-----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, WiGvExR6wx9oBlifiHEe9kyy9QGTYKXe0T16psA7ewK93HTGneJDqSNSZLRbZz6F 9ytzqWP/mBGqgzPkNXz9Yg== 0000912057-00-022043.txt : 20000508 0000912057-00-022043.hdr.sgml : 20000508 ACCESSION NUMBER: 0000912057-00-022043 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20000505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRECISION PARTNERS INC CENTRAL INDEX KEY: 0001086478 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 752783285 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438 FILM NUMBER: 620802 BUSINESS ADDRESS: STREET 1: 5605 N MACARTHUR BLVD STREET 2: SUITE 760 CITY: IRVING STATE: TX ZIP: 73038 BUSINESS PHONE: 9726801550 MAIL ADDRESS: STREET 1: 5605 N MACARTHUR BLVD STREET 2: SUITE 760 CITY: IRVING STATE: TX ZIP: 73038 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALAXY INDUSTRIES INC CENTRAL INDEX KEY: 0000039744 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438-01 FILM NUMBER: 620803 BUSINESS ADDRESS: STREET 1: 41150 JOY ROAD CITY: PLYMOUTH STATE: MI ZIP: 48170 BUSINESS PHONE: 7344595600 MAIL ADDRESS: STREET 1: PRECISION PARTNERS INC STREET 2: 5605 N MACARTHUR BLVD STE 760 CITY: IRVING STATE: TX ZIP: 75038 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GILLETTE MACHINE & TOOL CO INC CENTRAL INDEX KEY: 0001109225 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 160786135 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438-02 FILM NUMBER: 620804 BUSINESS ADDRESS: STREET 1: 955 MILSTEAD WAY CITY: ROCHESTER STATE: NY ZIP: 14624 BUSINESS PHONE: 7164360058 MAIL ADDRESS: STREET 1: 955 MILSTEAD WAY CITY: ROCHESTER STATE: NY ZIP: 14624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERTIFIED FABRICATORS INC CENTRAL INDEX KEY: 0001109231 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438-03 FILM NUMBER: 620805 BUSINESS ADDRESS: STREET 1: 6351 BURNHAM AVENUE CITY: BUENA PARK STATE: CA ZIP: 90621 BUSINESS PHONE: 7146701491 MAIL ADDRESS: STREET 1: 6351 BURNHAM AVENUE CITY: BUENA PARK STATE: CA ZIP: 90621 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MID STATE MACHINE PRODUCTS INC CENTRAL INDEX KEY: 0001109232 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438-04 FILM NUMBER: 620806 BUSINESS ADDRESS: STREET 1: 150 VERRI DRIVE CITY: WINSLOW STATE: ME ZIP: 04901 BUSINESS PHONE: 2078736136 MAIL ADDRESS: STREET 1: 150 VERRI DRIVE CITY: WINSLOW STATE: ME ZIP: 04901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONWIDE PRECISION PRODUCTS CORP CENTRAL INDEX KEY: 0001109233 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438-05 FILM NUMBER: 620807 BUSINESS ADDRESS: STREET 1: 200 TECH PARK DRIVE CITY: ROCHESTER STATE: NY ZIP: 14623 BUSINESS PHONE: 7162727100 MAIL ADDRESS: STREET 1: 200 TECH PARK DRIVE CITY: ROCHESTER STATE: NY ZIP: 14623 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL AUTOMATION INC/IL CENTRAL INDEX KEY: 0001109234 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752808932 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-33438-06 FILM NUMBER: 620808 BUSINESS ADDRESS: STREET 1: 3300 OAKTON CITY: SKOKIE STATE: IL ZIP: 60076 BUSINESS PHONE: 8476764004 MAIL ADDRESS: STREET 1: 3300 OAKTON CITY: SKOKIE STATE: IL ZIP: 60076 S-4/A 1 FORM S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 2000 REGISTRATION NO. 333-33438 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PRECISION PARTNERS, INC. (Exact name of registrant as specified in its charter) DELAWARE 6719 22-3639336 (State or other jurisdiction of (Primary Standard (I.R.S. Employer incorporation or organization) Industrial Classification Identification No.) Code Number)
------------------------ 5605 N. MACARTHUR BOULEVARD SUITE 760 IRVING, TEXAS 75038 (972) 580-1550 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ SEE TABLE OF ADDITIONAL REGISTRANTS ------------------------ RONALD M. MILLER CHIEF FINANCIAL OFFICER PRECISION PARTNERS, INC. 5605 N. MACARTHUR BOULEVARD SUITE 760 IRVING, TEXAS 75038 (972) 580-1550 (Name, address, including zip code, and telephone number, including area code of agent for service) ------------------------------ Copies to: CHRISTOPHER M. KELLY, ESQ. JONES, DAY, REAVIS & POGUE NORTH POINT 901 LAKESIDE AVENUE CLEVELAND, OHIO 44114-1190 (216) 586-3939 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / ------------------------------ The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF ADDITIONAL REGISTRANTS The address of the principal executive offices of each of the additional registrants listed below, and the name and address of the agent for service, is the same as is set forth for Precision Partners, Inc. on the facing page of this registration statement.
PRIMARY STANDARD JURISDICTION OF INDUSTRIAL I.R.S. EMPLOYER NAME INCORPORATION CLASSIFICATION NUMBER IDENTIFICATION NUMBER - ---- --------------- --------------------- --------------------- Mid State Machine Products................. Maine 3545 01-0280525 Galaxy Industries Corporation.............. Michigan 3545 38-1881019 Certified Fabricators, Inc................. California 3545 95-3316654 General Automation, Inc.................... Illinois 3545 75-2808932 Nationwide Precision Products Corp......... New York 3545 22-3639335 Gillette Machine & Tool Co., Inc........... New York 3545 16-0786135
PROSPECTUS PRECISION PARTNERS, INC. OFFER TO EXCHANGE OUR 12% SENIOR SUBORDINATED NOTES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR OUR OUTSTANDING 12% SENIOR SUBORDINATED NOTES DUE 2009 THESE NOTES ARE GUARANTEED ON A SENIOR SUBORDINATED BASIS BY: MID STATE MACHINE PRODUCTS GALAXY INDUSTRIES CORPORATION CERTIFIED FABRICATORS, INC. GENERAL AUTOMATION, INC. NATIONWIDE PRECISION PRODUCTS CORP. GILLETTE MACHINE & TOOL CO., INC. --------------------- THE EXCHANGE OFFER - - Precision Partners will exchange all outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradeable. - - You may withdraw tenders of outstanding notes at any time prior to the expiration of the exchange offer. - - The exchange offer expires at 5:00 p.m., New York City time, on June 6, 2000, unless extended. We do not currently intend to extend the expiration date. RESALES OF THE EXCHANGE NOTES - - We do not intend to list the exchange notes on any securities exchange or to seek approval through any automated quotation system, and no active public market for the exchange notes is anticipated. ------------------------ You should carefully consider the risk factors beginning on page 9 of this prospectus before deciding to participate in the exchange offer. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this prospectus is May 8, 2000 TABLE OF CONTENTS Forward-Looking Statements........... i Where You Can Find More Information.. ii Summary.............................. 1 Risk Factors......................... 9 The Exchange Offer................... 19 Use of Proceeds...................... 27 Capitalization....................... 28 Pro Forma Financial Information...... 29 Selected Historical Financial Information........................ 31 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 33 Business............................. 39 Management........................... 49 Security Ownership................... 52 Related Party Transactions........... 53 Description of Credit Facilities..... 54 Description of Exchange Notes........ 56 Book-Entry; Delivery And Form........ 94 Registration Rights For Outstanding Notes.............................. 97 Plan of Distribution................. 99 Certain U.S. Federal Income Tax Considerations..................... 101 Legal Matters........................ 103 Experts.............................. 103 Index to Financial Statements........ F-1
------------------------ FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, including those described under "Risk Factors," many of which are beyond our control. Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "estimate" and similar expressions, and include, among others, statements concerning: - our strategy; - our liquidity and capital expenditures; - our debt levels and ability to obtain financing and service debt; - competitive pressures and trends in the precision machining industry; - cyclicality and economic condition of the industries we currently serve; - prevailing levels of interest rates; - legal proceedings and regulatory matters; and - general economic conditions. Actual results could differ materially from those contemplated by the forward-looking statements as a result of factors such as those described in "Risk Factors." In light of these risks and uncertainties, we cannot assure you that the results and events contemplated by the forward-looking statements contained in this prospectus will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements. i ------------------------ WHERE YOU CAN FIND MORE INFORMATION Precision Partners and the subsidiary guarantors have filed a registration statement on Form S-4 to register with the SEC the exchange notes to be issued in exchange for the outstanding notes. This prospectus is part of that registration statement. As allowed by the SEC's rules, this prospectus does not contain all of the information you can find in the registration statement or the exhibits to the registration statement. For further information about us and about the exchange offer and the exchange notes, you should consult the registration statement, including the exhibits and schedules. A copy of the registration statement and any exhibits may be obtained from the SEC or by writing or telephoning us at the following address and telephone number: Precision Partners, Inc. 5605 N. MacArthur Boulevard Suite 760 Irving, Texas 75038 (972) 580-1550 Attention: Chief Financial Officer Upon effectiveness of the registration statement, we will file reports, proxy statements and other documents with the SEC in accordance with the requirements of the Securities Exchange Act of 1934. You may read and copy the registration statement and, when filed, such reports, proxy statements and other documents at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, located at http://www.sec.gov., that contains reports, proxy statements and other documents regarding registrants, including us, that file electronically with the SEC. In addition, we are required by the terms of the indenture to furnish the trustee and the holders of exchange and outstanding notes with quarterly and annual reports and other information within 15 days of filing the reports or other information with the SEC. You may also find further information about us and the subsidiary guarantors at our website http://www.precisionpartnersinc.com. The information contained on our website is not a part of this prospectus. ------------------------ This exchange offer is not being made to, nor will tenders of outstanding notes be accepted for exchange from holders of outstanding notes in any jurisdiction in which this exchange offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of that jurisdiction. ii SUMMARY The following summary details the most important features of this offering. THE COMPANY GENERAL Precision Partners is a leading contract mechanical manufacturing services supplier of complex precision metal parts, tooling and assemblies for original equipment manufacturers. Our flexible manufacturing facilities and operating processes enable us to service customers across a wide range of industries and aggressively pursue new customers in industries where we see the potential for strong growth. Our customers include industry leaders such as General Electric, New Venture Gear (a joint venture of General Motors and DaimlerChrysler), Xerox, LucasVarity (Kelsey Hayes), Boeing, Caterpillar and Dana. We have earned "Preferred" or "Qualified" supplier status with most of our customers and are predominantly the sole-source supplier to our customers of the parts we manufacture. Our pro forma revenues and EBITDA for the year ended December 31, 1999 were $149.8 million and $26.1 million, respectively, representing a 17.5% EBITDA margin. Our broad manufacturing capabilities and highly engineered processes allow us to meet the critical specifications of our customers. We manufacture parts, ranging in size from approximately 1 ounce to over 100,000 pounds, to extremely close tolerances. We are also able to maintain tight tolerances across flat sheets and surfaces with multiple contours. We work with traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel, invar and hastelloy. In addition, we provide our customers with design assistance, process and product engineering support and quality testing. Our manufacturing expertise includes precision machining such as milling, turning, boring, drilling, broaching and grinding, as well as value-added services such as prototyping, assembly, forming, welding, heat treating and plating. The industries we serve and the related precision parts, assemblies and tooling we machine and manufacture include: - Power Generation Industry - specialty alloy turbine wheels and spacers, shrouds and nozzles; - Automotive Industry - piston valves used primarily for automatic braking systems in light trucks and sport utility vehicles and machined engine blocks; - Business Machines Industry - bases and internal components for high-end scanners, digital imaging machines and copiers; - Space and Satellite Industries - adapter rings, thrust rings, casting chambers and handling and transport aids; - Aerospace Industry, Commercial and Military - precision tooling including bond jigs, assembly jigs and mill fixtures; - Agriculture and Construction Equipment Industries - high tolerance bearing caps, transmission housings and diesel and gas pump housings; and - Transportation Industry - class eight heavy truck axles, engine blocks and related parts. INDUSTRY The U.S. precision custom manufacturing industry is highly fragmented and, excluding precision manufacturing operations owned directly by original equipment manufacturers, is estimated to be comprised of approximately 7,500 companies representing, over the last several years, annual revenues 1 in excess of $20 billion. Within this market, precision machine shops and specialty tool manufacturers represent in excess of $13 billion of these revenues. As a result of high fragmentation and a large number of captive original equipment manufacturer operations, we believe there has been and will continue to be significant consolidation opportunities among industry participants. We believe that there are two main trends in the U.S. precision machining industry: - an increased amount of outsourced manufacturing by original equipment manufacturers; and - increased reliance by original equipment manufacturers on a few "Preferred" or "Qualified" suppliers that can provide a full line of high quality manufacturing and sub-assembly services, as well as process engineering and design assistance. We intend to continue to capitalize on these industry trends by providing our customers with a broad array of precision machining capabilities and by leveraging our competitive strengths. See "Business--Industry." COMPETITIVE STRENGTHS We believe that we have the following competitive strengths: - Leading supplier of high quality, difficult-to-produce parts; - Broad manufacturing capabilities serving diverse end markets; - Strong customer relationships; - Modern, high quality operations; and - An experienced management team. BUSINESS STRATEGY Our business strategies are as follows: - Capitalize on the industry trends among leading original equipment manufacturers to increase manufacturing outsourcing and concentrate on fewer, more reliable suppliers; - Pursue cross-selling opportunities and broaden our customer base across the diverse manufacturing capabilities and complementary customer bases of our operating subsidiaries; - Implement the best operating practices of each of our operations and utilize production resources to maximize manufacturing efficiency; and - Pursue strategic acquisitions. ------------------------ The principal executive offices of Precision Partners and the subsidiary guarantors are located at 5605 N. MacArthur Boulevard, Suite 760, Irving, Texas 75038 and our telephone number is (972) 580-1550. 2 THE EXCHANGE OFFER The Exchange Offer................... We are offering to exchange up to $100,000,000 aggregate principal amount of our registered 12% Senior Subordinated Notes due 2009 for an equal principal amount of our outstanding 12% Senior Subordinated Notes due 2009. The terms of the exchange notes are identical in all material respects to those of the outstanding notes, except for transfer restrictions and registration rights relating to the outstanding notes. Purpose of the Exchange Offer.............................. The exchange notes are being offered to satisfy our obligations under a registration rights agreement. Expiration Date; Withdrawal of Tender............................. The exchange offer will expire at 5:00 p.m., New York City time, on June 6, 2000, or on a later date and time to which we extend it. The tender of outstanding notes in the exchange offer may be withdrawn at any time prior to the expiration date. Any outstanding notes not accepted for exchange for any reason will be returned without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer. Procedures for Tendering Outstanding Notes.............................. Each holder of outstanding notes wishing to accept the exchange offer must complete, sign and date the letter of transmittal, in accordance with its instructions, and mail or otherwise deliver it, together with the outstanding notes and any other required documentation to the exchange agent at the address listed in the letter of transmittal. Outstanding notes may be physically delivered, but physical delivery is not required if a confirmation of a book-entry transfer of the outstanding notes to the exchange agent's account at Depository Trust Company, or DTC, is delivered in a timely fashion. See "The Exchange Offer--Procedures for Tendering Outstanding Notes." Conditions to the Exchange Offer..... The exchange offer is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered for exchange. The exchange offer is subject to certain customary conditions, which may be waived by us. We currently expect that each of the conditions will be satisfied and that no waivers will be necessary. See "The Exchange Offer--Conditions to the Exchange Offer." Exchange Agent....................... The Bank of New York. U.S. Federal Income Tax Considerations..................... Your exchange of an outstanding note for an exchange note will not constitute a taxable exchange. The exchange will not result in taxable income, gain or loss being recognized by you or by us. Immediately after the exchange, you will have the same adjusted basis and holding period in each exchange note received as you had immediately prior to the exchange in the corresponding outstanding note surrendered. See "Income Tax Considerations."
3 THE EXCHANGE NOTES The terms of the exchange notes are identical in all material respects to those of the outstanding notes, except for the transfer restrictions and registration rights relating to the oustanding notes that do not apply to the exchange notes. Issuer............................... Precision Partners, Inc. Securities Offered................... $100,000,000 aggregate principal amount of 12% Senior Subordinated Notes due 2009. The exchange notes will each be represented by one or more global certificates registered in the name of DTC. Transfer of exchange notes will be limited to transfers of book-entry interests within DTC and its participants. Maturity............................. March 15, 2009. Interest............................. The exchange notes will accrue interest from the last interest payment date. Interest on the notes will be payable semi-annually in arrears on each March 15 and September 15. Sinking Fund......................... None. Optional Redemption.................. We can redeem the exchange notes at any time on or after March 15, 2004, in whole or in part, at the redemption prices described under "Description of Exchange Notes--Optional Redemption," plus accrued and unpaid interest. Optional Redemption after Certain Equity Offerings................... At any time and from time to time on or prior to March 15, 2002, we can redeem up to 35% of the exchange notes and the outstanding notes with the net cash proceeds of certain equity offerings, as long as: - we pay 112% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest; - we redeem the notes within 180 days of the completion of the equity offering; and - at least 65% of exchange notes and the outstanding notes remains outstanding afterwards. Change of Control.................... If we undergo a change of control, you will have the right, as a holder of exchange notes, to require us to repurchase all of your exchange notes at a repurchase price equal to 101% of their face amount, plus accrued and unpaid interest. We might not be able to pay you the required price for exchange notes you request us to purchase at the time of a change of control because we may not have enough funds at that time or the terms of our other indebtedness may prevent us from doing so.
4 Ranking.............................. The exchange notes will be unsecured and will be subordinated in right of payment to all of our existing and future senior debt, including debt under our credit facilities. Because the exchange notes are subordinated, in the event of our bankruptcy, liquidation or dissolution, holders of notes will not be entitled to receive any payment until all holders of our senior debt have been paid in full. As of December 31, 1999, we had approximately $134.5 million of senior debt outstanding (excluding the $13.8 million of availability under our new revolving credit facility). Guarantees........................... All of our existing and certain of our future subsidiaries will fully and unconditionally guarantee the exchange notes on a joint and several basis. The subsidiary guarantees will each be unsecured and will each be subordinated in right of payment to each subsidiary guarantor's existing and future senior debt. Key Indenture Covenants.............. The indenture governing the exchange notes will contain covenants that, among other things, limit our and some of our subsidiaries' ability to: - incur additional debt; - pay dividends on or redeem or repurchase capital stock; - issue or allow any person to own preferred stock of subsidiaries; - incur or permit to exist indebtedness senior to the notes, but subordinated to any of our other indebtedness; - in the case of certain subsidiaries, guarantee debt without also guaranteeing the notes; - in the case of certain subsidiaries, create or permit to exist dividend or payment restrictions with respect to us; - make certain investments; - incur or permit to exist certain liens; - enter into transactions with affiliates; - merge, consolidate or amalgamate with another company; and - transfer or sell assets. These covenants are subject to a number of important exceptions and limitations, which are described under the heading "Description of Exchange Notes." All of our subsidiaries on the issue date will be restricted for purposes of the indenture.
RISK FACTORS An investment in the notes involves a high degree of risk. We urge you to review carefully the Risk Factors beginning on page 9 for a discussion of factors you should consider before making an investment in the exchange notes. 5 THE ACQUISITIONS On September 30, 1998 our indirect parent, Precision Partners L.L.C., acquired all of the outstanding capital stock of Mid Sate Machine Products and Galaxy Industries Corporation for an aggregate purchase price of approximately $54.5 million. On March 19, 1999, we underwent a corporate reorganization under which we acquired all of the issued and outstanding capital stock of Mid State and Galaxy. Also on March 19, 1999, we acquired all of the issued and outstanding capital stock of Certified Fabricators, Inc. and its sister company, Calbrit Design, Inc. and purchased substantially all of the assets and assumed some liabilities of General Automation, Inc. and Nationwide Precision Products Corp. for an aggregate purchase price of approximately $100.7 million, excluding fees and expenses and an additional conditional payment which may be payable by our parent, Precision Partners Holding Company. In July 1999, we merged Calbrit into Certified. On September 1, 1999, we acquired all of the issued and outstanding stock of Gillette Machine & Tool Co., Inc. for $11.4 million. The purchase price for one of the companies acquired in March included a $4.0 million escrow to be paid out upon the company meeting specified EBITDA targets through April 30, 1999. Since these targets were not met, the $4.0 million was returned to us, effectively reducing the purchase price by $4.0 million. In connection with the March acquisitions, we entered into new credit facilities. See "Description of Credit Facilities." 6 SUMMARY FINANCIAL INFORMATION Prior to the acquisitions of Mid State and Galaxy in September 1998, Precision Partners, L.L.C. had substantially no operations and, prior to the completion of the reorganization and acquisitions of Certified, Calbrit, Nationwide and General Automation in March 1999, we had substantially no operations. As a result, we believe historical financial information for our company prior to March 1999 and for our predecessor for accounting purposes, Mid State, is of limited relevance in understanding what our actual results of operations, financial position or cash flows would have been for historical periods had we in fact been organized and owned all of our current subsidiaries for such periods. For this reason, the following table sets forth summary historical financial information and summary unaudited pro forma financial information for our company only as of and for the year ended December 31, 1999. In addition, for financial statement presentation purposes, the reorganization is accounted for as if it occurred in September 1998 and we are treated as having commenced operations at that time in a manner similar to a pooling of interests. See Note 1 to our consolidated financial statements. The summary unaudited pro forma financial information gives effect to the following transactions as if each had occurred on January 1, 1999: - the acquisitions of Certified, Calbrit, Nationwide, General Automation and Gillette; - the reorganization under which we received the capital stock of Mid State and Galaxy as a capital contribution from Precision Partners, L.L.C.; and - the new credit facilities we entered into in March 1999 and the related prepayment of an existing term loan. The summary unaudited pro forma financial information is for illustrative purposes only and does not purport to be indicative of what the actual results of operations and financial position of our company would have been as of and for the periods presented, nor does it purport to represent our future financial position or results of operations. In addition, the fair value of the net assets at the actual closing date of the acquisitions could be significantly different than the fair value of the net assets used for purposes of the unaudited pro forma financial information. The following summary unaudited pro forma financial information should be read in conjunction with "Unaudited Pro Forma Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical audited financial statements of our company, Precision Partners, L.L.C., Mid State, Certified, Nationwide, General Automation and Gillette including the notes thereto, included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, 1999 --------------------------------- HISTORICAL PRO FORMA ------------- ----------------- (IN THOUSANDS, EXCEPT RATIO DATA) INCOME STATEMENT DATA: Net sales................................................... $123,188 $149,749 Gross profit................................................ 29,754 36,240 Operating income............................................ 4,914 10,724 Interest expense(1)......................................... 12,567 15,671 Net loss.................................................... (5,515) (3,738) OTHER FINANCIAL DATA: EBITDA(2)(3)................................................ 16,820 26,144 EBITDA margin(4)............................................ 13.7% 17.5% Depreciation and amortization............................... 11,906 15,420 Capital expenditures........................................ 10,260 11,677 Ratio of earnings to fixed charges(5)....................... -- -- Ratio of EBITDA to interest expense(1)...................... 1.3x 1.7x Ratio of net debt to EBITDA(3)(6)........................... 8.0x 5.1x
7
AS OF DECEMBER 31, 1999 HISTORICAL ----------------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 313 Working capital............................................. 3,844 Total assets................................................ 206,391 Total debt.................................................. 134,548 Stockholders' equity........................................ 36,132
- ------------------------ (1) Interest expense is shown net of historical and pro forma interest income of $245 and $298, respectively. Both historical and pro forma interest expense include $1,051 of amortization of deferred financing fees. (2) Historical EBITDA is defined as operating income plus depreciation and amortization of $11,906. Pro forma EBITDA is defined as pro forma operating income plus depreciation and amortization of $15,420. EBITDA is not a measure of performance under generally accepted accounting principles. While EBITDA should not be used in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity, management believes that it may be used by certain investors as supplemental information to evaluate a company's financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the definition of EBITDA used in this prospectus may not be comparable to the definition of EBITDA used by other companies. (3) EBITDA includes a jet aircraft lease expense of $186. This lease was terminated at closing in connection with our acquisition of General Automation pursuant to the terms of the purchase agreement. Excluding the effects of this lease for the entire period, EBITDA would have been $17,006 and $26,330, respectively, for historical 1999 and pro forma 1999 and the ratio of net debt to EBITDA would have been 7.9x and 5.1x, respectively, for historical 1999 and pro forma 1999. (4) EBITDA margin is calculated by dividing EBITDA for the period by net sales for the period, expressed as a percentage. (5) Earnings is defined as pre-tax income plus fixed charges, excluding capitalized interest and preferred stock dividend requirements. Fixed charges are defined as the sum of all interest expense (whether capitalized or expensed), the amortization of debt issue costs and discount or premium relating to any indebtedness (whether expensed or capitalized), the interest portion of rental expense, and preferred stock dividend requirements for majority-owned subsidiaries. For historical and pro forma 1999, earnings were insufficient to cover fixed charges by $7,645 and $4,811, respectively. (6) Net debt is defined as total debt less cash and cash equivalents. (FOOTNOTES ON NEXT PAGE) 8 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH BELOW AS WELL AS OTHER INFORMATION CONTAINED IN THIS PROSPECTUS PRIOR TO ACCEPTING THE EXCHANGE OFFER. RISK FACTORS ASSOCIATED WITH THE NOTES IF YOU DO NOT EXCHANGE YOUR OUTSTANDING NOTES FOR EXCHANGE NOTES IN THE EXCHANGE OFFER, YOUR EXCHANGE NOTES WILL CONTINUE TO BE SUBJECT TO SIGNIFICANT RESTRICTIONS ON TRANSFER, AND MAY BE SUBJECT TO A LIMITED TRADING MARKET AND A SIGNIFICANT DIMINUTION IN VALUE. If you do not exchange your outstanding notes for the exchange notes in the exchange offer, you will continue to be subject to the restrictions on transfer described in the legend on your outstanding notes. In general, you may only offer or sell the outstanding notes if they are registered under the Securities Act and applicable state securities laws, or offered or sold pursuant to an exemption from such requirements. We do not intend to register the outstanding notes under the Securities Act. To the extent other outstanding notes are tendered and accepted in the exchange offer, the trading market, if any, for the remaining outstanding notes would be adversely affected and there could be a significant diminution in the value of the outstanding notes as compared to the value of the exchange notes. See "The Exchange Offer--Consequences of the Failure to Exchange." AN ACTIVE PUBLIC MARKET MAY NOT DEVELOP FOR THE EXCHANGE NOTES, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE AND LIQUIDITY OF THE EXCHANGE NOTES. The exchange notes constitute securities for which there is no established trading market. We do not intend to list the exchange notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the exchange notes is currently anticipated. If a market for the exchange notes should develop, the exchange notes could trade at a discount from their principal amount and they may be difficult to sell. Future trading prices of the exchange notes will depend on many factors, including prevailing interest rates, our operating results and the market for similar securities. As a result, we can not give you any assurance that you will be able to resell any exchange notes or, if you are able to resell the price at which you will be able to do so. IF YOU PARTICIPATE IN THE EXCHANGE OFFER FOR THE PURPOSE OF PARTICIPATING IN A DISTRIBUTION OF THE EXCHANGE NOTES YOU COULD BE DEEMED AN UNDERWRITER UNDER THE SECURITIES ACT. If you exchange your outstanding notes in the exchange offer for the purpose of participating in a distribution of the exchange notes, you may be deemed an underwriter under the Securities Act. If so, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes. OUR INABILITY TO GENERATE SUFFICIENT CASH COULD RESULT IN A FAILURE TO MAKE REQUIRED REPURCHASES OF TENDERED NOTES FOR A CHANGE OF CONTROL. Upon a change of control, we will be required to make an offer to purchase all outstanding notes and exchange notes. We would be required to purchase all of the notes at 101% of their principal amount plus accrued and unpaid interest up to, but not including, the date of repurchase. The source of funds for any such purchase would be our available cash or cash generated from other sources. However, we can not assure you that we will have or will be able to borrow sufficient funds at the time of any change of control to make any required repurchases of tendered notes. We also can not assure you that restrictions in our credit facilities or other senior debt we may incur in the future would permit us to make such required repurchases. See "Description of Exchange Notes--Change of Control." 9 RISK FACTORS ASSOCIATED WITH OUR INDEBTEDNESS OUR SUBSTANTIAL DEBT AND THE SIGNIFICANT DEMANDS ON OUR CASH RESOURCES COULD AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE EXCHANGE NOTES AND ACHIEVE OUR BUSINESS PLAN. SUBSTANTIAL DEBT. We have incurred a substantial amount of indebtedness which requires significant interest payments. As of December 31, 1999, we had total consolidated debt of $134.5 million and net interest expense of approximately $12.6 million for the year then ended. Subject to the limits contained in the indenture governing the notes and the new credit facilities, we and our subsidiaries may incur additional indebtedness from time to time to finance capital expenditures, investments or acquisitions or for other general corporate purposes. DEMANDS ON CASH RESOURCES. We have substantial demands on our cash resources in addition to operating expenses and interest expense on the notes, including, among others, interest and amortization payments under our credit facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." EFFECTS ON YOUR INVESTMENTS AND OUR BUSINESS STRATEGY. Our level of indebtedness and these significant demands on our cash resources could have important effects on your investment in the notes. For example they could: - make it more difficult for us to satisfy our obligations with respect to the notes and our secured indebtedness; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the amount of our availability of our cash flow available for working capital, capital expenditures, acquisitions and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our industry (including the pursuit of our growth strategy); - place us at a competitive disadvantage compared to our competitors that have fewer debts and significantly greater operating and financing flexibility than we do; - limit, along with the financial and other restrictive covenants applicable to our indebtedness, among other things, our ability to borrow additional funds even when necessary to maintain adequate liquidity; - increase our vulnerability to general adverse economic and industry conditions; and - result in an event of default upon a failure to comply with these covenants which, if not cured or waived, could have a material adverse effect on our business, financial condition or results of operations. Our ability to pay interest on the notes, to repay portions of our long-term indebtedness including under the notes and the credit facilities, and to satisfy our other debt obligations will depend upon our future operating performance and the availability of refinancing indebtedness, which will be affected by the instruments governing our indebtedness, including the indenture and the credit facilities, prevailing economic conditions and financial, business and other factors, certain of which are beyond our control. If we are unable to service our indebtedness and fund our business, we will be forced to adopt an alternative strategy that may include: - reducing or delaying capital expenditures; - seeking additional debt financing or equity capital; - selling assets; or - restructuring or refinancing our indebtedness. 