-----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, I3Sa3Z/G2F663QYF8Jud42sxgMQU1IpULo4UjT47b24f7QlIyCkw4LJPBj9MRC6L EQI9iGkB+ghZ1laUSeMBfA== 0000950146-97-000364.txt : 19970313 0000950146-97-000364.hdr.sgml : 19970313 ACCESSION NUMBER: 0000950146-97-000364 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARDINGE INC CENTRAL INDEX KEY: 0000313716 STANDARD INDUSTRIAL CLASSIFICATION: MACHINE TOOLS, METAL CUTTING TYPES [3541] IRS NUMBER: 160470200 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15760 FILM NUMBER: 97555093 BUSINESS ADDRESS: STREET 1: ONE HARDING DRIVE CITY: ELMIRA STATE: NY ZIP: 14902 BUSINESS PHONE: 6077342281 MAIL ADDRESS: STREET 1: ONE HARDINGE DRIVE STREET 2: ONE HARDINGE DRIVE CITY: ELMIRA STATE: NY ZIP: 14902 FORMER COMPANY: FORMER CONFORMED NAME: HARDINGE BROTHERS INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 1996. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______ to _______. Commission File Number 0-15760 ------- HARDINGE INC. (Exact name of registrant as specified in its charter) NEW YORK 16-0470200 - ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Hardinge Drive, Elmira, New York 14902-1507 - ---------------------------------------- ------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: (607) 734-2281 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities pursuant to section 12(g) of the Act:: Common Stock with a par value of $.01 per share Preferred Stock purchase rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 21, 1997: Common Stock, $.01 par value - $111,362,636 The number of shares outstanding of the issuer's common stock as of February 21, 1997: Common Stock, $.01 par value 6,499,338 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Hardinge Inc.'s Proxy Statement filed with the Commission on March 11, 1997 are incorporated by reference to Part III of this Form. PART I ITEM 1. - BUSINESS General - ------- Hardinge Inc.'s principal executive offices are located at One Hardinge Drive, Elmira, New York 14902-1507; telephone (607) 734-2281. The Company has five wholly owned subsidiaries. Canadian Hardinge Machine Tools, Ltd. located near Toronto, Ontario was established by Hardinge Inc. in 1958. Hardinge Machine Tools, Ltd. was established in the United Kingdom in 1939 and became a wholly owned subsidiary in 1981 when it redeemed the shares previously held by others. Hardinge Brothers GmbH was established by the Company in Germany in 1987. In November 1995, the Company acquired 100% of the outstanding stock of L. Kellenberger & Co., AG of St. Gallen, Switzerland and its subsidiary, Kellenberger, Inc. of Elmsford, New York (collectively referred to as "Kellenberger"). The Company's headquarters is located in Chemung County, New York, which is on the south-central border of upstate New York. The Company has manufacturing facilities located in Chemung County, New York and in St. Gallen, Switzerland. The Company manufactures the majority of the products it sells, purchasing a few machine accessories from other manufacturers for resale. References to Hardinge Inc., the "Company", or "Hardinge" are to Hardinge Inc. and its predecessors and subsidiaries, unless the context indicates otherwise. The Company changed its name in 1995 from Hardinge Brothers, Inc., to Hardinge Inc. Products - -------- Hardinge Inc. has been a manufacturer of industrial-use Super-Precision(R) and general precision turning machine tools since 1890. Turning machines, or lathes, are power-driven machines used to remove material from a rough-formed part by moving multiple cutting tools arranged on a turret assembly against the surface of a part rotating at very high speeds in a spindle mechanism. The multi-directional movement of the cutting tools allows the part to be shaped to the desired dimensions. On parts produced on Hardinge machines, those dimensions are often measured in millionths of inches. Hardinge considers itself to be a leader in the field of producing machines capable of consistently and cost-effectively producing parts to those dimensions. In the late 1970's, Hardinge began to produce computer numerically controlled ("CNC") machines which use commands from an on-board computer to control the movement of cutting tools and rotation speeds of the part being produced. The computer control enables the operator to program operations such as part rotation, tooling selection and tooling movement for a specific part and then store that program in memory for future use. The machine is able to produce parts while left unattended when connected to automatic bar-feeding or robotics equipment designed to supply raw materials. Because of this ability, as well as superior speed of operation, a CNC machine is able to produce the same amount of work as several manually controlled machines, as well as reduce the number of operators required. Since the introduction of CNC turning machines, continual advances in computer control technology have allowed for easier programming and additional machine capabilities. In 1994, the Company expanded its machine tool line to include CNC vertical turning machines and vertical machining centers, the first sales of which occurred during the first quarter of 1995. Prior to that, all of the Company's turning machines were horizontal which means that the spindle holding the rotating part and the turret holding the cutting tools are arranged on a horizontal plane. On a vertical turning machine, the spindle and turret are aligned on a vertical plane, with the spindle on the bottom. A vertical turning machine permits the customer to produce 1 larger, heavier and more oddly shaped parts on a machine that uses less floor space when compared to a traditional horizontal turning machine. A vertical machining center cuts material differently than a turning machine. These machines are designed to remove material from stationary, prismatic (box-like) parts of various shapes with rotating tools that are capable of milling, drilling, tapping, reaming and routing. Machining centers have mechanisms that automatically change tools based on commands from a built-in computer control without the assistance of an operator. Machining centers are generally purchased by the same customers as turning machines and are being marketed by the Company on the basis that a customer will be able to obtain machining centers with the same quality and reliability as the Company's turning machines and will be able to obtain its turning machines and machining centers from a single supplier. The Company has further extended its machine offerings into the grinding machine sector of the metal-cutting machine tool industry with the acquisition of Kellenberger. Grinding is a machining process where a surface is shaped to closer tolerances with a rotating abrasive wheel or tool. Grinding machines can be used to finish parts of various shapes and sizes. The grinding machines of Kellenberger are used to grind the inside and outside diameters of round, cylindrical parts. Such grinding machines are typically used to provide for a more exact finish on a part which has been partially completed on a lathe. The grinding machines of Kellenberger, which are manufactured in both CNC and manually controlled models, are generally purchased by the same type of customers as other Hardinge equipment and furthers the ability of the Company to be a sole source supplier for its customers. During 1996, the Company took yet another step to address a new market segment with the introduction of its Cobra(TM)42 CNC lathe. A basic, no frills, yet very reliable and accurate lathe, the Cobra provides a relatively inexpensive product offering for potential customers with limited financial resources. Further refining its ability to provide products aimed at particular types of customer applications, Hardinge also introduced two new "long bed" lathes in 1996. These machines are specially designed to manufacture parts of greater length than would normally be possible using smaller, more conventional lathes. Multiple options are available on the broad range of the Company's machines which allow customers to customize their machines for the specific purpose and cost objective they require. The Company produces machines for stock with popular option combinations for immediate delivery, as well as machines made to specific customer orders. In recent years, the Company has increasingly emphasized the engineering of complete systems for customers who desire one or more CNC machines to produce a specific part. In configuring complete systems, the Company provides, in addition to its machines, the necessary computer programming and tooling, as well as robotics and other parts handling equipment manufactured by it or others. All Hardinge machines can be used to produce parts from all of the standard ferrous and non-ferrous metals, as well as plastics, composites and exotic materials. In addition, the Company offers the most extensive line available in the industry of workholding and toolholding devices, which may be used on both its turning machines and those produced by others. The Company considers itself to be a worldwide leader in the design and manufacture of workholding and toolholding devices. It also offers a complete line of six-foot and twelve-foot bar feed systems for its CNC and manual turning machines, which hold the workpiece steady and feed it into the turning machine. Also produced are a variety of other optional equipment and accessories for its machines. During 1996 the Company further expanded its workholding products with the addition of its Sure-Grip(TM) line of power jaw chucks. The Company offers various warranties on its equipment and considers post-sales support to be a critical element of its business. Services provided include operation and maintenance training, maintenance, and in-field repair. The Company's 2 intent, where practical, is to provide readily available replacement parts throughout the life of the machine. Markets and Distribution - ------------------------ Sales are principally in the United States and Western Europe. In addition, sales are made to customers in Canada, China, Mexico, Japan, Australia and other foreign countries. The Company primarily markets its machine tools through its direct sales force and through distributors and manufacturers' representatives in the United States and abroad. The Company uses a similar system of employee sales personnel and independent distributors in the United Kingdom and Canada. In other countries, the Company primarily sells through distributors. The Company's U.S. distributors have the exclusive right to distribute its products in particular markets, although these markets are located in less industrialized areas of the country. The Company's sales personnel earn a fixed salary plus commission based upon a percentage of net sales. Certain of the Company's distributors operate independent businesses, purchase machine tools and non-machine products from the Company and maintain inventories of these products and spare parts for their customers, while other distributors merely sell machine tools on behalf of the Company. The Company's commission schedule is adjusted to reflect the level of aftermarket support offered by its distributors. As is common in its industry, the Company provides long-term financing for the purchase of its equipment by qualified customers. The Company regards this program as an important part of its marketing efforts, particularly to independent machine shops. Customer financing is offered for a term of up to seven years, with the Company retaining a security interest in the equipment. In response to competitive pressures, the Company occasionally offers this financing at below market interest rates or with deferred payment terms. The present value of the difference between the actual interest charged on customer notes for periods during which finance charges are waived or reduced and the estimated rate at which the notes could be sold to financial institutions is accounted for as a reduction of the Company's net sales. The Company's non-machine products mainly are sold in the United States through telephone orders to a toll-free "800" telephone number, which is linked to an on-line computer order entry system maintained by the Company at its Elmira headquarters. In most cases, the Company is able to package and ship in-stock tooling and repair parts within 24 hours of receiving orders. With more popular items, the Company can package and ship within several hours. The Company promotes recognition of its products in the marketplace through advertising in trade publications and participation in industry trade shows. In addition, the Company markets its non-machine products through publication of general catalogue and other targeted catalogues, which it distributes to existing and prospective customers. A substantial portion of the Company's sales are to small and medium-sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and indirectly served by the Company include automotive, medical equipment, aerospace, defense, recreational equipment, farm equipment, construction equipment, energy, and transportation. Sales to the automobile industry accounted for 9% and 21% of the Company's net sales in 1996 and 1995, respectively. In 1994, no industry or customer accounted for more than 4% of the Company's net sales. The Company operates in a single business segment, industrial machine tools. 3 Competitive Conditions - ---------------------- The primary competitive factors in the marketplace for the Company's machine tools are reliability, price, delivery time, service and technological characteristics. There are many manufacturers of machine tools in the world. They can be categorized by the size of material their products can machine and the precision level they can achieve. In the size and precision level the Company addresses with its turning machines and machining centers, the primary competition comes from several Japanese manufacturers. Several German manufacturers also compete with the Company, primarily in Europe. The Kellenberger machines compete with Japanese, German and other Swiss manufacturers. Management considers its segment of the industry to be extremely competitive. The Company believes that it brings superior quality, reliability, value, availability, capability and support to its customers. Sources and Availability of Raw Materials - ----------------------------------------- The Company manufactures and assembles its lathes and machining centers and related products at its Elmira, New York plant. The Kellenberger grinding machines and related products are manufactured at its St. Gallen, Switzerland plant. Products are manufactured by the Company from various raw materials, including cast iron, sheet metal, bar steel and bearings. Although the Company's operations are highly integrated, it purchases a number of components from outside suppliers, including the computer and electronic components for its CNC lathes and machining centers. There are multiple suppliers for virtually all of the Company's raw material and components and the Company has not experienced a supply interruption in recent years. A major component of the Company's CNC machines is the computer and related electronics package. The Company purchases these components for its lathes and machining centers primarily from Fanuc Limited, a large Japanese electronics company, except on occasions where a significant customer order specifies a different control. While the Company believes that design changes could be made to its machines to allow sourcing from several other existing suppliers, and occasionally does so for these special orders, a disruption in the supply of the Fanuc components could cause the Company to experience a substantial disruption of its operations, depending on the circumstances at the time. Kellenberger assembles an electronics package of its own design. The Company utilizes several quality and process control programs, including Total Quality Management. The Company believes that it operates its quality system to the requirements of the ISO 9000 Quality System of the International Standards Organization and is postured to obtain ISO 9000 certification if required for marketing. The ISO 9000 Quality System is an internationally accepted quality standard for commercial operations, such as product design verification, reviewing the quality of suppliers, imperfection and testing requirements and maintaining quality records. The Company believes that these initiatives have helped it maintain the quality and reliability of its products. Research and Development - ------------------------ The Company's ongoing research and development program involves creating new products and modifying existing products to meet market demands and redesigning existing products to reduce the cost of manufacturing. The research and development department is staffed with experienced design engineers with technical through doctorate degrees. The cost of research and development, all of which has been charged to operations, amounted to $7,932,000, $5,713,000, and $5,218,000, in 1996, 1995 and 1994, respectively. 4 Patents - ------- Although the Company holds several patents with respect to certain of its products, it does not believe that its business is dependent to any material extent upon any single patent or group of patents. Seasonal Trends and Working Capital Requirements - ------------------------------------------------ The Company is not subject to significant seasonal trends. Its business, and that of the machine tool industry in general, is cyclical. However, the Company's quarterly results are subject to significant fluctuation based on the timing of its shipments of machine tools, which are largely dependent upon customer delivery requirements. Traditionally, the Company has experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at its U.S. and European customers' plants and the Company's policy of closing its facilities during the first two weeks of July. As a result, the Company's third-quarter net sales, income from operations and net income typically have been the lowest of any quarter during the year. During 1995 and 1994, shipments of certain large orders offset this historical pattern in the third quarter The ability to deliver products within a short period of time is an important competitive criterion. Also, the Company feels it is important to provide availability of replacement parts for a machine throughout its useful life. These factors contribute to a requirement that the Company carry significant amounts of inventory. For many years, the Company has periodically sold a substantial portion of the customer notes receivable generated by its customer financing program to various financial institutions. While the Company's customer financing program has an impact on its month-to-month borrowings, it has had little long-term impact on its working capital requirements because of the sales of these notes. Backlog - ------- The Company normally ships its machine products within two to three months after order. The Company's order backlog at December 31, 1996 and 1995 was $71,400,000 and $54,335,000, respectively. Orders are generally subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year may be materially affected by the timing of the Company's receipt of orders and the speed with which those orders are filled. Accordingly, the Company's backlog is not necessarily indicative of actual shipments or sales for any future period, and period-to-period comparisons may not be meaningful. Governmental Regulations - ------------------------ The Company believes that its current operations and its current uses of property, plant and equipment conform in all material respects to applicable laws and regulations. Environmental Matters - --------------------- The Company's operations are subject to extensive federal and state legislation and regulation relating to environmental matters. The Company believes it is currently 5 in material compliance with applicable environmental laws and regulations in each of the countries in which it operates. Future regulations, under the Clean Air Act and otherwise, are expected to impose stricter emission requirements on the metal working industry. While the Company believes that current pollution control measures at most of the emission sources at its manufacturing facilities will meet these anticipated future requirements, additional measures at some sources may be required. The Company does not believe that these anticipated future requirements are likely to have a material adverse effect upon its financial condition, results of operations or competitive position. Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Activities at properties owned by the Company and on adjacent areas have resulted in environmental impacts. In particular, the Company's New York manufacturing facility is located within the Kentucky Avenue Well Field on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency ("EPA") because of groundwater contamination. The Kentucky Avenue Well Field site encompasses an area of approximately three square miles which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, New York. The Company, however, has never been named as a potentially responsible party at the site or received any requests for information from EPA concerning the site. Environmental sampling on the Company's property within this site under supervision of regulatory authorities has identified off-site sources for such groundwater contamination and has found no evidence that the Company's property is contributing to the contamination. Environmental sampling at the Company's former New York manufacturing facility following the removal of an underground storage tank disclosed the presence of hydrocarbon contamination in surrounding soils. An environmental consultant retained by the Company prepared a site assessment and remedial action plan which were adopted and approved by the New York State Department of Environmental Conservation. Pursuant to the timetable set forth in the remedial action plan, the Company completed the construction phase of the cleanup in the first quarter of 1996 at a cost of approximately $400,000. The Company anticipates that ongoing operation and maintenance expenses for the cleanup are anticipated to be less than $100,000 annually. Although the Company believes, based upon information currently available to management, that it will not have material liabilities for environmental remediation, there can be no assurance that future remedial requirements or changes in the enforcement of existing laws and regulation, which are subject to extensive regulatory discretion, will not result in material liabilities. Employees - --------- As of December 31, 1996, the Company employed 1,415 persons, 1,175 of whom were located in the United States. None of the Company's employees are covered by collective bargaining agreements. Management believes that relations with the Company's employees are good. Foreign Operations and Export Sales - ----------------------------------- Information related to foreign and domestic operations and sales is included in Note 5 to consolidated financial statements contained in this Annual Report. The Company believes that its subsidiaries operate in countries where the economic climate is relatively stable. 6 ITEM 2. - PROPERTIES Pertinent information concerning the principal properties of the Company and its subsidiaries is as follows:
Acreage (Land) Square Footage Location Type of Facility (Building) - ------------------------------------ ------------------------------------------- ------------------------- Owned Properties Horseheads, New York Manufacturing, Engineering, Turnkey 80 acres Systems, Marketing, Sales, Demonstration, 515,000 sq. ft. Service and Administration Elmira, New York Warehouse 12 acres 176,000 sq. ft. St. Gallen Manufacturing, Engineering, Turnkey 8 acres Switzerland Systems, Marketing, Sales, Demonstration, 155,000 sq. ft. Service and Administration
Lease Expiration Location Type of Facility Square Footage Date - ---------------------------------------- --------------------------------- ---------------------- ----------------- Leased Properties Exeter, England Sales, Marketing, Service, 20,000 sq. ft. 6/30/97 Turnkey System and Administration Krefeld, Germany Sales, Service 1,500 sq. ft. 12/31/97 Elmsford, New York Sales, Service 9,500 sq. ft. 5/31/97 Los Angeles, California Sales, Service 14,500 sq. ft. 10/31/97 Demonstration Toronto, Canada Sales, Service 5,800 sq. ft. 6/5/2001 Charlotte, NC Sales, Service 6,400 sq. ft. 3/31/2006 Demonstration
ITEM 3. - LEGAL PROCEEDINGS The Company is from time to time involved in routine litigation incidental to its operations. None of the litigation in which the Company is currently involved, individually or in the aggregate, is material to its financial condition or results of operations. 7 ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1996, no matters were submitted to a vote of security holders. PART II ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prior to May of 1995, the Company's common stock was traded in a local, over-the-counter market in small amounts and on an irregular basis. The Company was aware that these and other transfers took place, but often was without knowledge of whether the transfer was a sale, was without consideration or was for re-registration. Valuation of the stock was made from time-to-time for tax and other purposes and some of said valuations are known to the Company. For example, the stock was valued quarterly by a qualified independent appraiser retained by the Company during the first quarter of 1995, for purposes of Employee Stock Ownership Plan administration. Also, First Albany Corporation had supplied the Company with quarterly data of actual known trades. For periods prior to the Company's May, 1995 public offering, the following table reflects the highest and lowest values known to the Company from the foregoing described sources. Since May 25, 1995, the Company has been traded on the NASDAQ market under the symbol "HDNG". The table also includes dividends per share, by quarter. The Company has paid five dividends in past years; in January, March, June, September and December. In 1995, the Board of Directors announced its intent to discontinue the special January dividend, therefore only four dividends were paid in 1996.
1996 1995 ------------------------------------- -------------------------------- Values Values ------------------------------------- -------------------------------- High Low Dividends High Low Dividends ------------------------------------- -------------------------------- Quarter Ended March 31 $28 1/2 $25 $ .17 $17 1/4 $12 1/4 $ .40 June 30 35 1/2 26 .17 20 1/4 17 1/4 .15 September 30 31 3/4 20 3/8 .17 26 1/2 19 1/8 .15 December 31 29 23 .19 26 3/4 23 3/8 .17
At February 21, 1997, there were 1,450 holders of record of common stock. Dividend amounts as well as high and low values have been restated for the first quarter of 1995 to reflect the reclassification of stock, as explained in the notes to the financial statements. 8 ITEM 6. - SELECTED FINANCIAL DATA The following selected financial data is derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes and other information included herein (dollar amounts in thousands except per share data).
