-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2fS4gRN5kmGCeyph1Gz23wAlilctrthpo5p/DzP95hcgc7am81Hvdd3de8rqiAf 6FeKkZgRv19M28CxUnU4WA== 0000950131-97-001372.txt : 19970228 0000950131-97-001372.hdr.sgml : 19970228 ACCESSION NUMBER: 0000950131-97-001372 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970227 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUNO INC CENTRAL INDEX KEY: 0001019779 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 061159240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-22447 FILM NUMBER: 97545250 BUSINESS ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: HERIDEA STATE: CT ZIP: 06450 BUSINESS PHONE: 203-237-5541 MAIL ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: HERIDEA STATE: CT ZIP: 06450 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- CUNO INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 3569 06-1159240 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER (STATE OR OTHER CLASSIFICATION CODE NO.) IDENTIFICATION NO.) JURISDICTION OF INCORPORATION OR ORGANIZATION) 400 RESEARCH PARKWAY, MERIDEN, CONNECTICUT 06450, (203) 237-5541 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) PAUL J. POWERS CHIEF EXECUTIVE OFFICER CUNO INCORPORATED 400 RESEARCH PARKWAY, MERIDEN, CONNECTICUT 06450, (203) 237-5541 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: HERBERT S. WANDER, ESQ., P.C. DEWEY B. CRAWFORD, ESQ. DAVID J. KAUFMAN, ESQ. GARDNER, CARTON & DOUGLAS KATTEN MUCHIN & ZAVIS 321 NORTH CLARK STREET 525 WEST MONROE STREET SUITE 3400-QUAKER TOWER CHICAGO, ILLINOIS 60661 CHICAGO, ILLINOIS 60610 (312) 902-5200 (312) 644-3000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------ Common Stock, $.001 par value................. 2,300,000 $15.375 $35,362,500 $10,716
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 300,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 27, 1997 PROSPECTUS 2,000,000 SHARES LOGO CUNO INCORPORATED COMMON STOCK -------------- All of the 2,000,000 shares of Common Stock, $.001 par value per share (the "Common Stock"), offered hereby are being sold by CUNO Incorporated ("CUNO" or the "Company"). The Company's Common Stock is traded on the Nasdaq National Market under the symbol "CUNO." On February 26, 1997, the last reported sale price of the Company's Common Stock was $15.625 per share, as reported on the Nasdaq National Market. See "Price Range of Common Stock." PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION DISCUSSED UNDER THE CAPTION "RISK FACTORS" AT PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE PROCEEDS TO UNDERWRITING TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share....................................... $ $ $ - -------------------------------------------------------------------------------- Total(3)........................................ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated at $300,000, all of which are payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 300,000 additional shares of Common Stock on the same terms and conditions as set forth above to cover over-allotments, if any. If the Underwriters exercise the over-allotment option in full, the total Price to Public will be $ , the total Underwriting Discount will be $ and the total Proceeds to Company will be $ . See "Underwriting." -------------- The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that delivery of the certificates representing shares of Common Stock will be made on or about , 1997 through The Depository Trust Company or at the offices of Robert W. Baird & Co. Incorporated, Milwaukee, Wisconsin. ROBERT W. BAIRD & CO. INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. GOLDMAN, SACHS & CO. THE DATE OF THIS PROSPECTUS IS , 1997. ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND OTHER SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 Health Care . Bioprocessing/Pharmaceuticals . Food & Beverage . Diagnostic/Laboratory Pressures to contain health care costs; demands for rapid and cost effective diagnostic tests; and increased governmental regulations are three of the forces driving this $900 million market. The Health Care market is estimated to be growing at 10% per year and contributes 27%* of CUNO sales revenue. CUNO manufactures an extensive range of filtration systems for bioprocessing and biological manufacturing procedures ranging from prefiltration products to sterilizing grade final membrane filters. These systems are used in the sterile filtration of pharmaceutical products, clarification of human blood plasma products, production of therapeutic drugs from genetically engineered organisms, and clarification of beer, wine and soft drinks. Additionally, the systems are used to purify water and gas for product formulation and equipment cleaning and the removal of endotoxins from various solutions. Worldwide, CUNO holds more than 200 patents for its products. *Based on 1996 sales of $179 million ARTWORK [PICTURE OF TEST TUBES] - ----------------- Zetapor(R) is available in flat stock and cartridge form. CUNO filtration products, such as Zetabind(R), are used extensively for diagnostic testing. Fluid Processing . Electronics . Coatings . Chemicals/Petrochemicals This $1.2 billion dollar market is estimated to be growing at 8% per year and contributes 46%* of CUNO's sales revenues. Fluid processing customers requirements for purer chemical solutions; high quality industrial and automotive finish paints and coatings; ultra pure process water demands of electronics manufacturers as well as government regulations to reduce potential exposure to toxic materials assure this market's continued growth. CUNO is recognized as a leading manufacturer of filtration systems for paints and coatings, electronics and petrochemical/chemical markets and provides filtration systems for many industry leaders across the spectrum of these activities. These systems may provide the ultra pure water used in the manufacture of microchips, or remove chemical or physical contaminants from automotive coatings. These systems remove undesirable substances from transformer coolants, improving the efficiency of these devices and can be found in gas processing plants where they remove corrosive chemicals. CUNO has steadily invested in research and manufacturing technology to ensure that its products continue to hold leadership positions in every major area of fluid purification for processing applications. * Based on 1996 sales of $179 million ARTWORK [PICTURE OF CAR BEING PAINTED] Betapure(R) absolute rated paint filter cartridge. Potable Water/Consumer . Residential & Commercial . Food Service The Potable Water market is driven by dramatically increased water safety concerns; consumer's desire for better tasting water and other beverages; and restaurant standardization of soft drink quality and taste. This $800 million market is estimated to be growing at 8% per year and contributes 27%* of CUNO's sales revenue. Water filtration products for home and commercial uses are the focus of CUNO's Aqua-Pure(R) and Water Factory(R) filtration systems. Aqua-Pure offers a range of filters for home use that includes water softening devices, whole house filtration systems that remove iron, scale and other contaminants from the incoming water supply and point-of-use filter systems. Water Factory reverse osmosis systems include devices for home and commercial filtration of water at the molecular level for uses as diverse as home water consumption to spot-free car wash rinses. CUNO offers more National Sanitation Foundation recognized water filtration devices than any other manufacturer. *Based on 1996 sales of $179 million Aqua-Pure whole house and point-of-use filtration systems ARTWORK [GLASS OF WATER] Water Factory reverse osmosis carafe home water system. PROSPECTUS SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which could cause actual results to differ materially from those indicated in such forward-looking statements. The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY The Company is a world leader in the design, manufacture and marketing of a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. The Company's products, which include proprietary depth filters and semi-permeable membrane filters, are used in the health care, fluid processing and potable water markets. These products, most of which are disposable, effectively remove contaminants that range in size from molecules to sand particles. Significant customers include Amgen Inc., Boston Chicken, Inc., Eli Lilly and Company, Genzyme Corporation, KFC Corporation, McDonald's Corporation, Monsanto Company and Minnesota Mining and Manufacturing Company ("3M"). Approximately 52% of the Company's net sales in fiscal year 1996 were derived from its international operations. The Company's objective is to provide high value-added products and premium customer service. The Company's proprietary manufacturing processes provide longer lasting, higher quality and more efficient filters that lower customers' operating expenses and improve the quality of customers' end products. As part of its commitment to customer service, the Company's scientists, each of whom possesses particular industry expertise, collaborate with customers on specific projects to ensure product satisfaction and to develop new products. In mid-1994, the Company realigned its business to accelerate sales growth and improve operating margins. A new senior management team developed and implemented the following initiatives, which are key elements of its ongoing growth strategy: (i) develop new products for specific markets, (ii) decrease product development cycle times, (iii) develop pre/final filter systems, (iv) increase customer focus, (v) improve operating efficiencies and (vi) pursue selective acquisitions. Due principally to these initiatives, net sales increased by 25.1% from $143 million to $179 million from fiscal year 1994 to fiscal year 1996 and operating margins (excluding distribution and other nonrecurring costs) improved from 3.5% to 9.8% over the same period. These initiatives resulted in the introduction of 15 new products or product extensions that produced over $18 million in aggregate net sales in the 24 months prior to the Spin-off (as defined below). The Company has scheduled the introduction of 13 new products in fiscal year 1997, nine of which have already been introduced. On September 10, 1996 (the "Distribution Date"), the Company's businesses and operations and the associated assets and liabilities were spun-off from Commercial Intertech Corp. ("Commercial Intertech") to its stockholders through a dividend distribution of the Common Stock of the Company (the "Spin-off"). The Company was incorporated in Delaware on May 23, 1985. Its principal executive offices are located at 400 Research Parkway, Meriden, Connecticut, 06450 and its telephone number is (203) 237-5541. 3 THE OFFERING Common Stock offered by the Company.... 2,000,000 shares Common Stock to be outstanding after the Offering.......................... 15,822,076 shares(1) Use of Proceeds........................ For repayment of indebtedness, working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol.......... CUNO
- -------- (1) Excludes as of January 31, 1997: (i) 374,790 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $13.72 per share; and (ii) 562,150 shares of Common Stock reserved for issuance in the future under the CUNO Incorporated 1996 Stock Incentive Plan (the "Employee Stock Plan") and the CUNO Incorporated Non- Employee Directors' Stock Plan (the "Directors Stock Plan" together with the Employee Stock Plan, the "Stock Plans"). See "Capitalization," "Management--Stock Plans" and Note K of Notes to Consolidated Financial Statements. 4 SUMMARY FINANCIAL AND OTHER DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth summary financial and other data of the Company. The income statement data for the fiscal years ended October 31, 1993, 1994, 1995 and 1996 are derived from audited Consolidated Financial Statements of the Company. The income statement data for the fiscal year ended October 31, 1992 and the three months ended January 31, 1996 and 1997 and the balance sheet data as of January 31, 1996 and 1997 are derived from the unaudited Consolidated Financial Statements of the Company. The data should be read in conjunction with the Consolidated Financial Statements (including the notes thereto) and other financial information included elsewhere herein and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." THREE MONTHS YEAR ENDED OCTOBER 31, ENDED JANUARY 31, ------------------------------------------------ -------------------- 1992 1993 1994 1995 1996(2) 1996 1997 -------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) INCOME STATEMENT DATA:(1) Net sales.............. $128,195 $130,771 $143,111 $162,699 $179,068 $ 41,004 $ 44,839 Gross profit........... 38,383 40,605 50,604 62,927 74,220 15,748 19,201 Distribution and other nonrecurring costs.... -- -- -- -- (5,564) -- -- Operating income (loss)................ (2,538) (1,678) 4,978 10,840 11,906 2,636 3,927 Interest expense, net.. (1,458) (114) (618) (546) (664) (70) (555) Other (expense) income, net................... (818) (757) (2,317) (731) (231) 75 (68) Income (loss) before income taxes.......... (4,814) (2,549) 2,043 9,563 11,011 2,641 3,304 (Provision) benefit for income taxes.......... 514 1,848 (236) (3,462) (5,418) (790) (1,239) Net income (loss)...... (4,300) (701) 1,807 6,101 5,593 1,851 2,065 Net income (loss) per share(3).............. $ (0.32) $ (0.05) $ 0.13 $ 0.45 $ 0.41 $ 0.14 $ 0.15 PRO FORMA DATA: Pro forma net income per share(3).......... $ 0.70(4) $ 0.11(5) $ 0.15 OTHER DATA: Depreciation and amortization.......... $ 8,276 $ 7,664 $ 8,154 $ 7,929 $ 7,475 $ 2,032 $ 1,779 Capital expenditures... 6,729 3,245 2,927 5,234 6,325 1,050 1,001
AS OF JANUARY 31, 1997 -------------------- AS ACTUAL ADJUSTED(6) -------- ----------- (UNAUDITED) BALANCE SHEET DATA: Working capital........................................... $ 16,144 $ 16,144 Total assets.............................................. 135,098 135,098 Short-term debt........................................... 13,218 13,218 Long-term debt, excluding current maturities.............. 35,577 6,424 Total stockholders' equity................................ 44,151 73,304
- -------- (1) Operating income has been reduced by an amount equal to the Company's estimate of the charges and expenses the Company would have incurred during those time periods presented prior to the Spin-off if it had operated as a separate, stand-alone entity. (2) Included in determining fiscal year 1996 operating income, net income and net income per share were distribution and other nonrecurring costs associated with the Spin-off equal to $5,564, $4,858 and $0.36, respectively. (3) Shares used to calculate net income (loss) per share were 13,566 for fiscal years 1992 through 1996 and the three months ended January 31, 1996 and 13,810 for the three months ended January 31, 1997. Excludes as of January 31, 1997: (i) 374,790 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $13.72 per share; and (ii) 562,150 shares of Common Stock reserved for issuance in the future under the Stock Plans. See "Capitalization," "Management--Stock Plans" and Note K of Notes to Consolidated Financial Statements. (4) Reflects elimination of $5,564 of distribution and other nonrecurring costs ($0.36 per share) and incurrence of $30.0 million of debt for a full fiscal year at an 8.5% interest rate, net of related federal and state taxes. (5) Reflects incurrence of $30.0 million of debt for the quarter at an 8.5% per annum interest rate, net of related federal and state taxes. (6) As adjusted to give effect to the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $15.625 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 5 RISK FACTORS Because the Company wants to provide investors with more meaningful and useful information, this Prospectus contains certain forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act")) that reflect the Company's current expectations regarding the future results of operations and performance and achievements of the Company. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company has tried, wherever possible, to identify these forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect" and similar expressions. These statements reflect the Company's current beliefs and are based on information currently available to it. Accordingly, these statements are subject to certain risks, uncertainties and assumptions, including the factors set forth in the following Risk Factors, which could cause the Company's future results, performance or achievements to differ materially from those expressed in, or implied by, any of these statements. The Company undertakes no obligation to release publicly the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this Prospectus or to reflect the occurrence of unanticipated events. In addition to the other information in this Prospectus, prospective investors should carefully consider the following Risk Factors before purchasing any of the Common Stock offered hereby. LIMITED HISTORY AS A STAND-ALONE COMPANY The Company has operated as a stand-alone company only since the Spin-off and Commercial Intertech has no obligation to provide assistance to the Company or any of its subsidiaries except as described in "Certain Related Party Transactions--Arrangements Between the Company and Commercial Intertech." There can be no assurance that services provided to the Company by Commercial Intertech under such arrangements, which are scheduled to expire in September 1997, will continue to be provided and, if not, whether, or on what terms, such services could be replaced. Any termination of the arrangements could have a material adverse effect on the Company's business, financial condition and results of operations. See "Certain Related Party Transactions-- Arrangements Between the Company and Commercial Intertech." LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION The financial information included herein may not necessarily reflect the results of operations, financial position and cash flows of the Company in the future or what the results of operations, financial position and cash flows would have been had the Company been a separate, stand-alone entity during the periods presented prior to the Spin-off. Such financial information does not completely reflect additional changes that will occur in the future funding and operations of the Company as a result of the Spin-off. In addition, the financial statements of the Company for the periods prior to the Spin-off include allocations and other estimates of certain assets, liabilities and expenses that were not historically recorded at the level of, but were associated with, the businesses transferred to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview" and the Consolidated Financial Statements (including the notes thereto) appearing elsewhere in this Prospectus. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Approximately 50%, 54% and 52% of the Company's net sales for fiscal years 1994, 1995 and 1996, respectively, were derived from its international operations. Consequently, the Company's operations may be adversely affected by significant fluctuations in the value of the U.S. dollar in comparison to local currencies in the countries in which the Company operates. The Company manufactures products in Japan, Brazil, France and Australia. The Company's international operations may be affected by economic, political and governmental conditions in some of the countries where the Company has manufacturing facilities or where its products are sold. In addition, changes in economic or political conditions in any of the countries in which the Company 6 operates could result in unfavorable taxation policies, exchange rates, new or additional currency or exchange controls, governmental regulations or other restrictions being imposed on the operations of the Company or expropriation. See Note J of Notes to Consolidated Financial Statements. PATENTS AND PROPRIETARY TECHNIQUES The Company has a patent portfolio as well as other proprietary information and manufacturing techniques and has applied, and will continue to apply, for patents to protect its technology. The Company's success depends in part upon its ability to protect its technology and proprietary products under U.S. and foreign patent and other intellectual property laws. Trade secrets and confidential know-how which are not patented are protected through confidentiality agreements, contractual provisions and internal Company administrative procedures. There can be no assurance that such arrangements will provide meaningful protection for the Company in the event of any unauthorized use or disclosure. There can be no assurance that third parties will not assert infringement claims against the Company or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. In addition, any such claim may require the Company to incur substantial litigation expenses or subject the Company to significant liabilities and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Trademarks and Patents." TECHNOLOGICAL AND REGULATORY CHANGE The filtration and separations industry is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for the Company's products and services. Changes in legislative, regulatory or industrial requirements or competitive technologies may render certain of the Company's filtration and separations products and processes obsolete. Acceptance of new products may also be affected by the adoption of new government regulations requiring stricter standards. The Company's ability to anticipate changes in technology and regulatory standards and to develop and introduce new and enhanced products successfully on a timely basis will be a significant factor in the Company's ability to grow and to remain competitive. There can be no assurance that the Company will be able to achieve the technological advances that may be necessary for it to remain competitive or that certain of its products will not become obsolete. The Company is also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in product development and failure of products to operate properly. See "Business--Competition" and "--Research and Development, Product Development and Engineering." CERTAIN FEDERAL INCOME TAX CONSIDERATIONS Commercial Intertech structured the Spin-off to qualify as tax-free under Section 355 of the Internal Revenue Code (the "Code"). However, no ruling was requested from the Internal Revenue Service ("IRS") concerning the federal income tax consequences of the transaction. There is no assurance that the Spin-off will be treated as tax-free by the IRS. If the Spin-off were determined to not be a tax-free distribution, the Company could be liable for significant federal income taxes. See "Certain Related Party Transactions-- Certain Federal Income Tax Consequences of the Spin-off." RISKS ASSOCIATED WITH ACQUISITIONS The Company's business strategy depends in part on its ability to effect acquisitions. Future acquisitions could be financed by internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, a combination of the foregoing or effectuated in stock-for- stock transactions. If the Company completes acquisitions, it will encounter various associated risks, including the possible inability to integrate an acquired business into the Company's manufacturing systems, increased goodwill amortization, diversion of management's attention and unanticipated problems or liabilities, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. As a result of the Spin-off, the Company will not be able to account for any acquisition as a pooling of interests until September 11, 1998. There can be no assurance that the Company will be able to make acquisitions on terms favorable to the Company. See "Business--Growth Strategy." 7 COMPETITION The filtration and separations markets in which the Company competes are highly competitive. The Company competes with many domestic and international companies in its global markets. There can be no assurance that the Company's products will continue to compete successfully with the products of its competitors. The principal methods of competition in the markets in which the Company competes are product specifications, performance, quality, knowledge, reputation, technology, distribution capabilities, service and price. The Company is under constant pressure from its customers to increase product efficiency while reducing cost. The Company has a significant number of competitors, some of which are larger and have greater financial and other resources than the Company. See "Business--Market Overview" and "-- Competition." DEPENDENCE ON KEY PERSONNEL The Company's success will depend in a large part upon its ability to attract and retain highly qualified management, marketing, sales and research and development ("R&D") personnel. Due to the specialized nature of the Company's business it may be difficult to locate and hire qualified personnel. The loss of the services of key personnel, or the inability of the Company to attract and retain other key personnel, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not have any employment agreements with management other than the employment agreement with Mark Kachur, which expires in April 1997. See "Management." AGREEMENTS WITH COMMERCIAL INTERTECH; LACK OF ARM'S-LENGTH NEGOTIATIONS In connection with the Spin-off, the Company entered into three agreements with Commercial Intertech for the purpose of defining the ongoing relationship with Commercial Intertech. While these agreements were not the result of arm's- length negotiations between independent parties, the Company believes such agreements contain terms comparable to those that would have resulted from negotiations between unaffiliated parties, although there can be no assurance that the parties would have agreed upon comparable terms. However, such agreements contain certain provisions dealing with corporate opportunities presented to the Company's officers or members of the Company's Board of Directors who are also officers of Commercial Intertech or members of Commercial Intertech's Board of Directors. Although such provisions would not necessarily have been included if Commercial Intertech and the Company had been unaffiliated parties negotiating at arm's-length, the Company and Commercial Intertech believe that the intercompany agreements as a whole reflect the results that would have been reached by unaffiliated parties negotiating at arm's-length. See "Certain Related Party Transactions--Arrangements Between the Company and Commercial Intertech." POTENTIAL CONFLICTS OF INTEREST OF BOARD OF DIRECTORS AND MANAGEMENT Paul J. Powers, Chairman of the Board of Directors, President, Chief Executive Officer and Chief Operating Officer of Commercial Intertech, is also Chairman of the Board of Directors and Chief Executive Officer of the Company. In addition, four of the nine members of the Company's Board of Directors are also members of the Commercial Intertech Board of Directors. See "Management." These relationships and the contractual and other ongoing relationships between the Company and Commercial Intertech may give rise to potential conflicts of interest should the interests of the Company and Commercial Intertech be different. The Distribution and Interim Services Agreement provides that any corporate opportunity, transaction, agreement or other arrangement that becomes known to a director or officer of the Company, which officer or director is also an officer or director of Commercial Intertech or a subsidiary of Commercial Intertech, shall not be the property or corporate opportunity of the Company, even if such opportunity, transaction, agreement or other arrangement relates to the fluid purification business. See "Certain Related Party Transactions--Arrangements Between the Company and Commercial Intertech-- Distribution and Interim Services Agreement." 8 POSSIBLE VOLATILITY OF SHARE PRICE The market price for the Common Stock may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors, technological innovation by the Company or its competitors, the growth and expansion of the Company's business, trends and uncertainties affecting the filtration and separations industry as a whole, issuances and repurchases of Common Stock, quarterly variations in the Company's operating results or the operating results of the Company's competitors, investors' expectations of the Company's prospects, changes in earnings estimates by analysts or reported results that vary materially from such estimates and general economic and other conditions. In addition, in recent years the stock market has experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. See "Price Range of Common Stock." ANTI-TAKEOVER PROVISIONS The Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") and Amended and Restated Bylaws (the "Restated Bylaws") contain provisions that (i) eliminate the stockholders' ability to act by written consent, (ii) provide for a staggered board of directors, (iii) require an affirmative vote of 80% of the stockholders entitled to vote to remove directors (who can only be removed for cause), to amend certain provisions of the Restated Certificate or to repeal or amend the Restated Bylaws and (iv) allow the Company's Board of Directors, without obtaining stockholder approval, to issue shares of preferred stock having rights that could adversely affect the voting power and economic rights of holders of the Common Stock. In addition, the Company cannot be acquired in a transaction accounted for as a pooling of interests until September 11, 1998. In 1996, the Company also adopted the Rights Plan (as defined below). Also, Section 203 of the Delaware General Corporation Law restricts certain business combinations with any "interested stockholder" as defined by such statute. Any of the foregoing factors may delay, defer, make less attractive or prevent a change in control of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock--Stockholder Rights Plan." 9 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of 2,000,000 shares of Common Stock offered hereby, after deducting the estimated underwriting discount and offering expenses payable by the Company, are estimated to be approximately $29.2 million ($33.6 million if the Underwriters' over-allotment option is exercised in full) at an assumed offering price of $15.625 per share. The Company intends to use the net proceeds to repay a portion of the indebtedness outstanding under the Company's Senior Unsecured Revolving Credit Facility with Mellon Bank, N.A. (the "Credit Facility"), which was incurred to replace debt assumed from Commercial Intertech in connection with the Spin- off. The balance of the net proceeds will be used for working capital and other general corporate purposes. The Credit Facility bears interest at the rate of approximately 6% per annum and matures on October 31, 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and the Consolidated Financial Statements (including the notes thereto). PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "CUNO." The following table sets forth, for the periods indicated, the high and low closing sales prices for the Common Stock on the Nasdaq National Market. The Common Stock commenced trading on September 11, 1996. Prior thereto, there was no public market for the Common Stock.
HIGH LOW ------ ------ FISCAL YEAR 1996: Fourth Quarter (commencing September 11, 1996).............. $16.00 $14.50 FISCAL YEAR 1997: First Quarter............................................... $17.75 $14.63 Second Quarter (through February 26, 1997).................. 17.13 14.88
On February 26, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $15.625. As of January 31, 1997, there were approximately 3,550 registered holders of record. DIVIDEND POLICY The Company has not declared or paid, and does not anticipate paying in the near future, any cash dividends on its Common Stock, but intends instead to retain future earnings, if any, for reinvestment in the future operation and expansion of the Company's business and related development activities. Any future determination to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements, general business conditions, legal restrictions on the payment of dividends, restrictions imposed by financing arrangements and other factors as the Board of Directors deems relevant. The terms of the Credit Facility prohibit the Company from declaring dividends during fiscal years 1997 and 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 10 CAPITALIZATION The table below sets forth the capitalization of the Company as of January 31, 1997 and as adjusted to reflect the application of the estimated net proceeds from the issuance and sale by the Company of 2,000,000 shares of Common Stock offered hereby (at an assumed offering price of $15.625 per share) assuming all of the net proceeds are used to repay indebtedness under the Credit Facility. See "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements (including the notes thereto).
AS OF JANUARY 31, 1997 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Short-term debt(1)........................................ $13,218 $13,218 ======= ======= Long-term debt: Credit Facility......................................... $33,000 $ 3,847 Mortgages and other..................................... 2,577 2,577 ------- ------- Total long-term debt.................................. 35,577 6,424 ------- ------- Stockholders' equity: Preferred Stock, $.001 par value; 2,000,000 shares authorized; no shares outstanding...................... -- -- Common Stock, $.001 par value; 50,000,000 shares authorized; 13,822,076 shares issued and outstanding actual; 15,822,076 shares issued and outstanding as adjusted(2)............................................ 14 16 Additional paid-in-capital.............................. 7,262 36,413 Retained earnings....................................... 35,701 35,701 Unearned compensation................................... (3,578) (3,578) Minimum pension liability adjustment.................... (811) (811) Translation adjustments................................. 5,563 5,563 ------- ------- Total stockholders' equity............................ 44,151 73,304 ------- ------- Total capitalization.................................. $79,728 $79,728 ======= =======
- -------- (1) Excludes as of January 31, 1997, $8.9 million of payables due to Commercial Intertech. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." (2) Excludes as of January 31, 1997: (i) 374,790 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $13.72 per share; and (ii) 562,150 shares of Common Stock reserved for issuance in the future under the Stock Plans. See "Management--Stock Plans" and Note K of Notes to Consolidated Financial Statements. 11 SELECTED FINANCIAL AND OTHER DATA The following table sets forth selected financial and other data of the Company. The balance sheet data as of October 31, 1994, 1995 and 1996 and the income statement data for the fiscal years ended October 31, 1993, 1994, 1995 and 1996 are derived from Consolidated Financial Statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The balance sheet data as of October 31, 1992 and 1993 and as of January 31, 1996 and 1997 and the income statement data for the fiscal year ended October 31, 1992 and the three months ended January 31, 1996 and 1997 are derived from unaudited consolidated financial statements. The unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, that the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. The results of operations for the three months ended January 31, 1997 are not necessarily indicative of results that may be expected for the full year. The data should be read in conjunction with the Consolidated Financial Statements (including the notes thereto), "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included herein.
THREE MONTHS YEAR ENDED OCTOBER 31, ENDED JANUARY 31, ------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 (2) 1996 1997 -------- -------- -------- -------- --------- -------- -------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA:(1) Net sales.............. $128,195 $130,771 $143,111 $162,699 $ 179,068 $41,004 $44,839 Cost of products sold.. (89,812) (90,166) (92,507) (99,772) (104,848) (25,256) (25,638) -------- -------- -------- -------- --------- -------- -------- Gross profit........... 38,383 40,605 50,604 62,927 74,220 15,748 19,201 Selling, general and administrative expenses.............. (40,921) (42,283) (45,626) (52,087) (56,750) (13,112) (15,274) Distribution and other nonrecurring costs.... -- -- -- -- (5,564) -- -- -------- -------- -------- -------- --------- -------- -------- Operating income (loss)................ (2,538) (1,678) 4,978 10,840 11,906 2,636 3,927 Interest expense, net.. (1,458) (114) (618) (546) (664) (70) (555) Other (expense) income, net................... (818) (757) (2,317) (731) (231) 75 (68) -------- -------- -------- -------- --------- -------- -------- Income (loss) before income taxes.......... (4,814) (2,549) 2,043 9,563 11,011 2,641 3,304 (Provision) benefit for income taxes.......... 514 1,848 (236) (3,462) (5,418) (790) (1,239) -------- -------- -------- -------- --------- -------- -------- Net income (loss)...... $ (4,300) $ (701) $ 1,807 $ 6,101 $ 5,593 $ 1,851 $ 2,065 ======== ======== ======== ======== ========= ======== ======== Net income (loss) per share(3).............. $ (0.32) $ (0.05) $ 0.13 $ 0.45 $ 0.41 $ 0.14 $ 0.15 PRO FORMA DATA: Pro forma net income per share(3).......... $ 0.70(4) $ 0.11(5) $ 0.15 OTHER DATA: Depreciation and amortization.......... $ 8,276 $ 7,664 $ 8,154 $ 7,929 $ 7,475 $ 2,032 $ 1,779 Capital expenditures... 6,729 3,245 2,927 5,234 6,325 1,050 1,001
AS OF AS OF OCTOBER 31, JANUARY 31, -------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Working capital........ $ 35,784 $ 36,541 $ 42,227 $ 49,174 $ 11,557(6) $ 31,339 $ 16,144 Total assets........... 151,135 145,952 153,071 162,827 138,756 167,598 135,098 Short-term debt........ 9,135 9,816 10,840 11,476 11,653 11,803 13,218 Long-term debt, excluding current maturities............ 4,418 5,580 5,175 4,060 33,772(7) 3,858 35,577 Total stockholders' equity................ 107,314 103,743 106,466 112,189 43,148(8) 112,611 44,151
- -------- (1) Operating income has been reduced by an amount equal to the Company's estimate of the charges and expenses the Company would have incurred during those time periods presented prior to the Spin-off if it had operated as a separate, stand-alone entity. (2) Included in determining fiscal year 1996 operating income, net income and net income per share were distribution and other nonrecurring costs to the Company associated with the Spin-off equal to $5,564, $4,858 and $0.36, respectively. (3) Shares used to calculate net income (loss) per share were 13,566 for fiscal years 1992 through 1996 and the three months ended January 31, 1996 and 13,810 for the three months ended January 31, 1997. Excludes as of January 31, 1997: (i) 374,790 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $13.72 per share; and (ii) 562,150 shares of Common Stock reserved for issuance in the future under the Stock Plans. See "Capitalization," "Management Stock Plans" and Note K to Consolidated Financial Statements. (4) Reflects elimination of $5,564 of distribution and other nonrecurring costs ($0.36 per share) and incurrence of $30.0 million of debt for a full fiscal year at an 8.5% interest rate, net of related federal and state taxes. (5) Reflects incurrence of $30.0 million of debt for the quarter at an 8.5% per annum interest rate, net of related federal and state taxes. (6) Reflects a $35.7 million dividend declared by the Company and payable to Commercial Intertech in conjunction with the Spin-off. (7) Reflects the allocation of $30.0 million of long-term debt from Commercial Intertech to the Company in the form of a dividend, in conjunction with the Spin-off, which was replaced with the $30.0 million Credit Facility. (8) Reflects incurrence of $30.0 million of long-term debt described in (7) above and a dividend of $35.7 million described in (6) above. See "Use of Proceeds." 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below contains certain forward-looking statements that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, the Company's management. The Company's future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. See "Risk Factors" for a discussion of factors that could cause or contribute to such material differences. The following presentation of management's discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements (including the notes thereto) and other financial information included herein. OVERVIEW The Company's net sales, gross profit and operating income increased significantly from fiscal year 1994 to fiscal year 1996. This improvement was attributable to a number of business initiatives begun in 1994 by the new senior management team. These initiatives included developing new products for specific markets, decreasing product development cycle times, developing pre/final filter systems, increasing customer focus and improving operating efficiencies. The Company's products are used in the health care, fluid processing and potable water markets. The main factor supporting the worldwide industry growth in these markets is the need to eliminate unwanted contaminants to ensure safe, consistent products or services. This need is increasingly important as the quality of the world's resources deteriorates, population growth continues, world industrialization progresses, global manufacturing becomes the norm, detection levels improve, global quality standards are demanded and environmental consciousness grows. The Company believes that its broad customer base and its geographic diversity tend to insulate it from the adverse effects of softening demand in any one market segment. In fiscal year 1996, approximately 52% of the Company's net sales were derived from its international operations. Therefore, the Company's operations may be affected by significant fluctuations in the value of the U.S. dollar, particularly in Japan and Europe, as many products for those major markets are manufactured in the U.S. Selling price increases are implemented regularly by the Company to cover the rising costs of wages, benefits, raw materials and purchased components. Competitive pressures and price resistance in the marketplace can sometimes limit the extent to which cost increases can be passed along to customers in established product lines. Consequently, the Company relies upon economies of scale efficiencies, productivity improvements and cost saving measures to offset any shortfall in price increases and to maintain or improve profit margins. The Company's increased profitability is principally attributable to operating cost leverage resulting from increasing net sales on a controlled fixed-cost base and a change in the product mix to higher margin membrane products. Although the Company's selling, general and administrative expenses have increased in absolute dollar terms to support the Company's increased sales effort, they have remained relatively constant as a percentage of net sales on an annual basis. Financial information described below may not necessarily be indicative of future operating results or future financial condition. In particular, while Commercial Intertech did not historically service debt specifically related to the Company or its subsidiaries, $30.0 million of Commercial Intertech's long- term debt was allocated to the Company in the form of a dividend as part of the Spin-off, giving rise to additional interest expense in future periods. In addition, the Company will incur additional compensation expense resulting from the conversion of 30,737 restricted shares of Commercial Intertech common stock into shares of restricted Common Stock that occurred following the Spin- off. The compensation expense, which is determined by the underlying value of the Common Stock, will be recognized over various vesting periods up to a maximum of five years. The Company will also incur certain additional costs as a stand-alone public company which it did not as a wholly-owned subsidiary. Other than the expenses described above, the Company does not expect to incur other costs materially different from historical results. 13 RESULTS OF OPERATIONS The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods presented:
PERCENTAGE OF NET SALES ----------------------------------------------- THREE MONTHS YEAR ENDED OCTOBER 31, ENDED JANUARY 31, ------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- -------- -------- Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit................. 35.4 38.7 41.4 38.4 42.8 Selling, general and administrative expenses..... (31.9) (32.0) (31.7) (32.0) (34.1) Operating income............. 3.5 6.7 9.8(1) 6.4 8.8
- -------- (1)Excludes distribution and other nonrecurring costs. THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED JANUARY 31, 1996 Results of operations for the three months ended January 31, 1997 are not comparable to the three months ended January 31, 1996 because the Spin-off occurred in the last quarter of fiscal year 1996. Results for the first quarter of fiscal year 1996 do not include increased interest expense related to the $30.0 million in debt assumed in the Spin-off, a higher tax rate resulting from the loss of certain foreign tax benefits previously realized when the Company was a part of the Commercial Intertech combined tax group and the amortization expense of performance shares. Net Sales. Net sales of $44.8 million in the first quarter of fiscal year 1997 represented a 9.4% increase over net sales of $41.0 million in the first quarter of fiscal year 1996. The effects of foreign currency fluctuations reduced net sales by $3.8 million as compared to the first quarter in the prior fiscal year. Net sales for the Company's U.S. operations increased by 15.0% over the same period, reflecting continued penetration of the health care market by nylon membrane products. Gross Profit. Gross profit in the first quarter of fiscal year 1997 increased by $3.5 million, or 21.9%, to $19.2 million from $15.7 million in the first quarter of fiscal year 1996 and increased as a percentage of net sales to 42.8% from 38.4%. This increase was a result of continued improvement in manufacturing efficiencies, particularly in the U.S., in combination with expanded sales of higher margin nylon membrane products. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2.2 million, or 16.5%, to $15.3 million in the first quarter of fiscal year 1997 from $13.1 million in the first quarter of fiscal year 1996 and increased as a percentage of net sales to 34.1% from 32.0% over the same period. Growth in these expenses stems from continued investment in selling and engineering resources worldwide and from projects related to new data processing systems in the U.S., Brazil and Singapore. Operating Income. Operating income increased by $1.3 million, or 49.0%, to $3.9 million in the first quarter of fiscal year 1997 from $2.6 million in the first quarter of fiscal year 1996, with most of that gain in the U.S., where expanded sales, an improved product mix and greater efficiencies resulted in an overall significant improvement in operating performance. Interest Expense. Interest expense increased by $0.5 million to $0.6 million in the first quarter of fiscal year 1997 from $0.1 million in the first quarter of fiscal year 1996. The increase in interest expense primarily resulted from the $30.0 million of debt assumed by the Company in conjunction with the Spin-off. 14 Income Taxes. The Company's effective income tax rate for the first quarter of 1997 was 37.5% as compared to 30.0% during the first quarter of fiscal year 1996. The change reflects a loss of certain foreign tax benefits previously realized when the Company was a part of the Commercial Intertech combined tax group. YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995 Net Sales. Net sales of $179.1 million in fiscal year 1996 represented a 10.1% increase over net sales of $162.7 million in fiscal year 1995. The effects of foreign currency fluctuations reduced net sales in fiscal year 1996 by $4.0 million as compared to fiscal year 1995. Net sales for the Company's U.S. operations increased by $11.5 million to $86.4 million in fiscal year 1996, a 15.4% increase over fiscal year 1995 net sales of $74.9 million. The increase in U.S. net sales was generated primarily by new product introductions in both the health care and fluid processing markets, including proprietary nylon membrane products. Net sales of these membrane products increased by more than 100% in the U.S. in fiscal year 1996. General economic conditions combined with the new sales programs increased the sale of core products. The sale of both new and existing products also benefited from management initiatives that placed more focus on in-field customer service and improved customer support. Much of this new customer support, especially in the health care and fluid processing markets, has been provided through the Scientific Application Support Service ("SASS") staff, a program implemented in fiscal year 1995. The Company continued to increase the SASS staff in fiscal year 1996. Engineering employment in the Company, including SASS positions, increased by 28% since the beginning of fiscal year 1994. Net sales for the Company's U.S. operations into the potable water market increased by 7.6% overall in fiscal year 1996, with certain markets up sharply. Net sales to the food service segment of this market, which includes restaurants and institutions, increased significantly in fiscal year 1996 due to new products as well as successful collaborative projects with key customers. The sale of home and commercial water purification products improved in fiscal year 1996 due to the creation of a dedicated sales force for the product line and the success of new product sales. Net sales from international operations increased by $4.9 million to $92.7 million in fiscal year 1996 from $87.8 million in fiscal year 1995. Net sales improved in all international operations in fiscal year 1996 when compared in local currencies. Europe's net sales improved as a result of new product introductions and further penetration of the Eastern European market. Japan's net sales, when adjusted for the changes in the value of the Yen, increased by 8.4%, but in U.S. dollar terms decreased by $1.7 million. Net sales in other international markets increased by $3.8 million overall in fiscal year 1996, or 12.7%, as compared to fiscal year 1995. A portion of the growth in these other markets was due to product line extensions launched over the past two years, as well as to the introduction of SASS into these markets during fiscal year 1995. Gross Profit. Gross profit increased by $11.3 million to $74.2 million in fiscal year 1996 from $62.9 million in fiscal year 1995 and increased as a percentage of net sales to 41.4% from 38.7% over the same period. Approximately $6.3 million of this increase was attributable to higher sales volume and $5.0 million to a shift to higher margin new products, improved operating efficiencies in the U.S. and Europe and the extension of certain product lines into the Brazilian market. A portion of the intangible assets carried by the Company became fully amortized, reducing amortization expense by $0.9 million. Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding distribution and other nonrecurring costs, increased by 9.0% in fiscal year 1996 as compared to fiscal year 1995, but decreased by 0.3% as a percentage of net sales. Although all operations reported increased expenses in fiscal year 1996, no one operation increased proportionally more than the others. Generally, the increase in selling, general and administrative expenses stemmed from sales and engineering personnel recruitment, increased sales training for both Company and distributor personnel and improved sales and marketing promotional support. 15 Fiscal year 1996 selling, general and administrative expenses included charges for services provided to the Company by its former parent, Commercial Intertech. Similar services were provided in fiscal year 1995 and fiscal year 1994. Under an agreement signed prior to the Spin-off, Commercial Intertech will continue to provide services in fiscal year 1997 as part of the transition of the Company to stand-alone status. These expenses will be charged to the Company on a basis consistent with prior years, but are expected to be less than prior years. These services are not expected to continue beyond fiscal year 1997. See "Certain Related Party Transactions-- Arrangements Between the Company and Commercial Intertech." Operating Income. As a result of the above, operating income increased by 9.8% to $11.9 million in fiscal year 1996 from $10.8 million in fiscal year 1995. YEAR ENDED OCTOBER 31, 1995 COMPARED TO YEAR ENDED OCTOBER 31, 1994 Net Sales. Net sales of $162.7 million in fiscal year 1995 represented a $19.6 million, or 13.7%, increase over net sales of $143.1 million in fiscal year 1994. Exchange rate fluctuations in fiscal year 1995 primarily benefited operations in Japan and Europe. All operations recorded increased net sales in fiscal year 1995. Net sales for the Company's U.S. operations increased by $2.9 million to $74.9 million in fiscal year 1995 from $72.0 million in fiscal year 1994. Strength in the electronics segment of the fluid processing market supported the growth. In addition, management initiatives, such as a market focused sales organization, the creation of the SASS teams to support customers in certain markets and closer interaction with distributors, which began during the last half of fiscal year 1994, started to favorably affect net sales during the last six months of fiscal year 1995. Net sales from international operations increased by $16.7 million to $87.8 million in fiscal year 1995 from $71.1 million in fiscal year 1994. All of the geographic regions reported improvements in fiscal year 1995. Net sales in Europe increased in fiscal year 1995 by $6.0 million, or 27.9%, as compared to fiscal year 1994, with much of the gain attributable to the health care market. Gross Profit. Gross profit for the Company increased by $12.3 million to $62.9 million in fiscal year 1995 from $50.6 million in fiscal year 1994 and increased as a percentage of net sales from 35.4% to 38.7% over the same period. Much of the improvement was from U.S. operations and was the result of increased sales in the potable water market and the divestment in fiscal year 1994 of an underperforming operation servicing the fluid processing market. Additionally, new management in the European manufacturing operation improved efficiencies in fiscal year 1995. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $6.5 million, or 14.2%, to $52.1 million in fiscal year 1995 from $45.6 million in fiscal year 1994 and increased as a percentage of net sales to 32.0% from 31.9% over the same period. Much of the increase in these expenses related to the costs associated with enlarging the sales staff worldwide. From the end of fiscal year 1994 to the end of fiscal year 1995, the number of sales personnel in the Company increased by 19.0%. Operating Income. As a result of the above, operating income increased by 118% to $10.8 million in fiscal year 1995 from $4.9 million in fiscal year 1994. OTHER MATTERS Distribution and Other Nonrecurring Costs. The Company recorded $5.6 million in distribution and other nonrecurring costs during fiscal year 1996 ($4.9 million after tax or $0.36 per share), of which $3.5 million was related directly to the Spin-off, $1.6 million was associated with establishing the Company as a stand-alone entity and $0.5 million was related to the improvement of certain foreign distribution channels in conjunction with stand-alone activities. Certain of these costs are not tax-deductible. 16 Nonoperating Activity. Net nonoperating income and expenses improved by $0.4 million in fiscal year 1996 and $1.7 million in fiscal year 1995. Fiscal year 1996 was favorably impacted by a $0.3 million reduction in exchange losses and $0.1 million gain on the sale of idle assets. In fiscal year 1995 exchange losses were $0.5 million less than fiscal year 1994. Additionally, a $1.1 million loss on the sale of assets was recorded in fiscal year 1994 as the result of the Company's disposition of an underperforming operation. Taxes. The Company's effective tax rate for fiscal year 1996 was 49%, primarily as a result of the nondeductibility of certain distribution expenses related to the Spin-off which increased the rate by 12 percentage points. The adjusted fiscal year 1996 tax rate is comparable to the fiscal year 1995 effective rate of 36%. The fiscal year 1994 effective tax rate of 12% was the result of the reversal of tax valuation adjustments associated with certain foreign operations. Inflation Effects on Operations. Inflation had a negligible effect on the Company's operations during fiscal years 1996 and 1995. The Company estimates that inflationary effects, in aggregate, were generally recovered or offset through increased pricing or cost reductions in both fiscal years. SELECTED QUARTERLY RESULTS AND SEASONALITY The following table sets forth certain quarterly operating information for each of the nine quarters ending January 31, 1997, both in dollars and as a percentage of net sales. This information was derived from the unaudited financial statements of the Company, which, in the opinion of management, were prepared on the same basis as the Consolidated Financial Statements contained elsewhere in this Prospectus and includes all adjustments, consisting of normal recurring accruals, which management considers necessary for the fair presentation of the information for the periods presented. The financial data given below should be read in conjunction with the Consolidated Financial Statements (including the notes thereto). Results for any previous fiscal quarter are not necessarily indicative of results for the full year or for any future quarter. The Company's business is typically not seasonal. However, net sales in the first quarter of each year tend to be lower than the other quarters due to the holiday season and customary year-end distributor inventory reductions.