10 We cannot assure you that any such strategy could be effected on terms satisfactory to us or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." EFFECT OF ADDITIONAL DEBT. Subject to the limits of our debt instruments, we may incur additional indebtedness from time to time to finance capital expenditures, investments or acquisitions for other purposes, including the borrowing of amounts repaid under our credit facilities. This could further exacerbate the risks described below. THE INDENTURE AND OUR CREDIT FACILITIES RESTRICT OUR ABILITY AND THE ABILITY OF SOME OF OUR SUBSIDIARIES TO ENGAGE IN SOME BUSINESS TRANSACTIONS. INDENTURE. The indenture restricts our ability and the ability of some of our subsidiaries to, among other things: - incur additional debt; - pay dividends on or redeem or repurchase capital stock; - issue or allow any person to own preferred stock of subsidiaries; - incur or permit to exist indebtedness senior to the notes, but subordinated to any of our other indebtedness; - in the case of non-guarantor subsidiaries, guarantee debt without also guaranteeing the notes; - in the case of restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to us; - make investments; - incur or permit to exist liens; - enter into transactions with affiliates; - merge, consolidate or amalgamate with another company; and - transfer or sell assets. CREDIT FACILITIES. The credit facilities also contain similar covenants, as well as a number of financial covenants requiring us to meet financial ratios and financial condition tests. Our ability to borrow under our revolving credit facility depends upon satisfaction of these covenants and our borrowing base requirements. Our ability to meet these covenants and requirements can be affected by events beyond our control. There can be no assurance that we will meet these requirements. EFFECT OF BREACH. Our failure to comply with the obligations and covenants in the credit facilities or the indenture could result in an event of default under the credit facilities or the indenture that, if not cured or waived, could terminate our ability to borrow under the revolving credit facility, could permit acceleration of the relevant debt and acceleration of debt under other instruments and, in the case of the credit facilities, could permit foreclosure on any collateral granted. THE EXCHANGE NOTES AND SUBSIDIARY GUARANTEES ARE JUNIOR IN RIGHT OF PAYMENT TO ALL OF OUR AND OUR SUBSIDIARY GUARANTOR'S INDEBTEDNESS, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT. The payment of principal, premium, if any, interest and additional interest, if any, on the exchange notes and the subsidiary guarantees will, to the extent set forth in the indenture, be subordinated in right of payment to all of our and the subsidiary guarantors' indebtedness, including under the credit 11 facilities, except any future indebtedness that expressly provides that it ranks equal with, or junior in right of payment to, the exchange notes and the subsidiary guarantees. SUBSTANTIALLY ALL OF OUR ASSETS AND THOSE OF OUR SUBSIDIARIES SECURE OTHER LONG TERM DEBT WHICH COULD REQUIRE US TO SATISFY THOSE OBLIGATIONS BEFORE THE EXCHANGE NOTES IN THE EVENT OF BANKRUPTCY, LIQUIDATION OR REORGANIZATION. The credit facilities are secured by, among other things, substantially all of our assets and those of our subsidiaries. Consequently, upon any distribution to our creditors or the creditors of a subsidiary guarantor in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or such subsidiary guarantor or our or its property, the holders of our and its senior debt, including the lenders under our credit facilities, will be entitled to be paid in full in cash before any payment may be made with respect to the exchange notes. Because we and such subsidiary guarantor may not have sufficient funds or assets to pay all of our or its creditors, holders of exchange notes may receive less, ratably, than the holders of senior debt. In addition, the payment of principal, premium, if any, interest and additional interest, if any, on the exchange notes will be prohibited in the event of a payment default on any of our or a subsidiary guarantor's senior debt and may be blocked, at the option of the holders of such senior debt, for up to 179 of 180 consecutive days in the event of specified non-payment defaults. As of March 21, 2000, we had approximately $144.6 million of consolidated senior debt outstanding, excluding $3.7 million of availability under our revolving credit facility. In addition, subject to the terms of the indenture and the credit facilities, we will be permitted to borrow substantial additional indebtedness, including senior debt, in the future. RISK FACTORS ASSOCIATED WITH PRECISION PARTNERS, INC. WE ARE STRUCTURED AS A HOLDING COMPANY AND WE DEPEND ON OUR SUBSIDIARIES IN ORDER TO SERVICE OUR DEBT. We are now, and continue to be, structured as a holding company. Our only significant asset is the capital stock or other equity interests of our operating subsidiaries. As a holding company, we conduct all of our business through our subsidiaries. Consequently, our cash flow and ability to service our debt obligations, including the exchange notes, are dependent upon the earnings of our operating subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by these subsidiaries to us. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend upon their operating results and will be subject to applicable laws and contractual restrictions contained in the instruments governing their indebtedness, including our credit facilities and the indenture. Although the indenture will limit the ability of these subsidiaries to enter into consensual restrictions on their ability to pay dividends and make other payments to us, these limitations will be subject to a number of significant qualifications. See "Description of Exchange Notes--Certain Covenants--Limitations on Dividend and Other Payment Restrictions Affecting Subsidiaries." There can be no assurance that the earnings of our operating subsidiaries will be adequate for us to service our debt obligations, including the exchange notes. BECAUSE OF OUR LIMITED OPERATING HISTORY, AND THE NUMBER OF ACQUISITIONS WE HAVE MADE, WE BELIEVE THAT HISTORICAL INFORMATION REGARDING OUR COMPANY PRIOR TO MARCH 1999 AND FOR OUR PREDECESSOR FOR ACCOUNTING PURPOSES, MID STATE, IS OF LITTLE RELEVANCE IN UNDERSTANDING OUR BUSINESS AS CURRENTLY CONDUCTED. Precision Partners, L.L.C. was incorporated in September 1998 and we were incorporated in February 1999 for the sole purpose of completing acquisitions. Until the acquisitions of Mid State and 12 Galaxy in September 1998, Precision Partners, L.L.C. had substantially no operations and, until the consummation of the reorganization and the acquisitions of Certified, Calbrit, Nationwide and General Automation in March 1999, we had substantially no operations. As a result, we believe the historical financial information presented in this prospectus, other than for 1999, is of limited relevance in understanding what our results of operations, financial position or cash flows would have been for the historical periods presented had we in fact been organized and owned all of our current subsidiaries. See "Pro Forma Financial Information," "Selected Historical Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE SUCCESS OF OUR ACQUISITION STRATEGY DEPENDS ON THE AVAILABILITY OF SUITABLE ACQUISITION CANDIDATES, DIVERSION OF MANAGEMENT TIME AND RISK OF UNDISCLOSED LIABILITIES. A significant aspect of our strategy is to continue to pursue select strategic acquisitions of companies that we believe can benefit from our operations, management and access to capital and enhance our relationships with existing customers or augment our manufacturing capabilities. Our ability to grow by acquisition is dependent upon, and may be limited by, the availability of suitable acquisition candidates and capital, and the restrictions contained in the new credit facilities, the indenture and any future financing arrangements. In addition, growth by acquisition involves risks that could adversely affect our operating results, including the substantial amount of management time that may be diverted from operations in order to pursue and complete such acquisitions, difficulties in managing the additional operations and personnel of acquired companies and the potential loss of key employees of acquired companies. There can be no assurance that we will be able to obtain the capital necessary to pursue our growth strategy or consummate acquisitions on satisfactory terms, if at all. Possible future acquisitions could result in the incurrence of additional debt, costs, contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could materially adversely affect our business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Although we perform a due diligence investigation of each business that we acquire, there may be liabilities of the acquired companies, including Mid State, Galaxy, Certified, General Automation, Nationwide and Gillette, that we fail or are unable to discover during our due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these liabilities by obtaining indemnities and warranties from the seller which may be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, amount, or duration, the financial limitations of the indemnitor or warrantor, or other reasons. OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY OPERATE OUR SUBSIDIARIES ON A COMBINED BASIS. Mid State, Galaxy, Certified, Nationwide, General Automation and Gillette previously operated independently of one another and there can be no assurance that we will be able to effectively manage these six operating companies on a combined basis. In addition, to the extent management time may be diverted to any one or more of the companies, the other operating companies may be adversely affected. A failure by us to operate these businesses profitably or to manage them effectively on a combined basis could have a material adverse effect on our results of operations and financial condition. THE SUCCESS OF OUR BUSINESS STRATEGY TO REALIZE A NUMBER OF CROSS SELLING OPPORTUNITIES COULD BE AFFECTED BY A NUMBER OF FACTORS BEYOND OUR CONTROL. As part of our business strategy, we intend to capitalize on a number of cross-selling opportunities we believe exist as a result the complementary customer bases and manufacturing capabilities of the 13 acquired companies and to implement certain operating improvements. Our ability to implement and realize the benefits of this strategy could be affected by a number of factors beyond our control, such as operating difficulties, increased operating costs, regulatory developments, general economic conditions, increased competition, or the inability to obtain adequate financing for our operations on suitable terms. In addition, after gaining experience with our operations under this strategy, we may decide to alter or discontinue certain aspects of it. Any failure to implement aspects of our strategy may adversely affect our results of operations, financial condition and ability to service debt, including our ability to make principal and interest payments on the notes. See "Business--Business Strategy." OUR INABILITY TO ACCESS ADDITIONAL CAPITAL COULD HAVE A NEGATIVE IMPACT ON OUR GROWTH STRATEGY. Our growth strategy will require additional capital investment. Capital will be required for, among other purposes, completing acquisitions, managing acquired companies, acquiring new equipment and maintaining the condition of our existing equipment. We intend to pay for future acquisitions using cash, capital stock, debt financings and/or assumption of indebtedness. However, our ability to make acquisitions and the manner in which they are financed will be limited by the covenants contained in the indenture and our credit facilities. To the extent that cash generated internally and cash available under our credit facilities is not sufficient to fund capital requirements, we will require additional debt and/or equity financing. There can be no assurance, however, such financing will be available or, if available, will be available on terms satisfactory to us. Future debt financings, if available, may result in increased interest and amortization expense, increased leverage and decreased income available to fund further acquisitions and expansion, and may limit our ability to withstand competitive pressures and render us more vulnerable to economic downturns. If we fail to obtain sufficient additional capital in the future, we could be forced to curtail our growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing our indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." A LOSS OF KEY EMPLOYEES AND HIGHLY SKILLED WORKERS COULD ADVERSELY AFFECT OUR BUSINESS. Some of our executive officers are key to our management and direction. Our future success will depend on our ability to retain capable management. To assist with the integration of the operations of our subsidiaries, we have retained the services of key personnel of these companies. The success of our operations may depend, in part, on the successful retention, at least initially, of these key personnel, as well as our ability to attract and retain additional talented personnel. Although we believe we will be able to attract and retain talented personnel and that we could replace key personnel should the need arise, the inability to attract or retain such personnel could have a material adverse effect on our business. In addition, because our products and processes are complex and require a high level of precision, we are generally dependent on an educated and trained workforce. We would be adversely affected by a shortage of skilled employees. See "Management--Directors and Executive Officers." FAILURE TO MAINTAIN RELATIONSHIPS WITH OUR LARGER CUSTOMERS AND FAILURE BY OUR CUSTOMERS TO CONTINUE TO PURCHASE EXPECTED QUANTITIES DUE TO CHANGES IN MARKET CONDITIONS COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS. Our largest customer, General Electric, accounted for approximately 26.5% of our 1999 net sales and our top ten customers accounted for approximately 67% of our 1999 net sales. The termination by General Electric or any one or more of our other top 10 customers of its relationship with us could have a material adverse effect upon our business, financial condition and results of operations. In addition, we have recently been awarded long-term contracts with Caterpillar and Dana. We currently anticipate that we will need to enter into up to approximately $35 million of new operating leases in connection with financing the new equipment necessary to meet the production requirements 14 for these contracts. To the extent we are unable to purchase, integrate and make operational this equipment on a cost-effective or timely basis, or to the extent the costs associated with purchasing, integrating or making operational this equipment are higher than we currently anticipate, our relationship with these customers and our business and results of operations could be negatively impacted. OUR REVENUES AND OPERATING RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATION. A significant portion of our revenues is derived from new projects and contracts, the timing of which is subject to a variety of factors beyond our control, including customer budgets and modifications in customer products. We cannot predict the degree to which, on a consolidated basis, these trends will continue. A portion of our operating expenses are relatively fixed. Because we typically do not enter into long-term contracts or have volume commitments with our customers, we must anticipate the future volume of orders based upon the historic purchasing patterns of our customers and upon discussions with our customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on our business, financial condition or results of operations. Additionally, we may periodically incur cost increases due to hiring and training of new employees in anticipation of future growth. The size, timing and integration of possible future acquisitions may also cause substantial fluctuations in operating results from quarter to quarter. As a result, operating results for any fiscal quarter may not be indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. THERE MAY BE CIRCUMSTANCES IN WHICH THE INTERESTS OF OUR INVESTORS COULD BE IN CONFLICT WITH YOUR INTERESTS AS A HOLDER OF EXCHANGE NOTES. Saunders, Karp & Megrue, L.P., a private equity firm, and its co-investors, including Carlisle Enterprises L.P. and, Harvey Equity Partners, L.L.C., also private equity firms, members of our management team, employees and some of the selling stockholders of companies we have acquired or will acquire in the acquisitions, indirectly own all of our equity securities. In addition, funds sponsored by Saunders, Karp & Megrue own indirectly 66.8% of our outstanding equity securities and, pursuant to our bylaws, Saunders, Karp & Megrue has the right to appoint three of our six directors and the right to have one of its appointees exercise two votes when all other directors have the right to only one vote. Carlisle, Harvey and the members of our management team who have invested in our company each have the right to appoint one of the remaining three directors. As a result, circumstances may occur in which the interests of Saunders, Karp & Megrue and/or the other investors could be in conflict with your interests as a holder of exchange notes. In addition, Saunders, Karp & Megrue and/or the other investors may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of exchange notes. We may from time to time engage in transactions with related parties and affiliates which include, among other things, business arrangements, lease arrangements for certain manufacturing facilities and offices and the payment of fees or commissions for the transfer of manufacturing by one operating company to another. Although the indenture will require that these types of transactions be on terms no less favorable to us or the applicable subsidiary than those which could be obtained on an arms' length basis from third parties, there can be no assurance that these transactions will not adversely affect our business, financial condition or results of operations. See "Related Party Transactions." 15 SIGNIFICANT COMPETITION FOR PRECISION PART MANUFACTURING OUTSOURCED BY ORIGINAL EQUIPMENT MANUFACTURERS MAY AFFECT OUR ABILITY TO SUCCEED. We operate in an industry which is highly fragmented and competitive. A variety of suppliers with different subsets of our manufacturing capabilities compete to supply the stringent demands of large original equipment manufacturers. In addition, our customers are continually seeking to consolidate their business among one or more "Preferred" or "Qualified" suppliers. If any customer becomes dissatisfied with our prices, quality or timeliness of delivery, among other things, it could award future business or, in an extreme case, move existing business to our competitors. We cannot assure you that our products will continue to compete successfully with the products of our competitors, including original equipment manufacturers themselves, many of which are significantly larger and have greater financial and other resources than we do. See "Business--Competition." THE CYCLICAL NATURE OF THE INDUSTRIES WE CURRENTLY SERVE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR COMPANY. A majority of our revenues are derived from customers which are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions, such as the construction, aerospace and automotive industries. General economic or industry specific downturns could have a material adverse effect on our company and our business, results of operations and financial condition. OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO OBTAIN RAW MATERIALS AND COMPONENTS FROM OUR SUPPLIERS ON FAVORABLE TERMS. Generally, our major raw materials consist of traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel, invar and hastelloy. A majority of our raw materials are supplied by our customers on consignment. Raw materials not supplied by our customers are purchased from several suppliers. Although all of these materials were available in adequate quantities to meet our production demands in 1998 and 1999, we can give you no assurance that such materials will be available in adequate quantities in the future. We do not presently anticipate any raw material shortages which would significantly affect production. However, the lead times between the placement of orders for certain raw materials and actual delivery to us may vary significantly and we may from time to time be required to order raw materials in quantities and at prices less than optimal to compensate for the variability of lead times of delivery. Because we maintain a relatively small inventory of raw materials and component parts, our business could be adversely affected if we are unable to obtain these raw materials and components from our suppliers on favorable terms. OUR BUSINESS COULD BE ADVERSELY AFFECTED TO THE EXTENT THE U.S. GOVERNMENT TERMINATED OR MODIFIED A CONTRACT WITH US OR ONE OF OUR CUSTOMERS. We are generally not a direct party to any contracts with the U.S. Government. However, a portion of our sales are to customers who use the parts, assemblies or tooling we supply to them to fill orders under U.S. government contracts to which they are a party. U.S. government contracts have significant inherent risks, including: - the ability of the U.S. government to terminate a contract for convenience, in which case the other party could be limited to receiving only costs already incurred or committed; - modification of U.S. government contracts due to lack of Congressional funding or changes in such funds; and 16 - an extensive and complex regulatory structure, which could subject the other party to contract termination, civil and criminal penalties and in some cases, suspension or disbarment from future U.S. government contracts. To the extent the U.S. government terminates or modifies a contract with one of our customers, we could be adversely affected if the affected customer reduced its purchases from us as a result. In addition, in the few instances where we are a direct party to a U.S. government contract, the inherent risks described above, as well as risks associated with the competitive bidding atmosphere under which U.S. government contracts are awarded and unreimbursed cost overruns in fixed-price contracts, could have a material adverse effect on our results of operations and financial condition. OUR EQUIPMENT, FACILITIES AND OPERATIONS ARE SUBJECT TO NUMEROUS ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS WHICH MAY BECOME MORE STRINGENT IN THE FUTURE AND MAY RESULT IN INCREASED LIABILITY AND INCREASED CAPTIAL EXPENDITURES. Our equipment, facilities and operations are subject to increasingly complex and stringent federal, state and local laws and regulations pertaining to protection of human health and the environment. These include, among other things, the discharge of contaminants into the environment and the handling and disposition of wastes (including industrial, solid and hazardous wastes). In addition, we are required to obtain and maintain regulatory approvals in the United States in connection with our operations. Many environmental laws and regulations provide for substantial fines and criminal sanctions for violations. It is difficult to predict the future development of such laws and regulations or their impact on future earnings and operations, but we anticipate that these laws and regulations will continue to require increased capital expenditures because environmental standards will become more stringent. We cannot assure you that material costs or liabilities will not be incurred. Certain environmental laws provide for strict, joint and several liability for investigation and remediation of spills and other releases of hazardous materials. These laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Persons who "arrange", as defined under these laws, for the disposal or treatment of hazardous materials also may be liable for the costs of investigation, removal or remediation of such materials at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. Such liability is strict, and may be joint and several. Because we own and operate a number of facilities, and because we arrange for the disposal of hazardous materials at many disposal sites, we may incur costs for investigation, removal and remediation, as well as capital costs associated with compliance with environmental laws and regulations. Although such environmental costs have not been material in the past and are not expected to be material in the future, changes in environmental laws and regulations or unexpected investigations and clean-up costs could have a material adverse effect on our business, financial condition or results of operations. See "Business--Environmental and Safety Regulation." A GUARANTEE COULD BE VOIDED IF THE GUARANTOR FRAUDULENTLY TRANSFERRED THE GUARANTEE AT THE TIME IT INCURRED THE INDEBTEDNESS, WHICH COULD RESULT IN NOTEHOLDERS BEING ABLE TO RELY ONLY UPON US TO SATISFY CLAIMS. Under the U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee can be voided, or claims in respect of a guarantee may be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee: - intended to hinder, delay or defraud any present or future creditor; or 17 - received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and - was insolvent or rendered insolvent by reason of such incurrence; or - was engaged in a business or transaction for which the guarantor's remaining assets constituted unreasonably small capital; or - intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor or to a fund for the benefit of the creditors of the guarantor. The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the governing law. Generally, however, a guarantor would be considered insolvent if: - the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets, or - if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature, or - it could not pay its debts as they become due. On the basis of historical financial information, recent operating history and other factors, we believe that the subsidiary guarantees are being incurred for proper purposes and in good faith and that each subsidiary guarantor, after giving effect to its guarantee of the notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with our conclusions in this regard. 18 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER In connection with the offering of the outstanding notes, we entered into a registration rights agreement with the initial purchasers of the outstanding notes. We are making this exchange offer to satisfy our obligations under the registration rights agreement. TERMS OF THE EXCHANGE We are offering to exchange, upon the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal, exchange notes for an equal principal amount of outstanding notes. The terms of the exchange notes are identical in all material respects to those of the outstanding notes, except for the transfer restrictions and registration rights relating to the outstanding notes. The exchange notes will be entitled to the benefits of the indenture. See "Description of the Notes." The exchange offer is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered or accepted for exchange. As of the date of this prospectus, $100 million aggregate principal amount of the outstanding notes is outstanding. Outstanding notes tendered in the exchange offer must be in denominations of a minimum principal amount of $1,000 or any integral multiple thereof. Based on certain interpretive letters issued by the staff of the SEC to third parties in unrelated transactions, holders of outstanding notes, except any holder who is an "affiliate" of ours within the meaning of Rule 405 under the Securities Act, who exchange their outstanding notes for exchange notes pursuant to the exchange offer generally may offer the exchange notes for resale, resell the exchange notes and otherwise transfer the exchange notes without compliance with the registration and prospectus delivery provisions of the Securities Act, PROVIDED that the exchange notes are acquired in the ordinary course of the holders' business and such holders are not participating in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes. Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes, where the outstanding notes were acquired by the broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. See "Plan of Distribution." In addition, to comply with the securities laws of individual jurisdictions, if applicable, the exchange notes may not be offered or sold unless they have been registered or qualified for sale in the jurisdiction or an exemption from registration or qualification is available and complied with. We have agreed, pursuant to our registration rights agreement to register or qualify the exchange notes for offer or sale under the securities or blue sky laws of the jurisdictions you request in writing. If you do not exchange such outstanding notes for exchange notes pursuant to the exchange offer, your outstanding notes will continue to be subject to the restrictions on transfer contained in the legend. If any holder of the outstanding notes is an affiliate of ours, is engaged in or intends to engage in or has any arrangement or understanding with any person to participate in the distribution of the exchange notes to be acquired in the exchange offer, the holder could not rely on the applicable interpretations of the SEC and must comply with the registration requirements of the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the registration requirement of the Securities Act and applicable state securities laws. 19 EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS The exchange offer expires on the expiration date, which is 5:00 p.m., New York City time, on June 6, 2000 unless we in our sole discretion extend the period during which the exchange offer is open. We reserve the right to extend the exchange offer at any time and from time to time prior to the expiration date by giving written notice to The Bank of New York, the exchange agent, and by public announcement communicated by no later than 9:00 a.m. on the next business day following the previously scheduled expiration date, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service. During any extension of the exchange offer, all outstanding notes previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. The exchange date will be the second business day following the expiration date. We expressly reserve the right to: - terminate the exchange offer and not accept for exchange any outstanding notes for any reason, including if any of the events set forth below under "--Conditions to the Exchange Offer" shall have occurred and shall not have been waived by us; and - amend the terms of the exchange offer in any manner, whether before or after any tender of the outstanding notes. If any termination or amendment occurs, we will notify the exchange agent in writing and will either issue a press release or give written notice to the holders of the outstanding notes as promptly as practicable. Unless we terminate the exchange offer prior to 5:00 p.m., New York City time, on the expiration date, we will exchange the exchange notes for the tendered outstanding notes on the exchange date. Any outstanding notes not accepted for exchange for any reason will be returned without expense to the tendering holder as promptly as practicable after expiration or termination of the exchange offer. See "--Acceptance of Outstanding Notes for Exchange; Delivery of Exchange Notes." This prospectus and the related letter of transmittal and other relevant materials will be mailed by us to record holders of outstanding notes and will be furnished to brokers, banks and similar persons whose names, or the names of whose nominees, appear on the lists of holders for subsequent transmittal to beneficial owners of outstanding notes. PROCEDURES FOR TENDERING OUTSTANDING NOTES The tender of outstanding notes by you pursuant to any one of the procedures set forth below will constitute an agreement between you and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal. GENERAL PROCEDURES. You may tender the notes by: - properly completing and signing the letter of transmittal or a facsimile and delivering the letter of transmittal together with -- the certificate or certificates representing the outstanding notes being tendered and any required signature guarantees, to the exchange agent at its address set forth in the letter of transmittal on or prior to the expiration date, or -- a timely confirmation of a book-entry transfer of the outstanding notes being tendered, if the procedure is available, into the exchange agent's account at DTC pursuant to the procedure for book-entry transfer described below, 20 - or complying with the guaranteed delivery procedures described below. If tendered outstanding notes are registered in the name of the signer of the letter of transmittal and the exchange notes to be issued in exchange therefor are to be issued, and any untendered outstanding notes are to be reissued, in the name of the registered holder, the signature of the signer need not be guaranteed. In any other case, the tendered outstanding notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to us and duly executed by the registered holder and the signature on the endorsement or instrument of transfer must be guaranteed by a commercial bank or trust company located or having an office or correspondent in the United States or by a member firm of a national securities exchange or of the National Association of Securities Dealers, Inc. or by a member of a signature medallion program such as "STAMP." If the exchange notes and/or outstanding notes not exchanged are to be delivered to an address other than that of the registered holder appearing on the note register for the outstanding notes, the signature on the letter of transmittal must be guaranteed by an eligible institution. Any beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender outstanding notes should contact the holder promptly and instruct the holder to tender outstanding notes on the beneficial owner's behalf. If the beneficial owner wishes to tender the outstanding notes itself, the beneficial owner must, prior to completing and executing the letter of transmittal and delivering the outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in the beneficial owner's name or follow the procedures described in the immediately preceding paragraph. The transfer of record ownership may take considerable time. A tender will be deemed to have been received as of the date when: - the tendering holder's properly completed and duly signed letter of transmittal accompanied by the outstanding notes is received by the exchange agent, - the tendering holder's properly completed and duly signed letter of transmittal accompanied by a book-entry confirmation is received by the exchange agent, or - a