Year Ended December 31 1996 1995 1994 1993 1992 ------------------------------------------------------------------ STATEMENT OF INCOME DATA Net sales $ 220,295 $ 180,586 $ 117,336 $ 98,437 $ 84,797 Cost of sales 145,264 119,975 76,937 63,169 55,905 ------------------------------------------------------------------ Gross profit 75,031 60,611 40,399 35,268 28,892 Selling, general and administrative expenses 45,058 36,076 27,882 25,804 24,864 Restructuring costs (2) 1,086 ------------------------------------------------------------------ Operating income 29,973 24,535 12,517 9,464 2,942 Interest expense 2,770 1,369 1,479 1,343 1,380 Interest (income) (889) (927) (453) (763) (1,160) (Gain) on sale of assets (326) (442) ------------------------------------------------------------------ Income before income taxes 28,092 24,419 11,933 8,884 2,722 Income taxes 10,804 9,574 5,214 3,730 1,152 ------------------------------------------------------------------ Income before cumulative effect of changes in accounting methods 17,288 14,845 6,719 5,154 1,570 Cumulative effect of changes in accounting methods(3) (2,754) ------------------------------------------------------------------ Net income (loss) $ 17,288 $ 14,845 $ 6,719 $ 5,154 $ (1,184) ================================================================== Weighted average number of common shares outstanding (1) 6,224 4,969 3,573 3,565 3,513 Per share data: (1) Income before cumulative effect of changes in accounting methods $2.78 $2.99 $1.88 $1.45 $ .45 Cumulative effect of changes in accounting methods (3) (.79) ------------------------------------------------------------------ Net income (loss) $2.78 $2.99 $1.88 $1.45 $(.34) ================================================================== Cash dividends declared per share $ .70 $ .62 $ .84 $ .79 $ .74 BALANCE SHEET DATA Working capital $ 116,256 $ 99,780 $ 60,520 $ 58,455 $ 54,035 Long-term portion of notes receivable 11,791 10,936 7,744 12,460 9,536 Total assets 229,162 211,582 121,726 111,169 98,461 Long-term debt 37,156 27,100 15,164 18,357 11,571 Shareholders' equity (3) 147,545 136,103 79,776 75,462 73,067
(1) All share and per share data has been restated to reflect the reclassification of stock in 1995, as explained in the notes to the financial statements. (2) During 1992, the Company significantly restructured its overhead functions, primarily in its foreign subsidiaries. Nonrecurring costs of statutorily required severance payments and other costs associated with the restructuring totaled $1,086,000 ($641,000 after tax). (3) The cumulative effect of changes in accounting principles for the year ended December 31, 1992 represent the adoption, as of January 1, 1992, of (a) FASB No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," resulting in a $2,867,000 decrease in net income (net of income tax benefit of $1,683,000), and (b) FASB No. 109, "Accounting for Income Taxes," resulting in a $113,000 increase in net income. 9 ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following table sets forth the net sales by product line for the periods indicated: For the years ended December 31, (in thousands) 1996 1995 1994 ----------------------------------------- Machine sales $ 144,725 $ 117,381 $ 65,829 Non-machine products and services 75,570 63,205 51,507 ----------------------------------------- Total $ 220,295 $ 180,586 $ 117,336 ========================================= Results of Operations 1996 Compared to 1995 Net Sales: Net sales for the year 1996 increased by 22.0% or $39,709,000 to $220,295,000 from $180,586,000 in 1995. Net sales in the European markets increased by $30,846,000 or 121.5%, primarily as a result of inclusion of a full year's sales volume of L. Kellenberger & Co. AG, the wholly owned subsidiary purchased on November 29, 1995. European sales of other Hardinge products increased as well, particularly in England and France. Sales in domestic U.S. markets increased by $10,753,000 or 7.9%, where a decline in sales to the U.S. automotive industry was more than offset by increased sales to other market segments plus the very successful launch of the Company's new low cost lathe product during the second half of 1996. Shipments to the automobile industry accounted for 9% of the Company's 1996 sales compared to 21% in 1995. The Company experienced a substantial increase in machine units sold during 1996. This increase is primarily a result of aggressive new product introductions and the inclusion of a full year's sales of Kellenberger grinders. Sales of non-machine products and services continue to represent a significant revenue source for the Company. 1996 sales of these products and services were $75,570,000, an increase of $12,365,000 over the prior year. The growth of these sales in 1996 is primarily caused by increased levels of customer activity plus sales of new products introduced during the year. Sales of these products and services account for approximately 35% of total sales dollars in both 1996 and 1995. Gross Profit: Gross profit increased by $14,420,000 or 23.8% to $75,031,000 in 1996, primarily as a result of increased sales. Gross profit as a percentage of sales improved to 34.1% in 1996 from 33.6% in 1995. The improvement resulted in part from the Company's use of advanced technology to upgrade its manufacturing efficiency. Another factor contributing to this increase was a higher portion of sales through the Company's direct sales organizations, relative to sales made to independent distributors, where discounts are generally higher. Sales of non-machine products and services continue to generate higher gross margins than machine sales. However, since both these sales categories increased at about the same rate during 1996, the comparison of gross profit between 1996 and 1995 was not effected by this mix. Increasing sales volume and improvements in manufacturing processes at the Company's Kellenberger subsidiary also contributed to the improvement in gross profit during 1996. Selling, General and Administrative Expenses: Selling, general and administrative expenses ("SG&A") as a percentage of net sales increased only slightly during 1996, in spite of the large increase in volume and the inclusion of a full year's expenses for the Kellenberger 10 operation. 1996's SG&A expenses represented 20.5% of sales compared to 20.0% in 1995. 1996's expenses include increased costs for product sales promotion, both for new product introductions and for the International Manufacturing Technology Show held in Chicago in September. This show, held every two years, is a major event for the industry. Income from Operations: Income from operations increased by $5,438,000 to $29,973,000 in 1996 compared to $24,535,000 in 1995. As a percentage of net sales, income from operations remained constant at 13.6% during both years. Interest Expense: Interest expense during 1996 totaled $2,770,000 compared to $1,369,000 in 1995. Interest expense during 1995 benefited from a mid-year paydown of debt as a result of the May, 1995 public offering of stock. 1996 interest cost increased as a result of higher average outstanding debt to fund the Kellenberger acquisition and increased working capital requirements. Interest Income: Interest income remained relatively constant during both years. During 1995, interest income was unusually high as a result of the temporary investment of cash received from the Company's public stock offering. Normally, interest income is mainly attributable to financing of customer purchases. During 1996 a significant increase in the volume of customer financing transactions resulted in interest income being about equal to the prior year. Gain on Sale of Assets: 1995's income includes a gain of $326,000 (approximately $198,000 on an after-tax basis) resulting from the sale of a branch office building. Income Taxes: The provision for income taxes as a percentage of pre-tax income was 38.5% and 39.2%, respectively, for 1996 and 1995. The 1996 consolidated tax rate was impacted favorably by a larger proportion of foreign income which was taxed at rates slightly lower than in the United States. Net Income: Net income for 1996 was $17,288,000 compared to $14,845,000 in 1995, an increase of 16.5%. The increase represents an accumulation of the factors discussed above. Geographically, results of operations in Western Europe have improved significantly on higher sales. Inclusion of a full year's results of Kellenberger was a primary factor in this improvement. Performance in North America continues to provide the large base of profitable operations. 1995 Compared to 1994 - --------------------- Net Sales: Net sales for the year ended December 31, 1995, increased 53.9% to $180,586,000 from $117,336,000 in 1994. Sales in the domestic U.S. markets increased by $44,610,000 or 48.5%, reflecting positive economic conditions and continued strength in machine tool purchases by the auto industry. Net sales in the European markets increased by $13,076,000 or 106.1% with particular strength from the UK and French markets as the economies there continued to expand. In other worldwide marketplaces, sales increased by 42.9% led mainly by growth in shipments to Asia. The acquisition of L. Kellenberger & Co. AG ("Kellenberger") did not result in a material impact on the year's sales and net income figures as only their results for the month of December were included in the Company's 1995 results. 11 Unit volumes increased in substantially all of the Company's Computer Numerically Controlled (CNC) machine lines. Shipments of the Company's newly introduced vertical CNC lathes and vertical CNC machining centers exceeded beginning of the year expectations. Shipments to the automobile industry of those new models, as well as horizontal CNC lathes, contributed to increased sales during the year with sales to the U.S. manufacturers accounting for 21% of the Company's 1995 net sales compared to 4% in 1994. Sales of non-machine products and services increased by 22.7% accounting for $63,205,000 or 35.0% of total net sales for the 1995 year compared to $51,507,000 or 43.9% of total sales for 1994. Sales in this product line increased in all of the Company's predominant geographical markets. The positive economic conditions in those areas contributed to increases in sales. Gross Profit: Gross profit increased 50.0% to $60,611,000 in 1995, from $40,399,000 in 1994. This increase was primarily the result of increased unit volumes. Gross profit as a percentage of sales was 33.6% in 1995 compared to 34.4% in 1994. Sales in the lathe and other machine tool product group traditionally have generated lower gross margins than the non-machine products and services group. Therefore, overall gross margin as a percentage of sales is negatively affected when sales in the lathe and other machine tool product group account for a larger percentage of overall net sales. The 1995 gross profit percentage was also affected by production start up costs for the Company's new machine introductions. These negative impacts were partially offset by the ability to spread fixed overhead costs over a larger number of units sold. The decline of the dollar against the Japanese yen, particularly in the first half of 1995, did not have a significant impact on year to year comparisons of gross profit due to the Company's foreign currency arrangements and lower discounts given. Selling, General, and Administrative Expenses: Selling, general and administrative ("SG&A") expenses decreased as a percent of net sales to 20.0% from 23.8% in 1994. This improvement indicates the success of the Company's cost control strategy of holding increases in this category to a minimum during periods of higher sales growth. Increases occurred primarily in the commission and other volume based expenditures, and advertising and show expenses where money was spent to promote new products. Income from Operations: Income from operations increased 96.0% to $24,535,000 in 1995 from $12,517,000 in 1994. Income from operations as a percentage of net sales increased to 13.6% in 1995 from 10.7% in 1994. Interest Expense: Interest expense in 1995 decreased by $110,000 from 1994. This resulted from a decrease in average outstanding debt due to the pay down of debt with the proceeds of the public offering in May, 1995. Additional borrowings to fund working capital growth partially offset this benefit. Interest Income: Interest income increased $474,000 in 1995 from 1994 primarily due to interest earned on cash from the public offering temporarily placed in interest bearing accounts. Income Taxes: The provision for income taxes as a percentage of income before income taxes was 39.2% for 1995 as compared to 43.7% for 12 1994. The 1995 consolidated tax rate was lower due to profits in the Company's Western European operations for which no tax provision was recorded because of tax credits available from net operating loss carryforwards which were fully utilized in 1995. Net Income: Net income for 1995 was $14,845,000, an increase of $8,126,000, or 120.9% from 1994. Net income from operations in all geographic locations increased. The largest dollar increase occurred in domestic operations while Western European operations generated positive results after incurring losses in 1994. Liquidity and Capital Resources: The Company's current ratio at December 31, 1996 was 4.20:1 compared to 3.47:1 at December 31, 1995. Current assets increased by $12,423,000 during 1996, with inventory increasing by $14,938,000, primarily in support of new product introductions and to meet customer delivery requirements. Cash at December 31, 1996 decreased by $2,484,000 from the previous year end. Current liabilities decreased by $4,053,000, primarily as a result of a reduction of $6,342,000 in accounts payable due to the timing of receipt and payment of invoices. Operating activities generated cash of $3,038,000 in 1996, compared to 1995 when operations consumed cash of $9,409,000. This $12,447,000 increase in cash from operating activities is a result of several factors. Higher earnings in 1996 provided $2,443,000 of the increase, while net increases in non-cash charges added another $3,034,000. Finally, a slowing of the rapid working capital growth experienced in 1995 was a primary contributor to a reduction of $6,970,000 in the growth of net operating assets during 1996, which accounts for the remainder of the improvement in cash generated by operating activities. The Company's major investing and financing activities during 1996 consisted of an aggressive program of capital investment and an increase in dividends. As is common in its industry, the Company provides long-term financing for the purchase of its equipment by qualified customers. The Company regards this program as an important part of its marketing efforts, particularly to independent machine shops. Customer financing is 13 offered for a term of up to seven years, with the Company retaining a security interest in the purchased equipment. In the event of a customer default and foreclosure, it is the practice of the Company to recondition and resell the equipment. It has been the Company's experience that such equipment resales have realized the approximate remaining contract value. In order to reduce debt and finance current operations, the Company periodically sells a substantial portion of its underlying customer notes receivable to various financial institutions. In 1996, the Company sold $27,255,000 of customer notes compared to $12,955,000 sold during 1995 reflecting the increase in notes available for sales as the number of shipments financed through the Company's program have increased in 1996 compared to 1995. Although the Company has no formal arrangements with financial institutions to purchase its customer notes receivable, it has not experienced difficulty in arranging such sales. While the Company's customer financing program has an impact on its month-to-month borrowings from time-to-time, it has had little long-term impact on its working capital because of the sales of the underlying customer notes receivable. The amount of long-term customer notes receivable held by the Company increased to $11,791,000 at December 31, 1996 from $10,936,000 at December 31, 1995. Total capital expenditures in 1996 were $12,734,000. The Company completed its expansion project at the Elmira manufacturing facility which was begun in 1995 and all related equipment is now operational, accounting for the majority of those expenditures. During 1996, the Company's United Kingdom subsidiary began construction of a new building to house its operations which were formerly located in leased facilities. Total 1996 capital expenditures for this project were approximately $2,100,000. The project's total cost at completion during the first quarter of 1997 is expected to be $2,700,000. Also during 1996, additional demonstration equipment was placed at foreign locations as the Company's marketing efforts continued to expand globally. The Company paid total dividends of $4,332,000 during 1996. At its meeting in October, 1996, the Board of Directors increased the quarterly dividend to $.19 per share, representing an 11.8% increase from the previous regular quarterly dividend rate of $.17 per share. The Company has revolving loan agreements with several U.S. banks providing for unsecured borrowing up to $50,000,000 on a revolving basis, $30,000,000 through August 1, 1997, and $20,000,000 through November 1, 1999. At those times, the outstanding amounts convert, at the Company's option, to term loans payable quarterly over four years through 2001 and 2003, respectively. As of December 31, 1996, total borrowings under these agreements were $18,691,000. The Company's Kellenberger subsidiary maintains lines of credit with commercial banks which permit borrowing in Swiss francs equivalent to approximately $9,000,000. These lines are secured by Kellenberger's land and buildings. At December 31, 1996, total borrowings under these agreements were $7,950,000. These facilities, along with a $5,000,000 unsecured short term line with another bank, provided for immediate access of up to $65,000,000 at December 31, 1996. Outstanding borrowings under these arrangements totaled $29,641,000 at that time. 14 During the first quarter of 1996, the Company entered into a long-term borrowing agreement for $17,750,000 with a syndication of banks. The proceeds were used to repay revolving loan borrowing which had originally been used to finance the acquisition of Kellenberger. Quarterly interest payments on this term loan began during 1996, and principal repayments will commence in 1998. The agreement contains financial and other covenants consistent with the revolving loan agreements. The annual report contains statements of a forward-looking nature relating to the financial performance of Hardinge Inc. Such statements are based upon information known to management at this time. The company cautions that such statements necessarily involve risk, because actual results could differ materially from those projected. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are changes in general economic conditions in the U.S. or internationally, actions taken by customers or competitors, the receipt of more or fewer orders than expected, and changes in the cost of materials. The company undertakes no obligation to revise its forward-looking statements if unanticipated events alter their accuracy. The Company currently intends to use its improved financial condition to seek growth opportunities in new products, international markets, and strategic acquisitions. Management believes that the currently available funds and credit facilities, and internally generated funds, will provide sufficient financial resources for its ongoing operations. 15 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HARDINGE INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS December 31, 1996 Audited Consolidated Financial Statements Report of Independent Auditors .................................. 17 Consolidated Balance Sheets ..................................... 18 Consolidated Statements of Income ............................... 20 Consolidated Statements of Shareholders' Equity ................. 21 Consolidated Statements of Cash Flows ........................... 22 Notes to Consolidated Financial Statements ...................... 23 All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 16 Report of Independent Auditors ------------------------------ Board of Directors Hardinge Inc. We have audited the accompanying consolidated balance sheets of Hardinge Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hardinge Inc. and Subsidiaries at December 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 December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Syracuse, New York January 27, 1997 17 HARDINGE INC. AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands) December 31 1996 1995 -------------------------- Assets Current assets: Cash $ 2,636 $ 5,120 Accounts receivable 41,150 41,095 Notes receivable 5,070 5,053 Inventories 99,906 84,968 Deferred income taxes 2,158 2,585 Prepaid expenses 1,656 1,332 -------------------------- Total current assets 152,576 140,153 Property, plant and equipment: Land and buildings 40,468 38,653 Machinery, equipment and fixtures 72,736 66,676 Office furniture, equipment and vehicles 4,402 3,991 -------------------------- 117,606 109,320 Less accumulated depreciation 53,716 49,716 -------------------------- 63,890 59,604 Other assets: Notes receivable 11,791 10,936 Deferred income taxes 651 726 Other 254 163 -------------------------- 12,696 11,825 -------------------------- Total assets $ 229,162 $ 211,582 ========================== 18 December 31 1996 1995 ------------------------ Liabilities and shareholders' equity Current liabilities: Accounts payable $ 12,067 $ 18,409 Notes payable to bank 10,950 10,504 Accrued expenses 10,676 9,423 Accrued income taxes 1,017 1,323 Deferred income taxes 896 Current portion of long-term debt 714 714 ------------------------ Total current liabilities 36,320 40,373 Other liabilities: Long-term debt 37,156 27,100 Accrued pension plan expense 1,485 1,087 Deferred income taxes 1,657 1,926 Accrued postretirement benefits 4,999 4,993 ------------------------ 45,297 35,106 Shareholders' equity: Preferred stock, Series A, par value $.01 per share; authorized 2,000,000; issued - none Common stocks, $.01 par value: Authorized shares - 20,000,000 Issued shares - 6,476,703 at December 31, 1996; 6,457,703 at December 31, 1995 65 65 Additional paid-in capital 57,027 56,323 Retained earnings 99,622 86,666 Treasury shares (343) (2,599) Cumulative foreign currency translation adjustment (3,731) (1,728) Deferred employee benefits (5,095) (2,624) ------------------------ Total shareholders' equity 147,545 136,103 ------------------------ Total liabilities and shareholders' equity $ 229,162 $ 211,582 ======================== See accompanying notes. 19 HARDINGE INC. AND SUBSIDIARIES Consolidated Statements of Income (In Thousands Except Per Share Data)
Year ended December 31 1996 1995 1994 -------------------------------------- Net sales $ 220,295 $ 180,586 $ 117,336 Cost of sales 145,264 119,975 76,937 -------------------------------------- Gross profit 75,031 60,611 40,399 Selling, general and administrative expenses 45,058 36,076 27,882 -------------------------------------- Income from operations 29,973 24,535 12,517 Interest expense 2,770 1,369 1,479 Interest (income) (889) (927) (453) (Gain) on sale of assets (326) (442) -------------------------------------- Income before income taxes 28,092 24,419 11,933 Income taxes 10,804 9,574 5,214 -------------------------------------- Net income $ 17,288 $ 14,845 $ 6,719 ====================================== Weighted average number of common shares outstanding 6,224 4,969 3,573 ====================================== Per share data: Net income per share $ 2.78 $ 2.99 $ 1.88 ====================================== Cash dividends declared per share $ .70 $ .62 $ .84 ======================================
See accompanying notes. 20 Hardinge Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (In thousands)
----------------------------------------------------------------------------------- Cumulative Foreign Additional Currency Deferred Total Common Paid-in Retained Treasury Translation Employee Shareholders' Stock Capital Earnings Stock Adjustment Benefits Equity =================================================================================================================================== Balance at December 31, 1993 $9,444 $619 $71,206 ($565) ($1,866) ($3,376) $75,462 Net income 6,719 6,719 Dividends declared (3,072) (3,072) Foreign currency translation adjustment (8) (8) Amortization (long-term incentive plan) 810 810 Shares awarded pursuant to long-term incentive plan 36 550 (575) 11 Payment on ESOP loan 200 200 Net purchase of treasury stock (346) (346) ---------------------------------------------------------------------------------- Balance at December 31, 1994 9,444 655 74,853 (361) (1,874) (2,941) 79,776 Net income 14,845 14,845 Dividends declared (3,032) (3,032) Foreign currency translation adjustment 146 146 Reclassification Class A and B to new Common Stock and change in par value from $ 5.00 to $.01 (9,405) 9,405 0 Issuance of 2,540,000 common shares in public offering 25 43,559 43,584 Issuance of 95,500 shares for long-term incentive plan 1 1,377 (1,378) 0 Stock bonuses awarded 518 502 1,020 Amortization (long-term incentive plan) 1,345 1,345 Tax benefit from long-term incentive plan 802 802 Payment on ESOP loan 350 350 Net purchase of treasury stock 7 (2,740) (2,733) ---------------------------------------------------------------------------------- Balance at December 31, 1995 65 56,323 86,666 (2,599) (1,728) (2,624) 136,103 Net income 17,288 17,288 Dividends declared (4,332) (4,332) Foreign currency translation adjustment (2,003) (2,003) Shares awarded pursuant to long-term incentive plan 259 2,779 (3,038) 0 Issuance of 18,000 shares for long-term incentive plan 486 (486) 0 Amortization (long-term incentive plan) 1,053 1,053 Net purchase of treasury stock (41) (523) (564) ---------------------------------------------------------------------------------- Balance at December 31, 1996 $65 $57,027 $99,622 ($343) ($3,731) ($5,095) $147,545 ==================================================================================
See accompanying notes. 21 HARDINGE INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands)
Year ended December 31 1996 1995 1994 -------------------------------------- Operating activities Net income $ 17,288 $ 14,845 $ 6,719 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,433 5,952 4,354 Provision for deferred income taxes 1,408 (642) (786) (Gain) on sale of assets (326) (442) Foreign currency transaction (gain) loss (556) 267 (147) Changes in operating assets and liabilities: Accounts receivable (387) (14,114) (4,340) Notes receivable (882) (3,255) 5,467 Inventories (16,439) (21,248) (6,249) Other assets (562) 1,060 109 Accounts payable (6,167) 7,240 2,603 Accrued expenses 1,896 657 3,922 Accrued postretirement benefits 6 155 80 -------------------------------------- Net cash provided by (used in) operating activities 3,038 (9,409) 11,290 Investing activities Capital expenditures - net (12,734) (17,703) (8,046) Proceeds from sale of assets 510 864 Acquisition of L. Kellenberger & Co. AG, net of cash acquired (19,232) -------------------------------------- Net cash (used in) investing activities (12,734) (36,425) (7,182) Financing activities Increase (decrease) in short-term notes payable to bank 1,591 (2,730) 2,791 Increase (decrease) in long-term debt 10,478 11,936 (3,193) (Purchase) of treasury stock, net of stock bonus (564) (1,713) (346) Dividends paid (4,332) (3,993) (2,864) Proceeds from stock offering 43,584 -------------------------------------- Net cash provided by (used in) financing activities 7,173 47,084 (3,612) Effect of exchange rate changes on cash 39 87 (67) -------------------------------------- Net (decrease) increase in cash (2,484) 1,337 429 Cash at beginning of year 5,120 3,783 3,354 -------------------------------------- Cash at end of year $ 2,636 $ 5,120 $ 3,783 ======================================
See accompanying notes. 22 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 1. Significant Accounting Policies Nature of Business Hardinge Inc. is a machine tool manufacturer, which designs, manufactures and distributes metal cutting lathes, grinding machines, machining centers and tooling and accessories related to metal cutting machines. Sales are principally in the United States and Western Europe. Sales are also made to customers in Canada, China, Mexico, Japan, Australia, and other foreign countries. A substantial portion of the Company's sales are to small and medium - sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and indirectly served by the Company include automotive, medical equipment, aerospace, defense, recreational equipment, farm equipment, construction equipment, energy and transportation. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Property, Plant and Equipment Property additions, including major renewals and betterments, are recorded at cost and are depreciated over their estimated useful lives. Upon retirement or disposal of an asset, the asset and related allowance for depreciation are eliminated and any resultant gain or loss is credited or charged to income. Depreciation is provided on the straight-line and sum of the years digits methods. Total depreciation expense on property, plant and equipment was $6,300,000, $4,538,000, and $3,388,000 for 1996, 1995 and 1994, respectively. Income Taxes The Company accounts for income taxes using the liability method according to Financial Accounting Standards Board Statement No. 109. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Certain balance sheet amounts in 1995 were reclassified to conform to 1996 presentation. Foreign Currency Translation In accordance with Financial Accounting Standards Board Statement No. 52, all balance sheet accounts of foreign subsidiaries are translated at current exchange rates and income statement items are translated at an average exchange rate for the year. The gain or loss resulting from translating subsidiary financial statements is recorded as a separate component of shareholders' equity. Transaction gains and losses are recorded in operations. 23 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 1. Significant Accounting Policies (continued) Foreign Exchange Contracts Gains and losses on contracts designated as hedges of existing assets and liabilities are accrued as exchange rates change and are recognized in income. Gains and losses on contracts designated as hedges of net investments in foreign subsidiaries are accrued as exchange rates change and are recognized in Shareholders' Equity as foreign currency translation adjustment. Gains and losses on contracts designated as hedges of identifiable foreign currency firm commitments are deferred and included in the measurement of the related foreign currency transaction. Income Per Share Income per share is computed using the weighted average number of shares of common stock outstanding during the year including common stock equivalents related to restricted stock. Restricted shares awarded under the Company's long-term incentive stock plans are treated as issued shares at time of award and are treated as outstanding in accordance with the treasury stock method over the period of their vesting. The number of shares outstanding has been adjusted to reflect the stock transactions as explained in Note 4 to the financial statements. Research and Development Costs The cost of research and development, all of which has been charged to operations, amounted to $7,932,000, $5,713,000, and $5,218,000 in 1996, 1995 and 1994, respectively. Stock Based Compensation The Company grants restricted shares of common stock to certain officers and other key managers. The Company accounts for restricted share grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (see note 6). Revenue Recognition The Company recognizes revenue from product sales upon shipment of the product. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. They are summarized as follows: December 31, 1996 1995 -------------------------- (in thousands) Finished products $ 29,966 $ 29,231 Work-in-process 35,479 29,083 Raw materials and purchased components 34,461 26,654 -------------------------- $ 99,906 $ 84,968 ========================== 24 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 2. Financing Arrangements Long-term debt consists of:
December 31 1996 1995 -------------------------- (in thousands) Note payable, due in annual installments of $714,000 through 1998, with interest payable quarterly at 9.38% $ 1,429 $ 2,143 Note payable, under revolving loan agreement, with interest at 6.45% as of December 31, 1996 8,691 25,671 Note payable, under revolving loan agreement, with interest at 6.21% as of December 31, 1996 10,000 Note payable, under term loan agreement, with an effective interest rate of 4.49% at December 31, 1996 17,750 -------------------------- 37,870 27,814 Less current portion 714 714 -------------------------- $ 37,156 $ 27,100 ==========================
