Each of the organizations pays its pro-rata share of rent and other expenses based on a square footage allocation. See Note 9 for additional discussion. Furthermore, the Company purchases certain insurance together with another company controlled by the Company’s principal shareholders to minimize insurance costs. Allocation of the expense of the program is either provided by the underwriter or based upon a formula that considers, among other things, sales levels, loss exposure and claim experience. Claims under the self-insured portion of the policies are charged directly to the incurring party. Amounts receivable from related organizations at December 28, 2019 and December 29, 2018 were $13,000 and $28,000, respectively.
14. UNAUDITED QUARTERLY FINANCIAL DATA
The following table and footnotes provide summarized unaudited fiscal quarterly financial data for 2019 and 2018 (amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
22,528 |
|
$ |
25,257 |
|
$ |
31,987 |
|
$ |
33,504 |
|
|
Gross profit |
|
|
4,681 |
|
|
3,722 |
|
|
7,535 |
|
|
8,615 |
|
|
Depreciation, depletion and amortization |
|
|
519 |
|
|
254 |
|
|
597 |
|
|
592 |
|
|
Net income (loss) |
|
|
13,322 |
|
|
(4,836) |
|
|
(20,284) |
|
|
(2,100) |
|
|
Basic and diluted income (loss) per share |
|
|
7.80 |
|
|
(2.82) |
|
|
(11.85) |
|
|
(1.23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
23,410 |
|
$ |
25,557 |
|
$ |
23,965 |
|
$ |
27,955 |
|
|
Gross profit |
|
|
5,006 |
|
|
5,974 |
|
|
5,225 |
|
|
6,649 |
|
|
Depreciation, depletion and amortization |
|
|
405 |
|
|
405 |
|
|
393 |
|
|
269 |
|
|
Net (loss) income |
|
|
(6,193) |
|
|
2,113 |
|
|
(1,236) |
|
|
(540) |
|
|
Basic and diluted (loss) income per share |
|
|
(3.65) |
|
|
1.24 |
|
|
(0.73) |
|
|
(0.32) |
|
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year.
40
15. INDUSTRY SEGMENT INFORMATION
In the first quarter of 2019, the Company reviewed its reporting structure in connection with the sale of the TMC ready-mix and Daniels Sand operating assets. Reporting segments were modified to conform to the way management measures and evaluates Company performance post-sale. The Company operates primarily in the Building Supplies industry group and has identified three reporting segments within this industry group. The HVAC segment produces and sells a variety of products including wall furnaces, fan coils, evaporative coolers, boiler room equipment and dryer boxes and related accessories from the Company’s wholly-owned subsidiaries, Williams Furnace Co. (WFC) of Colton, California, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona, Global Flow Products /American HVAC (GFP) of Broken Arrow, Oklahoma, and InOvate Dryer Technologies (InOvate) of Jupiter, Florida. Sales of this segment are nationwide although WFC and PMI sales are more concentrated in the southwestern United States. The Door segment sells hollow metal and wood doors, door frames and related hardware, sliding door systems and electronic access and security systems from the Company’s wholly-owned subsidiaries, McKinney Door and Hardware, Inc. (MDHI), Fastrac Building Supply (Fastrac) and Serenity Sliding Door Systems (Serenity), which operate out of facilities in Pueblo and Colorado Springs, Colorado. Sales of this segment are concentrated in Colorado, California and the Northwestern United States although door sales are also made throughout the United States. The Construction Materials segment offers construction supplies from locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries, Castle Aggregates and Castle Rebar & Supply of Colorado Springs, and TMOP Legacy Company (formerly Transit Mix of Pueblo, Inc.) of Pueblo, Colorado (the three companies collectively are referred to as the Castle Companies). During the quarter ended September 28, 2019 the Company determined to cease mining operations at its Pikeview aggregates quarry, which is part of the Construction Materials segment, as continuing mining operations was no longer in the best interest of the consolidated portfolio. During the fourth quarter of 2019, the Company purchased a formerly leased mining property in Pueblo, Colorado as part of a legal settlement. See Note 2 for further discussion of the legal settlement. In conjunction with both of these events, the Company recognized charges to record additional asset retirement liabilities and impairment of related assets associated with the properties. See Note 20 for further discussion. The Company expects an outside party to complete most of the remaining reclamation over approximately the next five years.
The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.
In addition to the above reporting segments, an “Unallocated Corporate” classification is used to report the unallocated expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office.
The following table presents information about reported segments for the fiscal years 2019 and 2018 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
Construction |
|
Unallocated |
|
Held for |
|
|
|
||||||
|
Year Ended December 28, 2019 |
|
HVAC |
|
Doors |
|
Materials |
|
Corporate (a) |
|
Sale |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
82,149 |
|
$ |
24,369 |
|
$ |
6,751 |
|
$ |
7 |
|
|
|
|
$ |
113,276 |
|
|
Depreciation, depletion and amortization |
|
|
1,272 |
|
|
285 |
|
|
321 |
|
|
84 |
|
|
|
|
|
1,962 |
|
|
Operating income (loss) |
|
|
948 |
|
|
2,174 |
|
|
(18,492) |
|
|
(7,475) |
|
|
|
|
|
(22,845) |
|
|
Segment assets |
|
|
50,822 |
|
|
14,248 |
|
|
10,463 |
|
|
13,554 |
|
|
896 |
|
|
89,983 |
|
|
Capital expenditures |
|
|
342 |
|
|
79 |
|
|
2,257 |
|
|
15 |
|
|
|
|
|
2,693 |
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
Construction |
|
Unallocated |
|
Held for |
|
|
|
||||||
|
Year Ended December 29, 2018 |
|
HVAC |
|
Doors |
|
Materials |
|
Corporate (a) |
|
Sale |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
73,478 |
|
$ |
20,158 |
|
$ |
7,150 |
|
$ |
101 |
|
|
|
|
$ |
100,887 |
|
|
Depreciation, depletion and amortization |
|
|
949 |
|
|
171 |
|
|
301 |
|
|
51 |
|
|
|
|
|
1,472 |
|
|
Operating income (loss) |
|
|
931 |
|
|
2,233 |
|
|
(7,878) |
|
|
(4,050) |
|
|
|
|
|
(8,764) |
|
|
Segment assets |
|
|
29,003 |
|
|
8,003 |
|
|
11,315 |
|
|
3,346 |
|
|
24,036 |
|
|
75,703 |
|
|
Capital expenditures |
|
|
1,064 |
|
|
119 |
|
|
181 |
|
|
45 |
|
|
|
|
|
1,409 |
|
|
|
(a) |
|
Includes unallocated corporate office expenses and assets which consist primarily of cash and cash equivalents, prepaid expenses, property, plant and equipment. |
16. WRITE OFF OF DEFERRED DEVELOPMENT
During July 2015, TMC began development of a granite mining property south of Colorado Springs. Prior to beginning the development process, the Company deposited $2,500,000 in an escrow account per agreement with the land owner. This amount was previously included in Other long-term assets on the Consolidated Balance Sheet. The development costs included drilling the property to ascertain its suitability for mining, engineering studies and legal expenses related to the preparation of an application to obtain the required mining permits from the State of Colorado and El Paso County.
TMC made its initial application for a mining permit from the state of Colorado in 2016. TMC filed its second application to the state in November 2017, which was rejected on April 26, 2018. The Company wrote off all capitalized costs associated with the permit application in the first half of 2018, a total of $6,840,000.
As of December 28, 2019 and December 29, 2018 the escrow balance mentioned above was included in Other current assets as the Company has begun the process to settle the account and recover the funds.
17. SETTLEMENT RECEIPT
As previously disclosed, on January 15, 2019, the Company reached an amicable resolution to a business dispute by way of a settlement agreement. Pursuant to the settlement agreement, the Company received $15,000,000. The other party and the Company further agreed to set up a joint escrow account to support certain conditions in the agreement. The Company’s contribution to the escrow account was $218,000. The Settlement Agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.
18. ACQUISITIONS
During the year ended December 28, 2019 the Company completed three different asset purchase transactions, acquiring the assets of four operating businesses. On May 20, 2019 the Company acquired the assets of Serenity and Fastrac, both based in Colorado Springs, Colorado, using available cash reserves. Serenity is a proprietary sliding door system providing superior sound attenuation, sold primarily into healthcare markets across the country. Fastrac is a leading supplier of commercial doors and hardware to healthcare and hospitality customers across the country. Serenity continues to operate as a stand-alone business while Fastrac operations were consolidated with the Company’s existing portfolio company, McKinney Door and Hardware, which has similar operations. The results of the acquisition of Serenity and Fastrac are included in the Company’s Consolidated Financial Statements from the date of acquisition. Both companies are included in the Door segment for reporting purposes.
On June 3, 2019 the Company acquired the assets of American Wheatley HVAC and Global Flow Products (together “GFP”), based in Broken Arrow, Oklahoma using available cash reserves. GFP sells American Wheatley HVAC branded products, including a broad line of ASME pressure vessels, custom fabricated products, valves, strainers and other hydronic accessories to commercial HVAC customers. The results of the acquisition of GFP are included in the Company’s Consolidated Financial Statements from the date of acquisition. GFP is included in the HVAC segment for reporting purposes.
42
These two transactions are not considered material individually. However, they are considered material in the aggregate. The total purchase price paid for these transactions was $12,855,000, which included a traditional post-closing working capital adjustment for $608,000, with approximately $12,163,000 paid in cash at closing. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of earn out agreements in amounts of up to $4,300,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired businesses following the closing of the transactions over a period of twenty-four (24) to thirty-six (36) months. Approximately $1,300,000 has been accrued based on estimated fair values of these earn out agreements. We acquired trade receivables of $1,916,000, inventory of $1,745,000, property and equipment of $2,530,000, other assets of $256,000, intangibles of $4,000,000 and goodwill of $3,614,000 and retained liabilities of $1,205,000. The current value assigned to trade receivables represents fair market value. The working capital adjustment has been finalized on both transactions and final valuation of the fair value of assets and liabilities including receivables, inventory, fixed assets, intangibles, goodwill and accounts payable has been recorded as of December 28, 2019. Transaction costs included in Selling and administrative expenses on the Consolidated Statements of Operations for the year ended December 28, 2019 was $1,229,000.
On June 17, 2019 the Company acquired the assets of InOvate, a supplier of commercial and residential dryer and HVAC venting systems and components. The total purchase price for the net assets acquired was $11,206,000, including a post-closing working capital adjustment of $84,000, with approximately $11,050,000 paid in cash at closing, using available cash reserves. The Company will pay additional contingent consideration, if earned, in the form of an earn out amount pursuant to the terms of an earn out agreement in an amount of up to $1,250,000, the payment of which is subject to certain conditions and the successful achievement of gross profit growth targets for the acquired business following the closing of the transaction over a period of twelve (12) months. Approximately $240,000 has been accrued based on an estimated fair value of this earn out agreement. The results of the acquisition of InOvate are included in the Company’s Consolidated Financial Statements from the date of acquisition. Transaction costs included in Selling and administrative expense on the Consolidated Statement of Operations for the year ended December 28, 2019 were $536,000.
In accordance with GAAP, the total purchase price has been allocated to the tangible and intangible net assets acquired based on their fair values. The working capital adjustment was finalized in the fourth quarter of 2019. The condensed balance sheet of InOvate at the acquisition date was as follows:
|
|
|
|
|
|
Purchase price |
|
$ |
11,206 |
|
|
|
|
|
|
Accounts receivable, net |
|
|
1,448 |
|
Other tangible assets |
|
|
984 |
|
Intangible assets |
|
|
8,808 |
|
Right of use asset |
|
|
387 |
|
Accounts payable and accrued expenses |
|
|
(1,353) |
|
Right of use liability |
|
|
(387) |
|
Total identifiable net assets |
|
|
9,887 |
|
Goodwill |
|
$ |
1,319 |
Accounts receivable are valued at anticipated fair market value and are not materially different from contracted value.
The following table presents selected unaudited pro forma information for the Company assuming the acquisition of InOvate had occurred as of December 31, 2017. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
||||
|
|
|
DECEMBER 28, |
|
DECEMBER 29, |
||
|
|
|
2019 |
|
2018 |
||
|
Revenue |
|
$ |
120,439 |
|
$ |
114,535 |
|
Pre-tax loss from continuing operations |
|
$ |
(21,505) |
|
$ |
(7,127) |
|
Basic and diluted loss per share: |
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(9.59) |
|
$ |
(3.04) |
|
Average shares outstanding |
|
|
1,711 |
|
|
1,697 |
43
Per ASC 805, the chart below summarizes the comparative financial statements for revenue and earnings as if all the acquisitions occurred at the beginning of the respective period.
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
||||
|
|
|
DECEMBER 28, |
|
DECEMBER 29, |
||
|
|
|
2019 |
|
2018 |
||
|
Revenue |
|
$ |
129,615 |
|
$ |
126,613 |
|
Pre-tax loss from continuing operations |
|
$ |
(19,325) |
|
$ |
(4,838) |
Revenue of the acquired companies’ increased total revenue by 18.5% for the year ended 2019. The impact of the acquired companies on earnings for the current year was not material. Total goodwill added to the Consolidated Balance Sheet due to acquisition activity during fiscal 2019 was $4,932,000. The goodwill is attributable to the skills and technical talent of the established work force at each of the acquired businesses and synergies expected to be achieved from integrating the individual acquired business operations in to the Company’s existing consolidated business portfolio. This amount is attributable to the HVAC and Door segments in the amounts of $2,734,000 and $2,198,000, respectively. Goodwill that is deductible for tax purposes, over the next fifteen years, is $3,092,000. The goodwill amounts were finalized in the fourth quarter of 2019.
19. DISPOSITIONS OF ASSETS
On February 1, 2019, the Company and certain of its subsidiaries sold substantially all of the real property, tangible personal property and executory contracts of TMC’s ready-mix business and the operations of Daniels Sand Company (Daniels) to Aggregate Industries — WCR, Inc. (the Buyer), a Colorado corporation, for $27,129,000. The purchase price was paid to the Company on February 1, 2019 less certain amounts to be held in escrow, as provided in the Asset Purchase Agreement among the Company parties and the Buyer (Purchase Agreement), to secure the Company’s obligations to pay its working capital adjustment and indemnification obligations under the Purchase Agreement. The escrow also retained amounts to be held pending the subdivision of certain real property to be sold to the Buyer at a subsequent date as included in the Purchase Agreement. Combined escrow amounts of $2,049,000 were included in Other current assets in the Consolidated Balance Sheet at December 28, 2019.
The Company retained the aggregates operations and retail building materials business of TMC and all related assets and liabilities. These operations include the Pikeview quarry business located in Colorado Springs (see Note 20), the aggregates mining business located in Pueblo, the sand and gravel mining business located in Fremont County, and the retail building materials business at sites located in Colorado Springs and Pueblo.
In the quarter ended March 30, 2019, the Company recorded a $6,508,000 pre-tax gain on the sale of TMC assets. During the quarter ending June 29, 2019 the working capital adjustment was finalized and resulted in the Company paying a net $1,248,000 to the Buyer. This adjustment, plus an adjustment to transaction fees, reduced the pre-tax gain on the sale to $5,283,000. The operations of the ready-mix and Daniels Sand businesses were classified as discontinued
operations and assets held for sale for all periods presented. General corporate overhead charges were not allocated to discontinued operations. Revenue, expenses and pre-tax income reclassified to discontinued operations were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
||||
|
|
DECEMBER 28, |
|
DECEMBER 29, |
|
||
|
|
2019 |
|
2018 |
|
||
|
Revenue |
$ |
4,058 |
|
$ |
63,096 |
|
|
Costs and expenses |
|
3,900 |
|
|
58,143 |
|
|
Depreciation, depletion and amortization |
|
578 |
|
|
1,161 |
|
|
Selling and administrative |
|
304 |
|
|
3,550 |
|
|
Gain on sales of equipment |
|
- |
|
|
919 |
|
|
Gain on sale of assets |
|
5,283 |
|
|
- |
|
|
Pre-tax income |
$ |
4,559 |
|
$ |
1,161 |
|
44
The results of discontinued operations are summarized as follows:
|
|
|
|
|
|
|
|
|
Year Ended |
||||
|
|
DECEMBER 28, |
|
DECEMBER 29, |
||
|
|
2019 |
|
2018 |
||
|
Operating (loss) income |
$ |
(724) |
|
$ |
1,161 |
|
Gain on sale of assets |
|
5,283 |
|
|
— |
|
Income tax provision |
|
(1,080) |
|
|
(315) |
|
Income from discontinued operations |
$ |
3,479 |
|
$ |
846 |
The assets and liabilities held for sale related to TMC’s ready-mix and Daniels Sand businesses were as follows:
|
|
|
|
|
|
|
|
|
|
DECEMBER 28, |
|
DECEMBER 29, |
|
||
|
|
2019 |
|
2018 |
|
||
|
Accounts receivable, net |
$ |
— |
|
$ |
9,054 |
|
|
Inventory |
|
— |
|
|
1,914 |
|
|
Property, plant and equipment, net |
|
— |
|
|
6,741 |
|
|
Other assets |
|
— |
|
|
6,327 |
|
|
Total assets held for sale |
$ |
— |
|
$ |
24,036 |
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
$ |
|
|
$ |
3,800 |
|
|
Other long-term liabilities |
|
— |
|
|
292 |
|
|
Total liabilities held for sale |
$ |
— |
|
$ |
4,092 |
|
20. ARO ASSET/LIABILITY
During the third quarter of fiscal year ended December 28, 2019, the Company made a strategic decision to cease mining operations at its Pikeview quarry in Colorado Springs, Colorado, as it was no longer in the best economic interest of the consolidated portfolio to continue operations. The Company has a legal obligation to complete reclamation of the property as required by its mining permits with the State of Colorado. GAAP requires the recognition of a liability in the period in which it is incurred if a reasonable estimate of fair value can be made. Prior to the cessation of mining operations, reclamation was performed concurrently by backfilling mined areas with overfill from current mining. The reclamation costs were reported as operating expense as the Company could not reasonably estimate the ultimate liability of final reclamation. Once the Company ceased mining operations and could reasonably estimate the cost of final reclamation, an asset retirement obligation (ARO), was recorded as of September 29, 2019 and revised at December 28, 2019. The ARO liability of $20,804,000 represents the estimated fair value of total reclamation costs using Level 3 inputs. The fair value of the liability was calculated by applying an expected present value technique using estimated cash flows over a period of time and then discounting the expected cash flows using a credit-adjusted risk-free interest rate. The related ARO asset was considered 100% impaired as total carrying value including future costs to maintain and dispose of the asset will exceed the fair value. Therefore, the Company also recorded an impairment charge of $20,217,000 related to the asset.
In the fourth quarter of 2019, the Company settled its litigation with Valco regarding the Transit Mix of Pueblo (TMOP) mining operation. See Note 2 for discussion of the settlement. As part of the settlement agreement, the Company purchased the land it previously leased from Valco. Once the Company took possession of the property with no plan to resume mining it was able to reasonably estimate the final cost of reclamation. A valuation was completed and resulted in the Company recording a $6,660,000 ARO liability and offsetting ARO asset during the fourth quarter of 2019. The asset was considered fully impaired as its carrying value exceeded the estimated undiscounted future cash inflows. The Company had previously recorded a $4,430,000 accrual for reclamation at TMOP which was eliminated. Therefore, the net impact of the impairment on the Consolidated Statement of Operations for the year ended December 28, 2019 was $2,230,000.
45
The following table details activity related to the Company’s ARO liabilities for fiscal years 2019 and 2018 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
DECEMBER 28, |
|
DECEMBER 29, |
|
||
|
|
2019 |
|
2018 |
|
||
|
Beginning balance |
$ |
6,269 |
|
$ |
6,166 |
|
|
Obligations incurred |
|
21,455 |
|
|
103 |
|
|
Accretion expense |
|
189 |
|
|
- |
|
|
Ending balance |
|
27,913 |
|
|
6,269 |
|
|
Less current portion |
|
4,200 |
|
|
1,017 |
|
|
Long-term portion |
$ |
23,713 |
|
$ |
5,252 |
|
In connection with the Company’s decision to cease mining activities, management performed a review of remaining assets to determine which, if any, should be classified as assets held for sale (AHS). Based on this review a total of $896,000, previously reported as Machinery and equipment on the Consolidated Balance Sheet, has been reclassified as AHS as of December 28, 2019. The net book value of the AHS was considered to be at or below fair market value, thus there was no impact to the Consolidated Statement of Operations from the reclassification.
21. VALUE CREATION INCENTIVE PLAN
The Company adopted the Continental Materials Corporation Value Creation Incentive Plan (VCIP) effective July 1, 2019. The VCIP is designed to attract and retain key management personnel by providing an incentive and reward for selected executive officers and employees of the Company. The VCIP involves only the payment of cash, not the issuance of common stock, based on appreciation of Phantom Equity or Phantom Equity Appreciation Rights (PE or PEARs, respectively) of the defined business unit, over a certain period of time. Fair value of the PE or PEAR awards was measured as of the balance sheet date presented. The awards vest over a period of four or five years and are payable over a three-year period following vesting. At December 28, 2019 total future compensation expense related to unvested awards yet to be recognized by the Company was approximately $1,635,000. This expense is expected to be recognized over a weighted-average remaining vesting period of approximately 4.1 years.
The Company used the Black-Scholes option pricing model as its method for determining fair value of the awards. The compensation expense related to the awards is recognized over the vesting period for each award. For the year ended December 28, 2019 the Company’s net loss included $204,000 of stock-based compensation. The total liability related to the PE and PEAR awards was $496,000, which includes $292,000 from an acquisition recorded at the opening balance sheet date, and is included as Long-term compensation on the Consolidated Balance Sheet as of December 28, 2019.
22. FAIR VALUE MEASUREMENT
PE and PEAR awards were recorded at fair value using the Black-Scholes option pricing model. There were no PE or PEAR appreciation awards at December 29, 2018. The following assumptions were used in determining the fair value of the award liability as of December 28, 2019:
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
1.67% |
|
|
Dividend rate |
|
|
0.00% |
|
|
Volatility range |
|
|
25% - 37% |
|
|
Weighted average expected term (years) |
|
|
4.1 |
|
The following table is a reconciliation for the PE and PEAR liability measured at fair value using Level 3 unobservable inputs (in thousands):
|
|
|
|
|
|
|
Balance at December 29, 2018 |
|
$ |
- |
|
|
Awards related to acquired companies |
|
|
300 |
|
|
Change due to vesting of awards granted |
|
|
331 |
|
|
Change in fair value measurement of liability |
|
|
(135) |
|
|
Balance at December 28, 2019 |
|
$ |
496 |
|
46
Contingent consideration was recorded at fair value using a Monte Carlo Simulation model. There was no contingent consideration liability at December 29, 2018. The following assumptions were used in determining the fair value of contingent consideration at December 28, 2019:
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
1.6% - 2.3% |
|
|
Expected term (years) |
|
|
.4 - 3.2 |
|
The following table is a reconciliation for the contingent consideration liability measured at fair value using Level 3 unobservable inputs (in thousands):
|
|
|
|
|
|
|
Balance at December 29, 2018 |
|
$ |
- |
|
|
Contingent consideration granted with acquisitions |
|
|
1,540 |
|
|
Change in fair value measurement of liability |
|
|
(58) |
|
|
Balance at December 28, 2019 |
|
$ |
1,482 |
|
The ARO liabilities were recorded at fair value using an expected present value technique. The following assumptions were used in determining the fair value of the ARO liabilities at December 28, 2019:
|
|
|
|
|
|
|
Credit adjusted risk-free interest rate |
|
|
3.66% |
|
|
Expected term (years) |
|
|
4.7 |
|
23. SUBSEQUENT EVENT
On February 18, 2020, Bee Street Holdings LLC (Bee Street), commenced an unsolicited tender offer for all outstanding shares of Common Stock of the Company (Common Stock) not already owned by Bee Street. Bee Street is an entity controlled by James G. Gidwitz, our chairman and Chief Executive Officer, and other members of Mr. Gidwitz’ s family. As of February 17, 2020, Bee Street beneficially owned 1,027,171, or approximately 61.3%, of the outstanding shares of Common Stock. Bee Street is offering to purchase all outstanding shares of Common Stock that Bee Street does not already own for $9.50 per share, net to the seller in cash, without interest, subject to applicable withholding taxes. Additional information about the tender offer is available in Bee Street’s and the Company’s SEC filings, including the Company’s Schedule 14D-9 filed on March 3, 2020. The offer is subject to certain conditions set forth in Bee Street’s tender offer documents. Bee Street has stated that if it purchases shares of Common Stock in the tender offer such that it will own at least 90% of the issued and outstanding Common Stock, Bee Street (or its affiliate), intends to merge with the Company (the “Merger”). As a result of the Merger, each then issued and outstanding share of Common Stock (other than Common Stock held by Bee Street and held by stockholders who validly perfect their dissenters’ rights under the Delaware General Corporation Law) would be cancelled and converted into and represent the right to receive $9.50 per share.
47
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
Continental Materials Corporation
Chicago, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Continental Materials Corporation as of December 28, 2019 and December 29, 2018, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the two-year period ended December 28, 2019, and the related notes and schedule listed in the Form 10-K index at Part IV, item 15 (a)2 (collectively referred to as the financial statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BKD, LLP
We have served as the Company’s auditor since 2009.
Indianapolis, Indiana
March 23, 2020
48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of December 28, 2019. The Chief Executive Officer and Chief Financial Officer, based on that evaluation, concluded that our disclosure controls and procedures are effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) required to be disclosed in our reports filed and submitted by the Company under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Commission.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15f under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992). Based on this assessment, management concluded that, as of December 28, 2019, the Company’s internal control over financial reporting is effective. Management reviewed the results of its assessment with the Audit Committee of the Company’s Board of Directors.
Remediation of a Material Weakness
We previously reported a material weakness in the effectiveness of the Company’s internal control over financial reporting as of September 28, 2019. Specifically, the lack of formalized processes and technical resources available to handle the increased volume of the complex non-routine transactions resulted in several material adjustments being recorded. Based on this material weakness, management concluded that our disclosure controls and procedures were not effective as of September 28, 2019.
In the fourth quarter of 2019, management formalized internal control processes and enhanced the level of technical resources available to address non-routine complex transactions, in order to record and report these transactions timely and appropriately in accordance with generally accepted accounting principles in each reporting period. We hired an interim financial reporting manager to assist with research of transactions outside the ordinary course of business. We enhanced research tools available to assist with research of non-routine complex transactions. We prepared formal accounting memoranda to support our conclusions on technical accounting matters and related disclosures. As a result of the remediation activities and controls in place as of December 28, 2019, management determined the material weakness had been remediated as of December 28, 2019.
As of December 28, 2019, the Company was not an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act. Accordingly, pursuant to SEC rules and regulations, the Company is not required to include, and this Annual Report on Form 10-K does not include, an attestation report of our independent registered public accounting firm regarding internal
49
control over financial reporting. We are required to annually reassess our status as a “smaller reporting company” as of the end of our fiscal year to determine whether we will be required to provide Management’s Annual Report on Internal Control Over Financial Reporting and the associated report of our independent registered public accounting firm in our Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as disclosed in Remediation of a Material Weakness above.
The Company does not have any information, not already reported, that is required to be reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.
The information required by items 10 through 14 of Form 10‑K is hereby incorporated by reference from the earlier filed of: (i) an amendment to this Annual Report on Form 10‑K or (ii) a definitive proxy statement filed pursuant to Regulation 14A within 120 days of December 28, 2019.