notice of guaranteed delivery or letter or facsimile transmission to similar effect from an eligible institution is received by the exchange agent. Issuances of exchange notes in exchange for outstanding notes tendered pursuant to a notice of guaranteed delivery or letter or facsimile transmission to similar effect by an eligible institution will be made only against deposit of the letter of transmittal, the tendered outstanding notes, or book-entry confirmation, if applicable and any other required documents. All questions as to the validity, form, eligibility, including time of receipt, and acceptance for exchange of any tender of outstanding notes will be determined by us, and will be final and binding. We reserve the absolute right to reject any or all tenders not in proper form or the acceptances for exchange of which may, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any of the conditions of the exchange offer or any defects or irregularities in tenders of any particular holder whether or not similar defects or irregularities are waived in the case of other holders. Neither we, the exchange agent nor any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. Our interpretation of the terms and conditions of the exchange offer, including the letter of transmittal and its instructions, will be final and binding. The method of delivery of outstanding notes and all other documents is at the election and risk of the tendering holders, and delivery will be deemed made only when actually received and confirmed by the exchange agent. If the delivery is by mail, it is recommended that registered mail properly insured with return receipt requested be used and that the mailing be made sufficiently in advance of the 21 expiration date to permit delivery to the exchange agent prior to 5:00 p.m., New York City time, on the expiration date. As an alternative to delivery by mail, holders may wish to consider overnight or hand delivery service. In all cases, sufficient time should be allowed to assure delivery to the exchange agent prior to 5:00 p.m., New York City time, on the expiration date. No letter of transmittal or outstanding notes should be sent to us. Holders may request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for the holders. BOOK-ENTRY TRANSFER. The exchange agent will make a request to establish an account with respect to the outstanding notes at the book-entry transfer facility for purposes of the exchange offer within two business days after the date of the prospectus, and any financial institution that is a participant in the book-entry transfer facility's systems may make book-entry delivery of outstanding notes by causing the book-entry transfer facility to transfer the outstanding notes into the exchange agent's account at the book-entry transfer facility in accordance with the book-entry transfer facility's procedures for transfer. GUARANTEED DELIVERY PROCEDURES. If you desire to tender outstanding notes pursuant to the exchange offer, but time will not permit a letter of transmittal, the outstanding notes or other required documents to reach the exchange agent on or before the expiration date, or if the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if the exchange agent has received at its office a letter or facsimile transmission from an eligible institution setting forth the name and address of the tendering holder, the names in which the outstanding notes are registered, the principal amount of the outstanding notes being tendered and, if possible, the certificate numbers of the outstanding notes to be tendered, and stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the expiration date, the outstanding notes, in proper form for transfer, or a book-entry confirmation, as the case may be, together with a properly completed and duly executed letter of transmittal and any other required documents, will be delivered by the eligible institution to the exchange agent in accordance with the procedures outlined above. Unless outstanding notes being tendered by the above-described method are deposited with the exchange agent, including through a book-entry confirmation, within the time period set forth above and accompanied or preceded by a properly completed letter of transmittal and any other required documents, we may, at our option, reject the tender. Copies of a notice of guaranteed delivery which may be used by eligible institutions for the purposes described in this paragraph are available from the exchange agent. TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL The letter of transmittal contains, among other things, the following terms and conditions, which are part of the exchange offer. The transferring party tendering outstanding notes for exchange thereby exchanges, assigns and transfers the outstanding notes to us and irrevocably constitutes and appoints the exchange agent as the transferor's agent and attorney-in-fact to cause the outstanding notes to be assigned, transferred and exchanged. The transferor represents and warrants that it has full power and authority to tender, exchange, assign and transfer the outstanding notes and to acquire exchange notes issuable upon the exchange of the tendered outstanding notes and that, when the same are accepted for exchange, we will acquire good and unencumbered title to the tendered outstanding notes, free and clear of all liens, restrictions except restrictions on transfer, charges and encumbrances and not subject to any adverse claim. The transferor also warrants that it will, upon request, execute and deliver any additional documents deemed by the exchange agent or us to be necessary or desirable to complete the exchange, assignment and transfer of tendered outstanding notes. The transferor further agrees that acceptance of any tendered outstanding notes by us and the issuance of exchange notes in exchange therefor will constitute performance in full by us of our obligations under the registration rights agreement and that we will have no further obligations or liabilities under the registration rights agreement, except in 22 certain limited circumstances. All authority conferred by the transferor will survive the death, bankruptcy or incapacity of the transferor and every obligation of the transferor will be binding upon the heirs, legal representatives, successors, assigns, executors, administrators and trustees in bankruptcy of the transferor. By tendering outstanding notes and executing the letter of transmittal, the transferor certifies that: - it is not an affiliate of Precision Partners, the subsidiary guarantors or any of our affiliates or, if the transferor is an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable; - the exchange notes are being acquired in the ordinary course of business of the person receiving the exchange notes, whether or not the person is the holder; - the transferor has not entered into an arrangement or understanding with any other person to participate in the distribution, within the meaning of the Securities Act, of the exchange notes; - the transferor is not a broker-dealer who purchased the outstanding notes for resale pursuant to an exemption under the Securities Act; and - the transferor will be able to trade the exchange notes acquired in the exchange offer without restriction under the Securities Act. Each broker-dealer that receives exchange notes for its own account in exchange for outstanding notes where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See "Plan of Distribution." WITHDRAWAL RIGHTS Outstanding notes tendered pursuant to the exchange offer may be withdrawn at any time prior to the expiration date. For a withdrawal to be effective, a written letter or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth in the letter of transmittal not later than the close of business on the expiration date. Any notice of withdrawal must specify the person named in the letter of transmittal as having tendered outstanding notes to be withdrawn, the certificate numbers and principal amount of outstanding notes to be withdrawn, that the holder is withdrawing its election to have such outstanding notes exchanged and the name of the registered holder of the outstanding notes, and must be signed by the holder in the same manner as the original signature on the letter of transmittal, including any required signature guarantees, or be accompanied by evidence satisfactory to us that the person withdrawing the tender has succeeded to the beneficial ownership of the outstanding notes being withdrawn. The exchange agent will return the properly withdrawn outstanding notes promptly following receipt of notice of withdrawal. Properly withdrawn outstanding notes may be retendered by following one of the procedures described under "--Procedures for Tendering Outstanding Notes" above at any time on or prior to the expiration date. If outstanding notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of such facility. All questions as to the validity of notices of withdrawals, including time of receipt, will be determined by us, and will be final and binding on all parties. ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES Upon the terms and subject to the conditions of the exchange offer, the acceptance for exchange of outstanding notes validly tendered and not withdrawn and the issuance of the exchange notes will be 23 made on the exchange date. For purposes of the exchange offer, we will be deemed to have accepted for exchange validly tendered outstanding notes when, and if we have given written notice to the exchange agent. The exchange agent will act as agent for the tendering holders of outstanding notes for the purposes of receiving exchange notes from us and causing the outstanding notes to be assigned, transferred and exchanged. Upon the terms and subject to the conditions of the exchange offer, delivery of exchange notes to be issued in exchange for accepted outstanding notes will be made by the exchange agent promptly after acceptance of the tendered outstanding notes. Any outstanding notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder without cost to the holder, or, in the case of outstanding notes tendered by book-entry transfer into the exchange agent's account at the book-entry transfer facility pursuant to the book-entry procedures described above, the outstanding notes will be credited to an account maintained by the holder with the book-entry transfer facility for the outstanding notes, as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the exchange offer, or any extension of the exchange offer, we will not be required to issue exchange notes in exchange for any properly tendered outstanding notes not previously accepted and may terminate the exchange offer, by oral or written notice to the exchange agent and by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service, or, at its option, modify or otherwise amend the exchange offer, if: - there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission -- seeking to restrain or prohibit the making or consummation of the exchange offer or any other transaction contemplated by the exchange offer, -- assessing or seeking any damages as a result thereof, or -- resulting in a material delay in our ability to accept for exchange or exchange some or all of the outstanding notes pursuant to the exchange offer; or - the exchange offer shall violate any applicable law or any applicable interpretation of the staff of the SEC. The foregoing conditions are for our sole benefit and may be asserted by us with respect to all or any portion of the exchange offer regardless of the circumstances, including any action or inaction by us, giving rise to the condition or may be waived by us in whole or in part at any time or from time to time in its sole discretion. The failure by us at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, and each right will be deemed an ongoing right which may be asserted at any time or from time to time. In addition, we have reserved the right, notwithstanding the satisfaction of each of the foregoing conditions, to terminate or amend the exchange offer. Any determination by us concerning the fulfillment or non-fulfillment of any conditions will be final and binding upon all parties. In addition, we will not accept for exchange any outstanding notes tendered, and no exchange notes will be issued in exchange for any outstanding notes, if at such time any stop order shall be threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or qualification of the indenture under the Trust Indenture Act of 1939. 24 EXCHANGE AGENT The Bank of New York has been appointed as the exchange agent for the exchange offer. Questions relating to the procedure for tendering, as well as requests for additional copies of this prospectus or the letter of transmittal and requests for notices of guaranteed delivery, should be directed to the exchange agent addressed as follows: BY REGISTERED OR CERTIFIED FACSIMILE TRANSMISSION BY HAND/OVERNIGHT DELIVERY: MAIL: NUMBER: The Bank of New York (FOR ELIGIBLE INSTITUTIONS The Bank of New York 101 Barclay Street, 7E ONLY) 101 Barclay Street New York, New York 10286 (212) 815-6339 Corporate Trust Services Attention: Reorganization Window, Ground Level Section TO CONFIRM BY TELEPHONE OR New York, New York 10286 FOR Attention: Reorganization INFORMATION CALL: Section (212) 815-6337
Delivery of the letter of transmittal to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. The Bank of New York also acts as trustee under the indenture. SOLICITATION OF TENDERS; EXPENSES We have not retained any dealer-manager or similar agent in connection with the exchange offer and we will not make any payments to brokers, dealers or others for soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse it for reasonable out-of-pocket expenses in connection therewith. The expenses to be incurred in connection with the exchange offer, including the fees and expenses of the exchange agent and printing, accounting and legal fees, will be paid by us and are estimated at approximately $0.5 million. No person has been authorized to give any information or to make any representations in connection with the exchange offer other than those contained in this prospectus. If given or made, the information or representations should not be relied upon as having been authorized by us. Neither the delivery of this prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the respective dates as of which information is given in this prospectus. The exchange offer is not being made to, nor will tenders be accepted from or on behalf of, holders of outstanding notes in any jurisdiction in which the making of the exchange offer or the acceptance would not be in compliance with the laws of the jurisdiction. However, we may, at our discretion, take any action as we may deem necessary to make the exchange offer in any jurisdiction and extend the exchange offer to holders of outstanding notes in the jurisdiction. In any jurisdiction the securities laws or blue sky laws of which require the exchange offer to be made by a licensed broker or dealer, the exchange offer is being made on behalf of us by one or more registered brokers or dealers which are licensed under the laws of the jurisdiction. APPRAISAL RIGHTS You will not have dissenters' rights or appraisal rights in connection with the exchange offer. ACCOUNTING TREATMENT The exchange notes will be recorded at the carrying value of the outstanding notes as reflected in the issuer's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting 25 purposes will be recognized by the issuer upon the exchange of exchange notes for outstanding notes. Expenses incurred in connection with the issuance of the exchange notes will be amortized over the term of the exchange notes. TRANSFER TAXES If you tender your outstanding notes, you will not be obligated to pay any transfer taxes in connection therewith except that unless you instruct us to register exchange notes in the name of, or request outstanding notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered holder, you will be responsible for the payment of any applicable transfer tax. INCOME TAX CONSIDERATIONS You should consult your own tax advisers with respect to your particular circumstances and with respect to the effects of state, local or foreign tax laws to which you may be subject. The following discussion is based upon the provisions of the Internal Revenue Code of 1986, regulations, rulings and judicial decisions, in each case as in effect on the date of this prospectus, all of which are subject to change. The exchange of an outstanding note for an exchange note will not constitute a taxable exchange. Such an exchange will not result in taxable income, gain or loss being recognized by you or by us. Immediately after the exchange, you will have the same adjusted basis and holding period in each exchange note received as you had immediately prior to the exchange in the corresponding outstanding note surrendered. See "Income Tax Considerations." CONSEQUENCES OF FAILURE TO EXCHANGE As consequence of the offer or sale of the outstanding notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws, holders of outstanding notes who do not exchange outstanding notes for exchange notes pursuant to the exchange offer will continue to be subject to the restrictions on transfer of the outstanding notes as set forth in the legend. In general, the outstanding notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not currently anticipate that we will register the outstanding notes under the Securities Act. Upon consummation of the exchange offer, due to the restrictions on transfer of the outstanding notes and the absence of such restrictions applicable to the exchange notes, it is likely that the market, if any, for outstanding notes will be relatively less liquid than the market for exchange notes. Consequently, holders of outstanding notes who do not participate in the exchange offer could experience significant diminution in the value of their outstanding notes, compared to the value of the exchange notes. 26 USE OF PROCEEDS We will not receive any proceeds from the exchange offer. The net proceeds from the sale of the outstanding notes were approximately $95.3 million, after deducting discounts, commissions and expenses of the offering. We used these proceeds, together with borrowings under our credit facilities, an equity contribution of $10.0 million from our investors and available cash, to finance the Certified, Calbrit, Nationwide and General Automation acquisitions and to prepay a term loan. The following table illustrates the sources and uses of proceeds in connection with the March acquisitions and the sale of the outstanding notes (in millions):
- ------------------------------------ - ------------------------------------ Term loan........................... $ 23.0 Cash purchase price for the Outstanding notes................... $100.0 acquisitions(1)................... 100.7 Equity contribution................. 10.0 Prepayment of indebtedness(2)....... 23.0 Available cash...................... 0.3 Fees and expenses................... 9.6 ------ ------ Total sources of funds............ $133.3 Total uses of funds............... $133.3 ====== ======
- ------------------------ (1) Includes the prepayment of approximately $11.1 of outstanding indebtedness of Certified plus approximately $0.4 million of related prepayment penalties. (2) Consisted of a $23.0 million floating rate term loan with an interest rate of 7.6% as of February 15, 1999. Amortization payments in respect of this loan were scheduled to begin December 31, 1999 and continue through September 30, 2004. 27 CAPITALIZATION The following table sets forth our cash and temporary investments and our consolidated capitalization as at December 31, 1999.
DECEMBER 31, 1999 ----------------- (IN MILLIONS) Cash and temporary investments.............................. $ 0.3 Debt: Term loan................................................. 23.0 Revolving credit facility(1).............................. 11.2 12% Senior Subordinated Notes due 2009.................... 100.0 Other long-term debt...................................... 0.3 Total debt.............................................. 134.5 Stockholders equity......................................... 36.1 ------ Total capitalization.................................... $170.9 ======
- ------------------------ (1) As at December 31, 1999, $11.2 million of our $25.0 million revolving credit facility was outstanding. As of the closing date for the sale of the outstanding notes, no indebtedness was outstanding under this facility. As of March 21, 2000, $21.3 million was outstanding. 28 PRO FORMA FINANCIAL INFORMATION The unaudited pro forma consolidated statement of operations for the year ended December 31, 1999 gives effect to: - the acquisitions of Certified, Nationwide, General Automation and Gillette; - the reorganization under which we received the capital stock of Mid State and Galaxy as a capital contribution from Precision Partners, L.L.C.; and - the new credit facilities we entered into in March 1999 and the related prepayment of an existing term loan, as if each such transaction had occurred on January 1, 1999. For purposes of the unaudited pro forma consolidated statement of operations, the historical financial information of General Automation and Nationwide has been adjusted to eliminate the effect of assets not acquired and liabilities not assumed in the relevant acquisition, in each case in accordance with the terms of the purchase agreement relating to such acquisition. The unaudited pro forma consolidated statement of operations should be read in conjunction with our historical financial statements and those of Mid State, Certified, Nationwide, General Automation and Gillette, including the notes thereto, in each case included elsewhere in this prospectus, and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The adjustments necessary to fairly present this pro forma consolidated financial information have been made based on available information and in the opinion of management are reasonable and are described in the accompanying notes. The pro forma consolidated financial information should not be considered indicative of actual results that would have been achieved had the transactions been consummated on the date indicated and do not purport to indicate results of operations as of any future date or for any future period. We cannot assure you that the assumptions used in the preparation of the pro forma consolidated financial information will prove to be correct. The acquisitions of Mid State, Galaxy, Certified, Nationwide, General Automation and Gillette were accounted for using the purchase method of accounting, pursuant to which the purchase price was allocated among the assets acquired and liabilities assumed in accordance with estimates of fair value as of the date of acquisition. However, the unaudited pro forma consolidated statement of operations reflects management's estimates of fair value as of January 1, 1999 and not at the actual date of acquisition. In addition, the pro forma adjustments are based upon available information and certain assumptions that management considers reasonable under the circumstances. Consequently, the amounts reflected in the unaudited pro forma consolidated statement of operations are subject to change, which could be significant. 29 PRECISION PARTNERS, INC. UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
HISTORICAL (HISTORICAL) ------------------------------------------------------------------ CONSOLIDATED CERTIFIED NATIONWIDE GENERAL GILETTE PRECISION FOR THE THREE FOR THE THREE FOR THE THREE FOR THE EIGHT PARTNERS, INC. MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED PRO FORMA DECEMBER 31, 1999 MARCH 19, 1999 MARCH 19, 1999 MARCH 19, 1999 AUGUST 31, 1999 ADJUSTMENTS ----------------- -------------- -------------- -------------- --------------- ----------- Net sales................... $123,188 $ 5,739 $6,214 $4,464 $10,144 $ -- Cost of sales............... 93,434 5,110 4,940 2,270 6,810 945 (1) Selling, general and administrative expenses... 24,840 1,080 554 509 2,796 (4,263)(2) Operating income (loss)..... 4,914 (451) 720 1,685 538 3,318 Other income (expense): Net interest expense...... (12,567) (647) (166) 18 (112) (2,197)(3) Other, net................ 8 4 (4) -- 128 -- Income (loss) before income taxes..................... (7,645) (1,094) 550 1,703 554 1,121 Provision (benefit) for income taxes.............. (2,130) -- -- 18 272 767 (4) Net income (loss)........... (5,515) (1,094) 550 1,685 282 354 Depreciation................ 8,525 634 453 274 603 831 Amortization................ 3,381 -- -- -- -- 719 EBITDA (5),(6).............. 16,820 183 1,173 1,959 1,141 4,868 PRO FORMA -------- Net sales................... $149,749 Cost of sales............... 113,509 Selling, general and administrative expenses... 25,516 Operating income (loss)..... 10,724 Other income (expense): Net interest expense...... (15,671) Other, net................ 136 Income (loss) before income taxes..................... (4,811) Provision (benefit) for income taxes.............. (1,073) Net income (loss)........... (3,738) Depreciation................ 11,320 Amortization................ 4,100 EBITDA (5),(6).............. 26,144
- ------------------------ (1) The pro forma adjustments for cost of sales reflect the following: Adjustment for additional depreciation for step-up in fair market value of fixed assets related to the purchase transactions.............................................. $ 831 Adjustment for new lease terms of facilities renegotiated in connection with the purchase transaction.................. 114 ------- $ 945 ======= (2) The pro forma adjustments for selling, general and administrative expenses reflect the following: Adjustments for termination of executive positions held by shareholders and related parties as part of the purchase contract whose positions will not be replaced............. $(4,769) Adjustment for additional amortization of goodwill related to the purchase transaction which is being amortized over twenty years.............................................. 719 Adjustments for professional fees expensed by one of the acquisitions to negotiate and consummate the purchase transaction............................................... (213) ------- $(4,263) ======= (3) Adjustment to record additional interest expense associated with the notes offered for exchange herein (net of the elimination of historical interest expense related to debt not assumed or refinanced), and amortization of the related debt issue costs over the ten year term of the notes totaling $1,051..................................... $(2,197) ======= (4) Adjustment to record the income tax benefit on pro forma income before income taxes. (5) Pro forma EBITDA is defined as operating income plus depreciation and amortization of $15,420. EBITDA is not a measure of performance under generally accepted accounting principles. While EBITDA should not be used in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity, management believes that it may be used by certain investors as supplemental information to evaluate a company's financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the definition of EBITDA used in this prospectus may not be comparable to the definition of EBITDA used by other companies. (6) EBITDA includes the effect of a jet aircraft lease expense of $186. This lease was terminated at closing in connection with the acquisition of General Automation pursuant to the terms of the purchase agreement. Excluding the effects of this lease for the entire period, EBITDA would have been $26,330.
30 SELECTED HISTORICAL FINANCIAL INFORMATION Prior to the acquisitions of Mid State and Galaxy in September 1998, Precision Partners, L.L.C. had substantially no operations and, prior to the completion of the reorganization and acquisitions of Certified, Calbrit, Nationwide and General Automation in March 1999, we had substantially no operations. As a result, we believe historical financial information for our company prior to March 1999 and for Precision Partners, L.L.C. and our predecessor for accounting purposes, Mid State, is of limited relevance in understanding what our actual results of operations, financial position or cash flows would have been for historical periods had we in fact been organized and owned all five subsidiaries for such periods. In addition, for financial statement presentation purposes, the reorganization is accounted for as if it had occurred in September 1998 and we are treated as having commenced operations at that time in a manner similar to a pooling of interests. See Note 1 to our consolidated financial statements. The selected historical financial information should be read in conjunction with our consolidated financial statements and Mid State, including the notes thereto, included elsewhere in this prospectus, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PRECISION MID STATE (PREDECESSOR) PARTNERS, INC. --------------------------------------------------- -------------------------------- JANUARY 1, 1998 SEPTEMBER 9, 1998 THROUGH THROUGH 1995 1996 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1998 1999 -------- -------- -------- ------------------ ----------------- ------------ (IN THOUSANDS, EXCEPT RATIO AND DATA) OPERATING DATA: Net sales...................... $29,824 $28,462 $33,870 $24,106 $12,602 $123,188 Cost of sales.................. 24,206 20,290 24,581 16,326 9,090 93,434 ------- ------- ------- ------- ------- -------- Gross profit................... 5,618 8,172 9,289 7,780 3,512 29,754 Selling, general and administrative expenses...... 4,141 4,322 4,571 3,374 3,134 24,840 ------- ------- ------- ------- ------- -------- Operating income............... 1,477 3,850 4,718 4,406 378 4,914 Interest expense, net.......... 108 69 85 37 526 12,567 Other income (expense), net.... 475 1,157 1,220 12 (138) 8 ------- ------- ------- ------- ------- -------- Income (loss) before provision for income taxes............. 1,844 4,938 5,853 4,381 (286) (7,645) Provision (benefit) for income taxes........................ 671 1,818 2,310 1,677 109 (2,130) ------- ------- ------- ------- ------- -------- Net income (loss).............. $ 1,173 $ 3,120 $ 3,543 $ 2,704 $ (395) $ (5,515) ======= ======= ======= ======= ======= ========
PRECISION MID STATE (PREDECESSOR) PARTNERS, INC. --------------------------------------------------- -------------------------------- JANUARY 1, 1998 SEPTEMBER 9, 1998 THROUGH THROUGH 1995 1996 1997 SEPTEMBER 30, 1998 DECEMBER 31, 1998 1999 -------- -------- -------- ------------------ ----------------- ------------ (IN THOUSANDS, EXCEPT RATIO DATA) OTHER FINANCIAL DATA: EBITDA(1)...................... $ 2,287 $ 4,734 $ 5,770 $ 5,212 $ 1,483 $ 16,820 Depreciation and amortization................. $ 810 $ 884 $ 1,052 $ 806 $ 1,105 $ 11,906 Ratio of earnings to fixed charges(2)................... 7.2x 20.2x 22.4x 25.6x -- -- BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents...... $ 2,638 $ 40 $ 963 $ 313 Working capital................ 14,019 5,769 5,748 3,844 Total assets................... 20,119 11,574 63,321 206,391 Total debt..................... 686 403 23,000 134,548 Stockholders' equity........... 17,094 8,265 31,605 36,132
- ------------------------ (1) EBITDA is defined as operating income plus depreciation and amortization. EBITDA is not a measure of performance under generally accepted accounting principles. While EBITDA should 31 not be used in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity, management believes that it may be used by certain investors as supplemental information to evaluate a company's financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the definition of EBITDA used in this prospectus may not be comparable to the definition of EBITDA used by other companies. (2) Earnings are defined as pre-tax income plus fixed charges, excluding capitalized interest and preferred stock dividend requirements. Fixed charges are defined as the sum of all interest (whether capitalized or expensed), the amortization of debt issue costs and discount or premium relating to any indebtedness (whether expensed or capitalized), the interest portion of rental expense, and preferred stock dividend requirements for majority-owned subsidiaries. For the period from September 9, 1998 through December 31, 1998 and for 1999, earnings were insufficient to cover fixed charges by $286 and $7,645, respectively. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are a leading contract mechanical manufacturing services supplier of complex precision metal parts, tooling and assemblies for original equipment manufacturers. Our broad manufacturing capabilities and highly engineered processes allow us to meet the critical specifications of our customers across a wide range of industries. We have earned "Preferred or "Qualified" supplier status with most of our customers and are predominately the sole-source supplier to our customers of the parts we manufacture. Precision Partners, L.L.C. was formed in September 1998 and we were formed in February 1999 for the sole purpose of consummating acquisitions in the business of manufacturing and supplying complex precision metal parts, tooling and assembles for original equipment manufacturers. On September 30, 1998, Precision Partners, L.L.C. acquired all of the outstanding capital stock of Mid State and Galaxy. In March 1999, we underwent a corporate reorganization under which we acuired all of the issued and outstanding capital stock of Mid State and Galaxy. At the same time, we also purchased all of the issued and outstanding capital stock of Certified and Calbrit and we purchased substantially all of the assets and assumed some liabilities of General Automation and Nationwide. The aggregate purchase price for the March acquisitions was approximately $100.7 million, excluding fees and expenses, and was financed through the net proceeds from the sale of the outstanding notes, borrowings under our credit facilities, an equity contribution and available cash. In July 1999, we merged Calbrit into Certified and in September 1999 we acquired Gillette. The purchase price for the Gillette acquisition was approximately $14.4 million and was financed using existing cash and borrowings under our revolving credit facility. Prior to the acquisitions of Mid State and Galaxy, Precision Partners, L.L.C. had substantially no operations and, prior to the consummation of the reorganization and the acquisitions of Certified, Calbrit, Nationwide and General Automation, we had substantially no operations. For financial statement presentation purposes, and for purposes of the following discussion, the reorganization is accounted for as if it occurred on September 9, 1998 and we are treated as having commenced operations at that time. See Note 1 to our consolidated financial statements. For this reason, the following management's discussion and analysis relates to the financial condition and results of operations of: - a combination of Mid State, as predecessor, for the period from January 1, 1998 through September 30, 1998 and our company for the period from September 9, 1998 (inception) through December 31, 1998 on a consolidated basis, including Mid State and Galaxy for the period from October 1, 1998 through December 31, 1998 and LLC for the period from September 9, 1998 through December 31, 1998; and - a combination of our company for the period from February 9, 1999 (inception) through December 31, 1999 on a consolidated basis, including Certified, Nationwide and General Automation from March 19, 1999 through December 31, 1999, Precision Partners, L.L.C. from January 1, 1999 to March 19, 1999 and Gillette from September 1, 1999 to December 31, 1999. This discussion and analysis should be read in conjunction with our historical audited financial statements and those of Mid State, and the Unaudited Pro Forma Consolidated Statement of Operations, including the notes thereto, included elsewhere in this prospectus. As a result, we believe the historical financial information presented in this prospectus for periods prior to 1999 is of limited relevance in understanding what our results of operations, financial position or cash flows would have been for the historical periods presented had we in fact been organized and owned all of our current subsidiaries for such periods. 33 A change in the senior management at Galaxy occurred during the third quarter of 1999, and in connection with this change, we engaged in a review of the operations (including customer and vendor relations) and accounting practices and procedures at Galaxy. This review was performed by a team consisting of internal management and outside professionals and has revealed administration and accounting practices inconsistent with our policies and procedures. These inconsistencies include the failure to execute proper cut-off procedures at month-end and the failure to recognize certain expenses in the period in which those expenses were incurred. We believe our 1999 financial results accurately reflect the excess costs associated with these matters, and after a review, we do not believe that our financial results for 1999 or any previously reported period have been materially misstated as a result of past practices at Galaxy. The following table sets forth, for the periods indicated, information derived from our audited consolidated statement of operations and the audited consolidated statements of operations of Mid State, in each case, for the periods indicated, both in dollars and expressed as a percentage of net sales (dollars in thousands):