The Company maintains an unsecured credit arrangement with two banks which provides for borrowing in several currencies up to the equivalent of $30,000,000 on a revolving loan basis through August 1, 1997. The credit agreement provides for repayment of the outstanding principal beginning September 30, 1997 in 16 consecutive equal quarterly installments. Interest charged on the debt is based on London Interbank Offered Rates (LIBOR) plus a fixed percentage. A commitment fee of 3/8 of 1% is payable on the unused portion of the facility. At December 31, 1996 total borrowings under the facility were $8,691,000. Approximately $1,691,000 of the borrowing was denominated in British pounds sterling. In November, 1996, the Company entered into an unsecured credit arrangement with a bank which provides for borrowing in several currencies up to the equivalent of $20,000,000 on a revolving loan basis through November 1, 1999. The credit agreement provides for repayment of the then outstanding principal beginning January 1, 2000 in 16 consecutive equal quarterly installments. Interest charged on the debt is based on LIBOR plus a fixed percentage. A commitment fee of 3/8 of 1% is payable on the unused portion of the facility. At December 31, 1996, total borrowings under this arrangement were $10,000,000. All debt under both revolving credit arrangements has been classified as long-term debt, as it is the Company's intention to maintain the principal amounts outstanding either through the existing credit facilities or new borrowing arrangements. In February 1996, the Company entered into an unsecured term loan arrangement with a syndication of banks for the purpose of financing its November, 1995 acquisition of L. Kellenberger & Co. AG. The loan provides for repayment of the outstanding principal in twenty equal installments beginning May, 1998. Interest is charged on the debt based on LIBOR plus a fixed percentage. The Company has entered into a 25 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 2. Financing Arrangements (continued) cross-currency interest rate swap agreement which effectively converts the $17,750,000 term loan to a borrowing in 21,000,000 Swiss francs with an effective interest rate of 4.49%. The swap agreement has been designated as a hedge against the Company's net investment in its Kellenberger facility. The Company also has a $5,000,000 unsecured short-term line of credit with a bank with interest based on a fixed percent over the one-month LIBOR. As of December 31, 1996, the $3,000,000 borrowed on this line carries an average interest rate of 6.03%. The agreement is negotiated annually and requires no commitment fee. The Company's Kellenberger subsidiary maintains lines of credit with commercial banks that permit borrowings in Swiss francs equivalent to approximately $9,000,000. These lines provide for interest at a fixed percentage over LIBOR and carry no commitment fees on unused funds. At December 31, 1996, total borrowings under these lines were $7,950,000 with an average interest rate of 4.12%. The borrowings are secured by the land and buildings of Kellenberger with a net book value of $9,421,000 at December 31, 1996 and terms are negotiated annually. The debt agreements require, among other things, that the Company maintain specified levels of tangible net worth, working capital and indebtedness. Interest paid in 1996, 1995, and 1994 totaled $2,799,000, $1,416,000, and $1,477,000, respectively. The Company conducts some of its sales and service operations from leased office space with lease terms up to 15 years and uses certain data processing equipment under lease agreements expiring at various dates during the next five years. Rent expense under these leases totaled $1,378,000, $1,192,000, and $1,290,000 during the years ended December 31, 1996, 1995, and 1994, respectively. Future minimum payments under noncancelable operating leases as of December 31, 1996 total $3,530,000, with payments over the next five years of $1,143,000, $704,000, $509,000, $121,000, and $116,000, respectively. The Company has provided financing terms of up to seven years for qualified customers who purchase equipment. The Company may choose, when appropriate, to sell underlying notes receivable contracts to financial institutions to reduce debt and finance current operations. During 1996, 1995, and 1994, the Company sold notes totaling $27,255,000, $12,955,000, and $30,000,000, respectively. The remaining outstanding balance of all notes sold as of December 31, 1996 and 1995 was $50,724,000 and $44,220,000, respectively. Gains and losses from the sales of notes receivable have not been material. Recourse against the Company from default of any of the notes included in the sales is limited to 10% of the then outstanding balance of the underlying notes. 26 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 3. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 1996 and 1995, the Company had state investment tax credits expiring at various dates through the year 2006, and foreign tax credit carryforwards expiring in 2001 for which no benefit has been recognized in the financial statements. Significant components of the Company's deferred tax assets and liabilities are as follows: 1996 1995 ------------------------ (in thousands) Deferred tax assets: Federal and state tax credit carryforwards $ 4,571 $ 3,507 Foreign net operating loss carryforwards 1,147 1,542 Postretirement benefits 1,861 1,852 Inventory valuation 265 Deferred employee benefits 1,201 742 Accrued pension 590 437 Other 818 634 ------------------------ 10,188 8,979 Less valuation allowance 4,571 3,507 ------------------------ Total deferred tax assets 5,617 5,472 Deferred tax liabilities: Tax over book depreciation 3,976 3,512 Margin on installment sales 257 126 Other 1,128 449 ------------------------ Total deferred tax liabilities 5,361 4,087 ------------------------ Net deferred tax assets $ 256 $ 1,385 ======================== Pretax income was $22,872,000, $21,554,000, and $11,709,000 from domestic operations and $5,220,000, $2,865,000, and $224,000 from foreign operations for 1996, 1995, and 1994, respectively. 27 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 3. Income Taxes (continued) Significant components of income tax expense (benefit) attributable to continuing operations are as follows: 1996 1995 1994 ------------------------------------- (in thousands) Current: Federal $ 7,488 $ 7,885 $ 4,812 Foreign 788 1,117 414 State 1,006 1,214 782 ------------------------------------- Total current 9,282 10,216 6,008 ------------------------------------- Deferred: Federal $ 468 $ (484) $ (739) Foreign 991 (104) 53 State 63 (54) (108) ------------------------------------- Total deferred 1,522 (642) (794) ------------------------------------- $10,804 $ 9,574 $ 5,214 ===================================== Income tax payments totaled $9,467,000, $9,009,000, and $4,642,000 in 1996, 1995 and 1994, respectively. The following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the consolidated statements of income. 1996 1995 1994 ----------------------- Federal income taxes 34.0% 34.0% 34.0% Tax differential on operations of foreign subsidiaries (.4) .2 3.3 State income taxes 2.4 3.1 3.7 Other 2.5 1.9 2.7 ----------------------- 38.5% 39.2% 43.7% ======================= As a result of changes in U.S. tax law effective in 1994, earnings of a foreign subsidiary were deemed distributed and U.S. federal taxes of $260,000 were provided in 1994. The remaining undistributed earnings of the foreign subsidiaries, which amounted to approximately $10,921,000 at December 31, 1996, are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state 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 the unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. 28 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 4. Shareholders' Equity Treasury Shares The number of shares of common stock in treasury were 12,365, 108,766, and 33,232 at December 31, 1996, 1995 and 1994, respectively. In 1996, the Company purchased a net 28,570 treasury shares and issued 124,971 shares under the long-term incentive plan from treasury. During 1995, the Company purchased a net 114,755 treasury shares and awarded 39,221 shares under the long-term incentive plan from treasury. The Company purchased a net 31,236 shares for treasury and awarded 46,750 shares under the long-term incentive stock plan from treasury during 1994. Stock Reclassification At the annual meeting on May 16, 1995, shareholders approved amendments to the Company's Certificate of Incorporation (a) converting each Class A common share into 2.00 shares of a new single class of Common Stock, representing a 2-for-1 stock split and each Class B common share into 2.05 shares of the new single class of Common Stock, representing a 2.05-for-1 stock split; (b) increasing the number of shares of Common Stock the Company is authorized to issue from 6,000,000 to 20,000,000 shares and reducing the par value of all Common Stock from $5 to $0.01 per share; and (c) authorizing a new class of Preferred Stock consisting of 2,000,000 shares. All share and per share data appearing in the financial statements and notes thereto have been restated giving effect to the amendments discussed above. Public Offering In June 1995, the Company issued 2,540,000 shares of its common stock at $19.00 per share in a public common stock offering. Proceeds of the offering, net of commissions and expenses, were $43,584,000. The proceeds were used to reduce the Company's debt, fund building expansion, and fund working capital growth. Preferred Stock Purchase Rights Pursuant to the Shareholder Rights Plan adopted at the Annual Meeting in 1995, each outstanding share of the Company's common stock carries with it the right to purchase shares of Series A Preferred Stock. Each right entitles the holder of the right to purchase one one-hundredth of a share of Series A Preferred Stock (a "Unit") at a purchase price of $80.00 per Unit. The rights will become exercisable ten business days after any person or group becomes the beneficial owner of 20% or more of the common stock or commences a tender or exchange offer upon consummation of which such person or group would, if successful, own 30% or more of the common stock. The rights, which will expire ten years from the date of issuance, may be redeemed by the Board of Directors, at $.01 per right, at any time prior to the expiration of ten business days after the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20% or more of the outstanding common stock. 29 5. Industry Segment and Foreign Operations The Company operates in one business segment - industrial machine tools. Domestic and foreign operations consist of: Year Ended December 31 1996 1995 1994 -------------------------------------- (in thousands) Sales: Gross sales: United States $ 189,060 $ 168,679 $ 110,942 Western Europe 65,051 25,739 12,346 Other 16,654 18,544 12,980 -------------------------------------- Total 270,765 212,962 136,268 -------------------------------------- Less interarea transfers: United States 41,670 32,042 18,915 Western Europe 8,800 334 17 -------------------------------------- Total 50,470 32,376 18,932 -------------------------------------- Net sales: United States 147,390 136,637 92,027 Western Europe 56,251 25,405 12,329 Other 16,654 18,544 12,980 -------------------------------------- Total net sales $ 220,295 $ 180,586 $ 117,336 ====================================== Operating income (loss): United States $ 23,630 $ 20,998 $ 12,220 Western Europe 5,258 1,502 (875) Other 1,085 2,361 1,614 -------------------------------------- Total operating income $ 29,973 $ 24,861 $ 12,959 ====================================== Net income (loss): United States $ 13,117 $ 12,418 $ 6,884 Western Europe 3,381 1,247 (1,039) Other 790 1,180 874 -------------------------------------- Total net income $ 17,288 $ 14,845 $ 6,719 ====================================== Identifiable assets: United States $ 174,687 $ 155,733 $ 106,606 Western Europe 48,163 43,214 7,256 Other 6,312 12,635 7,864 -------------------------------------- Total identifiable assets $ 229,162 $ 211,582 $ 121,726 ====================================== Interarea sales are accounted for at prices comparable to normal, unaffiliated customer sales, reduced by estimated costs not incurred on these sales. Operating income excludes interest income and interest expense directly attributable to the related operations. The operating loss in Western Europe in 1994 includes a $540,000 charge for the write off of inventory that became obsolete when the Company changed its distribution strategies there. In 1996 and 1995, sales to one customer in the automotive industry represented approximately 5% and 17%, respectively, of consolidated sales. 30 6. Employee Benefits Pension Plan The Company provides a non-contributory defined benefit pension plan covering all eligible domestic employees. The related benefits are generally based on years of service and a percentage of the employee's average annual compensation. The Company's practice is to fund all pension costs accrued and to contribute annually amounts within the range allowed by the Internal Revenue Service. A summary of the components of net periodic pension cost is presented below. Year Ended December 31 1996 1995 1994 ------------------------------------- (in thousands) Service costs--benefits earned during the year $ 1,321 $ 962 $ 1,126 Interest costs on projected benefit obligation 3,425 3,186 3,055 Actual return on plan assets (6,008) (9,753) (1,538) Net amortization and deferral 1,996 5,763 (2,065) ------------------------------------- Net pension costs $ 734 $ 158 $ 578 ===================================== Actuarial assumptions used to determine pension costs include a discount rate of 8.00% at December 31, 1996 (7.75% and 8.75% as of December 31, 1995 and 1994, respectively), expected long-term rate of return on assets of 9% for all three years, and expected rate of increase in compensation levels of 5% for all three years. Transition amounts, unrecognized prior service costs and unrecognized gains or losses are amortized on a straight line basis over the future working lifetime of those expected to receive benefits under the plan. The increase in the discount rate in 1996 decreased the projected benefit obligation at the end of the year by approximately $1,500,000. The decrease in the discount rate in 1995 increased the projected benefit obligation at the end of 1995 by approximately $5,000,000. 31 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 6. Employee Benefits (continued) A summary of the Plan's funded status and amounts recognized in the Company's consolidated balance sheets is as follows: 1996 1995 ---------------------------- (in thousands) Plan assets at fair value $ 54,037 $ 50,496 Projected benefit obligation for services rendered to date (47,053) (45,372) ---------------------------- Plan assets in excess of projected benefit obligation 6,984 5,124 Unrecognized net (gain) (9,816) (7,436) Unrecognized net (asset) from transition (2,091) (2,265) Unrecognized prior service costs resulting from Plan amendment 3,101 3,364 ---------------------------- Net pension (liability) recognized in the balance sheets $ (1,822) $ (1,213) ============================ Net pension liability consists of a long-term portion of $1,485,000 and $1,087,000 as of December 31, 1996 and December 31, 1995, respectively. The remaining balance is included in accrued expenses in the respective years. The portion of the projected benefit obligation representing the accumulated benefit obligation for the pension plan was $42,270,000 and $41,097,000 at the end of 1996 and 1995, respectively. The vested benefit obligation included in those numbers was $36,710,000 and $35,909,000 at the end of 1996 and 1995, respectively. Pension plan assets include 165,924 shares of the Company's common stock valued at approximately $4,418,000 and $4,314,000 at December 31, 1996 and 1995, respectively. Dividends paid on those shares were $116,000 and $103,000 in 1996 and 1995 respectively. The remaining plan assets consisted of United States Government securities, corporate bonds and notes, other common stocks and an insurance contract. Postretirement Plans Other Than Pensions The Company provides a contributory retiree health plan covering all eligible domestic employees who retired at normal retirement age prior to January 1, 1993 and all retirees who will retire at normal retirement age after January 1, 1993 with at least 10 years of active service. Employees who elect early retirement are eligible for the plan benefits if they have 15 years of active service at retirement. Benefit obligations and funding policies are at the discretion of the Company's management. Retiree contributions are adjusted annually and contain other cost-sharing features such as deductibles and coinsurance, all of which varies according to the retiree's date of retirement. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's 32 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 6. Employee Benefits (continued) expressed intent to limit its contributions to 125% of the average aggregate 1993 claim cost. The Company also provides a non-contributory life insurance plan to retirees. Because the amount of liability relative to this plan is insignificant, it is combined with the health plan for purposes of this disclosure. The Company accounts for other postretirement benefit costs in accordance with Financial Accounting Standards Board Statement No. 106. A summary of the components of net periodic other postretirement benefit costs relating to the plan is presented below. 1996 1995 1994 ---------------------------- (in thousands) Service cost--benefits earned during the year $114 $ 78 $ 97 Interest costs on projected benefit obligations 449 451 435 Amortization of actuarial losses 46 - 27 ---------------------------- Amount recorded in operations $609 $529 $559 ============================ Actuarial assumptions used to determine the liability for postretirement plans other than pensions included a discount rate of 7.50%, 7.25% and 8.75% at December 31, 1996, 1995 and 1994, respectively. The annual rate of increase in the per capita cost of covered health care benefits (the health care cost trend) was assumed to be 11% for 1996, and is assumed to decrease gradually to 6% by the year 2005 and remain at that level thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to the 125% cap on the Company's portion of the medical plan claims. A one percentage point increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation by only $171,000 and increase the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1996 by $20,000. The Company has not prefunded any of its postretirement health and life insurance liabilities and, consequently, there are no expected returns on assets anticipated in the calculation of expense. A schedule reconciling the accumulated benefit obligation with the Company's recorded liability follows: 1996 1995 --------------------------- (in thousands) Accumulated postretirement benefit obligation: Current retirees $ (3,039) $ (3,145) Fully eligible active participants (1,676) (1,877) Other active participants (1,308) (1,389) --------------------------- Total (6,023) (6,411) Unrecognized losses 1,024 1,418 --------------------------- Accrued postretirement benefit recognized in balance sheet $ (4,999) $ (4,993) =========================== 33 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 6. Employee Benefits (continued) Group Health Plan The Company has a contributory group benefit plan which provides medical and dental benefits to all of its domestic employees. Savings Plan The Company maintains a 401(k)plan which covers all domestic employees of the Company subject to minimum employment period requirements. Provisions of the plan allow employees to defer from 1% to 15% of their pre-tax salary to the plan. Those contributions may be invested at the option of the employees in a number of investment alternatives, one being Hardinge Inc. common stock. The Company contributes to the plan on a matching formula of 25% of an employee's contribution up to 5% of the employee's compensation. The Company's match is in Hardinge Inc. common stock. The Company contributed $253,000 in 1996 for this match. The Company may also contribute a discretionary contribution to the plan to be distributed among all participants. In 1996, the Company contributed $250,000 as a discretionary contribution. The Company maintains an Employee Stock Ownership Plan for its domestic employees. The approved Plan required establishment of an employee stock ownership trust, which borrowed from a bank to purchase the Company's common stock. The Company thereby effectively obligated itself to contribute to the employee trust sufficient amounts to allow the trust to repay the loan and related interest installments. During 1995, the Company made contributions to the trust sufficient to allow payment of the remainder of the loan. Contributions, including dividends, to the trust for the years ended December 31, 1995 and 1994 totaled $372,000 and $240,000, respectively. The interest portion of those contributions was $22,000 and $40,000 in 1995 and 1994, respectively. Approximately $29,000 and $41,000 of dividends on shares owned by the ESOP were used to service debt requirements in 1995 and 1994, respectively. Long-Term Incentive Plans In 1996, the Board of Directors established an Incentive Stock Plan to assist in attracting and retaining key employees. The Plan allows the Board to grant restricted stock, performance share awards, stock options and stock appreciation rights up to an aggregate of 300,000 shares of common stock to these employees. During 1996, certain officers and other key managers were awarded a total of 134,650 restricted shares of common stock. During 1995 and 1994, shares of restricted common stock were awarded totaling 95,500 and 46,750, respectively. Restrictions on 10,250 shares expired in 1996. Restrictions on 177,750 shares of common stock from similar 1993 and 1988 Incentive Stock Plans were released during 1995. As of December 31, 1996, a total of 448,700 restricted shares of common stock were outstanding under the three plans. All shares of restricted stock are subject to forfeiture and restrictions on transfer, and unconditional vesting occurs upon the completion of a specified period ranging from three to eight years from date of grant. 34 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 6. Employee Benefits (continued) Deferred compensation associated with these grants is measured by the market value of the stock on the date of grant and totaled $3,467,000, $1,377,500 and $575,000 in 1996, 1995 and 1994, respectively. This deferred compensation is being amortized on a straight-line basis over the specified service period. The unamortized deferred compensation at December 31, 1996, 1995 and 1994, totaled $5,095,000,$2,624,000, and $2,591,000, respectively, and is included along with Employee Stock Ownership Benefits as a reduction of shareholders' equity. Foreign Operations The Company also has employees in certain foreign countries that are covered by defined contribution and benefit pension plans and other employee benefit plans. Related obligations and costs charged to operations are not material. 7. Financial Instruments At December 31, 1996 and 1995, the carrying value of financial instruments such as cash, accounts receivable, accounts payable and short-term debt approximated their fair values, based on the short-term maturities of these instruments. The carrying amounts of debt under the revolving agreements classified as long-term debt approximate fair value as the underlying instruments are comprised of notes that are repriced on a short-term basis. In addition, the carrying amount of the term loan dated February, 1996 approximates its fair value as the underlying interest rate is variable. Related to this term loan, the Company entered into a seven year cross-currency interest rate swap agreement (see Note 2). The fair value of the instrument at December 31, 1996 was $1,241,000 based on current settlement value as determined by a financial institution. The fair value of notes receivable, short-term and long-term, was determined using a discounted cash flow analysis based on the rate at which the Company could sell those notes at year end under standard terms experienced on recent sales (a fixed percentage over U.S. Treasury notes). At December 31, 1996 and 1995, the carrying value of these notes approximated the fair value. The fair value of other long-term debt was determined based on rates obtained from financial institutions on funds available for terms approximating the remaining term of that debt. At December 31, 1996, the fair value of that debt with carrying value of $1,429,000 was $1,480,000. The Company regularly enters into foreign currency contracts to manage its exposure to fluctuations in foreign currency exchange rates on purchases of materials used in production and cash settlements of intercompany sales. Any gains or losses from these contracts have not been material. At December 31, 1996 and 1995, the Company had notional principal amounts of approximately $10,621,000 and $1,931,000 in contracts to purchase currency in the future from major commercial banks. The fair value of these contracts is not material. Concentration of Credit Risk The Company sells products to companies in diversified industries, with a substantial majority of sales occurring in North America and Western Europe. The Company performs periodic credit evaluations of the financial condition of its customers. The Company offers financing terms of up to seven years for its 35 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 7. Financial Instruments (continued) customers in the United States and Canada and files a lien against the equipment purchased under those terms. No collateral is required for sales made on open account terms with payment due within thirty days. As of December 31, 1996 and 1995, 22% and 18%, respectively, of the accounts receivable were from the three major U.S. automobile manufacturers, with receivables from one representing 10% at December 31, 1996 and 14% at December 31, 1995 of the consolidated accounts receivable. In addition, at December 31, 1996, receivables from one of the Company's distributors totaled 8% of the consolidated accounts receivable. 8. Acquisition On November 29, 1995, the Company completed the acquisition of 100% of the outstanding stock of L. Kellenberger & Co. AG and subsidiary, a St. Gallen, Switzerland based manufacturer of grinding machines ("Kellenberger"). The Company paid $19,232,000 including acquisition expenses. In connection with the acquisition, approximately $1,800,000 was placed in an escrow account to cover potential purchase price adjustments. This escrow is scheduled to be released in 1997 and the Company is not aware of any purchase price adjustment at this time. The acquisition cost was funded with an unsecured term loan arrangement with two banks. The acquisition has been accounted for as a purchase. Results of operations of Kellenberger have been included in the consolidated financial statements of the Company from the date of acquisition. The purchase price was allocated based on the estimated fair values of assets and liabilities as of the date of acquisition resulting in no goodwill. On the basis of an unaudited proforma consolidation of the results of operations as if the acquisition had taken place as of January 1, 1994, consolidated net sales for the combined companies would have been $213,127,000 and $141,703,000 for the years ended December 31, 1995 and 1994, respectively. Consolidated net income would have been $13,430,000 and $4,422,000 and earnings per share would have been $2.70 and $1.24 for the years of 1995 and 1994, respectively. The results reflect additional depreciation on the step-up in basis of certain fixed assets acquired, interest expense that would have been incurred to finance the purchase, and savings which would have resulted if cost cutting measures taken at the time of acquisition had taken place at the beginning of 1994. The proforma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1994 or of future results of operations of the consolidated entities. 36 HARDINGE INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) 9. Quarterly Financial Information (Unaudited) Summarized quarterly financial information for 1996 and 1995 is as follows: Quarter First Second Third Fourth ----------------------------------------- (in thousands, except per share data) 1996 ---- Net sales $ 59,622 $ 55,266 $ 47,577 $ 57,830 Gross profit 19,332 18,477 17,103 20,119 Income from operations 7,762 7,531 6,254 8,426 Net income 4,470 4,320 3,435 5,063 Net income per share .72 .69 .56 .82 Weighted average shares outstanding 6,199 6,228 6,189 6,204 1995 ---- Net sales $ 40,687 $ 41,501 $ 42,217 $ 56,181 Gross profit 13,913 14,207 14,439 18,052 Income from operations 5,498 5,801 4,949 8,287 Net income 3,304 3,275 3,182 5,084 Net income per share .92 .75 .52 .82 Weighted average shares outstanding 3,584 4,349 6,176 6,217 Earnings per share amounts are based on the weighted average shares outstanding for each period presented. As a result of the changes in outstanding shares from quarter to quarter, the total of the four quarters for 1996 and 1995 does not equal the annual earnings per share for each of the years. 37 ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 38 PART III ITEM 10. - DIRECTORS AND OFFICERS OF THE REGISTRANT Certain information required by this item is incorporated by reference from the Registrant's proxy statement filed with the Commission on March 11, 1997. Additional information required to be furnished by Item 401 of Regulation S-K is as follows:
List of Executive Officers of the Registrant - --------------------------------------------------------------------------------------------------------------------- Executive Officer Name Age Since Positions and Offices Held - ------------------------------ ------ --------------- ------------------------------------------------------- Robert E. Agan 58 1978 Chairman of the Board and Chief Executive Officer since October, 1996; Chairman of the Board, President and Chief Executive Officer in 1996; President and Chief Executive Officer 1984-1995; President and Chief Operating Officer in 1983; Executive Vice President and Chief Operating Officer 1980-1982; Vice President - Employee Relations 1978-1979; member of Board of Directors of the Company since 1980. J. Allan Krul 54 1988 President and Chief Operating Officer since October, 1996; Executive Vice President and Chief Operating Officer in 1996; Senior Vice President and Chief Operating Officer 1995-1996; Vice President - General Manager Machine Operations 1991-1994; Vice President - Engineering 1988-1990; member of Board of Directors of the Company since November, 1996. Malcolm L. Gibson 56 1983 Executive Vice President and Chief Financial Officer, and Assistant Secretary since October, 1996. Senior Vice President, Chief Financial Officer and Assistant Secretary 1995-1996; Vice President-Finance, Treasurer and Assistant Secretary 1985-1994; Vice President - Finance and Assistant Secretary 1983-1984; Treasurer 1972-1982. Joseph T. Colvin 53 1996 Vice President - Manufacturing since October, 1996; General Manager, Workholding Operations in 1996; Manufacturing Director, Machine Operations 1994- 1996; Formerly Vice President Operations, General Manager, Inertial Guidance Test Equipment and Original Equipment Manufacturing, Contraves, Inc., 1994; President and CEO, Modern Manufacturing, 1993; President, Inland Motor Division, Kollmorgen Corp., 1987-1992. 39 List of Executive Officers of the Registrant - --------------------------------------------------------------------------------------------------------------------- Executive Officer Name Age Since Positions and Offices Held - ------------------------------ ------ --------------- ------------------------------------------------------- J. Patrick Ervin 39 1996 Vice President - Sales & Marketing since October, 1996; General Manager, Machine Tool Division in 1996; Director, Sales & Marketing 1992-1996; Director of Materials & Purchasing 1990-1992; Superintendent, Machine Division 1989-1990, Various other Company positions 1978-1989. Douglas A. Greenlee 49 1992 Vice President - Business Development since 1993; Secretary in 1992; Formerly attorney, Hazel & Thomas, P.C., Law Firm; member of Board of Directors of the Company since 1979. Richard L. Simons 41 1996 Vice President - Finance since October, 1996; Controller 1987-1996; Assistant Treasurer 1985-1987; Manager Financial Accounting 1983-1984. Daniel P. Soroka 48 1996 Vice President - Engineering since October, 1996; Director of Research & Engineering 1992-1996; Manager of Mechanical Design and Analysis 1989-1992. Douglas C. Tifft 42 1988 Vice President - Employee Relations since 1988. Various other Company positions 1978-1988. Thomas T. Connelly 49 1984 Treasurer since 1995; Senior Vice President-General Manager Workholding Operations 1991 - 1994; Senior Vice President 1987 - 1990; Vice President and Assistant to the President 1985 - 1986; Treasurer and Assistant to the President in 1984; Treasurer in 1983; Assistant Treasurer in 1982.