50
|
|
|
|
|
Exhibit 10 |
|
Second Amended and Restated Credit Agreement dated March 16, 2020 among Continental Materials Corporation, as the Company (borrower), The Various Financial Institutions Party Thereto, as Lenders, and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as Administrative Agent and Arranger, filed as Exhibit 10 to this Form 10-K for the fiscal year ended December 28, 2019. |
|
|
|
|
|
Exhibit 10b |
|
Form of Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q for the quarter ended July 1, 1983, incorporated herein by reference.* |
|
|
|
|
|
Exhibit 10c |
|
|
|
|
|
|
|
Exhibit 10d |
|
|
|
|
|
|
|
Exhibit 10e |
|
|
|
|
|
|
|
Exhibit 21 |
|
|
|
|
|
|
|
Exhibit 23 |
|
Consent of Independent Registered Public Accounting Firm (filed herewith). |
|
|
|
|
|
Exhibit 31.1 |
|
|
|
Exhibit 31.2 |
|
|
|
Exhibit 32 |
|
|
|
|
|
|
|
Exhibit 95 |
|
|
|
|
|
|
|
Exhibit 101 |
|
The following financial information from the Company’s Annual Report for the fiscal year ended December 28, 2019 filed with the SEC on March 23, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations for the fiscal years 2019 and 2018, (ii) the Consolidated Statements of Cash Flows for the fiscal years 2019 and 2018, (iii) the Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018, (iv) the Consolidated Statements of Shareholders’ Equity for fiscal years 2019 and 2018, and (v) Notes to Consolidated Financial Statements. |
* Compensatory plan or arrangement
None.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
CONTINENTAL MATERIALS CORPORATION |
|
|
|
Registrant |
|
|
|
|
|
|
By: |
/S/Paul Ainsworth |
|
|
|
Paul Ainsworth, Vice President, Secretary and Chief Financial Officer |
Date: March 23, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
SIGNATURE |
|
CAPACITY(IES) |
|
DATE |
|
|
|
|
|
|
|
/S/ James G. Gidwitz |
|
Chief Executive Officer and a Director |
|
|
|
James G. Gidwitz |
|
(Principal Executive Officer) |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Paul Ainsworth |
|
Vice President, Secretary and Chief Financial Officer |
|
|
|
Paul Ainsworth |
|
(Principal Financial and Accounting Officer) |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Ralph W. Gidwitz |
|
|
|
|
|
Ralph W. Gidwitz |
|
Director |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Scott Gidwitz |
|
|
|
|
|
Scott Gidwitz |
|
Director |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Steven Gidwitz |
|
|
|
|
|
Steven Gidwitz |
|
Director |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Theodore R. Tetzlaff |
|
|
|
|
|
Theodore R. Tetzlaff |
|
Director |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Peter E. Thieriot |
|
|
|
|
|
Peter E. Thieriot |
|
Director |
|
March 23, 2020 |
|
|
|
|
|
|
|
/S/ Darrell M. Trent |
|
|
|
|
|
Darrell M. Trent |
|
Director |
|
March 23, 2020 |
52
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e)
for the fiscal years 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLUMN A |
|
COLUMN B |
|
COLUMN C(1) |
|
COLUMN D |
|
COLUMN E |
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||||
|
|
|
Balance at |
|
Additions |
|
|
|
|
|
||||
|
|
|
Beginning of |
|
Charged to Costs |
|
Deductions - |
|
Balance at End of |
|
||||
|
Description |
|
Period |
|
and Expenses |
|
Describe |
|
Period |
|
||||
|
Year 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (c) |
|
$ |
410,000 |
|
$ |
189,000 |
|
$ |
105,000 |
(a) |
$ |
494,000 |
|
|
Inventory valuation reserve (c) |
|
$ |
1,747,000 |
|
$ |
138,000 |
|
$ |
862,000 |
(b) |
$ |
1,023,000 |
|
|
Reserve for self-insured losses |
|
$ |
2,451,000 |
|
$ |
3,261,000 |
|
$ |
3,745,000 |
(d) |
$ |
1,967,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (c) |
|
$ |
140,000 |
|
$ |
68,000 |
|
$ |
(202,000) |
(a) |
$ |
410,000 |
|
|
Inventory valuation reserve (c) |
|
$ |
518,000 |
|
$ |
1,544,000 |
|
$ |
315,000 |
(b) |
$ |
1,747,000 |
|
|
Reserve for self-insured losses |
|
$ |
1,881,000 |
|
$ |
5,483,000 |
|
$ |
4,913,000 |
(d) |
$ |
2,451,000 |
|
Notes:
|
|
(a) |
|
Accounts written off, net of recoveries. |
|
|
(b) |
|
Amounts written off upon disposal of assets. |
|
|
(c) |
|
Reserve deducted in the balance sheet from the asset to which it applies. |
|
|
(d) |
|
Payments of self-insured claims including healthcare claims accrued and paid in connection with the Company’s self-insured employee healthcare benefit plan. |
|
|
(e) |
|
Column C (2) has been omitted as the answer would be “none”. |
53
EXHIBIT 4.1
DESCRIPTION OF CAPITAL STOCK
The following describes the common stock and certain provisions of the Articles of Incorporation, as amended (the “Articles”), and Amended and Restated By-laws (the “By-laws”) of Continental Materials Corporation (the “Company”), and certain related rights. This description is only a summary and is qualified in its entirety by reference to the Articles and the By-laws, each of which have been filed with the Securities and Exchange Commission.
Description of Common Stock
General
The authorized capital stock of the Company consists of 3,000,000 shares of common stock, par value $0.25 per share (“common stock”), and 400,000 shares of preferred stock, par value $0.50 per share (“preferred stock”). The common stock is listed on the NYSE American stock exchange under the symbol “CUO”. No shares of preferred stock have been issued or designated by the Company.
Voting Rights
Each outstanding share of common stock entitles the holder thereof to one vote on each matter submitted for approval to the stockholders at a meeting or by written consent, including the election of directors. Holders of common stock are not entitled to cumulative voting of their shares in elections of directors. The affirmative vote of at least 66 2/3% of the capital stock of the Company issued and outstanding and entitled to vote is required to approve certain merger and sale transactions involving the Company, and to amend certain provisions of the Articles.
Classification of the Board of Directors
The Company’s board of directors (the “Board of Directors”) is divided into three classes designated as Class I, Class II and Class III, respectively, as nearly equal in number as possible. One class of directors is elected for a three-year term at each annual meeting of stockholders. A full term for a director shall consist of three full years.
Dividend Rights
Subject to applicable law and the By-laws, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available to pay dividends.
No Preemptive or Similar Rights
Holders of common stock have no preemptive rights to subscribe for, purchase or otherwise acquire any securities of the Company, and there are no conversion rights or redemption, purchase, retirement or sinking fund provisions with respect to the common stock. All outstanding shares of common stock are fully paid and non-assessable.
Liquidation Rights
There are no express liquidation rights under the Articles.
Certain Articles and By-laws Provisions
Number of Directors. The Articles and the By-laws provide that the Board of Directors shall consist of nine members, unless a different number is set forth in the By-laws, which number may not be less than three.
Special Meetings. The By-laws provide that special meetings of stockholders may be called by the President or by resolution of the Board of Directors, or by the President or Secretary at the written request of stockholders owning a majority in the amount of the entire capital stock of the Company issued and outstanding and entitled to vote.
Blank Check Preferred. The Articles provides for 400,000 shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer or otherwise. To the extent the Board of Directors causes shares of preferred stock to be issued, the voting or other rights of a potential acquirer might be diluted. The Board of Directors has the authority to issue shares of preferred stock without any action by stockholders. Any such issuance may have the effect of delaying, deterring or preventing a change of control of the Company.
Limitations on Directors’ Liability. Section 145 of the General Corporation Law of the State of Delaware, as amended (the “DGCL”), provides that under certain circumstances a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in right of the corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at its request in such capacity in another corporation or business association, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. Article TENTH, Section 2 of the Articles provides that the Company shall indemnify directors and officers of the Company to the fullest extent permitted by the DGCL.
Pursuant to Section 102(b)(7) of the DGCL, Article TENTH, Section 1 of the Articles states that to the fullest extent permitted by the DGCL, directors of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director.
Exhibit 10
Execution Version
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
dated as of March 16, 2020
among
CONTINENTAL MATERIALS CORPORATION,
as the Company,
THE VARIOUS FINANCIAL INSTITUTIONS PARTY HERETO,
as Lenders,
and
CIBC BANK USA,
f/k/a The PrivateBank and Trust Company,
as Administrative Agent and Arranger
|
|
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|
|
SECTION 1 |
DEFINITIONS. |
|
|
1.1 |
Definitions |
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|
1.2 |
Other Interpretive Provisions |
|
|
1.3 |
Accounting Terms; Changes in GAAP; Rates |
|
|
1.4 |
Rates |
|
|
|
|
|
|
SECTION 2 |
COMMITMENTS OF THE LENDERS; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES. |
|
|
2.1 |
Commitments |
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|
|
2.1.1 Revolving Loan Commitment |
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|
|
2.1.2 [Intentionally Omitted] |
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|
|
2.1.3 L/C Commitment |
|
|
2.2 |
Loan Procedures |
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|
2.2.1 Various Types of Loans |
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|
2.2.2 Borrowing Procedures |
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|
2.2.3 Conversion and Continuation Procedures |
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|
2.2.4 Agent Advances |
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|
2.3 |
Letter of Credit Procedures |
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|
2.3.1 L/C Applications |
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|
2.3.2 Participations in Letters of Credit |
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|
2.3.3 Reimbursement Obligations |
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|
2.3.4 Funding by Lenders to Issuing Lender |
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|
2.4 |
Commitments Several |
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|
2.5 |
Certain Conditions |
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|
2.6 |
Defaulting Lenders |
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|
|
SECTION 3 |
EVIDENCING OF LOANS. |
|
|
3.1 |
Notes |
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|
3.2 |
Recordkeeping |
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|
SECTION 4 |
INTEREST. |
|
|
4.1 |
Interest Rates |
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|
4.2 |
Interest Payment Dates |
|
|
4.3 |
Setting and Notice of LIBOR Rates |
|
|
4.4 |
Computation of Interest |
|
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|
|
SECTION 5 |
FEES. |
|
|
5.1 |
Non-Use Fee |
|
|
5.2 |
Letter of Credit Fees |
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|
5.3 |
Administrative Agent’s Fees |
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|
|
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|
|
SECTION 6 |
REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT; PREPAYMENTS. |
|
|
6.1 |
Reduction or Termination of the Revolving Commitment |
|
|
|
6.1.1 Voluntary Permanent Reduction or Termination of the Revolving Commitment |
|
ii
iii
|
|
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|
|
9.18 |
Information |
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|
9.19 |
Intellectual Property |
|
|
9.20 |
Burdensome Obligations |
|
|
9.21 |
Labor Matters |
|
|
9.22 |
No Default |
|
|
9.23 |
Patriot Act; Sanctions; Anti-Corruption |
|
|
|
9.23.1 Patriot Act |
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|
|
9.23.2 Sanctioned Persons |
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|
|
9.23.3 Dealings with Sanctioned Persons |
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|
|
9.23.4 Anti-Corruption Laws |
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|
|
SECTION 10 |
AFFIRMATIVE COVENANTS. |
|
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10.1 |
Reports, Certificates and Other Information |
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|
|
10.1.1 Annual Report |
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10.1.2 Interim Reports |
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|
|
10.1.3 Compliance Certificates |
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|
|
10.1.4 Reports to the SEC and to Shareholders |
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|
|
10.1.5 Notice of Default, Litigation and ERISA Matters |
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|
|
10.1.6 Borrowing Base Certificates and Additional Monthly Reports |
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|
|
10.1.7 Management Reports |
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|
|
10.1.8 Projections |
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|
|
10.1.9 Subordinated Debt Notices |
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|
|
10.1.10 Other Information |
|
|
10.2 |
Books, Records, Inspections and Field Exams |
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|
10.3 |
Maintenance of Property; Insurance |
|
|
10.4 |
Compliance with Laws, Material Contracts; Payment of Taxes and Liabilities |
|
|
10.5 |
Maintenance of Existence, etc |
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|
10.6 |
Use of Proceeds |
|
|
10.7 |
Employee Benefit Plans |
|
|
10.8 |
Environmental Matters |
|
|
10.9 |
Further Assurances |
|
|
10.10 |
Deposit Accounts |
|
|
10.11 |
Post-Closing Obligations |
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|
|
|
|
|
SECTION 11 |
NEGATIVE COVENANTS |
|
|
11.1 |
Debt |
|
|
11.2 |
Liens |
|
|
11.3 |
Intentionally Omitted |
|
|
11.4 |
Restricted Payments |
|
|
11.5 |
Mergers, Consolidations, Sales |
|
|
11.6 |
Modification of Organizational Documents |
|
|
11.7 |
Transactions with Affiliates |
|
|
11.8 |
Unconditional Purchase Obligations |
|
|
11.9 |
Inconsistent Agreements |
|
|
11.10 |
Business Activities |
|
|
11.11 |
Investments |
|
iv
v
|
|
|
|
|
14.1 |
Appointment and Authorization |
|
|
14.2 |
Issuing Lender |
|
|
14.3 |
Delegation of Duties |
|
|
14.4 |
Exculpation of Administrative Agent |
|
|
14.5 |
Reliance by Administrative Agent |
|
|
14.6 |
Notice of Default |
|
|
14.7 |
Credit Decision |
|
|
14.8 |
Indemnification |
|
|
14.9 |
Administrative Agent in Individual Capacity |
|
|
14.10 |
Successor Administrative Agent |
|
|
14.11 |
Collateral Matters |
|
|
14.12 |
Administrative Agent May File Proofs of Claim |
|
|
14.13 |
Other Agents; Arrangers and Managers |
|
|
14.14 |
Restriction on Actions by Lenders |
|
|
|
|
|
|
SECTION 15 |
GENERAL. |
|
|
15.1 |
Waiver; Amendments |
|
|
15.2 |
Confirmations |
|
|
15.3 |
Notices |
|
|
15.4 |
Computations |
|
|
15.5 |
Costs, Expenses and Taxes |
|
|
15.6 |
Assignments; Participations |
|
|
|
15.6.1 Assignments |
|
|
|
15.6.2 Participations |
|
|
15.7 |
Register |
|
|
15.8 |
GOVERNING LAW |
|
|
15.9 |
Confidentiality |
|
|
15.10 |
Severability |
|
|
15.11 |
Nature of Remedies |
|
|
15.12 |
Entire Agreement |
|
|
15.13 |
Counterparts |
|
|
15.14 |
Successors and Assigns |
|
|
15.15 |
Captions |
|
|
15.16 |
Customer Identification - USA Patriot Act Notice |
|
|
15.17 |
INDEMNIFICATION BY THE COMPANY |
|
|
15.18 |
Nonliability of Lenders |
|
|
15.19 |
FORUM SELECTION AND CONSENT TO JURISDICTION |
|
|
15.20 |
WAIVER OF JURY TRIAL |
|
|
15.21 |
Acknowledgement and Consent to Bail-In of EEA Financial Institutions |
|
|
15.22 |
Commodity Exchange Act |
|
vi
vii
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of March 16, 2020 (this “Agreement”) is entered into among CONTINENTAL MATERIALS CORPORATION, a Delaware corporation (the “Company”), the financial institutions that are or may from time to time become parties hereto (together with their respective successors and permitted assigns, the “Lenders”) and CIBC BANK USA, an Illinois state chartered bank f/k/a The PrivateBank and Trust Company (in its individual capacity, “CIBC”), as administrative agent for the Lenders and as initial Issuing Lender.
WHEREAS, the Company, the Lender and the Administrative Agent are parties to that certain Amended and Restated Credit Agreement, dated as of November 18, 2011, by and among the Company, the Lender and the Administrative Agent, as amended by that certain (i) First Amendment to Credit Agreement, dated as of March 21, 2013, by and among the Company, the Lender and the Administrative Agent, (ii) Second Amendment to Credit Agreement, dated as of March 20, 2014, by and among the Company, the Lender and the Administrative Agent, (iii) Third Amendment to Credit Agreement, dated as of August 11, 2014, by and among the Company, the Lender and the Administrative Agent, (iv) Fourth Amendment to Credit Agreement, dated as of November 13, 2014, by and among the Company, the Lender and the Administrative Agent, (v) Fifth Amendment to Credit Agreement, dated as of March 20, 2015, by and among the Company, the Lender and the Administrative Agent, (vi) Sixth Amendment to Credit Agreement, dated as of August 10, 2015, by and among the Company, the Lender and the Administrative Agent, (vii) Seventh Amendment to Credit Agreement, dated as of March 24, 2016, by and among the Company, the Lender and the Administrative Agent, (viii) Eighth Amendment to Credit Agreement, dated as of May 26, 2017, by and among the Company, the Lender and the Administrative Agent, (ix) Ninth Amendment to Credit Agreement, dated as of May 15, 2018, by and among the Company, the Lender and the Administrative Agent, and (x) Tenth Amendment to Credit Agreement, dated as of March 27, 2019, by and among the Company, the Lender and the Administrative Agent (the “Existing Credit Agreement”); and
WHEREAS, the Company, CIBC as sole Lender and the Administrative Agent desire to amend and restate the Existing Credit Agreement to provide for the credit facilities set forth herein upon the terms and subject to the conditions set forth herein.
In consideration of the mutual agreements herein contained, the parties hereto agree as follows:
SECTION 1 DEFINITIONS.
1.1 Definitions. When used herein the following terms shall have the following meanings:
Acceleration Event means the occurrence of an Event of Default (a) in respect of which all or any portion of the Obligations have become or been declared immediately due and payable pursuant to Section 13.2, (b) in respect of which all or a portion of the Revolving Commitment has been terminated pursuant to Section 13.2, or (c) arising under Section 13.1.1 as a result of a failure to pay the Revolving Outstandings in full on the Termination Date.
Account Debtor is defined in the Guaranty and Collateral Agreement.
Account or Accounts is defined in the Guaranty and Collateral Agreement.
Acquisition means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of all or substantially all of any business or division of a Person, (b) the acquisition of in excess of 50% of the Capital Securities of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is already a Subsidiary).
Administrative Agent means CIBC in its capacity as administrative agent for the Lenders hereunder and any successor thereto in such capacity.
Affected Loan - see Section 8.3.
Affiliate of any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any officer or director of such Person and (c) with respect to any Lender, any entity administered or managed by such Lender or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans. A Person shall be deemed to be “controlled by” any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Unless expressly stated otherwise herein, neither the Administrative Agent nor any Lender shall be deemed an Affiliate of any Loan Party. For purposes of clarity, Canadian Imperial Bank of Commerce and each of its direct and indirect subsidiaries are “Affiliates” of CIBC.
Agent Advances - see Section 2.2.4.
Agent Fee Letter means the Fourth Amended and Restated Fee Letter dated as of the date hereof between the Company and the Administrative Agent, as the same may be amended, restated or supplemented from time to time.
Agreement - see the Preamble.
Applicable Margin means, for any day, the rate per annum set forth below, it being understood that the Applicable Margin for (a) LIBOR Loans shall be the percentage set forth under the column “LIBOR Margin”, (b) Base Rate Loans shall be the percentage set forth under the column “Base Rate Margin”, (c) the Non-Use Fee Rate shall be the percentage set forth under the column “Non-Use Fee Rate” and (d) the L/C Fee shall be the percentage set forth under the column “L/C Fee Rate”:
2
|
Revolving Loan |
|
|
|
|
LIBOR
|
Base Rate
|
Non-Use
|
L/C Fee
|
|
2.00% |
0% |
if the average Excess Availability for the applicable monthly period is less than $10,000,000, 0.25%; if the average Excess Availability for the applicable monthly period is equal to or greater than $10,000,000, 0.375% |
2.00% |
Approved Fund means any Fund that is administered, managed, advised or underwritten by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
Asset Disposition means the sale, lease, assignment or other transfer for value (each, a “Disposition”) by any Loan Party to any Person (other than a Loan Party) of any asset or right of such Loan Party (including, the loss, destruction or damage of any thereof or any actual or threatened (in writing to any Loan Party) condemnation, confiscation, requisition, seizure or taking thereof) other than (a) the Disposition of any asset which is to be replaced, and is in fact replaced, within ninety (90) days with another asset performing the same or a similar function, and (b) the sale or lease of inventory in the ordinary course of business.
Assignee - see Section 15.6.1.
Assignment Agreement - see Section 15.6.1.
Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, and all court costs and similar legal expenses.
Bail-In Action means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
Bail-In Legislation means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
Bank Product Agreements means those certain agreements entered into from time to time between any Loan Party and a Lender or its Affiliates in connection with any of the Bank Products.
Bank Product Obligations means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by the Loan Parties to any Lender or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of
3
money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that a Loan Party is obligated to reimburse to the Administrative Agent or any Lender as a result of the Administrative Agent or such Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to the Loan Parties pursuant to the Bank Product Agreements.
Bank Products means any service or facility extended to any Loan Party by any Lender or its Affiliates including: (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Hedging Agreements.
Base Rate means at any time the greater of (a) the Federal Funds Rate plus 0.5% and (b) the Prime Rate.
Base Rate Loan means any Loan which bears interest at or by reference to the Base Rate.
Base Rate Margin - see the definition of Applicable Margin.
Borrowing Base means an amount equal to the total of (a) 85% of the unpaid amount (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion) of all Eligible Accounts, plus (b) the lesser of (i) 60% of the value of all Eligible Inventory valued at the lower of cost (determined on a first in-first out or average basis, as the case may be, consistent with past practice) or market value (net of such reserves and allowances as the Administrative Agent deems necessary in its reasonable discretion, including, without limitation, reserves in respect of slow-moving Inventory noted in any field audit report), and (ii) $8,500,000. Notwithstanding anything to the contrary contained herein, (x) the availability provided by the Dating Program Accounts shall not exceed $5,000,000 in the aggregate, and (y) the availability provided by the foreign Accounts covered by foreign account receivable insurance shall not exceed $250,000 in the aggregate.
Borrowing Base Certificate means a certificate substantially in the form of Exhibit C.
Business Day means any day on which CIBC is open for commercial banking business in Chicago, Illinois and, in the case of a Business Day which relates to a LIBOR Loan, on which dealings are carried on in the London interbank eurodollar market.
Capital Expenditures means all expenditures which, in accordance with GAAP, would be required to be capitalized and shown on the consolidated balance sheet of the Company, including expenditures in respect of Capital Leases, but excluding expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed (a) from insurance proceeds (or other similar recoveries) paid on account of the loss of or damage to the assets being replaced or restored or (b) with awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced.
Capital Lease means, subject to Section 1.5, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person.
4
Capital Securities means, with respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the Closing Date, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership, interests in a trust, interests in other unincorporated organizations or any other equivalent of such ownership interest.
Cash Collateralize means to deliver cash collateral to the Issuing Lender, to be held as cash collateral for outstanding Letters of Credit in an amount equal to 103% of the outstanding undrawn face amount of such Letters of Credit, pursuant to documentation reasonably satisfactory to the Administrative Agent. Derivatives of such term have corresponding meanings.
Cash Equivalent Investment means, at any time, (a) any evidence of Debt, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by a Lender or its holding company) rated at least A-l by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or P-l by Moody’s Investors Service, Inc., (c) any certificate of deposit, time deposit or banker’s acceptance, maturing not more than one year after such time, or any overnight Federal Funds transaction that is issued or sold by any Lender or its holding company (or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000), (d) any repurchase agreement entered into with any Lender (or commercial banking institution of the nature referred to in clause (c)) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) above and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Lender (or other commercial banking institution) thereunder, (e) money market accounts or mutual funds which invest exclusively in assets satisfying the foregoing requirements, and (f) other short term liquid investments approved in writing by the Administrative Agent.
Change in Law means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.
Change of Control means the occurrence of any of the following events: (a) a majority of the outstanding voting stock of the Company shall be acquired (whether by transfer, accumulation or otherwise), directly or indirectly, by any Person (including any group acting together) other than Bee Street Holdings LLC, a Delaware limited liability company owned and controlled by James
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Gidwitz and Family Members (as defined in that certain Limited Liability Company Agreement of Bee Street Holdings LLC, dated as of February 13, 2020, among the managers and members of such entity), and Bee Street II, Inc., a Delaware corporation which is wholly owned by Bee Street Holdings LLC, or (b) the Company shall cease to, directly or indirectly, own and control 100% of each class of the outstanding Capital Securities of each Subsidiary.
CIBC - see the Preamble.
Closing Date - see Section 12.1.
Code means the Internal Revenue Code of 1986.
Collateral is defined in the Guaranty and Collateral Agreement.
Collateral Access Agreement means an agreement in form and substance reasonably satisfactory to the Administrative Agent pursuant to which a mortgagee or lessor of real property on which Collateral is stored or otherwise located, or a warehouseman, processor or other bailee of Inventory or other property owned by any Loan Party, acknowledges the Liens of the Administrative Agent and waives any Liens held by such Person on such property, and, in the case of any such agreement with a mortgagee or lessor, permits the Administrative Agent reasonable access to and use of such real property following the occurrence and during the continuance of an Event of Default to assemble, complete and sell any Collateral stored or otherwise located thereon.
Collateral Documents means, collectively, the Guaranty and Collateral Agreement, each Mortgage, each Environmental Indemnity Agreement, each Collateral Access Agreement, each Perfection Certificate, each control agreement and any other agreement or instrument pursuant to which the Company, any Subsidiary or any other Person grants or purports to grant collateral to the Administrative Agent for the benefit of the Lenders or otherwise relates to such collateral.
Commitment means, as to any Lender, such Lender’s commitment to make Loans, and to issue or participate in Letters of Credit, under this Agreement. The initial amount of each Lender’s commitment to make Loans is set forth on Annex A.
Commodity Exchange Act means the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
Company - see the Preamble.
Compliance Certificate means a Compliance Certificate in substantially the form of Exhibit B.
Computation Period means each period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter.
Consolidated Net Income means, with respect to the Company and its Subsidiaries for any period, the net income (or loss) of the Company and its Subsidiaries for such period.
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Contingent Liability means, with respect to any Person, each obligation and liability of such Person and all such obligations and liabilities of such Person incurred pursuant to any agreement, undertaking or arrangement by which such Person: (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the Capital Securities of any other Person; (c) undertakes or agrees (whether contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any property or assets constituting security therefor, (ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) to induce the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss. The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby.
Controlled Group means all members of a controlled group of corporations, all members of a controlled group of trades or businesses (whether or not incorporated) under common control and all members of an affiliated service group which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.
Dating Program means the extended terms program made available to the customers of Williams Furnace and Phoenix Manufacturing, permitting such customers to place orders and receive product during the period from (i) with respect to Williams Furnace, April 1 to August 31 of a particular year, which program requires such customers to pay one hundred percent (100%) of the invoiced amount by October 10 of such year and (ii) with respect to Phoenix Manufacturing, October 1 of a particular year to April 30 of the immediately succeeding year (the “following year”), which program requires such customers to pay fifty percent (50.0%) of the invoiced amount by June 10 of the following year, and the remaining invoiced amount by July 10 of the following year, such programs to be on the terms and conditions in place on the Closing Date or such other terms and conditions that are reasonably satisfactory to the Administrative Agent.
Dating Program Accounts means the Accounts owing to Williams Furnace or Phoenix Manufacturing pursuant to the Dating Program.
Debt of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b)
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all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (d) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person; provided that if such Person has not assumed or otherwise become liable for such indebtedness, such indebtedness shall be measured at the fair market value of such property securing such indebtedness at the time of determination, (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn), bankers’ acceptances and similar obligations issued for the account of such Person (including the Letters of Credit), (f) all Hedging Obligations of such Person, (g) all Contingent Liabilities of such Person, (h) all Debt of any partnership of which such Person is a general partner and (i) any Capital Securities or other equity instrument, whether or not mandatorily redeemable, that under GAAP is characterized as debt, whether pursuant to financial accounting standards board issuance No. 150 or otherwise.
Debt to be Repaid means Debt listed on Schedule 12.1.
Defaulting Lender means any Lender that (a) has failed to fund any portion of the Loans or participations in Letters of Credit required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, (c) has been deemed or has a parent company that has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding, (d) has notified any Company, Administrative Agent, any Issuing Lender or any Lender that it does not intend to comply with any of its funding obligations under this Agreement or has made a public statement to the effect that it does not intend to comply with its funding obligations under this Agreement or under other agreements in which it commits to extend credit or (e) has failed to confirm within three Business Days of a request by Administrative Agent that it will comply with the terms of this Agreement relating to its obligations to fund prospective Revolving Loans and participations in then outstanding Letters of Credit.
Dollar and the sign “$” mean lawful money of the United States of America.
EBITDA means, for any Computation Period (or another time period to the extent expressly provided herein), the sum of the following with respect to the Company and its Subsidiaries each as determined in accordance with GAAP:
(a) Consolidated Net Income, plus (without duplication) each of the following items to the extent deducted in determining such Consolidated Net Income:
(i) federal, state and other income taxes deducted in the determination of Consolidated Net Income;
(ii) Interest Expense deducted in the determination of Consolidated Net Income;
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(iii) depreciation, depletion and amortization expense deducted in the determination of Consolidated Net Income;
(iv) non-recurring fees and costs paid by the Company and its Subsidiaries in respect of the following: (i) fees, expenses (including legal fees and expenses) and due diligence costs associated with Permitted Acquisitions, whether or not consummated; (ii) legal fees and costs associated with the Valco trial preparation; (iii) fees, costs and expenses (including legal fees and expenses) in connection with the amendment and restatement of this agreement and all matters reasonably related thereto; (iv) fees, costs and expenses (including legal fees and expenses) in connection with the purchase of Capital Securities of the Company by Bee Street Holdings LLC or a Subsidiary thereof and transactions and other matters reasonably related thereto; (v) additional fees and costs associated with the exploration of the Hitch Rack Ranch facility in Colorado Springs, Colorado to determine the sustainability for mining and the pursuit of mining permits; and (vi) fees, costs and expenses in connection with reclamation or similar transactions related to the sale of quarry assets;
(v) any other non-cash charges and any extraordinary charges deducted in the determination of Consolidated Net Income, including any asset impairment charges (including write downs of goodwill); and
(vi) the amount of any earnout or other deferred payment paid in connection with any Permitted Acquisition;
minus
(b) any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued operations included in the determination of Consolidated Net Income.
All references to “non-cash” charges above shall only include items for which no cash outlay could reasonably be expected at any time now or in the future.