MID STATE (HISTORICAL) --------------------------------------------------------------- JANUARY 1, 1998 YEAR ENDED DECEMBER 31, THROUGH ----------------------------------------- SEPTEMBER 30, 1996 1997 1998 ------------------- ------------------- ------------------- (IN THOUSANDS) Net sales............ $28,462 100.0% $33,870 100.0% $24,106 100.0% Cost of sales........ 20,290 71.3 24,581 72.6 16,326 67.7 Gross profit......... 8,172 28.7 9,289 27.4 7,780 32.3 Selling, general and administrative expenses........... 4,322 15.2 4,571 13.5 3,374 14.0 Operating income..... 3,850 13.5 4,718 13.9 4,406 18.3 Net income (loss).... 3,120 11.0 3,543 10.5 2,704 11.2 ======= ======= ======= ======= ======= ======= Depreciation and amortization....... $ 884 3.1% $ 1,052 3.1% $ 806 3.3% EBITDA(1)............ 4,734 16.6 5,770 17.0 5,212 21.6 PRECISION PARTNERS, INC. (HISTORICAL) --------------------------------------------------------------- SEPTEMBER 9, 1998 THROUGH YEAR ENDED DECEMBER 31, COMBINED DECEMBER 31, 1998 1998(2) 1999(3) ------------------- ------------------- ------------------- (IN THOUSANDS) Net sales............ $12,602 100.0% $36,708 100.0% $123,188 100.0% Cost of sales........ 9,090 72.1 25,416 69.2 93,434 75.8 Gross profit......... 3,512 27.9 11,292 30.8 29,754 24.2 Selling, general and administrative expenses........... 3,134 24.9 6,508 17.7 24,840 20.2 Operating income..... 378 3.0 4,784 13.0 4,914 4.0 Net income (loss).... (395) (3.1) 2,309 6.3 (5,515) (4.5) ======= ======= ======= ======= ======== ======= Depreciation and amortization....... $ 1,105 8.8% $ 1,911 5.2% $ 11,906 9.7% EBITDA(1)............ 1,483 11.8 6,695 18.2 16,820 13.7
- --------------- (1) For historical financial information purposes, EBITDA is defined as operating income plus depreciation and amortization. EBITDA is not a measure of performance under generally accepted accounting principles. While EBITDA should not be used in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statements data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity, management believes that it may be used by certain investors as supplemental information to evaluate a company's financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the definition of EBITDA used in this prospectus may not be comparable to the definition of EBITDA used by other companies. (2) Precision Partners combined consists of our results of operations from September 9, 1998 (inception) through December 31, 1998 and of Mid State (predecessor) for the nine months ended September 30, 1998. (3) Our results for the period from February 9, 1999 (inception) through December 31, 1999, include Certified, Nationwide and General Automation, Precision Partners, L.L.C.'s results from January 1, 1999 to March 19, 1999 and Gillette's results from September 1, 1999 to December 31, 1999. HISTORICAL RESULTS OF OPERATIONS 1999 COMPARED TO 1998 COMBINED NET SALES. Net sales increased 235.6% to $123.2 million in 1999 compared to $36.7 million in 1998. The increase is due to the March acquisitions of Certified, General Automation, and Nationwide and the September acquisition of Gillette with aggregate sales for all of the acquired companies totaling $58.8 million for the nine months ended December 31, 1999. Sales at Mid State and Galaxy 34 increased 40.8% and 24.4%, respectively, to $64.4 million due to increased orders for gas turbine parts and engine and transmission components for large construction equipment. GROSS PROFIT. Gross profit for 1999 increased 163.5% to $29.8 million from $11.3 million in 1998. Gross margin decreased to 24.2% from 30.8% in 1998. The increase in gross profit is primarily attributable to the acquisitions of Certified, General Automation, Nationwide, and Gillette. The decrease in gross margin results from the lower margin products manufactured by the acquisitions as well as changes in product mix at Mid State that reduced its gross margin by 1.5% from 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 281.7% to $24.8 million from $6.5 million in 1998. This increase is mainly due to $7.2 million in general and administrative expense at Precision Partners, including the recognition of $3.0 million in bonus compensation paid to a selling shareholder of one of the acquired companies, $0.6 million in aborted acquisition costs, $6.5 million of selling, general and administrative expenses at Certified, General Automation, Nationwide, and Gillette expenses, and $4.5 million of goodwill amortization and additional depreciation expense resulting from a step-up in basis of the property, plant, and equipment of Certified, General Automation, Nationwide, and Gillette in connection with their acquisition by us. OPERATING INCOME. As a result of the foregoing, operating income increased 2.7% to $4.9 million in 1999 from $4.8 million in 1998. INCOME TAX EXPENSE. We realized an income tax benefit of $2.1 million in 1999 compared to income tax expense of $1.8 million in 1998. Our effective tax benefit rate was 27.9% in 1999 compared to an effective tax expense rate of 43.6% for 1998. The decrease in income tax expense is primarily due to interest expense in 1999 of $12.8 million related to the issuance of the outstanding notes resulting in a loss before taxes. The decrease in the effective benefit rate is primarily due to the impact of non-deductible goodwill generated from the 1999 acquisitions of Certified and Gillette and the 1998 acquisitions of Mid State and Galaxy. NET INCOME (LOSS). Net income decreased 338.8% to a loss of $5.5 million in 1999 from income of $2.3 million in 1998 for the aforementioned reasons. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 1999 was $11.9 million, which includes $3.4 million of amortization of $77.0 million of goodwill resulting from the acquisitions of Mid State, Galaxy, Certified, Nationwide, General Automation, and Gillette. The $8.5 million of depreciation expense is mainly attributable to the additional depreciation expense associated with the step-up in basis resulting from the acquisitions of these six companies. 1998 COMPARED TO 1997 NET SALES. Net sales increased 8.4% to $36.7 million in 1998 compared to $33.9 million in 1997. The increase is due to the acquisition of Galaxy in September 1998 with sales of $2.8 million in the fourth quarter of 1998. Sales at Mid State remained essentially flat. Increased orders for North American gas turbine parts substantially offset the effect of delayed delivery dates for hydroelectric turbine parts, which resulted from the downturn in the Asian economy. GROSS PROFIT. Gross profit for 1998 increased 21.6% to $11.3 million from $9.3 million in 1997. Gross margin increased to 30.8% in 1998 from 27.4% in 1997. The increase is primarily attributable to the acquisition of Galaxy in September 1998, which contributed fourth quarter gross profit of $0.7 million and Mid State's product mix. Mid State also reduced costs through improved production processes, increased operating efficiencies and the elimination of large discretionary management bonuses paid in 1997. 35 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for 1998 increased 42.4% to $6.5 million from $4.6 million in 1997. This increase is mainly due to $1.1 million in general and administrative expense at Precision Partners, L.L.C. from September 9, 1998 (inception) to December 31, 1998, as well as additional Galaxy expenses totaling $0.5 million in the last quarter of 1998. OPERATING INCOME. As a result of the foregoing, operating income increased slightly to $4.8 million in 1998 from $4.7 million in 1997. INCOME TAX EXPENSE. Income tax expense was $1.8 million in 1998 compared to $2.3 million in 1997. Our effective tax rate was 43.6% for 1998 compared to 39.5% for Mid State in 1997. The increase in the effective rate for 1998 is primarily due to non-deductible goodwill generated in the acquisitions of Mid State and Galaxy. NET INCOME. Net income decreased 34.8% to $2.3 million for 1998 from $3.5 million in 1997 for the aforementioned reasons. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 81.7% to $1.9 million in 1998 from $1.1 million in 1997. The increase includes $0.4 million in amortization of $35.0 million of goodwill resulting from the acquisitions of Mid State and Galaxy in September 1998, additional depreciation on the step-up in basis of property, plant and equipment and the inclusion of $0.3 million of depreciation expense recorded by Galaxy in the three months ended December 31, 1998. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are available borrowings under our revolving credit facility and cash flow from operations. We expect that our principal uses of liquidity will continue to be working capital, capital expenditures, debt service requirements and permitted acquisitions. Our credit facilities consist of a $23.0 million term loan facility and a $25.0 million revolving credit facility, including a $2.0 million sublimit for letters of credit, each maturing on March 31, 2005, unless terminated sooner upon an event of default. As of December 31, 1999, we have total debt of approximately $134.5 million, consisting of our $23.0 million term loan, the outstanding aggregate principal amount of the notes and $11.2 million of outstanding borrowings under our revolving credit facility. See "Capitalization." Our ability to borrow under the revolving credit facility is subject to our compliance with the financial covenants described below and a borrowing base based on our eligible accounts receivables and inventory. See "Description of Credit Facilities." The indenture and our credit facilities impose limitations on our ability to, among other things, incur additional indebtedness (including capital leases), incur liens, pay dividends or make other restricted payments, consummate asset sales, enter into transactions with affiliates, issue preferred stock, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. In addition, the credit facilities limit our ability to enter into sale and leaseback transactions and to make capital expenditures. The credit facilities also require that we meet and maintain certain financial ratios and tests, including (i) a minimum interest coverage ratio, EBITDA to interest expense, (ii) a maximum leverage ratio, total debt to EBITDA, and (iii) a minimum fixed charge coverage ratio, EBITDA to interest expense plus other fixed charges. Our ability to comply with these covenants and to meet and maintain these financial ratios and tests may be affected by events beyond our control, such as those described under "Risk Factors." As a result of the failure to have an exchange offer registration statement filed by September 15, 1999, to have it declared effective by September 16, 1999 and to complete the exchange offer by October 15, 1999, we are paying additional interest on the outstanding notes. The amount of additional interest has ranged from 0.5% per annum for the period from September 15, 1999 through 36 December 14, 1999 to 0.75% per annum for the period December 15, 1999 through March 14, 2000. Beginning March 15, 2000, the amount of additional interest increased to 1.0% per annum and will continue at that rate until effectiveness of the registration statement and completion of the exchange offer. The additional interest is expected to be nonrecurring with no impact on our continuing operations. We have limited amortization requirements under our credit facilities over the next two years. Our other debt service requirements over the next two years consist primarily of interest expense on the notes. Our short-term cash requirements for our operations are expected to consist mainly of capital expenditures to continue to maintain and expand our manufacturing capabilities and working capital requirements. We currently expect that our capital expenditures will be approximately $10.6 million in 2000, including maintenance capital expenditures of approximately $5.0 million. However, our capital expenditures will be affected by, and may be greater than currently anticipated depending upon, the size and nature of new business opportunities. We also expect to have to enter into approximately $35 million of operating leases in 2000 primarily for new equipment related to our recent contracts with Caterpillar and Dana and increased unit delivery requirements from General Electric. The aggregate purchase price for the acquisitions of Certified, Calbrit, Nationwide and General Automation of $100.7 million does not include fees and expenses or the potential effects of certain contingent purchase arrangements. The purchase price for one of the companies acquired included a $4.0 million escrow to be paid out upon the company meeting specified EBITDA targets through April 30, 1999. The targets were not met and the escrow has been returned to us, effectively reducing the purchase price and the resulting goodwill by $4.0 million. A contingent payment may be payable by our parent, Precision Partners Holdings Company, in the form of cash or a note payable-in-kind maturing September 30, 2009, based on one of the companies we acquired in March 1999 achieving specified EBITDA targets in 2000. Payment by Precision Partners Holding Company of this additional contingent payment, assuming the maximum amount is earned, would result in an annual increase in our goodwill amortization of approximately $0.5 million. Additional contingent payments, which were payable by Precision Partners Holding Company, based on this company and another company acquired in March 1999 meeting certain EBITDA targets in 1999 were not earned. In addition, a bonus payment of $3.0 million, based on one of the acquired companies achieving certain 1999 EBITDA targets, is payable in 2000 to the former stockholder of this company who is now an employee of our company. This bonus payment was accrued in December 1999 as compensation expense and will be paid no later than April 2000. We plan to continue our acquisition strategy and expect to finance future acquisitions using cash, capital stock, notes and/or assumption of indebtedness. However, the restrictions imposed on us by our long-term debt instruments may affect this strategy. In addition, to fully implement our growth strategy and meet the resulting capital requirements, we may be required to request increases in amounts available under our credit facilities, issue future debt securities or raise additional capital through equity financings. There can be no assurance that any such increase to our credit facilities will be available or, if available, will be on terms satisfactory to us, or that we will be able to successfully complete any future debt or equity financings on satisfactory terms, if at all. As a result, we could be placed at a competitive disadvantage in pursuing acquisitions. Based upon current operations and the historical results of our subsidiaries, we believe that our cash flow from operations, together with available borrowings under our new revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, lease payments, and scheduled interest payments over the next 12 months. However, there can be no assurance that we will continue to generate cash flow above current levels or that the acquired companies will repeat their historical performance. In addition, our ability to pay the notes at maturity will depend on the availability of refinancing. See "Risk Factors--Risks Associated With Our Indebtedness." 37 BACKLOG Firm backlog for 1999 increased 36.1% to $107.7 million from $79.1 million at December 31, 1998. Firm backlog represents the sales price of all undelivered products for which we have customer purchase orders or contractual coverage that will be delivered within the next 12 months. All of our firm backlog is subject to price renegotiations, terminations or rescheduling at the customer's convenience. Firm backlog for December 31, 1998 has been restated to be consistent with the current method of calculating backlog. DISCLOSURE ABOUT MARKET RISK Our term loan facility provides for interest to be charged at either the Eurodollar rate or a base rate determined in accordance with the credit agreement. Based on our current level of borrowings from our term loan facility, a 1.0% change in interest rate would result in a $0.2 million annual change in interest expense. Our revolving line of credit provides for interest to be charged at either the Eurodollar rate or a base rate determined in accordance with the credit agreement. Based on our current level of outstanding revolving line of credit, a 1.0% change in interest rate would result in a $0.1 million annual change in interest expense. The remainder of our debt is at fixed interest rates that are not subject to changes in interest rates. We do not own nor are we obligated for other significant debt or equity securities that would be affected by fluctuations in market risk. INFLATION We do not believe that inflation has had a significant impact on our cost of operations. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued the FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal periods beginning after June 15, 2000. We adopted this statement during 1999 and such adoption had no material effect on our financial statements. YEAR 2000 We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our on-going business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or finanical closings at month, quarterly or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers and suppliers. We expended $0.9 million on Year 2000 readiness efforts from 1997 to 1999. These efforts included replacing some outdated, noncompliant hardware and noncompliant software as well as indentifying and remediating Year 2000 problems. 38 BUSINESS THE COMPANY We are a leading contract mechanical manufacturing services supplier of complex precision metal parts, tooling and assemblies for original equipment manufacturers. Our flexible manufacturing facilities and operating processes enable us to service customers across a wide range of industries and aggressively pursue new customers in industries where we see the potential for strong growth. Our customers include industry leaders such as General Electric, New Venture Gear, a joint venture of General Motors and DaimlerChrysler, Xerox, Boeing, Caterpillar and Dana. We have earned "Preferred" or "Qualified" supplier status with most of our customers and are predominantly the sole-source supplier to our customers of the parts we manufacture. Our pro forma revenues and EBITDA for the fiscal year ended December 31, 1999 were $149.8 million and $26.1 million, respectively, representing a 17.5% EBITDA margin. Our broad manufacturing capabilities and highly engineered processes allow us to meet the critical specifications of our customers. We manufacture parts, ranging in size from approximately 1 ounce to over 100,000 pounds, to extremely close tolerances. We are also able to maintain tight tolerances, across flat sheets and surfaces with multiple contours. We work with traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel, invar and hastelloy. In addition, we provide our customers with design assistance, process and product engineering support and quality testing. Our manufacturing expertise includes precision machining such as milling, turning, boring, drilling, broaching and grinding, as well as value-added services such as prototyping, assembly, forming, welding, heat treating and plating. The industries we serve and the related precision parts, assemblies and tooling we machine and manufacture include: - Power Generation Industry - specialty alloy turbine wheels and spacers, shrouds and nozzles; - Automotive Industry - piston valves used primarily for automatic braking systems in light trucks and sport utility vehicles and machined engine blocks; - Business Machines Industry - bases and internal components for high-end scanners, digital imaging machines and copiers; - Space and Satellite Industries - adapter rings, thrust rings, casting chambers and handling and transport aids; - Aerospace Industry; Commercial and Military - precision tooling including bond jigs, assembly jigs and mill fixtures; - Agriculture and Construction Equipment Industries - high tolerance bearing caps, transmission housings and diesel and gas pump housings; and - Transportation Industry - class eight heavy truck axles and related parts and engine blocks. INDUSTRY The U.S. precision custom manufacturing industry is highly fragmented and, excluding precision manufacturing operations owned directly by original equipment manufacturers, is estimated to be comprised of approximately 7,500 companies representing, over the last several years, annual revenues in excess of $20 billion. Within this market, precision machine shops and specialty tool manufacturers represent in excess of $13 billion of these revenues. As a result of high fragmentation and a large number of captive original equipment manufacturer operations, we believe there has been and will 39 continue to be significant consolidation opportunities among industry participants. According to industry sources, since 1992, the U.S. precision machining industry has grown at a rate of approximately 10% per year. We believe that a significant component of this growth has been and will continue to be attributable to an increase in outsourcing by original equipment manufacturers. Historically, many of the large original equipment manufacturers were vertically integrated with large in-house component machining capabilities. They primarily utilized precision machining companies only for short term over-flow production of parts during periods of great demand. During the past several years, however, original equipment manufacturers have been increasingly outsourcing component manufacturing functions and, in many cases, eliminating their in-house machining capabilities. This outsourcing has been driven by the original equipment manufacturers' desire to: - reduce costs; - increase efficiency; - improve quality; - shorten product development cycles; and - increase their focus on core capabilities. Furthermore, while original equipment manufacturers continue to increase the amount of outsourced manufacturing, they have also begun to consolidate their supplier bases to ensure quality, decrease administrative costs and improve service, design and assembly coordination. Leading original equipment manufacturers are increasingly relying on their "Preferred" or "Qualified" suppliers to provide a full line of high quality manufacturing and sub-assembly services, as well as manufacturing engineering and design assistance. We intend to continue to capitalize on these industry trends by providing our customers with a broad array of precision machining capabilities and by leveraging our competitive strengths. COMPETITIVE STRENGTHS LEADING SUPPLIER OF HIGH QUALITY, DIFFICULT-TO-PRODUCE PARTS. We focus on manufacturing and supplying precision metal parts and assemblies which require exceptionally close tolerances and involve complex processes. Many of our parts also involve microfine surface finishes and exotic, difficult to machine materials. We manufacture parts ranging in size from approximately 1 ounce to over 100,000 pounds and from less than 1 inch to over 20 feet in diameter. These parts are manufactured to tolerances as tight as 50 millionths of an inch. We are also able to maintain tolerances across flat sheets and surfaces with multiple contours to within 1/1000 of an inch to produce three-dimensional sculptured contouring and precise geometric shaping of parts. By focusing primarily on more complex parts and assemblies with exacting dimensional and cosmetic requirements, we believe we distinguish ourselves as a unique contract manufacturer of a variety of high quality, difficult-to-produce parts. BROAD MANUFACTURING CAPABILITIES SERVING DIVERSE END MARKETS. Our broad range of manufacturing capabilities allows us to meet the exacting requirements of customers serving a variety of end markets and reduces the need for our customers to rely on multiple suppliers. Most of our manufacturing processes and equipment can, with certain adjustments, produce a variety of parts and assemblies. We therefore have the flexibility to serve customers in a wide range of industries. We currently serve such diverse industries as power generation, automotive, business machines, space and satellites, agriculture and construction equipment, commercial and military aerospace and surgical supplies. We believe that our manufacturing adaptability, coupled with our diverse range of end markets, allows us to mitigate volatility or downturns in any one particular sector. Additionally, through our ability to produce a wide range of parts and assemblies we are able to capitalize on the increasing trend among our customers to focus on a fewer number of "Preferred" or "Qualified" suppliers capable of servicing their multiple needs. 40 STRONG CUSTOMER RELATIONSHIPS. We have built strong relationships with our customers by focusing on delivering high-quality complex precision parts and by consistently offering on-time delivery, quick product turnaround and value-added services. We have earned "Preferred" or "Qualified" supplier status with most of our customers and we are predominantly the sole-source supplier to our customers of the parts we manufacture. Our customer base consists of industry leaders such as General Electric, New Venture Gear, Xerox, Mannesmann (Rexroth), LucasVarity (Kelsey Hayes), Raytheon, Boeing, DaimlerChrysler, Robert Bosch, Caterpillar, Johnson & Johnson, Kodak and Dana. We proactively work with customers and their engineers to improve the design and manufacturing specifications of the product material, the part to be produced and the tooling required to produce the customer's finished product. These initiatives often lead to improved quality and part performance, increased operating efficiency and reduced manufacturing costs. We believe that the strong relationships and "Preferred" or "Qualified" supplier status we have established with our customers present a significant barrier to entry for our competitors on the parts we manufacture and give us a competitive advantage procuring additional work. MODERN, HIGH QUALITY OPERATIONS. We believe that our modern facilities, diverse manufacturing capabilities and commitment to continuous operational improvements enable us to consistently meet the demanding quality, tolerance and cosmetic requirements of our customers. Over the last two years, we have invested a substantial amount to ensure that our facilities are state-of-the-art and will remain so for years to come without substantial additional expenditures. Our modern manufacturing operations utilize advanced computer numerically controlled machines with automatic tool changers and on-machine gauging, as well as laser inspection machines. Our facilities and processes meet demanding customer certification and quality requirements. We participate in General Electric's Six Sigma program, are a D-1 supplier for Boeing and have received NASA's coveted Silver Snoopy award for outstanding effort in contributing to the success of space flight missions based on quality, safety and cost efficiency. Currently, five of our manufacturing facilities are ISO 9000, DI 9000, and/or QS 9000 certified, with the remaining facility expected to be certified by August 2000. Management believes that our commitment to modern, high-quality manufacturing processes has been and will continue to be a key reason for our strong growth and improvements in operating profitability. EXPERIENCED MANAGEMENT TEAM. Our management team is comprised of executives and plant managers who have, on average, over 25 years of manufacturing, engineering and operational experience. We believe this management team has demonstrated an ability to attract new customers, adapt to changing industry trends and continuously improve manufacturing operations and efficiency. We also believe that this management team will be able to continue to grow our company and to manage even larger operations as we grow. BUSINESS STRATEGY CAPITALIZE ON INDUSTRY TRENDS. We intend to capture additional business from existing customers and actively pursue new customers by capitalizing on recent trends among leading original equipment manufacturers to increase manufacturing outsourcing and concentrate on fewer, more reliable suppliers. By leveraging our competitive strengths, we believe we can offer customers the significant competitive advantages that can be obtained from manufacturing outsourcing, including reduced costs, increased efficiency, improved quality and shortened product development cycles. By continuing to focus on customer needs and aggressively marketing our diverse manufacturing capabilities, we believe we can capture incremental and new business from existing customers as well as become the supplier of choice and sole-source for a variety of key complex precision machine parts for new customers with outsourcing needs. PURSUE CROSS-SELLING OPPORTUNITIES AND BROADEN CUSTOMER BASE. Our operating subsidiaries' diverse manufacturing capabilities and complementary customer bases create a number of cross-selling 41 opportunities which we intend to aggressively pursue. We intend to proactively market to both current and new customers our full range of process capabilities. By doing so, we expect to further penetrate certain of the industries we currently serve, as well as to expand into other industries where we see the potential for strong growth. IMPLEMENT OPERATING BEST PRACTICES AND MAXIMIZE EFFICIENCIES. We intend to continue to focus and capitalize on the best practices of each of our operations including manufacturing processes, capacity utilization, inventory management and cycle and flow times from customer order to delivery. Management plans to utilize production resources to maximize manufacturing efficiency across our operating subsidiaries. Our operating philosophy is based on increasingly lean production systems supported by excellence in customer service, as measured by quality, on-time delivery, quick turnaround and low manufacturing cost. We have a comprehensive company-wide management system that includes site visits and periodic operating management meetings to leverage our market and manufacturing expertise, focus on innovation and benchmarking and solve problems using a team oriented approach. We believe implementing these best practices and maximizing operating efficiencies will lead to continuing improvements in labor productivity, reductions in overhead and scrap rates, decreased manufacturing flow time and increased working capital turnover. PURSUE STRATEGIC ACQUISITIONS. We believe we are well-positioned to take advantage of the high fragmentation in the precision custom manufacturing industry to continue to build a world class contract manufacturer of precision parts, assemblies and tooling. We intend to do this by pursuing strategic acquisitions which will expand, diversify our existing customer base, end markets served and our portfolio of processing capabilities. We will continue to focus on acquisitions of financially sound companies that manufacture high quality, difficult to produce parts, tooling and assemblies and that are the leading suppliers of those products to their customers. CUSTOMERS We currently service customers across a wide range of industries including the power generation, automotive, business machines, space and satellite, agriculture and construction equipment, commercial and military aerospace, surgical supply and transportation industries. We have focused on developing solid relationships with customers that are leaders in their respective industries such as General Electric, New Venture Gear, Xerox, Mannesmann (Rexroth), LucasVarity (Kelsey Hayes), Raytheon, Boeing, DaimlerChrysler, Robert Bosch, Caterpillar, Johnson & Johnson, Kodak and Dana. Our largest customer, General Electric, accounted for approximately 26.5% of our 1999 net sales and our top ten customers represented approximately 67% of our 1999 net sales. We have earned "Preferred" or "Qualified" supplier status with most of our customers and we are predominantly the sole-source supplier to our customers of the parts we manufacture. We believe that we have developed strong and loyal customer relationships with leading original equipment manufacturer's based on our ability to reliably deliver high-precision, high-quality metal parts and our focus on providing the highest level of service. We believe that the strong relationships and the "Preferred" and "Qualified" supplier status we have established with our customers present a significant barrier to entry for our competitors. We obtain most of our orders for new precision parts, tooling or assemblies through a presourcing process by which the customer invites one or more "Preferred" or "Qualified" suppliers to bid on the design and/or manufacture of a part or assembly that meets certain price, timing and functional parameters. We then typically receive a blanket purchase order that covers parts and/or assemblies to be supplied for the particular end-product. These supply arrangements normally extend over the life of the particular part or assembly. In addition, we compete to supply parts and assemblies for successor models of a customer's product, even though we may currently be a preferred supplier of parts or assemblies on a current or predecessor model. Our customer relationships, coupled with the essential 42 nature of many of the complex, close tolerance products we manufacture, have enabled us to participate with our customers in the development of products and to receive contracts that range in duration from annual blanket purchase orders to six years. Bids for new business are based on a target sale price, based on our experience with making parts or assemblies of a similar nature. Prior to our commitment for full production, we and the customer generally agree on a final price, which, in some instances, may be subject to negotiated price reductions over the life of the project. MARKETING AND DISTRIBUTION We market our parts and manufacturing capabilities either through an internal sales force or an outside agency. We believe that our stable and experienced sales force, coupled with senior management communication with key customers, has been a key reason for our success in maintaining customer loyalty and building new customer relationships. Most of our sales personnel have worked with the same customers for many years. Prior to their acquisition by our company, the sales forces at each of our subsidiaries operated independently of one another. While maintaining the decentralized focus to promote customer service and expertise, we expect to introduce an additional focus on marketing our broad operating capabilities to pursue a number of cross-selling opportunities which we believe exist between the complementary customer bases of our subsidiaries. We compensate our sales force based on a base salary and/or commissions. Our parts either are shipped by common carrier, picked up by customers at our facilities or delivered to customers by our own truck fleet. PARTS AND END USES Many of the parts we manufacture require innovative technical production solutions to customer-specific requirements, as well as considerable manufacturing expertise. The following table sets forth a sample of the complex, precision parts or assembles that we manufacture for our customers, together with the industry and end-use for such part.