40 ITEM 11. - EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Registrant's proxy statement filed with the Commission on March 11, 1997. ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Registrant's proxy statement filed with the Commission on March 11, 1997. ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the Registrant's proxy statement filed with the Commission on March 11, 1997. 41 PART IV ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The financial statements of the Registrant listed in ITEM 8. of this Report are incorporated herein by reference. (2) The financial statement schedules of the Registrant listed in ITEM 8. of this Report are incorporated herein by reference. (3) Exhibits filed as part of this Report: See (c) below. (b) Reports on Form 8-K filed by the Registrant during the last quarter of the period covered by this report: None. (c) Exhibits required by Item 601 of Regulation S-K filed as a part of this Report on Form 10-K: Item Description - ---- ----------- 4.1 - Restated Certificate of Incorporation of Hardinge Inc. filed with the Secretary of State of the State of New York on May 24, 1995, incorporated by reference from the Registrant's Form 8-A, filed with the Securities and Exchange Commission on May 19, 1995. 4.2 - By-Laws of Hardinge Inc. as amended November 19, 1996. 4.3 - Section 719 through 726 of the New York Business Corporation Law, incorporated by reference from the Registrant's Form 10, effective June 29, 1987. 4.4 - Specimen of certificate for shares of Common Stock, par value $.01 per share, of Hardinge Inc., incorporated by reference from the Registrant's Form 8-A, filed with the Securities and Exchange Commission on May 19, 1995. 4.5 - Form of Rights Agreement, dated as of May 16, 1995, between Hardinge Inc. and American Stock Transfer and Trust Company, incorporated by reference from the Registrant's Form 8-A, filed with the Securities and Exchange Commission on May 23, 1995. 10.1 - Credit Agreement dated as of November 18, 1996 between Hardinge Inc. and Marine Midland Bank. 10.2 - Credit Agreement dated as of February 28, 1996 among Hardinge Inc. and the Banks signatory thereto and The Chase Manhattan Bank as Agent, incorporated by reference from the Registrant's Form 10-Q for the quarter ended March 31, 1996. 10.3 - $5,000,000 Master Note among Hardinge Inc. and Chemung Canal Trust Company dated July 23, 1996. 10.4 - Credit Agreement dated as of August 1, 1994 among Hardinge Inc., the Banks signatory thereto and The Chase Manhattan Bank, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). 10.5 - Amendment Number One dated February 29, 1996 to Credit Agreement dated as of August 1, 1994 among Hardinge Inc., the Banks signatory thereto and The Chase Manhattan Bank. 42 10.6 - Stock Purchase Agreement dated as of November 15, 1995 between Hardinge Inc. and L. Kellenberger & Co. AG, incorporated by reference from the Registrant's Form 8-K, as amended, dated November 29, 1995. 10.7 - Note Agreement dated August 29, 1991 between Hardinge Inc. and AEtna Life Insurance Company, relating to the issuance by Hardinge Inc. of $5,000,000 principal amount of its 9.38% notes due 1998, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.8 - The 1996 Hardinge Inc. Incentive Stock Plan as adopted by shareholders at the April 23, 1996 annual meeting, incorporated by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1996. *10.9 - Hardinge Inc. Savings Plan, incorporated by reference from the Registrant's Registration Statement on Form S-8 (No. 33-65049). *10.10 - Employment Agreement with Robert E. Agan dated as of April 1, 1995, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.11 - Employment Agreement with J. Allan Krul dated as of April 1, 1995, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.12 - Employment Agreement with Malcolm L. Gibson dated as of April 1, 1995, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.13 - Employment Agreement with Douglas A. Greenlee dated as of April 1, 1995, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.14 - Employment Agreement with Douglas C. Tifft dated as of April 1, 1995, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.15 - Hardinge Inc. 1993 Incentive Stock Plan, incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1993. *10.16 - The 1988 Hardinge Inc. Incentive Stock Plan, as adopted by shareholders at the annual meeting of shareholders held on May 17, 1988, incorporated by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1988. *10.17 - First Amendment to Hardinge Inc. 1988 Incentive Stock Plan, incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1993. *10.18 - Hardinge Inc. Executive Supplemental Pension Plan, incorporated by reference from the Registrant's Form 10-K for the year ended December 31, 1993. *10.19 - Form of Deferred Directors Fee Plan, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). *10.20 - Description of Incentive Cash Bonus Program, incorporated by reference from the Registrant's Registration Statement on Form S-2 (No. 33-91644). 21 - Subsidiaries of the Company. 23 - Consent of Ernst & Young LLP, Independent Auditors. 27 - Financial Data Schedule. - ------------------------------- *Management contract or compensatory plan or arrangement. 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARDINGE INC. ----------------------------------------------------- (Registrant) February 25, 1997 /s/ Robert E. Agan - ---------------------- ----------------------------------------------------- Robert E. Agan Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. February 25, 1997 /s/ J. Allan Krul - ---------------------- ----------------------------------------------------- J. Allan Krul President, Chief Operating Officer and Director February 25, 1997 /s/ Malcolm L. Gibson - ---------------------- ----------------------------------------------------- Malcolm L. Gibson Executive Vice President/Chief Financial Officer and Assistant Secretary (Principal Financial Officer) February 25, 1997 /s/ John W. Bennett - ---------------------- ----------------------------------------------------- John W. Bennett Director February 25, 1997 /s/ Richard J. Cole - ---------------------- ----------------------------------------------------- Richard J. Cole Director February 25, 1997 - ---------------------- ----------------------------------------------------- James L. Flynn Director February 25, 1997 /s/ E. Martin Gibson - ---------------------- --------------------------------------------------- E. Martin Gibson Director 44 February 25, 1997 /s/ Douglas A. Greenlee - --------------------- --------------------------------------------------- Douglas A. Greenlee Vice President and Director February 25, 1997 /s/ J. Philip Hunter - --------------------- --------------------------------------------------- J. Philip Hunter Director and Secretary February 25, 1997 /s/ Dr. Eve L. Menger - --------------------- --------------------------------------------------- Dr. Eve L. Menger Director February 25, 1997 /s/ Richard L. Simons - --------------------- --------------------------------------------------- Richard L. Simons Vice President - Finance (Principal Accounting Officer) 45 EX-4.2 2 EXHIBIT 4.2 Item 4.2 BY-LAWS -of- HARDINGE INC. ARTICLE I Offices. -------- SECTION 1. Principal Office. - ----------------------------- The principal office of the corporation shall be located in the County of Chemung and State of New York. SECTION 2. Other Offices. - -------------------------- The corporation may also have such other offices, either within or without the State of New York, as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Shareholders. ------------- SECTION 1. Place of Meetings of Shareholders. - ---------------------------------------------- Meetings of shareholders may be held at such place, within or without the State of New York, as may be fixed by the Board of Directors. SECTION 2. Annual Meeting of Shareholders. - ------------------------------------------- A meeting of shareholders shall be held annually on such date and at such place and time as may be fixed by the Board of Directors for the election of directors and the transaction of other business. SECTION 3. Special Meetings of Shareholders. - --------------------------------------------- Special meetings of the shareholders may be called by the Board of Directors or by the Chairman of the Board or by the President. Such call shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be confined to the purpose or purposes for which the meeting is called. -2- SECTION 4. Fixing Record Date. - ------------------------------- The Board of Directors may fix, in advance, a date as the record date for purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action. Such date shall be not more than fifty (50) nor less than ten (10) days before the date of such meeting nor more than 50 days before any other action. If no record date is fixed, the record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given and for all other purposes shall be at the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. SECTION 5. Notice of Meetings of Shareholders. - ----------------------------------------------- Written notice of every meeting of shareholders shall state the place, date and hour of the meeting and unless it is the annual meeting indicate that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the statutory requirements to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect. A copy of the notice of any meeting shall be given, personally or by mail, not less than ten (10) nor more than fifty (50) days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders, or, if he shall have filed with the secretary of the corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. SECTION 6. Adjourned Meetings. - ------------------------------- When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjourned meeting. When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at -3- the adjourned meeting the corporation may transact any business that might have been transacted on the original date of the meeting. However, if after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice. SECTION 7. List of Shareholders at Meeting. - -------------------------------------------- A list of shareholders as of the record date, certified by the secretary or by the transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meetings, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. SECTION 8. Quorum of Shareholders. - ----------------------------------- The holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of any business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholders. Despite the absence of a quorum, the shareholders present may adjourn the meeting. SECTION 9. Proxies. - -------------------- Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy. Every proxy must be signed by the shareholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except in those cases where an irrevocable proxy is provided by law. SECTION 10. Inspectors at Shareholders' Meetings. - -------------------------------------------------- The Board of Directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint inspectors. If appointed on the request of one or more shareholders, the holders of a majority of shares present and entitled to vote thereat shall determine the number of inspectors to be appointed. In case any person appointed fails to appear or -4- act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. A report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. SECTION 11. Qualifications of Voters. - -------------------------------------- Every shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders. Neither treasury shares nor shares held by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares. Shares held by an administrator, executor, guardian, conservator, committee, or other fiduciary, except a trustee, may be voted by him, either in person or by proxy, without transfer of such shares into his name. Shares held by a trustee may be voted by him, either in person or by proxy, only after the shares have been transferred into his name as trustee or into the name of his nominee. Shares held by or under the control of a receiver may be voted by him without the transfer thereof into his name if authority so to do is contained in an order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee. -5- Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the By-Laws of such corporation may provide, or, in the absence of such provision, as the Board of Directors of such corporation may determine. SECTION 12. Vote of Shareholders. - ---------------------------------- Directors shall, except as otherwise required by law, be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Any other corporate action by vote of the shareholders shall, except as otherwise required by law, these By-Laws or the certificate of incorporation, be authorized by a majority of the votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. SECTION 13. Conduct of Shareholders' Meetings. - ----------------------------------------------- The Officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as the presiding Officer may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. SECTION 14. Shareholder Proposals. - ----------------------------------- No shareholder shall be entitled to submit a proposal to a meeting of shareholders unless at the time of submitting the proposal, the shareholder shall be a record or beneficial owner of at least 1% or $1,000 in market value of shares entitled to be voted at the meeting, and shall have held such shares for at least one year and shall continue to own such shares through the date on which the meeting is held. A shareholder meeting the above requirements shall deliver to the secretary of the corporation not later than 120 days prior to the date on which the corporation's proxy statement was mailed to stockholders in connection with the previous year's annual meeting, the text of any proposal which he intends to propose at an annual meeting of shareholders and a notice of the intention of the shareholder to present such proposal at the meeting. A proposal to be presented at any meeting of shareholders other than an annual meeting shall be delivered to the Secretary a reasonable time before the mailing of the corporation's proxy material. -6- ARTICLE III Directors. ---------- SECTION 1. Board of Directors. - ------------------------------- The business of the corporation shall be managed under the direction of its Board of Directors. SECTION 2. Qualifications of Directors. - ---------------------------------------- Each director shall be at least 18 years of age. SECTION 3. Number of Directors. - -------------------------------- The number of directors constituting the entire Board shall be nine (9). This number may be increased or decreased from time to time by amendment of these By-Laws, provided, however, that the number may not be decreased to less than three (3). No decrease in the number of directors shall shorten the term of any incumbent director. SECTION 4. Election and Term of Directors. - ------------------------------------------- The number of directors constituting the Board shall be nine (9) subject to increase or decrease from time to time as provided herein. The directors shall be classified, with respect to the period for which they shall severally hold office, into three classes as nearly equal in number as possible, each holding office, subject to the transitional provisions described below, for a period expiring at the third annual meeting of stockholders following the first annual meeting of stockholders of the Corporation at which directors of such class have been elected. For transitional purposes the directorships held by the nine directors holding office following the 1995 annual meeting shall be classified as follows: Class I Directorships - Messrs. Agan, Cole and Gibson will be considered to hold Class I Directorships. The Class I Directorships held by Messrs. Agan and Cole will expire at the Annual Meeting of Stockholders in 1996 and 1998 and at the Annual Meetings held in every third year thereafter and the Class I Directorship held by Mr. Gibson will expire at the Annual Meeting of Stockholders in 1995, 1997 and 1998 and at the Annual Meetings held in every third year thereafter. -7- Class II Directorships - Dr. Menger and Messrs. Powers and Hunter will be considered to hold Class II Directorships. The Class II Directorships held by Dr. Menger and Mr. Hunter will expire at the Annual Meeting of Stockholders in 1995, 1997 and 1999 and at the Annual Meetings held in every third year thereafter and the Class II Directorship held by Mr. Powers will expire at the Annual Meeting of Stockholders held in 1996, 1997 and 1999 and at the Annual Meetings held in every third year thereafter; and Class III Directorships - Messrs. Bennett, Flynn and Greenlee will be considered to hold Class III Directorships. The Class III Directorships held by Messrs. Bennett and Flynn will expire at the Annual Meeting of Stockholders in 1995 and 1997 and at the Annual Meetings of Stockholders held in every third year thereafter and the Class III Directorship held by Mr. Greenlee will expire at the Annual 0 Meeting of Stockholders held in 1996 and 1997 and at the Annual Meetings held in every third year thereafter. SECTION 5. Nominations for Directors. - -------------------------------------- Nominations of candidates for election as directors of the corporation at any meeting of stockholders called for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote at such meeting. Nominations made by the Board of Directors shall be made at a meeting of the Board of Directors, or by written consent of directors in lieu of a meeting, not later than sixty days prior to the date of any meeting of stockholders called for the election of directors. The Secretary of the corporation shall request that each such proposed nominee provide the corporation with such information concerning himself as is required, under the rules of the Securities and Exchange Commission, to be included in the corporation's proxy statement soliciting proxies for his election as a director. Any stockholder who intends to make a nomination at any annual meeting of stockholders shall deliver to the Secretary of the corporation not later than 120 days prior to the date on which the corporation's proxy statement was mailed to stockholders in connection with the previous year's annual meeting, or if such nomination is to be made at a meeting of shareholders other than an annual meeting, a reasonable time before the mailing of the corporation's proxy material, a notice setting forth (i) the name, -8- age, business address and residence of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the corporation which are owned of record and beneficially by each such nominee and (iv) such other information concerning each such nominee as would be required, under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such nominees. Such notice shall include a signed consent of such nominee to serve as a director of the corporation, if elected. In the event that a person is validly designated as a nominee in accordance with the provisions of this section and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee. If the Secretary of the meeting of stockholders called for the election of directors determines that a nomination was not made in accordance with the foregoing procedures, such nomination shall be void. SECTION 6. Newly Created Directorships and Vacancies. - ------------------------------------------------------ Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors for any reason may be filled by vote of a majority of the directors then in office, although less than a quorum exists. A director elected to fill a newly created directorship or a vacancy shall be elected to hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until his successor has been elected and qualified. SECTION 7. Removal of Directors. - --------------------------------- Any director, an entire class of directors or the entire board of directors may be removed from office, only for cause, and only by the affirmative vote of the holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. SECTION 8. Quorum of Directors. - -------------------------------- One-third (1/3) of the entire Board of Directors shall constitute a quorum for the transaction of business or of any specified item of business. SECTION 9. Action by the Board of Directors. - --------------------------------------------- The vote of the majority of the directors present at a meeting of the Board of Directors at the time of the vote, if a quorum is present at such time, shall, except as otherwise provided -9- by law, these By-Laws or the certificate of incorporation, be the act of the Board of Directors. SECTION 10. Written Consent of Directors Without a Meeting. - ------------------------------------------------------------ Any action required or permitted to be taken by the Board of Directors or a committee thereof may be taken without a meeting if all members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board or committee shall be filed with the minutes of the proceedings of the Board or committee. SECTION 11. Place and Time of Meetings of Board of Directors. - -------------------------------------------------------------- Meetings of the Board of Directors, regular or special, may be held at any place, within or without the State of New York and at any time, fixed by the Board of Directors or by the person or persons calling the meeting. Such meetings may be held by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. SECTION 12. Notice of Meetings of the Board of Directors. - ---------------------------------------------------------- Regular meetings of the Board of Directors may be held without notice if the time and place of such meetings are fixed by the Board of Directors. Special meetings of the Board of Directors shall be held upon notice to the directors and may be called by the Chairman of the Board or the President, or any two directors. The notice shall be given personally including by telephone or mail, telegram, cable or other public instrumentality. If given personally or by telephone, such notice shall be given not less than 48 hours before the meeting to each director. If given by mail, cable telegram or other public instrumentality, such notice shall be given not less than five (5) days before the date of the meeting, to each director. Such notice shall be deemed given, if mailed, when deposited in the United States mail, with postage thereon prepaid, or, if telegraphed, cabled or sent by other public instrumentality, when given to the telegraph company, cable company, or other public instrumentality, directed to the director at his business address, or, if he shall have filed with the secretary of the corporation a written request that notices to him be mailed or telegraphed, cabled or sent to some other address, then directed to him at such other address. The notice need not specify the purpose of any regular or special meeting of the Board of Directors. -10- SECTION 13. Interested Directors. - ---------------------------------- No contract or other transaction between the corporation and one or more of its directors, or between the corporation and any other corporation, firm, association or other entity in which one or more of its directors or officers are directors, or have a substantial financial interest, shall be either void or voidable for this reason alone or by reason alone that such director or directors are present at the meeting of the Board, or of a committee thereof, which approves such contract or transaction, or that his or their votes are counted for such purpose: (1) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the Board or committee, and the Board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the Board as defined in Section 9 of this Article, by unanimous vote of the disinterested directors; or (2) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders; or (3) If the contract or transaction is affirmatively established by the party or parties thereto to be fair and reasonable as to the corporation at the time it was approved by the Board, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or a committee thereof which approves such contract or transaction. The Board of Directors shall have authority to fix the compensation of Directors for services in any capacity. A loan shall not be made by the corporation to any director unless it is authorized by vote of the shareholders. For this purpose, the shares of the director who would be the borrower shall not be shares entitled to vote. SECTION 14. Reimbursement and Compensation of Directors. - --------------------------------------------------------- The directors may be paid their expenses of attendance at each meeting of the Board of Directors and may be paid a fixed sum -11- for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of the executive committee or other committees may be allowed similar reimbursement and compensation for their services as such. SECTION 15. Executive Committee and Other Committees. - ------------------------------------------------------ The Board of Directors by resolution adopted by a majority of the entire board, may designate from among its members an executive committee and other committees, each consisting of three or more directors. Except as to matters listed below and except as otherwise provided by the Board of Directors, the executive committee, during the interim between meetings of the board of directors, shall possess and may exercise all of the powers of the Board of Directors in the management and direction of the business and conduct of the affairs of the corporation, and shall have power to authorize the seal of the corporation to be affixed to all papers which may be required. Each other committee shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing it. No such committee shall have authority as to the following matters: (1) The submission to shareholders of any action that needs shareholders' approval; (2) The filling of vacancies in the Board of Directors or in any committee; (3) The fixing of compensation of the directors for serving on the Board of Directors or on any committee; (4) The amendment or repeal of the by-laws or the adoption of new by-laws; (5) The amendment or repeal of any resolution of the Board of Directors. Each such committee shall serve at the pleasure of the board. The Board of Directors shall have the power at any time to fill vacancies in, to change the size or membership of, and to discharge any such committee. A majority of any such committee may determine its action and may fix the time and place of its meetings, unless provided otherwise by the Board of Directors. Each such committee shall keep a written record of its acts and proceedings and shall submit such record to the Board of Directors at each regular meeting -12- thereof and at such other times as requested by the Board of Directors. Failure to submit such record, or failure of the Board to approve any action indicated therein will not, however, invalidate such action to the extent it has been carried out by the Corporation prior to the time the record of such action was, or should have been, submitted to the Board of Directors as herein provided. ARTICLE IV Officers. --------- SECTION 1. Officers. - --------------------- The Board of Directors may elect from its members a Chairman of the Board and shall elect a President, a Chairman of the Executive Committee, one or more Executive Vice Presidents, one or more Senior Vice Presidents and Vice Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors may also at any time elect one or more Assistant Secretaries and/or Assistant Treasurers. Any two or more offices may be combined and conferred upon one person except the offices of President and Secretary. The Board of Directors shall appoint either the Chairman of the Board, if any, or the President, the Chief Executive Officer of the Corporation ("the CEO"), who, subject to the control of the Board of Directors, shall direct and control all the business and affairs of the Corporation. The Board of Directors may appoint an Executive Vice President or a Senior Vice President as the Chief Operating Officer of the Corporation ("the COO") who shall be subject to the control of, and perform such duties as may be assigned by, the Chairman of the Board, the President or the Board of Directors. The Board of Directors may appoint an Executive Vice President or a Senior Vice President as the Chief Financial Officer of the Corporation ("the CFO") who shall be responsible for all the fiscal affairs of the Corporation and who shall be subject to the control of, and perform such duties as may be assigned by, the Chairman of the Board, the President or the Board of Directors. SECTION 2. Election and Term of Office. - ---------------------------------------- The officers of the Corporation shall be elected by a majority vote of the entire Board of Directors at its first meeting held after the annual meeting of the stockholders. In the event of the failure of the Board to elect such officers at such meeting or in the event of a vacancy then such election may be made at any subsequent regular or special meeting of the Board. The President, the Chairman of the Board and the Chairman of the Executive Committee shall be, but the other officers need not be, directors of the Corporation. All officers shall serve under the direction -13- of and at the pleasure of the Board of Directors. Any vacancy occurring in any office may be filled by the Board of Directors. SECTION 3. Powers and Duties of Officers. - ------------------------------------------ (a) Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, and shall perform such other duties as may be assigned to him from time to time by the Board. (b) Chairman of the Executive Committee. The Chairman of the Executive Committee shall preside at all meetings of the Executive Committee, and in the absence of the Chairman of the Board of Directors and the President shall preside at all meetings of stockholders and at all meetings of the Board of Directors. He shall have such other and further powers and shall perform such other and further duties as may be assigned to him by the Board of Directors. (c) President. The President shall perform the duties of the Chairman of the Board of Directors in his absence or during his inability to act. Any action taken by the President in the performance of the duties of the Chairman of the Board of Directors shall be conclusive evidence of the absence or inability to act of the Chairman of the Board of Directors at the time such action was taken. He shall also have such other and further powers and shall perform such other and further duties as may be assigned to him by the Board of Directors. (d) Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall perform such duties as may be assigned to them by the Chairman of the Board of Directors or by the President or by the Board of Directors. The Board of Directors may designate any one or more of said Executive Vice Presidents or Senior Vice Presidents as the Chief Operating Officer or the Chief Financial Officer. (e) Treasurer. The Treasurer shall have the care and custody of the corporate funds and securities. He shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation in the manner ordered by the Board. He shall upon request render an account of all his transactions as Treasurer to the Board of Directors. He shall, at all reasonable hours, exhibit his books and accounts to any director upon application. He or an Assistant Treasurer or such other officers, directors or agents as may be designated by the Board of Directors shall endorse checks, notes or drafts payable to the order of the corporation and sign and -14- countersign checks, drafts, and orders for the payment or withdrawal of moneys or securities on deposit in the corporate accounts in such manner as the Board may direct. He shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chairman of the Board of Directors or by the President. (f) Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors, and the stockholders, unless another person be appointed for that purpose by the stockholders, and also, unless another person be appointed for that purpose by the Executive Committee, the minutes of the Executive Committee, in books provided for that purpose. He shall give or cause to be given all notices required by these by-laws or by resolution of the Board of Directors. He shall have charge of the stock certificate books, stock transfer books and stock ledgers, all of which shall at all reasonable hours be open to the examination of any director; he shall have custody of the seal of the Corporation; and he shall in general perform all the duties usually incident to the office of Secretary, subject to the control of the Board of Directors. The Secretary or an Assistant Secretary shall also certify all resolutions and proceedings of the stockholders, directors and Executive Committee. (g) Controller. The Controller shall be the chief accounting officer of the corporation, and shall be responsible for and have active control of all matters pertaining to the accounts of the corporation. He shall audit all payrolls and vouchers and shall direct the manner of certifying the same; shall supervise the manner of keeping all vouchers for payments and all other documents relating to such payments; shall receive and audit all operating and financial statements of the corporation and its subsidiaries; shall have the care, custody and supervision of the books of account of the corporation, their arrangement and classification and shall supervise the accounting and auditing practices of the corporation. He shall, at all reasonable hours, exhibit his books and accounts to any director upon application. He shall, upon request, render an account of the financial condition of the corporation to the Board of Directors. He shall perform such other duties as shall be assigned to him by the Board of Directors or by the Chairman of the Board of Directors or the President. (h) Assistant Officers. The Assistant Secretary or Secretaries and the Assistant Treasurer or Treasurers shall perform the duties of the Secretary and of the Treasurer, respectively, in the absence of those officers and shall have such further powers and perform such other duties as may be assigned to them respectively by the Board of Directors. (i) Removal. Any officer (other than a director) may be removed, either with or without cause, by a vote of a majority of -15- the whole Board of Directors at a special meeting of the Board called for that purpose, or by any committee or superior officer upon whom such power of removal may be conferred by the Board of Directors. (j) Bond. Any officer of the Corporation shall give a bond for the faithful discharge of his duties, in such sum, when and as shall be required by the Board of Directors. (k) Compensation. The compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a director of the corporation. SECTION 4. The Chairman of the Board, President, Secretary, or any other officer designated by the Board of Directors, is hereby empowered to endorse or execute and deliver any instrument of transfer of any certificate for shares of stock, or bond, or other security owned by or standing in the name of the Corporation. ARTICLE V Contracts, Checks and Deposits. ------------------------------- SECTION 1. Contracts. - ----------- ---------- The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 2. Checks, Drafts, etc. - -------------------------------- All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. SECTION 3. Deposits. - --------------------- All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the Board of Directors may select. -16- ARTICLE VI Certificates Representing Shares, Record of Shareholders, Transfer of Shares. ------------------------------------ SECTION 1. Issuance of Shares. - ------------------------------- No shares of any class of the corporation or any obligations or other securities convertible into or carrying options to purchase any such shares of the corporation, or any options or rights to purchase any such shares or securities of the corporation, shall be issued or sold unless such issuance or sale is approved by the affirmative vote of at least a majority of the entire Board of Directors. SECTION 2. Certificates Representing Shares. - --------------------------------------------- The shares of the corporation shall be represented by certificates which shall be in such form as shall be determined by the Board of Directors. All such certificates shall be consecutively numbered or otherwise identified. Such certificates shall be signed by the Chairman of the Board or the President or a Vice-President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may, but need not, be sealed with the seal of the corporation or a facsimile thereof. The signature of the officers upon the certificate may be facsimiles if the certificate is countersigned by a transfer agent or an assistant transfer agent, or registered by a registrar other than the corporation itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. Each certificate shall state upon the face thereof; (1) that the corporation is formed under the laws of New York; (2) the name of the person or persons to whom issued; (3) the number and class of shares and the par value of each share represented by such certificate. SECTION 3. Lost, Destroyed or Wrongfully Taken