QUARTERLY RESULTS ------------------------------------------- GROSS PROFIT OPERATING INCOME ------------- -------------------- % OF % OF NET NET NET SALES AMOUNT SALES AMOUNT SALES ------- ------- ----- --------- ------- (IN THOUSANDS) FISCAL YEAR 1995: Quarter ended January 31........ $37,713 $13,926 36.9% $ 2,416 6.4% Quarter ended April 30.......... 39,630 14,995 37.8 2,276 5.7 Quarter ended July 31........... 43,467 17,025 39.2 2,643 6.1 Quarter ended October 31........ 41,889 16,981 40.5 3,505 8.4 FISCAL YEAR 1996: Quarter ended January 31........ $41,004 $15,748 38.4% $ 2,636 6.4% Quarter ended April 30.......... 45,090 18,460 40.9 4,988 11.1 Quarter ended July 31........... 48,542 20,796 42.8 6,128(1) 12.6 Quarter ended October 31........ 44,432 19,216 43.2 3,718(1) 8.4 FISCAL YEAR 1997: Quarter ended January 31........ $44,839 $19,201 42.8% $ 3,927 8.8%
- -------- (1) Before deducting distribution and other nonrecurring costs of $2,876 (quarter ended July 31) and $2,688 (quarter ended October 31) associated with the Spin-off. 17 LIQUIDITY AND CAPITAL RESOURCES During fiscal year 1996, the Company generated cash from normal operating activities of $11.7 million, with a total amount generated from operating activities of $36.7 million. Of this total amount, $25.0 million is related to the net decrease in the receivable from Commercial Intertech. Such decrease resulted from: (i) the declaration of a $35.7 million dividend payable to Commercial Intertech; (ii) obligations paid by Commerical Intertech on behalf of the Company related to the Spin-off and for services provided by Commercial Intertech; and (iii) the Company's positive cash flows generated to Commercial Intertech prior to the Spin-off. In the first quarter of fiscal year 1997, the Company generated cash from operations of $0.6 million before reducing its related party payables to Commercial Intertech by $3.2 million, resulting in net cash used in operations of $2.6 million. In addition, the Company reduced its dividends payable to Commercial Intertech by $2.4 million. By October 1997, the Company expects to pay the balance of $8.9 million of payables due to Commercial Intertech as of January 31, 1997, as well as amounts due to Commercial Intertech under the Distribution and Interim Services Agreement. As a result of the increased level of operations, both accounts receivable and accounts payable increased, by a net of $2.6 million in fiscal year 1996 and a net of $2.4 million in fiscal year 1995. Due to a focused program to improve inventory management, inventories declined by $3.2 million in fiscal year 1996, increased $0.6 million in fiscal year 1995, and declined $1.3 million in fiscal year 1994. During 1996, the Company entered into an interim agreement for a $55.0 million bridge loan to provide funding for $30.0 million in debt assumed from Commercial Intertech at the time of the Spin-off and to support operating requirements. On October 31, 1996, the bridge loan was replaced with the Credit Facility. The Company pays variable interest rates under the Credit Facility based upon prime interest or LIBOR rates, plus an applicable margin. On January 31, 1997, the Company's interest rate was approximately 6.0%. The Credit Facility prohibits the Company from declaring dividends during fiscal years 1997 and 1998. Capital expenditures were $6.3 million in fiscal year 1996, $5.2 million in fiscal year 1995 and $2.9 million in fiscal year 1994. Budgeted fiscal year 1997 capital spending is $10.5 million. The Company believes that funds from operations, current lines of credit and the net proceeds from the sale of Common Stock offered hereby will be sufficient to meet its anticipated needs for the next twelve months for working capital, capital expenditures and general corporate purposes. 18 BUSINESS The discussion below contains certain forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Act) that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, the Company's management. The Company's future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. See "Risk Factors" for a discussion of factors that could cause or contribute to such material differences. GENERAL The Company is a world leader in the design, manufacture and marketing of a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. The Company's products, which include proprietary depth filters and semi-permeable membrane filters, are used in the health care, fluid processing and potable water markets. These products, most of which are disposable, effectively remove contaminants that range in size from molecules to sand particles. Significant customers include Amgen Inc., Boston Chicken, Inc., Eli Lilly and Company, Genzyme Corporation, KFC Corporation, McDonald's Corporation, Monsanto Company and 3M. Approximately 52% of the Company's net sales in fiscal year 1996 were derived from its international operations. The Company's objective is to provide high value-added products and premium customer service. The Company's proprietary manufacturing processes provide longer lasting, higher quality and more efficient filters that lower customers' operating expenses and improve the quality of customers' end products. As part of its commitment to customer service, the Company's scientists, each of whom possesses particular industry expertise, collaborate with customers on specific projects to ensure product satisfaction and to develop new products. In mid-1994, the Company realigned its business to accelerate net sales growth and improve operating margins. A new senior management team developed and implemented the following initiatives, which are key elements of its ongoing growth strategy: (i) develop new products for specific markets, (ii) decrease product development cycle times, (iii) develop pre/final filter systems, (iv) increase customer focus, (v) improve operating efficiencies and (vi) pursue selective acquisitions. Due principally to these initiatives, net sales increased by 25.1% from $143 million to $179 million from fiscal year 1994 to fiscal year 1996 and operating margins (excluding distribution and other nonrecurring costs) improved from 3.5% to 9.8% over the same period. These initiatives resulted in the introduction of 15 new products or product extensions that produced over $18 million in aggregate net sales in the 24 months prior to the Spin-off. The Company has scheduled the introduction of 13 new products in fiscal year 1997, nine of which have already been introduced. MARKET OVERVIEW Filtration is the process of separating particles of various sizes from liquids or gases. The mechanics of filtration range from the removal of coarse contaminants, most often particulates, as large as 200 microns, such as sand and sediment, to the elimination of bacteria and viruses at less than .01 micron (human hair is typically 20 microns in diameter). A filtration device consists of a plastic or metal housing and a filtration medium. Filtration media, which can be manufactured out of a variety of substances, act as the separator or barrier in the filtration process. Filtration media include microporous membranes, glass, synthetic and cellulosic fibers, porous metals and ceramics. Microporous membranes are thin, film-like materials with millions of uniform microscopic holes. Membranes are the most widely used filtration media because they remove specifically-sized particles and can be configured into a variety of shapes and sizes. 19 The Company estimates, based on 1995 industry data, that the potential size and growth rate of the three markets it serves are as follows:
ESTIMATED WORLD ESTIMATED WIDE POTENTIAL ANNUAL MARKET MARKET SIZE GROWTH RATE ------ --------------- ----------- (IN MILLIONS) Health Care.................................... $ 900 10% Fluid Processing............................... 1,200 8% Potable Water.................................. 800 8% ------ Total........................................ $2,900 ======
Health Care The health care market is experiencing rapid growth as a result of the intensive research efforts to find cures for diseases, the increasing use of more rapid and simpler diagnostic tests to help reduce health care costs, the trend towards finer and more cost-efficient filtration and increased governmental regulation. When harmful elements are identified, they are often regulated or new medical standards of care are implemented to decrease or eliminate contact. In many cases, fluid filtration can play a key role in eliminating contact with many harmful elements. Performance and reliability of the product, rather than price, are the primary factors in the customers' filtration decision process. The health care market includes pharmaceutical and biotechnology companies, which require cost-efficient filtration and high levels of purity for production of sterile, contaminate free drugs, and producers of diagnostic test kits, which require highly efficacious membranes. In addition, applications include bacteria-free water and food and beverage products. Fluid Processing The fluid processing market's major segments include chemical, petrochemical and oil and gas processors, manufacturers of paints and resins, electronics and semiconductors, and power generation facilities. As the use of sophisticated manufacturing processes and the adoption of practices focused on quality increase, the Company believes the demand for filtration products will also increase. In part, this trend is driven by the enhanced ability to detect contaminants in process streams. As automation increases, focus on quality control increases, and as the ability to detect contaminants progresses, fluid filtration will play a greater role in the manufacturing process. A rapidly growing segment of the fluid processing market is electronics manufacturing. Ultra pure water is used to rinse the components during manufacturing in order to ensure that the product is particle free with no residual contamination. The industry uses corrosive, high purity chemicals and gases for the manufacture of computer chips, hard disks, video terminals and other components. All of the chemicals and gases used are processed through very fine filtration systems. The rapidly expanding demand for electronic products and the wider use of computer chips is fueling industry growth. Potable Water The potable water market includes residential, commercial and food service customers. Demand is driven both by consumers' desire to improve the taste and quality of their drinking water and by the expanded concern of regulatory agencies. The largest growth in this market may occur in Asia/Pacific Rim and South American countries where the quality of drinking water has been found to be severely deficient in several regions. According to industry data, it is estimated that 1.2 billion people in the world do not have safe drinking water. Water safety concerns have driven the growth of the U.S. consumer bottled water market to over $2 billion, as well as driven the growth in the water filtration market. 20 In particular, the food service industry has an increasing demand for consistent global product quality. Food service includes water used for fountain beverages, steam ovens, coffee and tea. Specifically, restaurants have become increasingly aware of the need for water filtration and control of the taste and quality of the water used in their businesses. GROWTH STRATEGY Key elements of the Company's growth strategy include: Develop New Products for Specific Markets. The Company has initiated a strategy to develop high value-added products for specific markets based on its core technologies. Historically, the Company offered non-differentiated products and often competed solely on price. To gain a better understanding of specific markets and guide new product development, the Company introduced Scientific Application Support Services ("SASS"). Scientists with post- graduate degrees who are experts in specific industries are integral to SASS teams. These scientists collaborate with customers who are developing and implementing new processes or products that have specific filtration requirements. Often these relationships lead to the development of new market specific products. The Company has scheduled the introduction of 13 new products in fiscal 1997, nine of which have already been introduced. Many of these new products are in the health care market, and therefore offer high growth and above average margins. The Company believes that these products offer its customers greater efficiency, quality, safety and ease of use. The Company introduced 15 new products or product extensions in the 24 months prior to the Spin-off that have generated aggregate sales of $18 million. Decrease Product Development Cycle Times. The Company has decreased its product development cycle times from an average of four to five years to approximately 18 to 24 months. This improvement has resulted from increased market focus, collaboration with leading-edge customers through SASS teams and the formation of cross-functional product launch teams. The Company believes it can continue to shorten product development cycle times through these same methods. Develop Pre/Final Filter Systems. Many filtration systems have one or more prefilters to remove large contaminants from the liquid or gas before it passes through the final filter, prolonging the life of the more expensive final filter. When these filters are designed together in a system, the performance of the system is enhanced. The Company has a leading prefilter market position and is expanding the number of final filters it offers. This allows the Company to provide its customers with a total filter solution from one vendor. Increase Customer Focus. The Company has traditionally sold through distributors, who in turn sell to the end-user. The Company's current goal is to provide unmatched customer service to its end-user customers, while providing resources for its distributors. In many cases the customer is unable to define its filtration needs accurately and seeks outside resources to identify and choose the best filtration alternative. The Company's SASS professionals meet this need. Management has been training and focusing distributors on specific markets and providing additional sales and marketing support. This support enables distributors to provide customers with superior industry expertise and Company-specific product knowledge. Improve Operating Efficiencies. The Company believes it can improve operating efficiencies by implementing cost controls, productivity gains and profit-based compensation for its employees as well as by shifting product mix to higher margin health care and fluid processing products and outsourcing production of certain processes. The Company has recently initiated a $10 million capital investment program designed to (i) implement cell-based manufacturing, (ii) provide higher yields from raw materials, (iii) improve inventory management, (iv) lower labor costs, (v) reduce manufacturing cycle times and (vi) reduce scrap rates. The Company had gross profit margins of 35.4%, 38.7%, 41.4% and 42.8% in fiscal years 1994, 1995, 1996 and in the first quarter of fiscal year 1997, respectively. Pursue Selective Acquisitions. The Company believes that the continuing trend towards consolidation in each of its markets, together with recent systems trends (pre/final filter), will provide the Company with 21 attractive opportunities to acquire high-quality companies and subsequently allow the Company to expand into new geographic markets, add new customers, provide new products, manufacturing and service capabilities or increase the Company's penetration with existing customers. The Company evaluates acquisition candidates on a regular basis. In addition, management of the Company believes that the Spin-off has enabled the Company to be in a better position to use its Common Stock, which is directly tied to the performance of the Company's business, to acquire other companies in the industry. PRODUCTS The Company manufactures a full range of products targeted for each of its markets, offering its customers solutions to a wide range of filtration requirements. Many of the products manufactured by the Company use electrokinetic adsorption, a proprietary chemical process developed by the Company that alters both membrane and depth filter media surfaces. Electrokinetic adsorption uses molecular charges on dissolved ions to bind finer contaminants to the filter surface. This attribute significantly enhances filtration efficiency by removing contaminants smaller than the micron rating of the filter. The Company groups its products into the following categories. Membranes The typical polymer and nylon membranes that the Company produces resemble plastic films, except for the molecular size pores that are engineered into the surface and depth of the membrane. By varying pore size and altering the physical or chemical properties of the membrane, the quantity and type of substances that can pass through the membrane can be regulated with absolute certainty. The Company manufactures "absolute rated" products where no particle above a certain size can pass through the membrane. In many applications, these membranes can be integrity tested to ensure specific performance both at the beginning and end of a particular process. A membrane can be employed in a variety of configurations, including flat sheets, discs and pleated cartridges. Containers for filter media or housings can be manufactured from various metals or plastics and are designed to allow the application of pressure to create the required flow of liquid through the membrane. The frequency of the replacement of membranes depends on the application and intensity with which they are used. In some applications, such as in pharmaceutical or biotechnology, they are changed for each batch. In very clean applications or in totally enclosed environments, they may be changed weekly, monthly or annually. Uses of membranes include water purification for electronics and applications in semiconductor manufacturing, pharmaceutical, biotechnology and other applications, as well as for residential drinking water. The Company's membrane products include those sold under the following labels: Zetapor(R), Microfluor(R), Polypro(R), ZetaBind(R), Electropor(TM), BevASSURE(TM), Synchro(R), Acro(R), AC/PH Lithowater(R) and Water Factory Systems(R). Depth Filters The Company's disposable depth filters are constructed from a matrix or formation of very fine and micro-fine fibers such as polypropylene, cotton, polyester, glass fiber, acrylic, rayon, polymer, carbon and other materials. The fiber matrix is then processed into a rigid filter media using techniques such as thermal bonding, resin bonding, pleating or winding. The Company's technology strongly emphasizes graded density attributes and electrokinetic adsorption. Graded density depth technology allows filter media to be manufactured with very open porous outer layers, progressively becoming smaller in the size of the pores or void volume through the depth of the filter media. Graded density construction extends filter life in many applications and reduces pressure loss across the filtration process, thereby reducing energy costs. The structure of graded density filter media allows particles to be trapped throughout the depth of the cartridge, which minimizes surface binding, allows for high contaminant capacity and lowers pressure drops rather than solely trapping particles on the surface of the media. 22 The Company manufactures depth filters in a wide variety of cartridge and pore sizes with "absolute" particulate ratings. The filter cartridges are used in filter housings that can be manufactured in a broad range of metals or plastics to suit particular customer specifications. Filter housings are designed for a wide range of temperatures and pressures. The Company's depth filter products include those sold under the following labels: Zeta Plus(R), Betafine(R), Micro-Klean(R), Beta-Klean(R), Betapure(R), MicroWynd(R) and PetroFit(R). Cleanable Filters The Company designs and manufactures an extensive range of self-cleaning disc filters, backwash strainers and recleanable metal filters. The self-cleaning disc filters and backwash strainers can be electrically or mechanically operated with automatic controls to provide for specific requirements in process applications. The recleanable metal filter elements are constructed of sintered porous stainless steel or metal screens in tubular and pleated construction. The recleanable elements can be cleaned in place in a filter housing or removed for mechanical, ultrasonic or chemical cleaning. The Company's cleanable filter products include those sold under the following labels: Poro-Klean(R), Micro-Screen(R) and Auto-Klean(R). Housings and Systems The Company designs and manufactures a wide variety of filter housings to suit specific process and customer applications. The housings can be of plastic or metal construction utilizing a broad range of materials including polypropylene, PVC, nylon, aluminum, copper, brass, steel, stainless steel and other specialized metals, such as titanium. Specialized designs include sanitary, electropolished and coated finishes for chemical resistance and ease of sterilization, sanitization or cleaning. The Company supplies a broad range of standard housings manufactured from type 316 stainless steel in sanitary, polished and electropolished finishes for enhancing pharmaceutical and electronic applications. Finish specifications can be measured in terms of Roughness Average (Ra) with average variations in surface finish measured in microns down to 0.45 micron, the size of small bacteria. The Company designs and manufactures proprietary housings and systems such as CTG-Klean(TM) with patented features and a totally enclosed disposable filter media pack for use in critical applications where housing cleanliness is essential or when physical separation of toxic or corrosive chemicals from the metal housing is desired. The Company's range of housings are designed and manufactured to regulatory pressure vessel codes, particularly for applications in the oil and gas, refinery and petrochemicals industries. The Company designs and markets housings to meet the local regulatory requirements in most countries. 23 The Company's products are principally sold into the health care, fluid processing and potable water markets. In many cases, the Company's products are sold into more than one of these end markets. The following table summarizes the end markets into which the Company's products are sold. MARKET REPRESENTATIVE APPLICATION REPRESENTATIVE COMPANY PRODUCTS - ------------------------------------------------------------------------------- HEALTH CARE Pharmaceutical Manufacturing injectable Activated carbon, Zeta drugs Plus(R), Zetapor(R), Microfluor(R), PolyPro(R), ZetaBind(R), BevASSURE(TM) and sanitary filter housings Biological Blood plasma fractionation Diagnostics Biotechnology Membranes for test kits Food and Beverage Cell debris removal Wine and beer production - ------------------------------------------------------------------------------- FLUID PROCESSING Electronics Plating bath solutions Microfluor(R), Betafine(R), Betafine- D(R), Betapure(R), Electropor(TM), filter housings, MicroWynd(R)II, Beta- Klean(TM), Micro- Klean(R)II, Auto- Klean(R), Poro-Klean(R) and Micro-Screen(R) Semiconductors High purity water, chemicals and gases for manufacturing computer chips Coatings Processors Paint and resin filtration Chemical Product clarification equipment protection Oil, Gas and Petrochemical Removing contaminants from oil and gas streams Magnetic Media Coating purity/optical (recording tape and clarity floppy disk) Manufacturers Printers and Graphic Art Companies Manufacturing of high quality inks Power Generation Filtration of insulating oils - ------------------------------------------------------------------------------- POTABLE WATER Residential Drinking and cooking CUNO Food Service, CUNO water and appliance System ONE(TM), Aqua- protection Pure(R), CUNO OCS(TM), Water Factory Systems(R), FaucetMATE(TM) and CoolerMATE(R), Synchro(R), Acro(R), PHP and Lithowater(R) Commercial and Industrial Apartment buildings, offices, car washes and printers Food Service Fountain beverages, steam ovens, coffee and tea 24 NEW PRODUCTS A part of the Company's growth strategy is to develop new products for specific markets and to decrease product development cycle times. The Company has introduced 15 new products or product extensions in the 24 months prior to the Spin-off that have generated aggregate net sales of $18 million. The Company has introduced or plans to introduce the following new products in fiscal year 1997:
FISCAL YEAR 1997 MARKET NEW PRODUCT INTRODUCTION DESCRIPTION - ----------------------------------------------------------------------------------- HEALTH CARE Pharmaceutical and PolyPro(R) XL Second Quarter* Very high surface area Biopharmaceutical filters designed to protect valuable membrane filters Zetapor(R) II Fourth Quarter Uncharged Nylon66 cartridges validated for bacteria retention Zeta Plus(R) Second Quarter* A self-contained version BioCap(TM) of Zeta Plus(R) media that allows small to medium volume filtration for laboratory and pilot scale development Food and Beverage BevASSURE(TM)II Third Quarter Nylon66 membrane filter with improved sanitization cycles Diagnostic and ZetaBind(R) II Third Quarter Further advancements in Laboratory the development of ZetaBind(R) Nylon66 charged membrane to enhance the membrane's adaptability for specific applications - ----------------------------------------------------------------------------------- FLUID PROCESSING Electronics Zeta Plus(R) EC Second Quarter* A media for polishing filtration with enhanced adsorption characteristics Electropor(TM) II Second Quarter* Higher flow rate Nylon66 membrane filter Oil, Gas and Petro-Klean(TM) Second Quarter* New generation rigid Petrochemical resin bonded depth filter with greater life Chemical Z2 Beta-Klean(TM) Second Quarter* New generation absolute rated, rigid resin- bonded depth filter for a wide variety of chemical uses - ----------------------------------------------------------------------------------- POTABLE WATER Residential Aqua-Pure(R) DWS Second Quarter* Drinking water system Aqua-Pure(R) Fourth Quarter Purification system for countertop filter above counter use Commercial and AC-PHP (PRO-SFR) First Quarter* Automated reverse Industrial osmosis systems for car wash rinse water Food Service ScaleGard(TM) First Quarter* Reduce scale buildup in filters steam ovens
* Already introduced. 25 COMPETITION The Company competes with many domestic and international companies in its global markets including Millipore Corporation, Pall Corporation, Memtec Ltd., Osmonics, Inc. and Culligan Water Technologies, Inc. No one company has a significant presence in all the Company's markets. The principal methods of competition are product specifications, performance, quality, knowledge, reputation, technology, distribution capabilities, service and price. Some of the Company's other competitors are multi-line companies with other principal sources of income who have substantially greater resources than the Company; many others are local product assemblers or service companies that purchase components and supplies such as valves and tanks from more specialized manufacturers than the Company. Through its SASS teams, the Company has developed many products by collaborating with its customers throughout the design and development process. The Company believes that these relationships provide it with a competitive advantage over other manufacturers. RESEARCH AND DEVELOPMENT, PRODUCT DEVELOPMENT AND ENGINEERING The Company's research and development activities are conducted in its own laboratories, supplemented by on-site development and application of custom design and engineering. The Company's research, development and engineering expenditures, which mainly relate to the development of new products, product applications and manufacturing processes, for fiscal year 1994, 1995 and 1996 were approximately $7.8 million, $8.3 million and $9.9 million, respectively, representing 5.4%, 5.1% and 5.5% of net sales, respectively. The Company also incurs additional internal costs related to its sales and service personnel for product development. MANUFACTURING The Company's manufacturing is largely vertically integrated, using unique, proprietary and patented processes, with many of the major components of its filtration units manufactured and assembled in its own plants. As stated above, the Company has begun to outsource some of its manufacturing processes, such as metal housing manufacturing. The Company believes that it has sufficient manufacturing capacity for the foreseeable future. The Company has developed a new, more efficient membrane manufacturing process, which it believes provides a competitive advantage through the production of superior products at lower costs. All of the Company's manufacturing facilities are ISO 9002 certified. RAW MATERIALS The primary raw materials used by the Company are cotton, nylon, acrylic, cellulose and various resins, plastics and metals. The Company has not experienced a shortage of any of its raw materials in the past three years. The Company believes that there is an adequate supply of all of its raw materials at competitive prices available from a variety of suppliers. DISTRIBUTION AND SALES The Company has over 150 independent distributors of its products in 65 countries. Distributors represent the primary channel in the marketing of the Company's health care and fluid processing products. The Company has agreements with all of its major distributors in the U.S. In certain markets outside the U.S., the Company uses dedicated sales people. The Company's potable water products are sold directly to wholesalers, such as plumbing suppliers, water quality dealers and major resellers, and through manufacturers representatives and sales managers. The Company's agreements with its U.S. distributors are generally for a period of two years. Such agreements usually assign an exclusive territory, prohibit distributors from carrying competing products, require that distributors share market and customer related information with the Company and require that distributors carry an adequate stock of its products. The Company does not believe that the loss of any one of its distributors would have an adverse effect on the Company. The Company's top ten distributors accounted for approximately 25% of its net sales in fiscal year 1996. The Company believes that no end-user of any of its products accounts for more than 5% of net sales. As of January 31, 1997, the Company employed over 250 sales people, of which over 160 are located overseas. 26 PROPERTIES The Company's world headquarters is located in Meriden, Connecticut, which facility also contains manufacturing and assembly operations. The following table sets forth the location and approximate size of the Company's principal properties and facilities, all of which are owned by the Company.
APPROXIMATE FACILITY SIZE LOCATION (SQ. FT.) -------- ------------- Meriden, Connecticut......................................... 189,000 Enfield, Connecticut......................................... 120,000 Stafford Springs, Connecticut................................ 165,000 Kita-Ibaragi, Japan.......................................... 40,000 Marinque, Brazil............................................. 65,000 Calais, France............................................... 50,000 Mazeres, France.............................................. 40,000 Sydney, Australia*........................................... 290,000
-------- * 40% of this facility is sublet to an unrelated third party. In addition to the properties listed above, the Company leases one facility in the U.S. and 18 facilities outside the U.S. These facilities are generally used as warehouses and/or sales offices. Management believes that the current properties are sufficient for the Company's operations. TRADEMARKS AND PATENTS Trademarks and brand name recognition are important to the Company. The Company generally owns the trademarks under which its products are marketed. The Company has registered its trademarks and will continue to do so as they are developed or acquired. The Company has over 300 registered trademarks throughout the world. The Company protects such trademarks and believes that there is significant value associated with them. The Company has over 200 active patents throughout the world and at least 36 patent applications pending worldwide. The Company additionally relies on proprietary, non-patented technologies to a certain extent. Certain of the Company's employees sign non-disclosure and assignment of proprietary rights agreements. The Company protects its intellectual property and believes there is significant value associated with it. However, the Company believes that the loss of one or more of its trademarks and patents would not have a material adverse effect, as it is not heavily dependent on any one or few and is continually expanding its intellectual estate through new additions. GOVERNMENT REGULATIONS Management believes that the Company is in substantial compliance with applicable regulations of Federal, state and local authorities relating to the discharge of materials into the environment. The Company manufactures certain filtration products that are used as components in medical devices and the Company must use the Food and Drug Administration ("FDA") listed materials in the manufacture of these products. Certain medical devices marketed and manufactured by the Company's customers are subject to extensive regulation by the FDA and, in some instances, by foreign governments. Noncompliance with FDA requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing approvals or criminal prosecution. Before a new device can be introduced into the market, the manufacturer must generally obtain FDA clearance through either a 510(k) notification or a 27 premarket approval application ("PMA"). A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring a more rigorous demonstration of substantial equivalence than in the past. It generally takes from four to twelve months from submission to obtain a 510(k) clearance, but it may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information is needed before a substantial equivalence determination can be made. In many areas, the sale and promotion of water treatment devices is regulated at the state level by product registration, advertising restrictions, water testing, product disclosure and other regulations specific to the water treatment industry. In some local areas, certain types of water treatment products, including those manufactured by the Company, are restricted because of a concern with the amount and type of contaminants per volume of water discharged. EMPLOYEES At January 31, 1997, the Company employed over 1,200 people worldwide (exclusive of employees of independent distributors), with over 700 employees in the U.S. and over 500 employees in other countries. In the U.S., approximately 145 employees are members of a union under a contract that expires on October 31, 1997. Locations outside the U.S. also employ approximately 130 union members. The Company believes its employee relations are generally good. LEGAL PROCEEDINGS The Company is a party to various legal proceedings and claims in the ordinary course of business. The Company does not believe that the outcome of any pending matters will, individually or in the aggregate, materially adversely affect its business, financial condition or results of operations. 28 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND EMPLOYEES The executive officers, directors and employees of the Company as of January 31, 1997:
NAME AGE POSITION - ---- --- -------- Paul J. Powers.................. 62 Chief Executive Officer and Chairman of the Board Mark G. Kachur.................. 53 President, Chief Operating Officer and Director Michael H. Croft................ 53 Senior Vice President Ronald C. Drabik................ 50 Senior Vice President and Chief Financial Officer Timothy B. Carney............... 44 Vice President and Controller John A. Tomich.................. 39 Counsel and Secretary Joel B. Alvord.................. 58 Director Charles L. Cooney............... 52 Director Norbert A. Florek............... 57 Director John M. Galvin.................. 64 Director Gerald C. McDonough............. 68 Director C. Edward Midgley............... 60 Director David L. Swift.................. 60 Director
Paul J. Powers. Mr. Powers has been a director of the Company since 1986, when the Company was a subsidiary of Commercial Intertech, and Chief Executive Officer of the Company as of July 1996. He has also been President and Chief Operating Officer of Commercial Intertech since 1984 and Chief Executive Officer since 1987. He is Chairman of the Board of Directors for both the Company and Commercial Intertech. He holds a bachelor's degree in Economics from Merrimack College and a master's degree in Business Administration from George Washington University. Mr. Powers is also a director of Commercial Intertech, Ohio Edison Company, Global Marine, Inc. and Twin Disc, Inc. Mark G. Kachur. Mr. Kachur has been a director of the Company since July 1996, and President and Chief Operating Officer of the Company as of September 1996. From 1994 until the Spin-off, Mr. Kachur was a Senior Vice President of Commercial Intertech and President of the Company. From 1992 until 1994, he was President and CEO of Biotage Inc., and from 1971 to 1991, he was with Pall Corporation, the last seven years as a Group Vice President. He holds a bachelor of science degree in Mechanical Engineering from Purdue University and a master's degree in Business Administration from the University of Hartford. Michael H. Croft. Mr. Croft has been Senior Vice President of the Company since the Spin-off. From 1993 until the Spin-off, Mr. Croft was President-- U.S. Operations of the Company. From 1984 until 1993, he was with Cuno Pacific Rim operations serving as Managing Director of Cuno Pacific, Cuno Asia with oversight of Cuno K.K. (Japan). He holds a bachelor's degree in Engineering (Chemistry) from The University of Sydney and a Certificate in Marketing from the University of New South Wales. Ronald C. Drabik. Mr. Drabik has been Senior Vice President and Chief Financial Officer of the Company since the Spin-off. From July 1996 until joining the Company, he was a Vice President of Commercial Intertech. From 1995 until 1996, he was Vice President of Acme-Cleveland Corporation, a manufacturer of communications, motion control and measurement products. From 1993 until 1995, he was with Met-Coil Systems Corp., a machine tool builder, for which he served at various times as President, Executive Vice President, Senior Vice President, Chief Financial Officer and an outside consultant. From 1989 until 1992, he was Vice President of Finance and Chief Financial Officer of RB&W Corporation, a manufacturer/distributor of engineered fasteners. He holds a bachelor of arts degree from Baldwin-Wallace College. 29 Timothy B. Carney. Mr. Carney has been the Company's Vice President and Controller since the Spin-off. From 1993 until joining the Company, he served Commercial Intertech as Cuno Group Controller and from 1989 until 1993 he served Commercial Intertech as General Manager and Controller of Water Factory Systems. He holds a bachelor of science degree (Economics) and a master's degree in Business Administration from Youngstown State University. John A. Tomich. Mr. Tomich has been Counsel and Secretary of the Company since September 1996. Before joining the Company, after the Spin-off, he was Counsel and Assistant Secretary for Commercial Intertech, where he had been employed since January 1990 and had been involved extensively with the legal matters affecting the Company. He holds a bachelor of engineering degree (Mechanical Engineering) from Youngstown State University and juris doctor from the University of Akron, School of Law. He is a licensed Patent Attorney. Joel B. Alvord. Mr. Alvord has been a director of the Company since August 1996. He is currently Chairman of the Executive Committee and a Director of Fleet Financial Group, having served as its Chairman for the past two years. His banking career began in 1963. He became President of Hartford National Corporation in 1978 and served as Chief Executive Officer of Shawmut National Corporation from 1988 to 1995 when it was merged into Fleet Financial Group. He was educated at Loomis Chaffee School and Dartmouth College, from which he holds a bachelor's degree in History and a master's degree in Business Administration from the Amos Tuck School of Business Administration. Mr. Alvord is also a director of the Hartford Steam Boiler Inspection & Insurance Company and has been a member of the Board of Directors of the Federal Reserve Bank of Boston. Charles L. Cooney. Dr. Cooney has been a director of the Company since August 1996. He has been a Professor of Chemical and Biochemical Engineering at the Massachusetts Institute of Technology ("MIT") since 1982. At MIT he is also the executive officer of the Department of Chemical Engineering and co- director of the Program on the Pharmaceutical Industry. Since 1989, he has served as the regional editor of Bioseparations, and in 1992, Dr. Cooney became a founding Fellow for the American Institute for Medical and Biological Engineering. He holds a bachelor of science degree in Chemical Engineering from the University of Pennsylvania and a master's degree and a Ph.D. in Biochemical Engineering from MIT. Dr. Cooney is also a director of Genzyme Corporation. Norbert A. Florek. Mr. Florek has been a director of the Company since August 1996. Mr. Florek retired from the Allstate Insurance Company in 1995, where he served as Chief Financial Officer since 1990 and as a member of the Board of Directors. Since 1995, he has been a private financial consultant. He is a CPA and holds a bachelor's degree in Business Administration from Loyola University. Mr. Florek is also a director of U.S.A. Utilities Incorporated. David L. Swift. Mr. Swift has been a director of the Company since August 1996. Mr. Swift retired in 1996 from Acme-Cleveland Corporation, a manufacturer of communications, motion control and measurement products, where he served as Chairman of the Board since 1993 and Chief Executive Officer and President since 1988. He holds a bachelor of science degree from Ball State University and a juris doctorate from the Salmon P. Chase College of Law. Mr. Swift is also a director of Alltrista Corporation and Twin Disc, Inc. John M. Galvin. Mr. Galvin has been a director of the Company since 1993, when the Company was a subsidiary of Commercial Intertech. Since his retirement in 1992 from The Irvine Company, a major landowner and developer that also owns a major portfolio of income property, Mr. Galvin has been a private investor and consultant. From 1987 until 1992, he was Vice Chairman and Director of The Irvine Company. He holds a bachelor's degree in Business Administration from Indiana University. Mr. Galvin is also a director of Commercial Intertech, Global Marine, Inc. and Oasis Residential Inc. Gerald C. McDonough. Mr. McDonough has been a director of the Company since 1992, when the Company was a subsidiary of Commercial Intertech. Mr. McDonough retired from Leaseway Transportation Corporation, a trucking company, in 1988, where he had served as Chairman of the Board and Chief Executive 30 Officer since 1982. He holds a bachelor's degree in Business Administration from Case Western Reserve University. Mr. McDonough is also a director of Commercial Intertech, York International Corporation, Brush-Wellman Corporation and Associated Estates Realty Corporation and a trustee of the Fidelity Funds. C. Edward Midgley. Mr. Midgley has been a director of the Company since 1995, when the Company was a subsidiary of Commercial Intertech. Mr. Midgley has been associated with PaineWebber Incorporated since 1995 and is currently a Managing Director. From 1992 until 1995, he was Co-Head of Investment Banking, Executive Managing Director, Head of Mergers and Acquisitions and a Member of the Board of Directors of Kidder, Peabody & Co. Incorporated. He holds a bachelor of arts degree in Economics from Princeton University and a master's degree in Business Administration from Harvard Business School. Mr. Midgley is also a director of Commercial Intertech. Mr. Powers is the only person who is an officer of both the Company and Commercial Intertech. Mr. Powers receives a salary and other benefits as an officer of Commercial Intertech. The Company pays Mr. Powers directly for his services to the Company. BOARD OF DIRECTORS The nine member Board of Directors is divided into three classes. The Board is composed of three Class I directors (Messrs. Galvin, Alvord and Dr. Cooney), three Class II directors (Messrs. Kachur, McDonough and Florek) and three Class III directors (Messrs. Midgley, Powers and Swift). The terms of the Class I, Class II and Class III directors expire on the date of the 1997, 1998 and 1999 annual meetings, respectively. At each annual meeting, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term. Directors elected by the stockholders may be removed only for cause. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee The Audit Committee has the responsibility for recommending the selection of independent auditors by the Board of Directors; reviewing with such auditors, prior to the commencement of or during such audit for each fiscal year, the scope of the examination to be made; reviewing with such auditors the audited financial reports, any changes in accounting policies, the services rendered by such auditors (including management consulting services) and the effect of such services on the independence of such auditors; reviewing the Company's internal audit and control functions; considering such other matters relating to such audits and to the accounting procedures employed by the Company as the Audit Committee may deem appropriate; and reporting to the full Board of Directors regarding all of the foregoing. This Committee consists of the following four members: Messrs. Midgley (Chairman), Alvord, Florek and Dr. Cooney. No member of the Audit Committee is an employee of the Company. Compensation Committee The Compensation Committee determines annual salaries and bonuses for all elected officers and senior management, administers the Company's various stock option and award plans, and has the authority to approve incentive and deferred compensation plans, and related funding arrangements, for elected officers and senior management. This Committee consists of the following four members: Messrs. McDonough (Chairman), Galvin, Midgley and Alvord. No member of the Compensation Committee is an employee of the Company. Executive and Finance Committee The Executive and Finance Committee, during the intervals between the meetings of the Board of Directors, possesses and may exercise all the powers of the Board in the management of the business and affairs of the Company to the extent permitted by law. The Executive and Finance Committee has the responsibility for overseeing and ensuring that the Company's financial resources are managed prudently and cost effectively, with 31 emphasis on those issues that are long-term in nature, and makes recommendations to the Board as to: (i) debt and capital structure; (ii) issuance of shares or repurchase of outstanding shares; (iii) dividend policy and the declaration of dividends; (iv) acquisitions and divestitures; and (v) any other financial matters deemed appropriate by the Committee. The Executive and Finance Committee shall also have such other powers and perform such other duties as shall from time to time be prescribed by the Board of Directors. The Executive and Finance Committee consists of the following five members: Messrs. Powers (Chairman), Galvin, Midgley, McDonough and Swift. Nominating and Pension Committee The Nominating and Pension Committee has the responsibility to identify, recruit and nominate prospective members of the Board of Directors. This Committee also has the responsibility for overseeing and evaluating the investments of the Company's pension plan trusts, selecting fund managers and reviewing their performance, and designating the proportion of pension contributions to be assigned to such managers. This Committee consists of the following five members: Messrs. Galvin (Chairman), Swift, Florek, Powers and Dr. Cooney. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. McDonough, Galvin, Midgley and Alvord, none of whom is an employee of the Company. Messrs. McDonough, Galvin and Midgley also serve as directors for Commercial Intertech, which has entered into certain agreements with the Company that provided for the Spin- off and govern various interim and ongoing relationships between and among the two companies. See "Certain Related Party Transactions--Arrangements Between the Company and Commercial Intertech." COMPENSATION OF THE BOARD OF DIRECTORS Directors who are not employees or officers of the Company receive an annual retainer fee in the amount of $15,000, plus $1,000 for attending each meeting of the Board and $600 for attending each committee meeting. Outside directors have the option to make an annual election to receive the retainer and Board meeting fees in deferred stock units instead of cash. Directors who opt for the stock unit alternative receive a 20% premium in stock units versus the cash option. Directors who are employees or officers of the Company do not receive compensation for serving as directors. Directors are also reimbursed for reasonable travel expenses to and from meetings of the Board and committees. Outside directors receive non-qualified stock options to purchase 1,000 shares of Common Stock annually and receive 1,000 performance shares bi- annually. The performance shares are earned based upon the achievement of certain Company financial targets during a three year cycle. Mr. Powers, as an officer of the Company, is not compensated for serving as a director of the Company. 32 EXECUTIVE COMPENSATION The following table sets forth information with respect to the cash compensation paid by the Company for services rendered during the fiscal years ended October 31, for the years listed below to its Chief Executive Officer and the other executive officers of the Company whose total annual salary and bonus exceeded $100,000 during fiscal year 1996 (each, a "Named Executive Officer"). The salary described in this table for 1994, 1995, and the first three quarters of 1996 (prior to the Spin-off) for Paul J. Powers, Mark G. Kachur and Michael H. Croft was paid by Commercial Intertech. Salary paid to these three executive officers for the fourth quarter of 1996 was paid by the Company as follows: $25,000 for Paul J. Powers, $45,865 for Mark G. Kachur and $33,438 for Michael H. Croft. The salary paid to John A. Tomich by the Company during the fourth quarter of 1996 was $12,716 and the remaining salary amount was paid to him by Commercial Intertech. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------ ----------------------- RESTRICTED SECURITIES STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL OTHER ANNUAL AWARDS(2) OPTIONS COMPENSATION POSITIONS YEAR SALARY ($) BONUS ($) COMPENSATION ($) ($) (#) ($) - ------------------ ---- ---------- --------- ---------------- ---------- ---------- ------------ Paul J. Powers.......... 1996 397,503 -0- -0- -0- 65,000 16,023(5) Chairman and Chief 1995 481,667 440,000 -0- 131,995 34,000 15,810 Executive Officer 1994 461,667 400,000 -0- 835,634 37,500 15,876 Mark G. Kachur.......... 1996 263,179 152,000 10,883 45,601 74,658(4) 25,627(6) President and Chief 1995 247,500 135,000 38,414 24,008 15,000 21,706 Operating Officer 1994 134,300 120,000 -0- 174,375 15,000 -0- Michael H. Croft........ 1996 194,599 115,000 24,850 -0- 13,000 36,119(7) Senior Vice President 1995 183,000 30,000 12,000 -0- -0- 32,685 Ronald C. Drabik(1)..... 1996 50,212 30,000 -0- 107,500(3) 13,000 1,865(8) Senior Vice President and Chief Financial Officer Timothy B. Carney....... 1996 99,795 40,000 -0- -0- 6,000 15,282(9) Vice President and Controller John A. Tomich.......... 1996 89,316 12,000 -0- -0- 3,000 2,867(10) Counsel and Secretary
- -------- (1) Mr. Drabik became an officer of the Company on September 10, 1996 in connection with the Spin-off. At present, Mr. Drabik's annual salary is $175,000. (2) This column shows the market value of restricted share awards on the date of grant. The aggregate holdings/value of restricted stock held on October 31, 1996 by the individuals listed in this table, not including awards that were earned after the end of the fiscal year as part of the Company's Executive Management Incentive Plan and were elected to be taken in the form of restricted stock were: Paul J. Powers-- 67,896/$1,086,336; Mark G. Kachur--22,400/$358,400; Michael H. Croft-- 4,020/$64,320; Ronald C. Drabik--7,146/$114,336; Timothy B. Carney-- 3,294/$52,704; and John A. Tomich--1,876/$30,016. (3) Includes the value of shares of Commercial Intertech common stock awarded and converted to shares of Common Stock in connection with the Spin-off. (4) Includes options for 22,500 shares of Commercial Intertech common stock granted and converted to options for 39,658 shares of Common Stock in connection with the Spin-off. (5) Includes Commercial Intertech matching contributions to the Commercial Intertech Non-Qualified Stock Purchase Plan in the amount of $10,425; Commercial Intertech matching contributions pursuant to the Commercial Intertech 401(k) Plan in the amount of $4,500; and Commercial Intertech contribution pursuant to the Commercial Intertech Employee Stock Ownership Plan in the amount of $1,098. (6) Includes Commercial Intertech matching contributions to the Commercial Intertech Non-Qualified Stock Purchase Plan in the amount of $2,300; Commercial Intertech contribution pursuant to the Commercial Intertech Employee Stock Ownership Plan in the amount of $1,098; Commercial Intertech reimbursement of relocation costs in the amount of $17,344; Company matching contributions pursuant to the Company 401(k) Plan in the amount of $288; and Company reimbursement of relocation costs in the amount of $4,597. (7) Includes Commercial Intertech matching contributions to the Commercial Intertech Non-Qualified Stock Purchase Plan in the amount of $1,107; Commercial Intertech matching contributions pursuant to the Commercial Intertech 401(k) Plan in the amount of $3,245; Commercial Intertech reimbursement of relocation costs in the amount of $650; Commercial Intertech's amortized retirement of a loan in the amount of $10,880; Company matching contributions pursuant to the Company 401(k) Plan in the amount of $573; Company reimbursement of relocation costs in the amount of $1,310; and Company payment to a supplemental executive retirement plan in the amount of $18,354. (8) Includes Company reimbursement of relocation costs in the amount of $1,865. (9) Includes Commercial Intertech matching contributions pursuant to the Commercial Intertech 401(k) Plan in the amount of $2,489; Commercial Intertech's amortized retirement of a loan in the amount of $12,429; and Company matching contributions pursuant to the Company 401(k) Plan in the amount of $364. (10) Includes Commercial Intertech matching contributions pursuant to the Commercial Intertech 401(k) Plan in the amount of $2,298 and Commercial Intertech contribution pursuant to the Commercial Intertech Employee Stock Ownership Plan in the amount of $569. 33 The following table sets forth, for each of the Named Executive Officers, options granted for the Common Stock during fiscal year 1996 pursuant to the Employee Stock Plan. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATE SECURITIES OPTIONS OF STOCK PRICE UNDERLYING GRANTED TO APPRECIATION FOR OPTION OPTIONS EMPLOYEES EXERCISE OR TERM(3) GRANTED IN FISCAL BASE PRICE EXPIRATION --------------------------- NAME (#)(1) YEAR ($/SHARE) DATE 5% ($) 10% ($) - ---- ---------- ---------- ----------- ---------- ------------ -------------- Paul J. Powers.......... 65,000 19.2 15.125 9/25/06 618,386 1,567,101 Mark G. Kachur.......... 35,000 10.4 15.125 9/25/06 332,977 843,824 39,658(2) 11.7 10.709 1/23/06 267,122 676,936 Michael H. Croft........ 13,000 3.8 15.125 9/25/06 123,677 313,420 Ronald C. Drabik........ 13,000 3.8 15.125 9/25/06 123,677 313,420 Timothy B. Carney....... 6,000 1.8 15.125 9/25/06 57,082 144,656 John A. Tomich.......... 3,000 0.9 15.125 9/25/06 28,541 72,328
- -------- (1) The options were granted subject to a three-year vesting period, with 50% of the options granted becoming exercisable on each of the second and third anniversaries of the grant date. No SARs were granted. The vesting of the options may be accelerated in the event of a change in control. (2) This represents a stock option granted to Mr. Kachur for shares of Commercial Intertech common stock that were converted to the Company's shares in connection with the Spin-off. (3) Potential Realizable Value is presented net of the option exercise price but before any federal or state income taxes associated with exercise. These amounts represent certain assumed rates of appreciation only. Actual gains are dependent on the future performance of the Common Stock and the option holder's continued employment throughout the vesting period. The amounts reflected in the table may not necessarily be achieved. The following table sets forth, for each of the Named Executive Officers, information regarding the exercise of options for the Common Stock during fiscal year 1996 and unexercised options held as of the end of fiscal year 1996 pursuant to the Employee Stock Plan. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR END 1996 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTION AT FY END (#) AT FY END ($)(1) SHARES ACQUIRED VALUE ------------------------- ------------------------- NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- --------------- ------------ ------------------------- ------------------------- Paul J. Powers.......... -- -0- -0-/ 65,000 -0-/ 56,875 Mark G. Kachur.......... -- -0- -0-/114,317 -0-/468,150 Michael H. Croft........ -- -0- -0-/ 13,000 -0-/ 11,375 Ronald C. Drabik........ -- -0- -0-/ 13,000 -0-/ 11,375 Timothy B. Carney....... -- -0- -0-/ 6,000 -0-/ 5,250 John A. Tomich.......... -- -0- -0-/ 3,000 -0-/ 2,625
- -------- (1) The value per option is calculated by subtracting the exercise price from the October 31, 1996 closing sales price of the Common Stock on the Nasdaq National Market of $16.00. 34 The following table sets forth, for each of the Named Executive Officers, long-term incentive awards made during fiscal year 1996 pursuant to the Employee Stock Plan. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NUMBER OF PERFORMANCE OR NON-STOCK PRICE BASED PLANS SHARES, UNITS OTHER PERIOD ---------------------------------- OR OTHER RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM NAME (#) OR PAYOUT(1) (#) (#) (#) - ---- --------------- ---------------- ----------- ---------- ---------- Paul J. Powers.......... 50,000 10/31/99 12,500 50,000 75,000 Mark G. Kachur.......... 30,000 10/31/99 7,500 30,000 45,000 Michael H. Croft........ 10,000 10/31/99 2,500 10,000 15,000 Ronald C. Drabik........ 10,000 10/31/99 2,500 10,000 15,000 Timothy B. Carney....... 4,000 10/31/99 1,000 4,000 6,000 John A. Tomich.......... 2,000 10/31/99 500 2,000 2,000
- -------- (1) The date in the column represents the date on which the three-year performance period ends. Employees may retire from the Company with unreduced benefits under the Company's retirement plans at age 65 or later with 25 or more years of service. The table below shows the estimated annual pension benefits provided under the Company's defined benefit retirement plans for employees in higher salary classifications retiring at age 65 or later. ESTIMATED TOTAL ANNUAL RETIREMENT BENEFITS UNDER THE PENSION PLAN FOR SALARIED EMPLOYEES AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
YEARS OF SERVICE -------------------------------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------ -------- -------- -------- -------- -------- $150,000 $ 40,684 $ 54,245 $ 67,806 $ 71,196 $ 74,587 200,000 55,684 74,245 92,806 97,446 102,087 250,000 70,684 94,245 117,806 123,696 129,587 300,000 85,684 114,245 142,806 149,946 157,087 400,000 115,684 154,245 192,806 202,446 212,087
Benefits under the plans are calculated generally under a formula of 50% of the participant's final average compensation reduced by 50% of the participant's estimated social security benefits, reflected in the table in the form of a straight life annuity. The compensation covered by the pension plan is base salary as set forth in the Salary column of the Summary Compensation Table above. The compensation covered by the supplemental executive retirement plan is also base salary for Mr. Kachur, the only participant in that plan. As of January 31, 1997, Mr. Kachur had two credited years of service, Mr. Drabik had no credited years of service, Mr. Carney had 12 credited years of service and Mr. Tomich had seven credited years of service with the Company. Mr. Croft has elected not to participate in the pension plan. In addition, Mr. Powers is not a participant in the pension plan. THE EXECUTIVE MANAGEMENT INCENTIVE PLAN The Executive Management Incentive Plan ("EMIP") was approved by Commercial Intertech prior to the Spin-off and is a performance-based plan in which payouts are set in accordance with the requirements of Section 162(m) of the Code. The EMIP provides annual incentive compensation opportunities to the Company's senior executives based solely on the achievement of predetermined financial performance objectives (e.g., corporate net income). 35 THE MANAGEMENT INCENTIVE PLAN The Management Incentive Plan ("MIP") provides compensation that is not performance-based as defined in Code Section 162(m), but which will be based on both objective and subjective evaluations of individual executive performance. The MIP provides opportunities for executives to earn annual incentives based on the achievement of a combination of financial goals (operating and net income, return on net sales, return on assets and operating cash flow) for the Company and individual objectives. A threshold net income level will have to be achieved before any payments are made. The Compensation Committee has selected 52 individuals for plan participation in fiscal year 1997. Associated target award ranges will be determined according to individual responsibility levels, business judgment and median market data for comparably sized manufacturing companies. For fiscal year 1996, the Compensation Committee extended an opportunity to certain Company participants in Commercial Intertech's Senior Management Target Incentive Plan and Salaried Employee Incentive Plan to elect to receive up to 50% of their earned awards in restricted stock. For a number of participants who elected to receive part of their fiscal year 1996 compensation in restricted stock, the Company increased the stock award by 20%. The vesting period associated with the stock award is three years, and in the event a participant voluntarily leaves the Company or is terminated "for cause," the shares will be forfeited. Beginning in fiscal year 1997, the Compensation Committee will offer a 25% increase in the stock award and a four-year vesting period. EMPLOYMENT AGREEMENT In connection with the Spin-off, the Company assumed the Employment Agreement Mr. Kachur signed with Commercial Intertech on December 3, 1993, which expires in April 1997. The Employment Agreement provides for a base salary of $240,000 and grants of stock options as well as other Company benefit programs, including group life insurance, hospitalization and medical plans. CHANGE OF CONTROL AGREEMENTS The Company has entered into termination and change in control agreements (each, a "Termination Agreement") with Messrs. Carney, Croft, Drabik, Kachur, Powers and Tomich (each, an "Executive"). Under each Termination Agreement, following a "Change in Control" (as defined in the Termination Agreement), if an Executive is terminated without cause or if the Executive terminates his own employment for certain reasons, such Executive could receive (in addition to certain other benefits described below): (i) two to three times the sum of the base salary and highest recent annual bonus during the three preceding years; (ii) the value of any shares, dividends or other property payable assuming maximum performance with respect to any performance shares held by such Executive; (iii) accrued and unpaid base salary and pro rata portion of his highest recent bonus; (iv) the actuarial value of accrued benefits under such Executive's supplemental retirement plan; (v) all vested nonforfeitable amounts owing under any comprehensive benefit plans; (vi) continuation of certain benefits for two or three years, such as medical benefits; and (vii) certain other benefits and payments. If a Change in Control occurs, the Company is obligated to set aside, in trust, sufficient assets to fund all obligations under the Termination Agreements. In addition, payment received by an Executive in connection with a Change in Control could be "grossed up" for any excise taxes imposed by the "Golden Parachute" provisions of the Code. Under the Termination Agreements, each Executive may not compete with the Company for a certain period of time. STOCK PLANS Prior to the Spin-off, the Board of Directors and Commercial Intertech, as sole Company stockholder, adopted the CUNO Incorporated 1996 Stock Incentive Plan (the "Employee Stock Plan") and the CUNO Incorporated Non-Employee Directors' Stock Plan (the "Directors' Stock Plan" together with the Employee Stock Plan, the "Stock Plans"). The purpose of the Stock Plans is to motivate non-employee directors, officers, key employees and consultants to the Company ("Participants") by allowing them to participate in the 36 Company's future, to recognize and reward Participants' contributions and achievements and business performance through incentives linked to performance objectives and to enable the Company to attract and retain these persons by offering them an ownership interest in the Company. The Stock Plans are administered by the Compensation Committee. The Employee Stock Plan authorizes the issuance of up to 1,000,000 shares of Common Stock (plus any unused shares under the Directors' Stock Plan) pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock, performance shares, annual incentive bonuses or deferred stock to officers, key employees and consultants of the Company. The Directors' Stock Plan authorizes the issuance of up to 200,000 shares of Common Stock (plus any unused shares under the Employee Stock Plan) pursuant to the grant or exercise of stock options, deferred stock or performance shares to non-employee directors of the Company. Options granted to certain senior executives, management and other employees will vest or become exercisable over varied periods that will be determined at the time such options are granted. On the Distribution Date, directors who were not employees of the Company or any affiliate ("Non-Employee Directors") were automatically granted options to purchase 1,000 shares on the Distribution Date, and Non-Employee Directors will be granted options for 1,000 shares of Common Stock on the date of each annual stockholder's meeting beginning in 1997. Such options were, and shall be, granted at fair market value on the date of grant. Non-Employee Directors will also be permitted to elect to receive their retainer and meeting fees in the form of deferred stock instead of cash. Non-Employee Directors who elect to receive their retainer or meeting fees in such alternate form will receive shares of Common Stock with a value equal to as much as 120% of the value of the retainer or meeting fees the Non-Employee Director would have received in cash. Non-Employee Directors who held office on the Distribution Date received 5,000 performance shares and will also receive on a bi-annual basis performance shares for 1,000 shares of Common Stock, and the right to receive such shares will be conditioned upon the successful satisfaction of certain Company financial targets during a specified period. Stock Options may be either "incentive stock options" (within the meaning of Section 422 of the Code) or nonstatutory options (collectively, "Stock Options"). Only nonstatutory stock options may be granted to Non-Employee Directors. The exercise price per share purchasable under an option shall be determined at the time of grant by the Compensation Committee. Generally, Participants will be given ten years in which to exercise a Stock Option, or a shorter period once a Participant terminates employment. Payment may be made in cash or in the form of unrestricted shares the Participant already owns or by other means. At the Company's option, it may provide a Participant with a loan or guarantee of a loan for the exercise price of an option. The right to exercise an option may be conditioned upon the completion of a period of service or other conditions. Stock Appreciation Rights ("SARs") entitle a Participant to receive an amount in cash, shares or both, equal in value to (i) the excess of the fair market value of one share over the exercise price per share specified in the related Stock Option multiplied by (ii) the number of shares to which the SAR relates. The right to exercise a SAR may be conditioned upon the completion of a period of service or other conditions. Generally, Participants will be given ten years in which to exercise a SAR, or a shorter period once a Participant terminates employment. Shares of Restricted Stock ("Restricted Stock") may also be awarded under the Stock Plans, which requires the completion of a period of service or the attainment of specified performance goals by the Participant or the Company or a subsidiary, division or department of the Company or such other criteria as the Compensation Committee may determine. Upon a participant's Termination of Employment (as defined in the Stock Plans), the Restricted Stock still subject to restriction generally will be forfeited by the Participant. The Compensation Committee may waive these restrictions in the event of hardship or other special circumstances. Performance Share Awards ("Performance Shares") are grants of shares of Common Stock or the right to receive shares in the future that are subject to restrictions on transfer and retention based on satisfaction of certain performance criteria of the Company, the Participant or both. If the specified performance objectives established by the Committee are attained during the time period specified by the Committee (which will generally be at least a two- year period) and if the Participant continues in employment through the performance period, the restrictions on transfer and retention will be removed. Depending on a Participant's responsibilities, the performance criteria will be based on any of the following, either alone or in any combination, and either on a consolidated or business unit level, as the Committee may 37 determine: sales, net asset turnover, earnings per share, cashflow, cashflow from operations, operating profits or income, operating margin, net income, net income margin, return on net assets, return on total assets, return on common equity, return on total capital and total shareholder return. The Committee will specifically determine these criteria and may include or exclude any or all of the following items: extraordinary, unusual or nonrecurring items; effects of accounting changes; effects of financing activities; expenses for restructuring or productivity initiatives; non-operating items; spending for acquisitions; effects of divestitures; and effects of litigation or settlements. Capital gains may be included or excluded. The maximum number of performance shares that may be awarded to any Participant under the Plan for any year is one half of the shares of Common Stock reserved under the plan. Performance Shares in respect of which the Company's deduction is subject to Section 162(m) of the Code, may only be paid if the performance objectives are achieved, except where the Participant's employment is terminated for an extraordinary reason, in which case the Participant may receive a proportionate award. Deferred Stock ("Deferred Stock") is stock that can be awarded to a Participant in the future, at a specified time and under specified conditions. The Compensation Committee will determine the Participants to whom, and the time or times at which, any Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any Participant, the duration, the period during which and the conditions under which receipt of the shares will be deferred and any other terms and conditions of the Deferred Stock. Annual Incentive Awards ("Annual Incentives") are awards granted each fiscal year by the Committee and based on the satisfaction of specified bonus targets. The targets are based on Company performance measurements, as determined by the Committee, and include the following: sales, net asset turnover, earnings per share, cashflow, cashflow from operations, operating profits or income, net income, operating margin, net income margin, return on net assets, return on total assets, return on common equity, return on total capital and total shareholder return. The Committee will specifically determine these criteria and may include or exclude any or all of the following items: extraordinary, unusual or nonrecurring items; effects of accounting changes; effects of financing activities; expenses for restructuring or productivity initiatives; non-operating items; spending for acquisitions; effects of divestitures; and effects of litigation or settlements. Capital gains may be included or excluded. The Committee will determine each year whether the objectives have been satisfied and awards will be paid only if the deduction is subject to Section 162(m) of the Code, except for an extraordinary reason for a termination of employment. Payment may be made in cash, or at the election of the Participant, in the form of Restricted Stock. If Restricted Stock is chosen, it will be subject to limitation on transfer and risk of forfeiture for a designated period (generally, four years) and may have a value of as much as 130% of the cash value of the award had it been paid in cash. The maximum compensation that any Participant may receive in connection with an Annual Incentive, including Restricted Stock or Deferred Stock worth 130% of the cash value, is $1.5 million. Amendments and Modifications. The Stock Plans, as adopted, are not limited as to their duration. The Board of Directors of the Company may amend, alter, or discontinue the Stock Plans, subject to certain limits. Change in Control. In the event of a Change in Control of the Company (as defined in the Stock Plans): (1) any SAR and Stock Options outstanding as of the date of such Change in Control that are not then exercisable and vested will become fully exercisable and vested to the full extent of the original grant; and (2) the restrictions and deferred limitations applicable to any shares of Restricted Stock and Deferred Stock will lapse and such shares of Restricted Stock and Deferred Stock will become free of all restrictions and become fully vested and transferable to the full extent of the original grant. Also, the performance goals and other restrictions with respect to any outstanding award of Performance Shares or Annual Incentives may be deemed to be satisfied in full and fully distributable. A Change in Control includes any transaction that would result in any person owning, directly or indirectly, 20% or more of the outstanding Common Stock of the Company or the voting power of the Company, certain changes in the members of the board of directors, certain corporate transactions (such as a merger) and the sale of substantially all of the Company's assets. 38 BENEFICIAL OWNERS The following table sets forth, as of January 31, 1997, certain information with respect to the beneficial ownership of Common Stock by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each Company director, (iii) the Chief Executive Officer and each of the other Named Executive Officers and (iv) all Company directors and executive officers as a group.