EEA Financial Institution means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
EEA Member Country means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
EEA Resolution Authority means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
Eligible Account shall mean an Account owing to any Loan Party which meets each of the following requirements:
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(a) it arises from the sale or lease of goods or the rendering of services which have been fully performed by such Loan Party; and if it arises from the sale or lease of goods, (i) such goods comply with such Account Debtor’s specifications (if any) and have been delivered to such Account Debtor and (ii) the applicable Loan Party has possession of, or if requested by the Administrative Agent, has delivered to the Administrative Agent, delivery receipts evidencing such delivery;
(b) it (x) is subject to a perfected, first-priority Lien in favor of the Administrative Agent for the benefit of the Lenders, and (y) is not subject to any other assignment, claim or Lien, in each case, other than Permitted Liens;
(c) it is a valid, legally enforceable and unconditional obligation of the Account Debtor with respect thereto, and is not subject to the fulfillment of any condition whatsoever or any counterclaim, credit, allowance, discount, rebate or adjustment by the Account Debtor with respect thereto, or to any claim by such Account Debtor denying liability thereunder in whole or in part and the Account Debtor has not refused to accept and/or has not returned or offered to return any of the goods or services which are the subject of such Account;
(d) there is no bankruptcy, insolvency or liquidation proceeding pending by or against the Account Debtor with respect thereto;
(e) the Account Debtor with respect thereto is a resident or citizen of, and is located within, the United States, unless the sale of goods or services giving rise to such Account is on letter of credit, banker’s acceptance, other credit support terms reasonably satisfactory to the Administrative Agent, or, in the case of foreign Accounts owed to Williams Furnace or Phoenix Manufacturing, any such Account covered by foreign account receivable insurance in at least the amount of such Account (in the case of each such foreign Account, the amount of such Account for purposes of the Borrowing Base calculation shall be equal to ninety-five percent (95%) of the original amount of such Account minus $25,000 representing the applicable deductible);
(f) it is not an Account arising from a “sale on approval,” “sale or return,” “consignment” or “bill and hold” or subject to any other repurchase or return agreement;
(g) it is not an Account with respect to which possession and/or control of the goods sold giving rise thereto is held, maintained or retained by any Loan Party (or by any agent or custodian of any Loan Party) for the account of or subject to further and/or future direction from the Account Debtor with respect thereto;
(h) it arises in the ordinary course of business of the applicable Loan Party;
(i) if the Account Debtor is the United States or any department, agency or instrumentality thereof, the applicable Loan Party has assigned its right to payment of such Account to the Administrative Agent for the benefit of the Lenders pursuant to the Assignment of Claims Act of 1940, and evidence (reasonably satisfactory to the Administrative Agent) of such assignment has been delivered to the Administrative Agent;
(j) if the Account is evidenced by chattel paper or an instrument, the originals of such chattel paper or instrument shall have been endorsed and/or assigned and delivered to the
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Administrative Agent or, in the case of electronic chattel paper, shall be in the control of the Administrative Agent, in each case in a manner satisfactory to the Administrative Agent;
(k) such Account is evidenced by an invoice delivered to the related Account Debtor and is not more than (i) sixty (60) days past the due date thereof as reflected in the original invoice therefor, or (ii) one-hundred twenty (120) days past the original invoice date therefor; provided, however, the requirement set forth in item (ii) of this clause (k) shall not apply to the Dating Program Accounts to the extent the applicable Account Debtors are in compliance with the terms and conditions of the Dating Program with respect to the applicable Dating Program Accounts and a Senior Officer certifies in the applicable Borrowing Base Certificate that to his or her knowledge such Account Debtors are in compliance with the Dating Program and that such Dating Program Accounts (including any portion thereof) are not more than sixty (60) days past due;
(l) it is not an Account with respect to an Account Debtor that is located in any jurisdiction which has adopted a statute or other requirement with respect to which any Person that obtains business from within such jurisdiction must file a notice of business activities report or make any other required filings in a timely manner in order to enforce its claims in such jurisdiction’s courts unless (x) such notice of business activities report has been duly and timely filed or the applicable Loan Party is exempt from filing such report and has provided the Administrative Agent with satisfactory evidence of such exemption or (y) the failure to make such filings may be cured retroactively by the applicable Loan Party for a nominal fee;
(m) the Account Debtor with respect thereto is not a Loan Party or an Affiliate of any Loan Party;
(n) it is not owed by an Account Debtor with respect to which twenty-five percent (25%) or more of the aggregate amount of outstanding Accounts owed at such time by such Account Debtor is classified as ineligible under clause (k) of this definition; and
(o) if the aggregate amount of all Accounts owed by the Account Debtor thereon exceeds twenty-five percent (25%) of the aggregate amount of all Accounts at such time, then all Accounts owed by such Account Debtor in excess of such amount shall be deemed ineligible.
An Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account; provided, however, if such Account then meets each of the foregoing requirements it shall again be deemed an Eligible Account.
Eligible Inventory shall mean Inventory of any Loan Party which meets each of the following requirements:
(a) it (x) is subject to a perfected, first-priority Lien in favor of the Administrative Agent for the benefit of the Lenders and (y) is not subject to any other assignment, claim or Lien, in each case, other than Permitted Liens;
(b) it is salable and not slow-moving, obsolete or discontinued;
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(c) it is in the possession and control of the applicable Loan Party and it is stored and held at locations owned by the applicable Loan Party or, if any such location is not so owned, the Administrative Agent is in possession of a Collateral Access Agreement with respect thereto;
(d) it is not Inventory produced in violation of the Fair Labor Standards Act and subject to the “hot goods” provisions contained in Title 29 U.S.C. §215;
(e) it is not subject to any agreement or license which would restrict the Administrative Agent’s ability to sell or otherwise dispose of such Inventory;
(f) it is located in the United States or in any territory or possession of the United States that has adopted Article 9 of the UCC;
(g) it is not “in transit” to the applicable Loan Party or held by the applicable Loan Party on consignment;
(h) it is not “work-in-progress” Inventory;
(i) it is not supply items or packaging;
(j) it is not identified to any purchase order or contract to the extent progress or advance payments are received with respect to such Inventory;
(k) it does not breach any of the representations, warranties or covenants pertaining to Inventory set forth in the Loan Documents; and
(l) the Administrative Agent shall not have determined in the exercise of its reasonable credit judgment that it is unacceptable due to age, type, category, quality, quantity and/or any other reason whatsoever.
Inventory which is at any time Eligible Inventory but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be Eligible Inventory; provided, however, if such Inventory then meets each of the foregoing requirements it shall again be deemed Eligible Inventory.
Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release into or injury to the environment.
Environmental Indemnity Agreement means the Amended and Restated Hazardous Substance Remediation and Indemnification Agreement dated as of the date of the Existing Credit Agreement executed and delivered by the Company and the other Indemnitors named therein in favor of the Administrative Agent, in form and substance satisfactory to the Administrative Agent and as amended, restated or supplemented from time to time.
Environmental Laws means all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative or judicial orders, consent agreements, directed duties, requests, licenses, authorizations and permits
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of, and agreements with, any Governmental Authority, in each case relating to any matter arising out of or relating to public health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, emission, release, threatened release, control or cleanup of any Hazardous Substance.
ERISA means the Employee Retirement Income Security Act of 1974.
Event of Default means any of the events described in Section 13.1.
Excess Availability shall mean an amount equal to (a) the Revolving Commitment (as reduced from time to time pursuant to Section 6.1 hereof) minus (b) the Revolving Outstandings.
Excluded Swap Obligation means, with respect to any guarantor of a Swap Obligation, including the grant of a security interest to secure the guaranty of such Swap Obligation, any Swap Obligation if, and to the extent that, such Swap Obligation is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the guaranty or grant of such security interest becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Swap Obligation or security interest is or becomes illegal.
Excluded Taxes means taxes based upon, or measured by, the Lender’s or Administrative Agent’s (or a branch of the Lender’s or Administrative Agent’s) overall net income, overall net receipts, or overall net profits (including franchise taxes imposed in lieu of such taxes), but only to the extent such taxes are imposed by a taxing authority (a) in a jurisdiction in which such Lender or Administrative Agent is organized, (b) in a jurisdiction which the Lender’s or Administrative Agent’s principal office is located, or (c) in a jurisdiction in which such Lender’s or Administrative Agent’s lending office (or branch) in respect of which payments under this Agreement are made is located.
Existing Credit Agreement - see the Recitals.
FCPA - see Section 9.23.4.
Federal Funds Rate means, for any day, a fluctuating interest rate equal for each day during such period to the greater of (a) the rate calculated by the Federal Reserve Bank of New York based on such day’s Federal funds transactions by depositary institutions (as determined in such manner as the Federal Reserve Bank of New York shall set forth on its public website from time to time) and published on the next succeeding Business Day by the Federal Reserve Bank of New York as the Federal funds effective rate and (b) 0%, or, if such rate is not so published for any day which is a Business Day, the rate determined by the Administrative Agent in its discretion. The Administrative Agent’s determination of such rate shall be binding and conclusive absent manifest error.
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Fiscal Quarter means a fiscal quarter of a Fiscal Year.
Fiscal Year means the fiscal year of the Company and its Subsidiaries, which period shall be the 12-month period ending on the Saturday closest to December 31 of each year. References to a Fiscal Year with a number corresponding to any calendar year (e.g., “Fiscal Year 2020”) refer to the Fiscal Year ending on the Saturday closest to December 31 of such calendar year.
Fixed Charge Coverage Ratio means, for any Computation Period, the ratio of (a) the sum (without duplication) for such period of (i) EBITDA, minus (ii) income taxes paid in cash by the Loan Parties, minus (iii) all unfinanced Capital Expenditures, minus (iv) all amounts paid in cash in respect of any Permitted Capital Securities Repurchase, to (b) the sum for such period of (i) cash Interest Expense, plus (ii) scheduled payments of principal of Funded Debt (excluding the Revolving Loans), plus (iii) cash payments made in respect of Capital Leases, plus (iv) the amount by which reclamation or similar costs paid in such period exceed the cash proceeds received from the sale of quarry assets and cash refunds of escrow balances; provided, however that for purposes hereof, to the extent during any period there are excess cash proceeds from the sale of quarry assets after netting such proceeds against the reclamation or similar costs in such period, such excess cash proceeds may be carried forward and netted against the reclamation or similar costs in a later period, plus (v) all amounts paid in respect of any earnout or other deferred payment in connection with any Permitted Acquisition.
FRB means the Board of Governors of the Federal Reserve System or any successor thereto.
Foreign Subsidiary means any Subsidiary of the Company that is not organized under the laws of a jurisdiction within the United States.
Fund means any Person (other than a natural Person) that is (or will be) primarily engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
Funded Debt means, as to any Person, all Debt of such Person that matures more than one year from the date of its creation (or is renewable or extendible, at the option of such Person, to a date more than one year from such date).
GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) and the Securities and Exchange Commission, which are applicable to the circumstances as of the date of determination.
Governmental Authority means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
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Group - see Section 2.2.1.
Guaranty and Collateral Agreement means the Second Amended and Restated Guaranty and Collateral Agreement dated as of the date hereof executed and delivered by the Loan Parties, together with any joinders thereto and any other guaranty and collateral agreement executed by a Loan Party, in each case in form and substance satisfactory to the Administrative Agent and as amended, restated or supplemented from time to time.
Hazardous Substances means (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, dielectric fluid containing levels of polychlorinated biphenyls, radon gas and mold; (b) any chemicals, materials, pollutant or substances defined as or included in the definition of “hazardous substances”, “hazardous waste”, “hazardous materials”, “extremely hazardous substances”, “restricted hazardous waste”, “toxic substances”, “toxic pollutants”, “contaminants”, “pollutants” or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the exposure to, or release of which is prohibited, limited or regulated by any Governmental Authority or for which any duty or standard of care is imposed pursuant to, any Environmental Law.
Hedging Agreement means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices.
Hedging Obligation means, with respect to any Person, any liability of such Person under any Hedging Agreement. The amount of any Person’s obligation in respect of any Hedging Obligation shall be deemed to be the incremental obligation that would be reflected in the financial statements of such Person in accordance with GAAP.
Indemnified Liabilities - see Section 15.17.
Interest Expense means for any period the consolidated interest expense of the Company and its Subsidiaries for such period (including all imputed interest on Capital Leases).
Interest Period means, as to any LIBOR Loan, the period commencing on the date such Loan is borrowed or continued as, or converted into, a LIBOR Loan and ending on the date one, two or three months thereafter as selected by the Company pursuant to Section 2.2.2 or 2.2.3, as the case may be; provided that:
(a) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day;
(b) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; and
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(c) the Company may not select any Interest Period for a Revolving Loan which would extend beyond the scheduled Termination Date.
Inventory is defined in the Guaranty and Collateral Agreement.
Investment means, with respect to any Person, any investment in another Person, whether by acquisition of any debt or Capital Security, by making any loan or advance, by becoming obligated with respect to a Contingent Liability in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business) or by making an Acquisition.
Issuing Lender means any Lender selected by the Required Lenders after the date hereof, and their successors and assigns in such capacity, provided that the initial Issuing Lender shall be CIBC.
L/C Application means, with respect to any request for the issuance of a Letter of Credit, a letter of credit application in the form being used by the Issuing Lender at the time of such request for the type of letter of credit requested.
L/C Fee Rate - see the definition of Applicable Margin.
Lender - see the Preamble. References to the “Lenders” shall include the Issuing Lender; for purposes of clarification only, to the extent that CIBC (or any successor Issuing Lender) may have any rights or obligations in addition to those of the other Lenders due to its status as Issuing Lender, its status as such will be specifically referenced. In addition to the foregoing, for the purpose of identifying the Persons entitled to share in the Collateral and the proceeds thereof under, and in accordance with the provisions of, this Agreement and the Collateral Documents, the term “Lender” shall include Affiliates of a Lender providing a Bank Product.
Lender Party - see Section 15.17.
Letter of Credit - see Section 2.1.3.
LIBOR Loan means any Loan which bears interest at a rate determined by reference to the LIBOR Rate.
LIBOR Margin - see the definition of Applicable Margin.
LIBOR Office means with respect to any Lender the office or offices of such Lender which shall be making or maintaining the LIBOR Loans of such Lender hereunder. A LIBOR Office of any Lender may be, at the option of such Lender, either a domestic or foreign office.
LIBOR Rate means a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period (or three Business Days prior to the commencement of such Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial
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Markets system (or other authoritative source selected by the Administrative Agent in its sole discretion), divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), or as the LIBOR Rate is otherwise determined by the Administrative Agent in its sole and absolute discretion. The Administrative Agent’s determination of the LIBOR Rate shall be conclusive, absent manifest error and shall remain fixed during such Interest Period.
Lien means, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person (including an interest in respect of a Capital Lease) which secures payment or performance of any obligation and shall include any mortgage, lien, encumbrance, title retention lien, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise.
Loan Documents means this Agreement, the Notes, the Letters of Credit, the Master Letter of Credit Agreement, the L/C Applications, the Agent Fee Letter, the Collateral Documents, the Subordination Agreements (if any) and all documents, instruments and agreements delivered in connection with the foregoing.
Loan Party means the Company and each of its Subsidiaries (including, without limitation, each Guarantor referenced in the Guaranty and Collateral Agreement, but excluding, for the avoidance of doubt, any Foreign Loan Subsidiary).
Loan or Loans means, as the context may require, Revolving Loans and Agent Advances.
Margin Stock means any “margin stock” as defined in Regulation U.
Master Letter of Credit Agreement means, at any time, with respect to the issuance of Letters of Credit, a master letter of credit agreement or reimbursement agreement in the form, if any, being used by the Issuing Lender at such time.
Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business or properties of the Loan Parties taken as a whole, (b) a material impairment of the ability of any Loan Party to perform any of the Obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document.
McKinney Door means McKinney Door and Hardware, Inc., a Colorado corporation and a Loan Party.
Mining Royalty Agreement means that certain Fee Sand and Gravel Lease, dated as of October 21, 1996, by and between Valco Inc. and the Company, as amended, restated or modified from time to time.
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Mortgage means a mortgage, deed of trust, leasehold mortgage or similar instrument granting the Administrative Agent a Lien on real property of any Loan Party.
Mortgaged Property means the following real property owned by a Loan Party at the following locations (and the buildings and other structures located thereon) as more fully described in the applicable Mortgage: (a) parcel(s) of land located in Colton, California; (b) parcel(s) of land located in Colorado Springs, Colorado; and (c) parcel(s) of land located in Broken Arrow, Oklahoma.
Multiemployer Pension Plan means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Company or any other member of the Controlled Group may have any liability.
Net Cash Proceeds means:
(a) with respect to any Asset Disposition, the aggregate cash proceeds (including cash proceeds received pursuant to policies of insurance or by way of deferred payment of principal pursuant to a note, installment receivable or otherwise, but only as and when received) received by any Loan Party pursuant to such Asset Disposition net of (i) the direct costs relating to such sale, transfer or other disposition (including sales commissions and legal, accounting and investment banking fees), (ii) taxes paid or reasonably estimated by the Company to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (iii) amounts required to be applied to the repayment of any Debt secured by a Lien on the asset subject to such Asset Disposition (other than the Loans);
(b) with respect to any issuance of Capital Securities, the aggregate cash proceeds received by any Loan Party pursuant to such issuance, net of the direct costs relating to such issuance (including sales and underwriters’ commissions); and
(c) with respect to any issuance of Debt, the aggregate cash proceeds received by any Loan Party pursuant to such issuance, net of the direct costs of such issuance (including up-front, underwriters’ and placement fees).
Non-U.S. Participant - see Section 7.6(d).
Non-Use Fee Rate - see the definition of Applicable Margin.
Note means a promissory note substantially in the form of Exhibit A.
Notice of Borrowing - see Section 2.2.2.
Notice of Conversion/Continuation - see Section 2.2.3.
Obligations means all obligations (monetary (including post-petition interest, allowed or not) or otherwise) of any Loan Party under this Agreement and any other Loan Document including Attorney Costs and any reimbursement obligations of each Loan Party in respect of Letters of Credit and surety bonds, all Hedging Obligations permitted hereunder which are owed
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to any Lender or its Affiliate or Administrative Agent, and all Bank Product Obligations (subject to the limitations set forth in the definition thereof), all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due. Notwithstanding the foregoing or anything to the contrary contained in any of the other Loan Documents, “Obligations” shall not create any guaranty by any Loan Party of (or grant of security interest by any Loan Party to support, as applicable) any Excluded Swap Obligations of such Loan Party for purposes of determining any obligations of a Loan Party.
Patriot Act - see Section 15.16.
PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.
Participant - see Section 15.6.2.
Pension Plan means a “pension plan”, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or the minimum funding standards of ERISA (other than a Multiemployer Pension Plan), and as to which the Company or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.
Perfection Certificate means a perfection certificate executed and delivered to the Administrative Agent by a Loan Party.
Permitted Acquisition means any Acquisition by the Company or any other Loan Party where:
(a) the business or division acquired are for use, or the Person acquired is engaged, in businesses substantially similar to the businesses engaged in by the Loan Parties on the Closing Date;
(b) immediately before and after giving effect to such Acquisition, no Event of Default or Unmatured Event of Default shall exist;
(c) the aggregate Total Consideration to be paid by the Loan Parties (i) in connection with any such Acquisition, shall not exceed $10,000,000, and (ii) in connection with all Acquisitions collectively after the Closing Date, shall not exceed $15,000,000 in the aggregate;
(d) including such Acquisition, the Loan Parties shall not have consummated more than three (3) Acquisitions during the then prior twelve (12) month period;
(e) the aggregate Total Consideration to be paid by the Loan Parties (excluding any Debt assumed or issued in connection therewith which is permitted under Section 11.1) in connection with such Acquisition, together with all fees and expenses associated therewith, shall be paid solely from cash on hand of the Loan Parties, including the Person to be acquired, and/or Net Cash Proceeds from the issuance of Capital Securities of the Company not resulting in a Change of Control;
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(f) if seller debt, earn-outs or other deferred payments are owned by a Loan Party in connection with such Acquisition, (i) all of the terms of such seller debt, earn-outs or other deferred payments, including, without limitation, the subordination terms, covenants and pricing, shall be reasonably satisfactory to the Administrative Agent in its sole discretion, and (ii) such seller debt, earn-outs or other deferred payments shall be unsecured and subordinated to the Obligations pursuant to the terms of a subordination agreement reasonably acceptable to the Administrative Agent;
(g) immediately after giving effect to such Acquisition, the Loan Parties shall be in pro forma compliance with the financial covenants set forth in Section 11.13;
(h) in the case of the Acquisition of any Person, the board of directors or similar governing body of such Person has approved such Acquisition;
(i) in connection with such Acquisition, the Administrative Agent shall have received complete executed or conformed copies of each material document, instrument and agreement to be executed in connection with such Acquisition, together with all lien search reports and lien release letters and other documents as the Administrative Agent may require to evidence the termination of Liens on the assets or business to be acquired, and evidence that all material third party consents and approvals required in connection with such Acquisition have been obtained;
(j) the Loan Parties shall have completed due diligence on the business, division or Person being acquired in a manner and with results satisfactory to the Administrative Agent and shall have delivered revised Schedules to this Agreement and each of the other Loan Documents to the extent necessary to disclose facts pertaining to the business, division or Person proposed to be acquired;
(k) not less than ten (10) Business Days prior to any Acquisition with respect to which Total Consideration equals or exceeds $5,000,000, the Administrative Agent shall have received an acquisition summary with respect to the Person and/or business or division to be acquired, such summary to include a reasonably detailed description thereof (including financial information) and operating results (including financial statements for the most recent 12 month period for which they are available and as otherwise available), the terms and conditions, including economic terms, of the proposed Acquisition, and the Company’s calculation of the Total Consideration and the pro forma EBITDA relating thereto;
(l) the provisions of Section 10.10 have been satisfied;
(m) within ninety (90) days of the closing of such Acquisition, the target company (if such Acquisition is structured as a purchase of equity) or the Loan Party (if such Acquisition is structured as a purchase of assets or a merger and a Loan Party is the surviving entity) executes and delivers to Administrative Agent (a) such documents necessary to grant to Administrative Agent for the benefit of the Lenders a first priority Lien in substantially all of the assets of such target company or surviving company (consistent with the requirements of the Guaranty and Collateral Agreement), and their respective Subsidiaries (other than any Foreign Subsidiary), each in form and substance satisfactory to Administrative Agent and (b) an unlimited guaranty of the Obligations, or at the option of Administrative Agent in Administrative Agent’s absolute
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discretion, a joinder agreement satisfactory to Administrative Agent in which such target company or surviving company, and their respective Subsidiaries (other than any Foreign Subsidiary) becomes a guarantor under the Loan Documents and guarantees the payment and performance of the Obligations; and
(n) if the Acquisition is structured as a merger, a Loan Party is the surviving entity.
Permitted Capital Securities Repurchase - see Section 11.4.
Permitted Lien means (i) Liens for Taxes, assessments or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves in accordance with GAAP and in respect of which no Lien senior to the Liens of the Administrative Agent has been filed; (ii) Liens arising in the ordinary course of business (such as (a) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law, and (b) Liens in the form of deposits or pledges incurred in connection with worker’s compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any advances or borrowed money or the deferred purchase price of property or services, which do not in the aggregate materially detract from the value of the property or assets of any Loan Party or materially impair the use thereof in the operation of any Loan Party’s business and, in each case, for which it maintains adequate reserves in accordance with GAAP and in respect of which no Lien senior to the Liens of the Administrative Agent has been filed; (iii) Liens described on Schedule 11.2 as of the Closing Date; (iv) attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00) arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings and to the extent such judgments or awards do not constitute an Event of Default under Section 13.1.7 hereof; (v) easements, rights of way, restrictions, minor defects or irregularities in title (including leasehold title) and other similar Liens not interfering in any material respect with the ordinary conduct of the business of any Loan Party; (vi) subject to the limitation set forth in Section 11.1(iv), Liens arising in connection with capitalized leases (and attaching only to the property being leased) and Liens that constitute purchase money security interests on any property securing indebtedness incurred for the purpose of financing all or any part of the cost of acquiring such property, provided that any such Lien attaches to such property within twenty (20) days of the acquisition thereof and attaches solely to the property so acquired; (vii) Liens granted to the Administrative Agent for the benefit of the Lenders hereunder and under the other Loan Documents; (viii) customary rights of set-off in favor of banks existing solely with respect to cash and cash equivalents on deposit in one or more accounts maintained by any Loan Party and not in violation of this Agreement (to the extent arising in the ordinary course of business and not in connection with any financing); (ix) the filing of UCC financing statements solely as a precautionary measure in connection with operating leases permitted under this Agreement; (x) Liens on premium refunds and insurance proceeds granted in favor of insurance companies (or their financing affiliates) in connection with the financing of insurance premiums; and (xi) extensions, renewals or replacements of any Lien referred to in clauses (i) through (x) of this
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definition, provided that the principal amount of the Debt secured thereby is not increased and that any such extension, renewal or replacement is limited to the assets originally encumbered thereby.
Person means any natural person, corporation, partnership, trust, limited liability company, association, Governmental Authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity.
Phoenix Manufacturing means Phoenix Manufacturing, Inc., an Arizona corporation and a Loan Party.
Platform means Intralinks, Syndtrack or a substantially similar electronic transmission system.
Prime Rate means, for any day, the rate of interest in effect for such day as publicly announced from time to time by the Administrative Agent as its prime rate (whether or not such rate is actually charged by the Administrative Agent), which is not intended to be the Administrative Agent’s lowest or most favorable rate of interest at any one time. Any change in the Prime Rate announced by the Administrative Agent shall take effect at the opening of business on the day specified in the public announcement of such change; provided that the Administrative Agent shall not be obligated to give notice of any change in the Prime Rate.
Pro Rata Share means:
(a) with respect to a Lender’s obligation to make Revolving Loans, participate in Letters of Credit, reimburse the Issuing Lender, and receive payments of principal, interest, fees, costs, and expenses with respect thereto, (x) prior to the Revolving Commitment being terminated or reduced to zero, the percentage obtained by dividing (i) such Lender’s Revolving Commitment, by (ii) the aggregate Revolving Commitment of all Lenders and (y) from and after the time the Revolving Commitment has been terminated or reduced to zero, the percentage obtained by dividing (i) the aggregate unpaid principal amount of such Lender’s Revolving Outstandings by (ii) the aggregate unpaid principal amount of all Revolving Outstandings; and
(b) with respect to all other matters as to a particular Lender, the percentage obtained by dividing (i) such Lender’s Revolving Commitment by (ii) the aggregate amount of the Revolving Commitment of all Lenders; provided that in the event the Commitments have been terminated or reduced to zero, Pro Rata Share shall be the percentage obtained by dividing (A) the principal amount of such Lender’s Revolving Outstandings by (B) the principal amount of all outstanding Revolving Outstandings of all Lenders.
Regulation D means Regulation D of the FRB.
Regulation U means Regulation U of the FRB.
Reportable Event means a reportable event as defined in Section 4043 of ERISA and the regulations issued thereunder as to which the PBGC has not waived the notification requirement
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of Section 4043(a), or the failure of a Pension Plan to meet the minimum funding standards of Section 412 of the Code (without regard to whether the Pension Plan is a plan described in Section 4021(a)(2) of ERISA) or under Section 302 of ERISA.
Required Lenders means, at any time, Lenders whose Pro Rata Shares exceed 50.1% as determined pursuant to clause (c) of the definition of “Pro Rata Share”; provided that (i) the Pro Rata Shares held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders, and (ii) at all times there are two (2) or fewer Lenders which are not Affiliates of each other, Required Lenders shall require all such Lenders which are (x) not Affiliates of each other and (y) not Defaulting Lenders.
Revolving Commitment means $20,000,000, as reduced from time to time pursuant to Section 6.1.
Revolving Loan - see Section 2.1.1.
Revolving Loan Availability means the lesser of (i) the Revolving Commitment and (ii) the Borrowing Base.
Revolving Outstandings means, at any time, the sum of (a) the aggregate principal amount of all outstanding Revolving Loans, plus (b) the Stated Amount of all Letters of Credit, plus (c) the outstanding principal amount of all Agent Advances.
Sanctions - see Section 9.23.2.
SEC means the Securities and Exchange Commission or any other Governmental Authority succeeding to any of the principal functions thereof.
Senior Officer means, with respect to any Loan Party, any of the chief executive officer, the chief financial officer, the chief operating officer, the corporate secretary, the controller or the treasurer of such Loan Party.
Stated Amount means, with respect to any Letter of Credit at any date of determination, (a) the maximum aggregate amount available for drawing thereunder under any and all circumstances plus (b) the aggregate amount of all unreimbursed payments and disbursements under such Letter of Credit to the extent such unreimbursed amounts have not been converted into Revolving Loans.
Subordinated Debt means any unsecured Debt of any Loan Party which has subordination terms, covenants, pricing and other terms which have been approved in writing by the Required Lenders.
Subordination Agreements means all subordination agreements executed by a holder of Subordinated Debt in favor of the Administrative Agent and the Lenders from time to time after the Closing Date in form and substance and on terms and conditions satisfactory to the Administrative Agent.
Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person owns, directly or indirectly, such number of
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outstanding Capital Securities as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Company.
Swap Obligation means any Hedging Obligation that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
Taxes means any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing, but excluding Excluded Taxes.
Termination Date means the earlier to occur of (a) May 1, 2023 or (b) such other date on which the Commitments terminate pursuant to Section 6 or Section 13.