INDUSTRY CUSTOMER PART/ASSEMBLY END USE - --------------------------- -------------------- --------------------------- --------------------------- Power Generation General Electric Turbine Wheel Hot section of land-based power turbine Automotive LucasVarity (Kelsey Piston/Pump Assembly Anti-lock braking systems Hayes) Engine Blocks for light trucks Business Machines Xerox Internal Components and High volume copiers, Bases digital imaging copiers, scanners Agriculture and Caterpillar Bearing Caps Stabilizes engine shaft Construction Equipment Transmission Housings and Casings Automotive New Venture Gear Transmission Housings Transmissions for light trucks Surgical Supplies Johnson & Johnson Surgical Saw Shaft Lapthroscopic and endoscopic disposable instruments Military and Commercial Boeing Bond Jig Tooling Tooling for manufacture of Aerospace nacelle frame Space Thiokol Assembly Mold Tooling Tooling for Space Shuttle rocket Automotive Mannesmann (Rexroth) Diesel Engine Pump Housings Diesel gas pumps
43
INDUSTRY CUSTOMER PART/ASSEMBLY END USE - --------------------------- -------------------- --------------------------- --------------------------- Business Machines Kodak Internal Components and High and low volume copiers Bases and thermal printers Commercial Satellites Northrop Grumman Cure Fixtures Tooling Molds for commercial satellite rocket components Specialty Automotive DaimlerChrysler High Performance Engine Holds moving engine parts Blocks for racing cars Transportation Dana, Alstom Truck Axles, Switching Class eight trucks and Signaling and Gears and Engine Blocks railroad switch gears Caterpillar Medical Ortho Clinical Base plate Blood analyzer Diagnostics
A majority of our parts are manufactured by us in their final configuration with no additional processing, including brake piston plungers for LucasVarity, bearing caps and engine blocks for Caterpillar and bond jigs for Boeing. In concert with our customers, we routinely develop prototype parts. For example, we have produced prototype parts for Johnson & Johnson's lapthroscopic and endoscopic disposable instruments, for the joint strike fighter, for General Electric's land-based power generation systems, for the Delta IV rocket and for the assembly which links the modules of the International Space Station. DESIGN, DEVELOPMENT AND ENGINEERING Our customer-focused approach fosters a close working relationship with our customers' engineers to improve the design and manufacturing specifications of the parts we produce. We are able to develop our own tools, processes and prototypes to test design parameters for minimization of variability and lead-times. We apply engineering techniques such as computer aided design, computer aided manufacturing and failure mode and effects analyses to optimize part functionality and manufacturability. We believe our in-house capability to develop and produce prototypes using standard and customized manufacturing equipment and processes is a competitive advantage. We provide our customers with full systems support to control product timing and ensure part quality and reliability through all phases of design, launch and production manufacturing. As a result, we are able to take an innovative, leadership role in the development, design and assembly of parts, machines and systems to meet or exceed customer requirements. Through our computer aided manufacturing and computer aided design systems we are able to provide virtual prototyping. This process enables hundreds of design solutions to be visualized quickly and easily and facilitates product design and manufacturing. Our computer systems are capable of finite element analyses and simulation, as well as design for manufacturing and assembly. These processes allow many aspects of a design to be evaluated prior to production, resulting in lower tooling costs, reduced testing requirements and quicker time to market. Our reputation for quality, reliability and design improvement has led to numerous requests for participation on customer engineering teams. Our understanding of cutting tool technology and difficult to machine materials makes our employees value-adding members of these teams. Through this participation we are able to work with our customers to identify the most cost effective process, materials and manufacturing methods for any specific application. Once the design phase of the engineering process is completed, our expertise and experience allow us to engineer and customize our tooling, machines and systems to achieve the highest quality path to the customer's requirements. The parts we manufacture often have sophisticated tooling requirements which we internally build or customize. The development costs are either billed to the customer or amortized over the life of the parts. The tooling development typically begins early in the engineering cycle and is quickly completed after being selected as the supplier of choice. 44 MANUFACTURING Our manufacturing expertise includes precision machining capabilities such as turning, milling, boring, drilling, broaching and grinding, as well as value-added services such as prototyping, forming, fabrication, welding, heat treating, plating, painting, tapping and assembly. We believe that the breadth of our in-house process capability provides us with a significant competitive advantage in being a sole-source supplier for our customers' multiple needs. To produce many of our components, we develop innovative solutions to customer-specific requirements by customizing either the process, the tooling or the machines. By highly engineering the process, we are able to utilize general-purpose machines with computer numerically controlled capabilities to manufacture very complex and difficult to machine parts in many different configurations with a high degree of accuracy. Through data feedback, we systematically test for quality throughout the entire manufacturing process. Our advanced computer numerically controlled equipment includes machines with automatic tool changers and on-machine gauging, as well as laser inspection machines. With computer numerically controlled equipment, we are able to increase efficiency and turn-around times by identifying, documenting and correcting potential defects and irregularities and by more accurately shaping or cutting parts, while at the same time, allowing the parts we are manufacturing to be run quickly and in small lot sizes. We are also able to manufacture complex and difficult to machine parts by customizing our tooling and equipment. We are able to do this by capitalizing on our substantial expertise and experience with a wide variety of part styles and sizes, our knowledge of various cutting tools and our highly skilled workforce. As a result, we are able to design and develop our own tooling, customize conventional tooling and create customized machinery. Based on our innovative approach to tooling and fixturing, we are able to tailor-make fixtures that help hold tolerances and improve repeatability and consistency. We can also reengineer conventional machines and cutting tools by changing heads, adding computer numerically controlled capability or combining the most appropriate aspects of different apparatus to create a better-designed machine to improve manufacturability of parts. We also utilize functional gauging for quality inspections to ensure accuracy and precision, thereby also improving repeatability and consistency. We emphasize a cellular approach to manufacturing. This approach allows our processes to utilize such technology as optical measuring devices and robotics. Further, we utilize a pelletized manufacturing approach which is easily converted from one product application to another, and has lower reprogramming costs than the traditional hard automation approach. Cellular manufacturing also helps promote our team approach for optimizing the manufacturability of a part by reducing inventory and increasing our through-put rate by better process control, minimization of set-up times and improved traceability and correctibility of errors at all stages of the manufacturing process. We also utilize just-in-time manufacturing and sourcing systems which help us to meet our customer requirements for faster deliveries while also minimizing inventory levels. Our operating philosophy emphasizes delivering a quality product, on time, at the lowest achievable cost. Continuous improvement on these operating parameters is achieved by driving our operations toward shorter and shorter lead and cycle times, which in turn requires increasingly higher standards of quality. We believe our disciplined approach to our manufacturing operations, including monthly operations reviews and meetings, facilitates employee participation and motivates management and employees to strive for better operational performance. Through this process, we are also able to leverage market and manufacturing expertise, put a focus on innovation and benchmarking and solve problems using a team oriented approach. As a result, we can improve productivity, quality and employee commitment while reducing inventory, floor space requirements and lead times. 45 QUALITY Product quality is among the most important factors in maintaining "Preferred" and "Qualified" supplier status with original equipment manufacturers. In order to meet the exacting requirements of our customers, we maintain the most stringent standards of quality control. We routinely employ in-process inspection by using testing equipment as a process aid during all stages of design, launch and the machining process to assess compliance. These include state-of-the-art computer assisted design and computer assisted manufacturing equipment, statistical process control systems, laser tracking devices, failure mode and effect analysis and coordinate measuring machines. We are also able to extract numerical control quality control data from our computer numerically controlled machines, a statistical measurement of the quality of the parts being manufactured. Our customers use this information in place of inspections to determine quality assurance. In some cases, we have installed testing equipment identical to that of our customers, again eliminating the need for reinspection by our customers. We also perform quality control tests on all parts we outsource to small machine shops. As a result, we are able to significantly reduce defective parts and therefore improve efficiency, quality and reliability. Currently, five of our manufacturing facilities are ISO 9000, DI 9000, and/or QS 9000 certified, with the remaining facility expected to be certified by August 2000. Original equipment manufacturers are increasingly requiring these standards in lieu of individual certification procedures and as a condition to awarding business. We participate in General Electric's Six Sigma program, are a D-1 9000 supplier for Boeing and have received NASA's coveted Silver Snoopy award for outstanding effort in contributing to the success of space flight missions based on quality, safety and cost efficiency. We believe that our commitment to modern, high-quality manufacturing processes has been and will continue to be a key reason for our strong customer loyalty and growth and that the expense required to institute and maintain quality control procedures comparable to ours represents a barrier to entry for other companies. COMPETITION We operate in an industry which is highly fragmented and competitive. A variety of suppliers with different subsets of our manufacturing capabilities compete to supply the stringent demands of large original equipment manufacturers. Competition is generally based on price, quality, timeliness of delivery, design and engineering support and service and, in some instances, on our ability to deliver assemblies or sub-assemblies rather than individual parts. To an extent, the original equipment manufacturers are able to compete with their suppliers, since they can produce their own components and assemblies if they so choose. However, during the past several years, original equipment manufacturers have been increasingly outsourcing component manufacturing functions and, in many cases, eliminating their in-house machining capabilities, in an effort to reduce costs, increase efficiency, improve quality and shorten product development cycles. A large number of actual or potential competitors exist, including the internal component operations of the original equipment manufacturers as well as independent suppliers, some of which are larger and have greater financial and other resources than we do. However, we believe that none of these competitors competes with us along all of our manufacturing capabilities. In addition, our business is increasingly competitive due to the supplier consolidation resulting from increased outsourcing by original equipment manufacturers and supplier management policies designed to strengthen their supply base. These policies include designating a limited number of suppliers as "Preferred" or "Qualified" suppliers and, in some cases, encouraging new suppliers to begin to supply selected product groups. We principally compete for new business both at the beginning of the development of new products and upon the redesign of existing products by our major customers. Because of the large investment by original equipment manufacturers in tooling and the long lead time required to commence production, original equipment manufacturers generally do not change a 46 supplier during a program. If, however, a customer becomes dissatisfied with our prices, quality or timeliness of delivery, it could award future business or, in an extreme case, move existing business to another supplier. SUPPLIERS, SUBCONTRACTORS AND RAW MATERIALS Generally, our raw materials consist of traditional materials such as steel, aluminum, iron, copper, magnesium and bronze, as well as exotic and difficult to machine materials such as titanium, inconel, invar and hastelloy. These materials are typically delivered in the form of bar stock, precision forgings, castings and flat sheets. A majority of our raw materials are supplied by our customers on consignment. Raw materials not supplied by our customers are purchased from several suppliers, and we do not believe that we are dependent on one or very few of them. All of these materials were available in adequate quantities to meet our production demands in 1998 and 1999. We may subcontract certain of our manufacturing or services such as plating or painting, among others, to third parties. We have an active subcontractor program that, among other things, assesses subcontractor capabilities and quality on an on-going basis. We use a limited number of subcontractors based on their ability to deliver high quality parts or services on a cost effective basis. We have not experienced any difficulty obtaining necessary raw materials or subcontractor services. FACILITIES In addition to our corporate office, we operate ten manufacturing facilities, two of which we own and the remainder of which we lease. Leases expire at various times through April 2007 and we generally have extension options. The following table summarizes the location of our manufacturing facilities and their general size:
LOCATION SQUARE FOOTAGE TYPE OF INTEREST - -------- -------------- ---------------- FACILITIES: Buena Park, California (Altura)................ 32,000 Leased Buena Park, California (Burnham)............... 41,000 Leased Cerritos, California........................... 28,000 Leased Plymouth, Michigan............................. 52,000 Owned Canton, Michigan............................... 29,000 Leased Canton, Michigan............................... 66,000 Leased Skokie, Illinois............................... 82,000 Owned Winslow, Maine................................. 92,000 Leased Rochester, New York............................ 140,000 Leased Rochester, New York............................ 73,000 Leased CORPORATE OFFICE: Irving, Texas.................................. 3,000 Leased
BACKLOG Firm backlog for 1999, increased 36.1% to $107.7 million from $79.1 million at December 31, 1998. Firm backlog represents the sales price of all undelivered products for which we have customer purchase orders or contractual coverage that will be delivered within the next 12 months. All of our firm backlog is subject to price renegotiations, termination or rescheduling or the customer's convenience. Firm backlog for December 31, 1998, has been restated to be consistent with the current method of calculating backlog. 47 ENVIRONMENTAL AND SAFETY REGULATION Our equipment, facilities and operations are subject to increasingly complex and stringent federal, state and local laws and regulations pertaining to the protection of human health and the environment. These include, among other things, the discharge of contaminants into the environment and the handling and disposition of wastes (including industrial, solid and hazardous wastes). In addition, we are required to obtain and maintain regulatory approvals in the United States in connection with our operations. Many environmental laws and regulations provide for substantial fines and criminal sanctions for violations. Based on the results of Phase I environmental site assessments which were performed at each of our facilities in 1998 and 1999, we believe that we are in material compliance with applicable environmental laws and regulations. We continue to incur capital expenditures to ensure compliance with applicable environmental laws and regulations. However, in 1998 and 1999, capital expenditures for environmental control projects were not material. Based on current information, we estimate that capital expenditures for environmental control projects in 2000 will also not be material. It is difficult to predict the future development of such laws and regulations or their impact on future earnings and operations. The timing and magnitude of costs related to environmental compliance may vary and we cannot assure you that material costs or liabilities will not be incurred. Certain environmental laws provide for strict, joint and several liability for investigation and remediation of spills and other releases of hazardous materials. These laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Persons who arrange (as defined under these laws) for the disposal or treatment of hazardous materials also may be liable for the costs of investigation, removal or remediation of such materials at the disposal or treatment site, regardless of whether the affected site is owned or operated by them. Such liability is strict, and may be joint and several. Because we own and operate a number of facilities, and because we arrange for the disposal of hazardous materials at many disposal sites, we may incur costs for investigation, removal and remediation, as well as capital costs associated with compliance with environmental laws and regulations. Although such environmental costs have not been material in the past and are not expected to be material in the future, changes in environmental laws and regulations or unexpected investigations and clean-up costs could have a material adverse effect on our business, financial condition or results of operations. EMPLOYEES As of December 31, 1999, we had over 1,000 employees, approximately 87.5% of whom were employed in manufacturing and the remainder of whom were office and managerial employees. None of our employees is represented by a union or covered by a collective bargaining agreement. We believe our relations with our employees are satisfactory. LEGAL PROCEEDINGS We are a party to various litigation matters that are incidental to our business. We do not believe that the outcome of any of these legal proceedings will have a material adverse effect on our business, financial condition or results of operations. 48 MANAGEMENT OUR DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to our directors and executive officers as of December 31, 1999:
NAME AGE POSITION - ---- -------- -------- James E. Ashton...................... 57 Chief Executive Officer and Director Ronald M. Miller..................... 55 Chief Financial Officer and Secretary Melvin D. Johnson.................... 53 Executive Vice-President for Operations Robert Womack........................ 62 Chairman and Director John F. Megrue....................... 41 Director William J. Gumina.................... 29 Director Richard W. Detweiler................. 58 Director David W.M. Harvey.................... 35 Director
Effective as of April 26, 2000, Mr. Womack was appointed to our Board of Directors to fill the vacancy that was left when John Clark resigned as a director in February, 2000. Effective as of April 26, 2000, Dr. Ashton resigned as Chairman of our Company. He will, however, continue to serve as Chief Executive Officer and director until his successor is named. In addition, on that same date, we announced that Messrs. Miller and Johnson will also be resigning. However, each will continue to serve in their current positions until their successors are named. DR. JAMES E. ASHTON has been our Chairman of the Board of Directors, Chief Executive Officer, and a director since our formation. He has over 30 years of experience in the aerospace, defense, oil service, medical products and composite materials industries. Prior to joining our company, Dr. Ashton served as Chairman and CEO of Fiberite, Inc. ("Fiberite"), a manufacturer of composite materials. From April 1989 to June 1994, he served as Vice President and General Manager of the Armament Systems division of FMC Corp. (now United Defense, L.P.), a defense contractor ("FMC"). Prior to 1989, Dr. Ashton served in various management positions at Rockwell International Corporation, Schlumberger Ltd., Healthdyne, Inc. and General Dynamics Corporation. RONALD M. MILLER has been our Chief Financial Officer since our formation. Prior to joining our company, he served as the Chief Financial Officer and Vice President, Finance and Treasurer of Fiberite. Before joining Fiberite in April 1996, Mr. Miller served in various management positions at Rohr, Inc., an aerospace manufacturing company, including as its Vice President, Finance & Treasurer. MELVIN D. JOHNSON has been our Executive Vice-President for Operations since our formation. He has over 28 years of experience in the aerospace/defense, transportation, oilfield services, computer peripherals and photocopying industries. Prior to joining our company, Mr. Johnson was a member of the executive team of Fiberite, and served as general manager of Fiberite's Winona, Minnesota division. From 1970 until 1996, Mr. Johnson held management positions with Xerox Corporation, CalComp Technology Inc., a manufacturer of computer graphic peripherals and a subsidiary of Lockheed Martin Corp., Schlumberger Ltd., FMC and Trailmobile Trailer Corporation, a manufacturer of platform trailers. ROBERT WOMACK has served as our Chairman and as a director since April 26, 2000. Prior thereto, he served as Chairman and Chief Executive Officer of U.S. Industries Bath and Plumbing Products, a diversified manufacturer of plumbing, bath and HVAC products. From October, 1994 to January, 2000, he served as Chairman and Chief Executive Officer of Zurn Industries, a diversified manufacturing and engineering company. Mr. Womack has over 40 years of manufacturing and consulting experience. JOHN F. MEGRUE has been a director since our formation. He also serves as Chairman of the Board and a director of Hibbett Sporting Goods, Inc., as Vice Chairman of the Board and a director of 49 Dollar Tree Stores, Inc., and as a director of The Children's Place Retail Stores, Inc. Mr. Megrue has been a partner of Saunders, Karp & Megrue since 1992. WILLIAM J. GUMINA has been a director since our formation. Mr. Gumina has been a Vice President with Saunders, Karp & Megrue since January 1999 and was an associate with Saunders, Karp & Megrue from March 1998 until he became a Vice President. Prior to his association with Saunders, Karp & Megrue, Mr. Gumina was an associate with Donaldson, Lufkin & Jenrette Merchant Banking Partners. RICHARD W. DETWEILER has been a director since our formation. He also serves on the Board of Directors of TreeSource Industries, Inc. Mr. Detweiler has been a Managing Director with Carlisle since November 1996. Prior thereto he was Chairman and CEO of Precision Aerotech, Inc., a publicly traded, diversified manufacturing company. Mr. Detweiler has also held senior general management, financial and manufacturing positions with Caterpillar, Inc., Sundstrand Corporation and International Harvester (Navistar). DAVID W. M. HARVEY has been a director since our formation in September 1998. Mr. Harvey is the President of Harvey & Company LLC, a merchant banking and advisory services firm, he founded in 1998. Prior thereto, he was a managing director of W.E. Myers & Co. BOARD OF DIRECTORS BOARD CONSTITUTION. Our bylaws provide that our Board of Directors consist of six directors, four of whom are to be nominated by the Precision Fund, one by Harvey and one collectively by Messrs. Ashton, Miller and Johnson. Currently, all directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of our board of directors. DIRECTOR COMPENSATION. Members of our Board appointed by Harvey, Saunders, Karp & Megrue and Carlisle are reimbursed for expenses pursuant to certain advisory agreements. See "Related Party Transactions." Dr. Ashton is reimbursed by us for travel expenses incurred in connection with attending meetings. We have established one standing committee of the board of directors, a compensation committee. The compensation committee reviews and approves executive salaries and administers our bonus, stock option and incentive compensation plans. The compensation committee advises and consults with management regarding significant employee benefit and compensation policies and practices. Currently, the only member of the committee is Mr. Detweiler. A replacement has not yet been appointed for Mr. Clark, who had been a member of the compensation committee until his resignation. EMPLOYMENT AGREEMENTS We intend to enter into employment agreements with our senior management but have not yet done so. EXECUTIVE COMPENSATION The following table provides information relating to compensation for our chief executive officer and our two other most highly compensated executive officers whose compensation is required to be disclosed by the rules and regulations of the Securities Act. The compensation information for all of 50 the named executive officers for 1999 and 1998 is based on their compensation from us and has been annualized to reflect what their compensation would have been had we been operating for all of 1998:
LONG TERM COMPENSATION/AWARD ------------------ ANNUAL COMPENSATION OTHER SHARES OF COMMON ------------------- ANNUAL STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION - --------------------------- -------- -------- ------------ ------------------ ------------ James E. Ashton........... 1999 $178,000 -- $ 7,868 -- -- Chief Executive Officer 1998 $130,000 $32,500 $ 2,368 -- -- Ronald M. Miller.......... 1999 $107,000 -- 22,809 -- -- Chief Financial Officer 1998 $ 78,000 $ 9,750 2,368 -- -- Melvin D. Johnson......... 1999 $100,000 -- 17,056 -- -- Executive Vice-President 1998 $ 73,000 $ 9,125 2,368 -- -- for Operations
OPTION GRANTS None of the executive officers named in the summary compensation table have options to purchase common stock under Precision Partners Holding Company's 1999 Stock Option Plan. PRECISION PARTNERS HOLDING COMPANY 1999 STOCK OPTION PLAN Precision Partners Holding Company adopted its 1999 Stock Option Plan to provide an incentive to attract, retain and reward certain individuals performing services for Precision Partners Holding Company, its subsidiaries or affiliates. The plan provides for the granting of options to purchase shares of Class B common stock of Precision Partners Holding Company to employees, directors or consultants. The board of directors of Precision Partners Holding Company, the members of which are the same as the members of our board of directors, currently administers the plan. Under the plan the board of the directors has the power to: - determine the persons eligible to receive options and the number of shares subject to each option; - designate the options as incentive stock options or nonstatutory stock options; - determine the fair market value of shares of stock; - determine the terms and conditions applicable to each option; - approve one or more forms of option agreements; - amend, modify or otherwise adjust the exercise price of an option; - accelerate, continue, extend to defer the exercisability of any option; and - otherwise administer and interpret the plan. As of the date of this prospectus, eligible individuals have been granted options to purchase 2,669,000, net of forfeitures, under the 1999 plan pursuant to option agreements. An additional 1,000 shares of common stock are reserved for issuance under the plan. All of the options were granted at fair market value. Precision Partners Holdings Company intends that any additional options granted under the plan will be exercisable at a price per share not less than the fair market value of the common shares at the date of the grant. The option agreements provide that the options can vest based upon the period of services provided to the Precision Partners Holding Company, the attainment of specified performance objectives, and/or the passage of a specified period of time. 51 SECURITY OWNERSHIP The following table sets forth information regarding beneficial ownership of our common stock as of March 1, 2000 held by: - each person or group believed by us to beneficially own more than 5% of our common stock; - our directors, chief executive officer and two other most highly compensated executive officers; and - all our directors and executive officers as a group. Virtually all of our outstanding common stock is owned indirectly by Precision Partners, L.L.C. through Precision Partners Holding Company. The applicable percentage ownership for our common stock set forth below is based on 43,683,612 membership units of Precision Partners, L.L.C. outstanding as of March 1, 2000. Under the rules and regulations of Regulation S-K under the Securities Act, beneficial ownership is calculated in accordance with Rule 13d-1 under the Exchange Act. Under these rules, the term includes not only shares owned by a person or group, but also shares over which the person or group exercises voting and/or investment power. These rules also treat common stock subject to options, warrants or other securities that are currently, or within 60 days will be, convertible into or exchangeable for common stock, including preferred stock, as outstanding for purposes of calculating the beneficial ownership of the person owning such option warrant or other convertible or exchangeable security but not outstanding for purposes of computing the total number of outstanding shares or the beneficial ownership of any other person. Except as otherwise noted, we believe that each of the holders listed below has sole voting and investment power over the shares beneficially owned by them.