PERCENT OF VOTING SHARES SHARES ------------------------------- BENEFICIALLY PRIOR TO THE AFTER THE NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING - ------------------------ ------------ ------------- ------------ National City Bank N.E.(1).. 945,423 6.8% 5.3% Janus Capital Corporation(2)............. 704,325 5.1 4.5 Joel B. Alvord.............. 12,677 * * Timothy B. Carney........... 10,413(3) * * Charles L. Cooney........... 6,149 * * Michael H. Croft............ 24,735(3) * * Ronald C. Drabik............ 17,146 * * Norbert A. Florek........... 8,075 * * John M. Galvin.............. 16,612 * * Mark G. Kachur.............. 92,641(4) * * Gerald C. McDonough......... 10,649 * * C. Edward Midgley........... 26,149 * * Paul J. Powers.............. 243,699 1.8 1.5 David L. Swift.............. 7,072 * * John A. Tomich.............. 7,022 * * All directors and executive officers as a group (13 people).................... 483,039 3.5 3.1
- -------- * Less than 1%. (1) As reported on a Schedule 13G dated February 19, 1997 filed with the Commission by National City Bank N.E. According to such Schedule 13G, National City Bank N.E. has sole voting power over 672,209 shares and shared voting power over 171,306 shares and sole investment power over 92,668 shares, shared investment power over 709,555 shares and no investment power over 143,200 shares. The address of the stockholder is National City Center, 1900 East Ninth Street, Cleveland, Ohio 44114-3484. (2) As reported on a Schedule 13G dated February 10, 1997 filed with the Commission by Janus Capital Corporation. According to such Schedule 13G, Janus Capital Corporation has shared voting power and shared dispositive power with respect to all 704,325 of these shares. The address of the stockholder is 100 Fillmore Street, Denver, Colorado 80206-4923. (3) Includes the following number of Common Shares (fractional shares not shown) credited to the accounts of the above-mentioned beneficial owners by the trustee acting under the provisions of the Company's 401(k) Plan: Mr. Carney--1,210 shares; and Mr. Croft--1,468 shares. (4) Includes 26,439 shares of Common Stock subject to options exercisable within 60 days. 39 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred Stock"). COMMON STOCK As of February 26, 1997, there were 13,822,076 shares of Common Stock outstanding, excluding shares of Common Stock reserved for issuance upon exercise of options granted under the Stock Plans. The Common Stock is listed on the Nasdaq National Market under the symbol "CUNO." Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock are entitled to one vote per share in all matters to be voted upon by stockholders. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities and the liquidation preferences of any outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock that the Company may issue in the future. Holders of Common Stock have certain rights to purchase Series A Preferred Stock (as defined below) or Common Stock under certain circumstances. See "-- Preferred Stock" and "--Stockholder Rights Plan." PREFERRED STOCK Preferred Stock may be issued in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof as the Board determines. The rights, priorities, preferences, qualifications, limitations and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board may authorize the issuance of Preferred Stock which ranks senior to the Common Stock with respect to the payment of dividends and the distribution of assets on liquidation. In addition, the Board is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of Preferred Stock are outstanding. The Board, without stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present intention to issue shares of Preferred Stock. In connection with the adoption of the Rights Plan, the Company's Board of Directors has created one series of Preferred Stock, consisting of 300,000 shares of Series A Preferred Stock (as defined below). No shares of Series A Preferred Stock have been issued as of the date of this Prospectus. Each share of Series A Preferred Stock when and if issued will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but, if greater, will be entitled to an aggregate dividend per share of 100 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Series A Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share. Thereafter, and after the holders of the Common Stock receive a liquidation payment of $1.00 per share, the holders of the Series A Preferred Stock and the holders of the Common Stock will share the remaining assets in the ratio of 100 to 1 (as adjusted) for each share of Series A Preferred Stock and share of Common Stock so held, respectively. Finally, in the event of any merger, consolidation or other transaction in which Common Stock is exchanged, each share of Series A Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. In the event that the amount of accrued and unpaid dividends on the Series A Preferred Stock is equivalent to six full quarterly dividends or more, the holders of the 40 Series A Preferred Stock shall have the right, voting as a class, to elect two directors in addition to the directors elected by the holders of the Common Stock until all cumulative dividends on the Series A Preferred Stock have been paid through the last quarterly dividend payment date or until noncumulative dividends have been paid regularly for at least one year. CERTAIN CORPORATE PROVISIONS The Restated Certificate and the Restated Bylaws contain a number of provisions relating to corporate governance and to the rights of stockholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control of the Company. These provisions include (i) the classification of the Board into three classes, each serving for staggered three year terms, (ii) the authority of the Board to issue series of Preferred Stock with such voting rights and other powers as the Board may determine, (iii) notice requirements in the Restated Bylaws relating to nominations to the Board and to the raising of business matters at stockholders meetings, (iv) a requirement that a vote of at least 80% of shares entitled to vote generally for the election of directors is required to amend provisions of the Restated Certificate relating to the classification of the Board and removal of directors and (v) a prohibition of stockholder action by written consent. DELAWARE ANTI-TAKEOVER LAW The Company is a Delaware corporation that is subject to Section 203 of the Delaware General Corporation Law ("Section 203"). Under Section 203, certain "business combinations" between a Delaware corporation, whose stock generally is publicly traded or held of record by more than 2,000 stockholders, and an "interested stockholder" are prohibited for a three-year period following the date that such stockholder became an interested stockholder, unless (i) the corporation has elected in its certificate of incorporation not to be governed by Section 203 (the Company has not made such election), (ii) the business combination was approved by the board of directors of the corporation before the other party to the business combination became an interested stockholder, (iii) upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction (excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan) or (iv) the business combination is approved by the board of directors of the corporation and ratified by two- thirds of the voting stock that the interested stockholder did not own. The three-year prohibition also does not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors. The term "business combination" is defined generally to include mergers or consolidations between a Delaware corporation and an interested stockholder, transactions with an interested stockholder involving the assets or stock of the corporation or its majority- owned subsidiaries and transactions that increase an interested stockholder's percentage ownership of stock. The term "interested stockholder" is defined generally as those stockholders who become beneficial owners of 15% or more of a Delaware corporation's voting stock, together with the affiliates or associates of that stockholder. STOCKHOLDER RIGHTS PLAN The Board of Directors of the Company adopted a Stockholder Rights Plan (the "Rights Plan") pursuant to which a preferred share purchase right (a "Right") is associated with, and trades with, each share of the Common Stock outstanding. Each Right, when it becomes exercisable, entitles its registered holder to purchase from the Company one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), of the Company at a price of $60 per one-hundredth of a share of Series A Preferred Stock (the "Purchase Price"), subject to adjustment. 41 The Rights are not exercisable until the earlier of (i) a person or group of affiliated or associated persons having acquired beneficial ownership of 15% or more of the outstanding Common Stock (except pursuant to a Permitted Offer, as defined in the Rights Plan) (an "Acquiring Person") or (ii) 10 days (or such later date as the Company's Board of Directors may determine) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person (the earlier of such dates being called the "Rights Distribution Date"). In the event that any person or group becomes an Acquiring Person (the "Shares Acquisition Date"), each holder of a Right will thereafter have the right (the "Flip-In Right") to receive, upon exercise, the number of shares of Common Stock or one-hundredths of a share of Series A Preferred Stock (or, in certain circumstances, other securities of the Company) having a value (immediately prior to such triggering event) equal to two times the exercise price of the Right. Notwithstanding the foregoing, following the occurrence of the event described above, all Rights that are, or (under certain circumstances specified in the Rights Plan) were, beneficially owned by any Acquiring Person or any affiliate or associate thereof will be null and void. In the event that, at any time following the Shares Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction in which the holders of all of the outstanding Common Stock immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation's voting power or (ii) more than 50% of the Company's assets or earning power is sold or transferred, in either case with or to an Acquiring Person or any affiliate or associate or any other person in which such Acquiring Person, affiliate or associate has an interest or any person acting on behalf of or in concert with such Acquiring Person, affiliate or associate or, if in such transaction all holders of Common Stock are not treated alike, then each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right (the "Flip-Over Right") to receive, upon exercise, common shares of the acquiring company having a value equal to two times the exercise price of the Right. The holder of a Right will continue to have the Flip-Over Right whether or not such holder exercises or surrenders the Flip-In Right. At any time after a person becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the Common Stock, the Board of Directors of the Company may exchange the Rights (other than the Rights owned by the Acquiring Person or its associates and affiliates, which shall have become void) at an exchange ratio of one share of Common Stock per Right (subject to adjustment). The Rights will expire at the close of business on August 8, 2006, unless redeemed by the Company as described herein. At any time prior to the earlier to occur of (i) a person or group becoming an Acquiring Person or (ii) the expiration of the Rights, and under certain other circumstances, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"). Additionally, following the Shares Acquisition Date, the Company may redeem the then outstanding Rights in whole, but not in part, at the Redemption Price, provided that such redemption is in connection with a merger or other business combination transaction or series of transactions involving the Company in which all holders of Common Stock are treated alike, but not involving an Acquiring Person or its affiliates or associates. Series A Preferred Stock purchasable upon exercise of the Rights will not be redeemable. The Rights have certain anti-takeover effects. The Rights should not interfere with any merger or business combination approved by the Company's Board of Directors since the Rights may be redeemed by the Company at the Redemption Price prior to the time that a person or group becomes an Acquiring Person. However, by causing substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, the Rights may interfere with certain acquisitions, including acquisitions that may offer a premium over market price to some or all of the Company's stockholders. The Rights are not intended to prevent an acquisition of the Company on terms that are favorable and fair to all stockholders. 42 CERTAIN RELATED PARTY TRANSACTIONS ARRANGEMENTS BETWEEN THE COMPANY AND COMMERCIAL INTERTECH The Company and Commercial Intertech entered into the following agreements for the purpose of governing the post-Spin-off relationships. Distribution and Interim Services Agreement. Subject to certain exceptions, the distribution and interim services agreement (the "Distribution and Interim Services Agreement") provides for cross-indemnities principally designed to place financial responsibility for the liabilities of the Company's business with the Company and financial responsibility for the liabilities of the remaining businesses of Commercial Intertech with Commercial Intertech following the Spin-off. The Distribution and Interim Services Agreement provides that certain services, including tax, accounting, payroll, employee benefit and legal services, will continue to be provided to the Company for a period up to 12 months following the Distribution Date, at rates specified in such agreement, with certain exceptions. In addition, the Distribution and Interim Services Agreement provides that any corporate opportunity, transaction, agreement or other arrangement that becomes known to a director or officer of the Company, who is also an officer or director of Commercial Intertech or a subsidiary of Commercial Intertech, shall not be the property or corporate opportunity of the Company, even if such opportunity, transaction, agreement or other arrangement relates to the Company's business. Mr. Powers currently serves as Chief Executive Officer of both Commercial Intertech and the Company. Tax Allocation Agreement. A tax sharing agreement (the "Tax Allocation Agreement") provides that the Company is liable for U.S. federal, state, local and foreign tax liabilities that are attributable to the Company through the Distribution Date and that Commercial Intertech is responsible for all such taxes of Commercial Intertech (excluding the Company). In addition, all taxes (other than as described below) attributable to or occasioned by the separation of the Company's business and Commercial Intertech's remaining business and the Spin-off are the Company's responsibility. Under the Tax Allocation Agreement, if the Spin-off is determined to be taxable because a change of control of Commercial Intertech occurs, then the resulting tax liability will be borne solely by Commercial Intertech. If the Spin-off is determined to be taxable because of a change of control of the Company, then the resulting tax liability shall be borne solely by the Company. Under the Tax Allocation Agreement, each of Commercial Intertech and the Company make certain representations, warranties and covenants to the other party not to take any action that would be inconsistent with any requirement, nor fail to take any action required, in order to preserve the tax-free nature of the Spin-off. To the extent that either party violates such representations, warranties or covenants, then the party in breach shall be solely liable for the resulting tax liability. If a tax liability arises in connection with the Spin-off for any reason not set forth above, then such liability shall be borne equally by Commercial Intertech and the Company. For purposes of the Tax Allocation Agreement "a change of control" shall mean a greater than 50% change in stock ownership, measured by vote and value of either company. Employee Benefits Agreement. The employee benefits and compensation allocation agreement (the "Benefits Agreement") provides that any Commercial Intertech stock-based awards held by Company employees and Company non- employee directors who are not also directors of Commercial Intertech and half of such options held by Company non-employee directors who are also directors of Commercial Intertech were, as of the Distribution Date, replaced with similar stock-based awards for Common Stock, in each case adjusted so that the value thereof after the Distribution Date was equal to the value of the replaced award before the Distribution Date. The Benefits Agreement provides that, effective as of the Distribution Date, the Company became responsible for all benefit related other liabilities to employees and their beneficiaries and dependents as well as former employees of former Company businesses and their beneficiaries and dependents. INDEBTEDNESS BETWEEN THE COMPANY AND COMMERCIAL INTERTECH The Company assumed $30.0 million of Commercial Intertech's debt in connection with the Spin-off and declared to Commercial Intertech an additional $35.7 million dividend, of which $2.2 million was outstanding as 43 of January 31, 1997. In addition, the Company and it subsidiaries owe Commercial Intertech $6.7 million as of January 31, 1997 for amounts due under the Distribution and Interim Services Agreement as well as other intercompany charges. The Company expects to pay these balances by October 1997. Payments for these obligations are expected to be funded through the Company's internally generated cashflow or existing lines of credit. In connection with the Spin-off, the Company entered into a credit agreement with Mellon Bank, N.A. (the "Bank"), in its capacity as agent for various banks, subsequent to which the Bank agreed to provide the Credit Facility. The Company has drawn down a portion of the Credit Facility and has used some of the borrowings to repay the $30.0 million debt assumed from Commercial Intertech. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF Commercial Intertech structured the the Spin-off to qualify as a tax-free spin-off under Section 355 of the Code. However, no ruling was requested from the IRS concerning the federal income tax consequences of the transaction. If the Spin-off were determined to not qualify under Section 355 of the Code, then Commercial Intertech will be treated as if it sold the stock of the Company in a taxable transaction resulting in a substantial tax liability to Commercial Intertech. However, in certain circumstances the Company may be required to indemnify Commercial Intertech against 50% or all of such liability. See "--Arrangements Between the Company and Commercial Intertech." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, there will be 15,822,076 shares of Common Stock of the Company outstanding. All of these shares, including the 2,000,000 shares sold in the offering, are and will be immediately eligible for resale in the public market without restriction under the Securities Act, unless they are held by "affiliates" of the Company within the meaning of Rule 144 under the Securities Act. The Company has granted to the Underwriters (as defined below) an option, expiring 30 days from the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the sale of the Common Stock that the Underwriters have agreed to purchase. To the extent the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment. In general, under Rule 144 as currently in effect, a stockholder, including an "affiliate" of the Company, as that term is defined in Rule 144 (an "Affiliate"), who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least two years from the later of the date such securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 158,000 shares immediately after the offering) or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided that certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, under Rule 144(k), if a period of at least three years has elapsed between the later of the date restricted securities were acquired from the Company and the date they were acquired from an Affiliate of the Company, a stockholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without compliance with the foregoing requirements under Rule 144. The Securities and Exchange Commission has reduced the two year holding period to one year and the three year holding period to two years effective April 29, 1997. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is ChaseMellon Shareholder Services, L.L.C. 44 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell to each of the underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Robert W. Baird & Co. Incorporated, Cleary Gull Reiland & McDevitt Inc. and Goldman, Sachs & Co., are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite its name below:
NUMBER UNDERWRITERS OF SHARES - ------------ --------- Robert W. Baird & Co. Incorporated.................................... Cleary Gull Reiland & McDevitt Inc.................................... Goldman, Sachs & Co................................................... --------- Total............................................................... 2,000,000 =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all 2,000,000 shares of Common Stock offered hereby if any are purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, purchase commitments of the non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has been advised by the Underwriters that the several Underwriters propose to offer such Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may re-allow a concession not in excess of $ per share to other dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may be changed by the Representatives. The Company has granted to the Underwriters an option, expiring 30 days from the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the sale of the Common Stock that the Underwriters have agreed to purchase. To the extent the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment. The Company and its officers and directors have agreed that, except with the prior written consent of Robert W. Baird & Co. Incorporated, during the 90 days following the date of this Prospectus, they will not, directly or indirectly, offer, sell or otherwise dispose of, contract to sell or otherwise dispose of, or cause or in any way permit to be sold or otherwise disposed of, any shares of Common Stock or any other Company capital stock, rights to purchase Common Stock or other Company capital stock or securities or instruments convertible into or exchangeable for Common Stock or other Company capital stock, except for the Common Stock offered hereby. Notwithstanding the foregoing, the Company may (i) grant options, restricted stock, performance shares and stock appreciation rights pursuant to the Stock Plans in the ordinary course consistent with past practice, provided that none of such instruments shall be exercisable as the case may be, during the 90-day period described above and (ii) issue shares of Common Stock upon the exercise of options currently outstanding. Any permitted shortening of such periods and any related sales of Common Stock would not necessarily be preceded by a public announcement of the Company or the Representatives that such consent has been given. 45 The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities under the Securities Act of 1933 or contribute to payments the Underwriters may be required to make in respect thereof. In connection with the Offering and pursuant to Regulation M under the Exchange Act, the Underwriters may engage in transactions that stabilize or maintain the market price of the Common Stock at levels above those which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. LEGAL MATTERS Certain legal matters with respect to the validity of the Common Stock being offered hereby will be passed upon for the Company by Katten Muchin & Zavis, a partnership including professional corporations, Chicago, Illinois. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Gardner, Carton & Douglas, Chicago, Illinois. EXPERTS The Consolidated Financial Statements and schedule of the Company at October 31, 1996 and 1995, and for each of the three years in the period ended October 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates. Copies of reports, proxy and information statements and other information regarding registrants that file electronically are available on the Commission's Web site at http://www.sec.gov. The Company's Common Stock is listed on the Nasdaq National Market, and such reports, proxy statements and other information can also be inspected at the offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the shares offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Any statements contained herein concerning the provisions of any document filed as an Exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete and, in each instance, reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and copies of either of them or any part thereof may be obtained from such office, upon payment of the fees prescribed by the Commission. The Registration Statement, including the exhibits and schedules thereto, is also available on the Commission's Web site at http://www.sec.gov. 46 CUNO INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AUDITED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........................ F-2 Consolidated Balance Sheets as of October 31, 1996 and 1995.............. F-3 Statements of Consolidated Income for the Years Ended October 31, 1996, 1995 and 1994........................................................... F-4 Statements of Consolidated Stockholders' Equity for the Years Ended October 31, 1996, 1995 and 1994......................................... F-5 Statements of Consolidated Cash Flows for the Years Ended October 31, 1996, 1995 and 1994..................................................... F-6 Notes to Consolidated Financial Statements............................... F-7 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Statements of Consolidated Income for the Three Months Ended January 31, 1997 and 1996 (unaudited)............................................... F-21 Consolidated Balance Sheets as of January 31, 1997 (unaudited) and October 31, 1996........................................................ F-22 Statements of Consolidated Cash Flows for the Three Months Ended January 31, 1997 and 1996 (unaudited)........................................... F-23 Notes to Unaudited Condensed Consolidated Financial Statements as of January 31, 1997........................................................ F-24
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Stockholders and Board of Directors CUNO Incorporated We have audited the accompanying consolidated balance sheets of CUNO Incorporated and subsidiaries as of October 31, 1996 and 1995, and the related statements of consolidated income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CUNO Incorporated and subsidiaries at October 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Hartford, Connecticut December 16, 1996 F-2 CUNO INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
OCTOBER 31, ------------------ 1996 1995 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND COMMON SHARE DATA) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 5,244 $ 6,740 Accounts and notes receivable (less allowances of $1,133 and $1,136, respectively)................................ 36,944 33,381 Inventories............................................... 19,149 21,763 Deferred income taxes..................................... 5,333 5,766 Prepaid expenses and other current assets................. 1,484 2,511 Receivables from related party............................ -- 18,767 -------- -------- Total current assets.................................... 68,154 88,928 NONCURRENT ASSETS Intangible assets......................................... 19,695 21,663 Pension assets............................................ 1,174 3,264 Other noncurrent assets................................... 1,532 1,041 -------- -------- Total noncurrent assets................................. 22,401 25,968 PROPERTY, PLANT AND EQUIPMENT, NET.......................... 48,201 47,931 -------- -------- Total assets.......................................... $138,756 $162,827 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank loans................................................ $ 10,690 $ 10,440 Accounts payable.......................................... 12,719 10,780 Accrued payroll and related taxes......................... 9,084 8,446 Accrued other expenses.................................... 6,986 6,105 Accrued income taxes...................................... 1,360 2,947 Current portion of long-term debt......................... 962 1,036 Dividends payable to related party........................ 4,612 -- Payable to related party.................................. 10,184 -- -------- -------- Total current liabilities............................... 56,597 39,754 NONCURRENT LIABILITIES Long-term debt............................................ 33,772 4,060 Deferred income taxes..................................... 3,670 4,067 Retirement benefits....................................... 1,569 2,757 -------- -------- Total noncurrent liabilities............................ 39,011 10,884 STOCKHOLDERS' EQUITY Preferred stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding............. -- -- Common stock, $.001 par value; Authorized: 50,000,000 shares Issued: 1996-13,774,568 shares (excluding 6,854 in treasury) 1995-13,565,922 shares......................... 14 14 Additional paid-in-capital................................ 6,736 3,391 Retained earnings......................................... 33,636 102,245 Unearned compensation..................................... (3,448) -- Minimum pension liability adjustment...................... (811) -- Translation adjustments................................... 7,021 6,539 -------- -------- Total stockholders' equity.............................. 43,148 112,189 -------- -------- Total liabilities and stockholders' equity............ $138,756 $162,827 ======== ========
See notes to consolidated financial statements. F-3 CUNO INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED OCTOBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND COMMON SHARE DATA) Net sales............................... $ 179,068 $ 162,699 $ 143,111 Less costs and expenses: Cost of products sold................. 104,848 99,772 92,507 Selling, general and administrative expenses............................. 56,750 52,087 45,626 Distribution and other nonrecurring costs................................ 5,564 -- -- ----------- ----------- ----------- 167,162 151,859 138,133 ----------- ----------- ----------- Operating income........................ 11,906 10,840 4,978 Nonoperating income (expense): Interest income....................... 156 145 88 Interest expense...................... (820) (691) (706) Exchange losses....................... (171) (449) (933) Gain (loss) on sale of assets......... 121 -- (1,053) Other................................. (181) (282) (331) ----------- ----------- ----------- (895) (1,277) (2,935) ----------- ----------- ----------- Income before income taxes.............. 11,011 9,563 2,043 Provision for income taxes: Current............................... 5,293 4,697 1,491 Deferred.............................. 125 (1,235) (1,255) ----------- ----------- ----------- 5,418 3,462 236 ----------- ----------- ----------- Net income.............................. $ 5,593 $ 6,101 $ 1,807 =========== =========== =========== Earnings per common share............... $ 0.41 $ 0.45 $ 0.13 =========== =========== =========== Weighted average common shares outstanding............................ 13,565,922 13,565,922 13,565,922 =========== =========== ===========
See notes to consolidated financial statements. F-4 CUNO INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
YEAR ENDED OCTOBER 31, --------------------------------------- 1996 1995 1994 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) COMMON STOCK Balance at end of year............... $ 14 $ 14 $ 14 ADDITIONAL PAID-IN CAPITAL Balance at beginning of year......... 3,391 3,391 3,391 Performance shares issued............ 3,448 -- -- Shares repurchased................... (103) -- -- ------------ ------------ ------------ Balance at end of year............... 6,736 3,391 3,391 RETAINED EARNINGS Balance at beginning of year......... 102,245 97,284 97,507 Net income........................... 5,593 6,101 1,807 Less: Dividends to Commercial Intertech... 36,943 -- 1,958 Transfer of Commercial Intertech debt............................... 30,000 -- -- Divisional equity retained by Commercial Intertech............... 7,259 1,140 72 ------------ ------------ ------------ Balance at end of year............... 33,636 102,245 97,284 UNEARNED COMPENSATION Balance at beginning of year......... -- -- -- Performance shares issued............ (3,448) -- -- ------------ ------------ ------------ Balance at end of year............... (3,448) -- -- MINIMUM PENSION LIABILITY Balance at beginning of year......... -- -- -- Other................................ (811) -- -- ------------ ------------ ------------ Balance at end of year............... (811) -- -- TRANSLATION ADJUSTMENTS Balance at beginning of year......... 6,539 5,777 2,831 Net change for year.................. 482 762 2,946 ------------ ------------ ------------ Balance at end of year............... 7,021 6,539 5,777 ------------ ------------ ------------ Total stockholders' equity......... $ 43,148 $ 112,189 $ 106,466 ============ ============ ============ Stockholders' equity per share of common stock.......................... $ 3.13 $ 8.27 $ 7.85 ============ ============ ============
See notes to consolidated financial statements. F-5 CUNO INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED OCTOBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income....................................... $ 5,593 $ 6,101 $ 1,807 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization..... 7,475 7,929 8,154 Loss on sale of equipment....................... -- -- 1,053 Pension plan credits............................ 692 1,019 676 Change in deferred income taxes................. (239) (1,222) (1,143) Changes in current assets and liabilities: (Increase) in accounts receivable.............. (5,050) (3,839) (756) Decrease (increase) in inventories............. 3,224 (636) 1,301 Decrease (increase) in prepaid expenses and other current assets.......................... 838 (292) 166 Decrease (increase) in receivable from affiliate..................................... 24,964 (3,128) (4,814) Increase in accounts payable and accrued expenses...................................... 2,425 1,477 1,323 (Decrease) increase in accrued income taxes.... (3,236) 335 229 -------- ------- ------- Net cash provided by operating activities.... 36,686 7,744 7,996 INVESTING ACTIVITIES: Proceeds from sale of equipment.................. 43 113 109 Investment in intangibles........................ -- (343) (207) Capital expenditures............................. (6,325) (5,234) (2,927) -------- ------- ------- Net cash (used) by investing activities...... (6,282) (5,464) (3,025) FINANCING ACTIVITIES: Proceeds from long-term debt..................... 61,000 4,012 -- Principal payments on long-term debt............. (30,987) (4,900) (882) Net borrowings under bank loan agreements........ 1,311 880 (104) Conversion of other assets....................... (701) 1 32 Dividends paid to Commercial Intertech........... (62,331) -- (1,958) -------- ------- ------- Net cash (used) by financing activities...... (31,708) (7) (2,912) Effect of exchange rate changes on cash and cash equivalents....................................... (192) 59 396 -------- ------- ------- Net (decrease)increase in cash and cash equivalents....................................... (1,496) 2,332 2,455 Cash and cash equivalents at beginning of year..... 6,740 4,408 1,953 -------- ------- ------- Cash and cash equivalents at end of year........... $ 5,244 $ 6,740 $ 4,408 ======== ======= ======= Supplemental disclosures: Cash paid during the year for: Interest......................................... $ 694 $ 716 $ 703 Income taxes..................................... 9,732 4,338 1,149
See notes to consolidated financial statements. F-6 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--ORGANIZATION AND ACCOUNTING POLICIES Organization: On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech") initiated a plan to separate its Fluid Purification group subsidiaries and divisions (the "Company" or "CUNO") from the rest of Commercial Intertech's businesses in a tax-free transaction, subject to regulatory approval. The following companies and divisions made up the Fluid Purification Group companies--CUNO Incorporated, USA; CUNO Pacific Pty., Ltd., Australia; Commercial Intertech do Brasil, Ltda., Brazil; CUNO Europe S.A., France; CUNO KK, Japan; CUNO Filtration Asia Pte. Ltd., Singapore; and divisions located in England, Germany and Italy. On July 29, 1996, Commercial Intertech declared a distribution of 100 percent of its interest in the Company to be effected by a distribution on September 10, 1996 of one share of common stock of the Company for each share of Commercial Intertech held by existing stockholders of Commercial Intertech, based on a record date of August 9, 1996. On that date, there were approximately 13,566,000 common shares of Commercial Intertech outstanding. As part of the distribution, the Company's Certificate of Incorporation was amended to provide for the authorization of 2,000,000 shares of $.001 par value Preferred Stock and 50,000,000 shares of $.001 par value Common Stock. No preferred shares were issued with the distribution (see Note D). In conjunction with the reorganization, the Company assumed $30,000,000 of Commercial Intertech's debt which was paid in the form of a dividend. The dividend was paid out of the proceeds from a credit facility entered into by the Company shortly after the reorganization (see Note C). In addition, the Company declared an additional dividend of $35,675,000 payable to Commercial Intertech. Of this amount, $4,612,000 remains payable at October 31, 1996. In addition, CUNO Pacific Pty. Ltd. declared and paid a $1,268,000 dividend in February 1996. The accounts of the Company represent the consolidation of all entities formerly organized as the Fluid Purification Group of Commercial Intertech. The transfer of Commercial Intertech's interests and assets in the business and divisions which comprise the Company has been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests as of the time of the combination. Accordingly, the historical basis is carried over. The Company's stockholders' equity has been retroactively restated as if the reorganization had occurred at the beginning of the earliest period presented. The accompanying consolidated financial statements represent the financial condition of the Company and the results of operations as if the Company was a stand-alone corporation during the years shown. References to subsidiaries include those companies and divisions which have been organized under the consolidated Company. All significant transactions between the Company and its subsidiaries have been eliminated. The Company and Commercial Intertech have entered into a Tax Allocation Agreement providing, among other things, for the respective rights and obligations of Commercial Intertech and the Company concerning tax liabilities (including the allocation of and indemnification for tax liabilities) in connection with the distribution. In addition, the Company and Commercial Intertech have entered into a Distribution and Interim Services Agreement which provides that certain services which have historically been provided to the Company by Commercial Intertech will continue to be provided to the Company following the Distribution Date, at rates specified in such agreement, for a period of up to twelve months following the Distribution Date, with certain exceptions. The Tax Allocation Agreement and Distribution and Interim Services Agreement are not expected to result in expenses materially different from those reflected in the historical financial statements. Commercial Intertech provides certain management and administrative services to the Company. Amounts of Commercial Intertech's general corporate, accounting, legal, and other administrative costs related to such F-7 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) services have been allocated to the Company based on actual dollars spent or the relative percentage of time each department spends providing services to the Company. Management believes that this allocation method provides the Company with a reasonable amount of such expenses. Consolidation: The accounts of the Company and all of its subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions are eliminated in consolidation. Inventories: Inventories are stated at the lower of cost or market. Inventories in the U.S. are primarily valued on the last-in, first-out (LIFO) cost method. The method used for all other inventories is first-in, first-out (FIFO). Approximately 48 percent (49 percent in 1995) of worldwide inventories are accounted for using the LIFO method. Inventories as of October 31 consisted of the following:
1996 1995 ------- ------- (IN THOUSANDS) Raw materials.............................................. $ 2,817 $ 3,063 Work in process............................................ 6,503 6,784 Finished goods............................................. 9,829 11,916 ------- ------- $19,149 $21,763 ======= =======
If all inventories were priced using the FIFO method, which approximates replacement cost, inventories would have been $2,296,000 higher in 1996 and $2,220,000 higher in 1995. Intangibles: Intangible assets at October 31 are summarized as follows:
1996 1995 ------- ------- (IN THOUSANDS) Goodwill, less accumulated amortization (1996--$5,519,000; 1995--$4,944,000)..................... $16,164 $16,739 Other intangibles, less accumulated amortization (1996--$21,833,000; 1995--$20,440,000)................... 3,531 4,924 ------- ------- $19,695 $21,663 ======= =======
Goodwill, which is the excess of cost over the fair value of net assets acquired, generally is amortized on a straight-line basis over 40 years. Other intangibles, including patents, know-how and trademarks, are carried at their appraised value on the acquisition date less accumulated amortization, which is provided using the straight-line method over 10 to 25 years. Properties and Depreciation: Property, plant and equipment are recorded at cost. Buildings and equipment are depreciated over their useful lives, principally by use of the straight- line method, which range from 10 to 40 years for buildings and 2.5 to 20 years for machinery and equipment. F-8 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Impairment of Long-Lived Assets: In the event that facts and circumstances indicate that the carrying value of intangibles and long-lived assets or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset is compared to the asset's carrying amount to determine if a write-down is required. Income Taxes: The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. Deferred income tax assets and liabilities principally arise from differences between the tax basis of the asset or liability and its reported amount in the consolidated financial statements. Deferred tax balances are determined by using provisions of the enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Provisions are made for appropriate income taxes on undistributed earnings of foreign subsidiaries which are expected to be remitted to the parent company in the near term. The cumulative amount of unremitted earnings of subsidiaries, which aggregated approximately $3,000,000 at October 31, 1996, is deemed to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of any unrecognized deferred U.S. tax liability is not practicable because of the complexities associated with its hypothetical calculation. Translation of Foreign Currencies: The financial statements of foreign entities are translated in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, except for those entities located in highly inflationary countries. Under this method, revenue and expense accounts are translated at the average exchange rate for the year while all assets and liability accounts are translated into U.S. dollars at the current exchange rate. Resulting translation adjustments are recorded as a separate component of stockholders' equity and do not affect income determination. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. Cash equivalents consist of time deposits in financial institutions at October 31, 1996 and 1995. Revenue Recognition: Revenue is recognized when the earning process is complete and the risks and rewards of ownership have transferred to the customer, which is considered to have occurred upon shipment of the finished product. Advertising: Advertising costs are expensed as incurred and included in "selling, general and administrative expenses." Advertising expenses were $3,124,000, $2,906,000 and $2,738,000 for 1996, 1995 and 1994, respectively. Distribution and Other Nonrecurring Costs: Distribution and other nonrecurring costs represent incremental costs to the Company associated with the recent reorganization. Such costs are primarily comprised of professional service fees and costs associated with combining operations under a unified management. F-9 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings Per Share: All share and per share information has been retroactively restated to reflect the distribution in a manner similar to a stock split. In determining the weighted average number of common shares outstanding, it was assumed that the shares issued in conjunction with the reorganization were outstanding during each year presented. Fully diluted earnings per share is not presented as the effect of other common stock equivalents on the 1996 earnings per share calculation was not material. Uses of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Newly Issued Accounting Standards: In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued. This standard establishes a fair value method of accounting for or disclosing stock-based compensation plans. In 1997, the Company intends to adopt the disclosure provisions of this standard which requires disclosing the pro forma consolidated net income and earnings per share amounts assuming the fair value method was effective on November 1, 1995. The adoption of the disclosure provisions will not affect consolidated results of operations, financial position, or cash flows. In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." The SOP is effective for fiscal years beginning after December 15, 1996. The SOP does not make changes to existing accounting rules, but it clarifies how existing authoritative guidance on loss contingencies should be applied in determining environmental liabilities. The Company does not believe the SOP will have any material impact on its financial position or results of operations. The Company will be required to report under the SOP in its 1998 financial statements. NOTE B--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following:
1996 1995 ------- ------- (IN THOUSANDS) Land and land improvements................................ $ 6,495 $ 6,672 Buildings................................................. 26,301 27,706 Machinery and equipment................................... 58,749 56,550 Construction in progress.................................. 4,605 2,451 ------- ------- 96,150 93,379 Less depreciation and amortization........................ 47,949 45,448 ------- ------- $48,201 $47,931 ======= =======
Depreciation expense was $5,614,000 in 1996, $5,330,000 in 1995 and $5,395,000 in 1994. F-10 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE C--DEBT Long-term debt obligations are summarized below:
1996 1995 ------- ------ (IN THOUSANDS) Revolving credit............................................ $31,000 $ -- Mortgages................................................... 3,675 4,973 Other....................................................... 59 123 ------- ------ 34,734 5,096 Less current portion........................................ 962 1,036 ------- ------ $33,772 $4,060 ======= ======
During the fourth quarter of fiscal 1996, the Company entered into a $55.0 million bridge loan agreement to pay Commercial Intertech the $30.0 million of debt assumed as part of the Spin-off in the form of a dividend. The Company then replaced the bridge financing with a $60.0 million senior unsecured revolving credit facility. The new senior unsecured revolving credit facility was used to repay all outstanding debt associated with the bridge financing and for other general purposes. The credit facility matures in five years. The Company pays a variable per annum fee on the unused amount of the commitment, payable quarterly in arrears. The rate was 0.125 percent at October 31, 1996. The interest rate on outstanding borrowings at October 31, 1996 was 8.25 percent. The facility has interest options determinable by the Company based upon prime interest or LIBOR rates plus an applicable margin. These significantly reduced rates were not available to the Company on October 31, 1996 because the loan was not fully syndicated. Syndication has been completed and the rate at November 30, 1996 was 5.97 percent. The Company has $7.0 million in outstanding letters of credit at October 31, 1996 which reduces the availability of this credit facility. The credit agreement includes covenants which require the maintenance of certain financial ratios. The Company was in compliance with these covenants at October 31, 1996. The Company is prohibited from declaring dividends during fiscal 1997 and 1998. However, the Company may repurchase a maximum of $5,000,000 in treasury stock during 1997 and 1998 for its employee benefit plans. Mortgages relate to two manufacturing facilities. Two loans relating to a Japanese manufacturing facility bear interest at 1.75 and 1.88 percent, and mature through the year 2000. One of the two loans is secured with property and equipment in Kita-Ibaragi, Japan (net book value at October 31, 1996 - $5,466,000). The second loan is unsecured. A facility located in Enfield, Connecticut collateralizes a loan which bears interest at 5.0 percent, also maturing in the year 2000. The Enfield facility's net book value at October 31, 1996 was $3,885,000. Principal payments due in the five years after October 31, 1996 are:
(IN THOUSANDS) 1997......................................... $ 962 1998......................................... 913 1999......................................... 924 2000......................................... 935 2001......................................... 31,000
The Company had available unused short-term lines of credit in various countries totaling approximately $9.2 million at October 31, 1996. Drawdowns under the unused short-term lines of credit are subject to the lender's approval. F-11 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Outstanding bank loans at October 31, 1996 and 1995 had weighted average interest rates of 1.4 percent and 2.5 percent, respectively. The bank loans and unused short-term lines of credit are payable upon demand and are unsecured. There are no significant commitment fees related to the bank loans or unused lines of credit. NOTE--D CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred Stock, par value $.001 per share. Common Stock In conjunction with the reorganization, 13,565,922 shares of Common Stock were issued excluding shares of Common Stock reserved for issuance upon exercise of options granted under the Company's Stock Option Plans. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock are entitled to one vote per share in all matters to be voted upon by stockholders. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities and the liquidation preferences of any outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities, and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may issue in the future. Preferred Stock The authorized class of Preferred Stock may be issued in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof as the Board of Directors determines. The rights, priorities, preferences, qualifications, limitations and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of Preferred Stock which ranks senior to the Common Stock with respect to the payment of dividends and the distribution of assets upon liquidation. In addition, the Board is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of Preferred Stock are outstanding. Stockholder Rights Plan Prior to the Spin-off, the Company adopted a Stockholder Rights Plan, pursuant to which a preferred share purchase right (a "Right") is associated with, and trades with, each share of Common Stock outstanding. Each Right, when it becomes exercisable, entitles its holder to purchase from the Company one-hundredth of a share of Series A Junior Participating Preferred Stock ("Series A Preferred Stock"), par value $.001 per share, of the Company at a price of $60 per one-hundredth share, subject to adjustment. The Rights are not exercisable until the earlier of (i) the acquisition of 15% or more of the Company's Common Stock by a person or group of affiliated persons (an "Acquiring Person"); or (ii) 10 days following the commencement or announcement of an intention to make a tender or exchange offer which would result in a person or group becoming an Acquiring Person. F-12 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Each holder of a Right will have the right to receive, upon exercise, the number of shares of Common Stock or one-hundredths of a share of Series A Preferred Stock having a value (immediately prior to such triggering event) equal to two times the exercise price of such Right. In the event that the Company is acquired in a merger or acquisition, as defined, each holder of a Right shall have the right to receive, upon exercise, common shares of the acquiring company having a value equal to two times the exercise price of the Right. The Rights expire on August 8, 2006. NOTE E--OPERATING LEASES The Company has entered into certain lease agreements for various facilities and equipment. Rent expense under operating leases was approximately $1,672,000 in 1996, $1,729,000 in 1995, and $1,532,000 in 1994. Future minimum lease payments under noncancellable operating leases with an initial term of one year or more were as follows at October 31, 1996:
(IN THOUSANDS) 1997........................................................ $ 705 1998........................................................ 509 1999........................................................ 380 2000........................................................ 349 2001........................................................ 348 Thereafter.................................................. 234 ------ Total minimum lease payments................................ $2,525 ======
NOTE F--BENEFIT PLANS The Company maintains noncontributory defined benefit plans for substantially all of its U.S. employees. Pension benefits for the hourly employees covered by these plans are expressed as a flat benefit rate times years of continuous service. The salaried employees have previously been included in a defined benefit pension plan sponsored by Commercial Intertech. Benefits for salaried employees are now provided under a successor plan with essentially the same benefits which are based upon a percentage of the employee's average compensation during the preceding ten years, reduced by 50 percent of the Social Security Retirement Benefit. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be deemed appropriate from time to time. The Company also accounts for pension costs under the provisions of SFAS No. 87 for contributory defined benefit pension plans covering its employees in Japan. Benefits under these plans are based on years of service and compensation in the period immediately preceding retirement. Funding is predicated on minimum contributions as required by local laws and regulations plus additional amounts, if any, as may be deemed appropriate. Some employees of other foreign operations also participate in postemployment benefit arrangements not subject to the provisions of SFAS No. 87. F-13 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at October 31, 1996 and 1995 for the Company's U.S. and foreign defined benefit pension plans. Other foreign pension plans do not determine net assets or the actuarial present value of accumulated benefits as calculated and disclosed herein:
1996 1995 -------- -------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligation............................ $(17,546) $(18,426) ======== ======== Accumulated benefit obligation....................... $(20,071) $(20,492) ======== ======== Projected benefit obligation......................... $(24,567) $(26,009) Market value of plan assets.......................... 19,632 16,921 -------- -------- Projected benefit obligation in excess of plan assets.............................................. (4,935) (9,088) Unrecognized net loss................................ 819 2,887 Unrecognized prior service cost...................... 1,132 1,451 Unrecognized net obligation.......................... 567 3,590 Additional minimum liability......................... (408) (2,498) -------- -------- Net pension liability recognized in the consolidated balance sheets...................................... $ (2,825) $ (3,658) ======== ========
Plan assets at October 31, 1996 are invested in publicly traded and restricted mutual funds, various corporate and government bonds, guaranteed income contracts and listed stocks, including common stock of the Company having a market value of $376,000 at that date. Salaried plan assets have been estimated. A summary of the various components of net periodic pension cost for defined benefit plans and cost information for other plans for the three-year period is shown below:
1996 1995 1994 ------ ------ ------ (IN THOUSANDS) Defined benefit plans: Service cost..................................... $1,651 $1,337 $1,095 Interest cost.................................... 1,049 1,065 831 Actual return on plan assets..................... (1,930) (1,785) (462) Net amortization and deferral.................... 1,369 1,145 (150) ------ ------ ------ Net pension expense.............................. 2,139 1,762 1,314 Other plans: Foreign plans.................................... 273 218 184 ------ ------ ------ Total pension expense.......................... $2,412 $1,980 $1,498 ====== ====== ====== Assumptions used in the accounting for the defined benefit plans as of October 31 were: 1996 1995 1994 ------ ------ ------ Domestic plans: Weighted-average discount rate................... 7.8% 7.3% 8.5% Rates of increase in compensation levels......... 5.0 4.5 4.5 Expected long-term rate of return on assets...... 10.0 10.0 10.0 CUNO KK (Japan) plan: Weighted-average discount rate................... 4.0 4.0 5.0 Rates of increase in compensation levels......... 4.0 5.0 5.0 Expected long-term rate of return on assets...... 4.5 5.5 6.0
F-14 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE G--INCOME TAXES The components of income (loss) before income taxes and the provision (benefit) for income taxes are summarized as follows:
1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Income (loss) before income taxes Domestic....................................... $ 3,436 $ 3,652 $(1,037) Foreign........................................ 7,575 5,911 3,080 ------- ------- ------- 11,011 9,563 2,043 Provision (benefit) for income taxes Current Domestic--Federal............................ 1,947 1,466 (3) --State and local........................ 722 368 115 Foreign...................................... 2,960 3,546 1,379 Benefit of operating loss carryforwards........ (336) (683) -- ------- ------- ------- 5,293 4,697 1,491 Deferred Domestic--Federal............................ 79 (633) (376) --State and local........................ 4 (95) (140) Foreign...................................... 42 (507) (739) ------- ------- ------- 125 (1,235) (1,255) ------- ------- ------- 5,418 3,462 236 ------- ------- ------- Net income (loss) Domestic..................................... 684 2,546 (633) Foreign...................................... 4,909 3,555 2,440 ------- ------- ------- $ 5,593 $ 6,101 $ 1,807 ======= ======= =======
A reconciliation of the effective tax rate to the U.S. statutory rate follows:
1996 1995 1994 ---- ---- ----- Statutory U.S. federal income tax rate.................. 35.0% 35.0% 35.0% State and local taxes on income net of domestic federal income tax benefit..................................... 4.4 1.9 (0.8) Impact of foreign subsidiaries on effective rate........ (2.8) 4.0 (36.6) Benefit of operating loss carryforwards................. (3.1) (7.1) -- Nonrecurring distribution costs......................... 11.9 -- -- Goodwill with no U.S. tax benefit....................... 3.1 4.7 21.8 All other............................................... 0.7 (2.3) (7.8) ---- ---- ----- Effective income tax rate............................... 49.2% 36.2% 11.6% ==== ==== =====
F-15 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred income tax liabilities and assets as of October 31 are as follows:
1996 1995 1994 ------ ------ ------ (IN THOUSANDS) Deferred income tax liabilities: Tax over book depreciation.............................. $4,508 $4,925 $5,222 Other................................................... 61 87 103 ------ ------ ------ Total deferred income tax liabilities................. 4,569 5,012 5,325 Deferred income tax assets: Pension liability....................................... 942 684 511 Employee benefits....................................... 1,919 2,209 2,031 Net operating loss carryforwards........................ 1,061 1,832 3,279 Inventory valuation..................................... 1,001 877 538 Net operating loss carryback............................ 1,309 1,309 1,081 Other................................................... 1,061 1,632 1,628 ------ ------ ------ Total deferred income tax assets...................... 7,293 8,543 9,068 Valuation allowance for deferred income tax assets........ 1,061 1,832 3,279 ------ ------ ------ Net deferred income tax assets.......................... 6,232 6,711 5,789 ------ ------ ------ Net deferred income tax assets.......................... $1,663 $1,699 $ 464 ====== ====== ======
The valuation allowance has decreased by $771,000 in 1996, $1,447,000 in 1995 and $931,000 in 1994. The decrease in 1996 is the result of the reorganization of CUNO Latina Ltda. (Brazil), in addition to the utilization of net operating loss carryforwards. Although realization of the net deferred income tax assets is not assured, management believes it is more likely than not that all of the remaining net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced. The tax benefits from net operating loss carryforwards relate to the operation in Brazil and are available indefinitely. F-16 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE H--RELATED PARTY TRANSACTIONS Transactions with Commercial Intertech included in the balance sheets as "Receivables from related party", "Dividends payable to related party" and "Payable to related party" represent a net balance as a result of various transactions between the Company and Commercial Intertech. These accounts are short-term and non-interest bearing. The balance is primarily the result of the Company's declaration of dividends and other payments associated with the reorganization. Prior to the reorganization, the balance was primarily the result of the Company's participation in Commercial Intertech's domestic cash management system as all excess cash was remitted to Commercial Intertech and certain disbursements were made by Commercial Intertech. Also included are transactions relating to the Company's federal income tax liability and other corporate charges. Transactions with other Commercial Intertech subsidiaries are included in the "Other" classification. A summary of transactions follows:
OCTOBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- (IN THOUSANDS) Balance at beginning of year..................... $ 18,767 $15,104 $10,923 Net cash remitted to Commercial Intertech...... 22,145 15,084 11,716 Administrative expenses........................ (11,835) (9,869) (8,607) Payment of dividends........................... (31,063) -- -- Other.......................................... (8,198) (1,552) 1,072 -------- ------- ------- Balance at end of year........................... $(10,184) $18,767 $15,104 ======== ======= =======
NOTE I--PRODUCT DEVELOPMENT COSTS The Company maintains ongoing development programs at various facilities to formulate, design and test new products and product alternatives, and to further develop and significantly improve existing products. Costs associated with these activities, which the Company expenses as incurred, are shown below:
1996 1995 1994 ------ ------ ------ (IN THOUSANDS) Research and development........................... $3,625 $2,483 $1,884 Engineering........................................ 6,236 5,825 5,888 ------ ------ ------ $9,861 $8,308 $7,772 ====== ====== ====== Percent of net sales............................... 5.5% 5.1% 5.4% ====== ====== ======
NOTE J--SEGMENT REPORTING The Company has a single industry segment which is engaged in the design, manufacture and sale of products in the fluid purification industry. In the following table, data in the column labeled "Europe" pertains to subsidiaries operating within the European Economic Community. Data in the "Other" column pertains to operations located in Asia, Australia and Brazil. Operating income represents total revenue less total operating expenses. Identifiable assets are those assets used in the operations of each business or geographic area or which are allocated when used jointly. F-17 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) GEOGRAPHIC AREA
UNITED STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED ------- ------- ------- ------- ----------- ------------ (IN THOUSANDS) 1996 Sales to customers... $86,394 $30,541 $28,778 $33,355 $ -- $179,068 Inter-area sales..... 16,894 1,305 300 41 (18,540) -- ------- ------- ------- ------- -------- -------- Total net sales...... 103,288 31,846 29,078 33,396 (18,540) 179,068 Operating income..... 1,935 2,923 1,269 5,779 -- 11,906 Identifiable assets.. 74,647 17,350 24,430 17,085 133,512 Corporate assets..... 5,244 -------- Total assets......... $138,756 ======== 1995 Sales to customers... $74,893 $27,700 $30,508 $29,598 $ -- $162,699 Inter-area sales..... 16,516 1,423 593 1,470 (20,002) -- ------- ------- ------- ------- -------- -------- Total net sales...... 91,409 29,123 31,101 31,068 (20,002) 162,699 Operating income..... 1,607 2,351 2,533 4,349 -- 10,840 Identifiable assets.. 101,640 11,381 26,595 16,471 -- 156,087 Corporate assets..... 6,740 -------- Total assets......... $162,827 ======== 1994 Sales to customers... $71,964 $21,651 $25,234 $24,262 $ -- $143,111 Inter-area sales..... 12,981 1,069 236 1,197 (15,483) -- ------- ------- ------- ------- -------- -------- Total net sales...... 84,945 22,720 25,470 25,459 (15,483) 143,111 Operating income..... (1,413) 373 2,392 3,626 -- 4,978 Identifiable assets.. 96,174 13,749 25,125 13,615 -- 148,663 Corporate assets..... 4,408 -------- Total assets......... $153,071 ========
Net assets of foreign subsidiaries at October 31, 1996 and 1995 were $24,043,000 and $36,298,000, respectively, of which net current assets were $9,677,000 and $19,558,000 respectively. NOTE K--STOCK OPTIONS AND AWARDS In September 1996, the Company adopted and approved a stock option and award plan which allows for the grant of a number of stock incentive instruments, including nonqualified and incentive stock options, restricted stock, performance shares and stock appreciation rights which may be granted as part of a stock option or as a separate right to the holders of any options previously granted. The plan permits the granting of such stock awards of up to 1,200,000 shares of Common Stock. Accordingly, such shares have been authorized and reserved. The options are exercisable at various dates and have varying expiration dates. Approximately 946,760 shares of common stock are reserved for issuance to key employees and nonemployee directors under the provisions of these option and award plans as of October 31, 1996. Of its 353,961 stock options which were granted during 1996, 81,961 related to Commercial Intertech options held by Company executives prior to the September 10, 1996 distribution date. Such options were issued in a manner to preserve the economic position of the option holders which existed prior to the distribution. No accounting expense was charged to earnings in connection with this issuance. Awards of performance shares totaled 215,500 in 1996. When rights, options or awards are granted, associated compensation expense is accrued from date of grant to the date such options or awards are exercised. F-18 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A summary of the stock option activity follows for 1996:
SHARES EXERCISE UNDER PRICE OPTIONS OPTION (PER SHARE) EXERCISABLE ------- ----------- ----------- Outstanding at October 31, 1995............. -- -- -- Options granted........................... 272,000 $ 15.13 -- Commercial Intertech options exchanged.... 81,961 7.47-10.99 -- Options exercised......................... -- -- -- ------- ----------- --- Outstanding at October 31, 1996............. 353,961 $7.47-15.13 --
Shares available for future grants amounted to approximately 592,800 shares as of October 31, 1996. NOTE L--FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and cash equivalents approximate fair value. Long and short-term debt: The carrying amounts of the Company's borrowings under its short-term credit agreements approximate their fair value. The fair values of the long-term debt are estimated using discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's long-term debt approximates its carrying value because of the variable interest rate of the majority of the debt. The carrying amounts and fair values of the Company's financial instruments follows:
OCTOBER 31, --------------------------------- 1996 1995 ---------------- ---------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- (IN THOUSANDS) Cash and cash equivalents................. $ 5,244 $ 5,244 $ 6,740 $ 6,740 Bank loans................................ 10,690 10,690 10,440 10,440 Long-term debt............................ 34,734 34,719 5,096 5,068
The carrying amounts of accounts and notes receivable, receivables from related party, accounts payable and accrued expenses and amounts payable to related party approximates fair value because of the short-term nature of those transactions. FOREIGN CURRENCY EXCHANGE CONTRACTS: At times, the Company utilizes foreign currency exchange contracts to minimize the impact of currency fluctuations on transactions. At October 31, 1996 and 1995, the Company held contracts for $1,000,000 and $500,000 respectively, with fair values of $1,002,000 and $500,000, respectively. The fair value of foreign currency exchange contracts is estimated based on quoted exchange rates at year end. The forward contracts are an effective hedge against fluctuations in the value of the foreign currency. Therefore, the contracts have no income statement impact. F-19 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE M--DISPOSAL The Company recorded a loss of $1,053,000 during fiscal 1994 on the disposal of assets it had acquired from Bioken Separation, Inc., a manufacturer of proprietary cross-flow membrane devices and systems. The original cost of the acquisition was $2,224,000. NOTE N--QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH 1996 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................................. $41,004 $45,090 $48,542 $44,432 Gross profit............................... 15,748 18,460 20,796 19,216 Distribution and other nonrecurring costs(1).................................. -- -- 2,876 2,688 Net income (loss).......................... 1,851 3,251 630 (139) Earnings per common share.................. 0.14 0.24 0.05 (0.01) FIRST SECOND THIRD FOURTH 1995 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................................. $37,713 $39,630 $43,467 $41,889 Gross profit............................... 13,926 14,995 17,025 16,981 Net income................................. 1,416 1,241 1,419 2,025 Earnings per common share.................. 0.10 0.09 0.10 0.15
- -------- (1) Included in 1996 operating income and net income were distribution and other nonrecurring costs to the Company associated with the recent reorganization. These expenses totaled $4,858 (net of income taxes of $706). The Company incurred $2,876,000 or $0.21 per share during the third quarter of 1996 and $1,982,000 or $0.15 per share during the fourth quarter (net of taxes) for distribution and other nonrecurring costs. Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not necessarily equal the total for the year. F-20 CUNO INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
THREE MONTHS ENDED, JANUARY 31, ---------------------- 1997 1996 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................................... $44,839 $41,004 Less costs and expenses: Cost of products sold................................. 25,638 25,256 Selling, general and administrative expenses.......... 15,274 13,112 ---------- ---------- 40,912 38,368 ---------- ---------- Operating income........................................ 3,927 2,636 Nonoperating income (expense): Interest income....................................... 36 31 Interest expense...................................... (591) (101) Exchange losses....................................... (26) (10) Gain on sale of assets................................ 6 98 Other................................................. (48) (13) ---------- ---------- (623) 5 ---------- ---------- Income before income taxes.............................. 3,304 2,641 Provision for income taxes.............................. 1,239 790 ---------- ---------- Net income.............................................. $ 2,065 $ 1,851 ========== ========== Net income per common share............................. $ 0.15 $ 0.14 ========== ========== Weighted average common shares outstanding.............. 13,809,608 13,565,922 ========== ==========
See notes to unaudited condensed consolidated financial statements. F-21 CUNO INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JANUARY 31, OCTOBER 31, 1997 1996 ----------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets Cash and cash equivalents............................ $ 3,586 $ 5,244 Accounts and notes receivable (less allowances for doubtful accounts of $1,406 and $1,133, respectively)....................................... 36,437 36,944 Inventories.......................................... 19,712 19,149 Deferred income taxes................................ 5,301 5,333 Prepaid expenses and other current assets............ 1,393 1,484 -------- -------- Total current assets............................... 66,429 68,154 Noncurrent assets Intangible assets, net............................... 19,213 19,695 Pension assets....................................... 1,146 1,174 Other noncurrent assets.............................. 1,493 1,532 Property, plant and equipment, net................... 46,817 48,201 -------- -------- Total assets....................................... $135,098 $138,756 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank loans........................................... $ 12,306 $ 10,690 Accounts payable..................................... 11,797 12,719 Accrued payrolls and related taxes................... 6,905 9,084 Accrued expenses..................................... 7,223 6,986 Accrued income taxes................................. 2,269 1,360 Current portion of long-term debt.................... 912 962 Dividends payable to related party................... 2,170 4,612 Payable to related party............................. 6,703 10,184 -------- -------- Total current liabilities.......................... 50,285 56,597 Noncurrent liabilities Long-term debt....................................... 35,577 33,772 Deferred income taxes................................ 3,544 3,670 Retirement benefits.................................. 1,541 1,569 -------- -------- Total noncurrent liabilities....................... 40,662 39,011 Stockholders' equity Preferred stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding........ -- -- Common Stock, $.001 par value; 50,000,000 shares authorized, 13,822,076 and 13,774,568 shares outstanding......................................... 14 14 Additional paid-in-capital........................... 7,262 6,736 Retained earnings.................................... 35,701 33,636 Unearned compensation................................ (3,578) (3,448) Minimum pension liability adjustment................. (811) (811) Translation adjustments.............................. 5,563 7,021 -------- -------- Total stockholders' equity......................... 44,151 43,148 -------- -------- Total liabilities and stockholders' equity......... $135,098 $138,756 ======== ========
See notes to unaudited condensed consolidated financial statements. F-22 CUNO INCORPORATED AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED, JANUARY 31, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.............................................. $ 2,065 $ 1,851 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Depreciation and amortization......................... 1,779 2,032 Gain on sale of equipment............................. (4) -- Provision for unearned compensation................... 404 -- Pension plan credits.................................. -- 309 Change in deferred income taxes....................... (228) 708 Changes in assets and liabilities: Accounts receivable................................... (465) (49) Inventories........................................... (1,196) 278 Prepaid expenses and other current assets............. (604) (30) Payables to related party............................. (3,149) 537 Accounts payable and accrued expenses................. (2,078) (2,787) Accrued income taxes.................................. 891 (1,220) --------- --------- Net cash (used for) provided by operating activities.... (2,585) 1,629 INVESTING ACTIVITIES Proceeds from sale of equipment....................... 39 9 Capital expenditures.................................. (1,001) (1,050) --------- --------- Net cash (used for) investing activities................ (962) (1,041) FINANCING ACTIVITIES Proceeds from long-term debt.......................... 4,000 -- Principal payments on long-term debt.................. (2,049) (46) Net borrowings under bank loan agreements............. 2,371 344 Conversion of other assets............................ -- (558) Dividends paid to related party....................... (2,352) -- --------- --------- Net cash provided by (used for) financing activities.... 1,970 (260) Effect of exchange rate changes on cash and cash equivalents............................................ (81) (240) --------- --------- Net change in cash and cash equivalents................. (1,658) 88 Cash and cash equivalents--beginning of period.......... 5,244 6,740 --------- --------- Cash and cash equivalents--end of period................ $ 3,586 $ 6,828 ========= =========
See notes to unaudited condensed consolidated financial statements. F-23 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997 NOTE A--CUNO ORGANIZATION AND DISTRIBUTION On July 29, 1996, the Board of Directors of Commercial Intertech Corp. ("Commercial Intertech" or "Related Party") approved a plan to spin-off its fluid purification business by declaring a dividend distribution of 100% of the common stock of CUNO Incorporated ("CUNO" or the "Company") on a pro-rata basis to the holders of Commercial Intertech common shares (the "Distribution" or "Spin-off"). On September 10, 1996, the Distribution date, each holder of record of Commercial Intertech common shares as of the close of business on August 9, 1996, the record date for the Distribution, received one share of CUNO Common Stock for every one share of Commercial Intertech common share. No fractional shares of CUNO were issued. In connection with the Spin-off, the Company declared dividends of approximately $35,675,000 payable from the CUNO subsidiaries to the parent (Commercial Intertech), and immediately prior to the Distribution, CUNO assumed $30,000,000 of Commercial Intertech's debt in the form of a dividend. CUNO and Commercial Intertech have entered into a Tax Allocation Agreement in connection with the Distribution. In addition, the companies have entered into a Distribution and Interim Services Agreement which provides that certain services which have historically been provided to CUNO by Commercial Intertech will continue to be provided following the Distribution Date, at rates specified in such agreement, for a period of up to twelve months. NOTE B--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended January 31, 1997 are not necessarily indicative of the results that may be expected for the year ending October 31, 1997. The condensed consolidated balance sheet at October 31, 1996 was derived from the audited consolidated financial statements as of that date. For further information, refer to the consolidated financial statements and footnotes herein. NOTE C--EARNINGS PER SHARE DATA All share and per share information has been retroactively restated to reflect the Distribution in a manner similar to a stock split. In determining the weighted average number of common shares outstanding, it was assumed that the shares issued in conjunction with the reorganization were outstanding during each period presented. Fully diluted earnings per share is not presented as the effect of common stock equivalents was not material. NOTE D--INCOME TAXES The Company's effective income tax rate for the period was 37.5% compared to 30.0% during the first quarter of 1996. The change reflects a loss of certain foreign tax benefits previously realized when the Company was a part of Commercial Intertech's combined tax group. F-24 CUNO INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) NOTE E--INVENTORIES Inventories consisted of the following:
JANUARY 31, OCTOBER 31, 1997 1996 ----------- ----------- (IN THOUSANDS) Raw materials..................................... $ 2,642 $ 2,817 Work-in-process................................... 8,001 6,503 Finished goods.................................... 9,069 9,829 ------- ------- $19,712 $19,149 ======= =======
Inventories are stated at the lower of cost or market. Inventories in the U.S. are primarily valued on the last-in, first-out (LIFO) cost method. The method used for all other inventories is first-in, first-out (FIFO). An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. F-25 CUNO Systems Marketed Worldwide ARTWORK [MAP OF CUNO DISTRIBUTORS & FACILITIES] [FLAG] . Primary Distributors [FLAG] . CUNO Facilities [FLAG] . CUNO Major U.S. Facilities Meriden, Connecticut, World Headquarters Enfield, Connecticut Stafford Springs, Connecticut [FLAG] . CUNO Major International Facilities Calais, France [FLAG] Mazeres, France Blacktown, Australia [FLAG] Mairinque, Brazil Kita-Ibaragi, Japan [FLAG] Republic of Singapore - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPEC- TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SE- CURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UN- LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO- SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 10 Price Range of Common Stock.............................................. 10 Dividend Policy.......................................................... 10 Capitalization........................................................... 11 Selected Financial and Other Data........................................ 12 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 13 Business................................................................. 19 Management............................................................... 29 Summary Compensation Table............................................... 33 Beneficial Owners........................................................ 39 Description of Capital Stock............................................. 40 Certain Related Party Transactions....................................... 43 Shares Eligible for Future Sale.......................................... 44 Underwriting............................................................. 45 Legal Matters............................................................ 46 Experts.................................................................. 46 Available Information.................................................... 46 Index to Consolidated Financial Statements............................... F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,000,000 SHARES LOGO CUNO INCORPORATED COMMON STOCK --------------- PROSPECTUS --------------- ROBERT W. BAIRD & CO. INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. GOLDMAN, SACHS & CO. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of fees and expenses (other than underwriting commissions and discounts) payable by the Registrant in connection with the issuance and distribution of the Common Stock pursuant to the Prospectus contained in this Registration Statement. The Registrant will pay all of these expenses.