Termination Event means, with respect to a Pension Plan that is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of Company or any other member of the Controlled Group from such Pension Plan during a plan year in which Company or any other member of the Controlled Group was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Pension Plan, the filing of a notice of intent to terminate the Pension Plan or the treatment of an amendment of such Pension Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Pension Plan or (e) any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or appointment of a trustee to administer, such Pension Plan.
Total Consideration means the total consideration paid with respect to any Permitted Acquisition including, without limitation (a) all payments made in cash and property as consideration, and (b) any Debt assumed or issued in connection therewith.
Total Plan Liability means, at any time, the present value of all vested and unvested accrued benefits under all Pension Plans, determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.
Type - see Section 2.2.1.
UCC is defined in the Guaranty and Collateral Agreement.
Unfunded Liability means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Pension Plans exceeds the fair market value of all assets allocable to those benefits, all determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.
Unmatured Event of Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default.
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Wholly-Owned Subsidiary means, as to any Person, a Subsidiary all of the Capital Securities of which (except directors’ qualifying Capital Securities) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person.
Williams Furnace means Williams Furnace Co., a Delaware corporation and a Loan Party.
Withholding Certificate - see Section 7.6(d).
Write-Down and Conversion Powers means, with respect to any EEA Resolution Authority, the Write-Down and Conversion Powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
1.2 Other Interpretive Provisions. The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.
(a) Section, Annex, Schedule and Exhibit references are to this Agreement unless otherwise specified.
(b) The term “including” is not limiting and means “including without limitation.”
(c) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including.”
(d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.
(e) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.
(f) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Administrative Agent, the Company, the Lenders and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against the Administrative Agent or the Lenders merely because of the Administrative Agent’s or Lenders’ involvement in their preparation.
1.3 Accounting Terms; Changes in GAAP; Rates.
(a) Accounting Terms. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall be construed in conformity with GAAP. Financial statements and other information required to be delivered by the Company to the Lenders pursuant
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to Sections 10.1.1 and 10.1.2 shall be prepared in accordance with GAAP as in effect at the time of such preparation. Notwithstanding the foregoing, for purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, indebtedness of the Company and its Subsidiaries shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of FASB ASC 825 and FASB ASC 470-20 on financial liabilities shall be disregarded.
(b) Changes in GAAP. If the Company notifies the Administrative Agent that the Company requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Company that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.
1.4 Rates. Except as otherwise provided herein, Administrative Agent neither warrants nor accepts responsibility for, nor shall the Administrative Agent bear any liability in connection with, the administration, submission or any other matter related to the rates in the definition of “LIBOR Rate” or with respect to any comparable or successor rate thereto.
1.5 Notwithstanding any changes in GAAP after the Closing Date, any lease of the Company or its Subsidiaries that would be characterized as an operating lease under GAAP in effect on the Closing Date (whether such lease is entered into before or after the Closing Date) shall not constitute a Capital Lease under this Agreement or any other Loan Document as a result of such changes in GAAP unless otherwise agreed to in writing by the Company and the Administrative Agent.
SECTION 2 COMMITMENTS OF THE LENDERS; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES.
2.1 Commitments. On and subject to the terms and conditions of this Agreement, each of the Lenders, severally and for itself alone, agrees to make loans to, and to issue or participate in letters of credit for the account of, the Company as follows:
2.1.1 Revolving Loan Commitment. Each Lender with a Revolving Loan Commitment agrees to make loans on a revolving basis (“Revolving Loans”) from time to time until the Termination Date in such Lender’s Pro Rata Share of such aggregate amounts as the Company may request from all Lenders; provided that the Revolving Outstandings will not at any time exceed Revolving Loan Availability.
2.1.2 [Intentionally Omitted].
2.1.3 L/C Commitment. Subject to Section 2.3.1, the Issuing Lender agrees to issue letters of credit, in each case containing such terms and conditions as are permitted by this Agreement and are reasonably satisfactory to the Issuing Lender (each, a “Letter of Credit”), at the request of and for the account of the Company or the other Loan Parties at the
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direction of the Company from time to time before the scheduled Termination Date and, as more fully set forth in Section 2.3.2, each Lender agrees to purchase a participation in each such Letter of Credit; provided that (a) the aggregate Stated Amount of all Letters of Credit shall not at any time exceed $7,500,000 and (b) the Revolving Outstandings shall not at any time exceed Revolving Loan Availability.
2.2 Loan Procedures.
2.2.1 Various Types of Loans. Each Revolving Loan shall be divided into tranches which are, either a Base Rate Loan or a LIBOR Loan (each a “type” of Loan), as the Company shall specify in the related notice of borrowing or conversion pursuant to Section 2.2.2 or 2.2.3. LIBOR Loans having the same Interest Period which expire on the same day are sometimes called a “Group” or collectively “Groups”. Base Rate Loans and LIBOR Loans may be outstanding at the same time, provided that not more than three (3) different Groups of LIBOR Loans shall be outstanding with respect to the Revolving Commitment at any one time. All borrowings, conversions and repayments of Loans shall be effected so that each Lender will have a ratable share (according to its Pro Rata Share) of all types and Groups of Loans.
2.2.2 Borrowing Procedures. The Company shall give written notice (each such written notice, a “Notice of Borrowing”) substantially in the form of Exhibit E or telephonic notice (followed immediately by a Notice of Borrowing) to the Administrative Agent of each proposed borrowing not later than (a) in the case of a Base Rate borrowing, 11:00 A.M., Chicago time, on the proposed date of such borrowing, and (b) in the case of a LIBOR borrowing, 11:00 A.M., Chicago time, at least three Business Days prior to the proposed date of such borrowing. Each such notice shall be effective upon receipt by the Administrative Agent, shall be irrevocable, and shall specify the date, amount and type of borrowing and, in the case of a LIBOR borrowing, the initial Interest Period therefor. Promptly upon receipt of such notice, the Administrative Agent shall advise each Lender thereof. Not later than 1:00 P.M., Chicago time, on the date of a proposed borrowing, each Lender shall provide the Administrative Agent at the office specified by the Administrative Agent with immediately available funds covering such Lender’s Pro Rata Share of such borrowing and, so long as the Administrative Agent has not received written notice that the conditions precedent set forth in Section 12 with respect to such borrowing have not been satisfied, the Administrative Agent shall pay over the funds received by the Administrative Agent to the Company on the requested borrowing date. Each borrowing shall be on a Business Day. Each Base Rate borrowing shall be in an aggregate amount of at least $100,000 and an integral multiple of $100,000, and each LIBOR borrowing shall be in an aggregate amount of at least $500,000 and an integral multiple of at least $100,000.
2.2.3 Conversion and Continuation Procedures. (a) Subject to Section 2.2.1, the Company may, upon irrevocable written notice to the Administrative Agent in accordance with clause (b) below:
(A) elect, as of any Business Day, to convert any Loans (or any part thereof in an aggregate amount not less than $500,000 or a higher integral multiple of $100,000) into Loans of the other type; or
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(B) elect, as of the last day of the applicable Interest Period, to continue any LIBOR Loans having Interest Periods expiring on such day (or any part thereof in an aggregate amount not less than $500,000 or a higher integral multiple of $100,000) for a new Interest Period;
provided that after giving effect to any prepayment, conversion or continuation, the aggregate principal amount of each Group of LIBOR Loans shall be at least $500,000 and an integral multiple of $100,000.
(b) The Company shall give written notice (each such written notice, a “Notice of Conversion/Continuation”) substantially in the form of Exhibit F or telephonic notice (followed immediately by a Notice of Conversion/Continuation) to the Administrative Agent of each proposed conversion or continuation not later than (i) in the case of conversion into Base Rate Loans, 11:00 A.M., Chicago time, on the proposed date of such conversion and (ii) in the case of conversion into or continuation of LIBOR Loans, 11:00 A.M., Chicago time, at least three Business Days prior to the proposed date of such conversion or continuation, specifying in each case:
(A) the proposed date of conversion or continuation;
(B) the aggregate amount of Loans to be converted or continued;
(C) the type of Loans resulting from the proposed conversion or continuation; and
(D) in the case of conversion into, or continuation of, LIBOR Loans, the duration of the requested Interest Period therefor.
(c) If upon the expiration of any Interest Period applicable to LIBOR Loans, the Company has failed to select timely a new Interest Period to be applicable to such LIBOR Loans, the Company shall be deemed to have elected to convert such LIBOR Loans into Base Rate Loans effective on the last day of such Interest Period.
(d) The Administrative Agent will promptly notify each Lender of its receipt of a notice of conversion or continuation pursuant to this Section 2.2.3 or, if no timely notice is provided by the Company, of the details of any automatic conversion.
(e) Any conversion of a LIBOR Loan on a day other than the last day of an Interest Period therefor shall be subject to Section 8.4.
2.2.4 Agent Advances. Subject to the limitations set forth in this subsection, Administrative Agent is hereby authorized by the Company and the Lenders, from time to time in Administrative Agent’s sole discretion (and subject to the terms of this paragraph, the making of each Agent Advance shall be deemed to be a request by the Company and the Lenders to make such Agent Advance), (a) after the occurrence of an Event of Default or an event which, with the passage of time or giving of notice, will become an Event of Default, or (b) at any time that any of the other applicable conditions precedent set forth in Section 12.2 hereof have not been satisfied (including without limitation the conditions precedent that the
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aggregate Revolving Outstandings do not exceed the Revolving Loan Availability), to make Revolving Loans to the Company on behalf of Lenders which the Administrative Agent, in its sole discretion, determined in good faith deems necessary or desirable (i) to preserve or protect the Collateral, or any portion thereof, (ii) to enhance the likelihood of, or maximize the amount of, repayment of the Loans and other Obligations, or (iii) to pay any amount chargeable to the Company pursuant to the terms of this Agreement or the other Loan Documents (any of the advances described in this subsection being hereafter referred to as “Agent Advances”); provided, that (x) the outstanding principal amount of Agent Advances shall not exceed at any time $1,000,000, (y) the aggregate Revolving Outstandings shall not exceed the Revolving Commitments, and (z) the Administrative Agent has not been notified by the Required Lenders to cease making such Agent Advances. For all purposes in this Agreement, Agent Advances shall be treated as Revolving Loans and shall constitute Base Rate Loans. Agent Advances shall be repaid on demand by the Administrative Agent.
2.3 Letter of Credit Procedures.
2.3.1 L/C Applications. The Company shall execute and deliver to the Issuing Lender the Master Letter of Credit Agreement from time to time in effect. The Company shall give notice to the Administrative Agent and the Issuing Lender of the proposed issuance of each Letter of Credit on a Business Day which is at least three (3) Business Days (or such lesser number of days as the Administrative Agent and the Issuing Lender shall agree in any particular instance in their sole discretion) prior to the proposed date of issuance of such Letter of Credit. Each such notice shall be accompanied by an L/C Application, duly executed by the Company and in all respects satisfactory to the Administrative Agent and the Issuing Lender, together with such other documentation as the Administrative Agent or the Issuing Lender may request in support thereof, it being understood that each L/C Application shall specify, among other things, the date on which the proposed Letter of Credit is to be issued, the expiration date of such Letter of Credit (which shall not be later than the scheduled Termination Date unless the expiration date of such Letter of Credit is on or before the date that is one year following the scheduled Termination Date) and whether such Letter of Credit is to be transferable in whole or in part. Any Letter of Credit outstanding from and after the Termination Date (whether the Termination Date results from the occurrence of the scheduled maturity date, repayment in full of the Obligations (other than Obligations in respect of outstanding Letters of Credit), the acceleration of the Obligations or otherwise) shall immediately be Cash Collateralized. Any Letter of Credit outstanding after the Termination Date which is Cash Collateralized for the benefit of the Issuing Lender shall be the sole responsibility of the Issuing Lender. So long as the Issuing Lender has not received written notice that the conditions precedent set forth in Section 12 with respect to the issuance of such Letter of Credit have not been satisfied, the Issuing Lender shall issue such Letter of Credit on the requested issuance date. The Issuing Lender shall promptly advise the Administrative Agent of the issuance of each Letter of Credit and of any amendment thereto, extension thereof or event or circumstance changing the amount available for drawing thereunder. In the event of any inconsistency between the terms of the Master Letter of Credit Agreement, any L/C Application and the terms of this Agreement, the terms of this Agreement shall control.
2.3.2 Participations in Letters of Credit. Concurrently with the issuance of each Letter of Credit, the Issuing Lender shall be deemed to have sold and transferred to each Lender
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with a Revolving Loan Commitment, and each such Lender shall be deemed irrevocably and unconditionally to have purchased and received from the Issuing Lender, without recourse or warranty, an undivided interest and participation, to the extent of such Lender’s Pro Rata Share, in such Letter of Credit and the Company’s reimbursement obligations with respect thereto. If the Company does not pay any reimbursement obligation when due, the Company shall be deemed to have immediately requested that the Lenders make a Revolving Loan which is a Base Rate Loan in a principal amount equal to such reimbursement obligations. The Administrative Agent shall promptly notify such Lenders of such deemed request and, without the necessity of compliance with the requirements of Section 2.2.2, Section 12.2 or otherwise such Lender shall make available to the Administrative Agent its Pro Rata Share of such Loan. The proceeds of such Loan shall be paid over by the Administrative Agent to the Issuing Lender for the account of the Company in satisfaction of such reimbursement obligations. For the purposes of this Agreement, the unparticipated portion of each Letter of Credit shall be deemed to be the Issuing Lender’s “participation” therein. The Issuing Lender hereby agrees, upon request of the Administrative Agent or any Lender, to deliver to the Administrative Agent or such Lender a list of all outstanding Letters of Credit issued by the Issuing Lender, together with such information related thereto as the Administrative Agent or such Lender may reasonably request.
2.3.3 Reimbursement Obligations. (a) The Company hereby unconditionally and irrevocably agrees to reimburse the Issuing Lender for each payment or disbursement made by the Issuing Lender under any Letter of Credit honoring any demand for payment made by the beneficiary thereunder, in each case on the date that such payment or disbursement is made. Any amount not reimbursed on the date of such payment or disbursement shall bear interest from the date of such payment or disbursement to the date that the Issuing Lender is reimbursed by the Company therefor at a rate per annum equal to the Base Rate from time to time in effect plus the Base Rate Margin from time to time in effect (plus the default rate of interest set forth in Section 4.1 to the extent an Event of Default exists). If any reimbursement obligation is not paid on the day a payment or disbursement is made by the Issuing Lender under a Letter of Credit, the Company hereby authorizes and directs the Administrative Agent to increase the principal balance of the Revolving Loan as a Base Rate Loan in an amount equal to such payment or disbursement made by the Issuing Lender with respect to such Letter of Credit, except that if Revolving Loans are not available at such time as a result of the existence of an Event of Default or otherwise, the reimbursement obligation (including all interest accrued thereon) shall be payable on demand. The Issuing Lender shall notify the Company and the Administrative Agent whenever any demand for payment is made under any Letter of Credit by the beneficiary thereunder; provided that the failure of the Issuing Lender to so notify the Company or the Administrative Agent shall not affect the rights of the Issuing Lender or the Lenders in any manner whatsoever.
(b) The Company’s reimbursement obligations hereunder shall be irrevocable and unconditional under all circumstances, including (a) any lack of validity or enforceability of any Letter of Credit, this Agreement or any other Loan Document, (b) the existence of any claim, set-off, defense or other right which any Loan Party may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuing Lender, any Lender or any other Person, whether in connection with any Letter of Credit, this Agreement, any other Loan
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Document, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between any Loan Party and the beneficiary named in any Letter of Credit), (c) the validity, sufficiency or genuineness of any document which the Issuing Lender has determined complies on its face with the terms of the applicable Letter of Credit, even if such document should later prove to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein shall have been untrue or inaccurate in any respect, or (d) the surrender or impairment of any security for the performance or observance of any of the terms hereof. Without limiting the foregoing, no action or omission whatsoever by the Administrative Agent or any Lender (excluding any Lender in its capacity as the Issuing Lender) under or in connection with any Letter of Credit or any related matters shall result in any liability of the Administrative Agent or any Lender to the Company, or relieve the Company of any of its obligations hereunder to any such Person.
2.3.4 Funding by Lenders to Issuing Lender. If the Issuing Lender makes any payment or disbursement under any Letter of Credit and (a) the Company has not reimbursed the Issuing Lender in full for such payment or disbursement by 11:00 A.M., Chicago time, on the date of such payment or disbursement, (b) a Revolving Loan may not be made in accordance with Section 2.3.2 (as the result of the existence of an Event of Default or otherwise) or (c) any reimbursement received by the Issuing Lender from the Company is or must be returned or rescinded upon or during any bankruptcy or reorganization of the Company or otherwise, each other Lender with a Revolving Loan Commitment shall be obligated to pay to the Administrative Agent for the account of the Issuing Lender, in full or partial payment of the purchase price of its participation in such Letter of Credit, its Pro Rata Share of such payment or disbursement (but no such payment shall diminish the obligations of the Company under Section 2.3.3), and, upon notice from the Issuing Lender, the Administrative Agent shall promptly notify each other Lender thereof. Each other Lender irrevocably and unconditionally agrees to so pay to the Administrative Agent in immediately available funds for the Issuing Lender’s account the amount of such other Lender’s Pro Rata Share of such payment or disbursement. If and to the extent any Lender shall not have made such amount available to the Administrative Agent by 2:00 P.M., Chicago time, on the Business Day on which such Lender receives notice from the Administrative Agent of such payment or disbursement (it being understood that any such notice received after noon, Chicago time, on any Business Day shall be deemed to have been received on the next following Business Day), such Lender agrees to pay interest on such amount to the Administrative Agent for the Issuing Lender’s account forthwith on demand, for each day from the date such amount was to have been delivered to the Administrative Agent to the date such amount is paid, at a rate per annum equal to (a) for the first three days after demand, the Federal Funds Rate from time to time in effect and (b) thereafter, the Base Rate from time to time in effect. Any Lender’s failure to make available to the Administrative Agent its Pro Rata Share of any such payment or disbursement shall not relieve any other Lender of its obligation hereunder to make available to the Administrative Agent such other Lender’s Pro Rata Share of such payment, but no Lender shall be responsible for the failure of any other Lender to make available to the Administrative Agent such other Lender’s Pro Rata Share of any such payment or disbursement.
2.4 Commitments Several. The failure of any Lender to make a requested Loan on any date shall not relieve any other Lender of its obligation (if any) to make a Loan on such date, but
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no Lender shall be responsible for the failure of any other Lender to make any Loan to be made by such other Lender.
2.5 Certain Conditions. Except as otherwise provided in Sections 2.2.2 and 2.3.4 of this Agreement, no Lender shall have an obligation to make any Loan, or to permit the continuation of or any conversion into any LIBOR Loan, and the Issuing Lender shall not have any obligation to issue any Letter of Credit, if an Event of Default or Unmatured Event of Default exists.
2.6 Defaulting Lenders. Notwithstanding any provision of this Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the following provisions shall apply for so long as such Lender is a Defaulting Lender:
2.6.1 fees shall cease to accrue on the unfunded portion of the Revolving Commitment of such Defaulting Lender pursuant to Section 5.1;
2.6.2 if any Letters of Credit are outstanding at the time a Lender becomes a Defaulting Lender then:
(A) all or any part of the Defaulting Lender’s obligation to participate in Letters of Credit shall be reallocated among the non-Defaulting Lenders in accordance with their respective Pro Rata Shares as determined pursuant to clause (a) of the definition of “Pro Rata Share” but only to the extent (x) the sum of all non-Defaulting Lenders’ Revolving Outstandings plus such Defaulting Lender’s obligation to participate in Letters of Credit does not exceed the total of all non-Defaulting Lenders’ Commitments and (y) the conditions set forth in Section 12.2 are satisfied at such time;
(B) if the reallocation described in clause (a) above cannot, or can only partially, be effected, the Company shall within one Business Day following notice by Administrative Agent Cash Collateralize such Defaulting Lender’s obligation to participate in Letters of Credit (after giving effect to any partial reallocation pursuant to clause (a) above) in accordance with the procedures set forth in Section 2.3.1 for so long as such obligation to participate in Letters of Credit is outstanding;
(C) if the Company Cash Collateralizes any portion of such Defaulting Lender’s obligation to participate in Letters of Credit pursuant to Section 2.6.2, Company shall not be required to pay any fees to such Defaulting Lender pursuant to Section 5.2 with respect to such Defaulting Lender’s obligation to participate in Letters of Credit during the period such Defaulting Lender’s obligation to participate in Letters of Credit is Cash Collateralized;
(D) if the obligation to participate in Letters of Credit of the non-Defaulting Lenders is reallocated pursuant to this Section 2.6.2, then the fees payable to the Lenders pursuant to Section 5.1 and Section 5.2 shall be adjusted in accordance with such non-Defaulting Lenders’ Pro Rata Shares (as determined pursuant to clause (a) of the definition of “Pro Rata Share”); and
(E) if any Defaulting Lender’s obligation to participate in Letters of Credit is neither Cash Collateralized nor reallocated pursuant to this Section 2.6.2, then,
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without prejudice to any rights or remedies of any Issuing Lender or any Lender hereunder, all letter of credit fees payable under Section 5.2 with respect to such Defaulting Lender’s obligation to participate in Letters of Credit shall be payable to the applicable Issuing Lender until such obligation to participate in Letters of Credit is Cash Collateralized and/or reallocated; and
2.6.3 so long as any Lender is a Defaulting Lender, no Issuing Lender shall be required to issue, amend or increase any Letter of Credit, unless it is satisfied that the related exposure will be 100% covered by the Commitments of the non-Defaulting Lenders and/or cash collateral will be provided by the Company in accordance with Section 2.6.2, and participating interests in any such newly issued or increased Letter of Credit shall be allocated among non-Defaulting Lenders in a manner consistent with Section 2.6.2(A) (and Defaulting Lenders shall not participate therein);
2.6.4 in the event that Administrative Agent, the Company and the applicable Issuing Lender(s) each agrees that a Defaulting Lender has adequately remedied all matters that caused such Lender to be a Defaulting Lender, then the obligations to participate in Letters of Credit of the Lenders shall be readjusted to reflect the inclusion of such Lender’s Commitment and on such date such Lender shall purchase at par such of the Loans of the other Lenders as Administrative Agent shall determine may be necessary in order for such Lender to hold such Loans in accordance with its Pro Rata Share (as determined pursuant to clause (a) of the definition of “Pro Rata Share”);
2.6.5 any amount payable to a Defaulting Lender hereunder (whether on account of principal, interest, fees or otherwise and including any amount that would otherwise be payable to such Defaulting Lender pursuant to Section 7.5) shall, in lieu of being distributed to such Defaulting Lender, be retained by Administrative Agent in a segregated account and, subject to any applicable requirements of law, be applied at such time or times as may be determined by Administrative Agent (i) first, to the payment of any amounts owing by such Defaulting Lender to Administrative Agent hereunder, (ii) second, pro rata, to the payment of any amounts owing by such Defaulting Lender to the Issuing Lender(s), (iii) third, to the funding of any Revolving Loan or the funding or cash collateralization of any participating interest in any Letter of Credit in respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by Administrative Agent, (iv) fourth, if so determined by Administrative Agent and the Company, held in such account as cash collateral for future funding obligations of the Defaulting Lender under this Agreement, (v) fifth, pro rata, to the payment of any amounts owing to the Company or the Lenders as a result of any judgment of a court of competent jurisdiction obtained by any Company or any Lender against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement, and (vi) sixth, to such Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided, that if such payment is (x) a prepayment of the principal amount of any Loans or reimbursement obligations in respect of draws under Letters of Credit with respect to which the Issuing Lender has funded its participation obligations and (y) made at a time when the conditions set forth in Section 12.2 are satisfied, such payment shall be applied solely to prepay the Loans of, and reimbursement obligations owed to, all Revolving Lenders that are not Defaulting Lenders pro rata prior to being applied to the prepayment of any Loans, or reimbursement obligations owed to, any Defaulting Lender; and
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2.6.6 no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver, consent or any other action the Lenders or the Required Lenders have taken or may take hereunder (including any consent to any amendment or waiver pursuant to Section 15.1), provided that any waiver, amendment or modification requiring the consent of all Lenders or each directly affected Lender which affects such Defaulting Lender differently than other affected Lenders shall require the consent of such Defaulting Lender.
SECTION 3 EVIDENCING OF LOANS.
3.1 Notes. Each Lender’s portion of the Revolving Commitment shall be evidenced by a Note, with appropriate insertions, payable to the order of such Lender in a face principal amount equal to such Lender’s portion of the Revolving Commitment.
3.2 Recordkeeping. The Administrative Agent, on behalf of each Lender, shall record in its records, the date and amount of each Loan made by each Lender, each repayment or conversion thereof and, in the case of each LIBOR Loan, the dates on which each Interest Period for such Loan shall begin and end. The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Loans owing and unpaid. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the Obligations of the Company hereunder or under any Note to repay the principal amount of the Loans hereunder, together with all interest accruing thereon.
SECTION 4 INTEREST.
4.1 Interest Rates. The Company promises to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full as follows:
(a) at all times while such Loan is a Base Rate Loan, at a rate per annum equal to the sum of the Base Rate from time to time in effect plus the Base Rate Margin from time to time in effect; and
(b) at all times while such Loan is a LIBOR Loan, at a rate per annum equal to the sum of the LIBOR Rate applicable to each Interest Period for such Loan plus the LIBOR Margin from time to time in effect;
provided that at any time an Event of Default exists, unless the Required Lenders otherwise consent, the interest rate applicable to each Loan shall automatically be increased by 2%; provided further that such increase may thereafter be rescinded by the Required Lenders, notwithstanding Section 15.1. The parties hereto acknowledge and agree that any and all Base Rate Loans and LIBOR Loans (including the Interest Periods for all LIBOR Loans) outstanding on the date hereof under the Existing Credit Agreement shall continue under this Agreement and immediately become subject to the terms and conditions contained in this Agreement.
4.2 Interest Payment Dates. Accrued interest on each Base Rate Loan shall be payable on the first Business Day of each month in arrears for interest through the last day of the prior month and on the Termination Date. Accrued interest on each LIBOR Loan shall be payable on the last Business Day of each Interest Period and, with respect to Interest Periods in excess of one
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(1) month, on the same date of each month as the initial date of the Interest Period during such Interest Period and upon a prepayment of such Loan and at maturity. After the Termination Date, and at any time an Event of Default exists, accrued interest on all Loans shall be payable on demand.
4.3 Setting and Notice of LIBOR Rates. The applicable LIBOR Rate for each Interest Period shall be determined by the Administrative Agent, and notice thereof shall be given by the Administrative Agent promptly to the Company and each Lender. Each determination of the applicable LIBOR Rate by the Administrative Agent shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. The Administrative Agent shall, upon written request of the Company or any Lender, deliver to the Company or such Lender a statement showing the computations used by the Administrative Agent in determining any applicable LIBOR Rate hereunder.
4.4 Computation of Interest. Interest on LIBOR Loans shall be computed for the actual number of days elapsed on the basis of a year of 360 days. Interest on Base Rate Loans shall be computed for the actual number of days elapsed on the basis of a year of 365 or 366 days, as applicable. The applicable interest rate for each Base Rate Loan shall change simultaneously with each change in the Base Rate.
SECTION 5 FEES.
5.1 Non-Use Fee. The Company agrees to pay to the Administrative Agent for the account of each Lender a non-use fee (except as provided in Section 2.6), for the period from the Closing Date to the Termination Date, at the Non-Use Fee Rate in effect from time to time on such Lender’s Pro Rata Share (as adjusted from time to time) of the average daily unused amount of the Revolving Commitment during each calendar month. For purposes of calculating usage under this Section, the Revolving Commitment shall be deemed used to the extent of Revolving Outstandings. Such non-use fee shall be fully earned by the Lenders on the first day of each month and payable monthly in arrears on the first Business Day of each month with respect to all activity through the last day of the prior month and on the Termination Date for any period then ending for which such non-use fee shall not have previously been paid. The non-use fee shall be computed for the actual number of days elapsed on the basis of a year of 360 days.
5.2 Letter of Credit Fees. (a) Except as provided in Section 2.6, the Company agrees to pay to the Administrative Agent for the account of each Lender a letter of credit fee for each Letter of Credit equal to the L/C Fee Rate in effect from time to time on such Lender’s Pro Rata Share (as adjusted from time to time) of the undrawn amount of such Letter of Credit (computed for the actual number of days elapsed on the basis of a year of 360 days); provided that, unless the Required Lenders otherwise consent, the rate applicable to each Letter of Credit shall be increased by 2% at any time that an Event of Default exists. Such letter of credit fee shall be payable in arrears on the last day of each calendar quarter and on the Termination Date (or such later date on which such Letter of Credit expires or is terminated) for the period from the date of the issuance of each Letter of Credit (or the last day on which the letter of credit fee was paid with respect thereto) to the date such payment is due or, if earlier, the date on which such Letter of Credit expired or was terminated. Notwithstanding anything to the contrary contained herein, with respect to the letter of credit fee that is payable at the L/C Fee Rate as provided in this Section 5.2,
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0.25% of such letter of credit fee shall be considered a fronting fee payable entirely to the Issuing Lender.