PERCENT OF NAME AND ADDRESS OF NUMBER OF SHARES COMMON BENEFICIAL OWNER BENEFICIALLY OWNED STOCK OUTSTANDING - ------------------------------------------------------------ ------------------ ----------------- DIRECTORS AND EXECUTIVE OFFICERS(1): James E. Ashton............................................. 2,552,184 5.8% Ronald M. Miller............................................ 419,494 1.0% Melvin D. Johnson........................................... 251,697 0.6% John F. Megrue(2)........................................... -- -- William J. Gumina(2)........................................ -- -- Richard W. Detweiler(2)..................................... -- -- David W.M. Harvey(3)........................................ -- -- All directors and executive officers as a group, 7 persons................................................... 3,223,375 7.4% 5% STOCKHOLDERS: Precision Partners Investment Fund, L.L.C.(2)............... 36,367,236 83.2%
- ------------------------ (1) All addresses are in care our company, except for Precision Partners Investment Fund, L.L.C. whose address is 262 Harbor Drive, Stamford, CT 06902. (2) Precision Partners Investment Fund, L.L.C. is owned by two private equity funds sponsored by Saunders, Karp & Megrue, which collectively beneficially own approximately 66.8% of our outstanding common stock, and by three private equity funds sponsored by Carlisle, which collectively own approximately 16.4% of our outstanding common stock. Messrs. Megrue and Gumina are principals of Saunders, Karp and Megrue and may be deemed to be beneficially own the shares owned by the two Saunders, Karp & Megrue sponsored funds. Mr. Detweiler is a Managing Director with Carlisle and may be deemed to beneficially own the shares owned by the 52 three Carlisle funds. Each of Messrs. Megrue, Gumina and Detweiler disclaim beneficial ownership of such shares. (3) Harvey Equity Partners, L.L.C., which owns approximately 3.3% of our outstanding common stock, is a private equity fund sponsored by Harvey & Company LLC, a merchant banking and advisory services firm, of which Mr. Harvey is President and a founder. Mr. Harvey may be deemed to beneficially own the shares owned by Harvey Equity Partners, L.L.C. Mr. Harvey disclaims beneficial ownership of such shares. Founded in 1990, Saunders, Karp & Megrue is a private equity investment firm currently managing over $800 million of private equity capital. Since its inception, Saunders, Karp & Megrue has focused on investing in recapitalizations and buyouts of high-growth, middle market companies in the U.S. and on executing consolidation strategies of fragmented U.S. industry segments. Saunders, Karp & Megrue, through its private equity funds, has invested over $475 million in 27 companies concentrated in basic manufacturing, consumer products, restaurant, retail, financial services and distribution industries. Thomas A. Saunders, III and Allan W. Karp founded Saunders, Karp & Megrue in 1990 and in 1992 were joined by John F. Megrue (together, the "Saunders, Karp & Megrue Founders"). Since that time, the Saunders, Karp & Megrue Founders have invested the Saunders, Karp & Megrue equity funds and actively managed their respective portfolio investments. The Saunders, Karp & Megrue Founders are joined by other senior investment professionals and collectively they have significant experience in both the formation, management and investment of equity capital pools, and in the global capital markets, including financial advisory and mergers and acquisitions activity. RELATED PARTY TRANSACTIONS A majority of our directors are also principals of Saunders, Karp & Megrue, Carlisle and Harvey and are therefore in positions involving possible conflicts of interest. However, our directors and officers and those of our subsidiaries are subject to fiduciary obligations to act in our and our subsidiaries' best interests, as the case may be. We maintain with a third party insurer, for the benefit of our and our subsidiaries' directors and officers, liability insurance against certain liabilities incurred by these directors and officers in such capacity. We may from time to time engage in certain transactions with related parties and affiliates which include, among other things: - business arrangements; - lease arrangements for certain manufacturing facilities and offices; and - the payment of fees or commissions for the transfer of manufacturing by one operating company to another. The indenture governing the outstanding notes and which will govern the exchange notes generally requires that these types of transactions be on terms no less favorable to us or the applicable subsidiary than those which could be obtained on an arms' length basis from third parties. However, we can not provide you with any assurance that such transactions will not adversely affect our business, financial condition or results of operations. Certain consulting and advisory fees were payable to Harvey in connection with the financial performance of one of the companies acquired in March. In addition, similar fees may be payable if that company achieves specific financial performance targets in 2000 in connection with future acquisitions. From time to time, Saunders, Karp & Megrue, Carlisle and Harvey may also receive other customary fees in connection with divestitures, acquisitions and other transactions involving us or our subsidiaries. In addition, Precision Partners Holding Company has agreed to pay Saunders, Karp & Megrue and Carlisle an annual monitoring fee. 53 DESCRIPTION OF CREDIT FACILITIES GENERAL. We have a $23.0 million term loan facility and a $25.0 million revolving credit facility, including a $2.0 million sublimit for letters of credit. Each matures on March 31, 2005, unless terminated sooner upon an event of default. If terminated upon an event of default, all outstanding advances under the credit facilities may be required to be immediately repaid. The credit facilities can be used to complete permitted acquisitions, pay fees and expenses, or for working capital and other general corporate purposes. Borrowings under the credit facilities bear interest, at our option, at either a fixed rate equal to the higher of the overnight federal funds rate plus 50 basis points and the prime rate announced from time to time by Citibank, N.A. plus a margin of 100 to 200 basis points, based on our leverage ratio, or a floating rate equal to LIBOR plus a margin of 200 to 300 basis points, also based on our leverage ratio. Our ability to borrow under the credit facilities is subject to our compliance with the covenants described below and a borrowing base based on eligible accounts receivable and eligible inventory. At March 21, 2000, approximately $44.3 million of borrowings were outstanding under the credit facilities, consisting of the $23.0 million term loan and $21.3 million outstanding under our revolver. GUARANTEES AND SECURITY. All of our obligations under the credit facilities are guaranteed, jointly and severally, by our existing and future domestic subsidiaries and by Precision Partners Holding Company. In addition, our obligations under the credit facilities are secured by a first priority pledge of and security interest in all of the outstanding capital stock of our existing subsidiaries and future domestic subsidiaries, 65% of the outstanding capital stock of any future foreign subsidiary and substantially all of our assets and the assets of our existing and future domestic subsidiaries, including inventory, accounts receivable and all of our property, plants and equipment. Our obligations under the credit facilities are also secured by a pledge by Precision Partners Holding Company of all of our outstanding capital stock. CERTAIN FINANCIAL COVENANTS. The credit facilities require that we meet and maintain certain financial ratios and tests, including: - a maximum consolidated leverage ratio, total debt to EBITDA; - a minimum consolidated interest coverage ratio, EBITDA to interest expense; and - a minimum consolidated fixed charge coverage ratio, EBITDA to interest expense plus other fixed charges. CERTAIN OTHER COVENANTS. The credit facilities also contain covenants that limit our ability and that of our operating subsidiaries to take various actions, including: - incurring additional indebtedness and liens; - fundamentally changing corporate structure, including mergers, consolidations and liquidations; - disposing of property; - making certain payments, including on indebtedness prior to maturity, dividends and capital stock purchases; - making investments; - making capital expenditures; - modifying certain instruments; - changing fiscal periods; - entering into sale and leaseback transactions; - entering into affiliate transactions; - entering into agreements restricting distributions; - amending the acquisition documents; - granting negative pledges; and - entering into unrelated lines of business. 54 EVENTS OF DEFAULT. The credit facilities contain customary events of default with respect to us and our operating subsidiaries, including: - nonpayment of principal, interest or fees when due; - defaults with respect to other indebtedness; - noncompliance with covenants and other agreements contained in the new credit facilities; - breaches of representations or warranties; - events of bankruptcy; - failure to satisfy or stay execution of judgments in excess of $1,500,000; - incurrence of certain employee benefit liabilities; - invalidity of any guarantee; - failure of any new subsidiary to deliver documents necessary to create valid, preferred security interests in collateral; - invalidity or non-perfection of security interests in collateral; - failure of the notes or guarantees thereof to be subordinated; and - changes of control. 55 DESCRIPTION OF EXCHANGE NOTES The outstanding notes were, and the exchange notes will be issued under an indenture among us, the subsidiary guarantors and The Bank of New York, as trustee, as amended by the First and Second Supplemental Indentures thereto. The following is a summary of the material provisions of the indenture as so amended. It does not include all of the provisions of the indenture. We urge you to read the indenture because it defines your rights. The terms of the exchange notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended (the "TIA"). Copies of the indenture and of the first and second supplemental indentures have been filed as exhibits to the registration statement of which this prospectus is a part and may be obtained from the SEC or from us as described under "Where to Find More Information." You can find definitions of certain capitalized terms used in this description under "--Certain Definitions." For purposes of this section, references to the "Company" include only Precision Partners, Inc. and not our subsidiaries. BRIEF DESCRIPTION OF THE NOTES The exchange notes will be unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Debt of the Company. The exchange notes will be obligations of the Company evidencing the same indebtedness as the outstanding notes. Except as otherwise indicated, the following description relates to both the outstanding notes and the exchange notes. The form and terms of the exchange notes are the same as the form and terms of the outstanding notes in all material respects, except that: - The exchange notes have been registered under the Securities Act and therefore will not bear legends restricting their transfer and will not contain provisions relating to an increase in the interest rate which were included in the terms of the outstanding notes in circumstances relating to the timing of the exchange offer, and - the holders of the exchange notes will not be entitled to all of the rights of the holders of the outstanding notes under the registration rights agreement, which rights shall terminate upon the consummation of the exchange offer. The indenture provides that the exchange notes may be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the exchange notes will be issued in the form of one or more global notes and the trustee will act as Paying Agent and Registrar for the notes. See "Book Entry; Delivery and Form." The exchange notes may be presented for registration or transfer and exchange at the offices of the Registrar, which initially will be the trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders of the exchange notes ("Holders"). The Company will pay principal (and premium, if any) on the exchange notes at the trustee's corporate office in New York, New York. At the Company's option, interest may be paid at the trustee's corporate trust office or by check mailed to the registered address of the Holders. Any outstanding notes that remain outstanding after the completion of the exchange offer, together with the exchange notes issued in the exchange offer, will be treated as a single class of securities under the indenture. PRINCIPAL, MATURITY AND INTEREST Notes issued under the indenture are limited in aggregate principal amount to $150 million, of which $100 million was issued in the offer and sale of the outstanding notes. For each outstanding note accepted for exchange, the Holder will receive an exchange not having a principal amount equal to that of the surrendered outstanding note. The exchange notes will mature on March 15, 2009. Additional notes may be issued from time to time subject to the limitations set forth under "Certain Covenants--Limitation on Incurrence of Additional Indebtedness." Holders of such additional notes will have the right to vote together with Holders of exchange notes and of outstanding notes as a single class. 56 Interest on the exchange notes will accrue at the rate of 12% per annum and will be payable semiannually in cash on each March 15 and September 15 to the persons who are registered Holders at the close of business on the March 1 and September 1 immediately preceding the applicable interest payment date. Interest on the exchange notes will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from and including March 19, 1999, the date of issuance of the outstanding notes. The interest rate on the exchange notes is subject to increase in the circumstances described under "Exchange Offer and Registration Rights." Such additional interest will be payable on the same interest payment dates. As a result of the failure to have an exchange offer registration statement filed by September 15, 1999, to have it declared effective by September 16, 1999 and to complete the exchange offer by October 15, 1999, we are paying additional interest. The amount of additional interest has ranged from 0.5% per annum on September 15, 1999 to 0.75% per annum currently. Unless the registration statement is declared effective and the exchange offer completed by March 14, 2000, the amount of additional interest will increase to 1.0% per annum beginning on March 15, 2000 until effectiveness of the registration statement and completion of the exchange offer. SINKING FUND The exchange notes will not be entitled to the benefit of any mandatory sinking fund. REDEMPTION OPTIONAL REDEMPTION. Except as described below, the exchange notes are not redeemable before March 15, 2004. Thereafter, the Company may redeem the exchange notes at its option, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on March 15 of the year set forth below:
YEAR PERCENTAGE - ---- ---------- 2004..................................... 106.000% 2005..................................... 104.000% 2006..................................... 102.000% 2007 and thereafter...................... 100.000%
In addition, the Company must pay accrued and unpaid interest on the exchange notes redeemed. OPTIONAL REDEMPTION UPON QUALIFIED EQUITY OFFERINGS. At any time, or from time to time, on or prior to March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Qualified Equity Offerings (as defined below) to redeem up to 35% of all notes issued under the indenture at a redemption price equal to 112% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of redemption; provided that: (1) at least 65% of the principal amount of notes issued under the indenture remains outstanding immediately after any such redemption; and (2) the Company makes such redemption not more than 180 days after the consummation of any such Qualified Equity Offering. As used in the preceding paragraph, "Qualified Equity Offering" means a primary offering of Qualified Capital Stock, or rights, warrants or options to acquire Qualified Capital Stock, of Precision Partners Holding Company or Precision Partners, L.L.C. in the United States of at least $25 million to Persons who are not Affiliates of Precision Partners or Precision Partners Holding Company provided that, in the case of any such offering of Qualified Capital Stock of Precision Partners Holdings or Precision Partners, L.L.C., all the net proceeds thereof necessary to pay the aggregate redemption price (plus accrued interest to the redemption date) of the notes to be redeemed pursuant to the preceding paragraph are contributed to the Company. 57 SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the notes are to be redeemed at any time, selection of such notes for redemption will be made by the trustee either: (1) in compliance with the requirements of the principal national securities exchange, if any, on which such notes are listed; or (2) if such notes are not then listed on a national securities exchange, on a pro rata basis, by lot or by such method as the trustee shall deem fair and appropriate. No notes of a principal amount of $1,000 or less shall be redeemed in part. If a partial redemption is made with the proceeds of a Qualified Equity Offering, selection of the notes or portions thereof for redemption shall be made by the trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of notes to be redeemed at its registered address. If any note is to be redeemed in part only, the notice of redemption that relates to such note shall state the portion of the principal amount thereof to be redeemed. A new note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original note. On and after the redemption date, interest will cease to accrue on notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable redemption price pursuant to the indenture. SUBORDINATION The payment of all Obligations on the notes is subordinated in right of payment to the prior payment in full in cash or Cash Equivalents of all Obligations on Senior Debt. Upon any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshaling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Company or its property, whether voluntary or involuntary, all Obligations due upon all Senior Debt shall first be paid in full in cash or Cash Equivalents, or such payment duly provided for to the satisfaction of the holders of Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on the notes or for the acquisition of any of the notes for cash or property or otherwise. If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees with respect to, any Senior Debt, no payment of any kind or character shall be made by or on behalf of the Company or any other Person on its behalf with respect to any Obligations on the notes or to acquire any of the notes for cash or property or otherwise. In addition, if any other event of default occurs and is continuing with respect to any Designated Senior Debt, as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt, permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof and if the Representative for such Designated Senior Debt gives written notice of the event of default to the trustee (a "Default Notice"),then, unless and until all events of default with respect to such Designated Senior Debt have been cured or waived or have ceased to exist or the trustee receives notice from the Representative for such Designated Senior Debt terminating the Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Blockage Period"), neither the Company nor any other Person on its behalf shall (x) make any payment of any kind or character with respect to any Obligations on the notes or (y) acquire any of the notes for cash or property or otherwise. Notwithstanding anything herein to the contrary, in no event will a Blockage Period extend beyond 180 days from the date the Default Notice was delivered to the trustee and only one such Blockage Period may be commenced within any 360 consecutive days. No event of default 58 which existed or was continuing on the date of the commencement of any Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for commencement of a second Blockage Period by the Representative of such Designated Senior Debt whether or not after a period of 360 consecutive days, unless such event of default shall have been cured or waived or ceased to exist for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action, or any breach of any financial covenants for a period commencing after the date of commencement of such Blockage Period that, in either case, would give rise to an event of default pursuant to any provisions of the Designated Senior Debt under which an event of default previously existed or was continuing shall constitute a new event of default for this purpose). By reason of such subordination, in the event of the insolvency of the Company, creditors of the Company who are not holders of Senior Debt, including the Holders, may recover less, ratably, than holders of Senior Debt. GUARANTEES The Guarantors, jointly and severally, will fully and unconditionally guarantee the Company's obligations under the indenture and the notes. Each Guarantee will be subordinated to Guarantor Senior Debt on the same basis as the notes are subordinated to Senior Debt. The obligations of each Guarantor under its Guarantee will be limited as necessary to prevent the Guarantee from constituting a fraudulent conveyance or fraudulent transfer under applicable law. Each Guarantor may consolidate with or merge into or sell its assets to the Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company without limitation, or with other Persons upon the terms and conditions set forth in the indenture. See "Certain Covenants--Merger, Consolidation and Sale of Assets." In the event all of the Capital Stock of a Guarantor owned by the Company or a Restricted Subsidiary is sold by the Company and/or a Restricted Subsidiary or all or substantially all of the assets of a Guarantor are sold by such Guarantor and the sale complies with the provisions set forth in "Certain Covenants--Limitation on Asset Sales," such Guarantor's Guarantee will be released at the time of such sale. Separate financial statements of the Guarantors are not included herein because such Guarantors are jointly and severally liable with respect to the Company's obligations pursuant to the notes, and the aggregate net assets, earnings and equity of the Guarantors and the Company are substantially equivalent to the net assets, earnings and equity of the Company on a consolidated basis. CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder will have the right to require that the Company purchase all or a portion of such Holder's notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest, if any, thereon to the date of purchase. Prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control, the Company will be required to use its reasonable efforts to: (i) repay in full and terminate all commitments under all Indebtedness under the Credit Agreement and all other Senior Debt the terms of which require repayment upon a Change of Control or offer to repay in full and terminate all commitments under all Indebtedness under the Credit Agreement and all other such Senior Debt and to repay the Indebtedness owed to each lender which has accepted such offer; or (ii) obtain the requisite consents under the Credit Agreement and all other Senior Debt to permit the repurchase of the notes as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase notes pursuant to the provisions described below. 59 Within 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a note purchased pursuant to a Change of Control Offer will be required to surrender the note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date. If a Change of Control Offer is required to be made, there can be no assurance that the Company will be permitted by the terms of its Senior Debt to make such a Change of Control Offer or that it will have available funds sufficient to pay the Change of Control purchase price for all the notes that might be delivered by Holders seeking to accept the Change of Control Offer. In addition, the exercise by the holders of notes of their right to require the Company to repurchase the notes upon a Change of Control could cause a default under such Senior Debt, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company, which could cause an acceleration of such Senior Debt and a foreclosure with respect to any collateral securing it in the event such Senior Debt was not paid. In the event the Company is required to purchase outstanding notes pursuant to a Change of Control Offer, the Company expects that it would seek third party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Neither the Board of Directors of the Company nor the trustee (without the consent of a majority in principal amount of the notes then outstanding) may waive the covenant relating to a Holder's right to require the purchase of notes upon a Change of Control. This right and other restrictions in the indenture described herein on the ability of the Company and the Restricted Subsidiaries to incur additional Indebtedness, to grant liens on its property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a sale or takeover of the Company and, as a result, the removal of incumbent management, whether such sale or takeover is favored or opposed by such management. This right of the holders to require a repurchase of notes upon a Change of Control, however, is not part of a plan by management to adopt a series of anti-takeover provisions. Instead, the Change of Control purchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company may decide to do so in the future. Subject to the restrictions contained in the indenture described herein on the ability of the Company to incur additional Indebtedness, grant liens on its property, make Restricted Payments and make Asset Sales, the Company could, in the future, enter into certain highly leveraged transactions, including acquisitions, mergers, refinancings, restructurings or other recapitalizations, that would not constitute a Change of Control under the indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings and the holders of the notes. Except for limitations contained in such covenants, however, the indenture will not contain any covenants or provisions that would afford the holders of the notes protection in the event of any such highly leveraged transaction that does not constitute a Change of Control. The Company's obligation to make a Change of Control Offer may be discharged if a third party makes the Change of Control Offer in the manner and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer to be made by the Company and such third party purchases all notes properly tendered under such Change of Control Offer. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the indenture, the Company shall 60 comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the indenture by virtue thereof. CERTAIN COVENANTS The indenture will contain, among others, the following covenants: LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company or any Guarantor may incur Indebtedness (including, without limitation, Acquired Indebtedness) and the Restricted Subsidiaries that are not Guarantors may incur Acquired Indebtedness, in each case if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0 if such date of incurrence is on or prior to March 15, 2002 and 2.25 to 1 thereafter. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness or is entitled to be incurred pursuant to the prior sentence, the Company shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such categories of Permitted Indebtedness (or divided and classified in more than one of such categories of Permitted Indebtedness) or pursuant to the prior sentence. Accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause or permit any of the Restricted Subsidiaries to, directly or indirectly: (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company or in options, warrants or other rights to purchase Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock; (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock; or (c) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b) and (c) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto: (i) a Default or an Event of Default shall have occurred and be continuing; or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the covenant described under "--Limitation on Incurrence of Additional Indebtedness"; or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purpose, if other than in cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of: (A) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company 61 earned during the period beginning on the first day of the fiscal quarter commencing prior to the Issue Date and through the end of the most recent fiscal quarter for which financial statements are available prior to the date such Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (B) 100% of the aggregate net cash proceeds and the fair market value of property other than cash (as determined in good faith by the Company) received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date of Qualified Capital Stock of the Company or of other Indebtedness or securities converted to or exchanged for Qualified Capital Stock of the Company; plus (C) without duplication of any amounts included in clause (iii)(B) above, 100% of the aggregate net cash proceeds of any contribution to the equity capital of the Company (other than the Disqualified Capital Stock) received by the Company (excluding, in the case of clauses (iii)(B) and (C), any net proceeds from a Qualified Equity Offering to the extent used to redeem the notes); plus (D) an amount equal to the lesser of: (a) the sum of the fair market value of the Capital Stock of an Unrestricted Subsidiary owned by the Company and/or a Restricted Subsidiary and the aggregate amount of all Indebtedness of such Unrestricted Subsidiary owed to the Company and each Restricted Subsidiary on the date of Revocation of such Unrestricted Subsidiary as an Unrestricted Subsidiary in accordance with the covenant described under "--Limitation on Designations of Unrestricted Subsidiaries;" and (b) the Designation Amount with respect to such Unrestricted Subsidiary on the date of the Designation of such Subsidiary as an Unrestricted Subsidiary in accordance with the covenant described under "--Limitation on Designations of Unrestricted Subsidiaries;" plus (E) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date, an amount equal to the lesser of the return of capital with respect to such Investment and the initial amount of such Investment which was treated as a Restricted Payment, less, in either case, the cost of the disposition of such Investment and net of taxes. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend or distribution within 60 days after the date of declaration of such dividend if the dividend or distribution would have been permitted on the date of declaration; (2) any dividend or distribution in respect of or the repurchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Company, either (i) solely by conversion into or in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (3) so long as no Default or Event of Default shall have occurred and be continuing, repurchases of Capital Stock (or options therefor) of the Company from current or former officers, directors, employees or consultants pursuant to equity ownership or compensation plans or stockholders agreements not to exceed $1.0 million in any year (with unused amounts in any calendar year being carried over to succeeding calendar years, but not to exceed $1.5 million in any one year); 62 (4) payments pursuant to any tax sharing arrangement between the Company or any of its Restricted Subsidiaries and any other Person with which the Company or such Restricted Subsidiary files a consolidated tax return or with which the Company or such Restricted Subsidiary is part of a consolidated group for tax purposes not to exceed the amount the Company would be required to pay on a stand-alone basis; (5) the purchase or redemption of notes following a Change of Control after the Company shall have complied with the provisions under "--Change of Control," including payment of the purchase price pursuant to a Change of Control Offer; (6) the payment to Holdings of up to $800,000 in the aggregate in any fiscal year for Holdings to pay annual monitoring fees to Saunders, Karp & Megrue and Carlisle; (7) the payment of consulting and advisory fees to Harvey in connection with the 1999 Acquisitions or any future acquisition and related expenses; (8) the declaration and payment of dividends to holders of any class or series of Disqualified Capital Stock of the Company issued in accordance with the covenant entitled "--Limitation on Incurrence of Additional Indebtedness;" and (9) so long as no Default or Event of Default shall have occurred and be continuing, other Restricted Payments in an aggregate amount not to exceed $5 million. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1) and (2(ii)) shall be included in such calculation. LIMITATION ON ASSET SALES. The Company will not, and will not permit any of the Restricted Subsidiaries to, consummate an Asset Sale unless: (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Board of Directors of the Company); (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents or Replacement Assets and is received at the time of such disposition (provided that the amount of (x) any Indebtedness of the Company or any Guarantor that is actually assumed by the transferee in such Asset Sale and from which the Company and the Guarantors are fully and unconditionally released, (y) Indebtedness of a Restricted Subsidiary that is no longer such as a result of such Asset Sale (to the extent the Company and each other Restricted Subsidiary us released from any guarantee thereof) and (z) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash shall each be deemed to be cash for purposes of clause (i) above); and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either: (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case of any Senior Debt or Guarantor Senior Debt under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility; (B) to acquire Replacement Assets; or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii) (B). 63 On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds that have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 60 days following the applicable Net Proceeds Offer Trigger Date, all outstanding notes up to a maximum principal amount of notes equal to the Note Pro Rata Share, at a purchase price in cash equal to 100% of the principal amount of notes, plus accrued and unpaid interest (including additional interest, if any) thereon, if any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration) or Cash Equivalents, then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $10 million resulting from one or more Asset Sales or deemed Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $10 million, shall be applied as required pursuant to this paragraph). In the event that any other Indebtedness of the Company that ranks equally to in right of payment with the notes requires that such Indebtedness be repaid or repurchased upon the consummation of any Asset Sale (the "Other Indebtedness"), the Company may use the Net Proceeds Offer Amount otherwise required to be used to repay or repurchase such Other Indebtedness and to make a Net Proceeds Offer so long as the amount of such Net Proceeds Offer Amount available to be applied to purchase the notes is not less than the Note Pro Rata Share. With respect to any Net Proceeds Offer Amount, the Company shall make the Net Proceeds Offer in respect thereof at the same time as the analogous repayment or repurchase is made under any Other Indebtedness and the date of purchase in respect thereof shall be the same under the indenture as the repayment or purchase of any Other Indebtedness. With respect to any Net Proceeds Offer effected pursuant to this covenant, to the extent that the principal amount of the notes tendered pursuant to such Net Proceeds Offer exceeds the Note Pro Rata Share to be applied to the purchase thereof, such notes shall be purchased PRO RATA based on the principal amount of such notes tendered by each holder. In the event of the transfer of substantially all (but not all) of the property and assets of the Company and the Restricted Subsidiaries as an entirety to a Person in a transaction permitted under "--Merger, Consolidation and Sale of Assets," which transaction does not constitute a Change of Control, the successor corporation shall be deemed to have sold the properties and assets of the Company and the Restricted Subsidiaries not so transferred for purposes of this covenant and shall comply with the provisions of this covenant with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value (as determined in good faith by the Board of Directors of the Company) of such properties and assets of the Company or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 30 days following the Net Proceeds Offer Trigger Date, with a copy to the trustee, and shall comply with the procedures set forth in the indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender notes in an amount exceeding the Net 64 Proceeds Offer Amount, notes of tendering Holders will be purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. If not fully subscribed, the Company may retain and use the remaining Net Cash Proceeds for any purpose not otherwise prohibited by the indenture. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the indenture by virtue thereof. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company will not, and will not cause or permit any of the Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to: (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reasons of: (1) applicable law; (2) the indenture, the notes or the Guarantees; (3) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary; (4) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (5) the Credit Agreement; (6) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (7) any other agreement entered into after the Issue Date that contains encumbrances and restrictions that are not materially more restrictive with respect to any Restricted Subsidiary than those in effect with respect to such Restricted Subsidiary pursuant to agreements as in effect on the Issue Date; (8) agreements governing Permitted Indebtedness; (9) customary bank credit agreements Incurred pursuant to clause (xv) of the definition of Permitted Indebtedness; (10) customary restrictions on the transfer of any property or assets arising under a security agreement governing a Lien permitted under the indenture; (11) customary restrictions with respect to a Restricted Subsidiary pursuant to an agreement that has been entered into in connection with the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary; (12) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature discussed in clause (c) above on the property so acquired; 65 (13) secured Indebtedness otherwise permitted to be incurred pursuant to the covenants described under "--Limitations on Incurrence of Additional Indebtedness" and "--Limitation on Liens" that limit the right of the debtor to dispose of the assets securing such Indebtedness; (14) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; and (15) any agreement governing Refinancing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (4), (5), (6), (8) or (13) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such Refinancing Indebtedness are not materially more restrictive than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (2), (4), (5), (6), (8) or (13) above. LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any of the Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Restricted Subsidiary) or permit any Person (other than the Company or a Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. LIMITATION ON LIENS. The Company will not, and will not cause or permit any of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of the Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless: (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the notes, the notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens; and (ii) in all other cases, the notes are equally and ratably secured with the obligations so secured until such obligations are no longer secured by a Lien, except for: (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens securing Senior Debt, Guarantor Senior Debt or Indebtedness of a Restricted Subsidiary that is not a Guarantor that is permitted to be incurred under the indenture; (C) Liens securing the notes and any Guarantees; (D) Liens in favor of the Company or a Restricted Subsidiary; (E) Liens securing Refinancing Indebtedness incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the indenture and which has been incurred in accordance with the provisions of the indenture; provided, however, that such Liens do not extend to or cover any property or assets of the Company or any of the Restricted Subsidiaries not securing the Indebtedness so Refinanced (other than improvements, additions or accessions thereto); and (F) Permitted Liens. 66 PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness that is senior in right of payment to the notes or the Guarantee of such Guarantor and subordinate in right of payment to any other Indebtedness of the Company or such Guarantor, as the case may be. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, and will not cause or permit any Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and indenture in connection with any transaction complying with the provisions of the covenant described under "--Limitation on Asset Sales") to, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Restricted Subsidiaries) whether as an entirety or substantially as an entirety to any Person unless: (i) either: (1) the Company or such Guarantor shall be the surviving or continuing corporation; or (2) the Person (if other than the Company or such Guarantor) formed by such consolidation or into which the Company or such Guarantor is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and the Restricted Subsidiaries substantially as an entirety (the "Surviving Entity"): (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia; and (y) shall expressly assume, by supplemental indenture (in form and substance reasonably satisfactory to the trustee), executed and delivered to the trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the notes and the performance of every covenant of the notes, the Guarantee, if applicable, the indenture and, if then effect, the Registration Rights Agreement on the part of the Company or such Guarantor to be performed or observed; PROVIDED that a Guarantor may merge with or into the Company or another Guarantor without complying with this clause (i). (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction) on a pro forma basis, the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "--Limitation on Incurrence of Additional Indebtedness;" PROVIDED that a Guarantor may merge into the Company or another Guarantor without complying with this clause (ii); (iii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is 67 required in connection with such transaction, such supplemental indenture comply with the applicable provisions of the indenture and that all conditions precedent in the indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The indenture will provide that upon any consolidation, combination or merger of the Company or a Guarantor or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, in which the Company or such Guarantor is not the continuing corporation, the Surviving Entity formed by such consolidation or into which the Company or such Guarantor is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Guarantor under the indenture, the notes and the Guarantees with the same effect as if such Surviving Entity had been named as such and, except in the case of a conveyance, transfer or lease, the Company or such Guarantor, as the case may be, shall be released from the obligation to pay the principal of and interest on the notes or in respect of its guarantee, as the case may be, and all of the Company's or such Guarantor's other obligations and covenants under the notes, the indenture and its Guarantee, if applicable. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are not materially less favorable than those that would have reasonably been expected in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $5.0 million shall be approved by the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted Subsidiary enters into an Affiliate Transaction (or series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $10.0 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the trustee. (b) The restrictions set forth in clause (a) shall not apply to: (i) employment, consulting and compensation arrangements and agreements of the Company or any Restricted Subsidiary consistent with past practice or approved by a majority of the disinterested members of the Board of Directors of the Company (or a committee comprised of disinterested directors); (ii) reasonable fees and compensation paid to and indemnity provided on behalf of, officers, directors, employees, consultants or agents of the Company or any Restricted Subsidiary as determined in good faith by the Company's Board of Directors or senior management, including, without limitation, any issuance or grant of stock options, bonuses or similar rights to such employees, officers and directors; 68 (iii) transactions exclusively between or among the Company and any of the Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, provided such transactions are not otherwise prohibited by the indenture; (iv) Restricted Payments permitted to be made pursuant to the "--Limitation on Restricted Payments" covenant; (v) the payment to Holdings of up to $800,000 in the aggregate in any fiscal year for Holdings to pay annual monitoring fees to Saunders, Karp & Megrue and Carlisle; (vi) the payment of consulting and advisory fees to Harvey in connection with the 1999 Acquisitions or any future acquisition and related expenses; (vii) payments to the selling stockholders of Mid State, Galaxy and Certified pursuant to the relevant acquisition agreements or documents delivered in connection therewith (whether in cash or in the form of bonus compensation, a note or other security); (viii) Permitted Investments, (ix) in connection with a public offering of Common Stock of the Company, Holdings or any Restricted Subsidiary, loans or advances, having a maturity of one year or less after the date first made, to employees to finance the purchase by such employees of such Common Stock; (x) the issuance or sale of any Qualified Capital Stock of the Company or of any Guarantor; and (xi) the payment of all fees and expenses related to the 1999 Acquisitions, the new credit facilities and this offering (whether paid at or subsequent to the closing of such transactions). ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any Restricted Subsidiary transfers or causes to be transferred, in one transaction or a series of related transactions, any property with a book value in excess of $500,000 to any Domestic Restricted Subsidiary that is not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another Domestic Restricted Subsidiary having total assets with a book value in excess of $500,000, then such transferee or acquired or other Restricted Subsidiary shall: (1) execute and deliver to the trustee a supplemental indenture in form reasonably satisfactory to the trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the notes and the indenture on the terms set forth in the indenture; and (2) deliver to the trustee an opinion of counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of the indenture. The Indebtedness evidenced by any Guarantee (including the payment of principal of, premium, if any, and interest on the notes) will be subordinated to Guarantor Senior Debt on terms analogous to those applicable to the notes. See "--Subordination." The obligations of each Guarantor under its Guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor (including, without limitation, any guarantees under the Credit Agreement) and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the indenture, result in 69 the obligations of the Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment for distribution under a Guarantee is entitled to a contribution from each other Guarantor in a pro rata amount based on the Adjusted Net Assets of each Guarantor. CONDUCT OF BUSINESS. The Company will not, and will not permit any Restricted Subsidiary to, engage in any businesses which are not either: (i) the same, similar or related to the businesses in which the Company or any of the Restricted Subsidiaries are engaged on the Issue Date, (ii) businesses acquired through an acquisition after the Issue Date which are not material to the Company and the Restricted Subsidiaries, taken as a whole, or (iii) Permitted Investments. LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may designate any Subsidiary of the Company (other than a Subsidiary of the Company that owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under the indenture (a "Designation") only if: (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such Subsidiary has total assets greater than $1,000 and (a) no Default shall have occurred and be continuing after giving effect to such Designation; and (b) the Company would be permitted under the indenture to make an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the sum of (i) the fair market value of the Capital Stock of such Subsidiary owned by the Company and/or any of the Restricted Subsidiaries on such date and (ii) the aggregate amount of Indebtedness of such Subsidiary owed to the Company and the Restricted Subsidiaries on such date; and (c) after giving effect to such designation, the Company would be permitted to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "--Limitation on Incurrence of Additional Indebtedness" at the time of Designation (assuming the effectiveness of such Designation). In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment in the Designation Amount pursuant to the covenant described under "-- Limitation on Restricted Payments" for all purposes of the indenture. The indenture will further provide that the Company shall not, and shall not permit any Restricted Subsidiary to, at any time (x) provide direct or indirect credit support for or a guarantee of any Indebtedness of any Unrestricted Subsidiary (including of any undertaking agreement or instrument evidencing such Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any Indebtedness that provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except, in the case of clause (x) or (y), to the extent permitted under the covenant described under "--Limitation on Restricted Payments." The indenture will further provide that the Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary ("Revocation"), whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if: (a) no Default shall have occurred and be continuing at the time and after giving effect to such Revocation; and 70 (b) all Liens and Indebtedness of such Unrestricted Subsidiaries outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the indenture. All Designations and Revocations must be evidenced by an officers' certificate of the Company delivered to the trustee certifying compliance with the foregoing provisions. REPORTS TO HOLDERS. The indenture will provide that the Company will deliver to the trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The indenture further provides that, notwithstanding that the Company may not be subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the trustee and Holders with such annual and quarterly reports and such information, documents and other reports specified in Section 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA Section314(a). EVENTS OF DEFAULT The following events are defined in the indenture as "Events of Default:" (i) the failure to pay interest on any notes when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by the subordination provisions of the indenture); (ii) the failure to pay the principal on any notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by the subordination provisions of the indenture); (iii) a default in the observance or performance of any other covenant or agreement contained in the indenture which default continues for a period of 45 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the trustee or the Holders of at least 25% of the outstanding principal amount of the notes (except in the case of a default with respect to the covenant described under "--Certain Covenants--Merger, Consolidation and Sale of Assets," which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) a default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or of any Restricted Subsidiary (or the payment of which is guaranteed by the Company or any Restricted Subsidiary), whether such Indebtedness now exists or is created after the Issue Date, which default (a) is caused by a failure to pay principal of such Indebtedness after notice and the lapse of any applicable grace period provided in such Indebtedness on the date of such default (a "payment default") or (b) results in the acceleration of such Indebtedness prior to its express maturity (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days) and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a payment default or the maturity of which has been so accelerated (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days), aggregates $7.5 million; (v) one or more judgments in an aggregate amount in excess of $7.5 million not covered by adequate insurance shall have been rendered against the Company or any of the Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and nonappealable; 71 (vi) certain events of bankruptcy affecting the Company or any of the Significant Subsidiaries; or (vii) any Guarantee of a Significant Subsidiary ceases to be in full force and effect or any Guarantee of a Significant Subsidiary declared to be null and void and unenforceable or any Guarantee of a Significant Subsidiary is found to be invalid or any of the Guarantors that is a Significant Subsidiary denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the indenture). If an Event of Default (other than an Event of Default specified in clause (vi) above shall occur and be continuing, the trustee or the Holders of at least 25% in principal amount of outstanding notes may declare the principal of, premium, if any, and accrued interest on all the notes to be due and payable by notice in writing to the Company and (if given by the Holders) the trustee specifying the respective Events of Default and that it is a "notice of acceleration," and the same shall become immediately due and payable. If an Event of Default specified in clause (vi) above occurs and is continuing, then all unpaid principal of, premium, if any, and accrued and unpaid interest on all of the outstanding notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the trustee or any Holder. The indenture will provide that, at any time after a declaration of acceleration with respect to the notes as described in the preceding paragraph, the Holders of a majority in principal amount of the then outstanding notes may rescind and cancel such declaration and its consequences: (i) if the rescission would not conflict with any judgment or decree; (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration; (iii) to the extent the payment of such interest is lawful, if interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid; (iv) if the Company has paid the trustee its reasonable compensation and reimbursed the trustee for its expenses, disbursements and advances; and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. The Holders of a majority in principal amount of the then outstanding notes may waive any existing Default or Event of Default under the indenture, and its consequences, except a default in the payment of the principal of or interest on any notes. Holders of the notes may not enforce the indenture or the notes or institute any proceeding with respect thereto or for any remedy thereunder except as provided in the indenture and under the TIA. Subject to the provisions of the indenture relating to the duties of the trustee, the trustee is under no obligation to exercise any of its rights or powers under the indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the trustee reasonable indemnity. Subject to all provisions of the indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee. Under the indenture, the Company is required to provide an officers' certificate to the trustee promptly upon the Company obtaining knowledge of any Default or Event of Default (provided that the Company shall provide such certification at least annually whether or not it knows of any Default 72 or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have its obligations and the obligations of any Guarantors discharged with respect to the outstanding notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding notes, except for: (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the notes when such payments are due; (ii) the Company's obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payments; (iii) the rights, powers, trust, duties and immunities of the trustee and the Company's obligations in connection therewith; and (iv) the Legal Defeasance provisions of the indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the indenture ("Covenant Defeasance") and thereafter any omission or failure to comply with such obligations shall not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "--Events of Default" will no longer constitute an Event of Default with respect to the notes. In order to exercise Legal Defeasance or Covenant Defeasance: (i) the Company must irrevocably deposit with the trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be sufficient (through the payment of principal and interest), to pay the principal of, premium, if any, and interest on the notes on the stated date of payment thereof or on the applicable redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the trustee an opinion of counsel in the United States reasonably acceptable to the trustee confirming that: (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling; or (B) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the trustee an opinion of counsel in the United States reasonably acceptable to the trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; 73 (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the Company shall have delivered to the trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; (viii) the Company shall have delivered to the trustee an opinion of counsel to the effect that: (A) the trust funds will not be subject to any rights of holders of Senior Debt, including, without limitation, those arising under the indenture; and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (ix) certain other customary conditions precedent are satisfied. Notwithstanding the foregoing, the opinion of counsel required by clause (ii) above with respect to a Legal Defeasance need not be delivered if all notes not theretofore delivered to the trustee for cancellation (1) have become due and payable or (2) will become due and payable on the maturity date within one year under arrangements satisfactory to the trustee for the giving of notice of redemption by the trustee in the name, and at the expense, of the Company. SATISFACTION AND DISCHARGE The indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the notes, as expressly provided for in the indenture) as to all outstanding notes when: (i) either: (a) all the notes theretofore authenticated and delivered (except lost, stolen or destroyed notes which have been replaced or paid and notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the trustee for cancellation; or (b) all notes not theretofore delivered to the trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the notes not theretofore delivered to the trustee for cancellation, for principal of, premium, if any, and interest on the notes to the date of deposit together with irrevocable instructions from the Company directing the trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the indenture by the Company; and 74 (iii) the Company has delivered to the trustee an officers' certificate and an opinion of counsel stating that all conditions precedent under the indenture relating to the satisfaction and discharge of the indenture have been complied with. MODIFICATION OF THE INDENTURE From time to time, the Company, the Guarantors and the trustee, without the consent of the Holders, may amend the indenture for certain specified purposes, including curing ambiguities, defects or inconsistencies, so long as such change does not, in the opinion of the trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel. Other modifications and amendments of the indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding notes issued under the indenture, except that, without the consent of each Holder affected thereby, no amendment may: (i) reduce the amount of notes whose holders must consent to an amendment; (ii) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any notes; (iii) reduce the principal of or change or have the effect of changing the fixed maturity of any notes, or change the date on which any notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any notes payable in money other than that stated in the notes; (v) make any change in provisions of the indenture protecting the right of each Holder to receive payment of principal of and interest on such notes on or after the stated due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of the then outstanding notes to waive Defaults or Events of Default; (vi) amend, change or modify in any material respect the obligation of the Company to make and consummate a Change of Control Offer after the occurrence of a Change of Control or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated or modify any of the provisions or definitions with respect thereto; (vii) modify or change any provision of the indenture or the related definitions affecting the subordination or ranking of the notes or any Guarantee in a manner which adversely affects the Holders; or (viii) release any Guarantor from any of its obligations under its Guarantee or the indenture otherwise than in accordance with the terms of the indenture. GOVERNING LAW The indenture will provide that it, the notes and any Guarantees will be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. THE TRUSTEE The indenture will provide that, except during the continuance of an Event of Default, the trustee will perform only such duties as are specifically set forth in the indenture. During the existence of an Event of Default, the trustee will exercise such rights and powers vested in it by the indenture, and use the same degree of care and skill in its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. 75 The indenture and the provisions of the TIA contain certain limitations on the rights of the trustee, should it become a creditor of the Company, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the trustee will be permitted to engage in other transactions; provided that if the trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the indenture. Reference is made to the indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or at the time it merges or consolidates with the Company or any of the Restricted Subsidiaries or assumed by the Company or any Restricted Subsidiary in connection with the acquisition of assets from such Person and in each case whether or not such Indebtedness is incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary or such acquisition, merger or consolidation. "ADJUSTED NET ASSETS" of a Guarantor at any date means the lesser of the amount by which (x) the fair value of the property of such Guarantor exceeds the total amount of its liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Guarantee of such Guarantor at such date, and (y) the present fair salable value of the assets of such Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Guarantor on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date and after giving effect to any collection from any Subsidiary of such Guarantor in respect of the obligations of such Subsidiary under such Guarantor's Guarantee), excluding debt in respect of the Guarantee, as they become absolute and matured. "AFFILIATE" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. 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; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "AFFILIATE TRANSACTION" has the meaning set forth under "--Certain Covenants--Limitation on Transactions with Affiliates." "ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted Subsidiary in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged with or into the Company or any Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted Subsidiary of the assets of any Person (other than a Restricted Subsidiary) that constitute all or substantially all of the assets of such Person or comprise any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. 76 "ASSET SALE" means any direct or indirect sale, issuance, conveyance, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer (other than the granting of a Lien in accordance with the indenture) for value by the Company or any of the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Restricted Subsidiary of (a) any Capital Stock of any Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary); or (b) any other property or assets of the Company or any Restricted Subsidiary other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or the Restricted Subsidiaries receive aggregate consideration of less than $1.0 million, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted by the covenant described under "--Certain Covenants--Merger, Consolidation and Sale of Assets," (iii) any Restricted Payment made in accordance with the covenant described under "--Certain Covenants--Limitation on Restricted Payments," (iv) the sale, lease, conveyance, disposition or other transfer of property or equipment that has become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or any Restricted Subsidiary, (v) the creation or realization of any Permitted Lien, (vi) the sale of receivables or other assets pursuant to a receivables or asset securitization or similar program, (vii) any disposition the making of which is a Permitted Investment, (viii) the sale of any Cash Equivalents owned by the Company or any of its Subsidiaries and (ix) any exchange of like property pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended. "BLOCKAGE PERIOD" has the meaning set forth under "--Subordination." "BOARD OF DIRECTORS" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the trustee. "CAPITAL STOCK" means: (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person; and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. "CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "CARLISLE" means Carlisle Enterprises, LLC. "CASH EQUIVALENTS" means: (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one 77 year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds that invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "CHANGE OF CONTROL" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the indenture); (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of the indenture); or (iii) any Person or Group, other than the Permitted Holders, becomes the beneficial owner, directly or indirectly, of more than 50% of the total voting power of the Capital Stock of the Company, and the Permitted Holders beneficially own, directly or indirectly in the aggregate, a lesser percentage of the total voting power of the Capital Stock of the Company than such Person or Group and do not have the right or ability by voting power, contract, or otherwise to elect or designate for election a majority of the Board of Directors (or any analogous governing body) of the Company; or (iv) following the consummation of an initial public offering of the Company, the replacement of a majority of the Board of Directors of the Company or Holdings over a two-year period from the directors who constituted the Board of Directors of the Company or Holdings, as the case may be, at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company or Holdings, as the case may be, then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "CHANGE OF CONTROL OFFER" has the meaning set forth under "--Change of Control." "CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "--Change of Control." "COMMON STOCK" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. 78 "CONSOLIDATED EBITDA" means, with respect to the Company, for any period, the sum (without duplication) of: (i) Consolidated Net Income; and (ii) to the extent Consolidated Net Income has been reduced thereby: (A) all income taxes of the Company and the Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary or nonrecurring gains or taxes attributable to Asset Sales outside the ordinary course of business); (B) Consolidated Interest Expense; (C) Consolidated Non-cash Charges, less any non-cash items increasing Consolidated Net Income for such period, (D) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary or is merged or consolidated with the Company or any Restricted Subsidiary but after the first day of the relevant Four Quarter Period as used in the definition of "Consolidated Fixed Charge Coverage Ratio," (E) the aggregate amount of any earn-out payments or bonuses paid to the selling stockholders of Mid State and Galaxy during the relevant Four Quarter Period; (F) in the case of a successor to the Company by consolidation or merger or as a transferee of the Company's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets but after the first day of the relevant Four Quarter Period as used in the definition of "Consolidated Fixed Charge Coverage Ratio," and (G) monitoring fees paid by Holdings to Saunders, Karp & Megrue and Carlisle in an amount not to exceed $350,000 in the aggregate during the Four-Quarter Period all as determined on a consolidated basis for the Company and the Restricted Subsidiaries in accordance with GAAP. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to the Company, the ratio of Consolidated EBITDA of the Company during the four most recent full consecutive fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of the Company for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro forma basis for the period of such calculation to: (i) the incurrence or repayment of any Indebtedness of the Company or any of the Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period; and (ii) any Asset Sales or other dispositions or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Company 79 or one of the Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and also including any Consolidated EBITDA (including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X under the Exchange Act) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date as if such Asset Sale or Asset Acquisition or other disposition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period. If the Company or any of the Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if the Company or any Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio": (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. For purposes of this definition, whenever pro forma effect is to be given to an Asset Acquisition, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness incurred in connection therewith, the pro forma calculations shall be determined on a basis consistent with Regulation S-X under the Exchange Act, which determination shall be made in good faith by a responsible financial or accounting officer of the Company and such pro forma calculations may include such pro forma adjustments for nonrecurring non-cash items that the Company considers reasonable and quantifiable in order to reflect the ongoing impact of any such transaction on the Company's results of operations. "CONSOLIDATED FIXED CHARGES" means, with respect to the Company for any period, the sum, without duplication, of: (i) Consolidated Interest Expense; plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of the Company (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local income tax rate of the Company, expressed as a decimal. "CONSOLIDATED INTEREST EXPENSE" means, with respect to the Company for any period, the sum of, without duplication: (i) the aggregate of the interest expense of the Company and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP (excluding fees and expenses incurred in connection with the offer and sale of the notes), including without limitation, 80 (a) any amortization of debt discount, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED NET INCOME" means, with respect to the Company, for any period, the aggregate net income (or loss) of the Company and the Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom: (a) after-tax gains and losses from Asset Sales or abandonments or reserves relating thereto other than in the ordinary course of business; (b) after tax items classified as extraordinary or nonrecurring gains or losses; (c) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary or is merged or consolidated with the Company or any Restricted Subsidiary; (d) the net income (but not loss) of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law or otherwise (except for restrictions existing pursuant to clause (9) of the covenant described under "--Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries"); (e) the net income of any Person, other than a Restricted Subsidiary, except to the extent of cash dividends or distributions paid to the Company or to a Restricted Subsidiary by such Person; (f) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued); and (g) in the case of a successor to the Company by consolidation or merger or as a transferee of the Company's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "CONSOLIDATED NON-CASH CHARGES" means, with respect to the Company, for any period, the aggregate depreciation, amortization and other non-cash expenses of the Company and the Restricted Subsidiaries reducing Consolidated Net Income of the Company for such period, determined on a consolidated basis in accordance with GAAP (excluding any such charge that requires an accrual of or a reserve for cash charges for any future period). "COVENANT DEFEASANCE" has the meaning set forth under "--Legal Defeasance and Covenant Defeasance." "CREDIT AGREEMENT" means the Credit Agreement dated as of the Issue Date by and among the Company, the guarantors named therein, the lenders named therein, Citibank, N.A., as administrative agent, Bank of America National Trust and Savings Association, as syndication agent, and Sun Trust Bank, Atlanta, as documentation agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder (provided that such increase in borrowings is permitted by the covenant described under "-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness" (including the definition of Permitted Indebtedness)) or adding Restricted Subsidiaries as additional borrowers or guarantors thereunder) all 81 or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary against fluctuations in currency values. "DEFAULT" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice of both would be, an Event of Default. "DEFAULT NOTICE" has the meaning set forth under "--Subordination." "DESIGNATED SENIOR DEBT" means (i) Indebtedness under or in respect of the Credit Agreement and (ii) any other Indebtedness constituting Senior Debt that, at the time of determination, has an aggregate principal amount of at least $25,000,000 and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. "DESIGNATION" has the meaning set forth under "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." "DESIGNATION AMOUNT" has the meaning set forth under "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." "DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event (other than a Change of Control), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is mandatorily exchangeable for Indebtedness, or is redeemable, or exchangeable for Indebtedness, at the sole option of the holder thereof (except upon the occurrence of a Change of Control) on or prior to the final maturity date of the notes. "DOMESTIC RESTRICTED SUBSIDIARY" means a Restricted Subsidiary incorporated or otherwise organized or existing under the laws of the United States, any state thereof or any territory or possession of the United States. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto, and the rules and regulations of the Commission promulgated thereunder. "FAIR MARKET VALUE" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the trustee. "FOREIGN RESTRICTED SUBSIDIARY" means any Restricted Subsidiary that is organized and existing under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accounts and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "GUARANTEE" means as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or 82 payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. A guarantee will include, without limitation, any agreement to maintain or preserve any other Person's financial condition or to cause any other Person to achieve certain levels of operating results. "GUARANTEE" has the meaning set forth under "--Certain Covenants--Additional Subsidiary Guarantees." "GUARANTOR" means (i) each Subsidiary of the Company guaranteeing the notes as of the Issue Date and (ii) each other Person that in the future executes a Guarantee pursuant to the covenant described under "--Certain Covenants--Additional Subsidiary Guarantees" or otherwise; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its Guarantee is released in accordance with the terms of the indenture. "GUARANTOR SENIOR DEBT" means, with respect to any Guarantor, (i) the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of such Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of: (x) all monetary obligations of every nature of the Company or any Guarantor with respect to the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities; (y) all Interest Swap Obligations; and (z) all obligations under Currency Agreements; in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include: (i) any Indebtedness of such Guarantor owing to a Subsidiary of such Guarantor or any Affiliate of such Guarantor or any of such Affiliate's Subsidiaries; (ii) Indebtedness to, or guaranteed on behalf of, any stockholder, director, officer or employee of such Guarantor or any Subsidiary of such Guarantor (including, without limitation, amounts owed for compensation); (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services; (iv) Indebtedness represented by Disqualified Capital Stock; (v) any liability for federal, state, local or other taxes owed or owing by such Guarantor; (vi) Indebtedness incurred in violation of the covenant described under "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness"; (vii) Indebtedness that, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Guarantor; and 83 (viii) any Indebtedness that is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor. "HARVEY" means Harvey Equity Partners, L.L.C. "HOLDINGS" means Precision Partners Holding Company or any successor or assign thereof that owns 100% of the Qualified Capital Stock of the Company. "INCUR" has the meaning set forth under "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness." "INDEBTEDNESS" means, with respect to any Person, without duplication: (i) all Obligations of such Person for borrowed money; (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all Capitalized Lease Obligations of such Person; (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property or services, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade or other accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted); (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction; (vi) guarantees and other contingent obligations in respect of Indebtedness of any other Person referred to in clauses (i) through (v) above and clause (viii) below; (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) that are secured by any Lien on any property or asset of such first Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured; (viii) all Obligations under currency agreements and all interest swap obligations of such Person; and (xi) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "INDEPENDENT FINANCIAL ADVISOR" means a firm (i) that does not, and whose directors, officers and employees and Affiliates do not, have a direct or indirect financial interest in the Company and (ii) that, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. 84 "INITIAL PURCHASERS" means Salomon Smith Barney Inc. and NationsBanc Montgomery Securities LLC. "INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "INVESTMENT" means, with respect to any Person, (i) any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or (ii) any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person. "Investment" shall exclude extensions of trade credit by the Company and the Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. If the Company or any Restricted Subsidiary sells or otherwise disposes of less than all of the Capital Stock of any Restricted Subsidiary (the "Referent Subsidiary") such that, after giving effect to any such sale or disposition the Referent Subsidiary shall cease to be a Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Capital Stock of the Referent Subsidiary not sold or disposed of. "ISSUE DATE" means March 19, 1999. "LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance and Covenant Defeasance." "LIEN" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "LLC" means Precision Partners, L.L.C. "NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest), received by the Company or any of the Restricted Subsidiaries from such Asset Sale net of: (a) actual expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, sales commissions and relocation expenses); (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements; (c) repayments of Indebtedness secured by the property or assets subject to such Asset Sale that is required to be repaid in connection with such Asset Sale; (d) provision for minority interest holders in any Restricted Subsidiary as a result of such Asset Sale; (e) payments of unassumed liabilities (not constituting Indebtedness) relating to the assets sold at the time of, or within 30 days after, the date of such Asset Sale; and (f) appropriate amounts to be determined by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such 85 Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "NET PROCEEDS OFFER" has the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "NET PROCEEDS OFFER PAYMENT DATE" had the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "NOTE PRO RATA SHARE" means the amount of the applicable Net Proceeds Offer Amount obtained by multiplying the amount of such Net Proceeds Offer Amount by a fraction, (i) the numerator of which is the aggregate principal amount of notes outstanding at the time of the applicable Asset Sale with respect to which the Company is required to use the Net Proceeds Offer Amount to repay or make a Net Proceeds Offer or repay and (ii) the demoninator of which is the sum of (a) the aggregate accreted value and/or principal amount, as the case may be, of all Other Indebtedness outstanding at the time of the applicable Asset Sale and (b) the aggregate principal amount of all notes outstanding at the time of the applicable Net Proceeds Offer with respect to which the Company is required to use the applicable Net Proceeds Offer Amount to offer to repay or make a Net Proceeds Offer or repay. "OBLIGATIONS" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "PERMITTED HOLDERS" means (i) Saunders, Karp & Megrue and (ii) any Person "controlled" (as defined in the definition of "Affiliate") by one or more Persons identified in clause (i) of this definition. "PERMITTED INDEBTEDNESS" means, without duplication, each of the following: (i) Indebtedness under the notes, the indenture and any Guarantees issued in respect thereto, outstanding on the Issue Date, not to exceed an aggregate principal amount of $100 million; (ii) Indebtedness incurred pursuant to the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed the greater of (a) $50 million and (b) the sum of (x) 85% of the book value of the accounts receivable of the Company and its Restricted Subsidiaries on a consolidated basis plus (y) 50% of the book value of the inventory of the Company and its Restricted Subsidiaries on a consolidated basis plus (z) $25 million; (iii) other Indebtedness of the Company and the Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any proceeds from Asset Sales used to repay such Indebtedness pursuant to the covenant "--Limitation on Asset Sales;" (iv) Interest Swap Obligations of the Company covering Indebtedness of the Company or any Guarantor and Interest Swap Obligations of any Restricted Subsidiary covering Indebtedness of such Restricted Subsidiary; provided, however, that such Interest Swap Obligations are entered into to protect the Company and the Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the indenture to the extent the notional principal amount of such Interest Swap Obligations does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligations relates; 86 (v) Indebtedness under Currency Agreements; provided that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and the Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Indebtedness of a Restricted Subsidiary to the Company or another Restricted Subsidiary for so long as such Indebtedness is held by the Company or a Restricted Subsidiary, in each case subject to no Lien held by a Person other than the Company or a Restricted Subsidiary; provided that if as of any date any Person other than the Company or a Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Restricted Subsidiary for so long as such Indebtedness is held by a Restricted Subsidiary, in each case subject to no Lien; provided that if as of any date any Person other than a Restricted Subsidiary owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five business days of incurrence; (ix) Indebtedness of the Company or any of the Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance, performance or surety bonds entered into in the ordinary cause of business or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness; (xi) Purchase Money Indebtedness and Capitalized Lease Obligations (and any Indebtedness incurred to Refinance such Purchase Money Indebtedness or Capitalized Lease Obligations) not to exceed $10.0 million at any one time outstanding; (xii) guarantees of the obligations of Restricted Subsidiaries; (xiii) Indebtedness of the Company or any of its Restricted Subsidiaries arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from guarantees, letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries, incurred or assumed in connection with the disposition of any business, any Asset Sale or any disposition of the Capital Stock of a Restricted Subsidiary other than guarantees or similar credit support by the Company or any of its Restricted Subsidiaries of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Capital Stock for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of all such Indebtedness in the nature of such guarantees shall at no time exceed the gross proceeds actually received by the Company from the sale of such business, assets or Capital Stock; (xiv) reimbursement obligations relating to undrawn standby letters of credit (other than under the Credit Agreement) issued in the ordinary course of business; (xv) Indebtedness of Foreign Restricted Subsidiaries in an aggregate amount not to exceed $7.5 million; and 87 (xvi) additional Indebtedness of the Company and the Guarantors in an aggregate principal amount not to exceed $12.5 million at any one time outstanding (which amount may, but need not, be incurred under the Credit Agreement). "PERMITTED INVESTMENTS" means: (i) Investments by the Company or any Restricted Subsidiary in any Person that is or will become immediately after such Investment a Restricted Subsidiary or that will merge or consolidate into the Company or a Restricted Subsidiary; (ii) Investments in the Company or any Restricted Subsidiary by any Restricted Subsidiary; provided that any Indebtedness evidencing such Investment is unsecured and subordinate to the notes; (iii) Investments in cash and Cash Equivalents; (iv) loans and advances to employees, officers and directors of the Company and the Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of 1.0 million at any time outstanding; (v) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or a Restricted Subsidiary's businesses and otherwise in compliance with the indenture; (vi) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (vii) Investments made by the Company or the Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with the covenant described under "-- Certain Covenants -- Limitation on Asset Sales"; (viii) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, provided that such trade terms may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (ix) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (x) lease, utility and other similar deposits in the ordinary course of business; (xi) Investments paid for solely in Qualified Capital Stock of the Company; (xii) Investments acquired by the Company or a Restricted Subsidiary as a result of a foreclosure by, or other transfer of title to, the Company or such Restricted Subsidiary with respect to any secured Investment; (xiii) loans and advances to employees, officers and directors of the Company and the Restricted Subsidiaries in the ordinary course of business to purchase Capital Stock (or options therefor) of the Company in an amount not to exceed $1.5 million in the aggregate outstanding at any one time; and (xiv) additional Investments not to exceed $10.0 million at any one time outstanding. 