Certificates. - ------------------------------------------------------------- The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation, alleged to have been lost, apparently destroyed or wrongfully taken upon the making of an affidavit of that fact by the person claiming the certificate to be lost, apparently destroyed or wrongfully taken. When authorizing such issue of a new certificate or certificates, the Board of Directors, may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, apparently destroyed or wrongfully taken certificate or -17- certificates, or his legal representative to advertise the same in such manner as it shall require and/or give the corporation a bond in such sum and with such surety or sureties as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, apparently destroyed or wrongfully taken. SECTION 4. Record of Shareholders. - ----------------------------------- The corporation shall keep at its principal office, or at the office of its transfer agent in the State of New York, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. The corporation shall be protected in treating the persons in whose names shares stand on the record of shareholders as the owners thereof for all purposes. SECTION 5. Transfer of Shares. - ------------------------------- Upon surrender to the corporation or the transfer agent of the corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, and cancel the old certificate. Every such transfer of shares shall be entered on the record of shareholders of the corporation. ARTICLE VII Fiscal Year. ------------ The fiscal year of the corporation shall be the calendar year. ARTICLE VIII Dividends. ---------- The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its certificate of incorporation. -18- ARTICLE IX Seal. ----- The seal of the corporation shall be circular in form and contain the name of the corporation, the year when it was formed, and the words "New York". The corporation may use the seal causing it or a facsimile to be affixed or impressed or reproduced in any other manner. ARTICLE X Waiver of Notice. ----------------- SECTION 1. Waiver of Notice to Shareholders. - --------------------------------------------- Notice of meeting need not be given to any shareholder who signed a waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. SECTION 2. Waiver of Notice to Director. - ----------------------------------------- Notice of meeting need not be given to any director who signs a waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. SECTION 3. Notice Dispensed with When Delivery Prohibited. - ----------------------------------------------------------- Whenever communication to any shareholder or any director is unlawful under any statute of the State of New York or of the United States or any regulation, proclamation or order issued under said statutes, the giving of any notice to such shareholder or such director shall not be required and there shall be no duty to apply for license or other permission to so do. ARTICLE XI Indemnification. ---------------- To the fullest extent permitted by law, either directly or by the purchase of insurance or in part directly and in part by the purchase of insurance, the corporation shall indemnify each natural person, or if deceased, his personal representative made or -19- threatened to be made a party to any action or proceeding civil or criminal, including an appeal therein against the reasonable expenses, attorneys' fees, judgments, fines and amounts paid in settlement if such person is made or threatened to be made a party by reason of the fact that he or his testator or intestate is or was: (1) an officer, director or employee of the corporation or (2) an officer, director or employee of or served in any capacity in any other corporation, partnership, joint venture, trust or other enterprise, at the request of this corporation, provided that in the case of a person serving as an employee or in any other capacity in any other corporation, partnership, joint venture, trust or other enterprises, that such person was at the time he was so designated to serve by this corporation, an employee of this corporation, or (3) the occupant of a position or a member of a committee or board or a person having responsibilities under federal or state law, including but not limited to responsibilities under the Employee Retirement Income Security Act of 1974, who was appointed to such position or to such committee or board by the Board of this corporation or by an officer of this corporation or who served in such position or on such committee or board at the request or direction of the Board of this corporation or of an officer of this corporation or who assumed such responsibilities at the request or direction of the Board of this corporation or of any officer of this corporation, provided only that such person acted in good faith for a purpose which he reasonably believed would be in the best interest of the corporation or in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to the best interests of the corporation, and in criminal proceedings had no reasonable cause to believe that his conduct was unlawful. The corporation's obligations under this Article shall be reduced by the amount of any insurance which is available to any such person whether such insurance is purchased by the corporation or otherwise. The right of indemnity created herein shall be personal to the officer, director, employee or other person and their respective legal representatives and in no case shall any insurance carrier be entitled to be subrogated to any rights created herein. Nothing contained herein shall obligate the corporation to indemnify any person against any claim arising out of personal injuries, bodily injuries or property damage. -20- ARTICLE XII Employee Benefits. ------------------ The Board may from time to time make such provision for the establishment, funding, and carrying out of pension, profit sharing, share bonus, share purchase, share option, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions for any and all of its employees and officers, as in its discretion the Board may deem advisable and the Board may from time to time adopt and carry out any such plan or plans of providing such benefits or modify, discontinue or terminate any such plan as may then be in force. If any such benefit plan entitles members of the Board to participate as employees of the company, every member of the Board shall be entitled to vote upon any matter relating to the adoption, administration, carrying out, modification, discontinuance or termination of any such plan. The Board shall have power to appropriate funds including cash, stock, and other property of the company to defray, in whole or in part, the cost of providing any such benefits which may be based upon services rendered by employees prior to the date of establishment or modification of such plan and upon services to be rendered thereafter prior to the retirement or other payment date provided therein and may obligate the company to make payments toward defraying any such expenses over a period of years, subject always to the power of the Board in its discretion to modify, discontinue and terminate any such benefit plan to the extent then permitted in existing tax or other laws. The Board shall have full power in its discretion to provide for the administration of any such benefit plan and the investment and reinvestment of funds therein by an insurance company, trustees (who may be directors, officers or employees of the company), or other agency under such terms and conditions as the Board may deem advisable or to provide for the administration of such plan and the investment and reinvestment of the funds therein by the company. The Board shall have full power in its discretion to delegate to such committees, individuals (who may be directors, officers or employees of the company) or independent consultants such part of the carrying out of any such plan as in its discretion it may deem advisable. ARTICLE XIII Amendment and Repeal. --------------------- SECTION 1. Amendment and Repeal by the Shareholders. - ----------------------------------------------------- These By-Laws may be amended or repealed by the affirmative vote of holders of at least 75% of the outstanding shares of stock of the Corporation entitled to vote generally in -21- the election of directors, provided that the notice of meeting states such purpose. SECTION 2. Amendment and Repeal by the Board of Directors. - ----------------------------------------------------------- These By-Laws may also be amended or repealed by the affirmative vote of at least 75% of the entire Board of Directors. EX-10.1 3 EXHIBIT 10.1 CLOSING DOCUMENTS ----------------- CREDIT AGREEMENT between HARDINGE INC. (the "Borrower") and MARINE MIDLAND BANK (the "Bank") Dated as of November 18, 1996 HARDINGE/MARINE MIDLAND Closing List - ------------ 1. Credit Agreement dated 11/18/96 2. Authorization Letter on Hardinge letterhead 3. Certificate of Incumbency 4. Certified Resolution 5. Officer's Certificate 6. Opinion of Counsel as to Execution and Delivery of Documents (Cushman, Darby & Cushman, LLP opinion letter attached) 7. Certificate of Good Standing 8. Promissory Note CREDIT AGREEMENT CREDIT AGREEMENT dated as of November 18, 1996 between HARDINGE INC., a corporation organized under the laws of New York (the "Borrower"), and MARINE MIDLAND BANK, a banking corporation organized under the laws of New York (the "Bank"). The Borrower desires that the Bank extend credit as provided herein and the Bank is prepared to extend such credit. Accordingly, the Borrower and the Bank agree as follows: ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS. Section 1.01. Definitions. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have a correlative meaning when used in the plural and vice versa): "Affiliate" means any Person: (a) which directly or indirectly controls, or is controlled by, or is under common control with, the Borrower or any of its Subsidiaries; (b) which directly or indirectly beneficially owns or holds 5 % or more of any class of voting stock of the Borrower or any such Subsidiary; (c) 5% or more of the voting stock of which is directly or indirectly beneficially owned or held by the Borrower or such Subsidiary; or (d) which is a partnership in which the Borrower or any of its Subsidiaries is a general partner. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Aggregate Consideration" shall mean (i) in the case of a purchase of a company's equity securities, the total consideration paid for such securities (including amounts paid to holders of options, warrants and convertible securities) plus the principal amount of all indebtedness for borrowed money as set forth on the most recent consolidated balance sheet of the company being acquired prior to consummation of such sale, exchange or purchase, and (ii) in the case of a purchase of assets, the total consideration paid for such assets plus the principal amount of all indebtedness for borrowed money assumed by the Borrower. "Agreement" means this Credit Agreement, as amended or supplemented from time to time. References to Articles, Sections, Exhibits, schedules and the like refer to the Articles, Sections, -2- Exhibits, schedules and the like of this Agreement unless otherwise indicated. "Alternative Currency" shall mean at any time any of Canadian Dollars, Deutsche Marks, French Francs, Pounds Sterling, Swiss Francs, and Yen, so long as at such time (a) such Currency is dealt with in the London interbank deposit market, (b) such Currency is freely transferrable and convertible into Dollars in the London foreign exchange market, and (c) no central bank or other governmental authorization in the country of issue of such Currency is required to permit use of such Currency by any Bank for making any Loan hereunder and/or to permit the Borrower to borrow and repay the principal thereof and to pay the interest thereon, unless such authorization has been obtained. As of the date of this Agreement, each Alternative Currency is dealt with in the London interbank deposit market, each Alternative Currency is freely transferable and convertible into Dollars in the London foreign exchange markets and no central bank or other governmental authorization in the country of issue of such Alternative Currency is required to permit the use of such currency by the Bank for making any Loan hereunder and/or to permit the Borrower to borrow and repay the principal thereof and to pay interest thereon. "Amortization Date" means the first day of each calendar quarter, commencing on the first such day occurring after the Revolving Credit Termination Date, up to (and including) the Termination Date, provided that if any such day is not a Banking Day, such day shall be the next succeeding Banking Day (or, if such next succeeding Banking Day falls in the next calendar month, the next preceding Banking Day). "Authorization Letter" means the letter agreement executed by the Borrower in the form of Exhibit B. "Banking Day" means (a) any day on which commercial banks are not authorized or required to close in New York City, and (b) whenever such day relates to a Eurodollar Loan or notice with respect to any Eurodollar Loan, a day on which foreign exchange trading is carried out in the London interbank market in the Currency in which such Eurodollar Rate Loan is denominated. "Basis Point" means one one-hundredth of one percent. "Canadian Dollars" and the sign "C$" means the lawful currency of Canada. "Capital Lease" means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP. "Closing Date" means November 18, 1996, the date this Agreement has been executed by the Borrower and the Bank. -3- "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means the obligation of the Bank to make Loans under this Agreement in the aggregate principal amount of $20,000,000.00, as such amount may be reduced or otherwise modified from time to time. "Commitment Period" means the period from and including the date of this Agreement to but excluding the first Amortization Date and thereafter each period from and including an Amortization Date to but excluding the next succeeding Amortization Date. "Consolidated Capital Expenditures" means for any period, the Dollar amount of gross expenditures (including obligations under Capital Leases) made for fixed assets, real property, plant and equipment, and all renewals, improvements and replacements thereto, (but not repairs thereof) incurred during such period for the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Current Assets" means all assets of the Borrower and its Consolidated Subsidiaries, treated as current assets in accordance with GAAP. "Consolidated Current Liabilities" means all liabilities of the Borrower and its Consolidated Subsidiaries, treated as current liabilities in accordance with GAAP, including without limitation (a) all obligations payable on demand or within one (1) year after the date in which the determination is made, and (b) installment and sinking fund payments required to be made within one (1) year after the date on which determination is made, but excluding any such indebtedness renewable or extendable at the option of the obligor under, or payable from the proceeds of other indebtedness which may be incurred pursuant to the provisions of any revolving credit agreements or other similar agreement. "Consolidated Net Income" means for any period the net income of Borrower and its Consolidated Subsidiaries for such period determined on a consolidated basis without duplication, in accordance with GAAP. "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Borrower in accordance with GAAP. "Consolidated Tangible Net Worth" means Tangible Net Worth of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. -4- "Consolidated Total Unsubordinated Liabilities" means all items on a consolidated basis, in accordance with GAAP consistently applied, which would properly be included (a) on the liability side of the balance sheet (other than Subordinated Debt, capital stock, capital Surplus and retained earnings), or (b) as obligations under direct or indirect guarantees or obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise assure a creditor against loss in respect of, indebtedness or obligations of others; provided, however, excluded therefrom shall be all but 10% of the obligations resulting from the sale, pledge or discount of customer notes by Borrower and its Subsidiaries. "Controlled Group" shall have the meaning assigned to such term in Section 6.02(e) hereof. "Currency" means Dollars or any Alternative Currency. "Debt" means, with respect to any Person: (a) indebtedness of such Person for borrowed money; (b) obligations of such Person as lessee under Capital Leases, (c) obligations under direct or indirect guarantees in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (a) and (b) above, (not otherwise reserved for) and (d) defined benefit pension liabilities in respect of unfunded vested benefits under plans covered by ERISA calculated consistently with GAAP. Excluded from the term Debt shall be an amount equal to 90% of the obligations of the Borrower and its Subsidiaries arising from the sale, pledge, or discounting of customer notes. "Default" means any event which with the giving of notice or lapse of time, or both, would become an Event of Default. "Default Rate" means, with respect to the principal of any Loan and, to the extent permitted by law, any other amount payable by the Borrower under this Agreement or any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise), a rate per annum during the period from and including the due date, to, but excluding the date on which such amount is paid in full equal to 2% above the Variable Rate as in effect from time to time plus the Margin (if any) (provided that, if the amount so in default is principal of a Eurodollar Loan and the due date thereof is a day other than the last day of the Interest period therefor, the "Default Rate" for such principal shall be, for the period from and including the due date and to but excluding the last day of the Interest period therefor, 2% above the interest rate for such Loan as provided in section 2.10 hereof and, thereafter, the rate provided for above in this definition). -5- "Deutsche Marks" and the sign "DM" means the lawful currency of the Federal Republic of Germany. "Dollar Equivalent" means with respect to any Loan denominated in an Alternative Currency as at any date of determination thereof, the amount of Dollars that would be required to purchase the amount of the Alternative Currency of such Loan on the date two Business Days prior to the date of such Loan, based on the arithmetic mean (rounded upwards, if necessary. to the nearest one-one hundredth of one percent) of the spot selling rate at which the Bank offers to sell such Alternative Currency for Dollars in the London foreign exchange market at approximately 11:00 a.m. London time for delivery on the date of such Loan. "Dollars" and the sign "$" mean lawful money of the United States of America. "Domestic Subsidiaries" means any Subsidiary formed and currently existing under the laws of the United States of America or a State thereof. "Earnings Before Interest and Taxes" means the net income of the Borrower and its Consolidated Subsidiaries prior to the deduction of interest expense and prior to the deduction for federal, state or foreign corporate income and corporate franchise taxes. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder. "Eurodollar Loan" means any Loan when and to the extent the interest rate therefor is determined on the basis of the definition "LIBO Base Rate." -6- "Eurodollar Note" means the promissory note provided for in Section 2.02(b) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Event of Default" has the meaning given such term in Section 9.01. "Facility Documents" means this Agreement, the Notes, and the Authorization Letter. "Federal Funds Rate" means, for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions as published by the Federal Reserve Bank of New York for such day (or for any day that is not a Banking Day, for the immediately preceding Banking Day). "Forfeiture Proceeding" means any action, proceeding or investigation affecting the Borrower or any of its Subsidiaries or Affiliates before any court, governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or the receipt of notice by any such party that any of them is a suspect in or a target of any governmental inquiry or investigation, which may result in an indictment of any of them or the seizure or forfeiture of any of their property. "French Francs" and the sign "Ffr" means the lawful currency of the Republic of France. "Funded Debt" means, with respect to any Person, all Debt of such Person for borrowed money. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in Section 5.05 (except for changes concurred in by the Borrower's independent public accountants). "Hazardous Materials" means any substance regulated under any Environmental Laws. "Interest Period" means the period commencing on the date a Loan is made and ending, as the Borrower may select pursuant to Section 2.06: (a) in the case of Variable Rate Loans, the period commencing on the date such Variable Rate Loan is made and ending on the Quarterly Date next succeeding such date; (b) in the case of Eurodollar Loans, on the numerically corresponding day in the first, second, third, or sixth calendar month thereafter, provided that each such Interest Period which commences on the last Banking Day of a calendar month (or on any day for which -7- there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Banking Day of the appropriate calendar month. "Lending Office" means for each type of Loan, the lending office of the Bank (or of an affiliate of the Bank) designated as such for such type of Loan on its signature page hereof or such other office of the Bank (or of an affiliate of the Bank) as it may from time to time specify to the Borrower as the office by which its Loans of such type are to be made and maintained. "Liens" shall have the meaning assigned to such term in Section 7.01 hereof. "LIBO Base Rate" means with respect to any Eurodollar Loan the arithmetic mean of the respective rates per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted at approximately 11:00 a.m. London time by the principal branch of the Bank two Banking Days prior to the first day of the Interest Period for such Loan for the offering to leading banks in the London interbank market of deposits in the Currency of the Eurodollar Loan in immediately available funds, for a period, and in an amount, comparable to such Interest Period and principal amount of the Eurodollar Loan. If the Bank is no longer quoting on the London interbank market, the LIBO Base Rate shall be determined by the Bank on the basis of quotes from a bank selected by the Bank and approved by Borrower. "LIBO Rate" means, for any Eurodollar Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the sum of the quotient of (a) the LIBO Base Rate for such Loan for the Interest Period therefor, divided by (b) one minus the Reserve Requirement for such Loan for such Interest Period. "Loan" means a Revolving Credit Loan or a Term Loan or both, as the context requires. "Margin" means for each Variable Rate Loan and Eurodollar Loan the lowest applicable margin on the table next following, computed as of each Quarterly Date based upon Borrower's financial statements for the immediately preceding four Quarterly Dates for income statement items and the most recent Quarterly Date for balance sheet items. -8- ================================================================================ (a) Ratio of Funded Debt to Variable Rate Loans Eurodollar Loans Earnings Before Interest & Taxes - -------------------------------------------------------------------------------- Equal to or less than 1.0 0 Basis Points 45 Basis Points - -------------------------------------------------------------------------------- Greater than 1.0 and less than or 0 Basis Points 55 Basis Points equal to 2.0 - -------------------------------------------------------------------------------- Greater than 2.0 and less than or 0 Basis Points 65 Basis Points equal to 3.0 - -------------------------------------------------------------------------------- Greater than 3.0 0 Basis Points 75 Basis Points ================================================================================ "Multiemployer Plan" means a Plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Net Worth" means, at any date of determination thereof, the sum for the Borrower and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) of (a) the amount of common stock; plus (b) the amount of any preferred stock that does not have any requirement for the Borrower to purchase, redeem, retire or otherwise acquire the same; plus (c) the amount of additional paid-in-capital and retained earnings (or, in the case of an additional paid-in-capital or retained earnings deficit, minus the amount of such deficit); plus (d) cumulative pension liability adjustments (or, in the case of negative adjustments, minus the amount of such adjustments); plus (e) cumulative foreign currency translation adjustments (or, in the case of negative adjustments, minus the amount of such adjustments); plus (f) any other items which under GAAP are included in shareholders equity (or, in the case of items excluded from shareholders equity, minus such items); and minus (g) the cost of treasury stock. "Note" means collectively the Eurodollar Note and Variable Rate Note of the Borrower in the form of Exhibit A-1 and A-2 hereto evidencing the Loans made by the Bank hereunder. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. -9- "Plan" shall have the meaning assigned to such term in Section 6.02 (e) hereof. "Pounds Sterling" and the sign "(pound)" means the lawful currency of the United Kingdom. "Prime Rate" means that rate of interest from time to time announced by the Bank at its principal office as its prime commercial lending rate. "Principal Office" means the principal office of the Bank, located at One Marine Midland Plaza, Binghamton, New York 13902. "Quarterly Dates" shall mean the last day of March, June, September and December in each year, the first of which shall be the first such day after the date of this Agreement. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Regulatory Change" means, with respect to the Bank, any change after the date of this Agreement in United States federal, state, municipal or foreign laws or regulations (including without limitation Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including the Bank of or under any United States, federal, state, municipal or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" means, for any Interest Period for any Eurodollar Loan, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during the Interest Period for such Loan under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000.00 against in the case of Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall also reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBO Base Rate for Eurodollar Loans is to be determined as provided in the definition of "LIBO Base Rate" in this Section -10- 1.01 or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. "Revolving Credit Loan" means any loan made pursuant to Section 2.01(a). "Revolving Credit Termination Date" means November 1, 1999; provided that if such date is not a Banking Day, such date shall be the next succeeding Banking Day (or, if such next succeeding Banking Day falls in the next calendar month, the next preceding Banking Day). "Subordinated Debt" means Debt subordinated to the Bank on terms and conditions satisfactory to the Bank. "Subsidiary" means, with respect to any Person, any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. "Swiss Francs" and the sign "Sfr" means the lawful currency of Switzerland. "Tangible Net Worth" shall have the meaning assigned to such term in Section 8.02 hereof. "Term Loan" means the loan made by the Bank pursuant to Section 2.01(d). "Term Note" means the promissory note provided for in Section 2.02(c) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Termination Date" means October 1, 2003; provided that if such date is not a Banking Day, the Termination Date shall be the next succeeding Banking Day (or, if such next succeeding Banking Day falls in the next calendar month, the next preceding Banking Day). "Unfunded Benefit Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all benefit liabilities (within the meaning of section 4001(a)(16) of ERISA) under the Plan exceeds the fair market value of all Plan assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of the Borrower or any ERISA Affiliate under Title IV of ERISA. "Variable Rate" means, for any day, the higher of (a) the Federal Funds Rate for such day plus fifty (50) Basis Points, and (b) the Prime Rate for such day. -11- "Variable Rate Loan" means any Loan when and to the extent the interest rate for such Loan is determined in relation to the Variable Rate. "Variable Rate Note" means the promissory note provided for in Section 2.02(a) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Yen" and the sign "(Y)" means the lawful currency of Japan. Section 1.02. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all financial data required to be delivered hereunder shall be prepared in accordance with GAAP. ARTICLE 2. THE CREDIT. Section 2.01. The Loans. (a) Subject to the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow the aggregate amount of the Bank's Commitment by means of Variable Rate Loans in Dollars and Eurodollar Loans in any Currency and, the Bank agrees to make loans (the "Revolving Credit Loans") to the Borrower from time to time from and including the date hereof to but excluding the Revolving Credit Termination Date up to but not exceeding the amount of its Commitment. The Revolving Credit Loans may be outstanding as Variable Rate Loans or Eurodollar Loans (each a "type" of Loan). The Revolving Credit Loans of each type, shall be made and maintained at the Bank's Lending Office. (b) Each Revolving Credit Loan shall be due and payable on the last day of the Interest Period thereof and on the Revolving Credit Termination Date. (c) For purposes of determining at the time of any borrowing whether the amount of the borrowing would, together with all other outstanding Loans, exceed the aggregate amount of the Bank's Commitment, and for purposes of determining the unused portion of the Commitment, the amount of each Eurodollar Loan in an Alternative Currency shall be deemed to be the Dollar Equivalent of the amount of the Alternative Currency of such Eurodollar Loan on the date such determination is made. (d) The Bank agrees on the terms and conditions set forth in this Agreement to make a loan (the "Term Loan") to the -12- Borrower on the Revolving Credit Termination Date in a principal amount up to but not exceeding the amount of the Commitment, as such amount may be reduced pursuant to Section 2.07. The Term Loan may be outstanding as a Variable Rate Loan, a Eurodollar Loan or a Fixed Rate Loan as provided in Section 2.10(c). The Term Loan shall be repaid in 16 consecutive quarterly installments, each in an amount equal to 1/16 of the original principal amount of the Term Loan. The first such installment shall be due on the first Amortization Date. Section 2.02. The Notes. (a) The Variable Rate Loans of the Bank shall be evidenced by a single promissory note in favor of the Bank substantially in the form of Exhibit A-1 hereto, dated the date of this Agreement, payable to the order of the Bank and otherwise duly completed and executed by the Borrower. (b) The Eurodollar Loans of the Bank shall be evidenced by a single promissory note in favor of the Bank, substantially in the form of Exhibit A-2 hereto, dated the date of this Agreement, payable to the order of the Bank and otherwise duly completed and executed by the Borrower. (c) The Term Loan of the Bank shall be evidenced by a single promissory note in favor of the Bank in the form of Exhibit A-3 hereto, dated the Revolving Credit Termination Date, payable to the order of the Bank and otherwise duly completed and executed by the Borrower. (d) The date, amount, Currency (in the case of Eurodollar Loans), interest rate and duration of Interest Period for each Loan made by the Bank to the Borrower and each payment made on account of the principal thereof, shall be recorded by the Bank on its books and, on the schedule attached to each Note or any continuation thereof; provided, however, that the failure of the Bank to make, or any error in making, any such recordation shall not affect the obligations of Borrower to make a payment when due of any amount owing hereunder or under such Note in respect of the Loans evidenced by such Note. Section 2.03. Purpose. The Borrower shall use the proceeds of the Loans for general corporate purposes and import/export letters of credit and foreign exchange transactions. Subject to the limitations contained in Section 7.05, proceeds of Loans to a maximum aggregate principal of $15,000,000.00 may be used by the Borrower as Aggregate Consideration for acquisitions. Proceeds of Loans to a maximum aggregate principal of $15,000,000.00 may be used by the Borrower to repurchase shares of its common stock. Provided, however, and notwithstanding any provision herein to the contrary, such proceeds shall not be used -13- for the purpose, whether immediate, incidental or ultimate, of buying or carrying "margin stock" within the meaning of Regulation U. Section 2.04. Borrowing Procedures. The Borrower shall give the Bank notice of each borrowing to be made hereunder as provided in Section 2.08. Not later than 2:00 p.m. New York time on the date of such borrowing, the Bank shall, through its Lending Office and subject to the conditions of this Agreement, make the amount of the Loan to be made by it on such day available to the Bank at the Principal Office and in immediately available funds for the account of the Borrower. The amount so received by the Bank shall, subject to the conditions of this Agreement, be made available to the Borrower, in immediately available funds, by the Bank crediting an account of the Borrower designated by the Borrower and maintained with the Bank at the Principal Office. Section 2.05. Prepayments. The Borrower shall have the right to prepay Loans at any time or from time to time in multiples of $150,000.00 to be applied to principal in inverse order of maturity; provided that: (a) the Borrower shall give the Bank notice of each such prepayment as provided in Section 2.08; (b) Eurodollar Loans may not be prepaid, except that, if after the giving effect to any reduction or termination of the Commitments pursuant to Section 2.07, the outstanding aggregate principal amount of the Loans exceeds the aggregate amount of the Commitments, the Borrower shall pay or repay the Loans on the date of such reduction or termination in an aggregate principal amount equal to the excess, together with interest thereon accrued to the date of such payment or repayment and any amounts payable pursuant to Section 3.05 in connection therewith; and (c) in the event the outstanding aggregate principal balance of the Loans payable in Dollars and the Dollar Equivalent of all Loans payable in Alternative Currency exceeds the aggregate amount of the Commitment, Borrower shall pay the Loans in an aggregate principal amount equal to the excess, together with interest thereon accrued to the date of payment. Section 2.06. Interest Periods. In the case of each Loan, the Borrower shall select an Interest Period of any duration in accordance with the definition of Interest Period in Section 1.01, subject to the following limitations: (a) no Interest Period may extend beyond an Amortization Date unless, after giving effect thereto, the aggregate principal amount of Eurodollar Loans having Interest Periods which end after such Amortization Date shall be equal to or less than the principal amount to be outstanding hereunder after such Amortization Date: (b) notwithstanding clause (a) above, no Interest Period for a Eurodollar Loan shall have a -14- duration less than one month and if any such proposed Interest Period would otherwise be for a shorter period, such Interest Period shall not be available; (c) if an Interest Period would end on a day which is not a Banking Day, such Interest Period shall be extended to the next Banking Day, unless, in the case of a Eurodollar Loan, such Banking Day would fall in the next calendar month in which event such Interest Period shall end on the immediately preceding Banking Day; and (d) up to the Revolving Credit Termination Date, no more than ten Eurodollar Loans of the Bank may be outstanding at any one time. Section 2.07. Changes of Commitment. (a) Unless theretofore reduced to such amount pursuant to subsections (b) or (c) or (d) below, the amount of the Commitments shall automatically reduce on each Amortization Date by an amount equal to one-sixteenth (1/16th) of the outstanding principal balance of the Loans on the Revolving Credit Termination Date. The amount of the Commitment shall be reduced to zero on the Termination Date. (b) The Borrower shall have the right to reduce or terminate the amount of the Commitment at any time or from time to time, provided that: (i) the Borrower shall give notice of each such reduction or termination to the Bank as provided in Section 2.08, and (ii) each partial reduction shall be in an aggregate amount at least equal to $1,000,000.00. (c) On any day on or after the Revolving Credit Termination Date on which the amount of the