APPROXIMATE AMOUNT ----------- Securities and Exchange Commission registration fee............ $ 10,716 NASD filing fee................................................ 4,037 Nasdaq listing fee............................................. 17,500 Accountants' fees and expenses................................. 25,000 Blue Sky fees and expenses..................................... 5,000 Legal fees and expenses........................................ 110,000 Transfer Agent and Registrar fees and expenses................. 5,000 Printing and engraving expenses................................ 110,000 Miscellaneous expenses......................................... 12,747 -------- Total........................................................ $300,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article XII of the Registrant's Amended and Restated Certificate of Incorporation (the "Restated Certificate") provides that the Registrant may indemnify its directors, officers and employees to the full extent permitted by the General Corporation Law of the State of Delaware (the "DGCL"), such indemnification to be evidenced by an indemnification agreement, except that the Registrant shall not be obligated to indemnify any such person (i) with respect to proceedings, claims or actions initiated or brought voluntarily by any such person and not by way of defense or (ii) for any amounts paid in settlement of an action indemnified against by the Registrant without the prior written consent of the Registrant. The Registrant has entered into indemnity agreements with each of its directors. These agreements require the Registrant, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' liability insurance if available on reasonable terms. In addition, Article XII of the Restated Certificate provides that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of his or her fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derives an improper personal benefit. Reference is made to Section 145 of the DGCL, which provides for indemnification of directors and officers in certain circumstances. The Company has obtained a directors' and officers' liability insurance policy which entitles the Company to be reimbursed for certain indemnity payments it is required or permitted to make to its directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES None. II-1 ITEM 16. EXHIBITS (a) Exhibits. 1. Form of Underwriting Agreement. *3.1 Amended and Restated Certificate of Incorporation of the Registrant. *3.2 Amended and Restated Bylaws of the Registrant. 4.1 Specimen stock certificate representing Common Stock. *4.2 Registrant's Rights Agreement dated as of August 19, 1996. 5. Opinion of Katten Muchin & Zavis as to the legality of securities to be registered. *10.1 CUNO Incorporated Non-Employee Directors' Stock Option Plan. *10.2 CUNO Incorporated 1996 Stock Incentive Plan. *10.3 CUNO Incorporated Distributorship Agreement. *10.4 Distribution and Interim Services Agreement by and between CUNO Incor- porated and Commercial Intertech Corp. *10.5 Tax Allocation Agreement by and between CUNO Incorporated and Commer- cial Intertech Corp. *10.6 Employee Benefits and Compensation Allocation Agreement by and between CUNO Incorporated and Commercial Intertech Corp. *10.7 Employment Agreement dated December 3, 1993 between Commercial Intertech Corp. and Mark G. Kachur. **10.8 Termination and Change of Control Agreement dated October 1, 1996 be- tween CUNO Incorporated and Paul J. Powers. **10.9 Termination and Change of Control Agreement dated October 1, 1996 be- tween CUNO Incorporated and Mark G. Kachur. **10.10 Termination and Change of Control Agreement dated October 1, 1996 be- tween CUNO Incorporated and Michael H. Croft. **10.11 Termination and Change of Control Agreement dated October 1, 1996 be- tween CUNO Incorporated and Ronald C. Drabik. **10.12 Termination and Change of Control Agreement dated October 1, 1996 be- tween CUNO Incorporated and Timothy B. Carney. **10.13 Termination and Change of Control Agreement dated October 1, 1996 be- tween CUNO Incorporated and John A. Tomich. 10.14 Credit Agreement dated October 1, 1996 between CUNO Incorporated and Mellon Bank, N.A. **21. Subsidiaries of Registrant. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Katten Muchin & Zavis (contained in Exhibit 5). 24. Power of Attorney (included on the signature page of this registration statement).
- -------- * Incorporated by reference to the Registrant's Registration Statement on Form 10, as amended, filed with the Securities and Exchange Commission on July 29, 1996. ** Incorporated by reference to the Registrant's Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 23, 1997. II-2 (b) Financial Statement Schedule REPORT OF INDEPENDENT AUDITORS Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required or are inapplicable, and therefore have been omitted, or the required information is described in the Consolidated Financial Statements. ITEM 17. UNDERTAKINGS The Registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act of 1933, as amended (the "Act") the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the applicable provisions of the DGCL, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MERIDEN, STATE OF CONNECTICUT, ON THE 26TH DAY OF FEBRUARY, 1997. CUNO Incorporated /s/ Paul J. Powers By: _________________________________ Paul J. Powers Chief Executive Officer POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Ronald C. Drabik, John A. Tomich and Herbert S. Wander, and each of them singly, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities (including his capacity as a director and officer of CUNO Incorporated), to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-1 (including registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933, and all amendments thereto), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto each said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON FEBRUARY 26TH, 1997. SIGNATURE TITLE /s/ Paul J. Powers Chief Executive Officer and Chairman - ------------------------------------- of the Board (principal executive PAUL J. POWERS officer) /s/ Ronald C. Drabik Senior Vice President and Chief - ------------------------------------- Financial Officer (principal RONALD C. DRABIK financial and accounting officer) /s/ Mark G. Kachur President, Chief Operating Officer - ------------------------------------- and Director MARK G. KACHUR /s/ Joel B. Alvord Director - ------------------------------------- JOEL B. ALVORD /s/ Charles L. Cooney Director - ------------------------------------- CHARLES L. COONEY /s/ Norbert A. Florek Director - ------------------------------------- NORBERT A. FLOREK /s/ John M. Galvin Director - ------------------------------------- JOHN M. GALVIN /s/ Gerald C. McDonough Director - ------------------------------------- GERALD C. MCDONOUGH /s/ C. Edward Midgley Director - ------------------------------------- C. EDWARD MIDGLEY /s/ David L. Swift Director - ------------------------------------- DAVID L. SWIFT II-4 INDEX TO EXHIBITS
EXHIBITS -------- 1. Form of Underwriting Agreement. 4.1 Specimen stock certificate representing Common Stock. 5. Opinion of Katten Muchin & Zavis as to the legality of securities to be registered. 10.14 Credit Agreement Dated October 1, 1996 between CUNO Incorporated and Mellon Bank, N.A. 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Katten Muchin & Zavis (contained in Exhibit 5). 24. Power of Attorney (included on the signature page of this registration statement).
(b) Financial Statement Schedule SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Board of Directors CUNO Incorporated We have audited the consolidated financial statements of CUNO Incorporated and subsidiaries as of October 31, 1996 and 1995, and for each of the three years in the period ended October 31, 1996, and have issued our report thereon dated December 16, 1996 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Hartford, Connecticut December 16, 1996 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS CUNO INCORPORATED AND SUBSIDIARIES YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS --------- CHARGED CHARGED BALANCE AT TO COSTS TO OTHER BALANCE AT BEGINNING AND ACCOUNTS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD ----------- ---------- -------- --------- ---------- ---------- Year ended October 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts receivable $1,135,916 $ 21,673 $ 0 $ 24,136(A) $1,133,453 ========== ======== === ======== ========== Valuation allowance for deferred income tax assets 435,000(B) $1,832,000 $ 0 $ 0 $336,000(C) $1,061,000 ========== ======== === ======== ========== Year ended October 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts receivable $ 873,259 $643,310 $ 0 $380,653(A) $1,135,916 ========== ======== === ======== ========== Valuation allowance for deferred income tax assets 764,000(B) $3,279,000 $ 0 $ 0 $683,000(C) $1,832,000 ========== ======== === ======== ========== Year ended October 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts receivable $ 702,025 $193,249 $ 0 $ 22,015(A) $ 873,259 ========== ======== === ======== ========== Valuation allowance for deferred income tax assets $4,210,000 $ 0 $ $931,000(B) $3,279,000 ========== ======== === ======== ==========
- -------- (A) Uncollectible accounts written off, net of recoveries. (B) Increase (decrease) in net operating loss carryforwards for the year. (C) Net operating loss carryforwards utilized or expired. S-2 EX-1 2 UNDERWRITING Exhibit 1 GC&D DRAFT OF 2/27/97 CUNO INCORPORATED 2,000,000 Shares of Common Stock* UNDERWRITING AGREEMENT ---------------------- [March] ___, 1997 ROBERT W. BAIRD & CO. INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. GOLDMAN, SACHS & CO. As Representatives of the Several Underwriters Identified in Schedule I Annexed Hereto c/o Robert W. Baird & Co. Incorporated 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Ladies and Gentlemen: 1. INTRODUCTORY. CUNO Incorporated, a Delaware corporation (the "Company"), proposes to sell 2,000,000 shares (the "Firm Shares") of common stock, $.001 par value per share (the "Common Stock"), to the several underwriters identified in Schedule I annexed hereto (the "Underwriters"), who are acting severally and not jointly. In addition, the Company has agreed to grant to the Underwriters an option to purchase up to 300,000 additional shares of Common Stock (the "Optional Shares") as provided in section 5 hereof. The Firm Shares and, to the extent such option is exercised, the Optional Shares are hereinafter collectively referred to as the "Shares." You, as representatives of the Underwriters (the "Representatives"), have advised the Company that the Underwriters propose to make a public offering of their respective portions of the Shares as soon hereafter as in your judgment is advisable and that the public offering price of the Shares initially will be [$_____] per share. The Company hereby confirms its agreements with the Underwriters as follows: ______________________ * Plus an option to acquire up to 300,000 additional shares of Common Stock from the Company to cover over-allotments. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the several Underwriters, and shall be deemed to represent and warrant to the several Underwriters on each Closing Date (as hereinafter defined), that: (a) Each of the Company and the subsidiaries of the Company that are listed on Exhibit 21 of the Registration Statement (as hereinafter defined) (individually, a "Subsidiary" and collectively, the "Subsidiaries") has been duly incorporated and is validly existing as a corporation and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as presently conducted and described in the Prospectus (as hereinafter defined) and the Registration Statement; each of the Company and the Subsidiaries is duly registered and qualified to do business as a foreign corporation under the laws of, and is in good standing as such in, each jurisdiction in which such registration or qualification is required, except where the failure to so register or qualify would not have a material adverse effect on the condition (financial or other), business, property, net worth, results of operations or prospects of the Company and the Subsidiaries, taken as a whole ("Material Adverse Effect"); and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. Complete and correct copies of the certificate of incorporation or articles of incorporation and by-laws, as amended or restated ("Certificate of Incorporation" and "By- laws," respectively), of the Company and each of the Subsidiaries as in effect on the date hereof have been delivered to the Representatives, and no changes thereto will be made on or subsequent to the date hereof and prior to each Closing Date. (b) The shares of Common Stock issued and outstanding immediately prior to the issuance and sale of the Shares as set forth in the Prospectus have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus and the Registration Statement. There are no preemptive, preferential or, except as described in the Prospectus, other rights to subscribe for or purchase any shares of Common Stock (including the Shares), and no shares of Common Stock have been issued in violation of such rights. The Shares to be issued and sold to the Underwriters have been duly authorized and, when issued, delivered and paid for pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus and the Registration Statement. The delivery of certificates for the Shares to be issued and sold hereunder and payment therefor pursuant to the terms of this Agreement will pass valid title to such Shares to the Underwriters, free and clear of any lien, claim, encumbrance or defect in title. Except as described in the Prospectus, there are no outstanding options, warrants or other rights of any description, contractual or otherwise, entitling any person to be issued any class of security by the Company or any Subsidiary, and there are no holders of Common Stock or other securities of the Company or any Subsidiary, or of securities that are convertible or exchangeable into Common Stock or 2 other securities of the Company or any Subsidiary, that have rights to the registration of such Common Stock or securities under the Securities Act of 1933, as amended, and the regulations thereunder (together, the "Act") or the securities laws or regulations of any of the states (the "Blue Sky Laws"). (c) Except for the Subsidiaries, and as otherwise set forth in the Prospectus, the Company has no subsidiaries and does not own any equity interest in or control, directly or indirectly, any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization. The Company owns directly all of the issued and outstanding capital stock of each Subsidiary, free and clear of any and all liens, claims, encumbrances or security interests, and all such capital stock has been duly authorized and validly issued and is fully paid and nonassessable. There are no outstanding options, warrants or other rights of any description, contractual or otherwise, entitling any person to subscribe for or purchase any shares of capital stock of any Subsidiary. (d) The Company has full corporate power and authority to enter into and perform this Agreement, and the execution and delivery by the Company of this Agreement and the performance by the Company of its obligations hereunder and the consummation of the transactions described herein, have been duly authorized with respect to the Company by all necessary corporate action and will not: (i) violate any provisions of the Certificate of Incorporation or By-laws of the Company or any Subsidiary; (ii) violate any provisions of, or result in the breach, modification or termination of, or constitute a default under, any provision of any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, evidence of indebtedness or other instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary, or any property owned or leased by the Company or any Subsidiary, may be bound or affected; (iii) violate any statute, ordinance, rule or regulation applicable to the Company or any Subsidiary, or order or decree of any court, regulatory or governmental body, arbitrator, administrative agency or instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or any Subsidiary; or (iv) result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary. No consent, approval, authorization or other order of any court, regulatory or governmental body, arbitrator, administrative agency or instrumentality of the United States or other country or jurisdiction is required for the execution and delivery of this Agreement by the Company, the performance of its obligations hereunder or the consummation of the transactions contemplated hereby, except for compliance with the Act, the Securities Exchange Act of 1934, as amended, and the regulations thereunder (together, the "Exchange Act"), the Blue Sky Laws applicable to the public offering of the Shares by the several Underwriters and the clearance of such offering and the underwriting arrangements evidenced hereby with the National Association of Securities Dealers, Inc. (the "NASD"). This Agreement has been duly executed and delivered by and on behalf 3 of the Company and is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms. (e) A registration statement on Form S-1 (Reg. No. 333-_______) with respect to the Shares, including a preliminary form of prospectus, has been carefully prepared by the Company in conformity with the requirements of the Act and has been filed with the Securities and Exchange Commission (the "Commission"). Such registration statement, as finally amended and revised at the time such registration statement was or is declared effective by the Commission (including the information contained in the form of final prospectus, if any, filed with the Commission pursuant to Rule 424(b) and Rule 430A under the Act and deemed to be part of the registration statement if the registration statement has been declared effective pursuant to Rule 430A(b)) and as thereafter amended by post-effective amendment, if any, is herein referred to as the "Registration Statement." The related final prospectus in the form first filed with the Commission pursuant to Rule 424(b) or, if no such filing is required, as included in the Registration Statement, or any supplement thereto, is herein referred to as the "Prospectus." The prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and each such prospectus as amended from time to time until the date of the Prospectus, is referred to herein as the "Preliminary Prospectus." The Company has prepared and filed such amendments to the Registration Statement since its initial filing with the Commission, if any, as may have been required to the date hereof, and will file such additional amendments thereto as may hereafter be required. There have been delivered to the Representatives three signed copies of the Registration Statement and each amendment thereto, if any, together with three copies of each exhibit filed therewith, and such number of conformed copies for each of the Underwriters of the Registration Statement and each amendment thereto, if any (but without exhibits), and of each Preliminary Prospectus and of the Prospectus as the Representatives has requested. (f) Neither the Commission nor any state securities commission has issued any order preventing or suspending the use of any Preliminary Prospectus, nor, to the knowledge of the Company, have any proceedings for that purpose been initiated or threatened, and each Preliminary Prospectus filed with the Commission as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto complied when so filed with the requirements of the Act and, as of its date, did not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As of the effective date of the Registration Statement, and at all times subsequent thereto up to each Closing Date, the Registration Statement and the Prospectus contained or will contain all statements that are required to be stated therein in accordance with the Act and conformed or will conform in all respects to the requirements of the Act, and neither the Registration Statement nor the Prospectus included or will include any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated 4 therein or necessary to make the statements therein not misleading. Neither the Company, nor any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company, has distributed or will distribute prior to each Closing Date any offering material in connection with the offering and sale of the Shares other than a Preliminary Prospectus, the Prospectus, the Registration Statement or other materials permitted by the Act and provided to the Representatives. (g) Ernst & Young LLP, which has expressed its opinion with respect to the consolidated financial statements and schedules filed with the Commission and included as a part of each Preliminary Prospectus, the Prospectus or the Registration Statement are independent accountants as required by the Act. (h) The consolidated financial statements and the related notes thereto included in each Preliminary Prospectus, the Prospectus and the Registration Statement present fairly the financial position, results of operations and cash flows of the Company as of their respective dates or for the respective periods covered thereby, all in conformity with generally accepted accounting principles consistently applied throughout the periods involved. The financial statement schedules, if any, included in the Registration Statement present fairly the information required to be stated therein on a basis consistent with the consolidated financial statements of the Company contained therein. The Company had an outstanding capitalization as set forth in the Registration Statement and under "Capitalization" in the Prospectus as of the date indicated therein, and there has been no material change thereto since such date except as disclosed in the Prospectus. The financial and statistical information and data relating to the Company in each Preliminary Prospectus, the Prospectus and the Registration Statement are accurately presented and prepared on a basis consistent with the audited consolidated financial statements and books and records of the Company. The consolidated financial statements and schedules and the related notes thereto included in each Preliminary Prospectus, the Prospectus or the Registration Statement are the only such financial statements and schedules required under the Act to be set forth therein. (i) Neither the Company nor any Subsidiary is, nor with the giving of notice or passage of time or both, would be, in violation or in breach of: (i) its respective Certificate of Incorporation or By-laws; (ii) any statute, ordinance, order, rule or regulation applicable to the Company or such Subsidiary; (iii) any order or decree of any court, regulatory body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or such Subsidiary; or (iv) any provision of any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, evidence of indebtedness or other instrument to which the Company or such Subsidiary is a party or by which any property owned or leased by the Company or such Subsidiary is bound or affected. Neither the Company nor any Subsidiary has received notice of any violation of any applicable statute, ordinance, order, rule or regulation applicable to the Company or any Subsidiary. The 5 Company and each Subsidiary have obtained and hold, and are in compliance with, all permits, certificates, licenses, approvals, registrations, franchises, consents and authorizations of governmental or regulatory authorities required under all laws, rules and regulations in connection with their businesses (hereinafter "permit" or "permits"), and all of such permits are in full force and effect; and the Company and each Subsidiary have fulfilled and performed all of their respective obligations with respect to each such permit and no event has occurred which would result in, or after notice or lapse of time would result in, revocation or termination of any such permit or result in any other impairment of the rights of the holder of such permit. Neither the Company nor any Subsidiary is or has been (by virtue of any action, omission to act, contract to which it is a party or other occurrence) in violation of any applicable foreign, federal, state, municipal or local statutes, laws, ordinances, rules, regulations or orders (including those relating to environmental protection, occupational safety and health and equal employment practices) heretofore or currently in effect. (j) There are no legal or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened to which the Company or any Subsidiary is or may be a party or to which any property owned or leased by the Company or any Subsidiary is or may be subject, including, without limitation, any such proceedings that are related to environmental or employment discrimination matters, which are required to be described in the Registration Statement or the Prospectus which are not so described, or which question the validity of this Agreement or any action taken or to be taken pursuant hereto. Except as described in the Registration Statement or the Prospectus, neither the Company nor any Subsidiary: (i) is in violation of any statute, ordinance, rule or regulation, or any decision, order or decree of any court, regulatory body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or such Subsidiary relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environmental or human exposure to hazardous or toxic substances (collectively, "environmental laws"); (ii) owns or operates any real property contaminated with any substance that is subject to any environmental laws; (iii) is liable for any off-site disposal or contamination pursuant to any environmental laws; or (iv) is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim could have a Material Adverse Effect. (k) There is no transaction, relationship, obligation, agreement or other document required to be described in the Registration Statement or the Prospectus or to be filed or deemed to be filed as an exhibit to the Registration Statement by the Act, which has not been described or filed as required. All such contracts or agreements to which the Company or any Subsidiary is a party have been duly authorized, executed and delivered by the Company or such Subsidiary, constitute valid and binding agreements of the Company or such Subsidiary, and are enforceable by and against the Company or such Subsidiary, in accordance with the respective terms thereof. 6 (l) The Company or a Subsidiary has good and valid title to all property and assets reflected as owned by the Company or such Subsidiary in the Company's consolidated financial statements included in the Registration Statement (or elsewhere in the Registration Statement or the Prospectus), free and clear of all liens, claims, mortgages, security interests or other encumbrance of any kind or nature whatsoever except those, if any, reflected in such financial statements (or elsewhere in the Registration Statement or the Prospectus). All property (real and personal) held or used by the Company or a Subsidiary under leases, licenses, franchises or other agreements is held by the Company or such Subsidiary under valid, subsisting, binding and enforceable leases, franchises, licenses or other agreements. (m) Neither the Company nor any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company has taken or will take, directly or indirectly, any action designed to cause or result in, or which constituted, or which could cause or result in, stabilization or manipulation, under the Exchange Act or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Common Stock. (n) Except as described in the Registration Statement or the Prospectus, since the respective dates as of which information is given in the Registration Statement or the Prospectus and prior to each Closing Date: (i) neither the Company nor any Subsidiary has or will have incurred any liability or obligation, direct or contingent, or entered into any transaction, that is material to the Company, except as in the ordinary course of business; (ii) the Company has not and will not have paid or declared any dividend or other distribution with respect to its capital stock and neither the Company nor any Subsidiary is or will be delinquent in the payment of principal or interest on any outstanding debt obligation; and (iii) there has not been and will not have been any change in the capital stock, any material change in the indebtedness of the Company or any Subsidiary, or any change or development involving or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business. (o) Neither the Company nor any person that controls, is controlled by (including the Subsidiaries) or is under common control with the Company has, directly or indirectly: (i) made any unlawful contribution to any candidate for political office, or failed to disclose fully any contribution in violation of law; or (ii) made any payment to any federal, state or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof or applicable foreign jurisdictions. (p) The Company or a Subsidiary owns or possesses adequate rights to use all patents, patent applications, trademarks, service marks, trade names, trademark 7 registrations, service mark registrations, copyrights and licenses presently used in or necessary for the conduct of its business or ownership of its properties, and neither the Company nor any Subsidiary has violated or infringed upon the rights of others, or received any notice of conflict with the asserted rights of others, in respect thereof. (q) The Company or a Subsidiary has in place and effective such policies of insurance, with limits of liability in such amounts, as are normal and prudent in the ordinary course of the business of the Company and its Subsidiaries. (r) No labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent, and neither the Company nor any Subsidiary is a party to any collective bargaining agreement and, to the knowledge of the Company, no union organizational attempts have occurred or are pending. There has been no change in the relationship of the Company or any Subsidiary with any of its principal suppliers, manufacturers, contractors or customers resulting in or that could result in a Material Adverse Effect. (s) Neither the Company nor any Subsidiary is an "investment company", an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended. (t) All federal, state and local tax returns required to be filed by or on behalf of the Company or any Subsidiary have been filed (or are the subject of valid extension) with the appropriate federal, state and local authorities, and all such tax returns, as filed, are accurate in all material respects; all federal, state and local taxes (including estimated tax payments) required to be shown on all such tax returns or claimed to be due from or with respect to the business of the Company or such Subsidiary have been paid or reflected as a liability on the financial statements of the Company or such Subsidiary for appropriate periods; all deficiencies asserted as a result of any federal, state or local tax audits have been paid or finally settled, and no issue has been raised in any such audit which, by application of the same or similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so audited; no state of facts exist or has existed which would constitute grounds for the assessment of any tax liability with respect to the periods which have not been audited by appropriate federal, state or local authorities; there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any federal, state or local tax return of any period; and neither the Company nor any Subsidiary has ever been a member of an affiliated group of corporations filing consolidated federal income tax returns, other than a group of which the Company is and has been the common parent. (u) [EXCEPT FOR THE COMPANY'S [NAME EACH GROUP HEALTH, LIFE, DISABILITY OR OTHER WELFARE PLAN] AND ITS [NAME ANY CONTRIBUTORY OR NONCONTRIBUTORY DEFINED 8 CONTRIBUTION RETIREMENT PLAN AND DEFINED BENEFIT RETIREMENT PLANS] (COLLECTIVELY, THE "PLANS"),] neither the Company nor any Subsidiary is a participating employer or plan sponsor with respect to any employee pension benefit plan as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any employee welfare benefit plan as defined in Section 3(1) of ERISA, including, without limitation, any multiemployer welfare or pension plan. With respect to the Plans, the Company is in substantial compliance with all applicable regulations, including ERISA and the Code. With respect to each defined benefit retirement plan, such plan does not have benefit liabilities (as defined in Section 4001(a)(16) of ERISA) exceeding the assets of the plan. The Company or the administrator of each of the Plans, as the case may be, has timely filed the reports required to be filed by ERISA and the Code in connection with the maintenance of the Plans, and no facts, including, without limitation, any "reportable event" as defined by ERISA and the regulations thereunder, exist in connection with the Plans which, under applicable law, would constitute grounds for the termination of any of the Plans by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any of the Plans. (v) The Company and each Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of consolidated financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) None of the Company, any Subsidiary, any officer or director of the Company or any Subsidiary, or any person who owns, of record or beneficially, any class of securities issued by the Company is: (i) an officer, director or partner of any brokerage firm, broker or dealer that is a member of the NASD ("NASD Member"); or (ii) directly or indirectly, a "person associated with" an NASD member or an "affiliate" of an NASD member, as such terms are used in the NASD Rules of Fair Practice. In addition, neither the Company nor any Subsidiary has issued or transferred any Common Stock, warrants, options or other securities, or any other items of value, to any of the Underwriters or any "related person" of any Underwriter, as such term is used in the NASD Rules of Fair Practice, except as provided in this Agreement. (x) The Common Stock has been registered pursuant to Section 12(g) of the Exchange Act. The Shares have been listed on the National Market System of The Nasdaq Stock Market ("Nasdaq"), subject to notice of issuance. 9 (y) Neither the Company, any Subsidiary nor any affiliate of the Company or such Subsidiary does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075 of the Florida Statutes, and the Company agrees to comply with such Section if, prior to the completion of the distribution of the Shares, the Company, any Subsidiary or any affiliate of the Company or such Subsidiary commences doing such business. (z) All offers and sales of the securities of the Company and each Subsidiary prior to the date hereof were made in compliance with the Act and all other applicable state and federal laws or regulations. (aa) The Company has obtained for the benefit of the Underwriters the agreement (the "Lock-up Agreement"), enforceable by Robert W. Baird & Co. Incorporated ("Baird"), of each of the officers and directors of the Company, that for a period of 90 days after the date of the Prospectus, such persons will not, without the prior written consent of Baird, directly or indirectly, offer, sell or otherwise dispose of, contract to sell or otherwise dispose of, or cause or in any way permit to be sold or otherwise disposed of, any shares of Common Stock or any other Company capital stock, rights to purchase Common Stock or any other Company capital stock or securities or instruments convertible into or exchangeable for Common Stock or other Company capital stock. A certificate signed by any officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. A certificate delivered by the Company to its counsel for purposes of enabling such counsel to render the opinion referred to in section 8(d) will also be furnished to the Representatives and counsel for the Underwriters and shall be deemed to be additional representations and warranties to the Underwriters by the Company as to the matters covered thereby. 3. Representation of Underwriters. The Representatives will act as the representatives for the several Underwriters in connection with the public offering of the Shares, and any action under or in respect of this Agreement taken by the Representatives will be binding upon all of the Underwriters. 4. Information Furnished By The Underwriters. The information set forth in the last paragraph on the outside front cover page of the Prospectus concerning the terms of the offering by the Underwriters, the paragraph on the inside front cover page of the Prospectus relating to stabilization practices and passive market making, and the concession and reallowance amounts appearing under the caption "Underwriting" in the Prospectus constitute all of the information furnished to the Company by and on behalf of the Underwriters for use in connection with the preparation of the Registration Statement and the Prospectus, as such information is referred to in this Agreement. 10 5. Purchase, Sale and Delivery of Shares. ------------------------------------- (a) On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters identified in Schedule I annexed hereto 2,000,000 Firm Shares, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company the number of Firm Shares as hereinafter set forth at the price per share of $__________. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of full Firm Shares which (as nearly as practicable in full shares as determined by the Representatives) bears the same proportion to the number of Firm Shares to be sold by the Company as the number of shares set forth opposite the name of such Underwriter in Schedule I annexed hereto bears to the total number of Firm Shares to be purchased by all of the Underwriters under this Agreement. (b) On the First Closing Date (as hereinafter defined), the Company will deliver to the Representatives, at the offices of Robert W. Baird & Co. Incorporated, 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, or through the facilities of The Depository Trust Company, for the accounts of the several Underwriters, certificates representing the Firm Shares to be sold by it against payment in Milwaukee, Wisconsin of the purchase price therefor by certified or official bank check or checks in New York Clearing House (next day) funds payable to the order of the Company with respect to the Firm Shares being sold by the Company. As referred to in this Agreement, the "First Closing Date" shall be on the third full business day after the date of the Prospectus, at 9:00 a.m., Milwaukee, Wisconsin time, or at such other date or time not later than ten full business days after the date of the Prospectus as the Representatives and the Company may agree. The certificates for the Firm Shares to be so delivered will be in denominations and registered in such names as the Representatives request by notice to the Company, prior to the First Closing Date, and such certificates will be made available for checking and packaging at 9:00 a.m., Milwaukee, Wisconsin time on the first full business day preceding the First Closing Date at a location to be designated by the Representatives. (c) In addition, on the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company hereby agrees to sell to the Underwriters, and the Underwriters, severally and not jointly, shall have the right at any time within thirty days after the date of the Prospectus to purchase up to 300,000 Optional Shares from the Company at the purchase price per share to be paid for the Firm Shares, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised upon notice by the Representatives to the Company, within thirty days after the date of the Prospectus setting forth the aggregate number of Optional Shares to be purchased by the Underwriters and sold by the Company, the names and denominations in which the certificates for such shares are to be registered and the date 11 and place at which such certificates will be delivered. Such date of delivery (the "Second Closing Date") shall be determined by the Representatives, provided that the Second Closing Date, which may be the same as the First Closing Date, shall not be earlier than the First Closing Date and, if after the First Closing Date, shall not be earlier than three nor later than ten full business days after delivery of such notice to exercise. Certificates for the Optional Shares will be made available for checking and packaging at 9:00 a.m., Milwaukee, Wisconsin time, on the first full business day preceding the Second Closing Date at a location to be designated by the Representatives. The manner of payment for and delivery of (including the denominations of and the names in which certificates are to be registered) the Optional Shares shall be the same as for the Firm Shares. (d) The Representatives have advised the Company that each Underwriter has authorized the Representatives to accept delivery of the Shares and to make payment therefor. It is understood that the Representatives, individually and not as representatives of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligation under this Agreement. As referred to in this Agreement, "Closing Date" shall mean either the First Closing Date or the Second Closing Date. 6. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: (a) If the effective time of the Registration Statement is not prior to the execution and delivery of this Agreement, the Company will use its best efforts to cause the Registration Statement to become effective at the earliest possible time and, upon notification from the Commission that the Registration Statement has become effective, will so advise the Representatives and counsel to the Underwriters promptly and any Prospectus included in the Registration Statement shall be in a form approved by the Representatives. If the effective time of the Registration Statement is prior to the execution and delivery of this Agreement and any information shall have been omitted therefrom in reliance upon Rule 430A, the Company, at the earliest possible time, will furnish the Representatives with a copy of the Prospectus to be filed by the Company with the Commission to comply with Rule 424(b) and Rule 430A under the Act and, if the Representatives do not object to the contents thereof, will comply with such Rules. Upon compliance with such Rules, the Company will so advise the Representatives promptly. The Company will advise the Representatives and counsel to the Underwriters promptly of the issuance by the Commission or any state securities commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, or of any notification of the suspension of qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceedings for that purpose, and will also advise the Representatives and counsel to 12 the Underwriters promptly of any request of the Commission for amendment or supplement of the Registration Statement, of any Preliminary Prospectus or of the Prospectus, or for additional information, and the Company will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), to any Preliminary Prospectus or to the Prospectus (including a prospectus filed pursuant to Rule 424(b)) if the Representatives have not been furnished with a copy prior to such filing (with a reasonable opportunity to review such amendment or supplement) or if the Representatives object to such filing. (b) If, at any time when a prospectus relating to the Shares is required by law to be delivered in connection with sales by an Underwriter or dealer, any event occurs as a result of which the Prospectus would include an untrue statement of a material fact, or would omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to supplement the Prospectus to comply with the Act, the Company promptly will advise the Representatives and counsel to the Underwriters thereof and will promptly prepare and file with the Commission, at its expense, an amendment to the Registration Statement which will correct such statement or omission or an amendment which will effect such compliance; and, if any Underwriter is required to deliver a prospectus after the effective date of the Registration Statement, the Company, upon request of the Representatives, will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act. The Company consents to the use, in accordance with the provisions of the Act and with the Blue Sky Laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, of each Preliminary Prospectus. (c) Neither the Company nor any Subsidiary will, prior to the Second Closing Date, if any, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business, or enter into any transaction with an "affiliate," as defined in Rule 405 under the Act, which is required to be described in the Prospectus pursuant to Item 404 of Regulation S-K under the Act, except as described in the Prospectus. (d) Neither the Company nor any Subsidiary will, prior to the Second Closing Date, if any, acquire any of the Common Stock nor will the Company declare or pay any dividend or make any other distribution upon its Common Stock payable to stockholders of record on a date prior to such earlier date, except as described in the Prospectus. (e) The Company will make generally available to its security holders and the Representatives an earnings statement as soon as practicable, but in no event later than sixty days after the end of its fiscal quarter in which the first anniversary of the effective date of the Registration Statement occurs, covering a period of twelve consecutive calendar months beginning after the effective date of the Registration Statement, which 13 will satisfy the provisions of the last paragraph of Section 11(a) of the Act and Rule 158 promulgated thereunder. (f) During such period as a prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, the Company will furnish to the Representatives, at the expense of the Company, copies of the Registration Statement, the Prospectus, any Preliminary Prospectus and all amendments and supplements to any such documents, in each case as soon as available and in such quantities as the Representatives may reasonably request. (g) The Company will apply the net proceeds from the sale of the Shares to be sold by it hereunder for the purposes set forth in the Prospectus, and will timely file Form SR, and any amendments thereto, as required by Rule 463 under the Act. (h) The Company will cooperate with the Representatives and counsel to the Underwriters in qualifying or registering the Shares for sale under the Blue Sky Laws of such jurisdictions as the Representatives designates, and will continue such qualifications or registrations in effect so long as reasonably requested by the Representatives to effect the distribution of the Shares. The Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified. In each jurisdiction where any of the Shares shall have been qualified as provided above, the Company will file such reports and statements as may be required to continue such qualification for a period of not less than one year from the date of the Prospectus. The Company shall promptly prepare and file with the Commission, from time to time, such reports as may be required to be filed by the Act and the Exchange Act, and the Company shall comply in all respects with the undertakings given by the Company in connection with the qualification or registration of the Shares for offering and sale under the Blue Sky Laws. (i) During the period of three years from the date of the Prospectus, the Company will furnish to each of the Representatives and to each of the other Underwriters who may so request, as soon as available, each report, statement or other document of the Company or its Board of Directors mailed to its stockholders or filed with the Commission, and such other information concerning the Company as the Representatives may reasonably request. (j) The Company shall deliver the requisite notice of issuance to Nasdaq and shall take all necessary or appropriate action within its power to maintain the authorization for trading of the Common Stock as a Nasdaq National Market security, or take such action to authorize the Common Stock for listing on the New York Stock Exchange or the American Stock Exchange, for a period of at least thirty-six months after the date of the Prospectus. 14 (k) Except for the issuance and sale by the Company of Common Stock upon exercise of presently existing outstanding stock options, the sale of the Shares to be sold by the Company pursuant to this Agreement, and the grant of stock options pursuant to the Company's 1996 Stock Incentive Plan and Non-Employee Directors' Stock Plan, copies of which are filed as exhibits to or incorporated by reference in the Registration Statement, and provided that none of such options shall be exercisable during the 90-day period herein described, the Company shall not, for a period of 90 days after the date of the Prospectus, without the prior written consent of Baird, directly or indirectly, offer, sell or otherwise dispose of, contract to sell or otherwise dispose of, or cause or in any way permit to be sold or otherwise disposed of, any: (i) shares of Common Stock; (ii) rights to purchase shares of Common Stock; or (iii) securities that are convertible or exchangeable into shares of Common Stock. (l) The Company will maintain a transfer agent and, if required by law or the rules of The Nasdaq Stock Market or any national securities exchange on which the Common Stock is listed, a registrar (which, if permitted by applicable laws and rules, may be the same entity as the transfer agent) for its Common Stock. The Company shall, as soon as practicable after the date hereof, use its best efforts to obtain listing in Standard and Poor's Stock Guide, or such other recognized securities manuals for which it may qualify for listing, and the Company shall use its best efforts to maintain such listings for at least five years after the First Closing Date. (m) If at any time when a prospectus relating to the Shares is required to be delivered under the Act, any rumor, publication or event relating to or affecting the Company shall occur as a result of which, in the opinion of Baird, the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to the Prospectus), the Company will, after written notice from Baird advising the Company of any of the matters set forth above, promptly consult with Baird concerning the advisability and substance of, and, if the Company and Baird determine that it is appropriate, disseminate, a press release or other public statement responding to or commenting on, such rumor, publication or event. (n) The Company will comply or cause to be complied with the conditions to the obligations of the Underwriters in section 8 hereof. 7. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective, or if this Agreement is terminated for any reason, the Company will pay the costs, fees and expenses incurred in connection with the public offering of the Shares. Such costs, fees and expenses to be paid by the Company include, without limitation: (a) All costs, fees and expenses (excluding the expenses incurred by the Underwriters and the legal fees and disbursements of counsel for the Underwriters, but 15 including such fees and disbursements described in subsection (b) of this section 7) incurred in connection with the performance of the Company's obligations hereunder, including without limiting the generality of the foregoing: the registration fees related to the filing of the Registration Statement with the Commission; the fees and expenses related to the quotation of the Shares on Nasdaq or other national securities exchange; the fees and expenses of the Company's counsel, accountants, transfer agent and registrar; the costs and expenses incurred in connection with the preparation, printing, shipping and delivery of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all agreements and supplements provided for herein, this Agreement [and the Preliminary and Supplemental Blue Sky Memoranda], including, without limitation, shipping expenses via overnight delivery and/or courier service to comply with applicable prospectus delivery requirements; and the costs and expenses associated with the production of materials related to, and travel expenses incurred by the management of the Company in connection with, the various meetings to be held between the Company's management and prospective investors. (b) All registration fees and expenses, including legal fees and disbursements of counsel for the Underwriters incurred in connection with qualifying or registering all or any part of the Shares for offer and sale under the Blue Sky Laws and the clearing of the public offering and the underwriting arrangements evidenced hereby with the NASD. (c) All fees and expenses related to printing of the certificates for the Shares, and all transfer taxes, if any, with respect to the sale and delivery of the Shares. 8. Conditions to the Obligations of the Underwriters. The obligations of the several Underwriters under this Agreement shall be subject to the accuracy of the representations and warranties on the part of the Company herein set forth as of the date hereof and as of each Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following additional conditions, unless waived in writing by the Representatives: (a) The Registration Statement shall have been declared effective by the Commission not later than 5:30 p.m., Washington, D. C. time, prior to the date of this Agreement, or such later time as shall have been consented to by the Representatives, which consent shall be deemed to have been given if the Registration Statement shall have been declared effective on or before the date and time requested in the acceleration request submitted on behalf of the Representatives pursuant to Rule 461 under the Act; all filings required by Rules 424(b) and 430A under the Act shall have been timely made; no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission or any state securities commission nor, to the knowledge of the Company, shall any proceedings for that purpose have been initiated or threatened; and any request of the Commission or any state securities commission for inclusion of 16 additional information in the Registration Statement, or otherwise, shall have been complied with to the satisfaction of the Representatives. (b) Since the dates as of which information is given in the Registration Statement: (i) there shall not have occurred any change or development involving, or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business; (ii) the Company shall not have sustained any loss or interference from any labor dispute, strike, fire, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree; and (iii) there shall not have occurred any change in the long-term debt or capital stock of the Company. the effect of which on the Company, in any such case described in clause (i) or (ii) above, is in the opinion of the Representatives so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus. (c) The Representatives shall not have advised the Company that the Registration Statement or the Prospectus contains an untrue statement of fact that, in the opinion of the Representatives or counsel for the Underwriters, is material, or omits to state a fact that, in the opinion of the Representatives or such counsel, is material and is required to be stated therein or necessary to make the statements therein not misleading. (d) The Representatives shall have received an opinion of Katten Muchin & Zavis, counsel for the Company addressed to the Representatives, as the representatives of the Underwriters, and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and conduct its business as presently conducted and as described in the Prospectus and the Registration Statement; the Company is duly registered and qualified to do business as a foreign corporation under the laws of, and is in good standing as such in, each jurisdiction in which such registration or 17 qualification is required, except where the failure to so register or qualify would not have a Material Adverse Effect; (ii) The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred Stock, par value $.001 per share, and all such stock conforms as to legal matters to the descriptions thereof in the Prospectus and the Registration Statement; (iii) The issued and outstanding shares of capital stock of the Company immediately prior to the issuance and sale of the Shares have been duly authorized and validly issued, are fully paid and nonassessable, and there are no preemptive, preferential or, except as described in the Prospectus, other rights to subscribe for or purchase any shares of capital stock of the Company, and to such counsel's knowledge, no shares of capital stock of the Company have been issued in violation of such rights; (iv) Except for the Subsidiaries, the Company has no subsidiaries, and the Company does not own any equity interest in or control, directly or indirectly, any other corporation, limited liability company, partnership, joint venture, association, trust or other business organization except as described in the Prospectus and the Registration Statement; each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as presently conducted and as described in the Prospectus and the Registration Statement; each Subsidiary is duly registered or qualified to do business as a foreign corporation under the laws of, and is in good standing as such in, each jurisdiction in which such registration or qualification is required, except where the failure to so register or qualify would not have a Material Adverse Effect; the issued and outstanding shares of the capital stock of each Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and there are no preemptive, preferential or, to such counsel's knowledge, other rights to subscribe for or purchase any shares of capital stock of any Subsidiary, and to such counsel's knowledge, no shares of capital stock of any Subsidiary have been issued in violation of such rights; the Company owns directly and, to such counsel's knowledge, beneficially all of the issued and outstanding capital stock of each Subsidiary, free and clear of any and all liens, claims, encumbrances and security interests; (v) The certificates for the Shares to be delivered hereunder are in due and proper form and conform to the requirements of applicable law; and when duly countersigned by the Company's transfer agent, and delivered to the 18 Representatives or upon the order of the Representatives against payment of the agreed consideration therefor in accordance with the provisions of this Agreement, the Shares to be sold by the Company represented thereby will be duly authorized and validly issued, fully paid and nonassessable, and free of any preemptive, preferential or other rights to subscribe for or purchase shares of Common Stock; (vi) The Registration Statement has become effective under the Act, and to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or are threatened under the Act or any Blue Sky Laws; the Registration Statement and the Prospectus and any amendment or supplement thereto (except for the financial statements and other statistical or financial data included therein as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act; no facts have come to the attention of such counsel which lead it to believe that either the Registration Statement or the Prospectus or any amendment or supplement thereto contains any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of the First Closing Date or the Second Closing Date, as the case may be, contained any untrue statement of a material fact or omitted or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except for the financial statements and other financial data included therein as to which such counsel need express no opinion); to such counsel's knowledge, there are no legal or governmental proceedings pending or threatened, including, without limitation, any such proceedings that are related to environmental or employment discrimination matters, required to be described in the Registration Statement or the Prospectus which are not so described or which question the validity of this Agreement or any action taken or to be taken pursuant thereto, nor is there any transaction, relationship, agreement, contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement by the Act, which is not described or filed as required; (vii) The Company has full corporate power and authority to enter into and perform this Agreement; the performance of the Company's obligations hereunder and the consummation of the transactions described herein have been duly authorized by the Company by all necessary corporate action and this Agreement has been duly executed and delivered by and on behalf of the Company; no consent, approval, authorization or other order or decree of any court, regulatory or governmental body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having 19 jurisdiction over the Company is required for the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement (except for compliance with the Act, the Exchange Act, applicable Blue Sky Laws and the clearance of the underwriting arrangements by the NASD); (viii) The execution, delivery and performance of this Agreement by the Company will not: (A) violate any provisions of the Certificate or Articles of Incorporation or By-laws of the Company or any Subsidiary; (B) violate any provisions of, or result in the breach, modification or termination of, or constitute a default under, any agreement, lease, franchise, license, indenture, permit, mortgage, deed of trust, other evidence of indebtedness or other instrument to which the Company or any Subsidiary is a party or by which the Company or such Subsidiary, or any of their respective owned or leased property is bound, and which is filed as an exhibit to the Registration Statement; or (C) violate any statute, ordinance, order, rule, decree or regulation of any court, regulatory or governmental body, arbitrator, administrative agency or other instrumentality of the United States or other country or jurisdiction having jurisdiction over the Company or any Subsidiary (assuming compliance with all applicable federal and state securities laws); (ix) To such counsel's knowledge, except as described in the Prospectus, there are no holders of Common Stock or other securities of the Company, or securities that are convertible or exchangeable into Common Stock or other securities of the Company, that have rights to the registration of such securities under the Act or any Blue Sky Laws; (x) The Common Stock is a National Market Security on The Nasdaq Stock Market and is registered under the Exchange Act; (xi) Neither the Company nor any Subsidiary is, nor with the giving of notice or passage of time or both would be, in violation of its respective Certificate of Incorporation or By-laws or, to such counsel's knowledge, in default in any material respect in the performance of any agreement, lease, franchise, license, permit, mortgage, deed of trust, evidence of indebtedness or other instrument, or any other document that is filed as an exhibit to the Registration Statement, to which the Company or any Subsidiary is subject or bound; (xii) Neither the Company nor any Subsidiary is an "investment company", an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, and, upon its receipt of any proceeds from the sale of 20 the Shares, the Company will not become or be deemed to be an "investment company" thereunder; (xiii) The description in the Registration Statement and the Prospectus of statutes, laws, regulations, legal and governmental proceedings, and contracts and other legal documents described therein fairly and correctly present, in all material respects, the information required to be included therein by the Act; and (xiv) All offers and sales by the Company of its capital stock before the date hereof were at all relevant times duly registered under or exempt from the registration requirements of the Act, and were duly registered under or the subject of an available exemption from the registration requirements of any applicable Blue Sky Laws. In rendering such opinion, counsel for the Company may rely, to the extent counsel deems such reliance proper, as to matters of fact upon certificates of officers of the Company and of governmental officials, and copies of all such certificates shall be furnished to the Representatives and for the Underwriters on or before each Closing Date. (e) The Representatives shall have received an opinion of Gardner, Carton & Douglas, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the issuance and sale of the Shares by the Company, the Statement and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they request for the purpose of enabling them to pass upon such matters. (f) The Representatives shall have received on each Closing Date, a certificate of Mark G. Kachur, President and Chief Executive Officer, Ronald C. Drabik, Senior Vice President, Treasurer and Chief Financial Officer, of the Company, to the effect that: (i) The representations and warranties of the Company set forth in section 2 hereof are true and correct as of the date of this Agreement and as of the date of such certificate, and the Company has complied with all the agreements and satisfied all the conditions to be performed or satisfied by it at or prior to the date of such certificate; (ii) The Commission has not issued an order preventing or suspending the use of the Prospectus or any Preliminary Prospectus or any amendment or supplement thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the knowledge of the respective signatories, no proceedings for that purpose have been initiated or are pending or contemplated under the Act under the Blue Sky Laws of any jurisdiction; 21 (iii) Each of the respective signatories has carefully examined the Registration Statement and the Prospectus, and any amendment or supplement thereto, and such documents contain all statements required to be stated therein, and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and since the date on which the Registration Statement was initially filed, no event has occurred that was required to be set forth in an amended or supplemented prospectus or in an amendment to the Registration Statement that has not been so set forth; and (iv) Since the date on which the Registration Statement was initially filed with the Commission, there shall not have occurred any change or development involving, or which could be expected to involve, a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, except as disclosed in the Prospectus and the Registration Statement as heretofore amended or (but only if the Representatives expressly consent thereto in writing) as disclosed in an amendment or supplement thereto filed with the Commission and delivered to the Representatives after the execution of this Agreement; since such date and except as so disclosed or in the ordinary course of business, the Company has not incurred any liability or obligation, direct or indirect, or entered into any transaction which is material to the Company; since such date and except as so disclosed, there has not been any change in the outstanding capital stock of the Company, or any change that is material to the Company in the short-term debt or long-term debt of the Company; since such date and except as so disclosed, the Company has not acquired any of the Common Stock or other capital stock of the Company nor has the Company declared or paid any dividend, or made any other distribution, upon its outstanding Common Stock payable to stockholders of record on a date prior to such Closing Date; since such date and except as so disclosed, the Company has not incurred any material contingent obligations, and no material litigation is pending or threatened against the Company; and, since such date and except as so disclosed, the Company has not sustained any material loss or interference from any strike, fire, flood, windstorm, accident or other calamity (whether or not insured) or from any court or governmental action, order or decree. The delivery of the certificate provided for in this subsection (f) shall be and constitute a representation and warranty of the Company as to the facts required in the immediately foregoing clauses (i), (ii), (iii) and (iv) to be set forth in said certificate. (g) At the time this Agreement is executed and also on each Closing Date, there shall be delivered to the Representatives a letter addressed to the Representatives, as representatives of the Underwriters, from Ernst & Young LLP, the Company's 22 independent accountants, the first letter to be dated the date of this Agreement, the second letter to be dated the First Closing Date and the third letter (if applicable) to be dated the Second Closing Date, which shall be in form and substance satisfactory to the Representatives and shall contain information as of a date within five days of the date of such letter. There shall not have been any change or decrease set forth in any of the letters referred to in this subsection (g) which makes it impracticable or inadvisable in the judgment of the Representatives to proceed with the public offering or purchase of the Shares as contemplated hereby. (h) The Shares shall have been qualified or registered for sale under the Blue Sky Laws of such jurisdictions as shall have been specified by the Representatives, the underwriting terms and arrangements for the offering shall have been cleared by the NASD, and the Shares shall have been designated for inclusion as a Nasdaq National Market Security on the Nasdaq Stock Market. (i) Such further certificates and documents as the Representatives may reasonably request (including certificates of officers of the Company). (j) Each of the officers and directors of the Company has entered into a Lock-Up Agreement. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory to the Representatives and to Gardner, Carton & Douglas, counsel for the Underwriters. The Company shall furnish the Representatives with such manually signed or conformed copies of such opinions, certificates, letters and documents as the Representatives may reasonably request. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at either Closing Date is not so satisfied, this Agreement at the election of the Representatives will terminate upon notification to the Company without liability on the part of any Underwriter, including the Representatives, the Company except for the provisions of section 6(n) hereof, the expenses to be paid by the Company pursuant to section 7 hereof and except to the extent provided in section 10 hereof. 9. Maintain Effectiveness Of Registration Statement. The Company will use its best efforts to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement, and, if such stop order is issued, to obtain as soon as possible the lifting thereof. 10. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act or 23 the Exchange Act, from and against any losses, claims, damages, expenses, liabilities or actions in respect thereof ("Claims"), joint or several, to which such Underwriter or each such controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation), insofar as such Claims arise out of or are based upon any breach of any representation, warranty or covenant made by the Company in this Agreement, or any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or in any application filed under any Blue Sky Law or other document executed by the Company for that purpose or based upon written information furnished by the Company and filed in any state or other jurisdiction to qualify any or all of the Shares under the securities laws thereof (any such document, application or information being hereinafter called a "Blue Sky Application") or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. The Company agrees to reimburse each Underwriter and each such controlling person for any legal fees or other expenses incurred by such Underwriter or any such controlling person in connection with investigating or defending any such Claim; provided, however, that the Company will not be liable in any such case to the extent that any such Claim arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus or supplement thereto or in any Blue Sky Application in reliance upon and in conformity with the written information furnished to the Company pursuant to section 4 of this Agreement as required by this Agreement. The indemnification obligations of the Company as provided above are in addition to and in no way limit any liabilities the Company may otherwise have. (b) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors and each of its officers who signs the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act against any Claim to which the Company, or any such director, officer or controlling person may become subject under the Act, the Exchange Act, Blue Sky Laws or other federal or state statutory laws or regulations, at common law or otherwise (including payments made in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter and Baird), insofar as such Claim arises out of or is based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or 24 supplement thereto, or in any Blue Sky Application, in reliance solely upon and in conformity with the written information furnished by the Representatives to the Company pursuant to section 4 of this Agreement. The indemnification obligations of each Underwriter as provided above are in addition to any liabilities any such Underwriter may otherwise have. Notwithstanding the provisions of this section, no Underwriter shall be required to indemnify or reimburse the Company, or any officer, director or controlling person in an aggregate amount in excess of the total price at which the Shares purchased by any such Underwriter hereunder were offered to the public, less the amount of any damages such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. (c) Promptly after receipt by an indemnified party under this section of notice of the commencement of any action in respect of a Claim, such indemnified party will, if a Claim in respect thereof is to be made against an indemnifying party under this section, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve an indemnifying party from any liability it may have to any indemnified party under this Section 10 or otherwise. In case any such action is brought against any indemnified party, and such indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in and, to the extent that he, she or it may wish, jointly with all other indemnifying parties, similarly notified, to assume the defense thereof, with counsel (who shall not, except with consent of the indemnified party, be counsel to the indemnifying party) reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and any indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to the indemnified party and/or other indemnified parties which are different from or additional to those available to any indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. No indemnifying party shall without the written consent of the indemnified party effect a settlement or compromise of or consent to the entry of any judgment with respect to any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to an admission of fault, culpability or failure to act, by or on behalf of any indemnified party. (d) Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election to assume the defense of such action and upon approval by the indemnified party of counsel selected by the indemnifying party, the indemnifying party will not be liable to such indemnified party under this section for any 25 legal fees or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation, unless: (i) the indemnified party shall have employed separate counsel in connection with the assumption of legal defenses in accordance with the proviso to the last sentence of subsection (c) of this section; (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the indemnified party's notice to the indemnifying party of commencement of the action; or (iii) the indemnifying party has authorized the employment of counsel at the expense of the indemnifying party. (e) If the indemnification provided for in this section is unavailable or insufficient to an indemnified party under subsection (a) or (b) hereof in respect of any Claim referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall, subject to the limitations hereinafter set forth, contribute to the amount paid or payable by such indemnified party as a result of such Claim: (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares; or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above, but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such Claim, as well as any other relevant equitable considerations. The relative benefits received by each of the Company and the Underwriters shall be deemed to be in such proportion so that the Underwriters are responsible for that portion represented by the percentage that the amount of the underwriting discounts and commissions per share appearing on the cover page of the Prospectus bears to the public offering price per share appearing thereon, and the Company (including its officers and directors and controlling persons) is responsible for the remaining portion. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the Claims referred to above shall be deemed to include, subject to the limitations set forth in subsections (c) and (d) of this section, 26 any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. (f) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this section were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method or allocation which does not take into account the equitable considerations referred to in subsection (d) of this section. Notwithstanding the other provisions of this section, no Underwriter shall be required to contribute any amount that is greater than the amount bywhich the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this section are several in proportion to their respective underwriting commitments and not joint. 11. DEFAULT OF UNDERWRITERS. It shall be a condition to the obligations of each Underwriter to purchase the Shares in the manner as described herein, that, except as hereinafter provided in this section, each of the Underwriters shall purchase and pay for all the Shares agreed to be purchased by such Underwriter hereunder upon tender to the Representatives of all such Shares in accordance with the terms hereof. If any Underwriter or Underwriters default in their obligations to purchase Shares hereunder on either the First Closing Date or the Second Closing Date and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of Shares which the Underwriters are obligated to purchase on such Closing Date, the Representatives may make arrangements for the purchase of such Shares by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date the nondefaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Shares which such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of Shares with respect to which such default or defaults occur is greater than ten percent (10%) of the total number of Shares which the Underwriters are obligated to purchase on such Closing Date, and arrangements satisfactory to the Representatives for the purchase of such Shares by other persons are not made within thirty-six hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company, except for the expenses to be paid by the Company pursuant to section 7 hereof and except to the extent provided in section 10 hereof. In the event that Shares to which a default relates are to be purchased by the nondefaulting Underwriters or by another party or parties, the Representatives shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, for not 27 more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 12. EFFECTIVE DATE. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. Such execution and delivery shall include an executed copy of this Agreement sent by telecopier, facsimile transmission or other means of transmitting written documents. 13. TERMINATION. Without limiting the right to terminate this Agreement pursuant to any other provision hereof, this Agreement may be terminated by the Representatives prior to or on the First Closing Date and the over-allotment option from the Company referred to in section 5 hereof, if exercised, may be cancelled by the Representatives at any time prior to or on the Second Closing Date, if in the judgment of the Representatives, payment for and delivery of the Shares is rendered impracticable or inadvisable because: (a) additional governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or the American Stock Exchange, or trading in securities generally shall have been suspended or materially limited on either such exchange or on The Nasdaq Stock Market or a general banking moratorium shall have been established by either federal or state authorities in New York, Connecticut or Wisconsin; (b) any event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or which is not reflected in the Registration Statement but should be reflected therein to make the statements or information contained therein not misleading in any material respect; (c) an outbreak or escalation of hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated to such extent, in the judgment of the Representatives, as to have a material adverse effect on the financial markets of the United States, or to make it impracticable or inadvisable to proceed with completion of the sale of and payment for the Shares as provided in this Agreement; or (d) a downgrade shall have occurred in the rating accorded the Company's debt securities or preferred stock by any "nationally recognized statistical rating organization" as that term is defined by the Securities and Exchange Commission for purposes of Rule 436(g)(2) under the Act or such organization shall have publicly 28 announced that it has under surveillance or review, with possible negative implications, its rating of the Company's debt securities or preferred stock. Any termination pursuant to this Section shall be without liability on the part of any Underwriter to the Company, or on the part of the Company to any Underwriter, except for expenses to be paid by the Company pursuant to section 7 hereof or reimbursed by the Company pursuant to section 6(n) hereof and except as to indemnification to the extent provided in section 10 hereof. 14. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties, covenants and other statements of the Company, of its officers or directors, and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers, directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder. 15. NOTICES. All communications hereunder will be in writing and, if sent to the Representatives, will be mailed, delivered, telecopied (with receipt confirmed) or telegraphed and confirmed to Robert W. Baird & Co. Incorporated at 227 West Monroe Street, Suite 2100, Chicago, Illinois 60606, Attention: Paul T. Rogalski, Managing Director, with a copy to Dewey B. Crawford, Esq., Gardner, Carton & Douglas, 321 N. Clark Street, Chicago, Illinois 60610; and if sent to the Company, will be mailed, delivered, telecopied (with receipt confirmed) or telegraphed and confirmed to the Company at 400 Research Parkway, Meriden, Connecticut 06450, Attention: Ronald C. Drabik, with a copy to Katten Muchin & Zavis, 525 West Madison Street, Suite 1600, Chicago, Illinois 60661. 16. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors, personal representatives and assigns, and to the benefit of the officers and directors and controlling persons referred to in section 10 hereof and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. 17. PARTIAL UNENFORCEABILITY. If any section, paragraph, clause or provision of this Agreement is for any reason determined to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other section, paragraph clause or provision hereof. 18. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Wisconsin without reference to conflict of law principles thereunder. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument, and shall be effective when at least one counterpart hereof shall have been executed by or on behalf of each party hereto. 29 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters, including the Representatives, all in accordance with its terms. Very truly yours, CUNO INCORPORATED By:___________________________ Mark G. Kachur, President 30 The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ROBERT W. BAIRD & CO. INCORPORATED CLEARY GULL REILAND & MCDEVITT INC. GOLDMAN, SACHS & CO. By: ROBERT W. BAIRD & CO. INCORPORATED Acting as Representatives of the several Underwriters (including themselves) identified in Schedule I annexed hereto. By: ____________________________________ Authorized Representative 31 Cuno Incorporated Schedule I ---------- Number of Firm Shares to be Purchased Name of Underwriter -------------- ------------------- Robert W. Baird & Co. Incorporated............. Cleary Gull Reiland & McDevitt Inc............. Goldman, Sachs & Co............................ _________ Total 2,000,000 32 EX-4.1 3 SPECIMEN STOCK CERTIFICATE Exhibit 4.1 Number C Shares Common Stock Common Stock [CUNO LOGO] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE PAR VALUE $.001 CUSIP 126583 10 3 This Certifies that SEE REVERSE FOR CERTAIN DEFINITIONS SPECIMEN is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF Cuno Incorporated transferable in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be subject to the provisions of the Certificate of Incorporation and By-Laws of the Corporation, as amended (copies of which are on file with the Secretary of the Corporation), to all of which the holder by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness the Seal of the Corporation and signatures of its duly authorized officers. Dated: [SEAL OF CUNO] /s/ Paul J. Powers CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER AUTHORIZED SIGNATURE COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, LLC TRANSFER AGENT AND REGISTRAR BY The following abbreviations, when used in the inscription on the face of this certificate, shall be considered as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________________Custodian______________________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors survivorship and not as tenants Act__________________________________________________ in common (State) UNIF TRF MIN ACT --______________________Custodian(until age____________) (Cust) ___________________________under Uniform Transfers (Minor) to Minors Act________________________________________ (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _____________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------ - ------------------------------------------ _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_________________________________ X ______________________________________ X ______________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By_____________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY ELIGIBLE GUARANTOR INSTITUTION SUCH AS A SECURITIES BROKER/DEALER, COMMERCIAL BANK, TRUST COMPANY, SAVINGS ASSOCIATION OR A CREDIT UNION PARTICIPATING IN A MEDALLION PROGRAM. EX-5 4 OPINION OF KATTEN MUCHIN Exhibit 5 February 27, 1997 CUNO Incorporated 400 Research Parkway Meriden, Connecticut 06450 Re: Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: We have acted as counsel for CUNO Incorporated, a Delaware corporation (the "Company"), in connection with the preparation and filing of a Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Registration Statement relates to 2,300,000 shares (including the 300,000 shares subject to the Underwriters' over-allotment option) of the Company's Common Stock, $.001 par value per share (the "Common Stock"). In connection with this opinion, we have relied as to matters of fact, without investigation, upon certificates of public officials and others and upon affidavits, certificates and written statements of directors, officers and employees of, and the accountants for, the Company. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such instruments, documents and records as we have deemed relevant and necessary to examine for the purpose of this opinion, including (a) the Registration Statement, as amended, (b) the proposed Underwriting Agreement by and among the Company, Robert W. Baird & Co. Incorporated, Cleary Gull Reiland & McDevitt Inc. and Goldman, Sachs & Co. (the "Underwriting Agreement"), (c) the Amended and Restated Certificate of Incorporation of the Company, as presently in effect, (d) the Amended and Restated By-laws of the Company, as presently in effect, and (e) certain resolutions adopted by the Board of Directors of the Company relating to the issuance and sale of the Common Stock and related matters. In connection with this opinion, we have assumed the accuracy and completeness of all documents and records that we have reviewed, the genuineness of all signatures, the due authority of the parties signing such documents, the authenticity of the documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or reproduced copies. Based upon and subject to the foregoing, it is our opinion that the 2,300,000 shares of Common Stock covered by the Registration Statement (including the 300,000 shares subject to CUNO Incorporated February 27, 1997 Page 2 the Underwriters' over-allotment option), when issued and sold by the Company, and paid for in accordance with the provisions of the Underwriting Agreement, will be legally issued, fully paid and non-assessable shares of Common Stock. Our opinion expressed above is limited to the General Corporation Law of the State of Delaware, and we do not express any opinion concerning any other laws. This opinion is given as of the date hereof and we assume no obligation to advise you of changes that may hereafter be brought to our attention. We hereby consent to the reference to our name in the Registration Statement under the caption "Legal Matters" and further consent to the filing of this opinion as Exhibit 5 to the Registration Statement. Very truly yours, KATTEN MUCHIN & ZAVIS EX-10.14 5 CREDIT AGREEMENT Exhibit 10.14 $60,000,000 SENIOR UNSECURED REVOLVING CREDIT FACILITY CREDIT AGREEMENT by and among CUNO INCORPORATED, as Borrower and THE BANKS PARTY HERETO and MELLON BANK, N.A., as Agent Dated as of October 31, 1996
TABLE OF CONTENTS Article Page - ------- ---- 1. CERTAIN DEFINITIONS...................................................... 1 1.1 Certain Definitions................................................ 1 1.2 Construction....................................................... 17 1.2.1 Number; Inclusion........................................... 17 1.2.2 Determination............................................... 17 1.2.3 Agent's Discretion and Consent.............................. 17 1.2.4 Documents Taken as a Whole.................................. 17 1.2.5 Headings.................................................... 17 1.2.6 Implied References to this Agreement........................ 17 1.2.7 Persons..................................................... 18 1.2.8 Modifications to Documents.................................. 18 1.2.9 From, To and Through........................................ 18 1.2.10 Shall; Will................................................ 18 1.3 Accounting Principles.............................................. 18 2. REVOLVING CREDIT FACILITY................................................ 18 2.1 Commitments........................................................ 18 2.1.1 Revolving Credit Commitments................................ 18 2.1.2 Swing Loans Commitment...................................... 19 2.2 Nature of Banks' Obligations with Respect to Revolving Credit Loans....................................................... 19 2.3 Commitment Fees.................................................... 19 2.4 Voluntary Reduction of Revolving Credit Commitments................ 20 2.4.1 General Requirements........................................ 20 2.4.2 Collateral for Letter of Credit Outstandings................ 20 2.5 Loan Requests...................................................... 21 2.5.1 Revolving Credit Loan Requests.............................. 21 2.5.2 Swing Loan Request.......................................... 21 2.6 Making Loans....................................................... 22 2.6.1 Making Revolving Credit Loans............................... 22 2.6.2 Making Swing Loans.......................................... 22 2.7 Borrowings to Repay Swing Loans.................................... 22 2.8 Notes.............................................................. 23 2.8.1 Revolving Credit Notes...................................... 23 2.8.2 Swing Loan Note............................................. 23 2.9 Use of Revolving Credit Proceeds................................... 23 2.10 Letters of Credit Subfacility..................................... 23 2.10.1 Issuance of Letters of Credit.............................. 23 2.10.2 Participations............................................. 24 2.10.3 Letter of Credit Fees...................................... 24
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2.10.4 Disbursements, Reimbursement................................ 25 2.10.5 Documentation............................................... 25 2.10.6 Determinations to Honor Drawing Requests.................... 25 2.10.7 Nature of Participation and Reimbursement Obligations....... 26 2.10.8 Indemnity................................................... 27 2.10.9 Liability for Acts and Omissions............................ 27 3. INTEREST RATES............................................................ 28 3.1 Interest............................................................ 28 3.1.1 Interest Rate Options........................................ 29 3.2 Interest Periods.................................................... 29 3.2.1 Ending Date and Business Day................................. 29 3.2.2 Amount of Borrowing Tranche.................................. 30 3.2.3 Termination Before Expiration Date........................... 30 3.2.4 Renewals..................................................... 30 3.3 Interest After Default.............................................. 30 3.3.1 Letters of Credit Fees, Interest Rate........................ 30 3.3.2 Other Obligations............................................ 30 3.3.3 Acknowledgment............................................... 30 3.4 Euro-Rate Unascertainable........................................... 31 3.4.1 Unascertainable.............................................. 31 3.4.2 Illegality; Increased Costs; Deposits Not Available.......... 31 3.4.3 Agent's and Bank's Rights.................................... 31 3.5 Selection of Interest Rate Options.................................. 32 4. PAYMENTS.................................................................. 32 4.1 Payments............................................................ 32 4.2 Pro Rata Treatment of Banks......................................... 33 4.3 Interest Payment Dates.............................................. 33 4.4 Voluntary Prepayments............................................... 34 4.4.1 Right to Prepay.............................................. 34 4.5 Mandatory Reduction of Commitments; Mandatory Payments and Prepayments....................................................... 35 4.5.1 Qualified Note Placement..................................... 35 4.6 Additional Compensation in Certain Circumstances.................... 35 4.6.1 Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc....... 35 4.6.2 Indemnity.................................................... 36 4.7 Settlement Date Procedures.......................................... 37 4.8 Interbank Market Presumption........................................ 38 4.9 Taxes............................................................... 38
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4.9.1 No Deductions............................................... 38 4.9.2 Stamp Taxes................................................. 38 4.9.3 Indemnification for Taxes Paid by a Bank.................... 39 4.9.4 Certificate................................................. 39 4.9.5 Survival.................................................... 39 5. REPRESENTATIONS AND WARRANTIES........................................... 39 5.1 Representations and Warranties..................................... 39 5.1.1 Organization and Qualification.............................. 39 5.1.2 Subsidiary and Joint Venture Matters........................ 40 5.1.3 Power and Authority......................................... 40 5.1.4 Validity and Binding Effect................................. 40 5.1.5 No Conflict................................................. 41 5.1.6 Litigation.................................................. 41 5.1.7 Title to Properties......................................... 41 5.1.8 Financial Statements........................................ 41 5.1.9 Margin Stock................................................ 43 5.1.10 Full Disclosure............................................ 43 5.1.11 Taxes...................................................... 43 5.1.12 Consents and Approvals..................................... 43 5.1.13 No Event of Default; Compliance with Instruments........... 44 5.1.14 Patents, Trademarks, Copyrights, Licenses, Etc............. 44 5.1.15 Insurance.................................................. 44 5.1.16 Compliance with Laws....................................... 44 5.1.17 Material Contracts......................................... 45 5.1.18 Investment Companies....................................... 45 5.1.19 Plans and Benefit Arrangements............................. 45 5.1.20 Employment Matters......................................... 47 5.1.21 Environmental Matters...................................... 47 5.1.22 Senior Debt Status......................................... 49 5.1.23 Solvency................................................... 49 5.1.24 Schedule of Indebtedness................................... 50 5.1.25 Material Adverse Change.................................... 50 5.2 Updates to Schedules............................................... 50 6. CONDITIONS OF LENDING.................................................... 50 6.1 First Revolving Credit Loans....................................... 50 6.1.1 Officer's Certificate....................................... 50 6.1.2 Secretary's Certificate..................................... 51 6.1.3 Delivery of Loan Documents.................................. 51 6.1.4 Opinions of Counsel......................................... 51 6.1.5 Legal Details............................................... 52 6.1.6 Payment of Fees and Reimbursement of Expenses............... 52 6.1.7 Consents.................................................... 52 6.1.8 Officer's Certificate Regarding MACs........................ 52
-iii- 6.1.9 No Violation of Laws........................................ 52 6.1.10 No Actions or Proceedings.................................. 52 6.1.11 Insurance Policies; Certificates of Insurance.............. 53 6.1.12 Termination of Existing Debt............................... 53 6.1.13 Solvency Certificate....................................... 53 6.2 Each Additional Loan or Letter of Credit Issuance.................. 53 6.3 Syndication........................................................ 54 6.3.1 Syndication Representation and Warranties................... 54 6.3.2 Syndication Documents....................................... 54 6.3.3 Syndication Cooperation..................................... 54 7. COVENANTS................................................................ 55 7.1 Affirmative Covenants.............................................. 55 7.1.1 Preservation of Existence, Etc.............................. 55 7.1.2 Payment of Liabilities, Including Taxes, Etc................ 55 7.1.3 Maintenance of Insurance.................................... 55 7.1.4 Maintenance of Properties and Leases........................ 56 7.1.5 Maintenance of Patents, Trademarks, Etc..................... 56 7.1.6 Visitation Rights........................................... 56 7.1.7 Keeping of Records and Books of Account..................... 56 7.1.8 Plans and Benefit Arrangements.............................. 57 7.1.9 Compliance with Laws........................................ 57 7.1.10 Use of Proceeds............................................ 57 7.1.11 Subordination of Intercompany Loans........................ 57 7.1.12 Post-Closing Matters....................................... 57 7.1.13 Payment of Intercompany Obligations Related to Intertech... 58 7.1.14 Interest Rate Protection................................... 58 7.2 Negative Covenants................................................. 58 7.2.1 Indebtedness................................................ 58 7.2.2 Liens; Further Negative Pledges............................. 59 7.2.3 Guaranties.................................................. 60 7.2.4 Loans and Investments....................................... 60 7.2.5 Dividends and Related Distributions......................... 61 7.2.6 Liquidations, Mergers, Consolidations, Acquisitions......... 62 7.2.7 Dispositions of Assets or Subsidiaries...................... 63 7.2.8 Affiliate Transactions...................................... 65 7.2.9 Subsidiaries, Partnerships and Joint Ventures............... 65 7.2.10 Continuation of or Change in Business...................... 66 7.2.11 Plans and Benefit Arrangements............................. 66 7.2.12 Fiscal Year................................................ 67 7.2.13 Issuance of Stock.......................................... 67 7.2.14 Changes in Organizational Documents........................ 67 7.2.15 Minimum Fixed Charge Coverage Ratio........................ 68 7.2.16 Maximum Leverage Ratio..................................... 68 7.2.17 Minimum Consolidated Net Worth............................. 68 -iv-
7.2.18 Amendments to Certain Documents............................ 68 7.2.19 No Prepayment of Existing Indebtedness..................... 68 7.3 Reporting Requirements............................................. 69 7.3.1 Quarterly Financial Statements.............................. 69 7.3.2 Annual Financial Statements................................. 69 7.3.3 Certificate of the Borrower................................. 70 7.3.4 Notice of Default........................................... 70 7.3.5 Notice of Litigation........................................ 70 7.3.6 Budgets, Forecasts, Other Reports and Information........... 70 7.3.7 Notices Regarding Plans and Benefit Arrangements............ 71 8. DEFAULT.................................................................. 73 8.1 Events of Default.................................................. 73 8.1.1 Payments Under Loan Documents............................... 73 8.1.2 Breach of Warranty.......................................... 73 8.1.3 Breach of Negative Covenants and Sections 7.1.12 or 7.1.14.. 73 8.1.4 Breach of Other Covenants................................... 74 8.1.5 Defaults in Other Agreements or Indebtedness................ 74 8.1.6 Final Judgments or Orders................................... 74 8.1.7 Loan Document Unenforceable................................. 75 8.1.8 Notice of Lien or Assessment................................ 75 8.1.9 Insolvency.................................................. 75 8.1.10 Events Relating to Plans and Benefit Arrangements.......... 75 8.1.11 Cessation of Business...................................... 76 8.1.12 Change of Control.......................................... 76 8.1.13 Involuntary Proceedings.................................... 76 8.1.14 Voluntary Proceedings...................................... 77 8.1.15 Material Adverse Change.................................... 77 8.2 Consequences of Event of Default................................... 77 8.2.1 Events of Default Other Than Bankruptcy, Insolvency or Reorganization Proceedings................................ 77 8.2.2 Bankruptcy, Insolvency or Reorganization Proceedings........ 77 8.2.3 Set-off..................................................... 78 8.2.4 Suits, Actions, Proceedings................................. 78 8.2.5 Application of Proceeds..................................... 78 8.2.6 Other Rights and Remedies................................... 79 9. THE AGENT................................................................ 79 9.1 Appointment........................................................ 79 9.2 Delegation of Duties............................................... 80 9.3 Nature of Duties; Independent Credit Investigation................. 80 9.4 Actions in Discretion of Agent; Instructions from the Banks........ 80 9.5 Reimbursement and Indemnification of Agent by the Borrower......... 81
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9.6 Exculpatory Provisions............................................. 81 9.7 Reimbursement and Indemnification by Banks of the Agent............ 82 9.8 Reliance by Agent.................................................. 82 9.9 Notice of Default.................................................. 83 9.10 Notices........................................................... 83 9.11 Banks in Their Individual Capacities.............................. 83 9.12 Holders of Notes.................................................. 83 9.13 Equalization of Banks............................................. 84 9.14 Successor Agent................................................... 84 9.15 Other Fees........................................................ 85 9.16 Availability of Funds............................................. 85 9.17 Calculations...................................................... 85 9.18 Beneficiaries..................................................... 85 10. MISCELLANEOUS........................................................... 86 10.1 Modifications, Amendments or Waivers.............................. 86 10.1.1 Increase of Revolving Credit Commitments; Extension of Expiration Date.......................................... 86 10.1.2 Extension of Payment; Reduction of Principal, Interest or Fees; Modification of Terms of Payment................... 86 10.1.3 Release of Guarantor....................................... 86 10.1.4 Miscellaneous.............................................. 86 10.2 No Implied Waivers; Cumulative Remedies; Writing Required......... 87 10.3 Reimbursement and Indemnification of Banks by the Borrower; Taxes........................................................... 87 10.4 Holidays.......................................................... 88 10.5 Funding by Branch, Subsidiary or Affiliate........................ 88 10.5.1 Notional Funding........................................... 88 10.5.2 Actual Funding............................................. 89 10.5.3 Changes to Other Branches, Subsidiaries or Affiliates...... 89 10.6 Notices........................................................... 89 10.7 Severability...................................................... 90 10.8 Governing Law..................................................... 90 10.9 Prior Understanding............................................... 90 10.10 Duration; Survival............................................... 90 10.11 Successors and Assigns........................................... 91 10.12 Confidentiality.................................................. 92
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10.13 Counterparts..................................................... 92 10.14 Agent's or Bank's Consent........................................ 92 10.15 Exceptions....................................................... 93 10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL........................... 93 10.17 Tax Withholding Clause........................................... 93 10.18 Joinder of Subsidiaries.......................................... 94
-vii- LIST OF SCHEDULES AND EXHIBITS
SCHEDULE SCHEDULE 1.1(B) - COMMITMENTS OF BANKS SCHEDULE 1.1(P)(1) - EXISTING DEPOSITORY INSTITUTIONS SCHEDULE 1.1(P)(2) - PERMITTED LIENS SCHEDULE 5.1.1 - SUBSIDIARIES SCHEDULE 5.1.2 - SUBSIDIARY MATTERS SCHEDULE 5.1.6 - LITIGATION SCHEDULE 5.1.12 - CONSENTS AND APPROVALS SCHEDULE 5.1.19 - EMPLOYEE BENEFIT PLAN DISCLOSURES SCHEDULE 5.1.21 - ENVIRONMENTAL DISCLOSURES SCHEDULE 5.1.24 - INDEBTEDNESS SCHEDULE 6.1.4 - COUNSEL TO LOAN PARTIES SCHEDULE 7.1.12 - POST-CLOSING MATTERS SCHEDULE 7.2.4 - LOANS AND INVESTMENTS SCHEDULE 7.2.8 - AFFILIATE TRANSACTIONS EXHIBITS EXHIBIT 1.1(A)(1) - FORM OF CLOSING DATE CERTIFICATE EXHIBIT 1.1(A)(2) - FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT 1.1(I) - FORM OF INTERCOMPANY NOTE EXHIBIT 1.1(M)(1) - FORM OF MASTER GUARANTY AGREEMENT EXHIBIT 1.1(M)(2) - FORM OF MASTER INTERCOMPANY SUBORDINATION AGREEMENT EXHIBIT 1.1(R) - FORM OF REVOLVING CREDIT NOTE EXHIBIT 1.1(S)(1) - FORM OF SWING LOAN NOTE EXHIBIT 1.1(S)(2) - FORM OF SYNDICATION ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT 2.5.1 - FORM OF REVOLVING CREDIT LOAN REQUEST EXHIBIT 2.5.2 - FORM OF SWING LOAN REQUEST EXHIBIT 2.9.1 - FORM OF APPLICATION AND AGREEMENT FOR LETTERS OF CREDIT EXHIBIT 6.1.4 - OPINION OF COUNSEL EXHIBIT 7.2.6 - FORM OF TRANSACTION NOTICE CERTIFICATE EXHIBIT 7.3.3 - FORM OF COMPLIANCE CERTIFICATE
-viii- CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of October 31, 1996 and is made by and among CUNO INCORPORATED, a Delaware corporation (the "Borrower"), the BANKS (as hereinafter defined), and MELLON BANK, N.A., in its capacity as Agent. WITNESSETH: WHEREAS, the Borrower has requested a revolving credit facility in an aggregate principal amount of $60,000,000, including a $20,000,000 sublimit for letters of credit and a $5,000,000 sublimit for swingline loans; and WHEREAS, the Banks are willing to provide such credit facilities upon the terms and conditions hereinafter set forth; NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: 1. CERTAIN DEFINITIONS 1.1 Certain Definitions. In addition to words and terms defined elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise: Acquisition shall mean the acquisition of a 50% or greater direct and/or indirect ownership interest by merger, purchase or otherwise of all or substantially all of the stock or other equity interests or assets of any other Person or of any division or Subsidiary of a Person which constitutes a "reportable industry segment" or "class of similar products" of an industry segment (as such term is defined in Item 101(c) of Regulation S-K promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934). Affiliate as to any Person shall mean any other Person (i) which directly or indirectly controls, is controlled by, or is under common control with such Person, (ii) which beneficially owns or holds 5% or more of any class of the voting or other equity interests of such Person, or (iii) 5% or more of any class of voting or other equity interests of which is beneficially owned or held, directly or indirectly, by such Person. Control, as used in this definition, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be. Agent shall mean Mellon Bank, N.A., in its capacity as agent and its successors and assigns. Agent's Fee shall have the meaning assigned to that term in Section 9.15. Agreement shall mean this Credit Agreement, as the same may be supplemented or amended from time to time, including all schedules and exhibits. Applicable Margin, with respect to the Revolving Credit Loans, the Commitment Fees payable under Section 2.3 and Letters of Credit Fees payable under Section 2.10.3 shall mean the rate specified for such Obligation below, subject to adjustment as hereinafter provided:
Applicable Margin When the Status For Eurodollar Applicable Margin Below Exists Applicable Margin Loans and Standby For Documentary Applicable Margin For Base Rate Letters of Credit Letters of Credit For Commitment Loan Is: Fees Is: Fees Is: Fee Is: ---------------- ----------------- ----------------- ----------------- Level I Status 0% .25% .375% .10% Level II Status 0% .375% .375% .125% Level III Status 0% .50% .375% .15% Level IV Status 0% .625% .375% .20% Level V Status 0% .75% .375% .25%
For purposes of determining the Applicable Margin: (a) The Applicable Margin shall be determined on the Closing Date based on the Leverage Ratio computed on such date pursuant to a certificate in the form of Exhibit 1.1(A)(1) to be delivered on the Closing Date. (b) The Applicable Margin shall be recomputed as of the end of each fiscal quarter ending after the Closing Date and on the closing date of each transaction under Sections 7.2.6 or 7.2.7 which is conditioned upon the delivery of a Transaction Notice Certificate, based on the Leverage Ratio computed as required by this Agreement under the relevant circumstances. Any increase or decrease in the Applicable Margin computed as of a quarter end shall be effective on the date on which the Compliance Certificate under Section 7.3.3 or the Transaction Notice Certificate under Section 7.2.6 or 7.2.7 evidencing such computation is due to be delivered. -2- Assignment and Assumption Agreement shall mean an Assignment and Assumption Agreement by and among an "Assignor" and an "Assignee" (each as defined therein) and the Agent on behalf of the other Banks, substantially in the form of Exhibit 1.1(A)(2). Authorized Officer shall mean those individuals, designated by written notice to the Agent from the Borrower, authorized to execute notices, reports and other documents on behalf of the Loan Parties required hereunder. The Borrower may amend such list of individuals from time to time by giving written notice of such amendment to the Agent. Banks shall mean the financial institutions named on Schedule 1.1(B) and their respective successors and assigns as permitted hereunder, each of which is referred to herein as a "Bank". Base Rate shall mean the greater of (i) the interest rate per annum announced from time to time by the Agent at its Principal Office as its then prime rate, which rate may not be the lowest rate then being charged commercial borrowers by the Agent, or (ii) the Federal Funds Effective Rate plus 1/2% per annum. Base Rate Option shall mean the Revolving Credit Base Rate Option or the Swing Loan Base Rate Option. Base Net Worth shall mean, as of any date of determination, the sum of (A) 80% of the Consolidated Net Worth as of October 31, 1996, plus (B) 50% of the cash proceeds received after October 31, 1996 by the Borrower from any issuance by the Borrower of capital stock of the Borrower after deducting expenses incurred in connection with such issuance plus (C) 50% of consolidated net income of the Borrower and its Subsidiaries for each fiscal year after 1996 in which net income was earned (as opposed to a net loss). Interim determinations made during the second, third and fourth quarters of each fiscal year shall include 50% of year to date consolidated net income of the Borrower and its Subsidiaries during such fiscal year through the last day of the immediately preceding fiscal quarter. The foregoing shall be determined in accordance with GAAP, but without currency translation adjustments required by FAS 52. Benefit Arrangement shall mean at any time an "employee benefit plan," within the meaning of Section 3(3) of ERISA, which is neither a Plan nor a Multiemployer Plan and which is maintained, sponsored or otherwise contributed to by any member of the ERISA Group. Borrower shall mean CUNO Incorporated, a corporation organized and existing under the laws of the State of Delaware. Borrowing Date shall mean, with respect to any Loan, the date for the making thereof or the renewal or conversion thereof at or to the same or a different Interest Rate Option, which shall be a Business Day. -3- Borrowing Tranche shall mean specified portions of Loans outstanding as follows: (i) Loans to which a Revolving Credit Euro-Rate Option applies by reason of the selection of, conversion to or renewal of such Interest Rate Option on the same day and having the same Interest Period shall constitute one Borrowing Tranche, (ii) Loans with respect to which the Revolving Credit Base Rate Option applies by reason of the selection of or conversion to such Interest Rate Option shall constitute one Borrowing Tranche, (iii) Loans with respect to which the Swing Loan Base Rate Option applies by reason of the selection of or conversion to such Interest Rate Option shall constitute one Borrowing Tranche and (iv) Loans with respect to which the Swing Loan Quoted Rate Option applies by reason of the selection of or conversion to such Interest Rate Option shall constitute one Borrowing Tranche. Business Day shall mean any day other than a Saturday or Sunday or a legal holiday on which commercial banks are authorized or required to be closed for business in Pittsburgh, Pennsylvania or New York, New York, and, if the applicable Business Day relates to any Loan to which the Revolving Credit Euro-Rate Option applies, such day must also be a day on which dealings in Dollar deposits are carried on in the London interbank market. Capitalized Lease shall mean any lease of Property by a Person as lessee which is a capital lease in accordance with GAAP. Closing Date shall mean the Business Day on which the first Loan shall be made, which shall be October 31, 1996, or, if all of the conditions specified in Section 6.1 have not been satisfied or waived by such date, not later than November 29, 1996, as designated by the Borrower at least three Business Days' advance notice to the Agent at its Principal Office, or such other date as the parties agree. The closing shall take place at 10:00 a.m., Pittsburgh time, on the Closing Date at the offices of Buchanan Ingersoll Professional Corporation, Pittsburgh, Pennsylvania, or at such other time and place as the parties agree. Commitment Fee shall have the meaning assigned to that term in Section 2.3. Consideration shall mean (A) with respect to any Acquisition, the aggregate of (i) the cash paid by the Borrower or any of its Subsidiaries, directly or indirectly, to the seller in connection therewith, (ii) the Indebtedness incurred or assumed by the Borrower or any of its Subsidiaries (including Indebtedness owed by any target which is a Subsidiary immediately after the Acquisition), whether in favor of the seller or otherwise and whether fixed or contingent, (iii) any Guaranty (other than of Indebtedness described in clause (ii) above) given or incurred by the Borrower or any of its Subsidiaries in connection therewith and (iv) the present value of any other consideration (including stock or other securities issued by the Borrower or any of its Subsidiaries) given or obligation incurred by the Borrower or any of its Subsidiaries in connection therewith; and (B) with respect to any disposition of assets, the aggregate of (i) the cash paid to the Borrower or any of its Subsidiaries, (i) any Indebtedness of the Borrower or any of its Subsidiaries assumed by the purchaser and (iii) the present value of any other consideration received by the Borrower or any of its Subsidiaries in connection therewith. -4- Consolidated Capital Expenditures means, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including that portion of Capitalized Leases which is capitalized on a consolidated balance sheet of the Borrower and its Subsidiaries) by the Borrower and its Subsidiaries during that period that, in conformity with GAAP, are required to be included in or reflected in the property, plant or equipment or similar fixed asset accounts reflected on a consolidated balance sheet of the Borrower and its Subsidiaries. Any amount which is included in any period as an accrual shall not be duplicated in any calculation at the time payment thereof is actually made to the extent included in such prior accrual. Consolidated EBITDA for any period of determination shall mean an amount equal to the sum of (i) the net income (excluding income (or loss) of any Person in which any of the Borrower or its Subsidiaries has an equity interest of 50% or less, except to the extent of the amount of dividends or other distributions actually paid in cash by such Person to any of the Borrower or its Subsidiaries during such period) for such period plus (ii) interest expense in respect of Indebtedness to the extent deducted in determining net income for such period ("Interest Expense"), plus (iii) the provision for domestic and foreign taxes for such period based on income or profits to the extent such income or profits were included in computing net income for such period, plus (iv) depreciation deducted in determining net income for such period, plus (v) amortization deducted in determining net income for such period, plus (vi) only with respect to the Borrower's 1996 and 1997 fiscal years, expense to the extent deducted in determining net income for such period in respect of fees and costs which were incurred in connection with the Tender Offer and the Spin-Off (provided, that no such expense described in this clause (vi) shall be added to determine Consolidated EBITDA for any period of determination if the aggregate expense for that period of determination together with all expense included in determining net income in all periods prior to the period of determination for all such fees and costs would exceed $6,000,000), in each case of the Borrower and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided, however, there shall be excluded from the foregoing computation (A) all non-cash extraordinary income, gains and losses for such period and (B) all gains or losses from the sale of assets not sold in the ordinary course of business for such period, to the extent (A) or (B) were included in net income under the foregoing clause (i) for such period. Consolidated Funded Indebtedness as of any date of determination shall mean the aggregate of any and all indebtedness, obligations or liabilities of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP for or in respect of: (i) borrowed money, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) reimbursement obligations under (A) any letter of credit drawn upon and not reimbursed within the time period required, or (B) under any currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device (net of any payments made to the Borrower under any of the foregoing interest rate management devices), (iv) any other transaction (including forward sale or purchase agreements, capitalized leases (but not operating leases) and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such Person to -5- finance its operations or capital requirements (but not including trade payables, trade credits and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness and which are not more than sixty (60) days past due), or (v) any Guaranty (without duplication) of any liability described in the foregoing clauses (i) through (iv). Consolidated Income Tax Expense for any period of determination shall be equal to the consolidated income tax expense (domestic and foreign) of the Borrower and its Subsidiaries in respect of their consolidated net income for such period. Consolidated Interest Expense for any period of determination shall be equal to the Interest Expense of the Borrower and its Subsidiaries as determined in clause (ii) of the definition of the term "Consolidated EBITDA" for such period on a consolidated basis determined in accordance with GAAP, less any amortization of fees and costs which were incurred and paid in a period prior to the period of determination in connection with the Tender Offer and the Spin-Off to the extent included in Interest Expense for such period. Consolidated Net Worth shall mean as of any date of determination total stockholders' equity of the Borrower and its Subsidiaries as of such date determined and consolidated in accordance with GAAP, but without currency translation adjustments required by FAS 52. Dollar, Dollars, U.S. Dollars and the symbol $ shall mean lawful money of the United States of America. Domestic Subsidiary shall mean any Subsidiary of Borrower other than a Foreign Subsidiary and Domestic Subsidiaries shall mean more than one Domestic Subsidiary. Environmental Complaint shall mean any written complaint setting forth a cause of action for personal or property damage or natural resource damage or equitable relief, order, notice of violation, citation, request for information issued pursuant to any Environmental Laws by an Official Body, subpoena or other written notice of any type relating to, arising out of, or issued pursuant, to any of the Environmental Laws or any Environmental Conditions, as the case may be. Environmental Conditions shall mean any conditions of the environment, including the workplace, the ocean, natural resources (including flora or fauna), soil, surface water, groundwater, any actual or potential drinking water supply sources, substrata or the ambient air, relating to or arising out of, or caused by, the use, handling, storage, treatment, recycling, generation, transportation, release, spilling, leaking, pumping, emptying, discharging, injecting, escaping, leaching, disposal, dumping, threatened release or other management or mismanagement of Regulated Substances resulting from the use of, or operations on, any Property. Environmental Laws shall mean all federal, state, local and foreign Laws and regulations, including permits, licenses, authorizations, bonds, orders, judgments, and -6- consent decrees issued, or entered into, pursuant thereto, relating to pollution or protection of human health or the environment or employee safety in the workplace. ERISA shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. ERISA Group shall mean, at any time, the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. Euro-Rate shall mean with respect to the Loans comprising any Borrowing Tranche to which the Revolving Credit Euro-Rate Option applies for any Interest Period, the interest rate per annum determined by the Agent by dividing (the resulting quotient rounded upward to the nearest 1/16 OF 1% per annum) (I) the rate of interest determined by the Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the London interbank offered rates set forth on the "LIBO" page of the Reuters Monitor Money Rate Service (or appropriate successor) or, if Reuters or its successor ceases to provide such quotes, a comparable replacement determined by the Agent, at approximately 11:00 a.m. London time two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Borrowing Tranche and having a maturity comparable to such Interest Period by (II) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate may also be expressed by the following formula: Average of London interbank offered rates on LIBO page of Reuters Monitor Money Euro-Rate = Rate Service or appropriate successor -------------------------------------------------- 1.00 - Euro-Rate Reserve Percentage The Euro-Rate shall be adjusted with respect to any Revolving Credit Euro-Rate Option outstanding on the effective date of any change in the Euro-Rate Reserve Percentage as of such effective date. The Agent shall give prompt notice to the Borrower of the Euro-Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error. Euro-Rate Reserve Percentage shall mean the maximum percentage (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined by the Agent which is in effect during any relevant period: (i) as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in such System; -7- and (ii) to be maintained by a Bank as required for reserve liquidity, special deposit, or a similar purpose by any governmental or monetary authority of any country or political subdivision thereof (including any central bank), against (A) any category of liabilities that includes deposits by reference to which a Euro-Rate is to be determined, or (B) any category of extension of credit or other assets that includes Loans or Borrowing Tranches to which a Euro-Rate applies. Event of Default shall mean any of the events described in Section 8.1. Executive Officer shall mean as to any designated Person a natural Person who constitutes an executive officer of such designated Person for purposes of item 401(b) of Regulation S-K promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934. Expiration Date shall mean, with respect to the Revolving Credit Commitments, the fifth anniversary of the date of this Agreement. Federal Funds Effective Rate for any day shall mean the rate per annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight federal funds transactions arranged by federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day of which such rate was announced. Fixed Charge Coverage Ratio shall mean on any date of determination, the ratio of (i) Consolidated EBITDA minus Consolidated Capital Expenditures to (ii) the sum of Consolidated Interest Expense plus Consolidated Income Tax Expense, with such ratio determined as of the end of each fiscal quarter commencing on October 31, 1996, for the four fiscal quarters ended on the date of determination. Foreign Subsidiary means any Subsidiary of Borrower that (i) is formed under the laws of a jurisdiction other than the United States, any state of the United States, the District of Columbia or any territory or possession of the United States and (ii) maintains the major portion of its assets outside of the United States and Foreign Subsidiaries means more than one Foreign Subsidiary. Form 10 shall mean the Borrower's Form 10 filed with the Securities and Exchange Commission on July 29, 1996, as amended. -8- GAAP shall mean generally accepted accounting principles as are in effect in the United States from time to time, subject to the provisions of Section 1.3, and applied on a consistent basis both as to classification of items and amounts. Governmental Acts shall have the meaning assigned to that term in Section 2.10.8. Guarantor shall mean each Domestic Subsidiary of the Borrower. Guarantor Joinder shall mean a joinder to the Master Guaranty Agreement as provided in the Master Guaranty Agreement. Guaranty of any Person shall mean any obligation of such Person guaranteeing or in effect guaranteeing any liability or obligation of any other Person in any manner, whether directly or indirectly (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent or joint or several), including any agreement to indemnify or hold harmless any other Person, any performance bond or other suretyship arrangement and any other form of assurance against loss, except endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business. Indebtedness shall mean, as to any Person at any time, any and all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such Person for or in respect of: (i) borrowed money, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) reimbursement obligations (contingent or otherwise) under any (A) standby letter of creditor or (B) currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate management device (net of any payments made to the Borrower under any of the foregoing interest rate management devices), (iv) any other transaction (including forward sale or purchase agreements, capitalized leases (but not operating leases) and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such Person to finance its operations or capital requirements (but not including trade payables, trade credits and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note or other evidence of indebtedness and which are not more than sixty (60) days past due), or (v) any Guaranty of the Indebtedness described in the foregoing clauses (i) through (iv). For purposes of any calculation of an aggregate amount of Indebtedness, any Guaranty of Indebtedness shall be excluded to the extent the underlying Indebtedness to which such Guaranty relates is included in such calculation, and vice versa. Insolvency Proceeding shall mean, with respect to any Person, (a) any case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of the Borrower or any of its Subsidiaries or otherwise relating to liquidation, dissolution, winding-up or relief of such Person, or (b) any -9- general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of such Person's creditors generally or any substantial portion of its creditors, undertaken under any Law. Intercompany Loans shall mean loans made by one Loan Party to one or more other Loan Parties or their Subsidiaries and, in the case of loans between the Borrower and the Material Subsidiaries, evidenced by Intercompany Notes. Intercompany Notes shall mean the notes, in the form attached hereto as Exhibit 1.1(I), executed by each of the Material Subsidiaries in favor of the Borrower pursuant to which such Material Subsidiary evidences such Material Subsidiary's obligations to the Borrower. Interest Payment Date shall mean each date specified for the payment of interest in Section 4.3. Interest Period shall have the meaning assigned to such term in Section 3.2. Interest Rate Option shall mean any Revolving Credit Euro-Rate Option, Swing Loan Quoted Rate Option or Base Rate Option. Internal Revenue Code shall mean the Internal Revenue Code of 1986, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. Intertech shall mean Commercial Intertech Corp., an Ohio corporation which until the Spin-Off owned all of the capital stock of the Borrower. Joint Venture shall mean any corporation, partnership, limited liability company, joint venture, or any other entity in which the Borrower owns, directly or indirectly, 50% of the Control (as such term is defined in the definition of "Affiliate"). Labor Contracts shall mean all employment agreements, employment contracts, collective bargaining agreements and other agreements among any Loan Party or Subsidiary of a Loan Party and its employees. Law shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree or award of any Official Body. Letter of Credit shall have the meaning assigned to that term in Section 2.10.1. -10- Letter of Credit Outstandings shall mean collectively at any time the sum of: (i) the aggregate undrawn face amount of all Letters of Credit and, without duplication, (ii) all unpaid and outstanding