(b) In addition, with respect to each Letter of Credit, except as provided in Section 2.6, the Company agrees to pay to the Issuing Lender, for its own account, such reasonable fees and expenses as the Issuing Lender customarily requires in connection with the issuance, negotiation, processing and/or administration of letters of credit in similar situations.
5.3 Administrative Agent’s Fees. The Company agrees to pay to the Administrative Agent such agent’s fees as are mutually agreed to from time to time by the Company and the Administrative Agent including the fees set forth in the Agent Fee Letter. The Company acknowledges and agrees that the Agent Fee Letter continues to be in full force and effect for all purposes.
SECTION 6 REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT; PREPAYMENTS.
6.1 Reduction or Termination of the Revolving Commitment.
6.1.1 Voluntary Permanent Reduction or Termination of the Revolving Commitment. The Company may from time to time on at least five (5) Business Days’ prior written notice given in accordance with Section 15.3 hereof (which the Administrative Agent shall promptly advise each Lender thereof) permanently reduce the Revolving Commitment to an amount not less than the greater of (a) $10,000,000 and (b) the Revolving Outstandings. Any such reduction shall be in the amount of $5,000,000 or a higher integral multiple of $5,000,000. Concurrently with any reduction of the Revolving Commitment to zero, the Company shall pay all accrued interest on the Revolving Loans, all accrued non-use fees and all accrued letter of credit fees and shall Cash Collateralize in full all obligations arising with respect to the Letters of Credit.
6.1.2 Voluntary Temporary Reduction of the Revolving Commitment. The Company may from time to time on at least five (5) Business Days’ prior written notice given in accordance with Section 15.3 hereof (which the Administrative Agent shall promptly advise each Lender thereof) temporarily reduce the Revolving Commitment subject to the following terms and conditions: (a) with respect to any election made by the Company to temporarily decrease the Revolving Commitment, unless such election is terminated by the Company sooner as provided in the last sentence of this Section 6.1.2, the temporary decrease will automatically terminate on the one hundred eightieth (180) day anniversary of such election (each, a “Temporary Revolver Reduction Period” and each day during a Temporary Revolver Reduction Period, a “Temporary Revolver Reduction Day”), (b) with respect to any election made by the Company to temporarily decrease the Revolving Commitment, the Revolving Commitment may be reduced to an amount not less than the greater of (i) $10,000,000 and (ii) the Revolving Outstandings, (c) with respect to each calendar year, there shall be no more than two (2) Temporary Revolver Reduction Period elections made by the Company and no more than a total of one hundred eighty (180) Temporary Revolver Reduction Days, and (d) except as otherwise approved in writing by the Administrative Agent, no election may be made under this section during the existence of an Event of Default and any Temporary Revolver
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Reduction Period in place shall immediately terminate upon the occurrence of an Event of Default. Notwithstanding the foregoing, the Company may terminate any Temporary Revolver Reduction Period so long as no Event of Default exists by providing the Administrative Agent with no less than five (5) Business Days’ prior written notice of such termination.
6.1.3 All Reductions of the Revolving Commitment. All reductions of the Revolving Commitment shall reduce the Commitments ratably among the Lenders according to their respective Pro Rata Shares.
6.2 Prepayments.
6.2.1 Voluntary Prepayments. The Company may from time to time prepay the Loans in whole or in part without premium or penalty (but subject to payment of costs associated with breakfunding LIBOR Loans as set forth below); provided that the Company shall give the Administrative Agent (which shall promptly advise each Lender) notice thereof not later than 11:00 A.M., Chicago time, on the day of such prepayment (which shall be a Business Day), specifying the Loans to be prepaid and the date and amount of prepayment. Any such partial prepayment shall be in an amount equal to $500,000 or a higher integral multiple of $100,000.
6.2.2 Mandatory Prepayments.
(a) [Intentionally Omitted].
(b) If on any day the Revolving Outstandings exceed the Borrowing Base, the Company shall immediately prepay Revolving Loans and/or Cash Collateralize the outstanding Letters of Credit, or do a combination of the foregoing, in an amount sufficient to eliminate such excess.
(c) If on any day on which the Revolving Commitment is reduced pursuant to Section 6.1 the Revolving Outstandings exceed the Revolving Commitment, the Company shall immediately prepay Revolving Loans or Cash Collateralize the outstanding Letters of Credit, or do a combination of the foregoing, in an amount sufficient to eliminate such excess.
6.3 Manner of Prepayments.
6.3.1 All Prepayments. Any partial prepayment of a Group of LIBOR Loans shall be subject to the proviso to Section 2.2.3(a). Any prepayment of a LIBOR Loan on a day other than the last day of an Interest Period therefor shall include interest on the principal amount being repaid and shall be subject to Section 8.4. Except as otherwise provided by this Agreement, all principal payments in respect of the Loans shall be applied first, to repay outstanding Base Rate Loans and then to repay outstanding LIBOR Rate Loans in direct order of Interest Period maturities.
6.4 Repayments.
6.4.1 Revolving Loans. The Revolving Loans of each Lender shall be paid in full and the Revolving Commitment shall terminate on the Termination Date.
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SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.
7.1 Making of Payments. All payments of principal or interest on the Notes, and of all fees, shall be made by the Company to the Administrative Agent in immediately available funds at the office specified by the Administrative Agent not later than 2:00 p.m., Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by the Administrative Agent on the following Business Day. Subject to Section 2.6, the Administrative Agent shall promptly remit to each Lender its share of all such payments received in collected funds by the Administrative Agent for the account of such Lender. All payments under Section 8.1 shall be made by the Company directly to the Lender entitled thereto without setoff, counterclaim or other defense.
7.2 Application of Certain Payments.
(A) So long as no Unmatured Event of Default or Event of Default has occurred and is continuing, (a) payments matching specific scheduled payments then due shall be applied to those scheduled payments and (b) voluntary and mandatory prepayments shall be applied as set forth in Sections 6.2 and 6.3. Concurrently with each remittance to any Lender of its share of any such payment, Administrative Agent shall advise such Lender as to the application of such payment.
(B) Notwithstanding anything to the contrary contained in this Agreement, if an Event of Default has occurred and is continuing the Company hereby irrevocably waives the right to direct the application of payments received from or on behalf of the Company, and the Company hereby irrevocably agrees, as between the Company on the one hand and the Administrative Agent and the Lenders on the other, that the Administrative Agent shall have the continuing exclusive right to apply any and all such payments against the Obligations as the Administrative Agent may deem advisable notwithstanding any previous entry by the Administrative Agent in its applicable books and records.
(C) Following the occurrence and during the continuance of an Event of Default, but absent the occurrence and continuance of an Acceleration Event, Administrative Agent shall apply any and all payments received by the Administrative Agent in respect of the Obligations, and any and all proceeds of Collateral received by the Administrative Agent, in such order as the Administrative Agent may from time to time elect. In the absence of any specific election made by the Administrative Agent pursuant to this clause (C), or if directed in writing by the Required Lenders, payments and proceeds received by Administrative Agent pursuant to this clause (C) shall be applied in the following order: first, to all fees, costs, indemnities, liabilities, obligations and expenses incurred by or owing to Administrative Agent with respect to this Agreement, the other Loan Documents or the Collateral; second, to accrued and unpaid interest on Agent Advances; third, to Agent Advances; fourth, to all fees, costs, indemnities, liabilities, obligations and expenses incurred by or owing to any Lender with respect to this Agreement, the other Loan Documents or the Collateral; fifth, to accrued and unpaid interest on all other Obligations; sixth, to the principal amount of all other Obligations then due and owing and to Cash Collateralize any then outstanding Letters of Credit and payment of related fees; seventh, to all other outstanding Obligations (other than those described in clause eighth below); and eighth, to
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provide cash collateral to secure any contingent Obligations, including Obligations in respect of Hedging Obligations.
(D) Notwithstanding anything to the contrary contained in this Agreement, if an Acceleration Event shall have occurred, and so long as it continues, the Administrative Agent shall apply any and all payments received by the Administrative Agent in respect of the Obligations, and any and all proceeds of Collateral received by the Administrative Agent, in the following order: first, to all fees, costs, indemnities, liabilities, obligations and expenses incurred by or owing to the Administrative Agent with respect to this Agreement, the other Loan Documents or the Collateral; second, to accrued and unpaid interest on Agent Advances; third, to Agent Advances; fourth, to all fees, costs, indemnities, liabilities, obligations and expenses incurred by or owing to any Lender with respect to this Agreement, the other Loan Documents or the Collateral; fifth, to accrued and unpaid interest on all other Obligations (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts); sixth, ratably to the principal amount of all other Obligations outstanding, and to Cash Collateralize any and all the outstanding Letters of Credit and future payment of related fees herein; and seventh, to all other outstanding Obligations and contingent Obligations.
(E) Any balance remaining after giving effect to the applications set forth in this Section 7.2 shall be delivered to the Company or to whoever may be lawfully entitled to receive such balance or as a court of competent jurisdiction may direct. In carrying out any of the applications set forth in this Section 7.2, (i) amounts received shall be applied in the numerical order provided until exhausted prior to the application to the next succeeding category and (ii) each of the Persons entitled to receive a payment or cash collateral in any particular category shall receive an amount equal to its pro rata share of amounts available to be applied pursuant thereto for such category.
(F) Administrative Agent is authorized (but not obligated) to, and at its sole election may, charge to the Revolving Loan balance on behalf of the Company and cause to be paid all fees, expenses, costs (including insurance premiums in accordance with Section 10.3) and interest and principal, owing by Company under this Agreement or any of the other Loan Documents if and to the extent Company fails to promptly pay any such amounts as and when due, even if such charges would cause the balance of the aggregate Revolving Outstandings to exceed the Borrowing Base but not if such charges would cause the aggregate Revolving Outstandings to exceed the Revolving Commitment. Any charges so made shall, unless prohibited by applicable law, constitute part of the Revolving Loan hereunder and may be made regardless of whether the conditions set forth in Section 12.2 are then satisfied, including the existence of any Unmatured Event of Default or Event of Default either before or after giving effect thereto.
7.3 Due Date Extension. If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day (unless, in the case of a LIBOR Loan, such immediately following Business Day is the first Business Day of a calendar month, in which case such due date shall be the immediately preceding Business Day) and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension.
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7.4 Setoff. The Company, for itself and each other Loan Party, agrees that the Administrative Agent and each Lender have all rights of set-off and bankers’ lien provided by applicable law, and in addition thereto, the Company, for itself and each other Loan Party, agrees that at any time any Event of Default exists, the Administrative Agent and each Lender may apply to the payment of any Obligations of the Company and each other Loan Party hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of the Company and each other Loan Party then or thereafter with the Administrative Agent or such Lender.
7.5 Proration of Payments. Except as provided in Section 2.6, if any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise, on account of (a) principal of or interest on any Loan, but excluding (i) any payment pursuant to Section 8.7 or 15.6 and (ii) payments of interest on any Affected Loan) or (b) its participation in any Letter of Credit in excess of its applicable Pro Rata Share of payments and other recoveries obtained by all Lenders on account of principal of and interest on the Loans (or such participation) then held by them, then such Lender shall purchase from the other Lenders such participations in the Loans (or sub-participations in Letters of Credit) held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery.
7.6 Taxes.
(a) All payments made by the Company hereunder or under any Loan Documents shall be made without setoff, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any person shall be made by the Company free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.
(b) If the Company makes any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Taxes, the Company shall increase the payment hereunder or under any such Loan Document such that after the reduction for the amount of Taxes withheld (and any taxes withheld or imposed with respect to the additional payments required under this Section 7.6(b)), the amount paid to the Lenders or the Administrative Agent equals the amount that was payable hereunder or under any such Loan Document without regard to this Section 7.6(b). To the extent the Company withholds any Taxes on payments hereunder or under any Loan Document, the Company shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to the Administrative Agent within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to the Administrative Agent) evidencing the payment of all amounts so required to be deducted or withheld from such payment.
(c) If any Lender or the Administrative Agent is required by law to make any payments of any Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Tax is assessed against a Lender or the Administrative Agent with respect
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to amounts received or receivable hereunder or under any other Loan Document, the Company will indemnify such person against (i) such Tax (and any reasonable counsel fees and expenses associated with such Tax) and (ii) any taxes imposed as a result of the receipt of the payment under this Section 7.6(c). A certificate prepared in good faith as to the amount of such payment by such Lender or the Administrative Agent shall, absent manifest error, be final, conclusive, and binding on all parties.
(d) (i) To the extent permitted by applicable law, each Lender that is not a United States person within the meaning of Code Section 7701(a)(30) (a “Non-U.S. Participant”) shall deliver to the Company and the Administrative Agent on or prior to the Closing Date (or in the case of a Lender that is an Assignee, on the date of such assignment to such Lender) two accurate and complete original signed copies of IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable form prescribed by the IRS) certifying to such Lender’s entitlement to a complete exemption from, or a reduced rate in, United States withholding tax on interest payments to be made hereunder or any Loan. If a Lender that is a Non-U.S. Participant is claiming a complete exemption from withholding on interest pursuant to Code Sections 871(h) or 881(c), the Lender shall deliver (along with two accurate and complete original signed copies of IRS Form W-8BEN) a certificate in form and substance reasonably acceptable to Administrative Agent (any such certificate, a “Withholding Certificate”). In addition, each Lender that is a Non-U.S. Participant agrees that from time to time after the Closing Date, (or in the case of a Lender that is an Assignee, after the date of the assignment to such Lender), when a lapse in time (or change in circumstances occurs) renders the prior certificates hereunder obsolete or inaccurate in any material respect, such Lender shall, to the extent permitted under applicable law, deliver to the Company and the Administrative Agent two new and accurate and complete original signed copies of an IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable forms prescribed by the IRS), and if applicable, a new Withholding Certificate, to confirm or establish the entitlement of such Lender or the Administrative Agent to an exemption from, or reduction in, United States withholding tax on interest payments to be made hereunder or any Loan.
(ii) Each Lender that is not a Non-U.S. Participant (other than any such Lender which is taxed as a corporation for U.S. federal income tax purposes) shall provide two properly completed and duly executed copies of IRS Form W-9 (or any successor or other applicable form) to the Company and the Administrative Agent certifying that such Lender is exempt from United States backup withholding tax. To the extent that a form provided pursuant to this Section 7.6(d)(ii) is rendered obsolete or inaccurate in any material respect as result of change in circumstances with respect to the status of a Lender, such Lender shall, to the extent permitted by applicable law, deliver to the Company and the Administrative Agent revised forms necessary to confirm or establish the entitlement to such Lender’s or Administrative Agent’s exemption from United States backup withholding tax.
(iii) The Company shall not be required to pay additional amounts to a Lender, or indemnify any Lender, under this Section 7.6 to the extent that such obligations would not have arisen but for the failure of such Lender to comply with Section 7.6(d).
(iv) Each Lender agrees to indemnify the Administrative Agent and hold the Administrative Agent harmless for the full amount of any and all present or future Taxes and related liabilities (including penalties, interest, additions to tax and expenses, and any Taxes
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imposed by any jurisdiction on amounts payable to the Administrative Agent under this Section 7.6) which are imposed on or with respect to principal, interest or fees payable to such Lender hereunder and which are not paid by the Company pursuant to this Section 7.6, whether or not such Taxes or related liabilities were correctly or legally asserted. This indemnification shall be made within 30 days from the date the Administrative Agent makes written demand therefor.
SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR LIBOR LOANS.
8.1 Increased Costs.
(a) If, after the Closing Date, any Change in Law: (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the FRB, but excluding any reserve included in the determination of the LIBOR Rate pursuant to Section 4), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Lender; or (ii) shall impose on any Lender any other condition affecting its LIBOR Loans, its Note or its obligation to make LIBOR Loans; and the result of anything described in clauses (i) and (ii) above is to increase the cost to (or to impose a cost on) such Lender (or any LIBOR Office of such Lender) of making or maintaining any LIBOR Loan, or to reduce the amount of any sum received or receivable by such Lender (or its LIBOR Office) under this Agreement or under its Note with respect thereto, then upon demand by such Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to the Administrative Agent), the Company shall pay directly to such Lender such additional amount as will compensate such Lender for such increased cost or such reduction, so long as such amounts have accrued on or after the day which is 180 days prior to the date on which such Lender first made demand therefor. Notwithstanding anything to the contrary herein, this Section 8.1 shall not apply to any such increased cost or such reduction that is (i) the subject of Section 7.6 (which shall be controlling with respect to such matters), (ii) attributable to changes in the rate of tax on the overall net income of a Lender or its lending office imposed by the jurisdiction in which such Lender’s principal executive office or lending office is located, or (iii) attributable to the failure of a Lender to comply with Section 7.6(d).
(b) If any Lender shall reasonably determine that any Change in Law regarding capital adequacy has or would have the effect of reducing the rate of return on such Lender’s or such controlling Person’s capital as a consequence of such Lender’s obligations hereunder or under any Letter of Credit to a level below that which such Lender or such controlling Person could have achieved but for such Change in Law (taking into consideration such Lender’s or such controlling Person’s policies with respect to capital adequacy) by an amount deemed by such Lender or such controlling Person to be material, then from time to time, upon demand by such Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to the Administrative Agent), the Company shall pay to such Lender such additional amount as will compensate such Lender or such controlling Person for such reduction so long as such amounts have accrued on or after the day which is 180 days prior to the date on which such Lender first made demand therefor.
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8.2 Basis for Determining Interest Rate Inadequate or Unfair. If:
(a) the Administrative Agent reasonably determines (which determination shall be binding and conclusive on the Company) that by reason of circumstances affecting the interbank LIBOR market adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate; or
(b) the Required Lenders advise the Administrative Agent that the LIBOR Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Lenders of maintaining or funding LIBOR Loans for such Interest Period (taking into account any amount to which such Lenders may be entitled under Section 8.1) or that the making or funding of LIBOR Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of such Lenders materially affects such Loans;
then the Administrative Agent shall promptly notify the other parties thereof and, so long as such circumstances shall continue, (i) no Lender shall be under any obligation to make or convert any Base Rate Loans into LIBOR Loans and (ii) on the last day of the current Interest Period for each LIBOR Loan, such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan.
8.3 Changes in Law Rendering LIBOR Loans Unlawful. If any change in, or the adoption of any new, law or regulation, or any change in the interpretation of any applicable law or regulation by any governmental or other regulatory body charged with the administration thereof, should make it (or in the good faith judgment of any Lender cause a substantial question as to whether it is) unlawful for any Lender to make, maintain or fund LIBOR Loans, then such Lender shall promptly notify each of the other parties hereto and, so long as such circumstances shall continue, (a) such Lender shall have no obligation to make or convert any Base Rate Loan into a LIBOR Loan (but shall make Base Rate Loans concurrently with the making of or conversion of Base Rate Loans into LIBOR Loans by the Lenders which are not so affected, in each case in an amount equal to the amount of LIBOR Loans which would be made or converted into by such Lender at such time in the absence of such circumstances) and (b) on the last day of the current Interest Period for each LIBOR Loan of such Lender (or, in any event, on such earlier date as may be required by the relevant law, regulation or interpretation), such LIBOR Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Each Base Rate Loan made by a Lender which, but for the circumstances described in the foregoing sentence, would be a LIBOR Loan (an “Affected Loan”) shall remain outstanding for the period corresponding to the Group of LIBOR Loans of which such Affected Loan would be a part absent such circumstances.
8.4 Funding Losses. The Company hereby agrees that upon demand by any Lender (which demand shall be accompanied by a statement setting forth the basis for the amount being claimed, a copy of which shall be furnished to the Administrative Agent), the Company will indemnify such Lender against any net loss or expense which such Lender may sustain or incur (including any net loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain any LIBOR Loan), as reasonably determined by such Lender, as a result of (a) any payment, prepayment or conversion of any LIBOR Loan of such Lender on a date other than the last day of an Interest Period for such Loan (including any conversion pursuant to Section 8.3) or (b) any failure of the Company to
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borrow, convert or continue any Loan on a date specified therefor in a notice of borrowing, conversion or continuation pursuant to this Agreement. For this purpose, all notices to the Administrative Agent pursuant to this Agreement shall be deemed to be irrevocable.
8.5 Right of Lenders to Fund through Other Offices. Each Lender may, if it so elects, fulfill its commitment as to any LIBOR Loan by causing a foreign branch or Affiliate of such Lender to make such Loan; provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Lender and the obligation of the Company to repay such Loan shall nevertheless be to such Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or Affiliate.
8.6 Discretion of Lenders as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Lender had actually funded and maintained each LIBOR Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the LIBOR Rate for such Interest Period.
8.7 Mitigation of Circumstances; Replacement of Lenders.
(a) Each Lender shall promptly notify the Company and the Administrative Agent of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Lender’s sole judgment, otherwise disadvantageous to such Lender) to mitigate or avoid, (i) any obligation by the Company to pay any amount pursuant to Sections 7.6 or 8.1 or (ii) the occurrence of any circumstances described in Sections 8.2 or 8.3 (and, if any Lender has given notice of any such event described in clause (i) or (ii) above and thereafter such event ceases to exist, such Lender shall promptly so notify the Company and the Administrative Agent). Without limiting the foregoing, each Lender will designate a different funding office if such designation will avoid (or reduce the cost to the Company of) any event described in clause (i) or (ii) above and such designation will not, in such Lender’s sole judgment, be otherwise disadvantageous to such Lender.
(b) If the Company becomes obligated to pay additional amounts to any Lender pursuant to Sections 7.6 or 8.1, or any Lender gives notice of the occurrence of any circumstances described in Sections 8.2 or 8.3, or any Lender becomes a Defaulting Lender, the Company may designate another bank which is acceptable to the Administrative Agent and the Issuing Lender in their reasonable discretion (such other bank being called a “Replacement Lender”) to purchase the Revolving Commitment of such Lender (and Loans related thereto) and such Lender’s rights hereunder, without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to such Lender’s Revolving Commitment plus any accrued but unpaid interest on such Loans thereunder and all accrued but unpaid fees owed to such Lender and any other amounts payable to such Lender under this Agreement, and to assume all the obligations of such Lender hereunder, and, upon such purchase and assumption, such Lender shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Lender prior to the date of such purchase and assumption) and shall be relieved from all
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obligations to the Company hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Lender hereunder.
8.8 Conclusiveness of Statements; Survival of Provisions. Determinations and statements of any Lender pursuant to Sections 8.1, 8.2, 8.3 or 8.4 shall be conclusive absent demonstrable error. Lenders may use reasonable averaging and attribution methods in determining compensation under Sections 8.1 and 8.4, and the provisions of such Sections shall survive repayment of the Obligations, cancellation of any Notes, expiration or termination of the Letters of Credit and termination of this Agreement.
8.9 Effect of Benchmark Transition Event.
(a) Benchmark Replacement. Notwithstanding anything to the contrary herein or in any other Loan Document, upon the occurrence of a Benchmark Transition Event or an Early Opt-in Election, as applicable, the Administrative Agent (without, except as specifically provided in the two following sentences, any action or consent by any other party to this Agreement) may amend this Agreement to replace the LIBOR Rate with a Benchmark Replacement. Any such amendment with respect to a Benchmark Transition Event will become effective at 5:00 p.m. (Chicago time) on the fifth (5th) Business Day after the Administrative Agent has posted such proposed amendment to Borrower. Any such amendment with respect to an Early Opt-in Election will become effective on the date that Borrower has delivered to the Administrative Agent written notice that the Borrower accepts such amendment. No replacement of the LIBOR Rate with a Benchmark Replacement pursuant to this Section 8.9 will occur prior to the applicable Benchmark Transition Start Date.
(b) Benchmark Replacement Conforming Changes. In connection with the implementation of a Benchmark Replacement, the Administrative Agent will have the right to make Benchmark Replacement Conforming Changes from time to time and, notwithstanding anything to the contrary herein or in any other Loan Document, any amendments implementing such Benchmark Replacement Conforming Changes will become effective without any further action or consent of any other party to this Agreement.
(c) Notices; Standards for Decisions and Determinations. The Administrative Agent will promptly notify the Borrower of (i) any occurrence of a Benchmark Transition Event or an Early Opt-in Election, as applicable, and its related Benchmark Replacement Date and Benchmark Transition Start Date, (ii) the implementation of any Benchmark Replacement, (iii) the effectiveness of any Benchmark Replacement Conforming Changes and (iv) the commencement or conclusion of any Benchmark Unavailability Period. Any determination, decision or election that may be made by the Administrative Agent pursuant to this Section 8.9, including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action, will be conclusive and binding absent manifest error and may be made in its sole discretion and without consent from any other party hereto, except, in each case, as expressly required pursuant to this Section 8.9.
(d) Benchmark Unavailability Period. Upon Borrower’s receipt of notice of the commencement of a Benchmark Unavailability Period, the Borrower will be deemed to have
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converted any pending request for a Loan, and any conversion to or continuation of any Loans to be made, converted or continued during any Benchmark Unavailability Period into a request for a borrowing of or conversion to Loans at a rate per annum equal to the Prime Rate.
(e) Certain Defined Terms. As used in this Section 8.9:
“Benchmark Replacement” means the sum of: (a) the alternate benchmark rate (which may include Term SOFR) that has been selected by the Administrative Agent, giving due consideration to (i) any selection or recommendation of a replacement rate or the mechanism for determining such a rate by the Relevant Governmental Body and (ii) any then-prevailing market convention for determining a rate of interest as a replacement to the LIBOR Rate for U.S. dollar-denominated syndicated credit facilities, and (b) the Benchmark Replacement Adjustment.
“Benchmark Replacement Adjustment” means, with respect to any replacement of the LIBOR Rate with an Unadjusted Benchmark Replacement for each applicable interest period, the spread adjustment, or method for calculating or determining such spread adjustment (which may be a positive or negative value or zero) that has been selected by the Administrative Agent giving due consideration to (i) any selection or recommendation of a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of the LIBOR Rate with the applicable Unadjusted Benchmark Replacement by the Relevant Governmental Body and (ii) any evolving or then-prevailing market convention for determining a spread adjustment, or method for calculating or determining such spread adjustment, for the replacement of the LIBOR Rate with the applicable Unadjusted Benchmark Replacement for U.S. dollar-denominated syndicated credit facilities at such time.
“Benchmark Replacement Conforming Changes” means, with respect to any Benchmark Replacement, any technical, administrative or operational changes (including changes to the timing and frequency of determining rates and making payments of interest and other administrative matters) that the Administrative Agent reasonably decides may be appropriate to reflect the adoption and implementation of such Benchmark Replacement and to permit the administration thereof by the Administrative Agent in a manner substantially consistent with then evolving market practice (or, if the Administrative Agent reasonably decides that adoption of any portion of such market practice is not administratively feasible or if the Administrative Agent reasonably determines that no market practice for the administration of the Benchmark Replacement exists, in such other manner of administration as the Administrative
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Agent decides is reasonably necessary in connection with the administration of this Agreement).
“Benchmark Replacement Date” means the earlier to occur of the following events with respect to the LIBOR Rate:
(i) in the case of clause (i) or (ii) of the definition of “Benchmark Transition Event,” the later of (A) the date of the public statement or publication of information referenced therein and (B) the date on which the administrator of the LIBOR Rate permanently or indefinitely ceases to provide the LIBOR Rate; or
(ii) in the case of clause (iii) of the definition of “Benchmark Transition Event,” the date of the public statement or publication of information referenced therein.
“Benchmark Transition Event” means the occurrence of one or more of the following events with respect to the LIBOR Rate:
(i) a public statement or publication of information by or on behalf of the administrator of the LIBOR Rate announcing that such administrator has ceased or will cease to provide the LIBOR Rate, permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide the LIBOR Rate;
(ii) a public statement or publication of information by the regulatory supervisor for the administrator of the LIBOR Rate, the U.S. Federal Reserve System, an insolvency official with jurisdiction over the administrator for the LIBOR Rate, a resolution authority with jurisdiction over the administrator for the LIBOR Rate or a court or an entity with similar insolvency or resolution authority over the administrator for the LIBOR Rate, which states that the administrator of the LIBOR Rate has ceased or will cease to provide the LIBOR Rate permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide the LIBOR Rate; or
(iii) a public statement or publication of information by the regulatory supervisor for the administrator of the LIBOR Rate announcing that the LIBOR Rate is no longer representative.
“Benchmark Transition Start Date” means (a) in the case of a Benchmark Transition Event, the earlier of (i) the applicable Benchmark Replacement Date and (ii) if such Benchmark Transition Event is a public statement or publication of information of a prospective event, the 90th day prior to the expected date of such event as of such public statement or publication of information
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(or if the expected date of such prospective event is fewer than 90 days after such statement or publication, the date of such statement or publication) and (b) in the case of an Early Opt-in Election, the date specified by the Administrative Agent by notice to the Borrower.
“Benchmark Unavailability Period” means, if a Benchmark Transition Event and its related Benchmark Replacement Date have occurred with respect to the LIBOR Rate and solely to the extent that the LIBOR Rate has not been replaced with a Benchmark Replacement, the period (i) beginning at the time that such Benchmark Replacement Date has occurred if, at such time, no Benchmark Replacement has replaced the LIBOR Rate for all purposes hereunder in accordance with Section 8.9 and (ii) ending at the time that a Benchmark Replacement has replaced the LIBOR Rate for all purposes hereunder pursuant to Section 8.9.