Commitment is greater than the principal amount of the Loan outstanding on such day, the amount of the Commitment shall automatically reduce to an amount equal to such outstanding principal amount. (d) Each reduction of the amount of the Commitment pursuant to subsection (b) or (c) above during any Commitment Period shall result in an automatic and simultaneous reduction of the amount of the Commitment in an equal amount for each subsequent Commitment Period. (e) The Commitment once reduced or terminated may not be reinstated. Section 2.08. Certain Notices. Notices by the Borrower to the Bank of each borrowing pursuant to Section 2.04, each prepayment pursuant to Section 2.05 and each reduction or termination of the Commitments pursuant to Section 2.07(b) shall be irrevocable and shall be effective only if received by the Bank (a) in the case of borrowings and (in the case of Variable Rate Loans) prepayments of, (i) Variable Rate Loans, given before 10:00 a.m. New York time on the day of borrowing; (ii) Eurodollar Loans -15- in Dollars, given before 12:00 noon New York time three Banking Days prior thereto; (iii) Eurodollar Loans in an Alternative Currency, given before 12:00 noon New York time four banking days prior thereto, and (b) in the case of reductions or termination of the Commitment, given before 12:00 noon New York time three Banking Days prior thereto. Each such notice shall specify the Loans to be borrowed or prepaid, (subject to Section 2.09) the amount in Dollars (or, in the case of Loans in Alternative Currencies, the Dollar Equivalent) and type of the Loans to be borrowed or prepaid and the date of borrowing or prepayment (which shall be a Banking Day), and, in the case of Eurodollar Loans, the Currency or Currencies in which such Loans are to be made and, if required by the Bank, the account of the Borrower maintained with a commercial bank in the country in whose Currency such Eurodollar Loans are denominated. Each notice of reduction or termination shall specify the amount of the Commitment to be reduced or terminated. Section 2.09. Minimum Amounts. Except for borrowings which exhaust the full remaining amount of the Commitments, and prepayments (in the case of Variable Rate Loans) which result in the prepayment of all Loans, each borrowing and prepayment of principal shall be in an amount at least equal to $1,000,000.00 and shall be in incremental multiples of $500,000.00. Section 2.10. Interest. (a) During each Interest Period, interest shall accrue on the outstanding and unpaid principal amount of each Loan for the period from and including the date of such Loan to but excluding the Revolving Credit Termination Date at the following rates per annum: (i) for a Variable Rate Loan, at a variable rate per annum equal to the Variable Rate plus any Margin, and (ii) for a Eurodollar Loan, at a fixed rate equal to the LIBO Rate plus the Margin. If the principal amount of any Loan and any other amount payable by the Borrower hereunder or under a Note shall not be paid when due (at stated maturity, by acceleration or otherwise), interest shall accrue at the Default Rate on such amount to the full extent permitted by law from and including such due date to but excluding the date such amount is paid in full. (b) The interest rate on each Variable Rate Loan shall change when the Variable Rate changes and interest on each such Loan shall be calculated on the basis of a year of 365 days for the actual number of days elapsed. Interest on each Eurodollar Loan shall be calculated on the basis of a year of 360 days for the actual number of days elapsed. Promptly after the determination of any interest rate provided for herein or any change therein, the Bank shall notify the Borrower. -16- (c) On and after the Revolving Credit Termination Date to and including the Termination Date, interest shall accrue on the outstanding and unpaid principal amount of the Term Loan at one of the following rates as selected by the Borrower from time to time: (i) the variable rate described in Section 2.10(a)(i); or (ii) the fixed rate described in Section 2.10(a)(ii); or (iii) a fixed rate equal to one percent (1.0%) above the yield on United States Treasury Obligations for the interest period selected (in such case, a "Fixed Rate Loan"); or (iv) such other rate as the Bank may offer from time to time. (d) Accrued interest shall be due and payable in arrears upon any payment of principal and on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months or 90 days, at three-month (in the case of a Eurodollar Loan) intervals after the first day of such Interest Period; provided that interest accruing at the Default Rate shall be due and payable from time to time on demand of the Bank. Section 2.11. Fees. The Borrower shall pay to the Bank a commitment fee on the daily average unused Commitment of the Bank for the period from and including the date hereof to the earlier of the date the Commitment is terminated or the Revolving Credit Termination Date at a rate per annum equal to three-eighths of one percent (.375%), calculated on the basis of a year of 360 days for the actual number of days elapsed. The accrued commitment fee shall be due and payable in arrears upon any reduction or termination of the Commitments and on each Quarterly Date commencing on the first such date after the Closing Date. Section 2.12. Payments Generally. Except to the extent otherwise provided herein, all payments of principal of and interest on Loans made in Dollars, and other amounts (other than the principal of and interest on Eurodollar Loans made in an Alternative Currency) payable by the Borrower under this Agreement and the Notes shall be made in Dollars, and all payments of principal of and interest on Eurodollar Loans made in an Alternative Currency shall be made in such Alternative Currency, in immediately available funds not later than 1:00 p.m. New York time on the date on which such payments shall become due (each such payment made after such time on such due date to be deemed to have made on the next succeeding Banking Day; provided that, when a new Loan is to be made by the Bank on a date the Borrower is to repay any principal of an outstanding Loan in the same Currency, the Bank shall apply the proceeds thereof to the payment of the principal to be repaid and only an amount equal to the difference between the principal to be borrowed and the principal to be repaid shall be made available by the Bank to the Borrower as provided in Section 2.04 or paid by the Borrower to the Bank -17- pursuant to this Section 2.12, as the case may be. The Bank may (but shall not be obligated to) debit the amount of any such payment which is not made by such time to any ordinary deposit account of the Borrower with the Bank. The Borrower shall, at the time of making each payment under this Agreement or the Notes, specify to the Bank the principal or other amount payable by the Borrower under this Agreement or the Notes to which such payment is to be applied (and in the event that it fails to so specify, or if a Default or Event of Default has occurred and is continuing, the Bank may apply such payment as it may elect in its sole discretion (subject to Section 10. 16)). If the due date of any payment under this Agreement or the Notes would otherwise fall on a day which is not a Banking Day, such date shall be extended to the next succeeding Banking Day and interest shall be payable for any principal so extended for the period of such extension. Each payment received by the Bank hereunder or under any Note for the account of the Bank shall be paid promptly to the Bank, in immediately available funds, for the account of the Bank's Lending Office. ARTICLE 3. YIELD PROTECTION; ILLEGALITY; ETC. Section 3.01. Additional Costs. (a) The Borrower shall pay directly to the Bank from time to time on demand such amounts as the Bank may reasonably determine to be necessary to compensate it for any costs which the Bank determines are attributable to its making or maintaining any Eurodollar Loans under this Agreement or its Note or its obligation to make any such Loans hereunder, or any reduction in any amount receivable by the Bank hereunder in respect of any such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change, or any Reserve Requirement for any such Loans attributable to the Bank not maintaining a Lending Office in the country of an Alternative Currency, which: (i) changes the basis of taxation of any amounts payable to the Bank under this Agreement or its Note(s) in respect of any of such Loans (other than taxes imposed on the overall net income of the Bank or of its Lending Office for any of such Loans by the jurisdiction in which the Bank has its principal office or such Lending Office); or (ii) imposes or modifies any reserve, special deposit, deposit insurance or assessment, minimum capital, capital ratio or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, the Bank (including any of such Loans or any deposits referred to in the definition of "LIBO Base Rate" in Section 1.01); or (iii) imposes any other condition affecting this Agreement or its Note (or any of such extensions of credit or liabilities). The Bank will notify the Borrower of any event occurring after the date of this Agreement which will entitle the Bank to compensation pursuant to -18- this Section 3.01(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. The amount payable to the Bank shall be computed from the date of the occurrence giving rise to Additional Cost, or the date that is 120 days prior to the date of demand by the Bank, whichever is later. If the Bank requests compensation from the Borrower under this section 3.01(a), or under section 3.01(c), the Borrower may, by notice to the Bank, suspend the obligation of the Bank to make Loans of the type with respect to which such compensation is requested (in which case the provisions of section 3.04 shall be applicable). As of the date hereof there are no Additional Costs due to the Bank attributable to the Bank's not maintaining a Lending Office in the country of an Alternative Currency. (b) Without limiting the effect of the foregoing provisions of this Section 3.01, in the event that, by reason of any Regulatory Change, the Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of the Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of the Bank which includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if the Bank so elects by notice to the Borrower, the obligation of the Bank to make Loans of such type hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (in which case the provisions of Section 3.04 shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 3.01 (but without duplication), the Borrower shall pay directly to the Bank from time to time on request such amounts as the Bank may reasonably determine to be necessary to compensate the Bank for any costs which it determines are attributable to the maintenance of capital by it or any of its Affiliates pursuant to any future law or regulation of any jurisdiction or any interpretation, directive or request (whether or not having the force of law and whether in effect on the date of this Agreement or thereafter) of any court or governmental or monetary authority in respect of its Loans hereunder or its obligation to make Loans hereunder (such compensation to include, without limitation, an amount equal to any reduction in return on assets or equity of the Bank to a level below that which it could have achieved but for such law, regulation, interpretation, directive or request). The Bank will notify the Borrower if it is entitled to compensation pursuant to this Section 3.01(c) as promptly as practicable after it determines to request such compensation. The amount payable to the Bank shall be computed from the date of the occurrence entitling the Bank to -19- compensation, or the date that is one hundred twenty (120) days prior to the date of demand by the Bank, whichever is later. (d) Determinations and allocations by the Bank for purposes of this Section 3.01 of the effect of any Regulatory Change pursuant to subsections (a) or (b), or of the effect of capital maintained pursuant to subsection (c), on its costs of making or maintaining Loans or its obligation to make Loans, or on amounts receivable by, or the rate of return to, it in respect of Loans or such obligation, and of the additional amounts required to compensate the Bank under this Section 3.01, shall be conclusive, provided that such determinations and allocations are made on a reasonable basis. Section 3.02. Limitation on Types of Loans. Anything herein to the contrary notwithstanding, if: (a) the Bank determines (which determination shall be conclusive) that quotations of interest rates for the relevant deposits referred to in the definition of "LIBO Rate" in Section 1.01 are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for any type of Eurodollar Loans as provided in this Agreement; or (b) the Bank determines (which determination shall be conclusive) and notifies the Borrower (which notice shall include the Bank's calculation of cost) that the relevant rates of interest referred to in the definition of "LIBO Base Rate" in Section 1.01 upon the basis of which the rate of interest for any type of Eurodollar Loans is to be determined do not adequately cover the cost to the Bank of making or maintaining such Loans; then the Bank shall give the Borrower prompt notice thereof, and so long as such condition remains in effect, the Bank shall be under no obligation to make Loans of such type. Section 3.03. Illegality. Notwithstanding any other provision in this Agreement, in the event that it becomes unlawful for the Bank or its Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder, then the Bank shall promptly notify the Borrower thereof and the Bank's obligation to make or maintain Eurodollar Loans hereunder shall be suspended until such time as the Bank may again make and maintain such affected Loans (in which case the provisions of Section 3.04 shall be applicable). -20- Section 3.04. Certain Variable Rate Loans pursuant to Sections 3.01 and 3.03. If the obligations of the Bank to make Loans of a particular type (Loans of such type being herein called "Affected Loans" and such type being herein called the "Affected Type") shall be suspended pursuant to Section 3.01 or 3.03, all Loans which would otherwise be made by the Bank as Loans of the Affected Type shall be made instead as Variable Rate Loans and, if an event referred to in Section 3.01(b) or 3.03 has occurred and the Bank so requests by notice to the Borrower , all Affected Loans of the Bank then outstanding shall be automatically converted into Variable Rate Loans on the date specified by the Bank in such notice, and, to the extent that Affected Loans are so made as (or converted into) Variable Rate Loans, all payments of principal which would otherwise be applied to the Bank's Affected Loans shall be applied instead to its Variable Rate Loans. Section 3.05. Certain Compensation. The Borrower shall pay to the Bank, upon the request of the Bank, such amount or amounts as shall be sufficient (in the reasonable opinion of the Bank) to compensate it for any loss, cost or expense which the Bank reasonably determines is attributable to: (a) any payment to the Bank of a Eurodollar Loan made by the Bank on a date other than the last day of an Interest Period for such Loan (whether by reason of acceleration or otherwise); or (b) any failure by the Borrower to borrow a Eurodollar Loan to be made by the Bank on the date specified therefor in the relevant notice under Section 2.04. Without limiting the foregoing, such compensation shall include an amount equal to the excess, if any, of: (i) the amount of interest which otherwise would have accrued on the principal amount so paid or not borrowed for the period from and including the date of such payment or failure to borrow to but excluding the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, to but excluding the last day of the Interest Period for such Loan which would have commenced on the date specified therefor in the relevant notice) at the applicable rate of interest for such Loan provided for herein; over (ii) the amount of interest (as reasonably determined by the Bank) the Bank would have bid in the London interbank market (if such Loan is a Eurodollar Loan) for deposits in the applicable Currency for amounts comparable to such principal amount and maturities comparable to such period. In addition, the Borrower shall pay to the Bank such amount as shall be sufficient (in the reasonable opinion of the -21- Bank) to compensate it for any loss, cost or expense arising as a result of any prepayment of the fixed rate portion of a Term Loan. ARTICLE 4. CONDITIONS PRECEDENT. Section 4.01. Documentary Conditions Precedent. The obligations of the Bank to make the Loans constituting the initial borrowing are subject to the condition precedent that the Bank shall have received on or before the date of such Loans each of the following, in form and substance satisfactory to the Bank and its counsel: (a) the Notes duly executed by the Borrower; (b) the Authorization Letter duly executed by the Borrower; (c) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the closing Date, attesting to all corporate action taken by the Borrower, including resolutions of its Board of Directors authorizing the execution, delivery and performance of the Facility Documents to which it is a party and each other document to be delivered pursuant to this Agreement; (d) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the Closing Date, certifying the names and true signatures of the officers of the Borrower authorized to sign the Facility Documents and the other documents to be delivered by the Borrower under this Agreement; (e) a certificate of a duly authorized officer of the Borrower, dated the Closing Date, stating that the representations and warranties in Article 5 are true and correct on such date as though made on and as of such date and that no event has occurred and is continuing which constitutes a Default or Event of Default; (f) a favorable opinion of counsel for the Borrower, dated the Closing Date, in substantially the form of Exhibit C and as to such other matters as the Bank may reasonably request; (g) a recently dated certificate of the Secretary of State of the State of Borrower's formation as to its good standing. Section 4.02. Additional Conditions Precedent. The obligations of the Bank to make any Loan (including the initial Loan) shall be subject to the further conditions precedent that on the date of such Loan: -22- (a) the following statements shall be true: (i) the representations and warranties contained in Article 5 are true and correct on and as of the date of such Loan as though made on and as of such date; and (ii) no Default or Event of Default has occurred and is continuing, or would result from such Loan; and (b) the Bank shall have received such approvals, opinions or documents as the Bank may reasonably request. Section 4.03. Deemed Representations. Each notice of a Loan and acceptance by the Borrower of the proceeds thereof shall constitute a representation and warranty that the statements contained in Section 4.02(a) are true and correct both on the date of such notice and, unless the Borrower otherwise notifies the Bank prior to such borrowing, as of the date of such Loan. ARTICLE 5. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants that: Section 5.01. Incorporation, Good Standing and Due Qualification. The Borrower and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the State of its incorporation, has all power and authority to carry on its business as now being conducted and to own its properties and is duly licensed or qualified and in good standing or a foreign corporation in each other jurisdiction in which its properties are located or in which failure to qualify would materially and adversely affect the conduct of its business or the enforceability of contractual rights of the Borrower. Section 5.02. Corporate Power and Authority: No Conflicts. The execution, delivery and performance by the Borrower of the Facility Documents are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (a) the Borrower's charter or by-laws,or (b) any law or any contractual restriction or provision binding on or affecting the Borrower. Section 5.03. Governmental Approval. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Facility Documents to which the Borrower is a party. -23- Section 5.04. Legally Enforceable Agreements. Each Facility Document to which Borrower is a party is, or when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. Section 5.05. Financial Statements. The balance sheets of the Borrower and its Subsidiaries as at December 31, 1995, and the related statements of income and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, and the unaudited balance sheets of the Borrower and its Subsidiaries as at September 30, 1996 and the related statements of income and retained earnings, copies of which have been furnished to the Bank, fairly present the financial condition of the Borrower and its Subsidiaries at such date and the results of the operations of the Borrower and its subsidiaries for the period ended on such date, all in accordance with GAAP, and since September 30, 1996, there has been no material adverse change in such condition or operations. Section 5.06. Litigation. There is no pending or threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may materially adversely affect the financial condition or operations of the Borrower or any Subsidiary. Section 5.07. Margin Stock. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). Section 5.08. Use of Loan Proceeds. No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or to carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund indebtedness originally incurred for such purpose, or (b) for any purpose which violates or is inconsistent with the provisions of the Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. Section 5.09. Tax Returns. Each of the Borrower and its Subsidiaries has filed (or has obtained extensions of the time by which it is required to file) all United States federal income tax returns and all other material tax returns required to be -24- filed by it and has paid all taxes shown due on the returns so filed as well as all other taxes, assessments and governmental charges which have become due, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. Section 5.10. ERISA. Each member of the Controlled Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan subject to the provisions thereof and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA. Section 5.11. Subsidiaries. The Borrower has no Subsidiaries other than those set forth on Schedule I attached hereto as amended from time to time. Section 5.12. Ownership and Liens. Each of the Borrower and its Subsidiaries has good and marketable title to its material properties and assets reflected on the balance sheet referred to in Section 5.05 hereof, except for such properties and assets as have been disposed of since the date of such balance sheet as no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business, and all such properties and facets are free and clear of mortgages, pledges, liens, charges and other encumbrances, except for mortgages on real estate located in Switzerland in the approximate amount of 7,000,000 Swiss Francs and liens incurred in the ordinary course of business, any encumbrances that do not materially interfere with the use or operation of such property or assets and except as required or permitted by the provisions hereof or as disclosed in the balance sheet referred to in Section 5.05 hereof or otherwise disclosed to the Bank. Section 5.13. Hazardous Materials. Except as set forth in Schedule II hereof, and qualified in each instance whereby a breach of this representation set forth in this Section 5.13 would materially and adversely affect the business, operations, assets or financial condition of the Borrower: the Borrower is in compliance in all material respects with all Environmental Laws governing Hazardous Materials and the Borrower has not used Hazardous Materials on, from, or affecting any property now owned or occupied or hereafter owned or occupied by the Borrower in any manner which violates Federal, state or local laws, ordinances, rules, regulations, or policies governing the use, storage, treatment, transportation, manufacture, refinement, handling, -25- production or disposal of Hazardous Materials, and that, to the best of the Borrower's knowledge, no prior owner of any such property or any tenant, subtenant, prior tenant or prior subtenant have used Hazardous Materials on, from, or affecting such property in any manner which violates Federal, state or local laws, ordinances, rules, regulations, or policies governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials, without limiting the foregoing, the Borrower shall not cause or permit any property owned or occupied by it to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials, except in compliance with all applicable Federal, state and local laws or regulations, nor shall the Borrower cause or permit, as a result of any intentional or unintentional act or omission on its part or any tenant or subtenant, a release of Hazardous Materials onto any property owned or occupied by the Borrower or onto any other property, the Borrower shall comply with and ensure compliance by all tenants and subtenants with all applicable Environmental Laws, whenever and by whomever triggered, and shall obtain and comply with any and all approvals, registrations or permits required thereunder. Section 5.14. No Default on Other Agreements. Neither the Borrower or any of its Subsidiaries is in default in any manner which would materially and adversely affect the business, properties or assets, operations or condition (financial or otherwise) of the Borrower in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party. Section 5.15. Partnerships. Except as set forth on Schedule III, neither the Borrower nor any of its Subsidiaries is a partner in any partnership. Section 5.16. No Forfeiture. Neither the Borrower nor any of its Subsidiaries or Affiliates is engaged in or proposes to be engaged in the conduct of any business or activity which could result in a Forfeiture Proceeding and no Forfeiture Proceeding against any of them is pending or threatened, which would individually or in the aggregate materially and adversely affect the business, operations, assets or financial condition of the Borrower or any of its Subsidiaries. Section 5.17. Solvency. (a) The present fair saleable value of the assets of the Borrower after giving effect to all the transactions contemplated by the Facility Documents and the -26- funding of all Commitments hereunder exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of the Borrower and its Subsidiaries as they mature. (b) The property of the Borrower does not constitute unreasonably small capital for the Borrower to carry out its business as now conducted and as proposed to be conducted including the capital needs of the Borrower. (c) The Borrower does not intend to, nor does it believe that it will, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by the Borrower, and of amounts to be payable on or in respect of debt of the Borrower). The cash available to the Borrower after taking into account all other anticipated uses of the cash of the Borrower, is anticipated to be sufficient to pay all such amounts on or in respect of debt of the Borrower when such amounts are required to be paid. (d) The Borrower does not believe that final judgments against it in actions for money damages will be rendered at a time when, or in an amount such that, the Borrower will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at which such judgments might be rendered). The cash available to the Borrower after taking into account all other anticipated uses of the cash of the Borrower (including the payments on or in respect of debt referred to in paragraph (c) of this Section 5.17), is anticipated to be sufficient to pay all such judgments promptly in accordance with their terms. ARTICLE 6. AFFIRMATIVE COVENANTS. So long as any of the Notes shall remain unpaid or any Bank shall have any Commitment under this Agreement, the Borrower shall, unless the Bank shall otherwise consent in writing: Section 6.01. Compliance with Laws, Corporate Existence. (a) Comply, and cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, the breach of which would materially and adversely affect the business, operations, prospects or assets or the financial condition or otherwise of the Borrower. Such compliance shall include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges or levies imposed upon it or on its income or profits or upon its property except to the extent (i) such payment is being contested in good faith and by proper -27- proceedings, and (ii) adequate reserves are being maintained with respect thereto; and (b) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights, franchises, trade names and preserve all of its property used or useful in the conduct of its business and keep same in good repair and working condition except for property it deems no longer useful. Section 6.02. Reporting Requirements. Furnish directly to the Bank: (a) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such quarter and statements of income and retained earnings and changes in financial position of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, with a certification by the chief financial officer of the Borrower that such financial statements fairly present the financial condition and results Of operations of the Borrower in accordance with GAAP, at the dates and for the periods set forth therein; (b) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the annual report for such year for the Borrower and its Subsidiaries, containing consolidated and consolidating financial statements for such year certified in a manner acceptable to the Bank by Ernst & Young or other independent public accountants acceptable to the Bank; (c) with the statements submitted under subsections (c) and (b) above, a certificate signed by the chief financial officer of the Borrower or the certified public accountants, as the case may be, stating (i) the requirements of Section 4.02 hereof and (ii) the calculation of all financial covenants and ratios required under Article 8 hereof; (d) promptly after the sending or filing thereof, copies of all reports which the Borrower sends to any of its security holders, and copies of all reports and registration statements which the Borrower or any Subsidiary files with the Securities and Exchange Commission or any national securities exchange; (e) promptly after the filing or receiving thereof, if and when the Borrower or any member of the Controlled Group (as defined below) (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) -28- with respect to any Plan (as defined below) under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, promptly followed by a copy of such notice to the Bank; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, promptly followed by a copy of such notice to the Bank. As used in this Subsection 6.02(e), "Controlled Group" means all members of a control group of corporations and all trades or businesses (whether or not incorporated) under common control, which together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code of 1954, and "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Code and is either (x) maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group, or (xx) maintained pursuant to a collective bargaining agreement or similar arrangement under which more than one employer makes contributions and to which the Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, (f) prior to the end of each fiscal year of the Borrower, a budget (in format satisfactory to the Bank) for the succeeding fiscal year of the Borrower, plus from time to time any revisions or modifications to such budget within 15 days of the adoption of such revision or modification; and (g) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its subsidiaries as the Bank may from time to time reasonably request. Section 6.03. Notice of Proceedings. Promptly give notice in writing to the Bank of all litigation, arbitral proceedings, regulatory proceedings and Forfeiture Proceedings affecting the Borrower or any Subsidiary, except litigation or proceedings which, if adversely determined, could not materially and adversely affect the consolidated financial condition or the business taken as a whole of the Borrower and its Subsidiaries. Section 6.04. Insurance. The Borrower will, and will cause each Subsidiary to, maintain insurance with insurance companies or associations rated "A-" or better by A.M. Best & -29- Company or a comparable rating agency in such amounts and against such risks as is usually carried by owners of similar businesses and properties in the same general areas in which the Borrower and its subsidiaries operate. Section 6.05. Environmental Laws. Comply in all material respects with all Environmental Laws and provide to the Bank all documentation in connection with such compliance that the Bank may reasonably request. Section 6.06. Access to Premises and Records. At any reasonable time and from time to time, but only to the extent relevant to the loan transaction hereunder and the Borrower's ability to perform under the Credit Agreement, upon reasonable notice and during normal business hours, the Borrower shall permit the Bank or any agent or representative thereof to examine the records and books of account and visit the properties of the Borrower or its subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any Consolidated Subsidiary with any of the Borrower's officers and directors. Section 6.07. Notice of Default. In the event any financial officer of the Borrower knows of any default or event of default under any agreement to which the Borrower is a party or any Event of Default which shall have occurred or knows of the occurrence of any event which, upon notice or lapse of time or both, would constitute an Event of Default, promptly furnish to the Bank a written statement as to such occurrence specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto. Section 6.08. Subsidiaries. Give the Bank prompt written notice of the creation, establishment or acquisition, in any manner, of any Subsidiary not existing on the date hereof and will cause each newly formed or acquired Domestic Subsidiary whose assets equal or exceed by amount 10% of the assets of the Borrower, to jointly, severally and unconditionally guaranty payment of the Loans and performance of all of the obligations of the Borrower created by this Agreement. Section 6.09. Material Adverse Changes. The Borrower shall promptly notify the Bank of any litigation matter, investigation, audit, business development or change in financial condition, which has resulted in, or which the Borrower or its Subsidiaries reasonably believes will result in an Event of Default. -30- ARTICLE 7. NEGATIVE COVENANTS. So long as any of the Notes shall remain unpaid or the Bank shall have any Commitment under this Agreement, the Borrower shall not without the written consent of the Bank: Section 7.01. Liens, Etc. Create or suffer to exist, or permit any of its subsidiaries to create or suffer to exist, any Lien, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its subsidiaries to assign, any right to receive income, in each case to secure any Debt of any person or entity, other than: (a) Liens securing the payment of taxes, assessments or governmental charges or levies or the demands of suppliers, mechanics, carriers, warehousers, landlords and other like Persons, provided that (i) they do not in the aggregate materially reduce the value of any properties subject to the Liens or materially interfere with their use in the ordinary conduct of the owning business, and (ii) all claims which the Liens secure are being actively contested in good faith and by appropriate proceedings; (b) Liens incurred or deposits made in the ordinary course of business (i) in connection with worker's compensation, unemployment insurance, social security and other like laws, or (ii) to secure the performance of letters of credit, bids, tenders, sales contract, leases, statutory obligations, surety, appeal and performance bonds and other similar obligations, in each case not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of property; (c) attachment, judgment and other similar Liens arising in connection with court proceedings provided that (i) execution and other enforcement are effectively stayed, and (ii) all claims which the Liens secure are being actively contested in good faith and by appropriate proceedings; (d) Liens on property of a Subsidiary provided that they secure only obligations owing to the Borrower or another Subsidiary; (e) Liens related to lease obligations, and within the limitations, described in Section 7.02; (f) Liens against customer notes, which are created in connection with the sale, pledge or discounting of such customer notes, provided that immediately after giving effect thereto, the -31- Borrower's aggregate liabilities on account of such Debt secured by such Liens does not exceed $11,000,000.00; and (g) Liens against property leased pursuant to Capital Leases, provided that the aggregate amount of Debt secured by such Liens does not exceed $3,000,000.00. For the purposes of this Agreement, the term "Lien" shall mean any interest in property securing any Debt or obligation owed to, or