Reimbursement Obligations. Letters of Credit Fees shall have the meaning assigned to that term in Section 2.10.3. Level I Status shall mean that the Leverage Ratio is less than 1.5 to 1.0. Level II Status shall mean that the Leverage Ratio is greater than or equal to 1.5 to 1.0 and less than 2.0 to 1.0. Level III Status shall mean that the Leverage Ratio is greater than or equal to 2.0 to 1.0 and less than 2.5 to 1.0. Level IV Status shall mean that the Leverage Ratio is greater than or equal to 2.5 to 1.0 and less than 3.0 to 1.0. Level V Status shall mean that the Leverage Ratio is greater than or equal to 3.0 to 1.0. Leverage Ratio shall mean at any time of determination the ratio of Consolidated Funded Indebtedness on the relevant date to the Consolidated EBITDA for the relevant four fiscal quarters. For purposes of the foregoing, the Consolidated EBITDA for a given four fiscal quarter period shall be calculated on an historic pro forma basis which includes (in the case of an acquisition) or excludes (in the case of a disposition) the financial results of each transaction with respect to which a Transaction Notice Certificate was required pursuant to Section 7.2.6 or Section 7.2.7, in each case as if such transaction described in this sentence had occurred on the first day of such four quarter fiscal period. When the Leverage Ratio is being determined in connection with the delivery of a Transaction Notice Certificate, the numerator shall be Consolidated Funded Indebtedness as of the last day of the Month preceding the relevant transaction date (adjusting to such date for any changes in the amount of any Indebtedness for borrowed money under lines of credit (excluding overdraft facilities), revolving credit facilities or term loans) and the denominator shall be the Consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of the most recently ended fiscal quarter of the Borrower prior to such transaction date for which financial statements have become due pursuant to Section 7.3.1 or Section 7.3.2 (provided that for this purpose, the due date of the annual financial statements required under Section 7.3.2 shall be deemed to be 60 days after the end of the fiscal year). When the Leverage Ratio is being determined for purposes of each certificate required pursuant Section 7.3.3, the numerator shall be Consolidated Funded Indebtedness on the last day of the fiscal quarter or fiscal year end to which it relates and the denominator shall be the Consolidated EBITDA for the four consecutive fiscal quarters ending on the same date. -11- Leverage Ratio Status shall be on any date of determination any of Level I Status, Level II Status, Level III Status, Level IV Status, or Level V Status, based on the Leverage Ratio of the Loan Parties on such date. Lien shall mean any mortgage, deed of trust, pledge, lien, security interest, charge or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including any conditional sale or title retention arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing). Loan Documents shall mean this Agreement, the Master Guaranty Agreement, the Master Intercompany Subordination Agreement, the Notes, the Intercompany Notes, and any other instruments, certificates or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may be supplemented or amended from time to time in accordance herewith or therewith, and Loan Document shall mean any of the Loan Documents. Loan Parties shall mean collectively the Borrower and the Guarantors and Loan Party shall mean separately any one of them. Loans shall mean collectively the Revolving Credit Loans and Swing Loans and Loan shall mean separately any of the Loans. Master Guaranty Agreement shall mean the Master Guaranty and Suretyship Agreement in substantially the form of Exhibit 1.1(M)(1) or in such other form as is acceptable to the Agent in its sole discretion, in all cases executed and delivered by the Guarantors to the Agent for the benefit of the Banks. Master Intercompany Subordination Agreement shall mean a subordination agreement among the Loan Parties in the form attached hereto as Exhibit 1.1(M)(2). Material Adverse Change shall mean any circumstance or event or set of circumstances or events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition, results of operations or prospects of the Loan Parties taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of the Loan Parties TAKEN AS A WHOLE TO DULY AND PUNCTUALLY PAY OR PERFORM THEIR INDEBTEDNESS, OR (D) IMPAIRS MATERIALLY OR COULD REASONABLY BE EXPECTED TO IMPAIR MATERIALLY THE ABILITY OF THE AGENT OR ANY OF THE BANKS, TO THE EXTENT PERMITTED, TO ENFORCE THEIR LEGAL REMEDIES PURSUANT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. -12- Material Subsidiary shall mean any Subsidiary of the Borrower having at least 5% of the total consolidated assets of the Borrower and its Subsidiaries or at least 5% of the total consolidated revenues of the Borrower and its Subsidiaries for the 12-month period ending on the last day of the most recent fiscal quarter of the Borrower. Mellon shall mean Mellon Bank, N.A., its successors and assigns. Month, with respect to an Interest Period under the Revolving Credit Euro-Rate Option, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Interest Period. If any Euro-Rate Interest Period begins on a day of a calendar month for which there is no numerically corresponding day in the month in which such Interest Period is to end, the final month of such Interest Period shall be deemed to end on the last Business Day of such final month. Multiemployer Plan shall mean any employee benefit plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which the Borrower or any member of the ERISA Group is then making or accruing an obligation to make contributions or, within the preceding five plan years, has made or had an obligation to make such contributions. Multiple Employer Plan shall mean a Plan which has two or more contributing sponsors (including the Borrower or any member of the ERISA Group) at least two of whom are not under common control, as such a plan is described in Sections 4063 and 4064 of ERISA. Notes shall mean collectively the Revolving Credit Notes and Swing Notes and Note shall mean separately any of the Notes. Notices shall have the meaning assigned to that term in Section 10.6. Obligation shall mean any obligation or liability of any of the Loan Parties to the Agent or any of the Banks, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, under or in connection with this Agreement, the Notes, the Master Guaranty Agreement, the Letters of Credit or any other Loan Document. Official Body shall mean any national, federal, state, local or other government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. -13- Participation Advance shall mean, with respect to any Bank, such Bank's payment in respect of its participation in a Letter of Credit Borrowing according to its Ratable Share pursuant to Section 2.10.4. PBGC shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. Permitted Cash Equivalent Investments shall mean readily marketable: (i) direct obligations of the United States of America or any agency or instrumentality thereof or obligations backed by the full faith and credit of the United States of America maturing in six (6) MONTHS OR LESS FROM THE DATE OF ACQUISITION; (ii) commercial paper maturing in six (6) months or less rated not lower than "A-1" by Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. or "P-1" by Moody's Investors Service, Inc. on the date of acquisition; (iii) demand deposits, time deposits or certificates of deposit maturing within six (6) months which (x) are held by any domestic or foreign commercial bank which has capital and surplus in excess of $500,000,000 or the relevant foreign currency equivalent, or by a domestic commercial bank, the holding company of which has obligations rated not lower than "A-1" by Standard & Poor's Ratings Services, a division of the McGraw Hill Companies, Inc. or "P-1" by Moody's Investors Service, Inc. on the date of acquisition, (y) are deposited, held or issued, as applicable, by a financial institution reasonably and prudently chosen by the Borrower, provided the aggregate amount of any such deposits at any such institution shall not exceed $500,000 (or the relevant foreign currency equivalent) at any one time or (z) are listed on Schedule 1.1(p)(1); (iv) repurchase obligations of any commercial bank described in clause (iii) above with a term of not more than seven days for underlying securities of the type described in clause (i) above; and (v) investments in mutual funds which invest exclusively in obligations of the type described in clauses (i) through (iv) above. Permitted Liens shall mean: (i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and which are not yet due and payable; (ii) Pledges or deposits made in the ordinary course of business to secure payment of workmen's compensation, or to participate in any fund in connection with -14- workmen's compensation, unemployment insurance, old-age pensions or other social security programs; (iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default; (iv) Good-faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, not in excess of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (v) Encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use; (vi) Liens and security interests in favor of the Agent for the benefit of the Banks in the application for a Letter of Credit; (vii) Liens on property leased by any Loan Party or Subsidiary of a Loan Party or other interest or title of the lessor under operating leases securing obligations of such Loan Party or Subsidiary to the lessor under such leases; (viii) Any Lien or rights or restrictions with respect thereto existing on the date of this Agreement and described on Schedule 1.1(P)(2), provided that the principal amount secured thereby is not hereafter increased (although it may be refinanced), and no additional assets become subject to such Lien, other than additions or accessions to the assets which are subject to such Lien or any replacements of any such assets acquired in the ordinary course of business; (ix) Purchase Money Security Interests to the extent that (X) such Purchase Money Security Interests attach to inventory purchased in the ordinary course of business pursuant to customary payment terms and are not perfected by the filing of financing statements or other public filings or (Y) the aggregate amount of loans and deferred payments secured by Purchase Money Security Interests not described in the foregoing clause (X) do not exceed at any one time outstanding $5,000,000 (excluding for the purpose of this computation any loans or deferred payments secured by Liens described on Schedule 1.1(P)(2)); (x) Liens relating to the licensing by Borrower, the other Loan Parties or their Subsidiaries of intellectual property; -15- (xi) The following (A) if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed or (B) if a final judgment is entered and such judgment is discharged within thirty (30) days of entry or (C) if payments thereof are covered in full (subject to customary deductibles) by an insurance company of reputable standing which insurance company has acknowledged that the applicable policy applies to the following and is not reserving any right to contest applicability, and in any case they do not in the aggregate, materially impair the ability of any Loan Party to perform its Obligations hereunder or under the other Loan Documents: (1) Claims or Liens for taxes, assessments or charges by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, including the PBGC, due and payable and subject to interest or penalty, provided that the applicable Loan Party maintains such reserves or other appropriate provisions as shall be required by GAAP and pays all such taxes, assessments or charges forthwith upon the commencement of proceedings to foreclose any such Lien; (2) Claims, Liens or encumbrances upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits; (3) Claims or Liens of mechanics, materialmen, warehousemen, carriers, or other statutory nonconsensual Liens; (xii) Liens granted by the Japanese Foreign Subsidiary in its accounts receivable to Japanese commercial banks to secure Indebtedness incurred in the ordinary course of business by such Japanese Subsidiary for working capital in Japan; (xiii) additional Liens securing Indebtedness not to exceed at any time an amount equal to 5% of Consolidated Net Worth; (xiv) Liens in the nature of a lease entered into as part of a sale/leaseback transaction; (xv) Liens on assets of a Person which exist on the date such Person becomes the subject of an Acquisition by the Borrower or any of its Subsidiaries, provided that the same (A) do not attach to assets of such Person having a value in excess of 10% of the aggregate value of all assets of such Person acquired as part of the Acquisition, as such value is reflected on the books of such Person as of the date of consummation of such Acquisition, (B) secure only Indebtedness owed by such Person immediately prior to the Acquisition and (C) were not originated in anticipation of such Acquisition; and -16- (xvi) Liens created in connection with the refinancing of any Indebtedness which relates to any of the Liens described in this definition of Permitted Liens, subject, however to the proviso set forth in clause (viii) of this definition of Permitted Liens. Person shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, limited liability company, government or political subdivision or agency thereof, or any other entity. Plan shall mean at any time an employee pension benefit plan (including a Multiple Employer Plan, but not a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained by any entity which was at such time a member of the ERISA Group for employees of any entity which was at such time a member of the ERISA Group. Potential Default shall mean any event or condition which with notice, passage of time or a determination by the Agent or the Required Banks, or any combination of the foregoing, would constitute an Event of Default. Principal Office shall mean the main banking office of the Agent in Pittsburgh, Pennsylvania at the address shown on the signature page hereto. Prohibited Transaction shall mean any prohibited transaction as defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA for which neither an individual nor a class exemption has been issued by the United States Department of Labor. Property shall mean all real property and fixtures, both owned and leased, of the Borrower or any Subsidiary. Purchase Money Security Interest shall mean any Liens upon real or personal property to the extent the same secures no obligation other than (i) loans to the Borrower or Subsidiary of the Borrower the proceeds of which were used to acquire such property or (ii) payments owed by the Borrower or Subsidiary constituting the balance of the purchase price for such property. Qualified Investments shall have the meaning assigned to that term in Section 7.2.6 Qualified Note Placement shall mean a private or public placement of senior unsecured notes issued by the Borrower after the Closing Date, having terms acceptable to the Agent and which in the judgment of the Agent (i) has an average life longer than the then remaining unexpired term of the Revolving Credit Commitments; and (ii) has covenants that are -17- no more restrictive than those under this Agreement; provided that the proceeds thereof are applied to reduce the Revolving Credit Commitments by the amount of the financing raised. Qualified Survivor shall mean a Person which is the surviving entity following any acquisition of capital stock or merger, provided such surviving Person (i) after giving effect to such acquisition of capital stock or merger has a net worth equal to or greater than the net worth of the entities which were the subject of such acquisition of capital stock or merger and (ii) assumes or continues to perform, as applicable, all Obligations under the Loan Documents to which each was a party prior to such acquisition of capital stock or merger, and (iii) after the transaction (other than one in which the Borrower survives) is a Subsidiary of the Borrower. Ratable Share shall mean at any time of determination: (i) prior to the earlier of the Expiration Date or the termination of all of the Revolving Credit Commitments hereunder pursuant to Section 8.2.1 or 8.2.2, the proportion that a Bank's Revolving Credit Commitment bears to the Revolving Credit Commitments of all of the Banks; and (ii) thereafter, the proportion that the sum of a Bank's Loans and Letter of Credit Outstandings outstanding at such time bears to the total principal amount of all of the Loans and Letter of Credit Outstandings then outstanding. Regulated Substances shall mean any substance including any solid, liquid, semisolid, gaseous, thermal, thoriated or radioactive material, refuse, garbage, wastes, chemicals, petroleum products, by-products and coproducts, impurities, dust, scrap, and heavy metals defined as a "hazardous substance," "pollutant," "pollution," "contaminant," "hazardous or toxic substance," "extremely hazardous substance," "toxic chemical," "toxic waste," "hazardous waste," "industrial waste," "residual waste," "solid waste," "municipal waste," "mixed waste," "infectious waste," "chemotherapeutic waste," "medical waste," or "regulated substance" or any related materials, substances or wastes as now or hereafter defined pursuant to any Environmental Laws, ordinances, rules, regulations or other directives of any Official Body, the generation, manufacture, extraction, processing, distribution, treatment, storage, disposal, transport, recycling, reclamation, use, reuse, spilling, leaking, dumping, injection, pumping, leaching, emptying, discharge, escape, release or other management or mismanagement of which is regulated by the Environmental Laws. Regulation U shall mean Regulation U, T, G or X as promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time. Reimbursement Obligation shall have the meaning assigned to such term in Section 2.10.4. -18- Reportable Event shall mean a reportable event described in Section 4043 of ERISA and regulations thereunder with respect to a Plan or Multiemployer Plan. Required Banks shall mean at any time of determination: (i) prior to the earlier of the Expiration Date or a termination of all of the Revolving Credit Commitments hereunder pursuant to Section 8.2.1 or 8.2.3, Banks, whose Revolving Credit Commitments aggregate at least 66% of the total amount of all Revolving Credit Commitments at such time; and (ii) thereafter, Banks whose Loans and Letter of Credit Outstandings outstanding at such time aggregate at least 66 2/3% of the total principal amount of all of the Loans and Letter of Credit Outstandings then outstanding. Letter of Credit Outstandings shall be deemed, for purposes of this definition, to be in favor of the Agent and not a participating Bank if such Bank has not made its Participation Advance in respect thereof and shall be deemed to be in favor of such Bank to the extent of its Participation Advance if it has made its Participation Advance in respect thereof. Revolving Credit Base Rate Option shall mean the option of the Borrower to have Revolving Credit Loans bear interest at the rate and under the terms and conditions set forth in Section 3.1.1(i). Revolving Credit Commitment shall mean, as to any Bank at any time the amount initially set forth opposite its name on Schedule 1.1(B) (as amended from time to time pursuant to Section 11.11 of this Agreement) in the column labeled "Revolving Credit Commitment" as the same may have been reduced in accordance with Section 2.4 AND REVOLVING CREDIT COMMITMENTS SHALL MEAN THE AGGREGATE REVOLVING CREDIT COMMITMENTS OF ALL OF THE BANKS. Revolving Credit Euro-Rate Option shall mean the option of the Borrower to have Revolving Credit Loans bear interest at the rate and under the terms and conditions set forth in Section 3.1.1(ii). Revolving Credit Loan Request shall have the meaning ascribed thereto assigned to that term in Section 2.5.1 Revolving Credit Loans shall mean collectively and Revolving Credit Loan shall mean separately all loans or any loan made by the Banks or one of the Banks to the Borrower pursuant to Section 2.1 or 2.10.4. Revolving Credit Notes shall mean collectively and Revolving Credit Note shall mean separately all the Revolving Credit Notes of the Borrower in the form attached -19- hereto as Exhibit 1.1(R) evidencing the Revolving Credit Loans together with all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part. Revolving Facility Usage shall mean at any time the sum of the then outstanding Revolving Credit Loans and Letter of Credit Outstandings. Settlement Date shall mean each Thursday of each week and each date on which the Agent elects to effectuate settlement pursuant to Section 4.7. Solvent shall mean, with respect to any Person on a particular date, that on such date (i) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (ii) the present fair saleable value of the assets (including general intangibles) of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (iii) such Person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (v) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. Spin-Off shall mean the dividend distribution by Intertech to its shareholders of all of the outstanding shares of capital stock of the Borrower to the shareholders of Intertech which occurred on September 10, 1996. Subsidiary of any Person at any time shall mean (i) any corporation or trust of which more than 50% (by number of shares or number of votes) of the outstanding capital stock or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, any partnership of which such Person is a general partner or any partnership or limited liability company of which such Person is a limited partner or member, respectively, and as to which more than 50% of the partnership interests or membership interests are at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries, or (ii) any corporation, trust, partnership, limited liability company or other entity which is controlled or capable of being controlled by such Person and/or one or more of such Person's Subsidiaries. -20- Swing Loan Base Rate Option shall mean the option of the Borrower to have Swing Loans bear interest at the rate and under the terms and conditions set forth in Section 3.1.1 Swing Loan Commitment shall mean Mellon's commitment to make Swing Loans to the Borrower pursuant to Section 2.1.2 hereof in an aggregate principal amount up to but not in excess of $5,000,000. Swing Loan Quoted Rate Option shall mean the option of the Borrower to have Swing Loans bear interest at the rate and under the terms and conditions set forth in Section 3.1.1 Swing Loan Request shall mean a request for Swing Loans made in accordance with Section 2.5.2 hereof. Swing Note shall mean the Swing Loan Note of the Borrower in the form of Exhibit 1.1(S)(1) evidencing the Swing Loans, together with all extensions, renewals, refinancings or refundings thereof in whole or in part. Swing Loans shall mean collectively and Swing Loan shall mean separately all Swing Loans or any Swing Loan made by Mellon to the Borrower pursuant to Section 2.1.2 hereof. Syndication Assignment and Assumption Agreement shall mean a Syndication Assignment and Assumption Agreement by and among the "Assignees" and Mellon Bank, N.A. as the "Assignor" (each as defined therein) and the Agent, substantially in the form of Exhibit 1.1(S)(2). Syndication Date shall mean a date after the Closing Date selected by the Agent and notice of which is given by the Agent to the Borrower at least five (5) Business Days prior thereto. Tender Offer shall mean the July, 1996 offer by United Dominion, Inc. to Intertech's shareholders to purchase any and all shares of the common stock of Intertech. Transaction Notice Certificate shall mean any Transaction Notice Certificate referred to in Section 7.2.6 or 7.2.7. 1.2 Construction. Unless the context of this Agreement otherwise clearly requires, the following rules of construction shall apply to this Agreement and each of the other Loan Documents: -21- 1.2.1 Number; Inclusion. References to the plural include the singular, the plural, the part and the whole; "or" has the inclusive meaning represented by the phrase "and/or," and "including" has the meaning represented by the phrase "including without limitation"; 1.2.2 Determination. References to "determination" of or by the Agent or the Banks shall be deemed to include good-faith estimates by the Agent or the Banks (in the case of quantitative determinations) and good-faith beliefs by the Agent or the Banks (in the case of qualitative determinations) and such determination shall be conclusive absent manifest error; 1.2.3 Agent's Discretion and Consent. Whenever the Agent or the Banks are granted the right herein to act in its or their sole discretion or to grant or withhold consent such right shall be exercised in good-faith; 1.2.4 Documents Taken as a Whole. The words "hereof," "herein," "hereunder," "hereto" and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document as a whole and not to any particular provision of this Agreement or such other Loan Document; 1.2.5 Headings. The section and other headings contained in this Agreement or such other Loan Document and the Table of Contents (if any) preceding this Agreement or such other Loan Document are for reference purposes only and shall not control or affect the construction of this Agreement or such other Loan Document or the interpretation thereof in any respect; 1.2.6 Implied References to this Agreement. Article, section, subsection, clause, schedule and exhibit references are to this Agreement or such other Loan Document, as the case may be, unless otherwise specified; 1.2.7 Persons. Reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement or such other Loan Document, as the case may be, and reference to a Person in a particular capacity excludes such Person in any other capacity; -22- 1.2.8 Modifications to Documents. Reference to any agreement (including this Agreement and any other Loan Document together with the schedules and exhibits hereto or thereto), document or instrument means such agreement, document or instrument as amended, modified, replaced, substituted for, superseded or restated; 1.2.9 From, To and Through. Relative to the determination of any period of time, "from" means "from and including," "to" means "to but excluding," and "through" means "through and including"; and 1.2.10 Shall; Will. References to "shall" and "will" are intended to have the same meaning. 1.3 Accounting Principles. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. In the event that on or after the date hereof, a material change occurs in GAAP, the Banks and the Borrower will consult in good faith regarding whether such change in GAAP affects any financial covenants contained herein that should be adjusted due to such change in GAAP. 2. REVOLVING CREDIT FACILITY 2.1 Commitments. 2.1.1 Revolving Credit Commitments. Subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, each Bank severally agrees to make Revolving Credit Loans to the Borrower at any time or from time to time on or after the date hereof to the Expiration Date in an aggregate principal amount not to exceed at any one time such Bank's Revolving Credit Commitment minus the sum of (i) such Bank's Revolving Credit Loans then outstanding, plus (ii) such Bank's Ratable Share of the Letter of Credit Outstandings to the Borrower then outstanding plus (iii) such Bank's Ratable Share of Swing Loans outstanding that would be allocable to such Bank if Swing Loans were Revolving Credit Loans. Within such -23- limits of time and amount and subject to the other provisions of this Agreement, the Borrower may borrow, repay and reborrow pursuant to this Section 2.1. 2.1.2 Swing Loans Commitment. Subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, and in order to facilitate loans and repayments between Settlement Dates in amounts of $5,000,000 or less, Mellon may, at its option, cancelable at any time for any reason whatsoever, make swing loans (the "Swing Loans") to the Borrower at any time or from time to time after the date hereof to, but not including, the Expiration Date, in an aggregate principal amount outstanding at any one time not to exceed $5,000,000. the aggregate principal amount of Mellon's Swing Loans and the Revolving Credit Loans of all the Banks at any one time outstanding shall not exceed the Revolving Credit Commitments of all the Banks. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrower may borrow, repay and reborrow pursuant to this Section 2.1.2 2.2 Nature of Banks' Obligations with Respect to Revolving Credit Loans. Each Bank shall be obligated to participate in each request for Revolving Credit Loans pursuant to Section 2.5 in accordance with its Ratable Share. The obligations of each Bank hereunder are several. The failure of any Bank to perform its obligations hereunder shall not affect the Obligations of the Borrower to any other party nor shall any other party be liable for the failure of such Bank to perform its obligations hereunder. The Banks shall have no obligation to make Revolving Credit Loans hereunder on or after the Expiration Date. 2.3 Commitment Fees. Accruing from the Closing Date until the Expiration Date, the Borrower agrees to pay to the Agent for the account of each Bank, as consideration for such Bank's Revolving Credit Commitment hereunder, a nonrefundable commitment fee (the "Commitment Fee") equal to the Applicable Margin per annum (computed on the basis of a year of 360 days and actual days elapsed) times the average daily difference between (i) the amount of such Bank's Revolving Credit Commitment as the same may be constituted from time to time, and (ii) the sum of such Bank's Revolving Credit Loans outstanding plus its Ratable Share of then outstanding Letter of Credit Outstandings excluding documentary letters of credit. The Commitment Fee shall change on the effective date of any change in the Applicable Margin. All Commitment Fees shall be payable in arrears on the first Business Day of each January, April, July, and October after the Closing Date and on the Expiration Date or upon acceleration of the Notes. For purposes of the computation of the Commitment Fee pursuant to this Section 2.3, the Swing Loans shall be deemed to be borrowed amounts under Mellon's Revolving Credit Commitment. -24- 2.4 Voluntary Reduction of Revolving Credit Commitments. 2.4.1 General Requirements. The Borrower shall have the right at any time and from time to time upon not less than three (3) Business Days' prior written notice to the Banks to permanently reduce, in a minimum amount of $3,000,000 and in integral multiples of $1,000,000, or terminate the Revolving Credit Commitments, both without penalty or premium, except as hereinafter set forth, provided that any such reduction or termination shall be accompanied by (a) the payment in full by the Borrower of any Commitment Fee then accrued on the amount of such reduction or termination and (b) prepayment of the Revolving Credit Notes in an amount equal to the amount by which the then outstanding balance of the Notes and Letter of Credit Outstandings exceeds the Revolving Credit Commitments after such reduction or termination, as applicable, together with the full amount of interest accrued on the principal sum to be prepaid (and all amounts referred to in Section 4.5). From the effective date of any such reduction or termination, the obligations of Borrower to pay the Commitment Fee pursuant to Section 2.3 shall correspondingly be reduced or cease. 2.4.2 Collateral for Letter of Credit Outstandings. In the case of a voluntary reduction by the Borrower or the termination for any reason of the Revolving Credit Commitments, the Borrower shall deposit in a non-interest bearing blocked cash collateral account with the Agent (provided that (i) with the consent of the Agent, such account shall bear interest and (ii) the Agent shall utilize good faith efforts to grant such consent), as cash collateral for its Obligations in respect of the Letters of Credit and related applications and agreements, the amount, if any, by which the resulting Revolving Facility Usage exceeds the Revolving Credit Commitments as so reduced or terminated and the Borrower hereby pledges to the Agent and the Banks, and grants to the Agent and the Banks a security interest in, all such cash as security for such Obligations. From time to time the Agent shall return to the Borrower any excess of the amount held in such account over the amount by which the Revolving Facility Usage then exceeds the Revolving Credit Commitments. 2.5 Loan Requests. 2.5.1 Revolving Credit Loan Requests. Except as otherwise provided herein, the Borrower may from time to time prior to the Expiration Date request the Banks to make Revolving Credit Loans, or renew or convert the Interest Rate Option applicable to existing Revolving Credit Loans pursuant to Section 3.1.1, by delivering to the Agent, (i) not later than 12:00 p.m., Pittsburgh, Pennsylvania time, three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Revolving Credit Loans to which the Revolving Credit Euro-Rate Option applies or the conversion to or the renewal of the Revolving Credit Euro-Rate Option for any Revolving Credit Loans; and (ii) not later than 12:00 p.m., Pittsburgh, Pennsylvania time on the proposed -25- Borrowing Date with respect to the making of a Revolving Credit Loan to which the Revolving Credit Base Rate Option applies or the last day of the preceding Interest Period with respect to the conversion to the Revolving Credit Base Rate Option for any Revolving Credit Loan, of a duly completed request therefor substantially in the form of Exhibit 2.5.1 or a request by telephone immediately confirmed in writing by letter, facsimile or telex in such form (each, a " Revolving Credit Loan Request"), it being understood that the Agent may rely on the authority of any individual making such a telephonic request without the necessity of receipt of such written confirmation. Each Loan Request shall be irrevocable and shall specify (i) the proposed Borrowing Date; (ii) the aggregate amount of the proposed Revolving Credit Loans comprising each Borrowing Tranche, which shall be in integral multiples of $1,000,000 and not less than $3,000,000 for each Borrowing Tranche to which the Revolving Credit Euro-Rate Option applies and not less than the lesser of $1,000,000 or the maximum amount available for Borrowing Tranches to which the Revolving Credit Base Rate Option applies; (iii) whether the Revolving Credit Euro-Rate Option or Revolving Credit Base Rate Option shall apply to the proposed Revolving Credit Loans comprising the applicable Borrowing Tranche; and (iv) in the case of a Borrowing Tranche to which the Revolving Credit Euro-Rate Option applies, an appropriate Interest Period for the proposed Revolving Credit Loans comprising such Borrowing Tranche. 2.5.2 Swing Loan Request. Except as otherwise provided herein, the Borrower may from time to time prior to the Expiration Date request Swing Loans in integral multiples of $1,000,000 by telephonic or written request to Mellon not later than 2:30 p.m. Pittsburgh time on the proposed Borrowing Date (each, a "Swing Loan Request"), it being understood that Mellon may rely on the authority of any person making a telephonic request without the necessity of receipt of written confirmation. If requested by Mellon, the Borrower shall deliver a duly completed request for Swing Loans in the form of Exhibit 2.5.2 hereto. In the case of a Borrowing Tranche to which the Swing Loan Quoted Rate Option is to apply, the request shall also specify an appropriate Interest Period. 2.6 Making Loans. 2.6.1 Making Revolving Credit Loans. The Agent shall, promptly after receipt by it of a Loan Request pursuant to Section 2.5, notify the Banks of its receipt of the related Loan Request specifying: (i) the proposed Borrowing Date of such Revolving Credit Loans; (ii) the amount and type of each such Revolving Credit Loan and the applicable Interest Period (if any); and (iii) the apportionment among the Banks of such Revolving Credit Loans as determined by the Agent in accordance with Section 2.2. Each Bank shall remit the principal amount of each Revolving Credit Loan to the Agent such that the Agent is able to, and the Agent shall, to the extent the Banks have made funds available to it for such purpose, fund such Revolving Credit Loans to the Borrower in Dollars and immediately available funds at the Principal Office prior to 2:00 p.m., Pittsburgh, -26- Pennsylvania time, on the applicable Borrowing Date, provided that if the Agent assumes pursuant to Section 9.16 that a Bank will make available to the Agent such Bank's portion of a Revolving Credit Loan and such Bank fails to remit such funds to the Agent in a timely manner, the Agent may elect in its sole discretion to fund with its own funds the Revolving Credit Loans of such Bank on such Borrowing Date, and such Bank shall be subject to the repayment obligation in Section 9.16. 2.6.2 Making Swing Loans. Subject to Section 6.2, Mellon at its election after receipt by it of a Swing Loan Request pursuant to Section 2.5.2, shall fund such Swing Loan to the Borrower in U.S. Dollars and immediately available funds at the Principal Office prior to 3:00 p.m. Pittsburgh time on the Borrowing Date. 2.7 Borrowings to Repay Swing Loans. Mellon may at its option, exercisable at any time after a Swing Loan has been outstanding for more than five (5) Business Days for any reason whatsoever, demand repayment of the Swing Loans, and each Bank shall make a Revolving Credit Loan in an amount equal to such Bank's Ratable Share of the aggregate principal amount of the outstanding Swing Loans, plus, if Mellon so requests, accrued interest thereon, provided that no Bank shall be obligated in any event to make Revolving Credit Loans in excess of its Revolving Credit Commitment. In that event, such Revolving Credit Loans shall bear interest at the Revolving Credit Base Rate Option and shall be deemed to have been properly requested in accordance with Section 2.5.1 without regard to any of the requirements of that provision. Any such prepayment of a Swing Loan subject to the Swing Loan Quoted Rate Option shall be subject to the provisions of Section 4.6.2. Mellon shall provide notice to the Banks (which may be a telephonic or written notice by letter, facsimile or telex) that such Revolving Credit Loans are to be made under this Section 2.7 and of the apportionment among the Banks, and the Banks shall be unconditionally obligated to fund such Revolving Credit Loans (whether or not the conditions specified in Section 6.2 are then satisfied) by the time Mellon so requests, which shall not be earlier than 12:00 p.m. Pittsburgh time on the Business Day next succeeding the date the Banks receive such notice from Mellon. 2.8 Notes. 2.8.1 Revolving Credit Notes. The Obligation of the Borrower to repay the aggregate unpaid principal amount of the Revolving Credit Loans made to it by each Bank, together with interest thereon, shall be evidenced by a Revolving Credit Note payable to the order of such Bank in a face amount equal to the Revolving Credit Commitment of such Bank. -27- 2.8.2 Swing Loan Note. The obligation of the Borrower to repay the unpaid principal amount of the Swing Loans made to it by Mellon, together with interest thereon, shall be evidenced by the Swing Note payable to the order of Mellon in a face amount of $5,000,000. 2.9 Use of Revolving Credit Proceeds. The proceeds of the Revolving Credit Loans shall be used to repay certain existing Indebtedness, including the term debt that resulted from the payment of a one time dividend to Intertech, for working capital and other general corporate purposes. 2.10 Letters of Credit Subfacility. 2.10.1 Issuance of Letters of Credit. The Borrower may request the issuance of (or modification of any issued) letters of credit (each a "Letter of Credit" and in the aggregate the "Letters of Credit") on behalf of itself by delivering no later than 12:00 p.m., Pittsburgh, Pennsylvania time three (3) Business Days prior to the requested date of issuance of such Letter of Credit to the Agent a written notice specifying the proposed beneficiary, date of issuance and expiry date for such Letter of Credit or modification to an existing Letter of Credit and the nature of the transactions to be supported thereby. Subject to the terms and conditions hereof and to the execution of a completed application and continuing agreement for letters of credit in the form attached hereto as Exhibit 2.10.1 or such other form as the Agent may specify from time to time and in reliance on the agreements of the Banks set forth in this Section 2.10, the Agent will issue a Letter of Credit provided that each Letter of Credit shall (A) have a maximum maturity of 365 days from and including the date of issuance, (B) in no event expire later than five Business Days prior to the Expiration Date and provided further that in no event shall (i) the Letter of Credit Outstandings exceed, at any one time, $20,000,000 or (ii) the Revolving Facility Usage exceed, at any one time, the Revolving Credit Commitments. In the event of any conflict between the terms of this Agreement and the terms of the forms of application and continuing agreement for letters of credit, the terms of this Agreement shall control (provided that terms of the Agent's form of application and agreement for letters of credit which are in addition to those contained herein and which do not expressly conflict with the terms contained herein shall not be deemed to be in conflict with this Agreement), provided, however, that notwithstanding the foregoing, the provisions of the application and agreement for letters of credit, to the extent the same pertain to remedies, shall govern and control. Notwithstanding the minimum draw requirements for Revolving Credit Loans, any standby Letter of Credit may be requested for an amount greater than or equal to $250,000 and any documentary Letter of Credit may be requested for an amount greater than or equal to $50,000. -28- 2.10.2 Participations. Immediately upon issuance of each Letter of Credit, and without further action, each Bank shall be deemed to, and hereby agrees that it shall, have irrevocably purchased for such Bank's own account and risk from the Agent an individual participation interest in such Letter of Credit and drawings thereunder in an amount equal to such Bank's Ratable Share of the maximum amount which is or at any time may become available to be drawn thereunder, and each Bank shall be responsible to reimburse the Agent immediately for its Ratable Share of any disbursement under any Letter of Credit which has not been reimbursed by the Borrower in accordance with Section 2.10.4 by making its Ratable Share of the Revolving Credit Loans referred to in Section 2.9.4 available to the Agent. Upon the request of any Bank and no less frequently than once in each calendar month, the Agent shall notify each Bank of the amount of such Bank's participation in Letters of Credit. 2.10.3 Letter of Credit Fees. The Borrower agrees to pay to the Agent for the ratable accounts of the Banks as provided in Section 4.2 fees ("Letters of Credit Fees") with respect to Letter of Credit Outstandings in respect of standby and documentary Letters of Credit in an amount equal to such Letter of Credit Outstandings multiplied by a rate per annum, (computed on the basis of a year of 360 days, and actual days lapsed) as specified in the definition of Applicable Margin separately for standby Letters of Credit and for documentary Letters of Credit, for the applicable period specified below, payable quarterly in arrears on the first Business Day of each January, April, July and October following the Closing Date and on the earlier of the Expiration Date or the acceleration of the Notes. Such rates (per annum) of the foregoing Letters of Credit Fees shall change on the effective date of any change in the Applicable Margin. The Borrower shall also pay to the Agent for its sole account (i) a fronting fee equal to one-eighth of one percent (0.125%) per annum of the aggregate undrawn face amount of each Letter of Credit payable quarterly in arrears and (ii) its then in effect customary issuance fees and administrative expense payable with respect to its Letters of Credit as the Agent may generally charge or incur from time to time in connection with the issuance, maintenance, modification (if any), assignment or transfer (if any), negotiation, and administration of letters of credit, payable at such times as the Agent may specify. 2.10.4 Disbursements, Reimbursement. Borrower shall be obligated immediately to reimburse the Agent (each a "Reimbursement Obligation") for all amounts which the Agent is required to pay pursuant to the Letters of Credit issued by the Agent on or before the date on which the Agent is required to make payment with respect to a draft presented thereunder. The Agent will promptly notify the Borrower of each demand or presentment for payment or draft accepted for payment or other drawing under each Letter of Credit issued by the Agent. The Agent shall promptly notify each Bank of the amount required to be paid by such Bank as a result of a drawing upon such Letter -29- of Credit if the Borrower has not timely reimbursed the Agent for such draw. If such notice is received by a Bank before 1:00 p.m., Pittsburgh, Pennsylvania time, such Bank shall deliver such Bank's Ratable Share of such payment in immediately available funds to the Agent on that Business Day. If such notice is received by a Bank after 1:00 p.m., Pittsburgh, Pennsylvania time, such Bank shall before 10:00 a.m., Pittsburgh, Pennsylvania time, on the next succeeding Business Day deliver to the Agent such Bank's Ratable Share of such payment as a Revolving Credit Loan from such Bank in immediately available funds. 2.10.5 Documentation. The Borrower agrees to be bound by the terms of the Agent's application and agreement for letters of credit and the Agent's written regulations and customary practices relating to letters of credit, though such interpretation may be different from the Borrower's own. In the event of a conflict between such application or agreement and this Agreement, this Agreement shall govern (provided that terms of the Agent's application and agreement for letters of credit which are in addition to those contained herein and which do not expressly conflict with the terms contained herein shall be deemed not to be in conflict with this Agreement). It is understood and agreed that, except in the case of gross negligence or willful misconduct, the Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following the Borrower's instructions or those contained in the Letters of Credit issued by the Agent or any modifications, amendments or supplements thereto. 2.10.6 Determinations to Honor Drawing Requests. In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. 2.10.7 Nature of Participation and Reimbursement Obligations. The obligation of the Banks to participate in Letters of Credit pursuant to Section 2.10.2 and the obligation of the banks pursuant to section 2.10.4 to fund Revolving Credit Loans upon a draw under a Letter of Credit or to acquire participations in Letters of Credit and the Obligations of the Borrower to reimburse the Agent upon a draw under any Letter of Credit pursuant to section 2.10 shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of such sections under all circumstances, including the following circumstances: (i) the failure of any Loan Party or any other Person to comply with the conditions set forth in Sections 2.1 or 6.2 or as otherwise set forth in this Agreement for the making of a Revolving Credit Loan, it being acknowledged that such 30 conditions are not required for the making of a Revolving Credit Loan under SECTION 2.10.4; (ii) any lack of validity or enforceability of any Letter of Credit; (iii) the existence of any claim, set-off, defense or other right which any Loan Party, the Agent or any Bank may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Agent or any Bank or any other Person or whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any Loan Party or Subsidiaries of a Loan Party and the beneficiary for which any Letter of Credit was procured); (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Agent has been notified thereof; (v) payment by the Agent under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (vi) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Borrower, any other Loan Party or Subsidiaries of a Loan Party; (vii) any breach of this Agreement or any other Loan Document by any party thereto; (viii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; (ix) the fact that an Event of Default or a Potential Default shall have occurred and be continuing; and -31- (x) the fact that the Expiration Date shall have passed or this Agreement or the Revolving Credit Commitments hereunder shall have been terminated. 2.10.8 Indemnity. In addition to amounts payable as provided in Section 9.5, the Borrower hereby agrees to pay and to protect, indemnify and save harmless the Agent and the Banks from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and/or allocated costs of internal counsel) which any of them may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, other than as a result of (A) the gross negligence or willful misconduct of the Agent with respect to the Letters of Credit as determined by a final judgment of a court of competent jurisdiction or (B) subject to the following clause (ii), the wrongful dishonor by the Agent of a proper demand for payment made under any Letter of Credit or (ii) the failure of the Agent to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts"). 2.10.9 Liability for Acts and Omissions. As between any Loan Party and the Agent, such Loan Party assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, neither the Agent nor any Bank shall be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any Letter of Credit issued by the Agent, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if the Agent shall have been notified thereof); (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Agent, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Agent's rights or powers hereunder. -32- In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by the Agent under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put the Agent under any resulting liability to the Borrower or any Banks. The Banks and any Loan Party may not commence a proceeding against the Agent for wrongful disbursement under a Letter of Credit issued by the Agent as a result of acts or omissions constituting gross negligence or willful misconduct of the Agent, until the Banks have made and the Borrower has repaid the Revolving Credit Loans described in Section 2.10.4; provided, however, that nothing in this Section 2.10 shall adversely affect the right of any Loan Party, after such payment, to commence any proceeding against the Agent for any breach of its obligations hereunder. 3. INTEREST RATES 3.1 Interest The Borrower shall pay interest in respect of the outstanding unpaid principal amount of the Loans as selected by it from the Base Rate Option or Revolving Credit Euro-Rate Option set forth below applicable to the Loans, it being understood that, subject to the provisions of this Agreement, the Borrower by delivering to the Agent a duly completed Loan Request may select different Interest Rate Options and different Interest Periods to apply simultaneously to the Loans comprising different Borrowing Tranches and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the Revolving Credit Loans comprising any Borrowing Tranche by delivering to the Agent a duly completed Loan Request by the time described in Section 2.5 for conversion or renewal of such Interest Rate Option for a Revolving Credit Loan, provided that there shall not be at any one time outstanding more than ten (10) Borrowing Tranches in the aggregate among all the Loans. If at any time the designated rate applicable to any Loan made by any Bank exceeds such Bank's highest lawful rate, the rate of interest on such Bank's Loan shall be limited to such Bank's highest lawful rate. 3.1.1 Interest Rate Options. The Borrower shall have the right to select from the following Interest Rate Options applicable to the Loans (provided that the Euro-Rate Option is not available with respect to Swing Loans and the Swing Loan Quoted Rate Option is not available with respect to Revolving Credit Loans): (i) Base Rate Option: A fluctuating rate per annum (computed on the basis of a year of 365 days and actual days elapsed) equal to the Base Rate plus the Applicable Margin, such interest rate to change automatically from time to time -33- effective as of the effective date of (A) each change in the Base Rate and (B) each change in the Applicable Margin. (ii) Revolving Credit Euro-Rate Option: A rate per annum (computed on the basis of a year of 360 days and actual days elapsed) equal to the Euro-Rate plus the Applicable Margin, such interest rate shall change on the effective date of any change in the Applicable Margin. (iii) Swing Loan Quoted Rate Option: A fixed rate per annum based upon Mellon's cost of funds plus a margin as such rate is set and quoted to the Borrower on any given day by Mellon in its sole discretion. 3.2 Interest Periods. The interest period specified in a Loan Request (the "Interest Period") (i) during which a Euro Rate Option shall apply shall be one, two, three or six Months, provided, that prior to the Business Day following the Syndication Date, such Interest Period shall be one month and (ii) during which a Swing Loan Quoted Rate Option shall apply shall be one, two, three, four or five Business Days or two or three weeks or thirty (30) days; and provided, further, that: 3.2.1 Ending Date and Business Day. Any Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; 3.2.2 Amount of Borrowing Tranche. Each Borrowing Tranche of a Loan to which the Revolving Credit Euro-Rate Option applies shall be in integral multiples of $1,000,000 and not less than $3,000,000; 3.2.3 Termination Before Expiration Date. The Borrower shall not select, convert to or renew an Interest Period for any portion of the Loans that would end after the Expiration Date; and -34- 3.2.4 Renewals. In the case of the renewal of a Revolving Credit Euro-Rate Option at the end of an Interest Period, the first day of the new Interest Period shall be the last day of the preceding Interest Period, without duplication in payment of interest for such day. 3.3 Interest After Default. To the extent permitted by Law, upon the occurrence of an Event of Default and until such time such Event of Default shall have been cured or waived: 3.3.1 Letters of Credit Fees, Interest Rate. The Letters of Credit Fees and the rate of interest for each Loan otherwise applicable pursuant to Section 2.10 or Section 3.1, respectively, shall be increased by 2.0% per annum; 3.3.2 Other Obligations. Each other Obligation hereunder if not paid when due shall bear interest at a rate per annum equal to the sum of the rate of interest applicable under the Base Rate Option plus an additional 2.0% per annum from the time such Obligation becomes due and payable and until it is paid in full; and 3.3.3 Acknowledgment. The Borrower acknowledges that the increased rates referred to in this Section 3.3 reflect, among other things, the fact that the Loans or other amounts have become a substantially greater risk given their default status and that the Banks are entitled to additional compensation for such risk. All such interest shall be payable by Borrower upon demand by the Agent. 3.4 Euro-Rate Unascertainable. 3.4.1 Unascertainable. If on any date on which a Euro-Rate would otherwise be determined, the Agent shall have determined that: (i) adequate and reasonable means do not exist for ascertaining such Euro-Rate, or -35- (ii) a contingency has occurred which materially and adversely affects the London interbank market relating to the Euro-Rate, then the Agent shall have the rights specified in Section 3.4.3. 3.4.2 Illegality; Increased Costs; Deposits Not Available. If at any time any Bank shall have determined that: (i) the making, maintenance or funding of any Loan to which a Revolving Credit Euro-Rate Option applies has been made impracticable or unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Official Body or with any request or directive of any Official Body (whether or not having the force of Law), or (ii) such Revolving Credit Euro-Rate Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of any such Loan, or (iii) after making all reasonable efforts, deposits of the relevant amount in Dollars for the relevant Interest Period for a Loan to which a Revolving Credit Euro- Rate Option applies, are not available to such Bank with respect to such Loan in the London interbank market, then such Bank shall have the rights specified in Section 3.4.3. 3.4.3 Agent's and Bank's Rights. In the case of any event specified in Section 3.4.1, the Agent shall promptly so notify the Banks and the Borrower thereof, and in the case of a determination specified in Section 3.4.2, such Bank shall promptly so notify the Agent and endorse a certificate to such notice as to the specific circumstances of such notice, and the Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrower. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of (A) the Banks, in the case of such notice given by the Agent in respect of Section 3.4.1, or (B) such Bank, in the case of such notice given by such Bank in respect of Section 3.4.2, to allow the Borrower to select, convert to or renew a Revolving Credit Euro-Rate Option shall be suspended until the Agent shall have later notified the Borrower, or such Bank shall have later notified the Agent, of the Agent's or such Bank's, as the case may be, determination that the circumstances giving rise to such previous determination no longer exist. -36- If at any time the Agent makes a determination under Section 3.4.1 and the Borrower has previously notified the Agent of its selection of, conversion to or renewal of a Revolving Credit Euro-Rate Option and such Interest Rate Option has not yet gone into effect, such notification shall be deemed to provide for selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to the affected Loans. If any Bank notifies the Agent of a determination under Section 3.4.2, the Borrower shall, subject to the Borrower's indemnification Obligations under Section 4.6.2, as to any Loan of such Bank to which a Revolving Credit Euro-Rate Option applies, on the date specified in such notice convert such Loan to the Base Rate Option otherwise available with respect to such Loan. Absent due notice from the Borrower of conversion, such Loan shall automatically be converted to the Base Rate Option otherwise available with respect to such Loan upon such specified date. Upon any such conversion, the Borrower shall have the right to prepay Loans in the amount of such Loan on the date of such conversion without providing the notice otherwise required by Section 4.4.1. If an event occurs that makes the applicable Euro-Rate Option no longer available to the Borrower, the Borrower, the Agent and the Banks shall negotiate in good faith to provide a replacement Interest Rate Option for the affected Euro-Rate Option that is mutually satisfactory. 3.5 Selection of Interest Rate Options. If the Borrower fails to select a new Interest Period to apply to any Borrowing Tranche to which a Revolving Credit Euro-Rate Option applies at the expiration of an existing Interest Period applicable to such Borrowing Tranche in accordance with the provisions of Section 3.2, the Borrower shall be deemed to have converted such Borrowing Tranche to the Revolving Credit Base Rate Option commencing upon the last day of such Interest Period. 4. PAYMENTS 4.1 Payments. All payments and prepayments to be made in respect of principal, interest, Commitment Fees, Letters of Credit Fees, the Agent's Fee, or other amounts due from the Borrower hereunder (other than the fees and expenses referenced in Section 2.10.3 which are to be paid to the Agent as provided in such sections and the fees and expenses referenced in Section 9.15, each of which shall be paid in accordance with such sections) shall be payable prior to 12:00 p.m., Pittsburgh, Pennsylvania time, on the date when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower, and without set-off, counterclaim or other deduction of any nature, and an action therefor shall immediately accrue to the extent of any non-payment thereof. Payments of principal and interest on Loans and of Commitment Fees and Letters of Credit Fees shall be made to the Agent at the Principal Office for the ratable accounts of the Banks in Dollars and in immediately available funds, and the Agent shall promptly distribute such amounts to the Banks in immediately available funds; provided that in the event payments are received by noon (Pittsburgh, Pennsylvania time) by the Agent with respect to the Loans and such payments are not distributed -37- to the Banks on the same day received by the Agent, the Agent shall pay the Banks the Federal Funds Effective Rate with respect to the amount of such payments for each day held by the Agent and not distributed to the Banks. The Agent's and each Bank's statement of account, ledger or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement and shall be deemed an "account stated." 4.2 Pro Rata Treatment of Banks. Each borrowing of a Revolving Credit Loan shall be allocated to each Bank according to its Ratable Share, and each selection of, conversion to or renewal of any Interest Rate Option and each payment or prepayment by the Borrower with respect to principal, interest, Commitment Fees related to the Revolving Credit Loans, Letters of Credit Fees, or other fees (except for the Agent's Fee, and any fees to the Agent with respect to the issuance, administration or payments under Letters of Credit) or amounts due from the Borrower hereunder to the Banks with respect to the Revolving Credit Loans to it, shall (except as provided in Section 3.4.2 [Illegality, Increased Costs; Deposits not Available], 4.4 [Voluntary Prepayments] or 4.5 [Additional Compensation in Certain Circumstances]) be made in proportion to the applicable Revolving Credit Loans outstanding from each Bank and, if no such Revolving Credit Loans are then outstanding, in proportion to the Ratable Share of each Bank. 4.3 Interest Payment Dates. Interest on Loans to which the Base Rate Option applies shall be due and payable in arrears on the first Business Day of each January, April, July and October after the date hereof and on the Expiration Date and upon acceleration of the Notes. Interest on Loans to which the Revolving Credit Euro-Rate Option applies shall be due and payable on the last day of each Interest Period for those Loans and, if any such Interest Period is longer than three Months, also on the last day of every third Month during such Interest Period. Interest on Swing Loans subject to the Swing Loan Quoted Rate Option shall be due and payable in arrears on the first Business Day of each January, April, July and October and upon acceleration of the Notes. Without limitation on Section 4.4.1, interest on mandatory prepayments of principal under Section 4.5 shall be due on the date such mandatory prepayment is due. Interest on the principal amount of each Loan or other monetary Obligation shall be due and payable on demand after such principal amount or other monetary Obligation becomes due and payable (whether on the stated maturity date, upon acceleration or otherwise). 4.4 Voluntary Prepayments. 4.4.1 Right to Prepay. The Borrower shall have the right at its option from time to time to prepay the Loans in whole or part without premium or penalty (except as provided in Section 4.5): -38- (i) at any time with respect to any Loan to which the Base Rate Option applies, (ii) on the last day of the applicable Interest Period with respect to Loans to which a Revolving Credit Euro-Rate Option or a Swing Loan Quoted Rate Option applies, and (iii) on the date specified in a notice by any Bank pursuant to Section 3.4 [Euro-Rate Unascertainable], with respect to any Loan to which a Revolving Credit Euro- Rate Option applies. Whenever the Borrower desires to prepay any part of the Loans, it shall provide a prepayment notice to the Agent not later than 10:00 a.m., Pittsburgh, Pennsylvania time on the Business Day prior to the date of prepayment of Loans setting forth the following information (provided no notice from Borrower is required pursuant to subsection (iii) above): (x) the date, which shall be a Business Day, on which the proposed prepayment is to be made; (y) a statement indicating the application of the prepayment to the Revolving Credit Loans; and (z) the total principal amount of such prepayment, which shall not be less than $3,000,000 or integral multiples of $1,000,000. All prepayment notices shall be irrevocable. The principal amount of the Loans for which a prepayment notice is given, together with interest on such principal amount, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made. If the Borrower prepays a Loan pursuant to this Section but fails to specify the applicable Borrowing Tranche which the Borrower is prepaying, the prepayment shall be applied first to Swing Loans to which the Swing Loan Base Rate Option applies, then to Revolving Credit Loans to which the Base Rate Option applies, then to Swing Loans to which the Swing Loan Quoted Rate Option applies, then to Revolving Credit Loans to which the Revolving Credit Euro-Rate Option applies. Any prepayment hereunder shall be subject to the Borrower's Obligation to indemnify the Banks under Section 4.6.2. 4.5 Mandatory Reduction of Commitments; Mandatory Payments and Prepayments. 4.5.1 Qualified Note Placement. If the Borrower issues notes pursuant to a Qualified Note Placement, simultaneously with the closing thereof, the proceeds of such issuance shall be first applied to -39- Swing Loans to which the Swing Loan Base Rate Option applies, then to Revolving Credit Loans to which the Base Rate Option applies, then to Swing Loans to which the Swing Loan Quoted Rate Option applies, then to Revolving Credit Loans to which the Revolving Credit Euro-Rate Option applies. Upon each mandatory prepayment of Loans pursuant to this Section 4.5.1, the Revolving Credit Commitments automatically shall be permanently and irrevocably reduced by an amount equal to such prepayment. 4.6 Additional Compensation in Certain Circumstances. 