“Early Opt-in Election” means the occurrence of (i) a determination by the Administrative Agent or (ii) a notification by the Borrower to the Administrative Agent, that U.S. dollar-denominated syndicated credit facilities generally being executed at such time, or that generally include language similar to that contained in this Section 8.9, are being executed or amended, as applicable, to incorporate or adopt a new benchmark interest rate to replace the LIBOR Rate, and in the case of clause (ii) the agreement by the Administrative Agent to amend this Agreement as a result of such election.
“Federal Reserve Bank of New York’s Website” means the website of the Federal Reserve Bank of New York at http://www.newyorkfed.org, or any successor source.
“Relevant Governmental Body” means the Federal Reserve Board and/or the Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Federal Reserve Board and/or the Federal Reserve Bank of New York or any successor thereto.
“SOFR” with respect to any day means the secured overnight financing rate published for such day by the Federal Reserve Bank of New York, as the administrator of the benchmark (or a successor administrator) on the Federal Reserve Bank of New York’s Website.
“Term SOFR” means the forward-looking term rate based on SOFR that has been selected or recommended by the Relevant Governmental Body.
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“Unadjusted Benchmark Replacement” means the Benchmark Replacement excluding the Benchmark Replacement Adjustment.
SECTION 9 REPRESENTATIONS AND WARRANTIES.
To induce the Administrative Agent and the Lenders to enter into this Agreement and to induce the Lenders to make Loans and issue and participate in Letters of Credit hereunder, the Company represents and warrants to the Administrative Agent and the Lenders that on the Closing Date:
9.1 Organization. Each Loan Party is validly existing and in good standing under the laws of its jurisdiction of incorporation; and each Loan Party is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.
9.2 Authorization; No Conflict. Each Loan Party is duly authorized to execute and deliver each Loan Document to which it is a party, the Company is duly authorized to borrow monies hereunder and each Loan Party is duly authorized to perform its Obligations under each Loan Document to which it is a party. The execution, delivery and performance by each Loan Party of each Loan Document to which it is a party, and the borrowings by the Company hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law applicable to such Loan Party, the violation of which could reasonably be expected to result in a Material Adverse Effect, (ii) the charter, by-laws or other organizational documents of any Loan Party or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon any Loan Party or any of their respective properties or (c) require, or result in, the creation or imposition of any Lien on any asset of any Loan Party (other than Liens in favor of the Administrative Agent created pursuant to the Collateral Documents).
9.3 Validity and Binding Nature. Each of this Agreement and each other Loan Document to which any Loan Party is a party is the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, subject to bankruptcy, fraudulent transfer, moratorium, reorganization, insolvency and similar laws affecting the enforceability of creditors’ rights generally and to general principles of equity.
9.4 Financial Condition. The audited consolidated financial statements of the Company and its Subsidiaries as at December 31, 2018, and the unaudited consolidated financial statements of the Company and its Subsidiaries as at December 31, 2019 (such financial statements providing sales and pre-tax income information), copies of which have been delivered to each Lender, were prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and present fairly the consolidated financial condition of the Company and its Subsidiaries as at such dates and the results of their operations for the periods then ended.
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9.5 No Material Adverse Change. Since December 31, 2018, there has been no material adverse change in the business, assets, liabilities, properties, condition (financial or otherwise) or results of operations of the Loan Parties taken as a whole.
9.6 Litigation and Contingent Liabilities. No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the Company’s knowledge, threatened against any Loan Party which might reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 9.6. Other than any liability incident to such litigation or proceedings, no Loan Party has any material Contingent Liabilities not listed on Schedule 9.6 or permitted by Section 11.1.
9.7 Ownership of Properties; Liens. Each Loan Party owns good and, in the case of real property, marketable title to all of its material properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) other than Permitted Liens.
9.8 Equity Ownership; Subsidiaries. All issued and outstanding Capital Securities of the Loan Parties (other than the Company) are duly authorized and validly issued, fully-paid, non-assessable, and free and clear of all Liens other than those in favor of the Administrative Agent, and such securities were issued in compliance with all applicable state and federal laws concerning the issuance of securities. Schedule 9.8 sets forth the authorized Capital Securities of each Loan Party (other than the Company) as of the Closing Date. All of the issued and outstanding Capital Securities of the Loan Parties (other than the Company) are owned as set forth on Schedule 9.8 as of the Closing Date. As of the Closing Date, except as set forth on Schedule 9.8, there are no pre-emptive or other outstanding rights, options, warrants, conversion rights or other similar agreements or understandings for the purchase or acquisition of any Capital Securities of any Loan Party (other than the Company).
9.9 Pension Plans. (a) The Unfunded Liability of all Pension Plans does not in the aggregate exceed twenty percent of the Total Plan Liability for all such Pension Plans. Each Pension Plan complies in all material respects with all applicable requirements of law and regulations. No contribution failure under Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan has occurred with respect to any Pension Plan, sufficient to give rise to a Lien under Section 302(f) of ERISA, or otherwise to have a Material Adverse Effect. There are no pending or, to the knowledge of Company, threatened, claims, actions, investigations or lawsuits against any Pension Plan, any fiduciary of any Pension Plan, or Company or other any member of the Controlled Group with respect to a Pension Plan or a Multiemployer Pension Plan which could reasonably be expected to have a Material Adverse Effect. Neither the Company nor any other member of the Controlled Group has engaged in any prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Pension Plan or Multiemployer Pension Plan which would subject that Person to any material liability. Within the past five years, neither the Company nor any other member of the Controlled Group has engaged in a transaction which resulted in a Pension Plan with an Unfunded Liability being transferred out of the Controlled Group, which could reasonably be expected to have a Material Adverse Effect.
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No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan, which could reasonably be expected to have a Material Adverse Effect.
(b) All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Company or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither the Company nor any other member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, could result in a withdrawal or partial withdrawal from any such plan; and neither the Company nor any other member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.
9.10 Investment Company Act. No Loan Party is an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company,” within the meaning of the Investment Company Act of 1940.
9.11 Intentionally Omitted.
9.12 Regulation U. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.
9.13 Taxes. Each Loan Party has timely filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges due and payable with respect to such return, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. The Loan Parties have made adequate reserves on their books and records in accordance with GAAP for all taxes that have accrued but which are not yet due and payable. No Loan Party has participated in any transaction that relates to a year of the taxpayer (which is still open under the applicable statute of limitations) which is a “reportable transaction” within the meaning of Treasury Regulation Section 1.6011-4(b)(2) (irrespective of the date when the transaction was entered into).
9.14 Solvency, etc. On the Closing Date, and immediately prior to and after giving effect to the issuance of each Letter of Credit and each borrowing hereunder and the use of the proceeds thereof, with respect to the Loan Parties, taken as a whole, (a) the fair value of their assets is greater than the amount of their liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated in accordance with GAAP, (b) the present fair saleable value of their assets is not less than the amount that will be required to pay the probable liability on their debts as they become absolute and matured, (c) they are able to realize upon their assets and pay their debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (d) they do not intend to, and do not
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believe that they will, incur debts or liabilities beyond their ability to pay as such debts and liabilities mature and (e) they are not engaged in business or a transaction, and are not about to engage in business or a transaction, for which their property would constitute unreasonably small capital.
9.15 Environmental Matters. The on-going operations of each Loan Party comply in all respects with all Environmental Laws, except such non-compliance which could not (if enforced in accordance with applicable law) reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. Each Loan Party has obtained, and maintained in good standing, all licenses, permits, authorizations, registrations and other approvals required under any Environmental Law and required for their respective ordinary course operations, and for their reasonably anticipated future operations, and each Loan Party is in compliance with all terms and conditions thereof, except where the failure to do so could not reasonably be expected to result in material liability to any Loan Party and could not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. No Loan Party or any of its properties or operations is subject to, or reasonably anticipates the issuance of, any written order from or agreement with any Federal, state or local Governmental Authority, nor subject to any judicial or docketed administrative or other proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Substance. There are no Hazardous Substances or other conditions or circumstances existing with respect to any property, arising from operations prior to the Closing Date, or relating to any waste disposal, of any Loan Party that would reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. No Loan Party has any underground storage tanks that are not properly registered or permitted under applicable Environmental Laws or that at any time have released, leaked, disposed of or otherwise discharged Hazardous Substances.
9.16 Insurance. Set forth on Schedule 9.16 is a complete and accurate summary of the property and casualty insurance program of the Loan Parties as of the Closing Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage, annual premiums, exclusions, deductibles, self-insured retention, and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving any Loan Party). Each Loan Party and its properties are insured with financially sound and reputable insurance companies which are not Affiliates of the Loan Parties, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where such Loan Parties operate.
9.17 Real Property. Set forth on Schedule 9.17 is a complete and accurate list, as of the Closing Date, of the address of all real property owned or leased by any Loan Party, together with, in the case of leased property, the name and mailing address of the lessor of such property.
9.18 Information. All information heretofore or contemporaneously herewith furnished in writing by any Loan Party to the Administrative Agent or any Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information
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is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Administrative Agent and the Lenders that any projections, forecasts and other forward looking statements provided by the Loan Parties are based on good faith estimates and assumptions believed by the Loan Parties to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).
9.19 Intellectual Property. Each Loan Party owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the businesses of the Loan Parties, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect.
9.20 Burdensome Obligations. No Loan Party is a party to any agreement or contract or subject to any restriction contained in its organizational documents which could reasonably be expected to have a Material Adverse Effect.
9.21 Labor Matters. Except as set forth on Schedule 9.21, no Loan Party is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes involving any Loan Party that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Loan Parties are in substantial compliance with the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters.
9.22 No Default. No Event of Default or Unmatured Event of Default exists or would result from the incurrence by any Loan Party of any Debt hereunder or under any other Loan Document.
9.23 Patriot Act; Sanctions; Anti-Corruption.
9.23.1 Patriot Act. To the extent applicable, each Company and its Subsidiaries is in compliance in all material respects with (i) the Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended), and any other enabling legislation or executive order relating thereto, and (ii) the Patriot Act.
9.23.2 Sanctioned Persons. None of any Company, any of its Subsidiaries or, to the knowledge of any Company, any director, officer, employee, agent or affiliate of any Company or any of its Subsidiaries is a Person that is, or is owned or controlled by Persons that are: (i) the subject of any sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of State, the United Nations Security Council, the European Union, Her Majesty’s Treasury, or other relevant sanctions authority (collectively, “Sanctions”), or (ii) located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions (including, without limitation, currently, Crimea, Cuba, Iran, North Korea, Sudan and Syria).
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9.23.3 Dealings with Sanctioned Persons. For the past five years, neither Company nor any of its Subsidiaries has knowingly engaged in, or is now knowingly engaged in any dealings or transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was, or whose government is or was, the subject of Sanctions.
9.23.4 Anti-Corruption Laws. Company, its Subsidiaries and their respective directors, officers and employees and, to the knowledge of Company, the agents of Company and its Subsidiaries, are in compliance with the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”) and any other applicable anti-corruption law in all material respects.
SECTION 10 AFFIRMATIVE COVENANTS.
Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full (other than any Obligation arising solely from any Bank Product Agreement or contingent indemnification Obligations to the extent no claim giving rise thereto has been asserted) and all Letters of Credit have been terminated or Cash Collateralized, the Company agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:
10.1 Reports, Certificates and Other Information. Furnish to the Administrative Agent and each Lender:
10.1.1 Annual Report. Promptly when available and in any event within one hundred twenty (120) days after the close of each Fiscal Year: (a) a copy of the annual audit report of the Company and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and statements of earnings and cash flows of the Company and its Subsidiaries as at the end of such Fiscal Year, certified without adverse reference to going concern value and without qualification by independent auditors of recognized standing selected by the Company and reasonably acceptable to the Administrative Agent, together with (i) a written statement from such accountants to the effect that in making the examination necessary for the signing of such annual audit report by such accountants, nothing came to their attention that caused them to believe that the Company was not in compliance with any provision of Section 11.13 of this Agreement insofar as such provision relates to accounting matters or, if something has come to their attention that caused them to believe that the Company was not in compliance with any such provision, describing such non-compliance in reasonable detail and (ii) a comparison with the budget for such Fiscal Year and a comparison with the previous Fiscal Year; and (b) a consolidating balance sheet of the Company and its Subsidiaries as of the end of such Fiscal Year and consolidating statement of earnings and cash flows for the Company and its Subsidiaries for such Fiscal Year, certified by a Senior Officer of the Company.
10.1.2 Interim Reports. (a) Promptly when available and in any event within forty-five (45) days after the end of each Fiscal Quarter, consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of such Fiscal Quarter, together with consolidated and consolidating statements of earnings and cash flows for such Fiscal Quarter and for the period beginning with the first day of such Fiscal Year and ending on the last day of such Fiscal Quarter, together with a comparison with the corresponding
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period of the previous Fiscal Year and a comparison with the budget for such period of the current Fiscal Year, certified by a Senior Officer of the Company; and (b) promptly when available and in any event within 30 days after the end of each month, consolidated and consolidating statements of earnings for the Company and its Subsidiaries for such month and for the period beginning with the first day of such Fiscal Year and ending on the last day of such month, together with (x) a comparison with the corresponding period of the previous Fiscal Year and a comparison with the budget for such period of the current Fiscal Year, certified by a Senior Officer of the Company, and (y) a monthly internal management report providing an analysis of the financial performance for such month and for the period beginning with the first day of the applicable Fiscal Year and ending on the last day of such month.
10.1.3 Compliance Certificates. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 10.1.1 and each set of quarterly statements pursuant to Section 10.1.2, a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by a Senior Officer of the Company, containing (i) a computation of each of the financial ratios, restrictions and requirements set forth in Section 11.13 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it and (ii) to the extent there has been a change in the corporate structure of the Company or the Subsidiaries since the previously delivered compliance certificate under this Section 10.1.3, an updated organizational chart listing all Subsidiaries and the jurisdictions of their respective incorporation.
10.1.4 Reports to the SEC and to Shareholders. Unless available online to the public, promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of any Loan Party filed with the SEC; copies of all registration statements of any Loan Party filed with the SEC (other than on Form S-8); copies of all proxy statements or other communications made to security holders generally.
10.1.5 Notice of Default, Litigation and ERISA Matters. Promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto:
(a) the occurrence of an Event of Default or an Unmatured Event of Default;
(b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Company to the Lenders which has been instituted or, to the knowledge of the Company, is threatened against any Loan Party or to which any of the properties of any thereof is subject which, in each case, might reasonably be expected to have a Material Adverse Effect;
(c) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the
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requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of the Company with respect to any post-retirement welfare benefit plan or other employee benefit plan of the Company or another member of the Controlled Group, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent;
(d) any cancellation or material change in any insurance maintained by any Loan Party;
(e) any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which, in each case, might reasonably be expected to have a Material Adverse Effect;
(f) the imposition or occurrence of any Lien for Taxes, assessments or other governmental charges other than any Permitted Lien; or
(g) the occurrence of any material default or material breach under any documents or agreements related to any Subordinated Debt.
10.1.6 Borrowing Base Certificates and Additional Monthly Reports. Within fifteen (15) days of the end of each calendar month, (i) a Borrowing Base Certificate dated as of the end of such month and executed by a Senior Officer of the Company on behalf of the Company (provided that (a) the Company may deliver a Borrowing Base Certificate more frequently if it chooses, and (b) during any time an Event of Default exists or Excess Availability is, and continues to be, less than $5,000,000, the Administrative Agent may require the Company to deliver Borrowing Base Certificates more frequently), and (ii) reports setting forth the aging and other relevant information of the accounts receivable, accounts payable and inventory of the Loan Parties as of such month end (such reports to be in form and substance reasonably acceptable to the Administrative Agent).
10.1.7 Management Reports. Promptly upon receipt thereof, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with each annual or interim audit made by such auditors of the books of the Company.
10.1.8 Projections. As soon as practicable, and in any event not later than thirty (30) days after the commencement of each Fiscal Year, financial projections for the Company and its Subsidiaries for such Fiscal Year (including monthly operating and cash flow budgets) prepared in a manner consistent with the projections delivered by the Company to the
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Administrative Agent prior to the Closing Date or otherwise in a manner reasonably satisfactory to the Administrative Agent, accompanied by a certificate of a Senior Officer of the Company on behalf of the Company to the effect that such projections were based on good faith estimates of future financial performance prepared by the Company.
10.1.9 Subordinated Debt Notices. Promptly following receipt, copies of any material notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any Subordinated Debt.
10.1.10 Other Information. Promptly from time to time, such other information concerning the Loan Parties as any Lender or the Administrative Agent may reasonably request.
10.2 Books, Records, Inspections and Field Exams. Keep, and cause each other Loan Party to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each other Loan Party to permit, any Lender or the Administrative Agent or any representative thereof in each case, after reasonable notice, to inspect the properties and operations of the Loan Parties (i.e. a field exam); and permit, and cause each other Loan Party to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Lender or the Administrative Agent or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors, and to examine (and, at the expense of the Loan Parties, photocopy extracts from) any of its books or other records; and permit, and cause each other Loan Party to permit, the Administrative Agent and its representatives to inspect the Inventory and other tangible assets of the Loan Parties, to perform appraisals of the equipment of the Loan Parties, and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other collateral. All such inspections, field exams or audits by the Administrative Agent shall be at the Company’s expense, provided that so long as no Event of Default or Unmatured Event of Default exists and (a) the Company has average daily Excess Availability of at least $5,000,000 for the then preceding thirty (30) day period, the Company shall not be required to reimburse the Administrative Agent for inspections or audits more frequently than once each Fiscal Year and (b) the Company has average daily Excess Availability of less than $5,000,000 for the then preceding thirty (30) day period, the Company shall not be required to reimburse the Administrative Agent for inspections or audits more frequently than twice each Fiscal Year.
10.3 Maintenance of Property; Insurance. (a) Keep, and cause each other Loan Party to keep, all property useful and necessary in the business of the Loan Parties in good working order and condition, ordinary wear and tear excepted.
(b) Maintain, and cause each other Loan Party to maintain, with responsible insurance companies, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated, but which shall insure against all risks and liabilities of the type identified on Schedule 9.16 and shall have insured amounts no less than, and deductibles no higher than, those customarily maintained by
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companies similarly situated; and, upon written request of the Administrative Agent or any Lender, furnish within three (3) Business Days of such request to the Administrative Agent or such Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Loan Parties. The Company shall cause each issuer of an insurance policy to provide the Administrative Agent with an endorsement (i) showing the Administrative Agent as lender’s loss payee with respect to each policy of property or casualty insurance and naming the Administrative Agent as an additional insured with respect to each policy of liability insurance, (ii) providing that thirty (30) days’ notice will be given to the Administrative Agent prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to the Administrative Agent.
(c) UNLESS THE COMPANY PROVIDES THE ADMINISTRATIVE AGENT WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT WITHIN THREE (3) BUSINESS DAYS OF WRITTEN REQUEST BY THE ADMINISTRATIVE AGENT OR ANY LENDER, THE ADMINISTRATIVE AGENT MAY PURCHASE INSURANCE AT THE COMPANY’S EXPENSE TO PROTECT THE ADMINISTRATIVE AGENT’S AND THE LENDERS’ INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT ANY LOAN PARTY’S INTERESTS. THE COVERAGE THAT THE ADMINISTRATIVE AGENT PURCHASES MAY NOT PAY ANY CLAIM THAT IS MADE AGAINST ANY LOAN PARTY IN CONNECTION WITH THE COLLATERAL. THE COMPANY MAY LATER CANCEL ANY INSURANCE PURCHASED BY THE ADMINISTRATIVE AGENT, BUT ONLY AFTER PROVIDING THE ADMINISTRATIVE AGENT WITH EVIDENCE THAT THE COMPANY HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE ADMINISTRATIVE AGENT PURCHASES INSURANCE FOR THE COLLATERAL, THE COMPANY WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT MAY BE IMPOSED WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE PRINCIPAL AMOUNT OF THE LOANS OWING HEREUNDER. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF THE INSURANCE THE LOAN PARTIES MAY BE ABLE TO OBTAIN ON THEIR OWN.
10.4 Compliance with Laws, Material Contracts; Payment of Taxes and Liabilities. (a) Comply, and cause each Loan Party to comply, in all material respects with all material applicable laws, rules, regulations, decrees, orders, judgments, licenses, contracts and permits, the noncompliance with which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (b) without limiting clause (a) above, ensure, and cause each Subsidiary to ensure, that no Person who owns a controlling interest in or otherwise controls a Loan Party is or shall be (i) listed on the Specially Designated Nationals and Blocked Person List maintained by OFAC, Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (ii) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders; (c) without limiting clause (a) above, comply, and cause each other Loan Party to comply, with all applicable Bank Secrecy Act and anti-money laundering laws and regulations; and (d) pay, and cause each Loan Party to pay, prior to
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delinquency, all United States federal taxes and all other material taxes and governmental charges against it or any collateral, as well as claims of any kind which, if unpaid, could become a Lien on any of its property, other than Liens permitted by Section 11.2; provided that the foregoing shall not require the Company or any Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any collateral, such contest proceedings shall stay the foreclosure of such Lien or the sale of any portion of the collateral to satisfy such claim.
10.5 Maintenance of Existence, etc. Maintain and preserve, and (subject to Section 11.5) cause each other Loan Party to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect).
10.6 Use of Proceeds. Use the proceeds of the Loans and the Letters of Credit, solely for working capital purposes, for Capital Expenditures, for Permitted Acquisitions and for other general business purposes; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of “purchasing or carrying” any Margin Stock.
10.7 Employee Benefit Plans.
(a) Maintain, and cause each other member of the Controlled Group to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations.
(b) Make, and cause each other member of the Controlled Group to make, on a timely basis, all required contributions to any Multiemployer Pension Plan.
(c) Not, and not permit any other member of the Controlled Group to (i) seek a waiver of the minimum funding standards of ERISA, (ii) terminate or withdraw from any Pension Plan or Multiemployer Pension Plan or (iii) take any other action with respect to any Pension Plan that would reasonably be expected to entitle the PBGC to terminate, impose liability in respect of, or cause a trustee to be appointed to administer, any Pension Plan, unless the actions or events described in clauses (i), (ii) and (iii) individually or in the aggregate would not have a Material Adverse Effect.
10.8 Environmental Matters. If any release or threatened release or other disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of any Loan Party, the Company shall, or shall cause the applicable Loan Party to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, the Company shall, and shall cause each other Loan Party to, comply with any Federal or state judicial or administrative order requiring the performance at any real property of any Loan Party of activities in response to the release or threatened release of a Hazardous Substance. To the extent that the
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transportation of Hazardous Substances is permitted by this Agreement, the Company shall, and shall cause its Subsidiaries to, dispose of such Hazardous Substances, or of any other wastes, only at licensed disposal facilities operating in compliance with Environmental Laws.
10.9 Further Assurances. Take, and cause each other Loan Party to take, such actions as are necessary or as the Administrative Agent or the Required Lenders may reasonably request from time to time to ensure that the Obligations of each Loan Party under the Loan Documents are secured by substantially all of the assets of the Company and each domestic Subsidiary (as well as all Capital Securities of each domestic Subsidiary and 65% of all Capital Securities of each direct Foreign Subsidiary) and guaranteed by each domestic Subsidiary (including, upon the acquisition or creation thereof, any Subsidiary acquired or created after the Closing Date), in each case as the Administrative Agent may determine, including (a) the execution and delivery of guaranties, security agreements, pledge agreements, mortgages, deeds of trust, financing statements and other documents, and the filing or recording of any of the foregoing and (b) the delivery of certificated securities and other Collateral with respect to which perfection is obtained by possession.
10.10 Deposit Accounts. Unless the Administrative Agent otherwise consents in writing, the Loan Parties shall maintain all of their deposit and securities accounts with the Administrative Agent; provided that the Loan Parties may maintain a maximum aggregate balance of $400,000 in depository accounts not with the Administrative Agent, except that the accounts with any single institution shall not exceed a maximum aggregate balance of $100,000, it being agreed that each of the Company and the Subsidiaries will, upon the Administrative Agent’s request, use commercially reasonable efforts to cause depository institutions to enter into account control agreements in favor of the Administrative Agent (each such account control agreement to be on terms reasonably satisfactory to the Administrative Agent in all respects); provided, however, that in no event shall any Loan Party be required to pledge any Excluded Account (as defined in the Guaranty and Collateral Agreement).
10.11 Post-Closing Obligations. The Loan Parties shall cause to be performed and completed in a manner reasonably satisfactory to Administrative Agent all of the obligations set forth on Schedule 10.11 within the time periods set forth therein (which may be extended at the Administrative Agent’s discretion) and the failure to perform or complete such obligations shall constitute as immediate and automatic Event of Default hereunder without the requirement of notice or further action by Administrative Agent.
SECTION 11 NEGATIVE COVENANTS
Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full (other than any Obligation arising solely from any Bank Product Agreement or contingent indemnification Obligations to the extent no claim giving rise thereto has been asserted) and all Letters of Credit have been terminated or Cash Collateralized, the Company agrees that, unless at any time the Required Lenders shall otherwise expressly consent in writing, it will:
11.1 Debt. Not, and not permit any other Loan Party to, incur, permit to remain outstanding, assume or in any way become committed for Debt, except:
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(a) Debt incurred hereunder or to any Lender or the Administrative Agent;
(b) Debt existing on the date hereof as listed in Schedule 11.1 hereto and any extension, renewal or refinancing thereof so long as the principal amount thereof is not increased;
(c) Debt with respect to which the Required Lenders have given the Company prior written consent;
(d) Debt Secured by a Lien set forth in clause (vi) of the definition of Permitted Liens and any extension, renewal or refinancing thereof so long as the principal amount thereof is not increased;
(e) unsecured Debt of a Loan Party to any other Loan Party;
(f) ordinary course Hedging Obligations incurred for bona fide hedging purposes and not for speculation;
(g) unsecured seller Debt which represents all or part of the purchase price payable in connection with Permitted Acquisitions; provided that (i) the aggregate outstanding principal amount of all such Debt shall not at any time exceed $10,000,000 and (ii) all such Debt shall have terms (including subordination terms) that are reasonably acceptable to the Administrative Agent;
(h) Debt arising under surety, guarantee, performance, bid, reclamation, appeal, surety and similar bonds in the ordinary course of business consistent with past practice; provided that the aggregate outstanding principal amount of all such Debt shall not at any time exceed $10,000,000; and
(i) other Debt in the aggregate amount not greater than $500,000 at any time.
11.2 Liens. Not, and not permit any other Loan Party to, create, suffer or permit to exist any Lien of any kind or nature upon any of their assets now or hereafter owned or acquired, or acquire or agree to acquire any property or assets of any character under any conditional sale agreement or other title retention agreement; notwithstanding the foregoing, Permitted Liens are permitted hereunder.
11.3 Intentionally Omitted.
11.4 Restricted Payments. Not, and not permit any other Loan Party to, (a) make any distribution to any holders of its Capital Securities, (b) purchase or redeem any of its Capital Securities, (c) pay any management fees or similar fees to any of its equityholders or any Affiliate thereof, (d) make any redemption, prepayment, defeasance, repurchase or any other payment in respect of any Subordinated Debt or (e) set aside funds for any of the foregoing; provided that, notwithstanding the foregoing:
(i) any Subsidiary may pay dividends or make other distributions to the Company or to a Guarantor;
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(ii) the Company may make regularly scheduled payments of interest in respect of Subordinated Debt to the extent permitted under the subordination provisions thereof; and
(iii) from and after the date of this Agreement, the Company may purchase its outstanding Capital Securities (each, a “Permitted Capital Securities Repurchase”) so long as (A) no Unmatured Event of Default or Event of Default shall exist, including with respect to the covenants contained in Section 11.13.1 hereof tested on a pro forma basis after giving effect to any such purchase and the Company shall have delivered to the Administrative Agent a compliance certificate in the form of Exhibit B attached hereto evidencing such compliance with Section 11.13.1 and (B) the Company shall have Excess Availability of at least $5,000,000 after giving effect to such purchase.
11.5 Mergers, Consolidations, Sales. Not, and not permit any other Loan Party to, (a) be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any Capital Securities of any class of, or any partnership or joint venture interest in, any other Person, (b) sell, transfer, convey or lease all or any substantial part of its assets or Capital Securities (including the sale of Capital Securities of any Subsidiary) except for sales of inventory and obsolete equipment in the ordinary course of business, or (c) sell or assign with or without recourse any receivables, except, in each case, in connection with (i) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into the Company or into any other domestic Wholly-Owned Subsidiary; (ii) any such purchase or other acquisition by the Company or any domestic Wholly-Owned Subsidiary of the assets or Capital Securities of any Wholly-Owned Subsidiary; (iii) any Permitted Acquisition; and (iv) other sales and dispositions of assets (excluding the Capital Securities of Subsidiaries) for at least fair market value (as determined by the Board of Directors of the Company) so long as the net book value of all assets sold or otherwise disposed of in any Fiscal Year does not exceed $3,000,000.
11.6 Modification of Organizational Documents. Not (a) permit the charter, by-laws or other organizational documents of any Loan Party to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of the Lenders; or (b) change, or allow any Loan Party to change, its state of incorporation or its organizational form unless such Loan Party gives the Administrative Agent ninety (90) days’ prior written notice.