a claim by, a Person other than the owner of the property, whether the interest is based on common law, statute or contract (including the security interest or lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes). The term "Lien" shall not include minor reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions and other minor title exceptions affecting property, provided that they do not constitute security for a monetary obligation. For the purposes of this Agreement, the Borrower or a Subsidiary shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement, Capital Lease or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes, and such retention or vesting shall be deemed to be a Lien. In connection with any sale, pledge or discounting of Borrower's or its subsidiaries' customer notes, a "Lien" or "Liens" shall be deemed to exist to the extent of (i) the amount of any sums withheld from the Borrower or any Subsidiary in any such transaction, plus (ii) the amount of any obligation of the Borrower or any Subsidiary resulting from the non-payment of any customer notes involved in any such transaction. Section 7.02. Lease Obligations. Create or suffer to exist, or permit any of its subsidiaries to create or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease other than Capital Leases which would cause the liabilities of the Borrower and its subsidiaries, on a consolidated basis, in respect of all such obligations to exceed Five Million and 00/100ths Dollars ($5,000,000.00) payable in any period of twelve (12) months. Section 7.03. Prohibited Transactions. Use the proceeds of any Loan to acquire any security in any transaction which is subject to Sections 13 and 14 of the Securities Exchange Act of 1934 or use the proceeds of any Loan to otherwise acquire any public company other than on a friendly basis. -32- Section 7.04. Margin Stock. Use the proceeds of any Loan to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 7.05. Consolidations, Mergers, Acquisitions and Sales of Assets. Consolidate or merge with or into, or sell, lease or otherwise dispose of any of its assets to, any Person, or acquire all or any substantial portion of the properties, assets or shares of stock of any other organization or permit any Subsidiary to do any of the above (any of the above being an "Acquisition"), unless the Borrower is the surviving entity, the transaction is on a friendly basis and immediately thereafter the Borrower is in compliance with all terms and provisions of this Agreement and except that: (a) any Subsidiary may consolidate or merge with the Borrower or any wholly-owned subsidiary of the Borrower; (b) the Borrower or any Subsidiary may sell, lease or otherwise dispose of any of its inventory in the ordinary course of business and any of its assets which are obsolete, excess or unserviceable; (c) the Borrower or any Subsidiary may sell, pledge or discount customer notes, (d) the Borrower or any Subsidiary may sell, lease or otherwise dispose of any of its assets (other than as permitted by clauses (a) to (c) inclusive), provided that the aggregate net book value of all assets of the Borrower and its Subsidiaries sold, leased or otherwise disposed of during any fiscal year of the Borrower pursuant to this clause (d) shall not exceed 5% of the Consolidated Tangible Net Worth of the Borrower and its Subsidiaries at the end of the preceding fiscal year. All sales, leases or dispositions of assets pursuant to clause (b), (c) or (d) shall be at fair market value. Notwithstanding the foregoing, the total amount of Aggregate Consideration paid by the Borrower for Acquisitions (net of amounts paid for with the Borrower's stock) permitted under this section from and after February 29, 1996 shall not be greater than $10,000,000.00 in any consecutive twenty-four (24) month period without the prior written consent of the Bank. Section 7.06. Affiliate Transactions. Enter into or permit any Subsidiary to enter into any transaction (including the purchase, sale or exchange of Property or the rendering of any service) with any Affiliate except upon fair and reasonable terms -33- which are at least as favorable to the Borrower or the Subsidiary as would be obtained in a comparable arms-length transaction with a non-Affiliate. Section 7.07. Loans and Advances. Make or permit to exist any loans or advances to any Person, except that loans or advances incurred in the normal course of business, including employee advances and customer notes, are permitted. Section 7.08. Guaranties. Become or permit any Subsidiary to become liable for or permit any of its Property to become subject to any guaranty except guaranties under which the maximum aggregate amount of indebtedness, dividend or other obligation being guarantied can be mathematically determined at the time of issuance. Each guaranty permitted by this Section 7.08 must comply with the requirements of Section 8.01 (if it is included among Consolidated Current Liabilities) and with the requirement of Sections 8.03 and 8.05. Section 7.09. No Activities Leading to Forfeiture. Neither the Borrower nor any of its Subsidiaries or Affiliates shall engage in or propose to be engaged in the conduct of any business or activity which could result in a Forfeiture Proceeding, which would, individually or in the aggregate, materially and adversely affect the business, operations, assets or financial condition of the Borrower or any of its Subsidiaries. ARTICLE 8. FINANCIAL COVENANTS. So long as any of the Notes shall remain unpaid or the Bank shall have any Commitment under this Agreement: Section 8.01. Working Capital. The Borrower shall maintain at all times an excess of Consolidated Current Assets over Consolidated Current Liabilities of not less than $50,000,000.00. Consolidated Current Liabilities shall not include the current portion of the indebtedness evidenced by the Notes or of any other indebtedness maturing more than one year after the date of its creation. Section 8.02. Net Worth. The Borrower shall maintain a Consolidated Tangible Net Worth, at all times during each fiscal year of not less than the amount set forth below opposite such fiscal year: -34- Fiscal Year Ending December 31 Amount ----------- ------ 1996 $128,000,000 1997 $131,000,000 1998 $134,000,000 1999 $137,000,000 2000 $140,000,000 2001 $143,000,000 2002 $146,000,000 The term "Consolidated Tangible Net Worth" shall mean the total shareholders' equity prior to any cumulative foreign currency translation adjustments, minus intangible assets. Section 8.03. Debt. The Borrower shall not create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Debt if, immediately after giving effect to such Debt and the receipt and application of any proceeds thereof, the aggregate amount of Debt of the Borrower and its Subsidiaries, on a consolidated basis, would exceed 60% of the Consolidated Tangible Net Worth of the Borrower and its Subsidiaries. Section 8.04. Cash Flow. The Borrower shall maintain a Cash Flow Ratio at all times of not less than 2.0 to 1.0. "Cash Flow Ratio" means the ratio at each Quarterly Date equal to (a) the sum of Consolidated Net Income plus depreciation, amortization and other noncash expenses for the previous four consecutive fiscal quarters divided by (b) the current portion (i.e., due within one (1) year) of long term Debt. Section 8.05. Total Liabilities to Tangible Net Worth. The Borrower shall not permit the ratio of Consolidated Total Unsubordinated Liabilities to Consolidated Tangible Net Worth to be greater than .75 to 1.0 at any time. ARTICLE 9. EVENTS OF DEFAULT. Section 9.01. Events of Default. Any of the following events shall be an "Event of Default": (a) The Borrower shall fail to pay when due any Commitment fee due under Section 2.11 or any installment of principal of, or interest on, any Note; or -35- (b) Any representation or warranty made by the Borrower herein or in any other Facility Document, or by the Borrower (or any of its officers) in connection with this Agreement, or any other agreement to which the Bank and the Borrower are parties, shall prove to have been incorrect in any material respect when made; or (c) The Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or in any other Facility Document on its part to be performed or observed and any such failure shall remain unremedied for 10 days after written notice thereof shall have been given to the Borrower by the Bank; or (d) The Borrower or any of its Subsidiaries shall fail to pay any Debt (but excluding Debt evidenced by the Notes) of the Borrower or such Subsidiary as the case may be, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Debt, or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) Any judgment or order for the payment of money in excess of Two Million Five Hundred Thousand Dollars ($2,500,000.00) shall be rendered against the Borrower or any of its Subsidiaries, and either (i) enforcement proceedings shall -36- have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of 10 consecutive days during which a state of enforcement of such judgment or order, by reason of the pending appeal or otherwise, shall not be in effect; or (g) Any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of $250,000.00 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA, or notice of intent to terminate a Plan or Plans having aggregate Unfunded Benefit Liabilities in such amount or amounts which would at such time create a liability in excess of liabilities of such Plan or Plans recognized prior thereto on the Borrower's financial statements and which liability would cause a violation of any of the covenants under Article 7 (collectively, a "Material Plan") shall be filed under Title IV of ERISA by any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against any member of the Controlled Group to enforce Section 515 of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; (h) Any Forfeiture Proceeding shall have been commenced or the Borrower shall have given the Bank written notice of the commencement of any Forfeiture Proceeding, which would individually or in the aggregate, materially and adversely affect the business, operations, assets or financial condition of the Borrower or any of its Subsidiaries, or any Bank has a good faith basis to believe that a Forfeiture Proceeding has been threatened or commenced, which would, individually or in the aggregate, materially and adversely affect the business, operations, assets or financial condition of the Borrower or any of its subsidiaries. Section 9.02. Remedies. If any Event of Default shall occur and be continuing, the Bank may, by notice to the Borrower, (a) declare the Commitment to be terminated, whereupon the same shall forthwith terminate, and (b) declare the outstanding principal of the Notes, all interest thereon and all other amounts payable under this Agreement and the Notes to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided that, in the case of an Event of Default referred to in Section 9.01(e) or Section 9.01(h) above, the Commitment shall be immediately terminated, and the Notes, all interest thereon and all other -37- amounts payable under this Agreement shall be immediately due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE 10. MISCELLANEOUS. Section 10.01. Amendments and Waivers. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Borrower and the Bank, and any provision of this Agreement may be waived by the Bank; provided that no amendment, modification or waiver shall, unless by an instrument signed by the Bank: (a) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of the Commitment, (b) extend the date fixed for the payment of principal of or interest on any Loan or any fee payable hereunder, (c) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee payable hereunder, (d) alter the terms of this Section 10.01, or (e) waive any of the documentary conditions precedent set forth in Section 4.01 hereof. No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 10.02. Usury. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Agreement and the Notes shall be subject to the limitation that payments of interest shall not be required to the extent that receipt thereof would be contrary to provisions of law applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Section 10.03. Expenses and Indemnification. In addition to the fees set forth in Section 2.11 hereof, the Borrower shall reimburse the Bank on demand for all costs, expenses, and charges (including, without limitation, fees and charges of external legal counsel for the Bank and costs allocated by its internal legal departments) incurred by the Bank in connection with the enforcement of this Agreement or the Notes by reason of any Event of Default or any event which, after the giving of notice or passage of time, or both, would constitute an Event of Default. The Borrower agrees to indemnify and hold harmless the Bank from and against any and all claims, damages, liabilities and expenses (including, without limitation, fees and -38- disbursements of counsel) (each an "Indemnified Liability") which may be incurred by or asserted against the Bank in connection with or arising out of any threatened or actual litigation, or proceeding related to any acquisition or proposed acquisition by the Borrower, or by any Subsidiary, of all or any portion of the stock of substantially all the assets of any Person whether or not the Bank is a party thereto. The Borrower agrees that any Indemnified Liability will be promptly paid to the Bank upon the written demand of the Bank. Section 10.04. Survival. The obligations of the Borrower under Sections 3.01, 3.05 and 10.03 shall survive the repayment of the Loans and the termination of the Commitments. Section 10.05. Assignment, Participations. (a) This Agreement shall be binding upon, and shall inure to the benefit of, the Borrower, the Bank and their respective successors and assigns, except that the Borrower may not assign or transfer its rights or obligations hereunder. (b) The Bank may, with the consent of the Borrower (which consent will not be unreasonably withheld or delayed) assign all or any part of its Commitments, its Note or Loans to another bank or other Person. Upon execution and delivery by the assignee to the Borrower of an instrument in writing pursuant to which such assignee agrees to become a "Bank" hereunder having the Commitment and Loans specified in such instrument, and upon consent thereto by the Borrower, to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Borrower), the obligations, rights and benefits of the Bank and the Bank shall, to the extent of assignment, be released from the Commitment (or portion thereof) so assigned. (c) The Bank may sell or agree to sell to one or more banks or other Persons a participation in all or any part of any Loans held by it, or in its Commitment, in which event each purchaser of a participation (a "Participant") shall not have any rights or benefits under this Agreement or any Note (the participant's rights against the Bank in respect of such participation to be those set forth in the agreements executed by the Bank in favor of the Participant). All amounts payable by the Borrower to the Bank under Section 2 hereof in respect of Loans held by it and its Commitment, shall be determined as if the Bank had not sold or agreed to sell any participations in such Loan and Commitment, and as if the Bank were funding each of such Loan and Commitment in the same way that it is funding the portion of such Loan and Commitment in which no participations have been sold. -39- The agreement executed by the Bank in favor of the Participant shall not give the Participant the right to require the Bank to take or omit to take any action hereunder except action directly relating to (i) the extension of the Termination Date, (ii) the extension of a payment date with respect to any fees payable hereunder or any portion of the principal of or interest on any amount outstanding hereunder allocated to such participant, (iii) the reduction of the principal amount outstanding hereunder, or (iv) the reduction of the rate of interest payable on such amount or any amount of fees payable hereunder to a rate or amount, as the case may be, below that which the Participant is entitled to receive under its agreement with the Bank. (d) In addition to the assignments and participations permitted under paragraphs (b) and (c) above, the Bank may assign and pledge all or any portion of its Loans and Note to (i) any affiliate of such Bank, or (ii) any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank. No such assignment shall release the Bank from its obligations hereunder. (e) The Bank may furnish any information concerning the Borrower or any of its Subsidiaries in the possession of the Bank from time to time to assignees and participants (including prospective assignees and participants), provided that the Bank shall require any assignee or participant (prospective or otherwise) to agree in writing to maintain the confidentiality of such information. Section 10.06. Notices. Except as provided in Section 2.08 with respect to the timing of certain notices required hereunder, all notices, requests and other communications provided for herein (including, and not by way of limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including and not by way of limitation by telecopy), or, with respect to notices given pursuant to Section 2.04 hereof, by telephone confirmed in writing by telex, telecopier or other writing by the close of business on the day notice is given, delivered (or telephoned, as the case may be) to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof); or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, notices to the Bank and to the Borrower shall be given by telecopy, commercial overnight courier service, ordinary mail, or telex addressed to such party at its address on the signature page of this Agreement. Notices shall be effective: (i) if given by mail, three (3) days after deposit in the mails with first class postage prepaid, addressed as -40- aforesaid; (ii) if given by telex, when the telex is transmitted to the telex number as aforesaid, and (iii) in all other cases when delivered or received. Provided, however, that notices to the Bank shall be effective upon receipt. Section 10.07. Setoff. The Borrower agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim the Bank may otherwise have, the Bank shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final) held by it for the account of the Borrower at any of the Bank's offices, in Dollars or in any other currency, against any amount payable by the Borrower to the Bank under this Agreement or the Bank's Note which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower; provided that the Bank's failure to give such notice shall not affect the validity thereof. Payments by the Borrower hereunder shall be made without setoff or counterclaim. SECTION 10.08. JURISDICTION; IMMUNITIES. (a) THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES, AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE BORROWER AT ITS ADDRESS SPECIFIED IN SECTION 10.06. THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. THE BORROWER WAIVES ANY RIGHT IT MAY HAVE TO JURY TRIAL. (b) Nothing in this Section 10.08 shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdictions. (c) To the extent that the Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether from service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Borrower -41- hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the Notes. Section 10.09. Table of Contents; Headings. Any table of contents and the headings and captions hereunder are for convenience only and shall not affect the interpretation or construction of this Agreement. Section 10.10. Severability. The provisions of this Agreement are intended to be severable. If for any reason 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. Section 10.11. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. Section 10.12. Integration. The Facility Documents set forth the entire agreement among the parties hereto relating to the transactions contemplated thereby and supersede any prior oral or written statements or agreements with respect to such transactions. SECTION 10.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BUT EXCLUDING ALL OTHER CONFLICT-OF-LAW RULES. Section 10.14. Confidentiality. The Bank agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower pursuant to this Agreement which is identified by the Borrower as being confidential at the time the same is delivered to the Bank, provided that nothing herein shall limit the disclosure of any such information (a) to the extent required by statute, rule, regulation or judicial process, (b) to counsel for -42- the Bank, (c) to bank examiners, auditors or accountants, (d) in connection with any litigation to which the Bank is a party or (e) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the Bank a Confidentiality Agreement in substantially the form of Exhibit D hereto; and provided finally that in no event shall the Bank be obligated or required to return any materials furnished by the Borrower. Section 10.15. Treatment of Certain Information. The Borrower (a) acknowledges that services may be offered or provided to it (in connection with this Agreement or otherwise) by the Bank or by one or more of its subsidiaries or affiliates and (b) acknowledges that any information delivered to the Bank or its subsidiaries or affiliates regarding the Borrower may be shared among the Bank and such subsidiaries and affiliates. This Section 10.15 shall survive the repayment of the Loans and the termination of the Commitment. Section 10.16. Judgment Currency. This is an international loan transaction in which the specification of Dollars or an Alternative Currency as the case may be (the "Specified Currency"), any payment in New York City or the country of the Specified Currency, as the case may be (the "Specified Place"), is of the essence, and the Specified Currency shall be the currency of account in all events relating to the Loans denominated in the Specified Currency. The payment obligations of the Borrower under this Agreement and the Notes shall not be discharged by an amount paid in another Currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on conversion to the Specified Currency and transferred to the Specified Place under normal banking procedures does not yield the amount of the Specified Currency at the Specified Place due hereunder. If for the purpose of obtaining a judgment in any court it is necessary to convert a sum due hereunder in the Specified Currency into another Currency (the "Second Currency"), the rate of exchange which shall be applied shall be that at which in accordance with the normal banking procedures the Bank could purchase the Specified Currency with the Second Currency on the Business Day next preceding that on which such judgment is rendered. The obligation of the Borrower in respect of any sum due from it to the Bank hereunder (an "Entitled Person") shall, notwithstanding the rate of exchange actually applied in rendering such judgment, be discharged only to the extent that on the Business Day following receipt by such Entitled Person of any sum adjudged to be due hereunder or under the Notes in the Second Currency, such Entitled Person may in accordance with normal banking procedures purchase and transfer to the -43- Specified Place the Specified Currency with the amount of the Second Currency so adjudged to be due; and the Borrower hereby, as a separate obligation and notwithstanding any judgment, agrees to indemnify such Entitled Person against, and to pay such Entitled Person on demand in the Specified Currency, any difference between the sum originally due to such Entitled Person in the Specified Currency in the amount of the Specified Currency so purchased and transferred. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. HARDINGE INC. By /s/ Robert E. Agan ------------------------------- Robert E. Agan, Chairman of the Board and CEO Address for Notices: 1 Hardinge Drive Elmira, NY 14902 Telephone No.: (607) 734-2281 Telecopier No.: (607) 734-5517 MARINE MIDLAND BANK By /s/ Ronald W. Lesch -------------------------------- Name: Ronald W. Lesch Title: Vice President Address for Notices: One Marine Midland Plaza Binghamton, NY 13902 Telephone No.: (607) Telecopier No.: (607) EXHIBIT A-1 [Form of Variable Rate Loan Note] PROMISS0RY NOTE November 18, 1996 Elmira, New York HARDINGE INC. (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of Marine Midland Bank (the "Bank") at its principal office at One Marine Midland Plaza, Binghamton, New York 13902 or at such other place as required by the Credit Agreement referred to below, the aggregate unpaid principal amount of the Variable Rate Loans made by the Bank to the Borrower, in lawful money of the United States of America or such other Currency as required by said Credit Agreement and in immediately available funds on the dates and in the principal amounts provided in the Credit Agreement. The Borrower also promises to pay interest on the unpaid principal amount of each such Variable Rate Loan, in like money and funds, for the period such balance is outstanding, at said principal office at the rates of interest provided in the Credit Agreement and on the dates and in the manner provided in said Credit Agreement. The date and amount of each Variable Rate Loan made by the Bank to the Borrower under the Credit Agreement referred to below, maturity date and each payment of principal thereof shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof; provided, however, the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing under the Credit Agreement or hereunder in respect to the Variable Rate Loans made by the Bank. This is one of the Variable Rate Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of November 18, 1996 between the Borrower and the Bank and evidences the Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayment on the terms and conditions specified therein. -2- The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. The Borrower waives to the full extent permitted by applicable law the right to trial by jury in any legal proceedings arising out of or relating to this Note. This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, including Section 5-1401 of the New York General Obligations Law (or any similar successor provision thereto) but excluding all other conflict-of-law rules. HARDINGE INC. By ---------------------- Robert E. Agan Chairman of the Board SCHEDULE OF VARIABLE RATE LOANS
Date Amount Currency Interest Duration Amount of Balance Notation of Loan Rate of Balance Outstanding By Interest Period
EXHIBIT A-2 [Form of Eurodollar Loan Note] PROMISS0RY NOTE November 18, 1996 Elmira, New York HARDINGE INC. (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of Marine Midland Bank (the "Bank") at its principal office at One Marine Midland Plaza, Binghamton, New York 13902 or at such other place as required by the Credit Agreement referred to below, the aggregate unpaid principal amount of the Eurodollar Loans made by the Bank to the Borrower, in lawful money of the United States of America or such other Currency as required by said Credit Agreement and in immediately available funds on the dates and in the principal amounts provided in the Credit Agreement. The Borrower also promises to pay interest on the unpaid principal amount of each such Eurodollar Loan, in like money and funds, for the period such balance is outstanding, at said principal office at the rates of interest provided in the Credit Agreement and on the dates and in the manner provided in said Credit Aqreement. The date and amount of each Eurodollar Loan made by the Bank to the Borrower under the Credit Agreement referred to below, maturity date and each payment of principal thereof shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof; provided, however, the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing under the Credit Agreement or hereunder in respect to the Eurodollar Loans made by the Bank. This is one of the Eurodollar Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of November 18, 1996 between the Borrower and the Bank and evidences the Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayment on the terms and conditions specified therein. -2- The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. The Borrower waives to the full extent permitted by applicable law the right to trial by jury in any lega1 proceedings arising out of or relating to this Note. This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, including Section 5-1401 of the New York General Obligations Law (or any similar successor provision thereto) but excluding all other conflict-of-law rules. HARDINGE INC. By --------------------- Robert E. Agan Chairman of the Board SCHEDULE OF EURODOLLAR LOANB
Date Amount Currency Interest Duration Amount of Balance Notation of Loan Rate of Balance Outstanding By Interest Period
EXHIBIT A-3 [Form of Term Loan Note] TERM NOTE ---------- ----,------- Elmira, New York HARDINGE INC. (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of Marine Midland Bank (the "Bank") at its principal office at One Marine Midland Plaza, Binghamton, New York 13902 or at such other place as required by the Credit Agreement referred to below, the aggregate unpaid principal amount of the Term Loan made by the Bank to the Borrower on the Revolving Credit Termination Date, in sixteen (16) consecutive quarterly installments as provided in the Credit Agreement. The Borrower also promises to pay interest on the unpaid principal amount of such Term Loan, in like money and funds, for the period such balance is outstanding, at said principal office at the rates of interest provided in the Credit Agreement and on the dates and in the manner provided in said Credit Agreement. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration, or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate provided in said Credit Agreement. Any change in the interest rate resulting from a change in the Bank's Prime Rate shall be effective at the beginning of the day on which such change in the Bank's Prime Rate becomes effective. This Term Note is the Term Note referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of November 18, 1996 between the Borrower and the Bank and evidences the Term Loan made by the Bank thereunder. All capitalized terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayment on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. The Borrower waives to the full extent permitted by applicable law the right to trial by jury in any legal proceedings arisinq out of or relating to this Note. -2- This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, including Section 5-1401 of the New York General Obligations Law (or any similar successor provision thereto) but excluding all other conflict-of-law rules. HARDINGE INC. By---------------------- Robert E. Agan Chairman of the Roard EXHIBIT B [Form of Authorization Letter] _______ __, 1996 Re: Credit Agreement dated as of November 18, 1996 (the"Credit Agreement") between Hardinge Inc. and Marine Midland Bank ----------------------- Marine Midland Bank One Marine Midland Plaza Binghamton, NY 13902 Ladies and Gentlemen: In connection with the captioned Credit Agreement, we hereby designate any one of the following persons to give to you instructions, including notices required pursuant to the Agreement, orally or by telephone or teleprocess: NAME ---- Robert E. Agan, Chairman of the Board Malcolm L. Gibson, Executive Vice President and Chief Financial Officer Thomas T. Connelly, Treasurer Richard L. Simons, Vice President - Finance Ann Kuntz, Assistant Treasurer Instructions may be honored on the oral, telephonic or teleprocess instructions of anyone purporting to be any one of the above-designated persons even if the instructions are for the benefit of the person delivering them. We will furnish you with confirmation of each such instruction either by telex (whether tested or untested) or in writing signed by any person designated above (including any telecopy which appears to bear the signature of any person designated above) on the same day that the instruction is provided to you but your responsibility with respect to any instruction shall not be affected by your failure to receive such confirmation or by its contents. You shall be fully protected in, and shall incur no liability to us for, acting upon any instructions which you in good faith believe to have been given by any person designated above, and in no event shall you be liable for special, consequential or punitive damages. In addition, we agree to hold you and your agents harmless from any and all liability, loss and expense arising directly or indirectly out of instructions that we provide to you in connection with the Credit Agreement except for liability, loss or expense occasioned by the gross negligence or willful misconduct of you or your agents. Upon notice to us, you may, at your option, refuse to execute any instruction, or part hereof, without incurring any responsibility for any loss, liability or expense arising out of such refusal if you in good faith believe that the person delivering the instruction is not one of the persons designated above or if the instruction is not accompanied by an authentication method that we have agreed to in writing. We will promptly notify you in writing of any change in the persons designated above and, until you have actually received such written notice and have had a reasonable opportunity to act upon it, you are authorized to act upon instructions, even though the person delivering them may no longer be authorized. Very truly yours, HARDINGE INC. By -------------------- Robert E. Agan, Chairman of the Board EXHIBIT C [Letterhead of counsel to the Borrower] [Closing Date] Marine Midland Bank One Marine Midland Plaza Binghamton, NY 13902 Ladies and Gentlemen: We have acted as counsel to Hardinge Inc. ("the Borrower") in connection with the execution and delivery of that certain Credit Agreement (the "Credit Agreement") dated as of November 18, 1996 between the Borrower and Marine Midland Bank, as Bank. Except as otherwise defined herein, all terms used herein and defined in the Credit Agreement or any agreement delivered thereunder shall have the meanings assigned to them therein. In connection with the preparation of this Opinion, we have examined originals or counterparts, executed on behalf of the Borrower, of the Facility Documents and the exhibits attached thereto in originals or copies, certified to our satisfaction, of such records, certificates and documents as we deemed relevant and necessary as a basis for renderinq this Opinion. Based upon the foregoing, and having regard to such legal considerations as we deem relevant, we are of the opinion that: 1. The Borrower and, to the best of our knowledge, each of its Subsidiaries, is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all power and authority to carry on its business as presently being conducted and to own its properties, and is duly licensed or qualified and in good standing as a foreign corporation in each other jurisdiction in which its properties are located or in which failure to qualify would materially and adversely affect either the conduct of its business or the enforceability of contractual rights of the Borrower. -2- 2. The execution, delivery and performance by the Borrower of the Facility Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders; (b) contravene its charter or by-laws; (c) contravene any law or, to the best of our knowledge, contractual restriction or provision binding on or affecting the Borrower. 3. No authorization or approval or other action by, and no notice to or filing with any governmental authority or requlatory body is required for the due execution, delivery and performance by the Borrower of the Facility Documents. 4. The Credit Agreement is, and the other Facility Documents when executed thereunder will be, legal, valid and binding obligations enforceable in accordance with their respective terms, except that (a) the availability of equitable remedies may be limited by principles of equity, and (b) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of the rights of creditors generally. 5. Each Facility Document to which the Borrower is a party is, or when delivered under the Credit Agreement will be, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of the rights of creditors generally. 6. Except as described in Schedule II to the Credit Agreement, there is no pending, or to our knowledge threatened actions, suits or proceedings against or affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition or operations of the Borrower or of any such Subsidiary, or the ability of the Borrower to perform its obligations under the Facility Documents to which it is a party. We do not address herein those matters described in Cushman, Darby & Cushman, LLP letter dated November 15, 1996 attached hereto. Yours very truly, SAYLES, EVANS, BRAYTON, PALMER & TIFFT By ---------------------------- J. Philip Hunter, A Partner. EXHIBIT D CONFIDENTIALITY AGREEMENT [Date] Re: Credit Agreement dated as of November 18, 1996 between Hardinqe Inc. and Marine Midland Bank ------------------------------------- [Insert Name and Address of Prospective Participant or Assignee] Dear ------------------- As a Bank, party to the above-referenced Credit Agreement (the "Credit Agreement"), we have agreed with Hardinge Inc. (the "Borrower") pursuant to Section 10.14 of the Credit Agreement to use reasonable precautions to keep confidential, except as otherwise provided therein, all non-public information identified by the Borrower as being confidential at the time the same is delivered to us pursuant to the Credit Agreement. As provided in said Section 10.14, we are permitted to provide you, as a prospective [holder of a participation in the Loans (as defined in the Credit Agreement)] [assignee Bank], with certain of such non-public information subject to the execution and delivery by you, prior to receiving such non-public information, of a Confidentiality Agreement in this form. Such information will not be made available to you until your execution and return to us of this Confidentiality Agreement. Accordingly, in consideration of the foregoing, you agree (on behalf of yourself and each of your affiliates, directors, officers, employees, and representatives) that (A) such information will not be used by you except in connection with the proposed [participation] [assignment] mentioned above and (B) you shall use reasonable precautions, in accordance with your customary procedures for handling confidential information and in accordance with safe and sound bankinq Practices. to keep such information confidential, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to your counsel or to counsel for any of the Banks or the Agent, (iii) to bank examiners, auditors or accountants, (iv) in connection with any litigation to which you or any one or more of the Banks is a party; or (v) to the extent such information becomes publicly available other than as a result of disclosure other than as a result of disclosure by a Bank. Provided further, that, unless specifically prohibited by applicable law or court order, you agree, prior to disclosure thereof, to notify the Borrower of any request for disclosure of any such non-public information (x) by any governmental agency or representative thereof (other than any such request in connection with an examination of your financial condition by such governmental agency) or (y) pursuant to legal process; and provided finally that in no event shall you be obligated to return any materials furnished to you pursuant to this Confidentiality Agreement. Would you please indicate your agreement to the foregoing, by signing at the place provided below the enclosed copy of this Confidentiality Aqreement. Very truly yours, [Insert Name of Bankl By:_________________________ The foregoing is agreed to as of the date of this letter. [Insert name of prospective participant or assignee] By:________________________ SCHELDULE I Subsidiaries of Borrowrer