4.6.1 Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law, guideline or interpretation or any change in any Law, guideline or interpretation or application thereof by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of Law) of any central bank or other Official Body: (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Notes, the Loans or payments by the Borrower of principal, interest, Commitment Fees, or other amounts due from the Borrower hereunder or under the Notes (except for taxes on the overall net income of such Bank), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank, or (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or letters of credit, other credits or commitments to extend credit extended by, any Bank, or (B) otherwise applicable to the obligations of any Bank under this Agreement, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank with respect to this Agreement, the Notes or the making, maintenance or funding of any part of the Loans (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on any Bank's capital, taking into consideration such Bank's customary policies with respect to capital adequacy) by an amount which such Bank in its sole discretion deems to be material, such Bank shall from time to time notify the Borrower and the Agent of the amount determined in good -40- faith (using any averaging and attribution methods employed in good faith which shall be binding upon the parties absent manifest error) by such Bank to be necessary to compensate such Bank for such increase in cost, reduction of income or additional expense or reduced rates of return. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the Borrower to such Bank five (5) Business Days after such notice is given, subject, however, to the provisions of Section 10.5.3. 4.6.2 Indemnity. In addition to the compensation required by Section 4.6.1, the Borrower shall indemnify each Bank against all liabilities, losses or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Loans subject to a Revolving Credit Euro-Rate Option) which such Bank sustains or incurs as a consequence of any (i) payment, prepayment, conversion or renewal of any Loan to which a Revolving Credit Euro-Rate Option applies on a day other than the last day of the corresponding Interest Period (whether or not such payment or prepayment is mandatory, voluntary or automatic and whether or not such payment or prepayment is then due), (ii) attempt by the Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any Loan Requests under Section 2.5 or any notice relating to prepayments under Section 4.4, or (iii) default by the Borrower in the performance or observance of any covenant or condition contained in this Agreement or any other Loan Document, including any failure of the Borrower to pay when due (by acceleration or otherwise) any principal, interest, Commitment Fee or any other amount due hereunder. If any Bank sustains or incurs any such loss or expense, it shall from time to time notify the Borrower of the amount determined in good faith by such Bank (which determination may include such assumptions, allocations of costs and expenses and averaging or attribution methods as such Bank shall deem reasonable which shall be binding on the parties absent manifest error) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. -41- 4.7 Settlement Date Procedures. In order to minimize the transfer of funds between the Banks and the Agent, the Borrower may borrow, repay and reborrow Swing Loans, and Mellon may make Swing Loans, as provided in Section 2.1.2 hereof during the period between Settlement Dates. On each Settlement Date, the Banks agree among themselves to effect a settlement so that each Bank shall have its Ratable Share of all Revolving Credit Loans (including those Revolving Credit Loans designated by Mellon as Swing Loans) outstanding as of the close of business on the business day immediately preceding such Settlement Date. not later than 10:00 a.m. on each Settlement Date when Swing Loans are outstanding, the Agent shall notify each Bank of its Ratable Share of the Revolving Credit Loans outstanding as of the close of business on the business day immediately preceding such Settlement Date. Prior to 3:00 p.m. Pittsburgh time on such Settlement Date, each Bank shall pay to the Agent the amount, if any, necessary to effectuate the settlement contemplated by this Section, and the Agent shall promptly pay to each Bank its Ratable Share of all payments, if any, made by the Borrower to the Agent with respect to the Revolving Credit Loans not theretofor paid and any payments due such Bank in settlement under this Section. The Agent shall also effect settlement in accordance with this Section 4.7 on the proposed Borrowing Dates for all Revolving Credit Loans and may at its option effect settlement on any other Business Day. if an Event of Default shall occur and on the date of such occurrence the sum of Mellon's Revolving Credit Loans shall be less than Mellon's Ratable Share of all Revolving Credit Loans, Mellon shall pay to the Agent the amount, if any, necessary to effectuate the settlement between the Banks as contemplated by this Section 4.7. These settlement procedures are established solely as a matter of administrative convenience, and nothing contained in this Section 4.7 shall relieve the Banks of their obligations to fund Revolving Credit Loans on dates other than a Settlement Date pursuant to Section 2.7. Mellon may at any time, at its option, for any reason whatsoever require each Bank to pay immediately to Mellon such Bank's Ratable Share of the outstanding Swing Loans, and each Bank may at any time require the Agent to pay immediately to such Bank its Ratable Share of all payments made by the Borrower to the Agent with respect to the Revolving Credit Loans. 4.8 Interbank Market Presumption. For all purposes of this Agreement and each Note with respect to any aspects of the Euro-Rate, any Loan under the Revolving Credit Euro-Rate Option, each Bank and Agent shall be presumed to have obtained rates, funding, currencies, deposits, and the like in the applicable interbank market regardless whether it did so or not; and, each Bank's and Agent's determination of amounts payable under, and actions required or authorized by, Sections 3.4 and 4.6 shall be calculated, at each Bank's and Agent's option, as though each Bank and Agent funded its share of each Borrowing Tranche of Loans under the Revolving Credit Euro-Rate Option through the purchase of deposits of the types and maturities corresponding to the deposits used as a reference in accordance with the terms hereof in determining the Euro-Rate applicable to such Loans, whether in fact that is the case. -42- 4.9 Taxes. 4.9.1 No Deductions. All payments made by the Borrower hereunder and under each Note shall be made free and clear of and without deduction for any present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the net income of any Bank and all income and franchise taxes applicable to any Bank of the United States (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by Law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) each Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall timely pay the full amount deducted to the relevant tax authority or other authority in accordance with applicable Law. 4.9.2 Stamp Taxes. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made hereunder or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). 4.9.3 Indemnification for Taxes Paid by a Bank. The Borrower shall indemnify each Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.9) paid by any Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date a Bank makes written demand therefor. 4.9.4 Certificate. Within 30 days after the date of any payment of any Taxes by the Borrower, the Borrower shall furnish to each Bank, at its address referred to herein, the original or a certified copy of a receipt evidencing payment thereof. If no Taxes are payable in respect of any payment by the Borrower, the Borrower shall, if so requested by a Bank, provide a certificate of an officer of the Borrower to that effect. -43- 4.9.5 Survival. Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 4.9.1 through 4.9.4 shall survive the payment in full of principal and interest hereunder and under any instrument delivered hereunder. 5. REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties. The Borrower represents and warrants to the Agent and each of the Banks as follows: 5.1.1 Organization and Qualification. Each Loan Party and each Subsidiary of any Loan Party is a corporation or partnership, duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each Loan Party and each Subsidiary of any Loan Party has the lawful power to own or lease its properties and to engage in the business it presently conducts or proposes to conduct. Each Loan Party and each Subsidiary of any Loan Party is listed on Schedule 5.1.1 and is duly licensed or qualified and in good standing in each jurisdiction where the property owned or leased by it or the nature of the business transacted by it or both makes such licensing or qualification necessary (except where the failure to be so licensed or qualified would not constitute a Material Adverse Change), and upon request of the Agent, the Borrower will promptly furnish a written list of every jurisdiction where each Subsidiary and Loan Party is so qualified. 5.1.2 Subsidiary and Joint Venture Matters. Schedule 5.1.2 sets forth the authorized, issued and outstanding capital stock of or ownership interest in each Subsidiary and each Joint Venture and the record owner of such capital stock or other ownership interest, as the case may be. Other than as set forth on Schedule 5.1.2, each of the Borrower's Subsidiaries is directly or indirectly wholly owned by the Borrower and all of the issued and outstanding shares of capital stock of each such Subsidiary (referred to herein as the "Subsidiary Shares") are owned free and clear in each case of any Lien and each Joint Venture interest is owned by the Borrower or any of its Subsidiaries free and clear of any Lien. All Subsidiary Shares have been validly issued, and all Subsidiary Shares are fully paid and, except as otherwise set forth on such Schedule 5.1.2, nonassessable. There are no -44- options, warrants or other rights outstanding to purchase any Subsidiary Shares except as indicated on Schedule 5.1.2. 5.1.3 Power and Authority. Each Loan Party has full power to enter into, execute, deliver and carry out this Agreement and the other Loan Documents to which it is a party, to incur the Indebtedness contemplated by the Loan Documents and to perform its Obligations under the Loan Documents to which it is a party, and all such actions have been duly authorized by all necessary proceedings on its part. 5.1.4 Validity and Binding Effect. This Agreement has been duly and validly executed and delivered by each Loan Party, and each other Loan Document which any Loan Party is required to execute and deliver on or after the date hereof will have been duly executed and delivered by such Loan Party on the required date of delivery of such Loan Document. This Agreement and each other Loan Document constitutes, or will constitute, legal, valid and binding obligations of each Loan Party which is or will be a party thereto on and after its date of delivery thereof, enforceable against such Loan Party in accordance with its terms, except to the extent that enforceability of any such Loan Document may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance. 5.1.5 No Conflict. Neither the execution and delivery of this Agreement or the other Loan Documents by any Loan Party nor the consummation of the transactions herein or therein contemplated or compliance with the terms and provisions hereof or thereof by any of them (i) will conflict with, constitute a default under or result in any breach of (A) the terms and conditions of the certificate of incorporation, bylaws or other organizational documents of any Loan Party or any of its Subsidiaries which is a party thereto or (B) any Law or any agreement or instrument or order, writ, judgment, injunction or decree to which any such Loan Party or any of its Subsidiaries is a party, is bound by or is subject, which conflict, default or breach reasonably would be expected to result in a Material Adverse Change, or (ii) will result in the creation or enforcement of any Lien whatsoever upon any property (now or hereafter acquired) of any Loan Party or any of its Subsidiaries (other than Liens granted under the Loan Documents). 5.1.6 Litigation. Except as set forth on Schedule 5.1.6, there are no actions, suits, proceedings or investigations pending or, to the knowledge of any Loan Party, threatened against such Loan Party or any Subsidiary of any Loan Party at law or equity before any Official Body which individually or in the aggregate may result in any Material Adverse Change. None of the -45- Loan Parties or any Subsidiaries of any Loan Party is in violation of any order, writ, injunction or any decree of any Official Body which reasonably would be expected to result in any Material Adverse Change. 5.1.7 Title to Properties. Each Loan Party and each Subsidiary of any Loan Party has good and marketable title to or a valid leasehold interest in all material properties, assets and other rights which it purports to own or lease or which are reflected as owned or leased on its books and records, free and clear of all Liens except Permitted Liens, and subject to the terms and conditions of the applicable leases. All material leases of property are in full force and effect without the necessity for any consent which has not previously been obtained upon consummation of the transactions contemplated hereby. 5.1.8 Financial Statements. (i) Historical Statements. The Borrower has delivered to the Agent copies of its (A) audited consolidated year- end financial statements for and as of the end of the three fiscal years ended October 31, 1995 (the "Annual Statements" ) and (B) unaudited consolidated interim financial statements for the fiscal year to date and as of the end of the fiscal quarter ended July 31, 1996 (the "Interim Statements", and together with the Annual Statements, the "Historical Statements"). The Historical Statements were compiled from the books and records maintained by the Borrower's management, are correct and complete and fairly represent the consolidated financial condition of the Borrower and its Subsidiaries as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP consistently applied; (ii) Financial Projections. The Borrower has delivered to the Agent financial projections of the Borrower and its Subsidiaries for fiscal years 1996, 1997, 1998, 1999, 2000, and 2001 derived from various assumptions of the Borrower's management (the "Financial Projections"). The Financial Projections reflect the reasonable expectations of the Borrower's management as of the Closing Date in light of the history of the business, present and foreseeable conditions and intentions of the Borrower's management, all based on the assumptions thereto, which assumptions were made and based upon information available at the -46- time of preparation of such projections. The Financial Projections accurately reflect the liabilities of the Borrower and its Subsidiaries incurred pursuant to the Loan Documents upon consummation of the transactions contemplated hereby as of the Closing Date; and (iii) Accuracy of Financial Statements. Neither the Borrower nor any Subsidiary of the Borrower has as of the date of the Historical Statements any material liabilities, contingent or otherwise, or forward or long-term commitments that are not disclosed in the Historical Statements or in the notes thereto, and except as disclosed therein there are no unrealized or anticipated losses from any commitments of the Borrower or any Subsidiary of the Borrower which reasonably would be expected to cause a Material Adverse Change. Since October 31, 1995, no Material Adverse Change has occurred provided however, that neither the Tender Offer nor the Spin-Off shall be deemed to constitute a Material Adverse Change for the purposes of this clause (iii). 5.1.9 Margin Stock. None of the Loan Parties or any Subsidiaries of any Loan Party engages or intends to engage principally, or as one of its important activities, in the business of extending credit for the purpose, immediately, incidentally or ultimately, of purchasing or carrying margin stock (within the meaning of Regulation U). No part of the proceeds of any Loan or issued Letter of Credit has been or will be used, immediately, incidentally or ultimately, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of or which is inconsistent with the provisions of the regulations of the Board of Governors of the Federal Reserve System. 5.1.10 Full Disclosure. Neither this Agreement nor any other Loan Document, nor any certificate, statement, agreement or other documents furnished to the Agent or any Bank in connection herewith or therewith, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading. There is no fact known to any Executive Officer of any Loan Party which materially adversely affects the business, property, assets, financial condition, results of operations or prospects of any Loan Party or Subsidiary of any Loan Party which has not been set forth in this Agreement or in the certificates, statements, -47- agreements or other documents furnished in writing to the Agent and the Banks prior to or at the date hereof in connection with the transactions contemplated hereby. 5.1.11 Taxes. All federal, state, local and other tax returns required to have been filed with respect to each Loan Party and each Subsidiary of any Loan Party have been filed, other than those for which the failure to file the same would not reasonably be expected to result in a Material Adverse Change, and payment or adequate provision has been made for the payment of all taxes, fees, assessments and other governmental charges shown to be owing pursuant to said returns or to assessments received, except to the extent that such taxes, fees, assessments and other charges are being contested in good faith by appropriate proceedings diligently conducted and for which such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made. Except with respect to the consolidated Federal income tax return for Intertech and its Subsidiaries for the fiscal year ended October 31, 1993, there are no agreements or waivers extending the statutory period of limitations applicable to any federal income tax return of any Loan Party or Subsidiary of any Loan Party for any period. 5.1.12 Consents and Approvals. No consent, approval, exemption, order or authorization of, or a registration or filing with, any Official Body or any other Person is required by any Law or any agreement in connection with the execution, delivery and carrying out of this Agreement and the other Loan Documents by any Loan Party, except as listed on Schedule 5.1.12, all of which shall have been obtained or made on or prior to the Closing Date except as otherwise indicated on Schedule 5.1.12. 5.1.13 No Event of Default; Compliance with Instruments. No event has occurred and is continuing and no condition exists now or will exist after giving effect to and as a result of the extensions of credit to be made on the Closing Date under the Loan Documents which constitutes an Event of Default or Potential Default. None of the Loan Parties or any Subsidiaries of any Loan Party is in violation of (i) any term of its certificate of incorporation, bylaws, or other organizational documents or (ii) any material agreement or instrument to which it is a party or by which it or any of its properties may be subject or bound where such violation would constitute a Material Adverse Change. 5.1.14 Patents, Trademarks, Copyrights, Licenses, Etc. A Loan Party or a Subsidiary of a Loan Party owns or possesses all the material patents, trademarks, service marks, trade names, copyrights, licenses, registrations, franchises, permits and rights necessary to own and operate its properties and to carry on its -48- business as presently conducted and planned to be conducted by the Borrower and its Subsidiaries taken as a whole, without known conflict by, or with the rights of, others. 5.1.15 Insurance. The Borrower has delivered to the Agent a true and correct listing of the property and general liability insurance of the Borrower. No notice has been given or claim made and to the best knowledge of the Executive Officers and the individuals responsible for insurance matters of the Loan Parties no grounds exist to cancel or avoid any of such policies or bonds or to reduce the coverage provided thereby. Such policies and bonds provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of each Loan Party and each Subsidiary of any Loan Party in accordance with prudent business practice in the industry of the Loan Parties and their Subsidiaries. 5.1.16 Compliance with Laws. The Loan Parties and their Subsidiaries are in compliance in all material respects with all applicable Laws (other than Environmental Laws which are specifically addressed in Section 5.1.21) in all jurisdictions in which any Loan Party or Subsidiary of any Loan Party is presently or currently anticipates it will be doing business except where the failure to do so would not constitute a Material Adverse Change. 5.1.17 Material Contracts. Each material contract relating to the business operations of each Loan Party and each Subsidiary of any Loan Party, is valid, binding and enforceable upon such Loan Party or Subsidiary to the extent such Person is a party thereto in accordance with its respective terms, and the Loan Party which is a party thereto has not received actual notice of a default thereunder with respect to parties other than such Loan Party or Subsidiary. For purposes of this Section 5.1.17 the term "material contracts" shall mean those contracts or other agreements which the Borrower would be required to file with the Securities and Exchange Commission pursuant to item 601(a)(10) of Regulation S-K promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934. 5.1.18 Investment Companies. None of the Loan Parties or any Subsidiary of any Loan Party is an "investment company" registered or required to be registered under the Investment Company Act of 1940 or under the "control" of an "investment company" as such terms are defined in the Investment Company Act of 1940 and shall not become such an "investment company" or under such "control". -49- 5.1.19 Plans and Benefit Arrangements. Except as set forth on Schedule 5.1.19: (i) The Borrower and each other member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans and Multiemployer Plans. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of the Borrower, with respect to any Multiemployer Plan or Multiple Employer Plan, which reasonably would be expected to result in any material liability of the Borrower or any other member of the ERISA Group. The Borrower and all other members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any Law pertaining thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each other member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC, and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA; (ii) To the best of each Loan Parties' knowledge, each Multiemployer Plan and Multiple Employer Plan is able to pay benefits thereunder when due; (iii) Neither the Borrower nor any other member of the ERISA Group has instituted or intends to institute proceedings to terminate any Plan; (iv) No event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with respect to any Plan, and no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made to any Plan; (v) The aggregate actuarial present value of all benefit liabilities (whether or not vested) under the Plans, determined on an ongoing basis, as disclosed in, and as of -50- the date of, the most recent actuarial report for each such Plan, does not exceed the aggregate fair market value of the assets of such Plans; (vi) Neither the Borrower nor any other member of the ERISA Group has incurred or reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower nor any other member of the ERISA Group has been notified by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been terminated within the meaning of Title IV of ERISA and, to the best knowledge of the Borrower, no Multiemployer Plan or Multiple Employer Plan is reasonably expected to be reorganized or terminated, within the meaning of Title IV of ERISA; (vii) To the extent that any Benefit Arrangement is insured, the Borrower and all other members of the ERISA Group have paid when due all premiums required to be paid for all periods through the Closing Date. To the extent that any Benefit Arrangement is funded other than with insurance, the Borrower and all other members of the ERISA Group have made when due all contributions required to be paid for all periods through the Closing Date; and (viii) All Plans, Benefit Arrangements and Multiemployer Plans have been administered in all material respects in accordance with their terms and applicable Law. 5.1.20 Employment Matters. Each of the Loan Parties and each of their Subsidiaries is in compliance with the Labor Contracts and all applicable federal, state and local labor and employment Laws including those related to equal employment opportunity and affirmative action, labor relations, minimum wage, overtime, child labor, medical insurance continuation, worker adjustment and relocation notices, immigration controls and worker and unemployment compensation, where the failure to comply reasonably would be expected to constitute a Material Adverse Change. There are no outstanding grievances, arbitration awards or appeals therefrom arising out of the Labor Contracts or current or threatened strikes, picketing, handbilling or other work stoppages or slowdowns at facilities of any of the Loan Parties or any of their Subsidiaries which in any case would constitute a Material Adverse Change. -51- 5.1.21 Environmental Matters. ---------------------- Except as disclosed on Schedule 5.1.21: (i) Except for notices which would not reasonably be expected to result in a Material Adverse Change, none of the Loan Parties or any Subsidiary of any Loan Party has received any Environmental Complaint from any Official Body or private Person alleging that such Loan Party or Subsidiary or any prior owner of any Property or acquirer of any Property from any Loan Party or Subsidiary is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 9601, et seq., and none of the Loan Parties has any reason to believe that such an Environmental Complaint might be received. There are no pending or, to any Loan Party's knowledge, threatened Environmental Complaints relating to any Loan Party or any Subsidiary of any Loan Party or, to any Loan Party's knowledge, any prior or subsequent owner of any Property pertaining to, or arising out of, any Environmental Conditions which reasonably would be expected to result in a Material Adverse Change, (ii) Except for Environmental Conditions, violations or failures which individually and in the aggregate would not reasonably be expected to result in a Material Adverse Change, there are no circumstances at, on or under any Property that constitute a breach of or non- compliance with any of the Environmental Laws, and there are no past or present Environmental Conditions at, on or under any Property or, to any Loan Party's knowledge, at, on or under adjacent property, that prevent compliance with the Environmental Laws at any Property, (iii) Neither any Property nor any structures, improvements, equipment, fixtures, activities or facilities thereon or thereunder contain or use Regulated Substances, except in compliance with Environmental Laws, which would reasonably be expected to result in a Material Adverse Change. There are no processes, facilities, operations, equipment or other activities at, on or under any Property, or, to any Loan Party's knowledge, at, on or under adjacent property, that currently result in the release or threatened -52- release of Regulated Substances onto any Property, except to the extent that such releases or threatened releases are not a breach of or otherwise not a violation of the Environmental Laws or would not reasonably be expected to result in a Material Adverse Change, (iv) There are no aboveground storage tanks, underground storage tanks or underground piping associated with such tanks, used for the management of Regulated Substances at, on or under any Property that (a) do not have, to the extent required by Environmental Laws, a full operational secondary containment system in place, and (b) are not otherwise in compliance with all Environmental Laws, except in any case where such would not reasonably be expected to result in a Material Adverse Change. There are no abandoned underground storage tanks or underground piping associated with such tanks, previously used for the management of Regulated Substances at, on or under any Property that have not either been closed in place in accordance with Environmental Laws or removed in compliance with all applicable Environmental Laws and no contamination associated with the use of such tanks exists on any Property that is not in compliance with Environmental Laws, except in any case where such would not reasonably be expected to result in a Material Adverse Change, (v) The applicable Loan Party or a Subsidiary of a Loan Party has all permits, licenses, authorizations, plans and approvals necessary under the Environmental Laws for the conduct of the business of the Borrower and its Subsidiaries taken as a whole, except in any case where the failure to so have would not reasonably be expected to result in a Material Adverse Change. Each Loan Party and each Subsidiary of a Loan Party has submitted all notices, reports and other filings required by the Environmental Laws to be submitted to an Official Body which pertain to past and current operations on any Property, except in any case where the failure to so submit would not reasonably be expected to result in a Material Adverse Change, and (vi) Except for violations which individually and in the aggregate would not result in a Material Adverse Change, -53- all past and present on-site generation, storage, processing, treatment, recycling, reclamation, disposal or other use or management of Regulated Substances at, on, or under any Property and all off- site transportation, storage, processing, treatment, recycling, reclamation, disposal or other use or management of Regulated Substances have been done in accordance with the Environmental Laws. 5.1.22 Senior Debt Status. ------------------- The Obligations of each Loan Party under this Agreement, the Notes, the Master Guaranty Agreement and each of the other Loan Documents to which it is a party do rank and will rank no less than pari passu in priority of payment with all other Indebtedness of such Loan Party except Indebtedness of such Loan Party to the extent secured by Permitted Liens. There is no Lien upon or with respect to any of the properties or income of any Loan Party or Subsidiary of any Loan Party which secures indebtedness or other obligations of any Person except for Permitted Liens. 5.1.23 Solvency. --------- The Borrower and each Domestic Subsidiary is Solvent. 5.1.24 Schedule of Indebtedness. ------------------------- The Borrower has no Indebtedness not listed on Schedule 5.1.24 except items not exceeding $500,000 individually or $1,000,000 in the aggregate. 5.1.25 Material Adverse Change. ------------------------ Since October 31, 1995, no Material Adverse Change has occurred, provided however, that neither the Tender Offer nor the Spin-Off shall be deemed to constitute a Material Adverse Change for the purposes of this Section 5.1.25. 5.2 Updates to Schedules. --------------------- Except as set forth in the next sentence, no Schedule to this Agreement may be updated, amended or modified without the consent of the Required Banks given or withheld in their sole and absolute discretion. The Borrower shall provide to the Agent updates to Schedule 5.1.1, 5.1.2 and 5.1.24 on a quarterly basis provided, however, that the Agent's receipt of any such update shall not imply that the Agent or any Bank has consented to any event, transaction or change of circumstance reflected in such update, all of which shall continue to be governed by the other provisions of this Agreement. -54- 6. CONDITIONS OF LENDING --------------------- The obligation of each Bank to make Loans and of the Agent to issue Letters of Credit is subject to the performance by each of the Loan Parties of its Obligations to be performed hereunder at or prior to the making of any such Loans or issuance of such Letters of Credit and to the satisfaction of the following further conditions: 6.1 First Revolving Credit Loans. ----------------------------- On the Closing Date: 6.1.1 Officer's Certificate. ---------------------- The representations and warranties of the Borrower contained in Article 5 and in each of the other Loan Documents shall be true and accurate on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein), and the Borrower shall have performed and complied with all covenants and conditions hereof and thereof, no Event of Default or Potential Default shall have occurred and be continuing or shall exist; and there shall be delivered to the Agent for the benefit of each Bank a certificate of the Borrower dated the Closing Date and signed by its Chief Executive Officer, President or Chief Financial Officer, to each such effect. 6.1.2 Secretary's Certificate. ------------------------ There shall be delivered to the Agent for the benefit of each Bank a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Borrower, certifying as appropriate as to: (i) all action taken by the Borrower in connection with this Agreement and the other Loan Documents; (ii) the names of the officer or officers authorized to sign this Agreement and the other Loan Documents and the true signatures of such officer or officers and specifying the Authorized Officers permitted to act on behalf of the Borrower for purposes of this Agreement and the true signatures of such officers, on which the Agent and each Bank may conclusively rely; and (iii) copies of its organizational documents, including its certificate of incorporation and bylaws (or their equivalents) as in effect on the Closing Date certified by -55- the appropriate governmental official where such documents are filed in a governmental office together with certificates from the appropriate governmental officials as to the continued existence and good standing of the Borrower in each jurisdiction where organized or qualified to do business. 6.1.3 Delivery of Loan Documents. --------------------------- The Loan Documents shall have been executed and delivered to the Agent for the benefit of the Banks. 6.1.4 Opinions of Counsel. -------------------- There shall be delivered to the Agent for the benefit of each Bank written opinions of counsel for the Loan Parties listed on Schedule 6.1.4 (who may rely on the opinions of such other counsel as may be acceptable to the Agent), dated the Closing Date and in form and substance satisfactory to the Agent and its counsel. 6.1.5 Legal Details. -------------- All legal details and proceedings in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be in form and substance reasonably satisfactory to the Agent and its counsel, and the Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance reasonably satisfactory to the Agent and said counsel, as the Agent or said counsel may reasonably request. 6.1.6 Payment of Fees and Reimbursement of Expenses. ---------------------------------------------- The Borrower shall have paid or caused to be paid to the Agent for itself (and, as applicable, for the account of the Banks) to the extent not previously paid (i) all fees accrued through the Closing Date set forth in the commitment letter and related fee letter each dated October 15, 1996 and (ii) all costs and expenses for which the Agent and the Banks are entitled to be reimbursed thereunder and under this Agreement, to the extent they have been incurred as of the Closing Date. 6.1.7 Consents. --------- All material consents required to effectuate the transactions contemplated hereby as set forth on Schedule 5.1.12 shall have been obtained. -56- 6.1.8 Officer's Certificate Regarding MACs. Since October 31, 1995 (i) no Material Adverse Change shall have occurred and (ii) there shall have been no material change in the management of the Borrower (except as disclosed to the Banks in a writing referencing this provision); and there shall have been delivered to the Agent for the benefit of each Bank a certificate dated the Closing Date and signed by the Chief Executive Officer, President or Chief Financial Officer of the Borrower to each such effect; provided, however neither the Tender Offer nor the Spin-Off shall be deemed to constitute a Material Adverse Change. 6.1.9 No Violation of Laws. The making of the Loans and issuance of the Letters of Credit shall not contravene any Law applicable to any Loan Party or any of the Banks. 6.1.10 No Actions or Proceedings. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed against the Borrower, any Subsidiary, the Agent or any Bank or any of their respective officers or directors in their capacity as such before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, this Agreement or the other Loan Documents, which, in the Agent's sole discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement or any of the other Loan Documents. 6.1.11 Insurance Policies; Certificates of Insurance. The Borrower shall have delivered to the Agent upon its request evidence acceptable to the Agent that adequate insurance in compliance with Section 7.1.3 is in full force and effect and that all premiums then due thereon have been paid, together with if requested by the Agent a certified copy of each Loan Party's casualty insurance policy or policies. 6.1.12 Termination of Existing Debt. The Borrower simultaneously shall have terminated the Indebtedness incurred under and paid all amounts owed under the Credit Agreement dated as of August 9, 1996 among the Borrower, the banks parties thereto and Mellon Bank, N.A., as Agent. 6.1.13 Solvency Certificate. The Chief Financial Officer or any other Person specifically authorized by resolution of the Borrower shall certify as to the solvency and capital adequacy of the Borrower after giving effect to the transactions contemplated. -57- 6.2 Each Additional Loan or Letter of Credit Issuance. At the time of making any Loans or issuance of any Letters of Credit other than Loans made or Letters of Credit issued on the Closing Date and after giving effect to the proposed extensions of credit: the representations and warranties of the Borrower contained in Article 5 and in the other Loan Documents shall be true on and as of the date of such additional Loan or Letter of Credit with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein) and the Loan Parties shall have performed and complied with all covenants and conditions hereof; no Event of Default or Potential Default shall have occurred and be continuing or shall exist; the making of the Loans or issuance of such Letter of Credit shall not contravene any Law applicable to any Loan Party or Subsidiary of any Loan Party or any of the Banks; and the Borrower shall have delivered to the Agent, a duly executed and completed Loan Request or application for a Letter of Credit, as the case may be. 6.3 Syndication. 6.3.1 Syndication Representation and Warranties. On the Syndication Date, the representations and warranties of the Borrower contained in Article 5 and in the other Loan Documents shall be true on and as of such date with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein) and the Loan Parties shall have performed and complied with all covenants and conditions hereof; and no Event of Default or Potential Default shall have occurred and be continuing or shall exist. 6.3.2 Syndication Documents. On the Syndication Date, the Borrower shall deliver to the Agent for the benefit of the Banks (a) an Officer's Certificate dated as of the Syndication Date with respect to the matters set forth in Section 6.3.1 and Section 6.1.8(i), (b) a Secretary's Certificate dated as of the Syndication Date with respect to the matters set forth in Section 6.1.2(i) and 6.1.2(ii) and that there have been no changes in the charter documents or bylaws of the Borrower or any other Loan Party since the Closing Date, (c) Notes dated as of the Syndication Date which give effect to the syndication on the Syndication Date of the Revolving Credit Commitments of the Banks which originally executed the Credit Agreement in exchange for the original Notes issued to such Banks, (d) written opinions of the counsel to the Borrower identified in Section 6.1.4 with respect to such matters as the Agent may request and (e) acknowledgments dated as of the Syndication Date to the Loan Documents in form and substance satisfactory to the Agent. -58- 6.3.3 Syndication Cooperation The Agent, with the Borrower's assistance, will prepare and distribute a Confidential Information Memorandum (the "Memorandum") for the purpose of syndicating the credit facilities provided under this Agreement to financial institutions. The Agent will not distribute the Memorandum to any party that is not subject to a customary confidentiality agreement. The Borrower will use all reasonable efforts to assist the Agent in syndicating the credit facilities, including participating in meetings with potential syndicate members. Until the closing on the initial syndication, , except as otherwise required by Law, the Borrower will not, and will not permit any of its affiliates to, syndicate or issue, attempt to syndicate or issue, announce or otherwise authorize the announcement of the syndication or issuance of, or enter into discussions concerning the syndication of the credit facilities or any other debt facility to be syndicated, in each case without the prior written consent of the Agent, which will not be unreasonably withheld. 7. COVENANTS --------- 7.1 Affirmative Covenants. The Borrower covenants and agrees that until payment in full of the Loans and Reimbursement Obligations and interest thereon, expiration or termination of all Letters of Credit, satisfaction of all of the Loan Parties' other Obligations under the Loan Documents and termination of the Revolving Credit Commitments, the Borrower and its Subsidiaries shall comply at all times with each of the following affirmative covenants: 7.1.1 Preservation of Existence, Etc. The Borrower and, except as permitted by Section 7.2.6, each Material Subsidiary shall maintain its corporate existence and its license or qualification and good standing in each jurisdiction in which its ownership or lease of property or the nature of its business makes such license or qualification necessary, except where the failure to be so licensed or qualified would not result in a Material Adverse Change. 7.1.2 Payment of Liabilities, Including Taxes, Etc. Each Loan Party shall, and shall cause each of its Subsidiaries to, duly pay and discharge all liabilities to which it is subject or which are asserted against it, promptly as and when the same shall become due and payable, including all taxes, assessments and governmental charges upon it or any of its properties, assets, income or profits, prior to the date on which penalties attach thereto, except to the extent that such liabilities, including taxes, assessments or charges, are being contested in good faith and by appropriate and lawful proceedings diligently -59- conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made, but only to the extent that failure to discharge any such liabilities would not result in any additional liability which would adversely affect to a material extent the financial condition of the Loan Parties and their Subsidiaries taken as a whole, provided that the Loan Parties and their Subsidiaries will pay all such liabilities forthwith upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor unless and as long as such proceedings are stayed. 7.1.3 Maintenance of Insurance. Each Loan Party shall, and shall cause each of its Subsidiaries to, insure its properties and assets against loss or damage by fire and such other insurable hazards as such assets are commonly insured (including fire, extended coverage, property damage, workers' compensation, public liability and business interruption insurance) and against other risks (including errors and omissions with respect to directors and officers) in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self-insurance to the extent customary, for each such Loan Party or Subsidiary of a Loan Party within its respective industry. At the request of the Agent, the Loan Parties shall deliver to the Agent on the Closing Date and annually thereafter an original certificate of insurance signed by the Loan Parties' independent insurance broker describing and certifying as to the existence of the insurance required to be maintained by this Agreement and the other Loan Documents 7.1.4 Maintenance of Properties and Leases. Each Loan Party shall, and shall cause each of its Subsidiaries to, maintain in good repair, working order and condition (ordinary wear and tear excepted) in accordance with the general practice of other businesses of similar character and size, all of those material properties necessary to its business, and from time to time, such Loan Party or such Subsidiary will make or cause to be made all appropriate repairs, renewals or replacements thereof. 7.1.5 Maintenance of Patents, Trademarks, Etc. Each Loan Party shall, and shall cause each of its Subsidiaries to, maintain in full force and effect all patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and other authorizations necessary for the ownership and operation of its properties and business if the failure so to maintain the same would constitute a Material Adverse Change. 7.1.6 Visitation Rights. Each Loan Party shall, and shall cause each of its Subsidiaries to, permit any of the officers or authorized employees or representatives of the Agent (at the Borrower's expense) or any of the Banks to visit and inspect any of its properties and to examine and make -60- excerpts from its books and records and discuss its business affairs, finances and accounts with its Authorized Officers, all in such detail as any of the Banks may reasonably request, provided that each Bank shall provide the Borrower and the Agent with reasonable notice prior to any visit or inspection, the Banks shall attempt to reasonably coordinate such requests and all information obtained by any Bank shall be subject to Section 10.12. 7.1.7 Keeping of Records and Books of Account. The Borrower shall, and shall cause each Subsidiary to, maintain and keep proper books and records which will enable the Borrower and its Subsidiaries to issue consolidated and consolidating financial statements in accordance with GAAP and as otherwise required by applicable Laws of any Official Body having jurisdiction over the Borrower or any Subsidiary of the Borrower, and in which full, true and correct entries shall be made in all material respects of all dealings and business and financial affairs on a consolidated and consolidating basis. 7.1.8 Plans and Benefit Arrangements. The Borrower shall, and shall cause each other member of the ERISA Group to, comply with ERISA, the Internal Revenue Code and other applicable Laws applicable to Plans and Benefit Arrangements except where such failure, alone or in conjunction with any other failure, would not result in a Material Adverse Change. Without limiting the generality of the foregoing, the Borrower shall cause all of its Plans and all Plans maintained by any other member of the ERISA Group to be funded in accordance with the minimum funding requirements of ERISA and shall make, and cause each other member of the ERISA Group to make, in a timely manner, all contributions due to Plans, Benefit Arrangements and Multiemployer Plans. 7.1.9 Compliance with Laws. Each Loan Party shall, and shall cause each of its Subsidiaries to, comply with all applicable Laws, including all Environmental Laws, in all respects, provided that it shall not be deemed to be a violation of this Section 7.1.9 if any failure to comply with any Law would not result in fines, penalties, remediation costs, other similar liabilities or injunctive relief which in the aggregate would reasonably be expected to constitute a Material Adverse Change. 7.1.10 Use of Proceeds. The Borrower will use the Letters of Credit and the proceeds of the Loans only for lawful purposes in accordance with Sections 2.9 and the other provisions of this Agreement and such uses shall not contravene any applicable Law or any other provision hereof. -61- 7.1.11 Subordination of Intercompany Loans. Each Loan Party shall cause any Intercompany Loans owed by any Loan Party to the Borrower or any of its Subsidiaries to be subordinated pursuant to the terms of the Master Intercompany Subordination Agreement and evidenced by an Intercompany Note. 7.1.12 Post-Closing Matters. The Borrower shall deliver to the Agent for the benefit of the Banks the documents set forth on Schedule 7.1.12 at the times indicated therein. 7.1.13 Payment of Intercompany Obligations Related to Intertech The Borrower and its Subsidiaries shall settle all obligations owed by them in respect of all Indebtedness owed as of the date of the Spin-Off to Intertech and its Subsidiaries (after the Spin-Off) in a manner (including by set-off to the extent feasible) and within the time period that will enable Intertech and its Subsidiaries to meet its similar obligations in the manner and within the time set forth in the Form 10. 7.1.14 Interest Rate Protection. On or before the earlier of eighteen (18) months after the Closing Date or the Trigger Date, the Borrower shall have entered into an interest rate protection agreement or agreements in each case for a period of at least three years which in the aggregate are in an amount equal to at least 33 1/3% of Consolidated Funded Indebtedness at such time, and with such other terms and conditions as shall be acceptable to the Agent (the "Interest Rate Protection Agreements"). Documentation for the Interest Rate Protection Agreements shall be in a standard International Swap Dealer Association Agreement, and shall not require that any collateral be provided as security for such agreement. As used in this Section 7.1.14, "Trigger Date" means 15 days after the last day of the first thirty (30) consecutive day period in which the Euro-Rate with respect to Loans in Dollars was greater than or equal to at least eight percent (8%) for at least ten (10) days. Notwithstanding the foregoing provisions, if, within the time period set forth herein, the Borrower shall have completed a Qualified Note Placement, the Borrower will be deemed to have satisfied, or partially satisfied, the requirements of this Section 7.1.14 to the extent of the aggregate principal amount of the Notes issued in the Qualified Note Placement. 7.2 Negative Covenants. The Borrower covenants and agrees that until payment in full of the Loans and Reimbursement Obligations and interest thereon, expiration or termination of all Letters of Credit, satisfaction of all of the Loan Parties' other Obligations hereunder and termination of the Revolving Credit Commitments, the Borrower and its Subsidiaries shall comply with each of the following negative covenants: -62- 7.2.1 Indebtedness. ------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, at any time create, incur, assume or suffer to exist any Indebtedness, except the following: (i) Indebtedness under the Loan Documents; (ii) existing Indebtedness as set forth on Schedule 5.1.24 (including any extensions, amendments or refinancings or renewals thereof, provided there is no increase in the outstanding amount thereof or imposition of additional material obligations therein unless otherwise specified on Schedule 5.1.24); (iii) Indebtedness for borrowed money other than under the Loan Documents which does not have covenants that in the judgment of the Agent individually or in the aggregate are more restrictive in any material respect than under the Loan Documents; (iv) Indebtedness (to the extent not of a type included in Consolidated Funded Indebtedness) of Domestic Subsidiaries which shall not exceed $5,000,000 in the aggregate, minus the amount of the then outstanding Guaranties referred to in clause (iii) of Section 7.2.3; (v) Indebtedness of a Foreign Subsidiary to a Foreign Subsidiary, Indebtedness of a Loan Party to a Foreign Subsidiary or Indebtedness of a Loan Party to a Loan Party; (vi) Indebtedness of a Foreign Subsidiary to a Loan Party or Indebtedness of a Foreign Subsidiary to any other Person, provided, that the aggregate of all such Indebtedness, including any Indebtedness of this type set forth on Schedule 5.1.24, does not exceed at any one time outstanding $25,000,000 through fiscal year end 1998, and $30,000,000 thereafter, in each case, minus the amount of the then outstanding Guarantees referred to in clause (iv) of Section 7.2.3; (vii) any Indebtedness incurred as part of a Qualified Note Placement; and -63- (viii) any Guarantees permitted by Section 7.2.3. 7.2.2 Liens; Further Negative Pledges. -------------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, (i) at any time create, incur, assume or suffer to exist any Lien on any of its assets, whether real or personal property or fixtures, tangible or intangible, or now owned or hereafter acquired (the "Assets"), or agree or become liable to do so, except permitted liens, (ii) suffer to exist any indebtedness which if unpaid might by Law or upon bankruptcy or insolvency, or otherwise, be given priority over its general creditors or (iii) at any time, directly or indirectly, enter into any agreement, understanding or other arrangement which purports to restrict in any manner the ability of the Borrower or any of its Subsidiaries to grant security interests or Liens to the Agent for the benefit of the Agent and the Banks with respect to any Asset or Assets of the Borrower or any of its Subsidiaries that have not theretofore been encumbered or made subject to the grant of a security interest in favor of or for the benefit of the Agent and the Banks; provided however that a written agreement of a type described in the preceding clause (iii) containing terms satisfactory to the Agent may be entered into by one or more of the Borrower or any of its Subsidiaries in favor of the note purchasers in a Qualified Note Placement that is privately placed. 7.2.3 Guaranties. ----------- The Borrower shall not, and shall not permit any of its Subsidiaries to, at any time, directly or indirectly, become liable in respect of any Guaranty, except for: (i) Guaranties of Indebtedness of the Loan Parties under the Loan Documents; (ii) Guaranties of Indebtedness of Foreign Subsidiaries which Indebtedness constitutes Consolidated Funded Indebtedness; (iii) Guaranties by the Borrower or any of its Domestic Subsidiaries not included in clause (i) or (ii) above so long as the liability of the Borrower and its Domestic Subsidiaries thereunder does not exceed in the aggregate at any time outstanding $3,000,000; and (iv) Guaranties by Foreign Subsidiaries not included in clauses (i) or (ii) above so long as the liability of the Foreign Subsidiaries thereunder does not exceed in the aggregate at any time outstanding $5,000,000. 7.2.4 Loans and Investments. ---------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, at any time make or suffer to remain outstanding any loan or advance to, or purchase, acquire or own any stock, bonds, notes or securities of, or any equity interest in, or any other investment or interest in, or make any capital contribution to, any other Person, or agree, become or remain liable to do any of the foregoing, except as set forth on Schedule 7.2.4 and: (i) trade credit extended on usual and customary terms in the ordinary course of business; -64- (ii) advances to employees to meet expenses incurred by such employees in the ordinary course of business; (iii) Permitted Cash Equivalent Investments; (iv) investments in Foreign Subsidiaries by Loan Parties so long as the aggregate outstanding amount of such investments permitted by this Section 7.2.4(iv) (excluding Indebtedness of Foreign Subsidiaries to Loan Parties permitted by Section 7.2.1(vi), Indebtedness of Foreign Subsidiaries to Loan Parties set forth on Schedule 7.2.1, and investments which arise and exist as part of a Loan Party's permitted acquisition pursuant to Section 7.2.6) does not exceed at any one time $7,500,000; (v) investments in other Loan Parties; (vi) investments in Foreign Subsidiaries by Foreign Subsidiaries; (vii) liquidations, mergers, consolidations and acquisitions permitted by Section 7.2.6, provided, that in the case of a Foreign Subsidiary making an acquisition, after giving effect thereto, the aggregate investments in Foreign Subsidiaries by Loan Parties does not exceed the amount permitted by clause (iv) above; (viii) capital expenditures made in the ordinary course of business; (ix) investments permitted by clause (y) of Section 7.2.9; and (x) debt securities having maturities no longer than 6 months in an aggregate amount not exceeding $2,500,000 at any one time; provided, however, in no event shall the aggregate investments made by the Loan Parties after the date hereof of the types described in clauses (vii) and (ix) above exceed $20,000,000. 7.2.5 Dividends and Related Distributions. ------------------------------------ During the first two years after the Closing Date, the Borrower shall not, and shall not permit any of its Subsidiaries to, declare, make or pay, or agree to become or remain liable to make or pay, any dividend or other distribution of any nature (whether in cash, -65- property, securities or otherwise) on account of or in respect of its shares of capital stock or partnership or other equity interests on account of the purchase, redemption, retirement or acquisition of its shares of capital stock (or warrants, options or rights therefor) or partnership or other equity interests, except: (i) dividends or other distributions payable to another Loan Party or Subsidiary; (ii) dividends made by the Borrower described in Section 7.1.13; (iii) stock repurchases made by the Borrower for the purpose of utilization in employee benefit plans in the amount of $3,000,000 in each of the first two fiscal years after the Closing Date, provided that the aggregate stock repurchases in such years does not exceed $5,000,000. 7.2.6 Liquidations, Mergers, Consolidations, Acquisitions. ---------------------------------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, dissolve, liquidate or wind-up its affairs, or become a party to any merger or consolidation, or acquire by purchase, lease or otherwise all or substantially all of the assets, capital stock, or equity interests of any other Person except, subject in each case to Section 7.2.7, as follows: (i) the Borrower may acquire by merger (provided the Borrower is thereafter a Qualified Survivor), or may acquire the capital stock or other equity interests of or in, or may acquire all or a portion of the assets of (including as a result of a liquidation or dissolution of), any existing Subsidiary of the Borrower; (ii) any Domestic Subsidiary may acquire by merger (provided the survivor is a Qualified Survivor), or may acquire the capital stock or other equity interests of or in, or may acquire all or a portion of the assets of (including as a result of a liquidation or dissolution of), any other existing Domestic Subsidiary or any existing Foreign Subsidiary; (iii) any Foreign Subsidiary may acquire by merger (provided the survivor is a Qualified Survivor), or may acquire the capital stock or other equity interests of or in, or may acquire all or a portion of the assets of (including as a result -66- of a liquidation or dissolution of), any other existing Foreign Subsidiary; (iv) each of the Borrower and its Subsidiaries may make Acquisitions of Persons (other than the Borrower or an existing Subsidiary of the Borrower) that are in the same or a similar line of business then being conducted by the Borrower or any of its Subsidiaries provided the survivor is a Qualified Survivor and provide further that immediately after giving effect to any such Acquisition the aggregate Consideration paid or given by the Borrower or any of its Subsidiaries with respect to all Acquisitions then made by the Borrower and its Subsidiaries pursuant to this clause (iv) does not exceed on a cumulative basis $20,000,000 minus the cumulative Consideration paid or given by the Borrower and its Subsidiaries since the Closing Date to acquire interests in Joint Ventures as permitted by Section 7.2.9; and provided, however, that any Acquisition permitted in clause (iv) above shall be permitted only if (A) both immediately before and after the consummation of the transaction there exists no Event of Default or Potential Default, (B) the Borrower is in compliance with its representations, warranties and covenants hereunder after giving effect to the transaction, (C) if the transaction involves Consideration greater than $1,000,000, the Borrower shall have computed the Leverage Ratio (in the manner required in the definition thereof) as of the date (the "Transaction Date") of such transaction and there shall be an adjustment of the fees and interest rates effective on the Transaction Date if the Leverage Ratio Status changes on such date, and (D) there was delivered to the Agent no later than five (5) Business Days after the Transaction Date a certificate in the form of Exhibit 7.2.6 (the "Transaction Notice Certificate") executed by an Executive Officer of the Borrower certifying as to compliance with the foregoing clauses (A), (B) and (C) above; -67- 7.2.7 Dispositions of Assets or Subsidiaries -------------------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, sell, convey, assign, lease, spin-off as an in-kind dividend distribution, abandon or otherwise transfer or dispose of, voluntarily or involuntarily, any of its properties or assets, tangible or intangible (including sale, assignment, discount or other disposition of accounts, contract rights, chattel paper, equipment or general intangibles with or without recourse or of capital stock, partnership interests or other equity interests issued by a Subsidiary of the Borrower, except as permitted by Section 7.2.6 and except as follows: (i) transactions involving the sale of inventory in the ordinary course of business; (ii) any sale, transfer or lease or abandonment of assets in the ordinary course of business which are no longer necessary or required in the conduct of the Borrower's or such Subsidiary's business; (iii) any sale, transfer or lease of assets (x) by any Domestic Subsidiary to another Loan Party, (y) by any Foreign Subsidiary directly owned by one or more Loan Parties to another Foreign Subsidiary or another Loan Party or (z) by any Foreign Subsidiary that is not directly owned by one or more Loan Parties to a Foreign Subsidiary or another Loan Party; (iv) the discounting, assigning or sale of accounts receivable of the Japanese Foreign Subsidiary in connection with Indebtedness incurred in the ordinary course of business by such Foreign Subsidiary for working capital in Japan; (v) any licensing of intellectual property in the ordinary course of business; and (vi) any sale of assets, other than those specifically excepted pursuant to clauses (i) through (v) above, provided that upon the closing thereof the present value of the Consideration to be received by the seller in respect of the sale together with all such Consideration in respect of all other sale transactions pursuant to this clause (vi) consummated on and after the Closing Date does not exceed $10,000,000 in the aggregate; -68- provided, however, that no transactions identified in clause (vi) above shall be permitted unless: (A) both immediately before and after the consummation of the transaction there exists no Event of Default or Potential Default, (B) the Borrower is in compliance with its representations, warranties and covenants hereunder after giving effect to the transaction, (C) in the event the proposed transaction is for Consideration in excess of $1,000,000, the Borrower shall have computed the Leverage Ratio (in the manner required in the definition thereof) as of the date (the "Transaction Date") of such transaction and there shall be an adjustment of the fees and interest rates effective on the Transaction Date if the Leverage Ratio Status changes on such date, and (D) there was delivered to the Agent no later than five (5) Business Days after the Transaction Date a Transaction Notice Certificate executed by an Executive Officer of the Borrower certifying as to compliance with the foregoing clauses (A), (B) and (C) above. 7.2.8 Affiliate Transactions. ----------------------- Except as set forth on Schedule 7.2.8 the Borrower shall not, and shall not permit any of its Subsidiaries to, enter into or carry out any transaction with any of its Affiliates (including purchasing property or services from or selling property or services to any Affiliate of any Loan Party or other Person other than the Borrower or any of its Subsidiaries) unless such transaction is not otherwise prohibited by this Agreement and, is entered into in the ordinary course of business upon fair and reasonable arm's-length terms and conditions or is approved by independent Directors of the Borrower's Board of Directors or an appropriate committee thereof as being upon fair and reasonable arm's length terms and conditions (including without limitation employment arrangements with any Executive Officer of the Borrower or any Subsidiary), all of which are fully disclosed to the Agent and are in accordance with all applicable Law. 7.2.9 Subsidiaries, Partnerships and Joint Ventures. ---------------------------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, own or create directly or indirectly any Subsidiaries other than (i) any Domestic Subsidiary which has joined the Master Guaranty Agreement, as Guarantor, on the date required pursuant to Section 10.18, as applicable and joined the Master Intercompany Subordination Agreement, (ii) -69- any Foreign Subsidiary which is directly owned by the Borrower and/or one or more Domestic Subsidiaries; and (iii) any Foreign Subsidiary which is directly owned by one or more Foreign Subsidiaries. Each of the Borrower and its Subsidiaries shall not become or agree to become or permit any of its Subsidiaries to become a general or limited partner in any general or limited partnership or a joint venturer in any Joint Venture or a member in any limited liability company other than solely with Persons who are or pursuant to such transaction will become either a Subsidiary of the Borrower or a Joint Venture, provided that the cumulative aggregate Consideration paid on and after the Closing Date to acquire interests in Joint Ventures shall not exceed $5,000,000 and when aggregated with Acquisitions permitted pursuant to clause (iv) of Section 7.2.6 shall not exceed $20,000,000, and provided further that the Borrower and its Subsidiaries may be general or limited partners in other Loan Parties. 7.2.10 Continuation of or Change in Business. -------------------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to, engage in any business other than substantially those businesses as conducted and operated by the Borrower and its Subsidiaries on the Closing Date and those businesses reasonably related thereto. 7.2.11 Plans and Benefit Arrangements. ------------------------------- The Borrower shall not, and shall not permit any of its Subsidiaries to: (i) fail to satisfy the minimum funding requirements of ERISA and the Internal Revenue Code with respect to any Plan where such would result in a Material Adverse Change; (ii) request a minimum funding waiver from the Internal Revenue Service with respect to any Plan; (iii) engage in a Prohibited Transaction with any Plan, Benefit Arrangement or Multiemployer Plan which, alone or in conjunction with any other circumstances or set of circumstances resulting in liability under ERISA, would constitute a Material Adverse Change; (iv) permit the aggregate actuarial present value of all benefit liabilities (whether or not vested) under the Plans, determined on an ongoing basis, as disclosed in the most recent actuarial report completed with respect to each such Plan, to exceed, as of any actuarial valuation date, 120% of the fair market value of the assets of such Plans; -70- (v) fail to make when due any contribution to any Multiemployer Plan that the Borrower or any member of the ERISA Group may be required to make under any agreement relating to such Multiemployer Plan, or any Law pertaining thereto where such would result in a Material Adverse Change; (vi) withdraw (completely or partially) from any Multiemployer Plan or withdraw (or be deemed under Section 4062(e) of ERISA to withdraw) from any Multiple Employer Plan, where any such withdrawal would result in a material liability of the Borrower or any member of the ERISA Group; (vii) terminate, or institute proceedings to terminate, any Plan, where such termination would result in a material liability to the Borrower or any member of the ERISA Group; (viii) make any amendment to any Plan with respect to which security is required under Section 307 of ERISA; or (ix) fail to give any and all notices and make all disclosures and governmental filings required under ERISA or the Internal Revenue Code, where such failure would result in a Material Adverse Change. 7.2.12 Fiscal Year. ------------ The Borrower shall not, and shall not permit any Subsidiary of the Borrower to, change its fiscal year from the fiscal year ending on October 31 each year. 7.2.13 Issuance of Stock. ------------------ The Borrower shall not, and shall not permit any of its Subsidiaries to, issue any additional shares of its capital stock or any options, warrants or other rights in respect thereof other than to another Loan Party or Subsidiary of a Loan Party or to a Person which becomes a Loan Party or Subsidiary of a Loan Party, including as a result thereof. Notwithstanding the foregoing, nothing contained herein shall prohibit the Borrower from issuing shares of its capital stock or other equity interests of the Borrower. 7.2.14 Changes in Organizational Documents. ------------------------------------ Except as permitted by Section 7.2.6, the Borrower shall not, and shall not permit any of its Subsidiaries to, amend in any respect its certificate of incorporation (including -71- any provisions or resolutions relating to capital stock), by-laws or other organizational documents without providing at least five (5) calendar days' prior written notice to the Agent and the Banks and, in the event such change would be adverse to the Banks as determined by the Required Banks in their sole discretion, obtaining the prior written consent of the Required Banks. 7.2.15 Minimum Fixed Charge Coverage Ratio. ------------------------------------ The Borrower shall not permit the Fixed Charge Coverage Ratio to be less than the following: (i) 1.25 to 1.00 with respect to the relevant period ending on October 31, 1996, and January 31, April 30, and July 31, 1997; or (ii) 1.50 to 1.00 with respect to each period of determination ending on or after October 31, 1997. 7.2.16 Maximum Leverage Ratio. ---------------------- The Borrower shall not permit at any time during the respective periods set forth below the Leverage Ratio to be greater than as follows:
DATES RATIO - ----- ----- Closing Date through October 30,1997: 3.25 to 1.00 October 31, 1997 through October 30, 1999: 3.00 to 1.00 October 31, 1999 and thereafter: 2.50 to 1.00
7.2.17 Minimum Consolidated Net Worth. ------------------------------ The Borrower shall not permit at any time Consolidated Net Worth to be less than the Base Net Worth. 7.2.18 Amendments to Certain Documents. ------------------------------- The Borrower shall not permit, without the prior written consent of the Required Banks, any material amendment, waiver or modification to any document, indenture, agreement or instrument evidencing any Indebtedness set forth on Schedule 5.1.24 except for amendments, waivers or modifications to provisions which do not change or otherwise affect the terms of such agreements or instruments in a material manner. -72- 7.2.19 No Prepayment of Existing Indebtedness. The Borrower shall not permit the prepayment, directly or indirectly (including without limitation on the foregoing any purchase of one or more of the notes issued thereunder or any interest or participation in any such notes), prior to the stated maturity thereof of any principal of any Indebtedness set forth on section 1 of Schedule 5.1.24 or any notes issued in a Qualified Note Placement. 7.3 Reporting Requirements. The Borrower covenants and agrees that until payment in full of the Loans and Reimbursement Obligations and interest thereon, expiration or termination of all Letters of Credit, satisfaction of all of the Loan Parties' other Obligations hereunder and under the other Loan Documents and termination of the Revolving Credit Commitments, the Borrower will furnish or cause to be furnished to the Agent for itself and on behalf of each of the Banks (wherever referenced in Section 7.3, the term "consolidating" is limited to consolidating information on a basis consistent with current accounting practices of the Borrower): 7.3.1 Quarterly Financial Statements. As soon as available and in any event within forty-five (45) calendar days after the end of each of the first three fiscal quarters in each fiscal year, financial statements of the Borrower, consisting of a consolidated and consolidating balance sheet as of the end of such fiscal quarter and related consolidated and consolidating statements of income, stockholders' equity and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified (subject to normal year-end audit adjustments) by the Chief Executive Officer, President or Chief Financial Officer of the Borrower as having been prepared in accordance with GAAP and as to fairness of presentation, consistently applied, and setting forth in comparative form the respective financial statements for the corresponding date and period in the previous fiscal year. 7.3.2 Annual Financial Statements. As soon as available and in any event within ninety (90) calendar days after the end of each fiscal year of the Borrower, consolidated and consolidating financial statements of the Borrower consisting of a consolidated and consolidating balance sheet as of the end of such fiscal year, and related consolidated and consolidating statements of income, stockholders' equity and cash flows for the fiscal year then ended, all in reasonable detail and setting forth in comparative form the financial statements as of the end of and for the preceding fiscal year, and with respect to the consolidated statements, certified by independent certified public accountants of nationally recognized standing reasonably satisfactory to the Agent. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall be accompanied by a letter or report of such -73- accountants addressed to the Agent for the benefit of the Banks confirming the Borrower's calculations with respect to the certificate to be delivered pursuant to Section 7.3.3 with respect to such financial statements. 7.3.3 Certificate of the Borrower. ---------------------------- Concurrently with the financial statements of the Borrower furnished to the Agent and to the Banks pursuant to Sections 7.3.1 and 7.3.2, a certificate of the Borrower signed by the Chief Executive Officer, President or Chief Financial Officer of the Borrower, in the form of Exhibit 7.3.3, to the effect that, except as described pursuant to Section 7.3.4, (i) the representations and warranties contained in Article 5 and in the other Loan Documents are true on and as of the date of such certificate with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time) and the Borrower has performed and complied in all material respects with all covenants and conditions hereof, (ii) no Event of Default or Potential Default exists and is continuing on the date of such certificate and (iii) containing calculations in sufficient detail to demonstrate compliance as of the date of such financial statements with all financial covenants contained in Section 7.2. 7.3.4 Notice of Default. ------------------ Promptly after any Executive Officer of any Loan Party has learned of the occurrence of an Event of Default or Potential Default, a certificate signed by the Chief Executive Officer, President or Chief Financial Officer of such Loan Party setting forth the details of such Event of Default or Potential Default and the action which the such Loan Party proposes to take with respect thereto. 7.3.5 Notice of Litigation. --------------------- Promptly after the commencement thereof, notice of all actions, suits, proceedings or investigations before or by any Official Body or any other Person against any Loan Party or Subsidiary of any Loan Party which involve a claim or series of uninsured claims (provided that a claim shall be deemed to be uninsured unless the insurance company is a reputable insurance company and has acknowledged that the claim is covered by the applicable insurance policy without any reservation to challenge the applicability thereof) in excess of $5,000,000 or which if adversely determined would reasonably be expected to constitute a Material Adverse Change. 7.3.6 Budgets, Forecasts, Other Reports and Information. -------------------------------------------------- Promptly upon their becoming available to any Loan Party: (i) a summary (in detail reasonably satisfactory to the Agent) of the consolidated annual operating budget of the -74- Borrower, which shall be (x) certified by the Chief Financial Officer of the Borrower as having been prepared in accordance with reasonable assumptions and (y) supplied not later than the end of the first quarter of the fiscal year to which such budget pertains; (ii) any reports, notices or proxy statements generally distributed by the Borrower to its stockholders on a date no later than the date supplied to such stockholders; (iii) regular or periodic reports, including Forms 10- K, 10-Q and 8-K, registration statements and prospectuses, as may be filed by the Borrower with the Securities and Exchange Commission; (iv) a copy of any order in any proceeding to which the Borrower or any of its Subsidiaries is a party issued by any Official Body, which order, if carried out, reasonably would be expected to result in a Material Adverse Change; and (v) such other reports and information as any of the Banks may from time to time reasonably request. The Loan Parties shall also notify the Banks promptly of the enactment or adoption of any Law which reasonably would be expected to result in a Material Adverse Change. 7.3.7 Notices Regarding Plans and Benefit Arrangements. ------------------------------------------------- 7.3.7.1 Certain Events. --------------- Promptly upon becoming aware of the occurrence thereof, notice (including the nature of the event and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto) of: (i) any Reportable Event with respect to the Borrower or any other member of the ERISA Group (regardless of whether the obligation to report said Reportable Event to the PBGC has been waived), (ii) any Prohibited Transaction which could subject the Borrower or any other member of the ERISA Group to a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue -75- Code in connection with any Plan, any Benefit Arrangement or any trust created thereunder, (iii) any assertion of material withdrawal liability with respect to any Multiemployer Plan, (iv) any partial or complete withdrawal from a Multiemployer Plan by the Borrower or any other member of the ERISA Group under Title IV of ERISA (or assertion thereof), where such withdrawal is likely to result in material withdrawal liability, (v) any cessation of operations (by the Borrower or any other member of the ERISA Group) at a facility in the circumstances described in Section 4063(e) of ERISA, (vi) withdrawal by the Borrower or any other member of the ERISA Group from a Multiple Employer Plan, (vii) a failure by the Borrower or any other member of the ERISA Group to make a payment to a Plan required to avoid imposition of a Lien under Section 302(f) of ERISA, (viii) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA, or (ix) any change in the actuarial assumptions or funding methods used for any Plan, other than those required by GAAP, where the effect of such change is to materially increase or materially reduce the unfunded benefit liability or obligation to make periodic contributions. 7.3.7.2 Notices of Involuntary Termination and Annual Reports. Promptly after receipt thereof, copies of (a) all notices received by the Borrower or any other member of the ERISA Group of the PBGC's intent to terminate any Plan administered or maintained by the Borrower or any member of the ERISA Group, or to have a trustee appointed to administer any such Plan; and (b) at the request of the Agent or any Bank each annual report (IRS Form 5500 series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Borrower or any other member of the ERISA Group, and schedules showing the amounts contributed to each such Plan by or on behalf of the -76- Borrower or any other member of the ERISA Group in which any of their personnel participate or from which such personnel may derive a benefit, and each Schedule B (Actuarial Information) to the annual report filed by the Borrower or any other member of the ERISA Group with the Internal Revenue Service with respect to each such Plan. 7.3.7.3 Notice of Voluntary Termination. Promptly upon the filing thereof, copies of any Form 5310, or any successor or equivalent form to Form 5310, filed with the PBGC in connection with the termination of any Plan. 8. DEFAULT 8.1 Events of Default. An Event of Default shall mean the occurrence or existence of any one or more of the following events or conditions (whatever the reason therefor and whether voluntary, involuntary or effected by operation of Law): 8.1.1 Payments Under Loan Documents. The Borrower shall fail to pay when due any principal of any Loan (including scheduled installments, mandatory prepayments or the payment due at maturity) or any Reimbursement Obligations or shall fail to pay within two (2) Business Days when due any interest on any Loan or on any Reimbursement Obligations or any other amount owing hereunder or under the other Loan Documents after such principal, interest or other amount becomes due in accordance with the terms hereof or thereof; 8.1.2 Breach of Warranty. Any representation or warranty made or deemed made at any time by any of the Loan Parties herein or by any of the Loan Parties in any other Loan Document, or in any certificate, other instrument or statement furnished pursuant to the provisions hereof or thereof, shall prove to have been false or misleading in any material respect as of the time it was made or deemed made or furnished; 8.1.3 Breach of Negative Covenants and Sections 7.1.12 or 7.1.14. The Borrower shall default in the observance or performance of any covenant contained in Section 7.2 or the covenants contained in Sections 7.1.12 or 7.1.14; -77- 8.1.4 Breach of Other Covenants. Any of the Loan Parties shall default in the observance or performance of any other covenant, condition or provision hereof or of any other Loan Document and such default shall continue unremedied for a period of thirty (30) Business Days after any Executive Officer of the Borrower becomes aware of the occurrence thereof (such grace period to be applicable only in the event such default can be remedied by corrective action of the Loan Parties as determined by the Agent in its sole discretion); 8.1.5 Defaults in Other Agreements or Indebtedness. If a breach, default or event of default shall occur at any time under the terms of any other agreement involving borrowed money or the extension of credit or any other Indebtedness under which any Loan Party or Subsidiary of any Loan Party may be obligated as a borrower or guarantor in excess of $5,000,000 in the aggregate and such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto,) any Indebtedness when due (whether at stated maturity, by acceleration or otherwise) or such breach or default permits or causes the acceleration of any Indebtedness or the termination of any commitment to lend; provided, however, that no default shall exist under this Section 8.1.5 if any such breach, default or event of default described herein is waived in a manner that fully cures or eliminates such breach, default or event of default, except that if (i) such waiver is with respect to a breach, default or event of default arising under the agreement in question which is the result of (A) the failure by the Borrower or any Loan Party to (1) make any payments of principal or interest under such agreement when due thereunder or (2) comply with any financial covenants set forth in such agreement or (B) any representation or warranty made by the Borrower or any Loan Party in such agreement proving to be false or misleading in any material respect at the time such representation or warranty was made or deemed made, or (ii) the Indebtedness under such agreement actually is accelerated as a result of such breach, default or event of default, then a default shall exist under this Section 8.1.5, notwithstanding any waiver described herein or rescission of acceleration. 8.1.6 Final Judgments or Orders. Any final judgments or orders for the payment of money in excess of $5,000,000 in the aggregate shall be entered against any Loan Party by a court having jurisdiction in the premises, which judgment either (i) is not discharged, vacated, bonded or stayed pending appeal within a period of sixty (60) days from the date of entry, or (ii) is not fully insured (provided that a judgment shall be deemed to be uninsured unless the insurance company is a reputable insurance company and has acknowledged that the judgment is covered by the applicable insurance policy without any reservation to challenge the applicability thereof) or the Borrower or any of its Subsidiaries' assets having a value on its respective books in excess of $5,000,000 in the aggregate are attached, seized, levied upon or subjected to a writ or distress -78- warrant; or such come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not cured within sixty (60) days thereafter; 8.1.7 Loan Document Unenforceable. Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the party executing the same or such party's successors and assigns (as permitted under the Loan Documents) in accordance with the respective terms thereof or shall in any way be terminated (except in accordance with its terms) or become or be declared ineffective or inoperative or shall in any way be challenged or contested; 8.1.8 Notice of Lien or Assessment. A notice or notices of Lien or assessment in excess of $5,000,000 in the aggregate which are not Permitted Liens are filed of record with respect to all or any part of any of the Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, including the PBGC, or if any taxes or debts owing at any time or times hereafter to any one of these becomes payable and the same is not paid within sixty (60) days after the same becomes payable (unless the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed); 8.1.9 Insolvency. The Borrower, any Material Subsidiary, or one or more other Subsidiaries of the Borrower which individually or in the aggregate represent more than five percent (5%) of the book value of the consolidated assets of the Borrower and its Subsidiaries, ceases to be able to pay its debts as they become due, admits in writing its inability to pay its debts as they mature or is no longer Solvent; 8.1.10 Events Relating to Plans and Benefit Arrangements. Any of the following occurs: (i) any Reportable Event, which the Agent and the Required Banks determine in good faith constitutes grounds for the termination of any Plan by the PBGC or the appointment of a trustee to administer or liquidate any Plan, shall have occurred and be continuing; (ii) proceedings shall have been instituted or other action taken to terminate any Plan, or a termination notice shall have been filed with respect to any Plan; (iii) a trustee shall be appointed to administer or liquidate any Plan; (iv) the PBGC shall give notice of its intent to institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer or liquidate any Plan; and, in the case of the occurrence of (i), (ii), (iii) or (iv) above, the Agent determines in good faith that the amount of the Borrower's liability is likely to exceed 10% of its Consolidated Net Worth; (v) the Borrower or any member of the ERISA Group shall fail to make any contributions when due to a Plan or a Multiemployer Plan; (vi) the Borrower or -79- any other member of the ERISA Group shall make any amendment to a Plan with respect to which security is required under Section 307 of ERISA; (vii) the Borrower or any other member of the ERISA Group shall withdraw completely or partially from a Multiemployer Plan; (viii) the Borrower or any other member of the ERISA Group shall withdraw (or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any applicable Law is adopted, changed or interpreted by any Official Body with respect to or otherwise affecting one or more Plans, Multiemployer Plans or Benefit Arrangements and, with respect to any of the events specified in (v), (vi), (vii), (viii) or (ix), the Agent and the Required Banks determine in good faith that any such occurrence would be reasonably likely to materially and adversely affect the total enterprise represented by the Borrower and the other members of the ERISA Group; 8.1.11 Cessation of Business. Except as permitted by Section 7.2.6 or Section 7.2.7, the Borrower, any Material Subsidiary or one or more other Subsidiaries of the Borrower which individually or in the aggregate represent more than five percent (5%) of the book value of the consolidated assets of the Borrower and its Subsidiaries, ceases to conduct its or their business as contemplated or such Person or Persons are enjoined, restrained or in any way prevented by court order from conducting all or any material part of their respective business and such injunction, restraint or other preventive order is not dismissed within thirty (30) days after the entry thereof; 8.1.12 Change of Control. (i) Any person or group of persons (within the meaning of Section 13(a) or 14(a) of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act)of 20% or more of the voting capital stock of the Borrower; or (ii) within a period of twelve (12) consecutive calendar months, individuals who were directors on the board of directors of the Borrower on the first day of such period together with any directors whose election by such board of directors or whose nomination for election by the shareholders was approved by a vote of the majority of the directors then in office shall cease to constitute a majority of the board of directors of the Borrower; 8.1.13 Involuntary Proceedings. An Insolvency Proceeding shall have been instituted by a Person other than the Borrower or any of its Subsidiary in a court having jurisdiction in the premises seeking a decree or order for relief in respect of the Borrower or any of its Subsidiary, and such proceeding shall remain undismissed or unstayed and in effect for a period of sixty (60) consecutive days or such court shall enter a decree or order granting any of the relief sought in such proceeding; unless in the case of any Subsidiary that is not a Borrower or a Material Subsidiary, the same would not be a Material Adverse Change; -80- 8.1.14 Voluntary Proceedings. A Borrower or any Material Subsidiary shall, or if it would be a Material Adverse Change any other Subsidiary shall, commence a voluntary Insolvency Proceeding, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing. 8.1.15 Material Adverse Change. There shall have occurred a Material Adverse Change. 8.2 Consequences of Event of Default. 8.2.1 Events of Default Other Than Bankruptcy, Insolvency or Reorganization Proceedings. If an Event of Default specified under Sections 8.1.1 through 8.1.12 shall occur and be continuing, the Banks and the Agent shall be under no further obligation to make Loans or issue Letters of Credit, as the case may be, and the Agent may, and upon the request of the Required Banks, shall (i) by written notice to the Borrower, terminate the Revolving Credit Commitments, declare the unpaid principal amount of the Notes and all Reimbursement Obligations then outstanding and all interest accrued thereon, any unpaid fees and all other indebtedness of the Borrower to the Banks hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable to the Agent for the benefit of each Bank without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, and (ii) require the Borrower to, and the Borrower shall thereupon, deposit in a non-interest bearing account with the Agent, as cash collateral for its Obligations under the Loan Documents, an amount equal to the maximum amount currently or at any time thereafter available to be drawn on all outstanding Letters of Credit, and the Borrower hereby pledges to the Agent and the Banks, and grants to the agent and the banks a security interest in, all such cash as security for such Obligations. Upon the curing of all existing Events of Default to the satisfaction of the Required Banks, the Agent shall return such cash collateral to the Borrower; 8.2.2 Bankruptcy, Insolvency or Reorganization Proceedings. If an Event of Default specified under Section 8.1.13 or 8.1.14 shall occur, the Revolving Credit Commitments shall automatically terminate, the Banks shall make no Loans hereunder and the unpaid principal amount of the Notes, and all Reimbursement Obligations then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; -81- 8.2.3 Set-off. If an Event of Default shall occur and be continuing, any Bank to whom any Obligation is owed by any Loan Party hereunder or under any other Loan Document or any participant of such Bank which has agreed in writing to be bound by the provisions of Section 9.13 and any branch, Subsidiary or Affiliate of such Bank or participant anywhere in the world shall have the right, subject to the approval of the Required Banks, in addition to all other rights and remedies available to it, to set off against and apply to the then unpaid balance of all the Loans and all other Obligations of the Borrower and the other Loan Parties hereunder or under any other Loan Document any debt owing to, and any other funds held in any manner for the account of, the Borrower or such other Loan Party by such Bank or participant or by such branch, Subsidiary or Affiliate, including all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by the Borrower or such other Loan Party for its own account (but not including funds held in custodian or trust accounts) with such Bank or participant or such branch, Subsidiary or Affiliate; provided, however, that the Agent shall use reasonable, good faith efforts to notify the applicable Loan Party of the exercise of such right of set-off as soon as possible after such exercise. Such right shall exist whether or not any Bank or the Agent shall have made any demand under this Agreement or any other Loan Document, whether or not such debt owing to or funds held for the account of the Borrower or such other Loan Party is or are matured or unmatured and regardless of the existence or adequacy of any collateral, any Guaranty or any other security, right or remedy available to any Bank or the Agent; 8.2.4 Suits, Actions, Proceedings. If an Event of Default shall occur and be continuing, and whether or not the Agent shall have accelerated the maturity of Loans pursuant to any of the foregoing provisions of this Section 8.1.15, the Agent or any Bank, with the approval of the Required Banks, if owed any amount with respect to the Notes, may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the Notes, including as permitted by applicable Law the obtaining of the ex parte appointment of a receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the Agent or such Bank; 8.2.5 Application of Proceeds. From and after the date on which the Agent has taken any action pursuant to this Section 8.1.15 and until all Obligations of the Loan Parties have been paid in full, any and all proceeds received by the Agent from any sale or other disposition of any collateral, or any part thereof, the exercise of any other remedy by the Agent, shall be applied as follows: (i) first, to reimburse the Agent and the Banks for reasonable out-of-pocket costs, expenses and disbursements, including -82- reasonable attorneys' and paralegals' fees and legal expenses, incurred by the Agent or the Banks in connection with realizing on any collateral or collection of any Obligations of any of the Loan Parties under any of the Loan Documents, including advances made by the Banks or any one of them or the Agent for the reasonable maintenance, preservation, protection or enforcement of, or realization upon, any collateral, including advances for taxes, insurance, repairs and the like and reasonable expenses incurred to sell or otherwise realize on, or prepare for sale or other realization on, any of any collateral; (ii) second, to the repayment of all Indebtedness then due and unpaid of the Loan Parties to the Banks incurred under this Agreement or any of the other Loan Documents, whether of principal, interest, fees, expenses or otherwise, in such manner as the Agent may determine in its discretion; and (iii) the balance, if any, to the Borrower or as required by Law. 8.2.6 Other Rights and Remedies. The Agent may, and upon the request of the Required Banks shall, exercise all post-default rights granted to the Agent and the Banks under the Loan Documents or applicable Law. 9. THE AGENT 9.1 Appointment. Each Bank hereby irrevocably designates, appoints and authorizes Mellon Bank, N.A. to act as Agent for such Bank under this Agreement and to execute and deliver or accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of a Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to herein, and to exercise such powers and to perform such duties hereunder as are specifically delegated to or required of the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. agrees to act as the Agent on behalf of the Banks to the extent provided in this Agreement. -83- 9.2 Delegation of Duties. The Agent may perform any of its respective duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of its duties as Agent) and, subject to Sections 9.5 and 9.6, shall be entitled to engage and pay for the advice or services of any attorneys, accountants or other experts concerning all matters pertaining to its duties hereunder and to rely upon any advice so obtained. 9.3 Nature of Duties; Independent Credit Investigation. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist. The duties of the Agent shall be mechanical and administrative in nature. Agent shall not have by reason of this Agreement a fiduciary or trust relationship in respect of any Bank; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement except as expressly set forth herein. Each Bank expressly acknowledges (i) that the Agent has not made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of any of the Loan Parties, shall be deemed to constitute any representation or warranty by the Agent to any Bank; (ii) that it has made and will continue to make, without reliance upon the Agent, its own independent investigation of the financial condition and affairs and its own appraisal of the creditworthiness of each of the Loan Parties in connection with this Agreement and the making and continuance of the Loans hereunder; and (iii) except as expressly provided herein, that the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of any Loan or at any time or times thereafter. 9.4 Actions in Discretion of Agent; Instructions from the Banks. The Agent agrees, upon the written request of the Required Banks, to take or refrain from taking any action of the type specified as being within the Agent's rights, powers or discretion herein, provided that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable Law. In the absence of a request by the Required Banks, the Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Banks or all of the Banks. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Banks, subject to Section 9.6. Subject to the provisions of Section 9.6, no Bank shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Banks, or in the absence of such instructions, in the absolute discretion of the Agent. -84- 9.5 Reimbursement and Indemnification of Agent by the Borrower. The Borrower agrees unconditionally upon demand to pay or reimburse the Agent and to save the Agent harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements, including fees and expenses of counsel, appraisers and environmental consultants, except with respect to clauses (A), (B) and (C) below, incurred by the Agent (a) in connection with the development, negotiation, preparation, printing, execution, syndication, administration, performance and interpretation of this Agreement and the other Loan Documents, and other instruments and documents to be delivered hereunder, (b) relating to any amendments, waivers or consents pursuant to provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings; (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted by or asserted against the Agent, in its capacity as such, as a result of the use of the proceeds of the Loans; and (iii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (A) if the same results from the Agent's gross negligence or willful misconduct, or (B) if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense (except that the Borrower shall remain liable to the extent such failure to give notice does not result in a loss to the Borrower), or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrower, which shall not be unreasonably withheld. In addition, the Borrower agrees to reimburse and pay all reasonable out-of-pocket expenses of the Agent's regular employees and agents engaged to perform audits of the books, records and properties of the Loan Parties and their Subsidiaries. 9.6 Exculpatory Provisions. None of the Agent or any of its respective directors, officers, employees, agents, attorneys or Affiliates shall (a) be liable to any Bank for any action taken or omitted to be taken by it or them hereunder, or in connection herewith including pursuant to any Loan Document, unless caused by its or its respective directors, officers, employees, agents, attorneys or Affiliates own gross negligence or willful misconduct, (b) be responsible in any manner to any of the Banks for the effectiveness, enforceability, genuineness, validity or due execution of this -85- Agreement or any other Loan Documents or for any recital, representation, warranty, document, certificate, report or statement herein or made or furnished under or in connection with this Agreement or any other Loan Documents, or (c) be under any obligation to any of the Banks to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Loan Parties, or the financial condition of the Loan Parties, or the existence or possible existence of any Event of Default or Potential Default. None of the Agent or any Bank or any of their respective directors, officers, employees, agents, attorneys or Affiliates shall be liable to any of the Loan Parties for any consequential, special or indirect damages, losses or expenses (including without limitation, counsel fees) resulting from any breach of contract, tort or other wrong in connection with the negotiation, documentation, administration or collection of the Loans or any of the Loan Documents. 9.7 Reimbursement and Indemnification by Banks of the Agent. Each Bank agrees to reimburse and indemnify the Agent (to the extent not reimbursed by the Borrower and without limiting the Obligation of the Borrower to do so) in proportion to its Ratable Share from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in its capacity as such or in its capacity of issuing Letters of Credit, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Agent hereunder or thereunder, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (a) if the same results from the Agent's gross negligence or willful misconduct, or (b) if such Bank was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense (except that such Bank shall remain liable to the extent such failure to give notice does not result in a loss to the Bank), or (c) if the same results from a compromise and settlement agreement entered into without the consent of such Bank, which shall not be unreasonably withheld. In addition, each Bank agrees promptly upon demand to reimburse the Agent (to the extent not reimbursed by the Borrower and without limiting the Obligation of the Borrower to do so) in proportion to its Ratable Share for all amounts due and payable by the Borrower to the Agent in connection with the Agent's periodic audit of the Loan Parties' books, records and business properties. 9.8 Reliance by Agent. The Agent shall be entitled to rely upon any writing, telegram, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, order or other document or conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon the advice and opinions of counsel and other professional advisers selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense (other than a -86- liability or expense relating to gross negligence or willful misconduct) which may be incurred by it by reason of taking or continuing to take any such action. 9.9 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default unless the Agent has received written notice from a Bank or the Borrower referring to this Agreement, describing such Potential Default or Event of Default and stating that such notice is a "notice of default." 9.10 Notices. The Agent shall promptly send to each Bank a copy of all notices and other documents received from the Borrower pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Agent shall promptly notify the Borrower and the other Banks of each change in the Base Rate and the effective date thereof. 9.11 Banks in Their Individual Capacities. With respect to the Revolving Credit Commitments and the Loans made by it, the Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Agent, and the term "Banks" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates and each of the Banks and their respective Affiliates may, without liability to account, except as prohibited herein, make loans to, accept deposits from, discount drafts for, act as trustee under indentures of, and generally engage in any kind of banking or trust business with, the Loan Parties and their Affiliates, in the case of the Agent, as though it were not acting as Agent hereunder and in the case of each Bank, as though such Bank were not a Bank hereunder. 9.12 Holders of Notes. The Agent may deem and treat any payee of any Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 9.13 Equalization of Banks. The Banks and the holders of any participations in any Notes agree among themselves that, with respect to all amounts received by any Bank or any such holder for application on any Obligation hereunder or under any Note or under any such participation, whether received by voluntary payment, by realization upon security, by the exercise of the right -87- of set-off or banker's lien, by counterclaim or by any other non-pro rata source, equitable adjustment will be made in the manner stated in the following sentence so that, in effect, all such excess amounts will be shared ratably among the Banks and such holders in proportion to their interests in payments under the Notes, except as otherwise provided in Sections 3.4.2 or 4.6.1. The Banks or any such holder receiving any such amount shall purchase for cash from each of the other Banks an interest in such Bank's Loans in such amount as shall result in a ratable participation by the Banks and each such holder in the aggregate unpaid amount under the Notes, provided that if all or any portion of such excess amount is thereafter recovered from the Bank or the holder making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by law (including court order) to be paid by the Bank or the holder making such purchase. 9.14 Successor Agent. ---------------- The Agent (i) may resign as Agent or (ii) shall resign if such resignation is requested by the Required Banks (if the Agent is a Bank, the Agent's Loans and its Revolving Credit Commitment shall be considered in determining whether the Required Banks have requested such resignation), in either case of (i) or (ii) by giving not less than thirty (30) days' prior written notice to the Borrower. If the Agent shall resign under this Agreement, then subject to the consent of the Borrower (which consent shall not be unreasonably withheld and which consent shall not be required during any period in which an Event of Default exists) either (a) the Required Banks shall appoint from among the Banks a successor agent for the Banks, or (b) if a successor agent shall not be so appointed and approved within the thirty (30) day period following the Agent's notice to the Banks of its resignation, then the Agent shall appoint a successor agent who shall serve as Agent until such time as the Required Banks appoint a successor agent. Upon its appointment, such successor agent shall succeed to the rights, powers and duties of the Agent and the term "Agent" shall mean such successor effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the resignation of any Agent hereunder, the provisions of this Article 9 shall inure to the benefit of such former Agent and such former Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was an Agent under this Agreement. 9.15 Other Fees. ----------- The Borrower shall pay to the Agent the fees due pursuant to that certain commitment letter and related fee letter, each dated October 15, 1996, at the times and in the amounts set forth in such letters. 9.16 Availability of Funds. ---------------------- Unless the Agent shall have been notified by a Bank prior to the date upon which a Loan is to be made that such Bank does not intend to make available to the Agent such Bank's -88- portion of such Loan, the Agent may assume that such Bank has made or will make such proceeds available to the Agent on such date and the Agent may, in reliance upon such assumption (but shall not be required to), make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank, the Agent shall be entitled to recover such amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand, from the Borrower) together with interest thereon, in respect of each day during the period commencing on the date such amount was made available to the Borrower and ending on the date the Agent recovers such amount, at a rate per annum equal to the Federal Funds Effective Rate. 9.17 Calculations. ------------- In the absence of gross negligence or willful misconduct, the Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Loans, fees or any other amounts due to the Banks under this Agreement. In the event an error in computing any amount payable to any Bank is made, the Agent, the Borrower and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate. 9.18 Beneficiaries. --------------- Except as expressly provided herein, the provisions of this Article 9 are solely for the benefit of the Agent and the Banks, and the Loan Parties shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for any of the Loan Parties. 10. MISCELLANEOUS ------------- 10.1 Modifications, Amendments or Waivers. ------------------------------------- With the written consent of the Required Banks, the Agent, acting on behalf of all the Banks, and the Borrower, on behalf of the Loan Parties, may from time to time enter into written agreements amending or changing any provision of this Agreement or any other Loan Document or the rights of the Banks or the Loan Parties hereunder or thereunder, or may grant written waivers or consents to a departure from the due performance of the Obligations of the Loan Parties hereunder or thereunder; provided, however, that the written consent of the Required Banks shall not be required with respect to the joinder of additional Loan Parties pursuant to Section 10.18. Any such agreement, waiver or consent made with such written -89- consent shall be effective to bind all the Banks and the Loan Parties; provided, that, without the written consent of all the Banks, no such agreement, waiver or consent may be made which will: 10.1.1 Increase of Revolving Credit Commitments; Extension of ------------------------------------------------------ Expiration Date. --------------- Increase the amount of the Revolving Credit Commitment of any Bank hereunder or extend the Expiration Date; 10.1.2 Extension of Payment; Reduction of Principal, Interest ------------------------------------------------------ or Fees; Modification of Terms of Payment. ----------------------------------------- Whether or not any Loans are outstanding, extend the time for payment of principal or interest of any Loan, the Commitment Fee or any other fee payable to any Bank, or reduce the principal amount of or the rate of interest borne by any Loan or reduce the Commitment Fee or any other fee payable to any Bank, or otherwise affect the terms of payment of the principal of or interest of any Loan, the Commitment Fee or any other fee payable to any Bank; 10.1.3 Release of Guarantor. -------------------- Release any Domestic Subsidiary from its Obligations under the Master Guaranty Agreement; or 10.1.4 Miscellaneous. -------------- Amend Sections 4.2 [Pro Rata Treatment of Banks], 9.6 [Exculpatory Provisions] or 9.13 [Equalization of Banks] or this Section 10.1, alter any provision regarding the pro rata treatment of the Banks, change the definition of Required Banks, or change any requirement providing for the Banks or the Required Banks to authorize the taking of any action hereunder. No agreement, waiver or consent which would modify the interests, rights or obligations of the Agent in its capacity as Agent, or its capacity as the issuer of Letters of Credit shall be effective without the written consent of the Agent. 10.2 No Implied Waivers; Cumulative Remedies; Writing Required. --------------------------------------------------------------- No course of dealing and no delay or failure of the Agent or any Bank in exercising any right, power, remedy or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or operate as a waiver thereof, nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of the Agent and the Banks -90- under this Agreement and any other Loan Documents are cumulative and not exclusive of any rights or remedies which they would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. 10.3 Reimbursement and Indemnification of Banks by the Borrower; Taxes. ----------------------------------------------------------------- The Borrower agrees unconditionally upon demand to pay or reimburse to each Bank and to save each Bank harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements (including fees and expenses of counsel for each Bank except with respect to (A), (B) and (C) below), incurred by such Bank (a) in connection with the administration and interpretation of this Agreement, the other Loan Documents, and the other instruments and documents to be delivered hereunder, provided such reimbursement with respect to administration only shall be available to such Bank at a time when an Event of Default shall have occurred and be continuing, (b) relating to any amendments, waivers or consents pursuant to provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings; (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted by or asserted against such Bank as a result of the use of the proceeds of the Loans; and (iii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Bank, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by such Bank hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (A) if the same results from such Bank's gross negligence or willful misconduct, or (B) if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense (except that the Borrower shall remain liable to the extent such failure to give notice does not result in a loss to the Borrower), or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrower, which shall not be unreasonably withheld. The Banks will attempt to minimize the fees and expenses of legal counsel for the Banks which are subject to reimbursement by the Borrower hereunder by considering the usage of one law firm to represent the Banks and the Agent if appropriate under the circumstances. The Borrower agrees unconditionally to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Agent or any Bank to be payable in connection with this Agreement or any other Loan Document, and the Borrower -91- agrees unconditionally to save the Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions, except as provided otherwise above. 10.4 Holidays. -------- Whenever any payment or action to be made or taken hereunder shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day (except as provided in Section 3.2.1 with respect to Interest Periods under the Revolving Credit Euro- Rate Option), and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 10.5 Funding by Branch, Subsidiary or Affiliate. ------------------------------------------ 10.5.1 Notional Funding. ---------------- Each Bank shall have the right from time to time, without notice to the Borrower, to deem any branch, Subsidiary or Affiliate (which for the purposes of this Section 10.5 shall mean any corporation or association which is directly or indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained or funded any Loan to which the Revolving Credit Euro-Rate Option applies at any time, provided that immediately following (on the assumption that a payment were then due from the Borrower to such other office), and as a result of such change, the Borrower would not be under any greater financial obligation pursuant to Section 4.5 than it would have been in the absence of such change. Notional funding offices may be selected by each Bank without regard to such Bank's actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank; and 10.5.2 Actual Funding. -------------- Each Bank shall have the right from time to time to make or maintain any Loan by arranging for a branch, Subsidiary or Affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 10.5.2. If any Bank causes a branch, Subsidiary or Affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Bank, but in no event shall any Bank's use of such a branch, Subsidiary or Affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, Subsidiary or Affiliate to incur any cost or expenses payable by the Borrower hereunder or require the Borrower to pay any other compensation to any Bank (including any expenses incurred or payable pursuant to Section 4.5) which would otherwise not be incurred. -92- 10.5.3 Changes to Other Branches, Subsidiaries or Affiliates. ----------------------------------------------------- If a Bank claims any additional amounts payable pursuant to Section 4.5 or that it is unable to make Loans to which a Revolving Credit Euro-Rate Option applies, it shall use its reasonable efforts (consistent with legal and regulatory restrictions) to avoid the need for paying such additional amounts or such inability, including changing the jurisdiction of its applicable lending office or moving the Loan to a Subsidiary or Affiliate; provided, however, that the taking of any such action would not, in the reasonable judgment of such Bank, be disadvantageous to such Bank. 10.6 Notices. ------- All notices, requests, demands, directions and other communications (as used in this Section 10.6, collectively referred to as "notices") given to or made upon any party hereto under the provisions of this Agreement shall be by telephone or in writing (including telex or facsimile communication) unless otherwise expressly permitted hereunder and shall be delivered or sent by telex or facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages to this Agreement or any Guaranty or in accordance with any subsequent unrevoked written direction from any party to the others. All notices shall, except as otherwise expressly herein provided, be effective (a) in the case of telex or facsimile, when received, (b) in the case of hand-delivered notice, when hand-delivered, (c) in the case of telephone, when telephoned, provided, however, that in order to be effective, telephonic notices must be confirmed in writing no later than the next day by letter, facsimile or telex, (d) if given by mail, four (4) days after such communication is deposited in the mail with first-class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered; provided, that notices to the Agent shall not be effective until received. Any Bank giving any notice to any Loan Party shall simultaneously send a copy thereof to the Agent, and the Agent shall promptly notify the other Banks of the receipt by it of any such notice. 10.7 Severability. ------------ The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 10.8 Governing Law. ------------- Each Letter of Credit and Section 2.10 shall be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be revised or amended from time to time, and to the extent not inconsistent therewith, the internal laws of the Commonwealth of Pennsylvania without -93- regard to its conflict of laws principles and the balance of this Agreement shall be deemed to be a contract under the Laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 10.9 Prior Understanding. ------------------- This Agreement and the other documents and instruments executed in connection herewith supersede all prior understandings and agreements, whether written or oral, between the parties hereto and thereto relating to the transactions provided for herein and therein, including any prior confidentiality agreements and commitments except that the Borrower's fee payment obligations contained in the fee letter referred to in Section 9.15 shall continue in full force and effect. 10.10 Duration; Survival. ------------------ All representations and warranties of the Loan Parties contained herein or made in connection herewith shall survive the making of Loans and issuance of Letters of Credit and shall not be waived by the execution and delivery of this Agreement, any investigation by the Agent or the Banks, the making of Loans, issuance of Letters of Credit, or payment in full of the Loans. All covenants and agreements of the Loan Parties contained in Sections 7.1, 7.2 and 7.3 shall continue in full force and effect from and after the date hereof so long as the Borrower may borrow or request Letters of Credit hereunder and until termination of the Revolving Credit Commitments, repayment of all Loans and expiration or termination of all Letters of Credit. All covenants and agreements of the Borrower contained herein relating to the payment of principal, interest, premiums, additional compensation or expenses and indemnification, including those set forth in the Notes, Article 4 and Sections 9.5, 9.7 and 10.3, shall survive payment in full of the Loans, expiration or termination of the Letters of Credit and termination of the Revolving Credit Commitments. 10.11 Successors and Assigns. ---------------------- This Agreement shall be binding upon and shall inure to the benefit of the Banks, the Agent, the Loan Parties and their respective successors and assigns, except that, other than as contemplated by Sections 7.2.6 and 7.2.7, none of the Loan Parties may assign or transfer any of its rights and Obligations hereunder or any interest herein without consent of all Banks. Each Bank may, at its own cost, make assignments of or sell participations in all or any part of its Revolving Credit Commitment and Loans and its Ratable Share of Letter of Credit Outstandings to one or more banks or other entities, subject to the consent of the Borrower (which consent shall not be required during any period in which an Event of Default exists), and the Agent with respect to any assignee, such consents not to be unreasonably withheld, and provided that (i) assignments may not be made in amounts less than $5,000,000 and (ii) after giving effect to such assignment, no Bank which remains a Bank thereafter shall have Commitments of less than $5,000,000. In the case of an assignment, upon receipt by the Agent of the Syndication -94- Assignment and Assumption Agreement with respect to all assignments made as part of the initial syndication of the credit facilities under the Agreement after the Closing Date, or the Assignment and Assumption Agreement with respect to each subsequent assignment, the assignee or assignees shall have, to the extent of such assignment (unless otherwise provided therein), the same rights, benefits and obligations as it would have if it had been a signatory Bank hereunder, the Revolving Credit Commitments in Section 2.1 shall be adjusted accordingly and Schedule 1.1(B) to this Agreement shall be modified by Schedule I to the Syndication Assignment and Assumption Agreement with respect to all assignments made as part of the initial syndication of the credit facilities under this Agreement after the Closing Date or by Schedule I to each Assignment and Assumption Agreement with respect to subsequent assignments, and upon surrender of any Notes subject to such assignment, the Borrower shall execute and deliver new Notes to the assignee in an amount equal to the amount of the Revolving Credit Commitments assumed by it and new Notes to the assigning Bank in an amount equal to the Revolving Credit Commitments retained by it hereunder. Any assigning Bank shall pay to the Agent a service fee in the amount of $3,500 for each assignment, which amount shall not be subject to reimbursement or indemnification by the Borrower. In the case of a participation, the participant shall only have the rights specified in Section 8.2.3 (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto and not to include any voting rights), all of such Bank's obligations under this Agreement or any other Loan Document shall remain unchanged, and all amounts payable by any Loan Party hereunder or thereunder shall be determined as if such Bank had not sold such participation. Any assignee or participant which is not incorporated under the Laws of the United States of America or a state thereof shall deliver to the Borrower and the Agent the form of certificate described in Section 10.17 relating to federal income tax withholding. Each Bank may furnish any publicly available information concerning any Loan Party or its Subsidiaries and any other information concerning any Loan Party or its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees or participants), provided that such assignees and participants agree to be bound by the provisions of Section 10.12. Notwithstanding any other language in this Agreement, any Bank may at any time assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank as collateral in accordance with Regulation A and the applicable Operating Circular of such Federal Reserve Bank. 10.12 Confidentiality. --------------- The Agent and the Banks each agree to keep confidential all information obtained from any Loan Party or its Subsidiaries which is nonpublic and confidential or proprietary in nature (including any information the Borrower specifically designates as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the administration and enforcement of this Agreement and who are notified that the information is to be treated as -95- confidential, (ii) to assignees and participants as contemplated by Section 10.11, (iii) to the extent requested by any bank regulatory authority or, with notice to the Borrower if not prohibited, as otherwise required by applicable Law or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not known to be subject to confidentiality restrictions, (v) if the Borrower shall have consented to such disclosure, or (vi) after notice to the Borrower unless the Borrower is an adverse party in such litigation, in connection with any litigation to which any Bank is a party the subject matter of which involves this Agreement or is deemed necessary upon the advice of legal counsel of such Bank by such Bank in any defense of such litigation. 10.13 Counterparts. This Agreement may be executed by different parties hereto on any number of separate counterparts, including facsimiles, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. 10.14 Agent's or Bank's Consent. Whenever the Agent's or any Bank's consent is required to be obtained under this Agreement or any of the other Loan Documents as a condition to any action, inaction, condition or event, the Agent and each Bank shall be authorized to give or withhold such consent in its sole discretion and to condition its consent upon the giving of additional collateral, the payment of money or any other matter. 10.15 Exceptions. The representations, warranties and covenants contained herein shall be independent of each other, and no exception to any representation, warranty or covenant shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exceptions be deemed to permit any action or omission that would be in contravention of applicable Law. 10.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL. EACH LOAN PARTY HEREBY IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO SUCH LOAN PARTY AT THE ADDRESSES PROVIDED FOR IN SECTION 10.6 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL -96- RECEIPT THEREOF. EACH LOAN PARTY WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR INCONVENIENT FORUM. EACH LOAN PARTY, THE AGENT AND THE BANKS HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW. 10.17 Tax Withholding Clause. Each Bank or assignee or participant of a Bank that is not incorporated under the Laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Agent two (2) duly completed copies of the following: (i) Internal Revenue Service Form W-9, 4224 or 1001, or other applicable form prescribed by the Internal Revenue Service, certifying that such Bank, assignee or participant is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes, or is subject to such tax at a reduced rate under an applicable tax treaty, or (ii) Internal Revenue Service Form W-8 or other applicable form or a certificate of such Bank, assignee or participant indicating that no such exemption or reduced rate is allowable with respect to such payments. Each Bank, assignee or participant required to deliver to the Borrower and the Agent a form or certificate pursuant to the preceding sentence shall deliver such form or certificate as follows: (A) each Bank which is a party hereto on the Closing Date shall deliver such form or certificate at least five (5) Business Days prior to the first date on which any interest or fees are payable by the Borrower hereunder for the account of such Bank; (B) each assignee or participant shall deliver such form or certificate at least five (5) Business Days before the effective date of such assignment or participation (unless the Agent in its sole discretion shall permit such assignee or participant to deliver such form or certificate less than five (5) Business Days before such date in which case it shall be due on the date specified by the Agent). Each Bank, assignee or participant which so delivers a Form W-8, W-9, 4224 or 1001 further undertakes to deliver to each of the Borrower and the Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent, either certifying that such Bank, assignee or participant is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes or is subject to such tax at a reduced rate under an applicable tax treaty or stating that no such exemption or reduced rate is allowable. The Agent shall be entitled to withhold United States federal income taxes at the full withholding rate unless the Bank, assignee or participant establishes an exemption or that it is subject to a reduced rate as established pursuant to the above provisions. -97- 10.18 Joinder of Subsidiaries. Any Subsidiary of the Borrower which is required to join the Master Guaranty Agreement pursuant to Section 7.2.9 shall execute and deliver to the Agent a signature page to the Master Guaranty Agreement and to the Master Intercompany Subordination Agreement. The Loan Parties shall deliver such Guarantor Joinder and the other documents required by this Section 10.18 to the Agent within five (5) Business Days after the date of the filing of such Subsidiary's articles of incorporation if the Subsidiary is a corporation, the date of the filing of its certificate of limited partnership if it is a limited partnership or the date of its organization if it is an entity other than a limited partnership or corporation or, if acquired, the date of acquisition. The Agent shall have received, for its benefit and the benefit of the Banks, opinions of the Loan Parties legal counsel in form and substance satisfactory to the Agent together with such other documents, certificates and agreements as the Agent may request to effectuate the provisions of this Section 10.18. -98- [SIGNATURE PAGE 1 OF 2 TO CREDIT AGREEMENT] IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. BORROWER: ATTEST: CUNO INCORPORATED. By: /s/ Ronald C. Drabik --------------------------- Title: Chief Financial Officer ------------------------ [Seal] Address for Notices: 400 Research Parkway Meriden CT 06450 Telecopier No. (203) 238-8912 Attention: Ronald C. Drabik Telephone No. (203) 237-5541 -99- [SIGNATURE PAGE 2 OF 2 TO CREDIT AGREEMENT] MELLON BANK, N.A., Individually as a Bank and as Agent By: /s/ John Paul Marotta -------------------------------- Title: Assistant Vice President ----------------------------- Address for Notices: Legal Documents: Mellon Financial Services 65 East 55th Street, 15th Floor New York, NY 10022-3219 Telecopier No. (212) 702-5269 Attention: John Paul Marotta Telephone No. (212) 702-4029 Administrative Notices: Mellon Bank, N.A. Loan Administration Three Mellon Bank Center Pittsburgh, PA 15259 Telecopier No. (412) 236-2027 Mellon's Wiring Instructions: MELLON BANK PITTSBURGH, PA ABA #043000261 ATTN: LOAN ADMINISTRATION CREDIT ACCOUNT #___________ REF: CUNO Incorporated -100- EX-23.1 6 CONSENT OF ERNST & YOUNG [LETTERHEAD OF ERNST & YOUNG LLP] Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "SELECTED FINANCIAL AND OTHER DATA" and "EXPERTS" and to the use of our reports dated December 16, 1996, in the Registration Statement (Form S-1 No. 333- ) and related Prospectus of CUNO Incorporated for the registration of 2,000,000 shares of its common stock. /s/ Ernst & Young LLP Hartford, Connecticut February 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----