11.7 Transactions with Affiliates. Not, and not permit any other Loan Party to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Loan Parties) other than (a) transactions expressly permitted under this Agreement and the other Loan Documents and (b) which is on terms which are less favorable than are obtainable from any Person which is not one of its Affiliates.
11.8 Unconditional Purchase Obligations. Not, and not permit any other Loan Party to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services.
11.9 Inconsistent Agreements. Not, and not permit any other Loan Party to, enter into any agreement containing any provision which would (a) be violated or breached in any material
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respect by any borrowing by the Company hereunder or by the performance by any Loan Party of any of its Obligations hereunder or under any other Loan Document, (b) prohibit any Loan Party from granting to the Administrative Agent and the Lenders, a Lien on any of its assets or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Company or any other Subsidiary, or pay any Debt owed to the Company or any other Subsidiary, (ii) make loans or advances to any Loan Party or (iii) transfer any of its assets or properties to any Loan Party, other than (A) customary restrictions and conditions contained in agreements relating to the sale of all or a substantial part of the assets of any Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary to be sold and such sale is permitted hereunder (B) restrictions or conditions imposed by any agreement relating to purchase money Debt, Capital Leases and other secured Debt permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Debt and (C) customary provisions in leases and other contracts restricting the assignment thereof.
11.10 Business Activities. Not, and not permit any other Loan Party to, engage in any line of business other than the businesses engaged in on the date hereof and businesses reasonably related thereto and businesses and activities which are extensions thereof or otherwise incidental, complementary, synergistic, reasonably related, or ancillary to any of the foregoing (and businesses acquired in connection with any Permitted Acquisition).
11.11 Investments. Not, and not permit any other Loan Party to, make or permit to exist any Investment in any other Person, except the following:
(a) contributions by the Company to the capital of any Guarantor, or by any Subsidiary to the capital of any Guarantor, so long as the recipient of any such capital contribution has guaranteed the Obligations and such guaranty is secured by a pledge of all of its Capital Securities and substantially all of its real and personal property, in each case in accordance with Section 11.10;
(b) Investments constituting Debt permitted by Section 11.1;
(c) Contingent Liabilities constituting Debt permitted by Section 11.1 or Liens permitted by Section 11.2;
(d) Cash Equivalent Investments;
(e) bank deposits in the ordinary course of business, provided that the aggregate amount of all such deposits which are maintained with any bank other than a Lender shall not at any time exceed the amounts described in Section 10.10 hereof;
(f) Investments in securities of Account Debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such account debtors;
(g) Investments listed on Schedule 11.11 as of the Closing Date;
(h) Permitted Acquisitions;
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(i) extensions of credit upon customary terms to their customers in the ordinary course of their business; and
(j) extensions of credit to officers and employees in accordance with policies in effect on the date of this Agreement to the extent the Administrative Agent has received a written copy of such policy;
provided that (x) any Investment which when made complies with the requirements of the definition of the term “Cash Equivalent Investment” may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; (y) no Investment otherwise permitted by clause (b), (c), (g), (h) or (i) of this Section 11.11 shall be permitted to be made if, immediately before or after giving effect to the making of such Investment, any Event of Default or Unmatured Event of Default exists.
11.12 Restriction of Amendments to Certain Documents. Not, and not permit any other Loan Party to, make or agree to any amendment to or modification of, or waive any of its rights under (a) any agreement or instrument governing any Subordinated Debt which would (i) have the effect of (x) providing for earlier payment in respect of principal or redemptions or otherwise, (y) requiring collateral or guarantees to secure any Subordinated Debt or (z) increasing the interest rate payable with respect to any Subordinated Debt or (ii) otherwise adversely affect the interests of the Lenders in any material respect or (b) the Mining Royalty Agreement without prompt notice thereof to the Administrative Agent (such notice to include a description of the amendment, modification or waiver).
11.13 Financial Covenants.
11.13.1 Minimum Fixed Charge Coverage Ratio. Not permit the Fixed Charge Coverage Ratio for any Computation Period referenced below to be less than the applicable amount set forth below; provided that (i) the Fixed Charge Coverage Ratio shall not be tested for any Fiscal Quarter if the total combined amount of (a) unrestricted cash of the Loan Parties maintained in bank accounts with the Administrative Agent (or otherwise subject to the Administrative Agent’s control), plus (b) Cash Equivalent Investments of the Loan Parties, plus (c) the average daily Excess Availability during such Fiscal Quarter, collectively, exceeds $5,000,000, (ii) the Fixed Charge Coverage Ratio shall be measured on a trailing nine (9) month basis for the Computation Period ending September 30, 2020, and (iii) the Fixed Charge Coverage Ratio shall be measured on a trailing twelve (12) month basis for the Computation Period ending December 31, 2020 and each Computation Period ending thereafter:
|
Computation
|
Fixed Charge
|
|
September 30, 2020 and each Fiscal Quarter end thereafter |
1.06 to 1.00 |
11.13.2 Minimum EBITDA. Not permit EBITDA for (i) the three (3) month period ending March 31, 2020 to be less than -$525,000 and (ii) the three (3) month period ending June 30, 2020 to be less than $265,000.
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SECTION 12 EFFECTIVENESS; CONDITIONS OF LENDING, ETC.
The obligation of each Lender to make its Loans and of the Issuing Lender to issue Letters of Credit is subject to the following conditions precedent:
12.1 Conditions to Effectiveness. The effectiveness of this Agreement is, in addition to the conditions precedent specified in Section 12.2, subject to the conditions precedent that (a) all Debt to be Repaid has been (or concurrently with the initial borrowing hereunder will be) paid in full, and that all agreements and instruments governing the Debt to be Repaid and that all Liens securing such Debt to be Repaid have been (or concurrently with the initial borrowing hereunder will be) terminated and (b) the Administrative Agent shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to the Administrative Agent), in form and substance satisfactory to the Administrative Agent (and the date on which all such conditions precedent have been satisfied or waived in writing by the Administrative Agent and the Lenders is called the “Closing Date”):
12.1.1 Notes. An Amended and Restated Revolving Loan Note for each Lender.
12.1.2 Authorization Documents. For each Loan Party, such Person’s (a) charter (or similar formation document), certified by the appropriate Governmental Authority; (b) good standing certificates in its state of incorporation and in each other state requested by the Administrative Agent; (c) bylaws; (d) resolutions of its board of directors approving and authorizing such Person’s execution, delivery and performance of the Loan Documents to which it is party and the transactions contemplated thereby; and (e) signature and incumbency certificates of its officers executing any of the Loan Documents (it being understood that the Administrative Agent and each Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary (or similar officer) as being in full force and effect without modification.
12.1.3 Consents, etc. Certified copies of all documents evidencing any necessary corporate action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Loan Parties of the documents referred to in this Section 12.
12.1.4 Borrowing Request and Letter of Direction. To the extent a borrowing is requested by the Borrower for the Closing Date, a borrowing request and letter of direction containing funds flow information with respect to the proceeds of any Loans on the Closing Date.
12.1.5 Guaranty and Collateral Agreement. A counterpart of the Guaranty and Collateral Agreement executed by each Loan Party, together with all instruments, transfer powers and other items required to be delivered in connection therewith.
12.1.6 Perfection Certificate. A Perfection Certificate completed and executed by each Loan Party required by the Administrative Agent.
12.1.7 McKinney Door Mortgaged Property. [Reserved].
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12.1.8 Williams Furnace Mortgaged Property. [Reserved].
12.1.9 2701 W Concord St LLC Mortgaged Property. [Reserved].
12.1.10 Collateral Access Agreements. To the extent required by the Administrative Agent on the Closing Date, in the case of any leased real property, a Collateral Access Agreement from the landlord of such property waiving any landlord’s Lien in respect of personal property kept at the premises subject to such lease and permitting access to the location by the Administrative Agent and its agents and containing such other terms and provisions as may be required by the Administrative Agent.
12.1.11 Opinions of Counsel. To the extent required by the Administrative Agent on the Closing Date, opinions of counsel for each Loan Party, including local counsel in respect of each Mortgage and amendment to Mortgage, in each case in form and substance reasonably satisfactory to the Administrative Agent.
12.1.12 Insurance. Evidence of the existence of insurance required to be maintained pursuant to Section 10.3(b), together with evidence that the Administrative Agent has been named as a lender’s loss payee and an additional insured on all related insurance policies.
12.1.13 Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all Attorney Costs of the Administrative Agent to the extent invoiced prior to the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Administrative Agent’s reasonable estimate of Attorney Costs incurred or to be incurred by the Administrative Agent through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Administrative Agent).
12.1.14 Solvency Certificate. A Solvency Certificate executed by a Senior Officer of the Company.
12.1.15 Material Adverse Change. The Administrative Agent shall be satisfied that since December 31, 2018 there has been no material adverse change in the business, assets, liabilities, properties, condition (financial or otherwise) or results of operations of the Loan Parties taken as a whole.
12.1.16 Search Results; Lien Terminations. Certified copies of Uniform Commercial Code search reports dated a date reasonably near to the Closing Date, listing all effective financing statements which name any Loan Party (under their present names and any previous names) as debtors, together with (a) copies of such financing statements, (b) payoff letters evidencing repayment in full of all Debt to be Repaid, the termination of all agreements relating thereto and the release of all Liens granted in connection therewith, with Uniform Commercial Code or other appropriate termination statements and documents effective to evidence the foregoing (other than Liens permitted by Section 11.2) and (c) such other Uniform Commercial Code termination statements as the Administrative Agent may reasonably request.
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12.1.17 Filings, Registrations and Recordings. The Administrative Agent shall have received each document (including Uniform Commercial Code financing statements) required by the Collateral Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the collateral described therein, prior to any other Liens (subject only to Liens permitted pursuant to Section 11.2), in proper form for filing, registration or recording.
12.1.18 Borrowing Base Certificate. A Borrowing Base Certificate dated as of the Closing Date.
12.1.19 Closing Certificate. A certificate executed by an officer of the Company on behalf of the Company certifying the matters set forth in Section 12.2.1 as of the Closing Date.
12.1.20 Other. Such other documents as the Administrative Agent or any Lender may reasonably request.
12.2 Conditions. The obligation (a) of each Lender to make each Loan and (b) of the Issuing Lender to issue each Letter of Credit is subject to the following further conditions precedent that:
12.2.1 Compliance with Warranties, No Default, etc. Both before and after giving effect to any borrowing and the issuance of any Letter of Credit, the following statements shall be true and correct:
(a) the representations and warranties of each Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all material respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date and except to the extent already qualified by materiality, in which case such representation and warranty shall be true and correct in all respects); and
(b) no Event of Default or Unmatured Event of Default shall have then occurred and be continuing.
12.2.2 Representation. Each request by the Company for the making of a Loan or the issuance of a Letter of Credit shall be deemed to constitute a representation and warranty by the Company that the conditions precedent set forth in this Section 12.2.1 are satisfied at the time of the making of such Loan or the issuance of such Letter of Credit.
SECTION 13 EVENTS OF DEFAULT AND THEIR EFFECT.
13.1 Events of Default. Each of the following shall constitute an Event of Default under this Agreement:
13.1.1 Non-Payment of the Loans, etc. The Company or any other Loan Party shall fail to make any payment of principal or interest when and as due; or, in the case of
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any other amounts payable hereunder or under any other Loan Document, the Company or any other Loan Party shall fail to make such payment within five (5) days of the due date thereof.
13.1.2 Cross-Default. There shall occur any default or event of default, or any event which might become such with notice or the passage of time or both, or any similar event, or any event which requires the prepayment of borrowed money or the acceleration of the maturity thereof, under the terms of any evidence of indebtedness or other agreement issued or assumed or entered into by the Company or any other Loan Party or under the terms of any indenture, agreement or instrument under which any such evidence of indebtedness or other agreement is issued, assumed, secured or guaranteed, and such event shall continue beyond any applicable period of grace.
13.1.3 Bankruptcy, Insolvency, etc. Any Loan Party becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or any Loan Party applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for such Loan Party or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for any Loan Party or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of any Loan Party, and if such case or proceeding is not commenced by such Loan Party, it is consented to or acquiesced in by such Loan Party, or remains for 60 days undismissed; or any Loan Party takes any action to authorize, or in furtherance of, any of the foregoing.
13.1.4 Non-Compliance with Loan Documents. (a) Failure by any Loan Party to comply with or to perform any covenant set forth in Sections 10.1.1, 10.1.2, 10.1.3, 10.1.5, 10.1.6, 10.3(b) (solely as such section relates to the maintenance of insurance at all times), 10.5, 10.10, 10.11 or Section 11; or (b) failure by any Loan Party to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 13) and continuance of such failure described in this clause (b) for 30 days.
13.1.5 Representations; Warranties. Any representation or warranty made by any Loan Party herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by any Loan Party to the Administrative Agent or any Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified.
13.1.6 Pension Plans. (a) Any Person institutes steps to terminate a Pension Plan if as a result of such termination the Company or any member of the Controlled Group could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $500,000; (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (c) the
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Unfunded Liability exceeds twenty percent of the Total Plan Liability, or (d) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Company or any member of the Controlled Group have incurred on the date of such withdrawal) exceeds $500,000.
13.1.7 Litigation. Any suit, action or other proceeding (judicial or administrative) commenced against the Company or any other Loan Party, or with respect to any assets of the Company or any other Loan Party, shall threaten to have a material and adverse effect on the future operations of the Company or any other Loan Party; or a final judgment or settlement shall be entered in, or agreed to in respect of, any such suit, action or proceeding and said final judgment or settlement would have a Material Adverse Effect on the Company and the other Loan Parties taken as a whole, it being agreed that any final judgment or settlement (either individually or collectively with all other judgments and settlements) in excess of $250,000 shall be deemed to have a Material Adverse Effect (provided that any amounts covered by insurance shall not be included in such aggregate amount so long as the insurance company has acknowledged coverage in writing).
13.1.8 Invalidity of Collateral Documents, etc. Any Collateral Document shall cease to be in full force and effect; or any Loan Party (or any Person by, through or on behalf of any Loan Party) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document.
13.1.9 Invalidity of Subordination Provisions, etc. Any subordination provision in any document or instrument governing Subordinated Debt (if any), or any subordination provision in any guaranty by any Subsidiary of any Subordinated Debt, shall cease to be in full force and effect, or any Loan Party or any other Person (including the holder of any applicable Subordinated Debt) shall contest in any manner the validity, binding nature or enforceability of any such provision.
13.1.10 Change of Control. A Change of Control shall occur.
13.1.11 Material Adverse Effect. The occurrence of any event having a Material Adverse Effect.
13.2 Effect of Event of Default. If any Event of Default described in Section 13.1.3 shall occur in respect of the Company, the Commitments shall immediately terminate and the Loans and all other Obligations hereunder shall become immediately due and payable and the Company shall become immediately obligated to Cash Collateralize all Letters of Credit, all without presentment, demand, protest or notice of any kind; and, if any other Event of Default shall occur and be continuing, the Administrative Agent may (and, upon the written request of the Required Lenders shall) declare the Commitments to be terminated in whole or in part and/or declare all or any part of the Loans and all other Obligations hereunder to be due and payable and/or demand that the Company immediately Cash Collateralize all or any Letters of Credit, whereupon the Commitments shall immediately terminate (or be reduced, as applicable) and/or the Loans and other Obligations hereunder shall become immediately due and payable (in whole or in part, as applicable) and/or the Company shall immediately become obligated to Cash Collateralize the
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Letters of Credit (all or any, as applicable), all without presentment, demand, protest or notice of any kind. The Administrative Agent shall promptly advise the Company of any such declaration, but failure to do so shall not impair the effect of such declaration. Any cash collateral delivered hereunder shall be held by the Administrative Agent (without liability for interest thereon) and applied to the Obligations arising in connection with any drawing under a Letter of Credit. After the expiration or termination of all Letters of Credit, such cash collateral shall be applied by the Administrative Agent to any remaining Obligations hereunder and any excess shall be delivered to the Company or as a court of competent jurisdiction may elect.
SECTION 14 THE AGENT.
14.1 Appointment and Authorization. Each Lender hereby irrevocably (subject to Section 14.10) appoints, designates and authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Administrative Agent shall not have any duty or responsibility except those expressly set forth herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in other Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.
14.2 Issuing Lender. The Issuing Lender shall act on behalf of the Lenders (according to their Pro Rata Shares) with respect to any Letters of Credit issued by it and the documents associated therewith. The Issuing Lender shall have all of the benefits and immunities (a) provided to the Administrative Agent in this Section 14 with respect to any acts taken or omissions suffered by the Issuing Lender in connection with Letters of Credit issued by it or proposed to be issued by it and the applications and agreements for letters of credit pertaining to such Letters of Credit as fully as if the term “Administrative Agent”, as used in this Section 14, included the Issuing Lender with respect to such acts or omissions and (b) as additionally provided in this Agreement with respect to the Issuing Lender.
14.3 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.
14.4 Exculpation of Administrative Agent. None of the Administrative Agent nor any of its directors, officers, employees or agents shall (a) be liable for any action taken or omitted to
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be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except to the extent resulting from its own gross negligence or willful misconduct in connection with its duties expressly set forth herein as determined by a final, nonappealable judgment by a court of competent jurisdiction), (b) have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents) or (c) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by the Company or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document (or the creation, perfection or priority of any Lien or security interest therein), or for any failure of the Company or any other party to any Loan Document to perform its Obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company’s Subsidiaries or Affiliates.
14.5 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, electronic mail message, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, confirmation from the Lenders of their obligation to indemnify the Administrative Agent against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon each Lender. For purposes of determining compliance with the conditions specified in Section 12, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received written notice from such Lender prior to the proposed Closing Date specifying its objection thereto.
14.6 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to
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the Administrative Agent for the account of the Lenders, unless the Administrative Agent shall have received written notice from a Lender or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a “notice of default”. The Administrative Agent will notify the Lenders of its receipt of any such notice. The Administrative Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Lenders in accordance with Section 13; provided that unless and until the Administrative Agent has received any such request, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders.
14.7 Credit Decision. Each Lender acknowledges that the Administrative Agent has not made any representation or warranty to it, and that no act by the Administrative Agent hereafter taken, including any consent and acceptance of any assignment or review of the affairs of the Loan Parties, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender as to any matter, including whether the Administrative Agent has disclosed material information in its possession. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Loan Parties, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Administrative Agent, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of the Company which may come into the possession of the Administrative Agent.
14.8 Indemnification. Whether or not the transactions contemplated hereby are consummated, each Lender shall indemnify upon demand the Administrative Agent and its directors, officers, employees and agents (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), according to its applicable Pro Rata Share, from and against any and all Indemnified Liabilities (as hereinafter defined); provided that no Lender shall be liable for any payment to any such Person of any portion of the Indemnified Liabilities to the extent determined by a final, nonappealable judgment by a court of competent jurisdiction to have resulted from the applicable Person’s own gross negligence or willful misconduct. No action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse the Administrative Agent upon demand for its ratable share of any Agent Advances and any costs or out-of-pocket expenses (including Attorney Costs and Taxes) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement
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(whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Administrative Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit, any foreclosure under, or modification, release or discharge of, any or all of the Collateral Documents, termination of this Agreement and the resignation or replacement of the Administrative Agent.
14.9 Administrative Agent in Individual Capacity. CIBC and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Loan Parties and Affiliates as though CIBC were not the Administrative Agent hereunder and without notice to or consent of any Lender. Each Lender acknowledges that, pursuant to such activities, CIBC or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Affiliate) and acknowledge that the Administrative Agent shall be under no obligation to provide such information to them. With respect to their Loans (if any), CIBC and its Affiliates shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though CIBC were not the Administrative Agent, and the terms “Lender” and “Lenders” include CIBC and its Affiliates, to the extent applicable, in their individual capacities.
14.10 Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 30 days’ notice to the Lenders. If the Administrative Agent resigns under this Agreement, the Required Lenders shall, with (so long as no Event of Default exists) the consent of the Company (which shall not be unreasonably withheld or delayed), appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Lenders and the Company, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” shall mean such successor agent, and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Section 14 and Sections 15.5 and 15.17 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.
14.11 Collateral Matters. The Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion, (a) to release any Lien granted to or held by the Administrative Agent under any Collateral Document (i) upon termination of the Commitments and payment in full of all Loans and all other obligations of the Company hereunder (other than any Obligation
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arising solely from any Bank Product Agreement or contingent indemnification Obligations to the extent no claim giving rise thereto has been asserted) and the expiration or termination of all Letters of Credit (or Cash Collateralization of all such Letters of Credit); (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder (including the release of any Guarantor); or (iii) subject to Section 15.1, if approved, authorized or ratified in writing by the Required Lenders; or (b) to subordinate its interest in any Collateral to any holder of a Lien on such Collateral which is permitted by Section 11.2 (it being understood that the Administrative Agent may conclusively rely on a certificate from the Company in determining whether the Debt secured by any such Lien is permitted by Section 11.1). Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the Administrative Agent’s authority to release, or subordinate its interest in, particular types or items of Collateral pursuant to this Section 14.11. Each Lender hereby authorizes the Administrative Agent to give blockage notices in connection with any Subordinated Debt at the direction of Required Lenders and agrees that it will not act unilaterally to deliver such notices.
14.12 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Company) shall be entitled and empowered, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 5, 15.5 and 15.17) allowed in such judicial proceedings; and
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 5, 15.5 and 15.17.
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.
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14.13 Other Agents; Arrangers and Managers. None of the Lenders or other Persons identified on the facing page or signature pages of this Agreement as a “syndication agent,” “documentation agent,” “co-agent,” “book manager,” “lead manager,” “arranger,” “lead arranger” or “co-arranger”, if any, shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders or other Persons so identified in deciding to enter into this Agreement or in taking or not taking action hereunder.
14.14 Restriction on Actions by Lenders. Each Lender agrees that it shall not, without the express written consent of Administrative Agent, and shall, upon the written request of Administrative Agent (to the extent it is lawfully entitled to do so), set off against the Obligations, any amounts owing by such Lender to a Loan Party or any deposit accounts of any Loan Party now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so in writing by Administrative Agent, take or cause to be taken, any action, including the commencement of any legal or equitable proceedings to foreclose any loan or otherwise enforce any security interest in any of the Collateral or to enforce all or any part of this Agreement or the other Loan Documents. All enforcement actions under this Agreement and the other Loan Documents against the Loan Parties or any third party with respect to the Obligations or the Collateral may only be taken by Administrative Agent (at the direction of the Required Lenders or as otherwise permitted in this Agreement) or by its agents at the direction of Administrative Agent.
SECTION 15 GENERAL.
15.1 Waiver; Amendments. No delay on the part of the Administrative Agent or any Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. Except as set forth in Section 8.9(b), no amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the other Loan Documents shall in any event be effective unless the same shall be in writing and acknowledged by Lenders having aggregate Pro Rata Shares of not less than the aggregate Pro Rata Shares expressly designated herein with respect thereto or, in the absence of such designation as to any provision of this Agreement, by the Required Lenders, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment, modification, waiver or consent shall (a) extend or increase the Commitment of any Lender without the written consent of such Lender, (b) extend the date scheduled for payment of any principal (excluding mandatory prepayments) of or interest on the Loans or any fees payable hereunder without the written consent of each Lender directly affected thereby, (c) reduce the principal amount of any Loan, the rate of interest thereon or any fees payable hereunder, without the consent of each Lender directly affected thereby (except for periodic adjustments of interest rates and fees resulting from a change in the Applicable Margin as provided for in this Agreement); or (d) release any party from its obligations under the Guaranty and Collateral Agreement or all or any substantial part of the Collateral granted under the Collateral Documents (except as permitted by Section 14.11), change the definition of Required Lenders, any provision of this Section 15.1 or reduce the
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aggregate Pro Rata Share required to effect an amendment, modification, waiver or consent, without, in each case, the written consent of all Lenders. No provision of Section 14 or other provision of this Agreement affecting the Administrative Agent in its capacity as such shall be amended, modified or waived without the consent of the Administrative Agent. No provision of this Agreement relating to the rights or duties of the Issuing Lender in its capacity as such shall be amended, modified or waived without the consent of the Issuing Lender. No provision of this Agreement relating to the rights and duties of any Lender to which Bank Product Obligations are owed (including Hedging Obligations) shall be amended, modified or waived with the consent of such Lender.
If, in connection with any proposed amendment, modification, waiver or termination requiring the consent of all Lenders, the consent of the Required Lenders is obtained, but the consent of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained being referred to as a “Non-Consenting Lender”), then, so long as the Administrative Agent is not a Non-Consenting Lender, the Administrative Agent and/or a Person or Persons reasonably acceptable to the Administrative Agent shall have the right to purchase from such Non-Consenting Lenders, and such Non-Consenting Lenders agree that they shall, upon the Administrative Agent ‘s request, sell and assign to the Administrative Agent and/or such Person or Persons, all of the Loans and Revolving Commitments of such Non-Consenting Lenders for an amount equal to the principal balance of all such Loans and Revolving Commitments held by such Non-Consenting Lenders and all accrued interest, fees, expenses and other amounts then due with respect thereto through the date of sale.
15.2 Confirmations. The Company and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing (with a copy of each such confirmation to the Administrative Agent) the aggregate unpaid principal amount of the Loans then outstanding under such Note.
15.3 Notices.
(A) Generally. Except as otherwise provided in Sections 2.2.2 and 2.2.3, or clauses (b) and (c) below, all notices hereunder shall be in writing (including facsimile transmission and email) and shall be sent to the applicable party at its address shown on Annex B or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three (3) Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. For purposes of Sections 2.2.2 and 2.2.3, the Administrative Agent shall be entitled to rely on telephonic instructions from any person that the Administrative Agent in good faith believes is an authorized officer or employee of the Company, and the Company shall hold the Administrative Agent and each other Lender harmless from any loss, cost or expense resulting from any such reliance.
(B) Electronic Communications. Notices and other communications to the Lenders and the Issuing Lenders hereunder may be delivered or furnished by electronic communication (including email, and Internet or intranet websites) pursuant to procedures
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approved by the Administrative Agent provided that the foregoing shall not apply to notices to any Lender or Issuing Lender pursuant to Section 2 if such Lender or Issuing Lender, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Section by electronic communication. The Administrative Agent or Company may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an email address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return email or other written acknowledgement), and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient, at its email address as described in the foregoing clause (i), of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such notice, email or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient.
(C) Platform.
(a) Each Loan Party agrees that the Administrative Agent may, but shall not be obligated to, make the Communications (as defined below) available to the Issuing Lender and the other Lenders by posting the Communications on the Platform.
(b) The Platform is provided “as is” and “as available.” The Agent Parties (as defined below) do not warrant the adequacy of the Platform and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or the Platform. In no event shall the Administrative Agent or any of its Affiliates or the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of the Administrative Agent or its Affiliates (collectively, the “Agent Parties”) have any liability to the Company or the other Loan Parties, any Lender or any other Person or entity for damages of any kind, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the Company’s, any Loan Party’s or the Administrative Agent’s transmission of communications through the Platform. “Communications” means, collectively, any notice, demand, communication, information, document or other material provided by or on behalf of any Loan Party pursuant to any Loan Document or the transactions contemplated therein which is distributed to the Administrative Agent, any Lender or any Issuing Lender by means of electronic communications pursuant to this Section, including through the Platform.
15.4 Computations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be
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made in accordance with GAAP, consistently applied; provided that if the Company notifies the Administrative Agent that the Company wishes to amend any covenant in Sections 10 or 11.13 (or any related definition) to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Company that the Required Lenders wish to amend Sections 10 or 11.13 (or any related definition) for such purpose), then the Company’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition) is amended in a manner satisfactory to the Company and the Required Lenders. Notwithstanding the foregoing, upon a change in GAAP concerning the treatment of leases (ASC Topic 840, “Leases”) the Company shall continue to calculate relevant covenants on the basis of GAAP in effect immediately prior to such change and shall provide a reconciliation of the calculations to GAAP.
15.5 Costs, Expenses and Taxes. The Company agrees to pay on demand all reasonable out-of-pocket costs and expenses of the Administrative Agent (including Attorney Costs and any Taxes) in connection with the preparation, negotiation, execution, syndication, delivery and administration (including perfection and protection of any Collateral and the costs of the Platform, if applicable) of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), whether or not the transactions contemplated hereby or thereby shall be consummated, and all reasonable out-of-pocket costs and expenses (including Attorney Costs and any Taxes) incurred by the Administrative Agent and each Lender after an Event of Default in connection with the collection of the Obligations or the enforcement of this Agreement the other Loan Documents or any such other documents or during any workout, restructuring or negotiations in respect thereof. In addition, the Company agrees to pay, and to hold the Administrative Agent and the Lenders harmless from all liability for, any fees of the Company’s auditors in connection with any reasonable exercise by the Administrative Agent and the Lenders of their rights pursuant to Section 10.2. All Obligations provided for in this Section 15.5 shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit and termination of this Agreement.