Jurisdiction Percentage Name and Address of Incorporation of Ownership - ---------------- ---------------- ------------ Hardinge Credlt Co., Inc. One Hardinge Drive Elmira, NY 14902 New York 100% Hardinge Technologies Systems Inc. One Hardinge Drive Elmira, NY 14902 New York 100% Morrison Machine Products, Inc. One Hardinge Drive Elmira, NY 14902 New York 100% Canadian Hardinge Machine Tools, Ltd. Toronto, Canada Canada 100% Hardinge Machine Tools, Ltd. Exeter, England United Kingdom 100% Hardinge Brothers GmbH Federal Republic Krefeld, Germany of Germany 100% L. Kellenberger & Co., AG St. Gallen Switzerland 100% Kellenberger Incorporated 200 Clearbrook Road Elmsford, NY 10523 New York 100% Hardinge Shanghai Company, Ltd. Shanghai China 100%
SCHEDULE II Hazardous Materials In December, 1992, Hardinge removed an underground waste oil tank at its College Avenue facility. Environmental sampling following the removal of the tank disclosed the presence of hydrocarbon contamination in surrounding soils. An environmental consultant retained by Hardinge prepared a site assessment and an action plan for on-site remediation which were adopted and approved by the New York State Department of Environmental Conservation. The project is on site. Remediation commenced in the Fall of 1995. SCHEDULE III Partnerships of Borrower Egret Aviation Co. Ownership of airplane with three Box 228 other companies Elmira, NY 14902 [Hardinge Logo] From the Office of Robert E. Agan President/Chief Executive Officer November 18, 1996 Re: Credit Agreement dated as of November 18, 1996 (the "Credit Agreement") between Hardinge Inc. and Marine Midland Bank ----------------------- Marine Midland Bank One Marine Midland Plaza Binghamton, NY 13902 Ladies and Gentlemen: In connection with the captioned Credit Agreement, we hereby designate any one of the following persons to give to you instructions, including notices required pursuant to the Agreement, orally or by telephone or teleprocess: NAME ---- Robert E. Agan, Chairman of the Board Malcolm L. Gibson, Executive Vice President and Chief Financial Officer Thomas T. Connelly, Treasurer Richard L. Simons, Vice President - Finance Ann Kuntz, Assistant Treasurer Instructions may be honored on the oral, telephonic or teleprocess instructions of anyone purporting to be any one of the above-designated persons even if the instructions are for the benefit of the person delivering them. We will furnish you with confirmation of each such instruction either by telex (whether tested or untested) or in writing signed by any person designated above (including any telecopy which appears to bear the signature of any person designated above) on the same day that the instruction is provided to you but your responsibility with respect to any instruction shall not be affected by your failure to receive such confirmation or by its contents. You shall be fully protected in, and shall incur no liability to us for, acting upon any instructions which you in good faith believe to have been given by any person designated above, and in no event shall you be liable for special, consequential or punitive damages. In addition, we agree to hold you and your agents harmless from any and all liability, loss and expense arising directly or indirectly out of instructions that we provide to you in connection with the Credit Agreement except for liability, loss or expense occasioned by the gross negligence or willful misconduct of you or your agents. Upon notice to us, you may, at your option, refuse to execute any instruction, or part hereof, without incurring any responsibility for any loss, liability or expense arising out of such refusal if you in good faith believe that the person delivering the instruction is not one of the persons designated above or if the instruction is not accompanied by an authentication method that we have agreed to in writing. We will promptly notify you in writing of any change in the persons designated above and, until you have actually received such written notice and have had a reasonable opportunity to act upon it, you are authorized to act upon instructions, even though the person delivering them may no longer be authorized. Very truly yours, HARDINGE INC. By /s/ Robert E. Agan ---------------------- Robert E. Agan, Chairman of the Board HARDINGE INC. I, J. Philip Hunter, do hereby certify that I am the duly elected and acting Secretary of Hardinge Inc., and that the following named persons have been duly elected to the offices set forth opposite their respective names and are now serving and acting as such officers and that the signature opposite their respective names is the specimen signature of each such person. Robert E. Agan Chairman of the Board Chief Executive Officer /s/ Robert E. Agan ------------------ Malcolm L. Gibson Executive Vice President, Chief Financial Officer and Assistant Secretary /s/ Malcolm L. Gibson --------------------- Thomas T. Connelly Treasurer /s/ Thomas T. Connelly ---------------------- Richard L. Simons Vice President, Finance /s/ Richard L. Simons --------------------- J. Philip Hunter Secretary /s/ J. Philip Hunter -------------------- IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Hardinge Inc. this 18th day of November, 1996. /s/ J. Philip Hunter -------------------- J.PHILIP HUNTER HARDINGE INC. Certified Resolution. THIS IS TO CERTIFY that I, J. Philip Hunter, am the duly elected and acting Secretary of Hardinge Inc., a New York corporation with offices at One Hardinge Drive, P.O. Box 1507, Elmira, New York; that at a meeting of the Board of Directors of said Corporation duly called and held on October 22, 1996 at which a quorum was present and voting throughout, the following resolutions were duly and unanimously adopted and have not been amended or revoked at the date hereof. RESOLVED that this Corporation borrow from Marine Midland Bank from time to time on a revolving credit basis and otherwise an aggregate amount not to exceed at any time outstanding $20,000,000 under and pursuant to a proposed Commitment Letter from Marine Midland Bank dated September 18, 1996, copy of which Commitment Letter shall be filed with the records of this meeting, and be it further RESOLVED that the form, terms and provisions of: (a) said proposed Credit Agreement between this Corporation and Marine Midland Bank, providing, among other things, for the making by Marine Midland Bank to this Corporation from time to time of advances (the "Advances") in an aggregate amount not to exceed at any time outstanding $20,000,000 upon the terms and conditions therein set forth, which terms and conditions are substantially similar to the present Revolving Credit Agreement with The Chase Manhattan Bank (National Association), and for the payment by this Corporation of costs and expenses as therein provided; and (b) promissory notes (the "Notes") to be issued by this Corporation to Marine Midland Bank pursuant to the terms and conditions of said proposed Credit Agreement to be entered into with Marine Midland Bank, a single Note issued to the order of Marine Midland Bank evidencing the indebtedness of this Corporation resulting from each of the Advances made by Marine Midland Bank to this Corporation and providing, among other things, for -2- the repayment of such Advances, and payment of interest thereon, as set forth above with respect thereto: be, and the same hereby are, in all respects approved, and that the Chief Executive Officer, Chief Financial Officer, Vice President - Finance, or Treasurer of this Corporation be, and each of them hereby is, authorized, in the name and on behalf of this Corporation, to execute and deliver said Credit Agreement with Marine Midland Bank and said Notes, each in the form or substantially in the form thereof as above described, with such additional changes, additions and modifications thereto as the officer of this Corporation executing the same shall approve, such approval to be conclusively evidenced by his execution and delivery thereof; and be it further RESOLVED that said Credit Agreement with Marine Midland Bank, as the same is or may be amended or changed as above provided, together with a copy of the Notes, be filed by the Secretary of this Corporation with the minutes of the meetings of the Board of Directors of this Corporation; and be it further RESOLVED that the Chief Executive Officer, Chief Financial Officer, Vice President - Finance, Treasurer, the Secretary and Assistant Secretary of this Corporation be, and each of them hereby is, authorized and empowered (any one of them acting alone) to do or cause to be done all such acts or things and to sign and deliver, or cause to be signed and delivered, all such documents, instruments and certificates (including, without limitation, all notices and certificates required or permitted to be given or made under the terms of the Credit Agreement), in the name and on behalf of this Corporation or otherwise, as such officer of this Corporation may deem necessary, advisable or appropriate to effectuate or carry out the purposes and intent of the foregoing resolutions and to perform the obligations of this Corporation under the agreements and instruments referred to therein. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Corporation this 18th day of November, 1996. /s/ J.Philip Hunter ------------------- J. Philip Hunter (SEAL) HARDINGE INC. Officer's Certificate The undersigned, being the duly elected Chairman of the Board of Hardinge Inc., a corporation duly organized and existing under the laws of the State of New York (the "Company") does hereby certify pursuant to Section 4.01 of the Credit Agreement between the Company and Marine Midland Bank, dated as of November 18, 1996 (the "Credit Agreement") that the representations and warranties contained in Article 5 of the Credit Agreement are true and correct on the date hereof as though made on this date and that no event has occurred and it is continuing which constitutes a Default, or Event of Default, as defined under the Credit Agreement. IN WITNESS WHEREOF, this Certificate has been duly executed this 18th day of November, 1996. /s/ Robert E. Agan --------------------- Robert E. Agan, Chairman of the Board [letterhead of Sayles,Evans, Brayton, Palmer & Tifft] November 18, 1996 Marine Midland Bank One Marine Midland Plaza Binghamton, NY 13902 Ladies and Gentlemen: We have acted as counsel to Hardinge Inc. ("the Borrower") in connection with the execution and delivery of that certain Credit Agreement (the "Credit Agreement") dated as of November 18, 1996 between the Borrower and Marine Midland Bank, as Bank. Except as otherwise defined herein, all terms used herein and defined in the Credit Agreement or any agreement delivered thereunder shall have the meanings assigned to them therein. In connection with the preparation of this Opinion, we have examined originals or counterparts, executed on behalf of the Borrower, of the Facility Documents and the exhibits attached thereto in originals or copies, certified to our satisfaction, of such records, certificates and documents as we deemed relevant and necessary as a basis for renderinq this Opinion. Based upon the foregoing, and having regard to such legal considerations as we deem relevant, we are of the opinion that: 1. The Borrower and, to the best of our knowledge, each of its Subsidiaries, is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all power and authority to carry on its business as presently being conducted and to own its properties, and is duly licensed or qualified and in good standing as a foreign corporation in each other jurisdiction in which its properties are located or in which failure to qualify would materially and adversely affect either the conduct of its business or the enforceability of contractual rights of the Borrower. 2. The execution, delivery and performance by the Borrower of the Facility Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders; (b) contravene its charter or by-laws; (c) contravene any law or, to the best of our knowledge, contractual restriction or provision binding on or affecting the Borrower. 3. No authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Facility Documents. 4. The Credit Agreement is, and the other Facility Documents when executed thereunder will be, legal, valid and binding obligations enforceable in accordance with their respective terms, except that (a) the availability of equitable remedies may be limited by principles of equity, and (b) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of the rights of creditors generally. 5. Each Facility Document to which the Borrower is a party is, or when delivered under the Credit Agreement will be, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of the rights of creditors qenerally. 6. Except as described in Schedule II to the Credit Agreement, there is no pending, or to our knowledge threatened actions, suits or proceedings against or affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition or operations of the Borrower or of any such Subsidiary, or the ability of the Borrower to perform its obligations under the Facility Documents to which it is a party. We do not address herein those matters described in Cushman, Darby & Cushman, LLP letter dated November 15, 1996 attached hereto. Yours very truly, SAYLES, EVANS, BRAYTON, PALMER & TIFFT By /s/ J. Philip Hunter ----------------------------------------- J. Philip Hunter, A Partner. [Letterhead of Cushman Darby & Cushman Intellectual Property Group] November 15, 1996 VIA FACSIMILE J. Philip Hunter, Esq. SAYLES, EVANS, BRAYTON, PALMER & TIFFT One West Church Street Elmira, New York 14901 Re: Loan Disclosure Our Ref: WWT/50377-226058 Dear Phil: This will confirm our telephone conversation of today in which we discussed the above matter and the requirement for disclosure in connection with a loan application and closing. To summarize, our review of the indemnity provision granted Hardinge, Inc. by G.E.-Fanuc is sufficient to cover any significant potential liability for sales that have occurred to the present time by G.E.-Fanuc to Hardinge, Inc. We are also aware of the fact that IMS, a potential plaintiff, has granted at least one patent license to a company situated relative to the market in a position similar to Hardinge, Inc. In view of these facts, we do not believe that there is any significant potential liability which need be disclosed on a loan application at the present time since the potential for litigation over the IMS patents against Hardinge, Inc. does not appear reasonably likely in the foreseeable future. In the event such a claim were made, there is the possibility that any liability in the future can be avoided simply by purchasing the relevant equipment from a licensed source. I understand that Mr. Allan Krul is endeavoring to determine the terms of such licenses that are available. Based on my discussion with Allan and Mr. Soroka in Elmira, it appears that the cost of such a license will add only an insignificant amount to the overall cost of the machines. In view of all of the foregoing, we do not believe tbat an adverse statement need be made on a loan application as to any potential llability arising out of the controversy that G.E.-Fanuc is now engaged in. J. Philip Hunter, Esq. Page 2 SAYLES, EVANS, BRAYTON, PALMER & TIFFT November 15, 1996 Please don't hesitate to call should there be any questions. Very truly yours, /s/ W. Warren Taltavull W. Warren Taltavull WWT/lfb State of New York Department of State SS: I hereby certify, that HARDINGE INC. was formed by consolidation on 12/24/1937, under the name of HARDINGE BROTHERS, INC., fixing the duration as perpetual, and that a diligent examination has been made of the index of corporation papers filed in this Department for a certificate, order, or record of a dissolution, and upon such examination, no such certificate, order or record has been found, and that so far as indicated by the records of this Department, such corporation is a subsisting corporation. I further certify the following: A Certificate of Amendment HARDINGE BROTHERS, INC., changing name to HARDINGE INC., was filed 05/19/1995. Restated Certificate was filed on 05/24/1995. I further certify, that no other certificates have been filed by such corporation. [Seal of New York Department of State] Witness my hand and the official seal of Department of State at the City of Albany, this 15th day of November one thousand nine hundred and ninety six /S/ Special Deputy Secretary of State ------------------------------------- Special Deputy Secretary of State 199611180080 36 PROMISSORY NOTE November 18, 1996 Elmira, New York HARDINGE INC. (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of Marine Midland Bank (the "Bank") at its principal office at One Marine Midland Plaza, Binghamton, New York 13902 or at such other place as required by the Credit Agreement referred to below, the aggregate unpaid principal amount of the Variable Rate Loans made by the Bank to the Borrower, in lawful money of the United States of America or such other Currency as required by said Credit Agreement and in immediately available funds on the dates and in the principal amounts provided in the Credit Agreement. The Borrower also promises to pay interest on the unpaid principal amount of each such Variable Rate Loan, in like money and funds, for the period such balance is outstanding, at said principal office at the rates of interest provided in the Credit Agreement and on the dates and in the manner provided in said Credit Agreement. The date and amount of each Variable Rate Loan made by the Bank to the Borrower under the Credit Agreement referred below, maturity date and each payment of principal thereof shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof; provided, however, the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing under the Credit Agreement or hereunder in respect to the Variable Rate Loans made by the Bank. This is one of the Variable Rate Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of November 18, 1996 between the Borrower and the Bank and evidences the Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Credit Aqreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayment on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. The Borrower waives to the full extent permitted by applicable law the right to trial by jury in any legal proceedings arising out of or relating to this Note. -2- This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, including Section 5-1401 of the New York General Obligations Law (or any similar successor provision thereto) but excluding all other conflict-of-law rules. HARDINGE INC. By /s/ Robert E. Agan ----------------------- Robert E. Agan Chairman of the Board SCHEDULE OF VARIABLE RATE LOANS
Date Amount Currency Interest Duration Amount of Balance Notation of Loan Rate of Payment Outstanding By Interest Period
PROMISSORY NOTE November 18, 1996 Elmira, New York HARDINGE INC. (the "Borrower"), a corporation organized under the laws of New York, for value received, hereby promises to pay to the order of Marine Midland Bank (the "Bank") at its principal office at One Marine Midland Plaza, Binghamton, New York 13902 or at such other place as required by the Credit Agreement referred to below, the aggregate unpaid principal amount of the Eurodollar Loans made by the Bank to the Borrower, in lawful money of the United States of America or such other Currency as required by said Credit Agreement and in immediately available funds on the dates and in the principal amounts provided in the Credit Agreement. The Borrower also promises to pay interest on the unpaid principal amount of each such Eurodollar Loan, in like money and funds, for the period such balance is outstanding, at said principal office at the rates of interest provided in the Credit Agreement and on the dates and in the manner provided in said Credit Agreement. The date and amount of each Eurodollar Loan made by the Bank to the Borrower under the Credit Agreement referred below, maturity date and each payment of principal thereof shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof; provided, however, the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing under the Credit Agreement or hereunder in respect to the Eurodollar Loans made by the Bank. This is one of the Eurodollar Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of November 18, 1996 between the Borrower and the Bank and evidences the Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of certain Events of Default and for prepayment on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. The Borrower waives to the full extent permitted by applicable law the right to trial by jury in any legal proceedings arising out of or relating to this Note. -2- This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, including Section 5-1401 of the New York General Obligations Law (or any similar successor provision thereto) but excluding all other conflict-of-law rules. HARDINGE INC. By /s/Robert E. Agan ----------------------- Robert E. Agan Chairman of the Board SCHEDULE OF EURODOLLAR LOANS
Date Amount Currency Interest Duration Amount of Balance Notation of Loan Rate of Payment Outstanding By Interest Period
EX-10.3 4 EXHIBIT 10.3 CHEMUNG CANAL TRUST COMPANY Master Note $5,000,000.00 Elmira, New York July 23, 1996 For value received, the undersigned, HARDINGE, INC., ("Borrower") promises to pay to the order of Chemung Canal Trust Company ("Lender"), on demand or when due as provided herein, at its office at One Chemung Canal Plaza, Elmira, New York, or at any other office designated by Lender, the principal sum of Five Million and NO/100 ($5,000,000.00) Dollars or so much thereof as shall equal the unpaid principal amount of all advances made by Lender to Borrower, plus interest on the principal amount outstanding from time to time. This note shall be evidence of Indebtedness and shall constitute the terms of payment by the Borrower to the Lender of principal which may be borrowed, repaid, and reborrowed from time to time, it being understood that the Lender may, in its sole discretion, decline in whole or in part to make any advance requested by Borrower. The excess of borrowing over repayments shall be the principal balance due hereunder from time to time and at any time. The Lender may, in its sole discretion, make an advance to the Borrower upon oral request. Each oral request shall be conclusively presumed to have been made by a person authorized by Borrower to do so, and any credit by the Lender of any advance to or for the account of the Borrower shall establish the Borrower's obligation to repay the same in accordance with the terms of this note. The Lender shall incur no liability to any party by reason of making an advance upon an oral request. The Lender will endeavor (but shall be under no obligation) to send to the Borrower written confirmation of the date and amount of such advance, but its failure to do so will not relieve the Borrower of its obligations hereunder, including its obligation to repay the advance when due. Each advance made to Borrower shall be deposited in Borrower's account at Chemung Canal Trust Company, identified below. Advances in excess of $500,000.00 shall accrue interest at a rate equal to the sum of the one month London Interbank Offered Rate (LIBOR) in effect from time to time plus .50% per annum. The LIBOR rate as used herein shall mean the annual rate of interest announced in the Wall Street Journal. All advances will carry the LIBOR rate fixed for one month. All advances under $500,000.00 and any advance paid prior to the one month maturity will have its interest rate revert to the Chase Manhattan Bank Prime Rate. All interest will be calculated for the actual number of days on a 360-day year basis. Interest will be payable monthly and it shall be due on the same day of each month until the principal amount is paid in full; provided, however, that if demand is made for payment of the entire principal balance, all interest due shall be payable at the same time, and if all or any part of the principal balance is paid at any time, all interest accrued and unpaid to the date of the payment will be due with such payment. Lender may, at its sole option, declare the entire balance of principal and accrued interest due and payable at any time, and in that event, the Borrower will immediately pay the entire balance in full. All or any part of the indebtedness evidenced by this note may be paid without penalty at any time. Any payment not received within ten (10) business days after it becomes due may, at the option of the Lender, be subject to a late charge equal to 2.0% thereof or $25, whichever is greater. All payments shall be made in lawful money of the United States in immediately available funds. If the Lender demands and accepts partial payments, such demand or acceptance shall not be construed as a waiver of the right to demand the entire unpaid balance due hereunder at any time in accordance with the terms thereof. Any delay by the Lender in exercising any rights hereunder shall not operate as a waiver of such rights. To secure payment of the indebtedness evidenced by this note from time to time, the Borrower has transferred, pledged, and delivered to the Lender and has granted to the Lender a security interest or mortgage in the following property: not applicable, together with all proceeds thereof and all dividends and other distributions of any kind with respect thereto and all substitutions and exchanges therefor and additions thereto. The provisions of any separate Security Agreement or mortgage executed by the Borrower shall become a part of the terms of this Master Note. If this item is checked ___, notwithstanding any other provision of this note, the Borrower agrees that for a period of___ consecutive days during each of the Borrower's fiscal years, there shall be no principal balance and accrued interest outstanding under this Master Note. Borrower, and endorsers and guarantors hereof, waive any demand, presentment for payment, protest and notice or protest for non-payment of this note. This note shall be governed by the laws of the State of New York. Borrower agrees to pay all reasonable costs and expenses, including attorneys' fees and disbursements incurred by Lender in enforcing this note. HARDINGE, INC. By: /s/ Robert E. Agan ------------------------- By: Hardinge, Inc. Its Chairman of the Board One Hardinge Drive President/CEO Elmira, New York 14902-1507 GUARANTY The Undersigned, jointly and severally if more than one, hereby unconditionally (i) guarantee the full and prompt payment of the indebtedness evidenced by this Master Note when due whether by acceleration or otherwise; (ii) agree to all the terms and conditions of this note; (iii) consent that from time to time without notice to the undersigned and without affecting any liability of the undersigned, any collateral may be exchanged, released, surrendered, sold, applied or otherwise dealt with; (iv) agree that at the election of the holder, and without affecting the liability of the undersigned, any time of payment may be extended or accelerated in whole or in part and that this note may be renewed in whole or in part. Dated: ,19 . --------------------------------- ----------------- --- --------------------------------- EX-10.5 5 EXHIBIT 10.5 Item 10.5 AMENDMENT NUMBER ONE This Amendment Number One (the "Amendment") is to the Credit Agreement among HARDINGE BROTHERS, INC. (now known as Hardinge Inc.) (the "Borrower") the Banks signatory thereto, and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) as Agent, dated as of August 1, 1994 (the "Agreement"). Terms used but not otherwise defined herein shall have the same meaning set forth in the Agreement. 1. The definition of "Margin" as set forth in Section 1.01 of the Agreement shall be modified in its entirety as follows: "Margin" means for each Variable Rate Loan and Eurodollar Loan the lowest applicable margin on the table next following, computed as of each Quarterly Date based upon Borrower's financial statements for the immediately preceding four Quarterly Dates for income statement items and the most recent Quarterly Date for balance sheet items. ================================================================================ (a) Ratio of Funded Debt to Earnings Variable Rate Loans Eurodollar Loans Before Interest & Taxes - -------------------------------------------------------------------------------- Equal to or less than 1.0 0 Basis Points 45 Basis Points - -------------------------------------------------------------------------------- Greater than 1.0 and less than 0 Basis Points 65 Basis Points or equal to 2.0 - -------------------------------------------------------------------------------- Greater than 2.0 and less than 0 Basis Points 85 Basis Points or equal to 3.0 - -------------------------------------------------------------------------------- Greater than 3.0 0 Basis Points 100 Basis Points ================================================================================ 2. Section 7.01(f) of the Agreement shall be modified in its entirety as follows: (f) Liens against customer notes, which are created in connection with the sale, pledge or discounting of such customer notes, provided that immediately after giving effect thereto, the Borrower's aggregate liabilities on account of such Debt secured by such Liens does not exceed $11,000,000.00; and 3. Section 7.02 of the Agreement shall be modified in its entirety as follows: Section 7.02 Lease Obligations. Create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any obligations for the payment of rental for any property under leases or agreements to lease other than Capital Leases which would cause the liabilities of the Borrower and its Subsidiaries, on a consolidated basis, in respect of all such obligations to exceed Five Million and 00/100 Dollars ($5,000,000.00) payable in any period of twelve (12) months. 4. Section 7.05(d) of the Agreement shall be modified in its entirety as follows: (d) The Borrower or any Subsidiary may sell, lease or otherwise dispose of any of its assets (other than as permitted by clauses (a) to (c) inclusive), provided that the -2- aggregate net book value of all assets of the Borrower and its Subsidiaries sold, leased or otherwise disposed of during any fiscal year of the Borrower pursuant to this clause (d) should not exceed 5% of the Consolidated Tangible Net Worth of the Borrower and its Subsidiaries at the end of the preceding fiscal year. All sales, leases or dispositions of assets pursuant to clause (b), (c) or (d) shall be at fair market value. Notwithstanding the foregoing, the aggregate amount of acquisitions (net of amounts paid for with the Borrower's stock) permitted under this section from and after February 29, 1996 shall not be greater than $10,000,000.00 in any consecutive twenty-four (24) month period without the prior written consent of the Required Banks. 5. Section 8.02 of the Agreement shall be modified in its entirety as follows: Section 8.02 Net Worth. The Borrower shall maintain a Consolidated Tangible Net Worth, at al1 times during each fiscal year of not less than an amount set forth below opposite such fiscal year: Fiscal Year Ending December 31 Amount ----------- ------ 1995 $125,000,000 1996 $128,000,000 1997 $131,000,000 1998 $134,000,000 1999 $137,000,000 2000 $140,000,000 2001 $143,000,000 2002 $146,00O,OOO The term "Consolidated Tangible Net Worth" shall mean the total shareholders' equity prior to any cumulative foreign currency translation adjustments, minus intangible assets. 6. Section 8.04 of the Agreement shall be modified in its entirety as follows: Section 8.04 Cash Flow. The Borrower shall maintain a Cash Flow Ratio at all times of not less than 2.0 to l.0. "Cash Flow Ratio" means the ratio at each Quarterly Date equal to (a) the sum of Consolidated Net Income plus depreciation, amortization and other noncash expenses for the previous four consecutive quarters divided by (b) the current portion (i.e. due within one (1) year) of long term Debt. -3- "Consolidated Net Income" means for any period the net income of Borrower and its Consolidated Subsidiaries for such period determined on a consolidated basis without duplication, in accordance with GAAP. 7. Section 9.01(f) of the Agreement shall be modified in its entirety as follows: (f) Any judgment or order for the payment of money in excess of Two Million Five Hundred Thousand Dollars ($2,500,000.00) shall be rendered against the Borrower or any of its Subsidiaries, and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of 10 consecutive days during which a state of enforcement of such judgment or order, by reason of the pending appeal or otherwise, shall not be in effect; or 8. The effective date of this Amendment Number One shall be February 29, 1996. 9. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing any such counterpart. 10. Except as expressly set forth herein, this Amendment shall not, by implication or otherwise, limit, constitute a waiver of, or otherwise affect the rights and remedies of the Agent or the Banks, nor except to the extent expressly set forth herein, alter, modify, amend, or in any way affect the terms, conditions, obligations, covenants or agreements contained in the Agreement, all of which shall otherwise continue in full force and effect in accordance with their respective terms. IN WITNESS WHEREOF, the parties have caused this Amendment Number One to be duly executed. HARDINGE INC. By: /s/ Robert E. Agan ----------------------------- Robert E. Agan, President and Chief Executive Officer -4- AGENT: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By: /s/ Michelle Benedict-Jones ---------------------------------------- Michelle Benedict-Jones, Vice President BANKS: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By: /s/ Michelle Benedict-Jones ---------------------------------------- Michelle Benedict-Jones, Vice President -5- CHEMICAL BANK By: /s/ Christine McLeod -------------------------------- Christine McLeod, Vice President -6- NATWEST BANIC, N.A., (formerly National Westminster Bank, USA) By: /s/ Michael Dwyer ----------------------------- Michael Dwyer, Vice President EX-21 6 EXHIBIT 21 Item 21 SUBSIDIARIES OF THE COMPANY Jurisdiction of Company Incorporation or Organization ------- ------------------------------- Canadian Hardinge Machine Tools, ltd. Canada Hardinge Machine Tools, ltd. United Kingdom Hardinge Brothers GmbH Federal Republic of Germany L. Kellenberger & Co., AG Switzerland Kellenberger Incorporated New York Hardinge Shanghai Company, Ltd. China EX-23 7 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33- 65049) pertarning to the Hardinge Inc. Savings Plan of our report dated January 27, 1997, with respect to the consolidated financial statements of Hardinge Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Syracuse, New York March 7, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 2,636 0 58,011 0 99,906 152,576 117,606 53,716 229,162 36,320 37,156 0 0 65 147,480 229,162 220,295 220,295 145,264 45,058 0 0 2,770 28,092 10,804 17,288 0 0 0 17,288 2.78 2.78
-----END PRIVACY-ENHANCED MESSAGE-----