15.6 Assignments; Participations.
15.6.1 Assignments. Any Lender may at any time assign to one or more Persons (other than to a Defaulting Lender or any of its Affiliates or any Person who upon becoming a Lender hereunder would constitute a Defaulting Lender) (any such Person, an “Assignee”) all or any portion of such Lender’s Loans and Commitments, with the prior written consent of the Administrative Agent, the Issuing Lender (for an assignment of the Revolving Loans and the Revolving Commitment) and, so long as no Event of Default exists, the Company (which consents shall not be unreasonably withheld or delayed and shall not be required for an assignment by a Lender to a Lender or an Affiliate of a Lender or an Approved Fund). Except as the Administrative Agent may otherwise agree, any such assignment shall be in a minimum aggregate amount equal to $5,000,000 or, if less, the remaining Commitment and Loans held by the assigning Lender. The Company and the Administrative Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned to an Assignee until the Administrative Agent shall have received and accepted an effective assignment agreement in substantially the form of Exhibit D hereto (an “Assignment
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Agreement”) executed, delivered and fully completed by the applicable parties thereto and a processing fee of $3,500. No assignment may be made to any Person if at the time of such assignment the Company would be obligated to pay any greater amount under Sections 7.6 or 8 to the Assignee than the Company is then obligated to pay to the assigning Lender under such Sections (and if any assignment is made in violation of the foregoing, the Company shall not be required to pay such greater amounts). Any attempted assignment by a Lender not made in accordance with this Section 15.6.1 shall be treated as the sale of a participation under Section 15.6.2.
(a) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (ii) the assigning Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, the assigning Lender) pursuant to an effective Assignment Agreement, the Company shall execute and deliver to the Administrative Agent for delivery to the Assignee (and, as applicable, the assigning Lender) a Note in the principal amount of the Assignee’s Pro Rata Share of the Revolving Commitment (and, as applicable, a Note in the principal amount of the Pro Rata Share of the Revolving Commitment retained by the assigning Lender). Each such Note shall be dated the effective date of such assignment. Upon receipt by the assigning Lender of such Note, the assigning Lender shall return to the Company any prior Note held by it.
(b) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
15.6.2 Participations. Any Lender may at any time sell to one or more Persons participating interests in its Loans, Commitments or other interests hereunder (any such Person, a “Participant”). In the event of a sale by a Lender of a participating interest to a Participant, (a) such Lender’s obligations hereunder shall remain unchanged for all purposes, (b) the Company and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations hereunder and (c) all amounts payable by the Company shall be determined as if such Lender had not sold such participation and shall be paid directly to such Lender. No Participant shall have any direct or indirect voting rights hereunder except with respect to any event described in Section 15.1 expressly requiring the unanimous vote of all Lenders or, as applicable, all affected Lenders. Each Lender agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Lender enters into with any Participant. The Company agrees that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement and with respect to any Letter of Credit to the same extent as if the amount of its participating interest were owing
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directly to it as a Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with the Lenders, and the Lenders agree to share with each Participant, as provided in Section 7.5. The Company also agrees that each Participant shall be entitled to the benefits of Section 7.6 or 8 as if it were a Lender (provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Section 7.6 or 8 than would have been paid to the participating Lender on such date if no participation had been sold and that each Participant complies with Section 7.6(d) as if it were an Assignee).
15.7 Register. Administrative Agent shall maintain as a non-fiduciary agent of Company, a copy of each Assignment Agreement delivered and accepted by it and register (the “Register”) for the recordation of names and addresses of the Lenders and the Commitment of each Lender and principal and stated interest of each Loan owing to each Lender from time to time and whether such Lender is the original Lender or the Assignee. No assignment shall be effective unless and until the Assignment Agreement is accepted and registered in the Register. All records of transfer of a Lender’s interest in the Register shall be conclusive, absent manifest error, as to the ownership of the interests in the Loans. Administrative Agent shall not incur any liability of any kind with respect to any Lender with respect to the maintenance of the Register. This Section and Section 15.6.2 shall be construed so that the Loans are at all times maintained in “registered form” for the purposes of the Code and any related regulations (and any successor provisions).
15.8 GOVERNING LAW. THIS AGREEMENT AND EACH NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
15.9 Confidentiality. As required by federal law and the Administrative Agent’s policies and practices, the Administrative Agent may need to obtain, verify, and record certain customer identification information and documentation in connection with opening or maintaining accounts, or establishing or continuing to provide services. The Administrative Agent and each Lender agree to use commercially reasonable efforts (equivalent to the efforts the Administrative Agent or such Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to them by any Loan Party and designated as confidential, except that the Administrative Agent and each Lender may disclose such information (a) to Persons employed or engaged by the Administrative Agent or such Lender in evaluating, approving, structuring or administering the Loans and the Commitments; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 15.9 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by the Administrative Agent or such Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of the Administrative Agent’s or such Lender’s counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which the Administrative Agent or such Lender is a party; (f) to any nationally recognized rating agency that requires access to information about
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a Lender’s investment portfolio in connection with ratings issued with respect to such Lender; (g) to any Affiliate of the Administrative Agent, the Issuing Lender or any other Lender who may provide Bank Products to the Loan Parties; or (h) that ceases to be confidential through no fault of the Administrative Agent or any Lender. Notwithstanding the foregoing, the Company consents to the publication by the Administrative Agent or any Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, and the Administrative Agent reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements.
15.10 Severability. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement 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 such provision or the remaining provisions of this Agreement. All obligations of the Company and rights of the Administrative Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law.
15.11 Nature of Remedies. All Obligations of the Company and rights of the Administrative Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
15.12 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof (except as relates to the fees described in Section 5.3) and any prior arrangements made with respect to the payment by the Company of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of the Administrative Agent or the Lenders. Upon the closing of the transactions contemplated by this Agreement and the other Loan Documents, the Existing Credit Agreement shall be amended, restated and replaced for all purposes by this Agreement; provided, however, the Company, the Lender and the Administrative Agent hereby agree that, notwithstanding anything to the contrary contained herein, (a) this Agreement amends, restates and consolidates (but does not discharge) the liabilities and obligations of the Company under the Existing Credit Agreement, (b) this Agreement is being entered into in replacement of (and not in discharge of the liabilities and obligations evidenced by) the Existing Credit Agreement, (c) any Event of Default existing under the Existing Credit Agreement or any other Loan Document (whether known or unknown on the date hereof) shall continue for all purposes and shall constitute an Event of Default hereunder, and (d) except for amendments, restatements and/or supplements to the other Loan Documents in connection with the closing of this Agreement, all other Loan Documents entered into in connection with or otherwise related to the Existing Credit Agreement shall continue in full force and effect for all purposes unaffected by this Agreement or any other Loan Document.
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15.13 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by the Lenders shall be deemed to be originals.
15.14 Successors and Assigns. This Agreement shall be binding upon the Company, the Lenders and the Administrative Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Lenders and the Administrative Agent and the successors and assigns of the Lenders and the Administrative Agent. No other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. The Company may not assign or transfer any of its rights or Obligations under this Agreement without the prior written consent of the Administrative Agent and each Lender.
15.15 Captions. Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.
15.16 Customer Identification - USA Patriot Act Notice. Each Lender and CIBC (for itself and not on behalf of any other party) hereby notifies the Loan Parties that, pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Loan Parties, which information includes the name and address of the Loan Parties and other information that will allow such Lender or CIBC, as applicable, to identify the Loan Parties in accordance with the Patriot Act.
15.17 INDEMNIFICATION BY THE COMPANY. IN CONSIDERATION OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT BY THE ADMINISTRATIVE AGENT AND THE LENDERS AND THE AGREEMENT TO EXTEND THE COMMITMENTS PROVIDED HEREUNDER, THE COMPANY HEREBY AGREES TO INDEMNIFY, EXONERATE AND HOLD THE ADMINISTRATIVE AGENT, EACH LENDER AND EACH OF THE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES AND AGENTS OF THE ADMINISTRATIVE AGENT AND EACH LENDER (EACH A “LENDER PARTY”) FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, LOSSES, LIABILITIES, DAMAGES AND EXPENSES, INCLUDING ATTORNEY COSTS (COLLECTIVELY, THE “INDEMNIFIED LIABILITIES”), INCURRED BY THE LENDER PARTIES OR ANY OF THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY TENDER OFFER, MERGER, PURCHASE OF CAPITAL SECURITIES, PURCHASE OF ASSETS OR SIMILAR TRANSACTION FINANCED OR PROPOSED TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF ANY OF THE LOANS, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS SUBSTANCE AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY
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LOAN PARTY OR THE OPERATIONS CONDUCTED THEREON, (D) THE INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY LOAN PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS SUBSTANCES OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF THE LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION. IF AND TO THE EXTENT THAT THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, THE COMPANY HEREBY AGREES TO MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. ALL OBLIGATIONS PROVIDED FOR IN THIS SECTION 15.17 SHALL SURVIVE REPAYMENT OF THE LOANS, CANCELLATION OF THE NOTES, EXPIRATION OR TERMINATION OF THE LETTERS OF CREDIT, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE COLLATERAL DOCUMENTS AND TERMINATION OF THIS AGREEMENT.
15.18 Nonliability of Lenders. The relationship between the Company on the one hand and the Lenders and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to any Loan Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Loan Parties, on the one hand, and the Administrative Agent and the Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. Neither the Administrative Agent nor any Lender undertakes any responsibility to any Loan Party to review or inform any Loan Party of any matter in connection with any phase of any Loan Party’s business or operations. The Company agrees, on behalf of itself and each other Loan Party, that neither the Administrative Agent nor any Lender shall have liability to any Loan Party (whether sounding in tort, contract or otherwise) for losses suffered by any Loan Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. NO LENDER PARTY SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH THE PLATFORM IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER PARTY HAVE ANY LIABILITY WITH RESPECT TO, AND THE COMPANY ON BEHALF OF ITSELF AND EACH OTHER LOAN PARTY, HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). The Company acknowledges that it has been advised by
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counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party. No joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Loan Parties and the Lenders.
15.19 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE ADMINISTRATIVE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
15.20 WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
15.21 Acknowledgement and Consent to Bail-In of EEA Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
15.21.1 the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and
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15.21.2 the effects of any Bail-In Action on any such liability, including, if applicable:
(A) a reduction in full or in part or cancellation of any such liability;
(B) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or
(C) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.
15.22 Commodity Exchange Act. Notwithstanding anything to the contrary in this Agreement or any other Collateral Document, no Loan Party shall be deemed to be a guarantor of another Loan Party’s Swap Obligations owing to Lender if such Loan Party is not an “eligible contract participant” as defined in §1(a)(18) of the Commodity Exchange Act and the applicable rules issued by the Commodity Futures Trading Commission and/or the Securities and Exchange Commission (collectively, and as now or hereafter in effect, the “ECP Rules”) to the extent that the providing of such guaranty by such Loan Party would violate the ECP Rules or any other applicable law or regulation.
[SIGNATURE PAGES FOLLOW]
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The parties hereto have caused this Second Amended and Restated Credit Agreement to be duly executed and delivered by their duly authorized officers as of the date first set forth above.
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CONTINENTAL MATERIALS CORPORATION, |
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as the Company and a Loan Party |
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By: |
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Paul Ainsworth |
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Chief Financial Officer |
Signature Page to Second Amended and Restated Credit Agreement
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CIBC BANK USA, |
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as Administrative Agent, as a Lender and the initial Issuing Lender |
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By: |
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Richard Pierce |
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Managing Director |
Signature Page to Second Amended and Restated Credit Agreement
ANNEX A
LENDERS AND PRO RATA SHARES
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Lender |
Revolving Commitment Amount |
Pro Rata Share |
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CIBC Bank USA |
$20,000,000 |
100% |
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TOTALS |
$20,000,000 |
100% |
Annex A
ANNEX B
ADDRESSES FOR NOTICES
CONTINENTAL MATERIALS CORPORATION, as the Company
440 South LaSalle, Suite 3100
Chicago, IL 60605-5020
Attention: Vice President & CFO
Facsimile: (312) 541-8089
CIBC BANK USA, as Administrative Agent, Issuing Lender and a Lender
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Richard Pierce
Annex B
EXHIBIT A
FORM OF AMENDED AND RESTATED NOTE
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[ ], 2020 |
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$__________________ |
Chicago, Illinois |
The undersigned, for value received, promises to pay to the order of ______________ (the “Lender”) at the principal office of CIBC Bank USA f/k/a The PrivateBank and Trust Company (the “Administrative Agent”) in Chicago, Illinois the aggregate unpaid amount of all Loans made to the undersigned by the Lender pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Lender), such principal amount to be payable on the dates set forth in the Credit Agreement.
The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America.
This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Second Amended and Restated Credit Agreement, dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”; terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, certain financial institutions (including the Lender) and the Administrative Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated.
This Amended and Restated Revolving Loan Note evidences the same indebtedness as did the Revolving Loan Note issued by the undersigned to the Lender, dated [________] (the “Prior Note”), which is amended and restated hereby. This Amended and Restated Revolving Loan Note is issued in substitution for (and not in discharge of the indebtedness evidenced by) the Prior Note.
This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State.
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CONTINENTAL MATERIALS CORPORATION |
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Exhibit A-1
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
To: CIBC Bank USA, as Administrative Agent
Please refer to the Second Amended and Restated Credit Agreement dated as of [ ], 2020 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Continental Materials Corporation (the “Company”), various financial institutions and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement.
I. Reports. Enclosed herewith is a copy of the [annual audited/quarterly/monthly] report of the Company as at _____________, ____ (the “Computation Date”), which report fairly presents in all material respects the financial condition and results of operations [(subject to the absence of footnotes and to normal year-end adjustments)] of the Company as of the Computation Date and has been prepared in accordance with GAAP consistently applied.
II. Financial Tests. The Company hereby certifies and warrants to you that the following is a true and correct computation as at the Computation Date of the ratios and/or financial restrictions contained in the Credit Agreement:
A. Section 11.13.1 - Minimum Fixed Charge Coverage Ratio
1. See attached computation
B. Section 11.13.2 - Minimum EBITDA
2. See attached computation
The Company further certifies to you that no Event of Default or Unmatured Event of Default has occurred and is continuing.
The Company has caused this Certificate to be executed and delivered by its duly authorized officer on _________, ____.
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CONTINENTAL MATERIALS CORPORATION |
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Exhibit B-1
EXHIBIT C
FORM OF BORROWING BASE CERTIFICATE
To: CIBC Bank USA, as Administrative Agent
Please refer to the Second Amended and Restated Credit Agreement dated as of [ ], 2020 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Continental Materials Corporation (the “Company”), various financial institutions and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as Administrative Agent. This certificate (this “Certificate”), together with supporting calculations attached hereto, is delivered to you pursuant to the terms of the Credit Agreement. Capitalized terms used but not otherwise defined herein shall have the same meanings herein as in the Credit Agreement.
The Company hereby certifies and warrants to the Administrative Agent and the Lenders that at the close of business on ______________, ____ (the “Calculation Date”), the Borrowing Base was $_____________, computed as set forth on the schedule attached hereto.
The Company has caused this Certificate to be executed and delivered by its officer thereunto duly authorized on ___________, ______.
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CONTINENTAL MATERIALS CORPORATION |
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Exhibit C-1
SCHEDULE TO BORROWING BASE CERTIFICATE
Dated as of [_________________]
See Attached Form
Exhibit C-2
EXHIBIT D
FORM OF
ASSIGNMENT AGREEMENT
Date:_________________
To: Continental Materials Corporation
and
CIBC Bank USA, as Administrative Agent
Re: Assignment under the Credit Agreement referred to below
Gentlemen and Ladies:
Please refer to Section 15.6.1 of the Second Amended and Restated Credit Agreement dated as of [ ], 2020 (as amended or otherwise modified from time to time, the “Credit Agreement”) among Continental Materials Corporation (the “Company”), various financial institutions and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as administrative agent (in such capacity, the “Administrative Agent”). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement.
___________________ (the “Assignor”) hereby sells and assigns, without recourse, to ___________________ (the “Assignee”), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to the Assignor’s rights and obligations under the Credit Agreement as of the date hereof equal to % of all of the Loans, of the participation interests in the Letters of Credit and of the Commitments, such sale, purchase, assignment and assumption to be effective as of ____________, _____, or such later date on which the Company and the Administrative Agent shall have consented hereto (the “Effective Date”). After giving effect to such sale, purchase, assignment and assumption, the Assignee’s and the Assignor’s respective percentages for purposes of the Credit Agreement will be as set forth opposite their names on the signature pages hereof.
The Assignor hereby instructs the Administrative Agent to make all payments from and after the Effective Date in respect of the interest assigned hereby directly to the Assignee. The Assignor and the Assignee agree that all interest and fees accrued up to, but not including, the Effective Date are the property of the Assignor, and not the Assignee. The Assignee agrees that, upon receipt of any such interest or fees, the Assignee will promptly remit the same to the Assignor.
The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim.
Unless otherwise waived by the Administrative Agent, the Assignor shall pay the fee payable to the Administrative Agent pursuant to Section 15.6.1 of the Credit Agreement.
Exhibit D-1
The Assignee hereby confirms that it has received a copy of the Credit Agreement. Except as otherwise provided in the Credit Agreement, effective as of the Effective Date:
(a) the Assignee (i) shall be deemed automatically to have become a party to the Credit Agreement and to have all the rights and obligations of a “Lender” under the Credit Agreement as if it were an original signatory thereto to the extent specified in the second paragraph hereof; and (ii) agrees to be bound by the terms and conditions set forth in the Credit Agreement as if it were an original signatory thereto; and
(b) the Assignor shall be released from its obligations under the Credit Agreement to the extent specified in the second paragraph hereof.
The Assignee hereby advises each of you of the following administrative details with respect to the assigned Loans and Commitment:
(A) Institution Name:
Address:
Attention:
Telephone:
Facsimile:
(B) Payment Instructions:
This Assignment shall be governed by and construed in accordance with the laws of the State of Illinois
Please evidence your receipt hereof and your consent to the sale, assignment, purchase and assumption set forth herein by signing and returning counterparts hereof to the Assignor and the Assignee.
Exhibit D-2
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ACKNOWLEDGED AND CONSENTED TO |
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this ____ day of ________, ____ |
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CIBC BANK USA, as Administrative Agent |
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ACKNOWLEDGED AND CONSENTED TO |
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this __ day of ______, |
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CONTINENTAL MATERIALS CORPORATION |
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Exhibit D-3
EXHIBIT E
FORM OF NOTICE OF BORROWING
To: CIBC Bank USA, as Administrative Agent
Please refer to the Second Amended and Restated Credit Agreement dated as of [ ], 2020 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Continental Materials Corporation (the “Company”), various financial institutions and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement.
The undersigned hereby gives irrevocable notice, pursuant to Section 2.2.2 of the Credit Agreement, of a request hereby for a borrowing as follows:
(i) The requested borrowing date for the proposed borrowing (which is a Business Day) is ______________, ____.
(ii) The aggregate amount of the proposed borrowing is $______________.
(iii) The type of Revolving Loans comprising the proposed borrowing are [Base Rate] [LIBOR] Loans.
(iv) The duration of the Interest Period for each LIBOR Loan made as part of the proposed borrowing, if applicable, is ___________ months (which shall be 1, 2 or 3 months).
The undersigned hereby certifies that on the date hereof and on the date of borrowing set forth above, and immediately after giving effect to the borrowing requested hereby: (i) there exists and there shall exist no Unmatured Event of Default or Event of Default under the Credit Agreement; and (ii) each of the representations and warranties contained in the Credit Agreement and the other Loan Documents is true and correct in all material respect as of the date hereof, except to the extent already qualified by materiality, in which case such representation and warranty shall be true and correct in all respects, except as such representation or warranty expressly relates to another date and except for changes therein expressly permitted or expressly contemplated by the Credit Agreement.
The Company has caused this Notice of Borrowing to be executed and delivered by its officer thereunto duly authorized on ___________, ______.
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CONTINENTAL MATERIALS CORPORATION |
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Exhibit E-1
EXHIBIT F
FORM OF NOTICE OF CONVERSION/CONTINUATION
To: CIBC Bank USA, as Administrative Agent
Please refer to the Second Amended and Restated Credit Agreement dated as of [ ], 2020 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) among Continental Materials Corporation (the “Company”), various financial institutions and CIBC Bank USA f/k/a The PrivateBank and Trust Company, as Administrative Agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement.
The undersigned hereby gives irrevocable notice, pursuant to Section 2.2.3 of the Credit Agreement, of its request to:
(a) on [ date ] convert $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the [________] Rate, into a(n) [________] Loan [and, in the case of a LIBOR Loan, having an Interest Period of [_____] month(s)];
[(b) on [ date ] continue $[________]of the aggregate outstanding principal amount of the [_______] Loan, bearing interest at the LIBOR Rate, as a LIBOR Loan having an Interest Period of [_____] month(s)].
The undersigned hereby represents and warrants that all of the conditions contained in Section 12.2 of the Credit Agreement have been satisfied on and as of the date hereof, and will continue to be satisfied on and as of the date of the conversion/continuation requested hereby, before and after giving effect thereto.
The Company has caused this Notice of Conversion/Continuation to be executed and delivered by its officer thereunto duly authorized on ___________, ______.
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CONTINENTAL MATERIALS CORPORATION |
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Exhibit F-1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Registrant has no parent; see proxy statement for Registrant’s principal shareholders. The following are Registrant’s subsidiaries included in the consolidated financial statements:
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Name of Subsidiary
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State or Other
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Castle Concrete Company |
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Colorado |
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McKinney Door and Hardware, Inc. |
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Colorado |
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Phoenix Manufacturing, Inc. |
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Arizona |
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Castle Rebar and Supply Company (f/k/a Transit Mix Concrete Co.) |
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Colorado |
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TMOP Legacy Company (f/k/a Transit Mix of Pueblo, Inc.) |
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Colorado |
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Williams Furnace Co. |
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Delaware |
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2701 W Concord St LLC |
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Delaware |
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GFP Acquisition Company |
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Delaware |
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Inovate Acquisition Company |
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Delaware |
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Serenity Acquisition Company |
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Delaware |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement of Continental Materials Corporation (Company) on Form S-8 (File No. 33-23671) of our report dated March 23, 2020, on our audits of the consolidated financial statements and consolidated financial statement schedule of the Company as of December 28, 2019 and December 28, 2019, and for the years then ended, which report is included in this Annual Report on Form 10-K.
/s/ BKD, LLP
Indianapolis, Indiana
March 23, 2020
Exhibit 31.1
CERTIFICATION
I, James G. Gidwitz, certify that:
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I have reviewed this annual report on Form 10-K of Continental Materials Corporation; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
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The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: March 23, 2020
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/s/ James G. Gidwitz |
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James G. Gidwitz |
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Chairman of the Board and |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Paul Ainsworth, certify that:
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I have reviewed this annual report on Form 10-K of Continental Materials Corporation; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
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4. |
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The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
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(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
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Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
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Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
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5. |
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The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: March 23, 2020
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Mark |
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By: |
/s/ Paul Ainsworth |
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Paul Ainsworth |
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Vice President and Chief Financial Officer |
Exhibit 32
CONTINENTAL MATERIALS CORPORATION
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Continental Materials Corporation (the “Company”) on Form 10-K for the fiscal year ended December 28, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James G. Gidwitz, the Chairman of the Board and Chief Executive Officer of the Company, and I, Paul Ainsworth, the Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
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(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 23, 2020
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By: |
/s/ James G. Gidwitz |
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James G. Gidwitz |
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Chairman of the Board and |
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Chief Executive Officer |
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By: |
/s/ Paul Ainsworth |
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Paul Ainsworth |
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Vice President and Chief Financial Officer |
The foregoing certification accompanies the issuer’s Annual Report on Form 10-K and is not filed as provided in SEC Release Nos. 33-8212, 34-4751 and IC-25967, dated November 16, 2007.
Exhibit 95
Mine Safety Disclosures
The following disclosures are provided pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K, which require certain disclosures by companies required to file periodic reports under the Securities Exchange Act of 1934, as amended, that operate mines regulated under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”).
Mine Safety Information. Whenever the Federal Mine Safety and Health Administration (“MSHA”) believes a violation of the Mine Act, any health or safety standard or any regulation has occurred, it may issue a citation which describes the alleged violation and fixes a time within which the mining operator must abate the alleged violation. In some situations, such as when MSHA believes that conditions pose a hazard to miners, MSHA may issue an order removing miners from the area of the mine affected by the condition until the alleged hazards are corrected. When MSHA issues a citation or order, it generally proposes a civil penalty, or fine, as a result of the alleged violation, that the operator is ordered to pay. Citations and orders can be contested and appealed, and as part of that process, are often reduced in severity and amount, and are sometimes dismissed. The number of citations, orders and proposed assessments vary depending on the size and type (underground or surface) of the mine as well as by the MSHA inspectors assigned.
Mine Safety Data. The following headings are used in the table below to describe the categories of violations, orders or citations issued by MSHA under the Mine Act with respect to the Company’s mines:
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Section 104 S&S Citations: Citations received from MSHA under Section 104 of the Mine Act for violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard. |
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Section 104(b) Orders: Orders issued by MSHA under Section 104(b) of the Mine Act, which represents a failure to abate a citation under Section 104(a) within the period of time prescribed by MSHA. This results in an order of immediate withdrawal from the area of the mine affected by the condition until MSHA determines that the violation has been abated. |
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Section 104(d) Citations and Orders: Citations and orders issued by MSHA under Section 104(d) of the Mine Act for unwarrantable failure to comply with mandatory health or safety standards. |
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Section 110(b)(2) Violations: Flagrant violations issued by MSHA under Section 110(b)(2) of the Mine Act. |
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Section 107(a) Orders: Orders issued by MSHA under Section 107(a) of the Mine Act for situations in which MSHA determined an “imminent danger” existed. |
The following table details the violations, citations and orders issued to us by MSHA during the fiscal year ended December 28, 2019 (Dollar amounts in thousands):
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Section |
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Section 104 |
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Section |
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104(d) |
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Section |
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Section |
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Mining |
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S&S |
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104(b) |
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Citations |
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110(b)(2) |
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107(a) |
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Proposed |
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Related |
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Citations(2) |
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Orders |
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and Orders |
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Violations |
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Orders |
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Assessments(2) |
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Fatalities |
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Mine(1) |
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(#) |
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(#) |
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($) |
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(#) |
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Snyder Quarry |
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— |
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$ |
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Grisenti Farms Gravel Pit |
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— |
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Pueblo East |
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— |
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— |
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— |
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— |
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— |
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Pikeview Quarry |
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— |
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— |
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(1) |
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The definition of “mine” found in Section 3 of the Mine Act includes the mine, as well as other items used in, or to be used in, or resulting from, the work of extracting minerals, such as land, structures, facilities, equipment, machines, |
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tools and minerals preparation facilities. Unless otherwise indicated, any of these other items associated with a single mine have been aggregated in the totals for that mine. MSHA assigns an identification number to each mine and may or may not assign separate identification numbers to related facilities such as preparation facilities. We are providing the information in the table by mine rather than MSHA identification number because that is how we manage and operate our mining business and we believe this presentation will be more useful to the reader than providing information based on MSHA identification numbers. |
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(2) |
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Represents the total dollar value of the proposed assessment from MSHA under the Mine Act pursuant to the citations and/or orders preceding such dollar value in the corresponding row. |
Pattern or Potential Pattern of Violations. During the fiscal year ended December 28, 2019, none of the mines operated by us received written notice from MSHA of (a) a pattern of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of mine health or safety hazards under Section 104(e) of the Mine Act or (b) the potential to have such a pattern.
Pending Legal Actions. There were no pending legal actions before the Federal Mine Safety and Health Review Commission (the “Commission”) as of December 28, 2019, nor were there any legal actions instituted and resolved during the fiscal year ended December 28, 2019. The Commission is an independent adjudicative agency established by the Mine Act that provides administrative trial and appellate review of legal disputes arising under the Mine Act. These cases may involve, among other questions, challenges by operators to citations, orders and penalties they have received from MSHA, or complaints of discrimination by miners under Section 105 of the Mine Act. The following provides additional information of the types of proceedings that may be brought before the Commission:
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Contest Proceedings: A contest proceeding may be filed by an operator to challenge the issuance of a citation or order issued by MSHA. |
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Civil Penalty Proceedings: A civil penalty proceeding may be filed by an operator to challenge a civil penalty MSHA has proposed for a violation contained in a citation or order. We do not institute civil penalty proceedings based solely on the assessment amount of proposed penalties. Any initiated adjudications address substantive matters of law and policy instituted on conditions that are alleged to be in violation of mandatory standards of the Mine Act. |
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Discrimination Proceedings: Involves a miner’s allegation that he or she has suffered adverse employment action because he or she engaged in activity protected under the Mine Act, such as making a safety complaint. Includes also temporary reinstatement proceedings involving cases in which a miner has filed a complaint with MSHA stating that he or she has suffered discrimination and the miner has lost his or her position. |
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Compensation Proceedings: A compensation proceeding may be filed by miners entitled to compensation when a mine is closed by certain closure orders issued by MSHA. The purpose of the proceeding is to determine the amount of compensation, if any, due to miners idled by the orders. |
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Temporary Relief: Applications for temporary relief are applications filed under Section 105(b)(2) of the Mine Act for temporary relief from any modification or termination of any order. |
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Appeals: An appeal may be filed by an operator to challenge judges’ decisions or orders to the Commission, including petitions for discretionary review and review by the Commission on its own motion. |
During fiscal 2018, we had no legal actions instituted or resolved. As of December 28, 2019, we had no pending legal actions.