88 "PERMITTED LIENS" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or any Restricted Subsidiary shall have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (v) easements, rights-of-way, zoning restrictions and other similar charges, restrictions or encumbrances in respect of real property or minor imperfections of title which do not, in the aggregate, impair in any material respect the ordinary conduct of the business of the Company and the Restricted Subsidiaries taken as a whole; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; provided that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation; (vii) purchase money Liens securing Indebtedness incurred to finance property or assets of the Company or any Restricted Subsidiary acquired in the ordinary course of business, and Liens securing Indebtedness which Refinances any such Indebtedness; provided, however, that (A) the related purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed the lesser of the fair market value and the cost of such property or assets plus the aggregate amount of fees and expenses incurred in connection therewith and shall not be secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets so acquired and (B) the Lien securing the purchase money Indebtedness shall be created within 90 days of such acquisition; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of the Restricted Subsidiaries, including rights of offset and set-off; 89 (xi) Liens securing Interest Swap Obligations, which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the indenture; (xii) Liens securing Indebtedness under Currency Agreements; (xiii) Liens securing Acquired Indebtedness (and any Indebtedness which Refinances such Acquired Indebtedness) incurred in accordance with the covenant described under "-- Certain Covenants -- Limitation on Incurrence of Additional Indebtedness"; provided that (A) such Liens secured the Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and were not granted in connection with, or in anticipation of the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and (B) such Liens do not extend to or cover any property or assets of the Company or of any of the Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary; (xiv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xv) Liens arising pursuant to Sale and Leaseback Transactions entered into in compliance with the indenture; (xvi) Liens on the Capital Stock or other securities of an Unrestricted Subsidiary that secures indebtedness or other obligations of such Unrestricted Subsidiary; (xvii) any encumbrance or restriction (including put and call arrangements) with respect to the Capital Stock of any joint venture, partnership or similar arrangement pursuant to any joint venture, partnership or similar agreement; and (xviii) Liens securing Indebtedness that otherwise may be incurred under the indenture in an aggregate amount not to exceed $5 million. "PERSON" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "PREFERRED STOCK" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or any Restricted Subsidiary incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of any property, provided that the aggregate principal amount of such Indebtedness does not exceed the lesser of the fair market value of such property or such purchase price or cost. "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified Capital Stock. "QUALIFIED EQUITY OFFERING" has the meaning set forth under " - --Redemption--Optional Redemption upon Qualified Equity Offerings." "REFERENCE DATE" has the meaning set forth under "--Certain Covenants--Limitation on Restricted Payments." "REFINANCE" means in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. "REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any Restricted Subsidiary of Indebtedness incurred in accordance with the covenant described under "--Certain Covenants-- 90 Limitation on Incurrence of Additional Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix) and (xi) through (xvi) inclusive of the definition of Permitted Indebtedness), in each case that does not: (1) result in an increase in the aggregate principal amount of any Indebtedness provided that the amount of any premium reasonably necessary to Refinance such Indebtedness and the amount of reasonable expenses incurred by the Company in connection with such Refinancing shall not be deemed an increase in the aggregate principal amount of the Indebtedness to be Refinanced; (2) create Indebtedness (A) the portion of which is scheduled to mature prior to the notes with a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) with a final maturity earlier than the final maturity of the Indebtedness being Refinanced or the notes, whichever is later; provided that if such Indebtedness being Refinanced is Indebtedness of the Company or a Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and/or Guarantors. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated the Issue Date by and among the Company, the Guarantors and the Initial Purchasers. "REPLACEMENT ASSETS" means assets and property that will be used in the business of the Company and/or its Restricted Subsidiaries as existing on the Issue Date or in a business the same, similar or reasonably related thereto (including Capital Stock of a Person that becomes a Restricted Subsidiary if such Person is engaged in businesses that comply with the covenant described under "--Certain Covenants--Conduct of Business"). "REPRESENTATIVE" means the indenture trustee or other trustee, agent or representative in respect of any Designated Senior Debt: provided that if, and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt. "RESTRICTED PAYMENT" has the meaning set forth under "--Certain Covenants--Limitation on Restricted Payments." "RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not been designated by the Board of Directors of the Company, by a Board Resolution delivered to the trustee, as an Unrestricted Subsidiary pursuant to and in compliance with the covenant described under "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such Designation may be revoked by a Board Resolution of the Company delivered to the trustee, subject to the provisions of such covenant. "REVOCATION" has the meaning set forth under "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." "SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such Property other than between the Company and a Restricted Subsidiary or between Restricted Subsidiaries. "SEC" means the U.S. Securities and Exchange Commission, as from time to time constituted, or if at any time after the execution of the indenture the SEC is not existing and performing the applicable duties now assigned to it, then the body or bodies performing such duties at such time. 91 "SECURITIES ACT" means the Securities Act of 1933, as amended, or any successor statute or statutes thereto, and the rules and regulations of the Commission promulgated thereunder. "SENIOR DEBT" means: (i) the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the notes. Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of: (x) all monetary obligations of every nature of the Company, under the Credit Agreement, including, without limitation, obligations to pay principal and interest reimbursement obligations under letters of credit, fees, expenses and indemnities; (y) all Interest Swap Obligations; and (z) all obligations under Currency Agreements, in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt" shall not include: (i) any Indebtedness of the Company to a Restricted Subsidiary or any Affiliate of the Company or any of such Affiliate's Subsidiaries; (ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer or employee of the Company or any Restricted Subsidiary (including without limitation, amounts owed for compensation); (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services; (iv) Indebtedness represented by Disqualified Capital Stock; (v) Indebtedness incurred in violation of the covenant described under "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness"; and (vi) any Indebtedness that is, by its express terms, subordinated in right of payment to any other Indebtedness of the Company or a Restricted Subsidiary and senior in right of payment to the notes. "SIGNIFICANT SUBSIDIARY" means, with respect to any Person, any Restricted Subsidiary of such Person that satisfies the criteria for a "significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities Act. "SKM" means Saunders Karp & Megrue, L.P. "SUBSIDIARY," with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. 92 "SURVIVING ENTITY" has the meaning set forth under "--Certain Covenants--Merger, Consolidation and Sale of Assets." "UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated as such pursuant to and in compliance with the covenant described under "--Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such designation may be revoked by a Board Resolution of the Company delivered to the trustee, subject to the provisions of such covenant. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date the making of such payment. 93 BOOK-ENTRY; DELIVERY AND FORM The outstanding notes were issued in the form of two global certificates, one representing the outstanding notes issued under Rule 144A and the other representing the notes issued under Regulation S. The exchange notes will be issued in the form of one or more global certificates. The outstanding global notes were deposited on the date of closing of the sale of the outstanding notes, and the exchange global notes will be deposited on the exchange date, with the trustee as custodian for The Depository Trust Company, or DTC, and registered in the name of DTC or its nominee for credit to the account of a direct or indirect participant in DTC, as described below. The term "global notes" means the outstanding global notes or the exchange global notes, as the context may require. Except as set forth below, the global notes may be transferred, in whole, and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global notes may not be exchanged for notes in certificated form except in the limited circumstances described below. See "--Exchange of Book-Entry Notes for Certificated Notes." Except in the limited circumstances described below, owners of beneficial interests in the global notes will not be entitled to receive physical delivery of certificated notes. Transfers of beneficial interests in the global notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants including, if applicable, those of Euroclear and Cedel, which may change from time to time. Initially, the trustee will act as paying agent and registrar. The exchange notes may be presented for registration of transfer and exchange at the offices of the registrar. DEPOSITORY PROCEDURES The following information regarding the operations and procedures of DTC, Euroclear and Cedel has been provided by such organizations and is provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to change by them from time to time. We take no responsibility for these operations and procedures (or the description thereof) and urge investors to contact the system or their participants directly to discuss these matters. DTC has advised us that it is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the company that, pursuant to procedures established by it, (i) upon deposit of the global notes, DTC will credit the accounts of Participants designated by the trustee with portions of the principal amount of the global notes and (ii) ownership of such interests in the global notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interests in the global notes). Investors in the exchange notes may hold their interests therein directly through DTC, if they are Participants in such system, or indirectly through organizations, including Euroclear and Cedel, which are Participants in such system. Euroclear and Cedel will hold interests in the global notes on behalf of 94 their participants through customers' securities accounts in their respective names on the books of their respective depositories, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A., as operator of Cedel. All interests in a global note, including those held through Euroclear or Cedel, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Cedel may also be subject to the procedures and requirements of such systems. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a global note to such persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having beneficial interests in a global note to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Payments in respect of the principal of, and premium, if any, and interest on a global note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered Holder under the indenture. Under the terms of the indenture, both we and the trustee will treat the persons in whose names the exchange notes, including the global notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither we, the trustee nor any agent of ours or of the trustee has or will have any responsibility or liability for (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interest in the global notes, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the global notes or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the company that its current practice, upon receipt of any payment in respect of securities such as the exchange notes, including principal and interest, is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interest in the relevant security as shown on the records of DTC, unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants, as the case may be, and will not be the responsibility of DTC, the trustee or us. Neither we nor the trustee will be liable for any delay by DTC or any of its Participants or Indirect Participants in identifying the beneficial owners of the exchange notes, and both we and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Except for trades involving only Euroclear and Cedel participants, interests in the global notes are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will, therefore, settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its Participants. See "--Same Day Settlement and Payment." Transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same day funds, and transfers between participants in Euroclear and Cedel will be effected in the ordinary way in accordance with their respective rules and operating procedures. Cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or Cedel participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case may be, by its respective depositary; however, such cross- 95 market transactions will require delivery of instructions to Euroclear or Cedel, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the global note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Cedel participants may not deliver instructions directly to the depositories for Euroclear or Cedel. DTC has advised us that it will take any action permitted to be taken by a Holder of exchange notes only at the direction of one or more Participants to whose account DTC has credited the interests in the global notes and only in respect of such portion of the aggregate principal amount of the notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default with respect to the notes, DTC reserves the right to exchange the global notes for legended notes in certificated form, and to distribute such notes to its Participants. Neither we nor the trustee nor any of our respective agents will have any responsibility for the performance by DTC, Euroclear or Cedel or our respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES A global note is exchangeable for definitive notes in registered certificated form only if (i) DTC (x) notifies us that it is unwilling or unable to continue as depositary for the global notes and fails to appoint a successor depositary within 90 days or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) we, at our option, notify the trustee in writing that we elect to cause the issuance of the notes or (iii) there shall have occurred and be continuing an event of default with respect to the notes. In addition, beneficial interests in a global note may be exchanged for certificated notes upon request but only upon prior written notice given to the trustee by or on behalf of DTC in accordance with the indenture. In all cases, certificated notes delivered in exchange for any global note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary, in accordance with its customary procedures. SAME-DAY SETTLEMENT AND PAYMENT The indenture requires that payments in respect of the exchange notes represented by the global notes, including principal, premium, if any, and interest, be made by wire transfer of immediately available funds to the accounts specified by the Holder of the global notes. With respect to exchange notes in certificated form, we will make all payments of principal, premium, if any, and interest on the exchange notes at the office or agency maintained by us for such purpose within the City and State of New York, initially the office of the paying agent maintained for such purpose, or, at our option, by check mailed to the Holders thereof at their respective addresses set forth in the register of Holders of exchange notes; PROVIDED that all payments of principal, premium, if any, and interest on exchange notes in certificated form the Holders of which have given wire transfer instructions to us will be required to be made by wire transfer of immediately available funds to the accounts specified by such Holders. The exchange notes represented by the global notes are expected to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such exchange notes will, therefore, be required by DTC to be settled in immediately available funds. We expect that secondary trading in any certificated notes will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or Cedel participant purchasing an interest in a global note from a Participant or Indirect Participant in DTC will be 96 credited, and any such crediting will be reported to the relevant Euroclear or Cedel participant, during the securities settlement processing day, which must be a business day for Euroclear and Cedel, immediately following the settlement date of DTC. DTC has advised us that cash received in Euroclear or Cedel as a result of sales of interests in a global note by or through a Euroclear or Cedel participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or Cedel cash account only as of the business day for Euroclear or Cedel following DTC's settlement date. REGISTRATION RIGHTS FOR OUTSTANDING NOTES The following is a summary of the material terms of the registration rights agreement. Under the registration rights agreement, we were required to: - by September 15, 1999, file a registration statement relating to the exchange offer with the SEC; - by September 16, 1999, use our best efforts to have the registration statement declared effective; and - by October 15, 1999, use our best efforts to consummate the exchange offer. Under existing SEC interpretations contained in several no-action letters to unrelated third parties, the exchange notes will be freely transferable by holders which are not our affiliates after the exchange offer without further registration under the Securities Act if the holder of the exchange notes can make the representations described under "Exchange Offer--Terms and Conditions of the Letter of Transmittal." Broker-dealers receiving exchange notes in the exchange offer will, however, have a prospectus delivery requirement with respect to resales of such exchange notes, as described in "Plan of Distribution." In the no-action letters, the SEC has taken the position that broker-dealers receiving exchange notes in the exchange offer may fulfill their prospectus delivery requirements with respect to exchange notes, other than a resale of an unsold allotment from the original sale of the outstanding notes, with this prospectus. We have agreed for a period of 180 days after completion of the exchange offer to make available a prospectus meeting the requirements of the Securities Act to these broker-dealers and other persons, if any, with similar prospectus delivery requirements for use in connection with any resale of exchange notes. If we are not permitted to consummate the exchange offer because it is not permitted by applicable law or SEC policy or any holder of outstanding notes notifies us prior to the 60th day following completion of the exchange offer that: - it is prohibited by law or SEC policy from participating in the exchange offer, - that it may not resell the exchange notes acquired by it in the exchange offer to the public without delivering a prospectus and this prospectus is not appropriate or available for such resale, or - that it is a broker-dealer and owns outstanding notes acquired directly from us or one of our affiliates, we and the subsidiary guarantors have agreed to file with the SEC a shelf registration statement to cover resales of outstanding notes by holders who satisfy specified conditions relating to the provision of information in connection with the shelf registration statement. We have agreed to use our best efforts to cause the shelf registration statement to be declared effective as promptly as possible by the SEC. Upon the occurrence of events which would require an amendment or supplement to the prospectus, public resales will not be permitted under a shelf registration statement or this prospectus until the amendment or supplement is provided to holders, including a period of up to 120 days in any 97 calendar year during which we are entitled under the registration rights agreement to suspend use of the shelf registration statement or this prospectus to avoid public disclosure of an event that would have a material adverse effect on us or require public disclosure of a pending material transaction not previously disclosed. If we fail to meet any of the deadlines described above for the exchange offer or a shelf registration statement, additional interest will accrue on the outstanding notes over and above the stated interest rate of 12% at a rate of 0.50% per annum for the first 90 days after the default and increasing by an additional 0.25% per annum at the beginning of each subsequent 90-day period. However, the additional interest rate on the outstanding notes may not exceed in the aggregate 1.0% per annum. Upon curing the registration default, additional interest on the outstanding notes as a result of such registration default shall cease to accrue. If, after curing all registration defaults, there is a subsequent registration default, the rate of additional interest will initially be 0.50%, regardless of the additional interest rate in effect with respect to any prior registration default. As a result of the failure to have an exchange offer registration statement filed by September 15, 1999, to have it declared effective by September 16, 1999 and to complete the exchange offer by October 15, 1999, we are paying additional interest on the outstanding notes. The amount of additional interest has ranged from 0.5% per annum on September 15, 1999 to 1.0% per annum currently. Additional interest will continue to accrue at that rate until effectiveness of the registration statement and completion of the exchange offer. Any amount of additional interest that becomes due is payable in cash, on the same dates as interest payments are made on the outstanding notes. The amount of additional interest is determined by multiplying the applicable additional interest rate by the principal amount of the outstanding notes multiplied by a fraction, the numerator of which is the number of days the additional interest rate was applicable during such period, determined on the basis of a 360-day year comprised of twelve 30-day months, and the denominator of which is 360. 98 PLAN OF DISTRIBUTION Except as provided below, this prospectus may not be used for an offer to resell, resale or other retransfer of the exchange notes. Each broker-dealer receiving exchange notes for its own account from the exchange offer must acknowledge that it will deliver a prospectus if it resells the exchange notes. This prospectus may be used by a broker-dealer who resells exchange notes received in exchange for outstanding notes, but only if the broker-dealer acquired the outstanding notes from its market-making activities or other trading activities. We have agreed that for 180 days after the exchange date, we will make this prospectus available to any broker-dealer to use in a resale of the exchange notes. In addition, until August 4, 2000, 90 days after the date of this prospectus, all dealers effecting transactions in the exchange notes may be required to deliver a prospectus. We acknowledge and each holder, except a broker-dealer, must acknowledge, that it is not engaged in, does not intend to engage in, and does not have an arrangement or understanding with any person to participate in any distribution of exchange notes. We will not receive any proceeds from the exchange of outstanding notes for exchange notes or from any resale of exchange notes by broker-dealers. Broker-dealers who receive exchange notes for their own accounts through the exchange offer may sell using the following resale methods, alone or in combination: - resale in the over-the-counter market; - resale in negotiated transactions; or - resale by writing options on the exchange notes Any resale by the preceding methods must be at the prevailing market price at the time of resale, at some price related to the prevailing market price, or at negotiated prices. Resales may be made directly to purchasers or to or through brokers or dealers. Broker-dealers may receive compensation in the form of commissions or concessions from any other broker-dealer or from the purchasers of exchange notes. A broker-dealer that resells exchange notes received for its own account through the exchange offer, and a broker or dealer that participates in a distribution of the exchange notes, may be deemed an underwriter within the meaning of the Securities Act. Consequently, any profit on the resale of exchange notes and any commission or concessions the broker or dealer receives may be considered underwriting compensation under the Securities Act. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. By tendering outstanding notes and executing the letter of transmittal, holders tendering outstanding notes for exchange notes certifies that: - it is not an affiliate of ours or of our subsidiaries or affiliates or, if the tendering party is an affiliate of ours or of our subsidiaries or affiliates, it will comply with the registration and prospectus requirements of the Securities Act if applicable; - the exchange notes are being acquired in the ordinary course of business of the person receiving the exchange notes, whether or not that person is the holder of the exchange notes; - the tendering party has not entered into any arrangement or understanding with any person to participate in the distribution of exchange notes; - the tendering party is not a broker-dealer who purchased the outstanding notes for resale through an exemption under the Securities Act; and - the tendering party will be able to trade the exchange notes acquired in the exchange offer without restriction under the Securities Act. 99 In addition, any broker-dealer who acquired the outstanding notes for its own account by its market-making activities or other trading activities must deliver a prospectus that complies with the Securities Act. Except in the case where a broker-dealer resells an unsold allotment from the original sale of the outstanding notes, the SEC has indicated that a participating broker-dealer may fulfill its prospectus delivery requirements with this prospectus. For 180 days after the expiration date, we will promptly send additional copies of this prospectus, and any amendments or supplements, to any participating broker-dealer that requests the prospectus in the letter of transmittal. We will pay all expenses incident to the exchange offer. This does not include, however, any commissions or concessions of any brokers or dealers. Additionally, we will indemnify the holders of the notes, including participating broker-dealers, against liabilities, including liabilities under the Securities Act. By accepting this exchange offer, each participating broker-dealer agrees that it will discontinue its use of this prospectus if the we should notify it that an event has occurred that makes a statement in the prospectus materially false or misleading. Once we provide the participating broker-dealer with an amendment or supplement to the prospectus correcting any misstatement or omission, then the broker-dealer may resume using the prospectus with the amendment or supplement, as the case may be. If we give notice to the broker-dealer to suspend use of the prospectus, then the 180-day period referred to above will be extended by the number of days from the date the broker-dealer received notice until the date the broker-dealer received the amended or supplemented prospectus. For our part, we agree to promptly notify participating broker-dealers of material changes that render any statement in the prospectus false or misleading. 100 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of certain United States federal income and estate tax consequences of the acquisition, ownership and disposition of notes by an initial beneficial owner of notes that, for United States federal income tax purposes, is not a "United States person" (a "Non-United States Holder"). This discussion is based upon the United States federal tax law now in effect, which is subject to change, possibly retroactively. When we use the term "United States person," we generally mean a holder of notes who (for United States Federal income tax purposes): - is a citizen or resident of the United States; - is a corporation (including an entity treated as a corporation for federal income tax purposes) created or organized in or under the laws of the United States or any state thereof or the District of Columbia; - is an estate, the income of which is subject to United States Federal income taxation regardless of its source; or - is a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust (or, is a trust that was a "United States person" under the law in effect on August 20, 1996 and elected to continue to be so treated). The tax treatment applicable to each holder of the notes may vary depending upon the particular situation of such holder. United States persons acquiring the notes are subject to different rules than those discussed below. In addition, certain other holders (including, but not limited to, insurance companies, tax exempt organizations, financial institutions, persons who own notes through partnerships or other pass-through entities, broker-dealers and individuals who are United States expatriates) may be subject to special rules not discussed below. WE ADVISE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES TO YOU OF THE ACQUISITION, OWNERSHIP AND SALE OF THE NOTES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. INTEREST Interest paid by the company to a Non-United States Holder will not be subject to United States federal income or withholding tax if such interest is not "effectively connected with the conduct of a trade or business within the United States" (within the meaning of the United States Internal Revenue Code of 1986, as amended (the "Code") carried on by such Non-United States Holder and such Non-United States Holder: - does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the company; - is not a "controlled foreign corporation" (within the meaning of the Code) with respect to which the company is a "related person" (within the meaning of the Code); and - certifies, under penalties of perjury, that it is not a United States person and provides its name and address (on Internal Revenue Service Form W-8 or W-8BEN, as appropriate) to the company or an agent appointed by the company (or, a securities clearing organization, bank or other financial institution that holds the notes on behalf of the Non-United States Holder in the ordinary course of its trade or business certifies on behalf of such holder that it has received such certification from the holder and provides a copy to the company or its agent). 101 If you are not qualified for exemption under these rules, interest paid to you may be subject to withholding tax at the rate of 30% (or any lower applicable treaty rate). The payment of interest effectively connected with your United States trade or business, however, would not be subject to a 30% withholding tax so long as you provide the company or its paying agent an adequate certification (on Internal Revenue Service Form W-8ECI or 4224, as appropriate), but such interest would be subject to United States federal income tax on a net basis at the rates applicable to United States persons generally (and, if you are a corporation, you may also be subject to branch profits tax at a rate of 30% or a lower treaty rate). GAIN ON DISPOSITION If you are a Non-United States Holder, you will generally not be subject to United States federal income tax on gain recognized on a sale, exchange, (other than pursuant to this exchange offer), redemption or other disposition of a note, unless any of the following is true: - your investment in the notes is effectively connected with a United States trade or business that is carried on by you; or - if you are a nonresident alien individual and you hold the note as a capital asset or you are present in the United States for 183 or more days in the taxable year within which such sale, exchange, redemption or other disposition takes place and, in each case, certain other requirements are met. If you have a United States trade or business and the investment in the notes is effectively connected with such United States trade or business, any gain recognized on a sale, redemption or other disposition of notes may be subject to United States federal income tax on a net basis at the rates applicable to United States persons generally (and, if you are a corporation, you may also be subject to branch profits tax at a rate of 30% or a lower treaty rate). If you exchange our outstanding notes for our exchange notes pursuant to this exchange offer, you wil not recognize any taxable gain or loss because of that exchange. Your tax basis in the exchange notes you receive in the exchange will be the same as your tax basis (immediately before the exchange) in the outstanding notes you surrended in the exchange. Your holding period for the exchange notes you receive in the exchange will include your holding period for the outstanding notes you surrendered in the exchange. FEDERAL ESTATE TAXES If interest on the notes is not effectively connected with a United States trade or business, and is exempt from withholding of United States federal income tax under the rules described above (other than by treaty), the notes will not be included in the estate of a deceased Non-United States Holder for United States federal estate tax purposes. INFORMATION REPORTING AND BACKUP WITHHOLDING The company will, where required, report to the holders of notes and the Internal Revenue Service the amount of any interest paid on the notes in each calendar year and the amounts of tax withheld, if any, from those payments. In the case of payments of interest to Non-United States Holders, temporary Treasury regulations provide that the 31% backup withholding tax and certain information reporting requirements will not apply to payments for which the requisite certification, as described above, has been received or an exemption has otherwise been established, provided that neither the company nor its payment agent has actual knowledge that the holder is a United States person or that the conditions of any other exemption are not in fact satisfied. Under temporary Treasury regulations, these information reporting 102 and backup withholding requirements will apply, however, to the gross proceeds paid to a Non-United States Holder on the disposition of the notes by or through a United States office of a United States or foreign broker, unless the holder certifies to the broker under penalties of perjury as to its name, address and status as a foreign person or the holder otherwise establishes an exemption. As a general matter, information reporting and backup withholding will not apply to a payment of the proceeds of a disposition of the notes by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of notes by a foreign office of a broker that: - is a United States person; - derives 50% or more of its gross income for certain periods from activities that are effectively connected with the conduct of a trade or business in the United States; or - is a "controlled foreign corporation." Even if a broker meets one of these three conditions, information reporting will not apply if the broker has documentary evidence in its records that the holder is not a United States person and certain other conditions are met. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. You should be aware that the Treasury Department promulgated revised final regulations regarding the withholding and information reporting rules discussed above. In general, the final regulations do not significantly change the substantive withholding and information reporting requirements, but unify current certification procedures and forms. The final regulations are generally effective for payments made after December 31, 2000, subject to certain transition rules. WE STRONGLY URGE PROSPECTIVE NON-UNITED STATES HOLDERS TO CONSULT THEIR OWN TAX ADVISORS FOR INFORMATION ON THE IMPACT, IF ANY, OF THE NEW FINAL REGULATIONS. LEGAL MATTERS The validity of the exchange notes will be passed upon for us by Jones Day Reavis & Pogue, New York, New York. EXPERTS Our consolidated financial statements as of December 31, 1999 and 1998 and the year ended December 31, 1999, and for the period from September 9, 1998 (inception) to December 31, 1998 (Precision), and of Mid State (Predecessor) for the nine month period ended September 30, 1998, appearing in this prospectus and registration statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Mid State (Predecessor) for the year ended December 31, 1997, appearing in this prospectus and registration statement, have been audited by Baker Newman & Noyes, independent auditors, as indicated in their report thereon appearing elsewhere herein and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of General Automation as of March 19, 1999 and December 31, 1998 and for the period from January 1, 1999 to March 19, 1999 and the years ended December 31, 1998 and 1997, appearing in this prospectus and registration statement, have been audited by 103 Ernst & Young, LLP independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firms as experts in accounting and auditing. The combined financial statements of Certified and Calbrit as of March 19, 1999 and October 31, 1998 and for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998 and 1997, appearing in this prospectus and registration statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of Nationwide as of March 19, 1999 and for the period from June 1, 1998 to March 19, 1999, included in this prospectus and registration statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of Nationwide for years ended May 31, 1998 and 1997, included in this prospectus, have been audited by Insero, Kasperski, Ciaccia & Co., P.C., independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of Gillette as of August 31, 1999 and for the period from March 1, 1999 to August 31, 1999, included in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of Gillette as of February 28, 1999 and for the year then ended, included in this Prospectus and Registration Statement, have been audited by Bonadio & Co., LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. 104 INDEX TO FINANCIAL STATEMENTS
PAGE NO. -------- CONSOLIDATED FINANCIAL STATEMENTS OF PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) Report of Independent Auditors, Ernst & Young LLP........... F-3 Report of Independent Auditors, Ernst & Young LLP........... F-4 Report of Independent Auditors, Baker Newman & Noyes........ F-5 Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998 (Precision)............................. F-6 Consolidated Statements of Operations for the year ended December 31, 1999 and the period from September 9, 1998 (Inception) to December 31, 1998 (Precision), and the nine months ended September 30, 1998 and year ended December 31, 1997 (Predecessor)........................... F-7 Consolidated Statements of Stockholders' Equity for the year ended December 31, 1999 and the period from September 9, 1998 (Inception) to December 31, 1998 (Precision), and the nine months ended September 30, 1998 and year ended December 31, 1997 (Predecessor)........................... F-8 Consolidated Statements of Cash Flows for the year ended December 31, 1999 and the period from September 9, 1998 (Inception) to December 31, 1998 (Precision), and the nine months ended September 30, 1998 and year ended December 31, 1997 (Predecessor)........................... F-9 Notes to Consolidated Financial Statements.................. F-11 FINANCIAL STATEMENTS OF GENERAL AUTOMATION, INC. Report of Independent Auditors, Ernst &Young LLP............ F-22 Balance Sheets as of March 19, 1999 and December 31, 1998... F-23 Statements of Income for the period from January 1, 1999 to March 19, 1999, and the years ended December 31, 1998 and 1997...................................................... F-24 Statements of Stockholders' Equity for the period from January 1, 1999 to March 19, 1999, and the years ended December 31, 1998 and 1997................................ F-25 Statements of Cash Flows for the period from January 1, 1999 to March 19, 1999, and the years ended December 31, 1998 and 1997.................................................. F-26 Notes to Financial Statements............................... F-27 COMBINED FINANCIAL STATEMENTS OF CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. Report of Independent Auditors, Ernst & Young LLP........... F-31 Combined Balance Sheets as of March 19, 1999 and October 31, 1998.......................................... F-32 Combined Statements of Operations for the period from November 1, 1998 to March 19, 1999, and for the years ended October 31, 1998 and 1997........................... F-33 Combined Statements of Stockholders' Equity for the period from November 1, 1998 to March 19, 1999, and the years ended October 31, 1998 and 1997........................... F-34 Combined Statements of Cash Flows for the period from November 1, 1998 to March 19, 1999, and for the years ended October 31, 1998 and 1997........................... F-35 Notes to Combined Financial Statements...................... F-36
F-1
PAGE NO. -------- FINANCIAL STATEMENTS OF NATIONWIDE PRECISION PRODUCTS CORP. Report of Independent Auditors, Ernst & Young LLP........... F-46 Report of Independent Auditors, Insero, Kasperski, Ciaccia & Co., P.C.................................................. F-47 Balance Sheets as of March 19, 1999 and May 31, 1998........ F-48 Statements of Income for the period from June 1, 1999 to March 19, 1999, and the years ended May 31, 1998 and 1997...................................................... F-49 Statements of Stockholders' Equity for the period from June 1, 1999 to March 19, 1999, and the years ended May 31, 1998 and 1997..................................... F-50 Statements of Cash Flows for the period from June 1, 1999 to March 19, 1999, and the years ended May 31, 1998 and 1997...................................................... F-51 Notes to Financial Statements............................... F-52 FINANCIAL STATEMENTS OF GILLETTE MACHINE & TOOL CO., INC. Report of Independent Auditors, Ernst & Young LLP........... F-59 Report of Independent Auditors, Bonadio & Co., LLP.......... F-60 Balance Sheets as of August 31, 1999 and February 28, 1999...................................................... F-61 Statements of Income and Retained Earnings for the period from March 1, 1999 to August 31, 1999, and the year ended February 28, 1999......................................... F-62 Statements of Cash Flows for the period from March 1, 1999 to August 31, 1999, and the year ended February 28, 1999...................................................... F-63 Notes to Financial Statements............................... F-64
F-2 REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP The Board of Directors Precision Partners, Inc. We have audited the consolidated balance sheets of Precision Partners, Inc. ("Precision") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1999 and the period from September 9, 1998 (inception) through December 31, 1998. These financial statements are the responsibility of Precision's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Precision Partners, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for the year ended December 31, 1999 and the period from September 9, 1998 (inception) through December 31, 1998, in conformity with accounting principles generally accepted in the United States. March 17, 2000 /s/ Ernst & Young LLP Dallas, Texas F-3 REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP The Management Committee Precision Partners, Inc. We have audited the consolidated statements of operations, stockholders' equity and cash flows of Mid State Machine Products (the "Predecessor") for the nine month period ended September 30, 1998. These financial statements are the responsibility of the Predecessor's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements of Mid State Machine Products referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows for the nine month period ended September 30, 1998 in conformity with accounting principles generally accepted in the United States. January 19, 1999 /s/ Ernst & Young LLP Boston, Massachusetts F-4 REPORT OF INDEPENDENT AUDITORS, BAKER NEWMAN & NOYES The Board of Directors Mid State Machine Products We have audited the consolidated statements of operations, stockholders' equity and cash flows of Mid State Machine Products for the year ended December 31, 1997. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements of Mid State Machine Products referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows for the year ended December 31, 1997 in conformity with generally accepted accounting principles. February 2, 1998 /s/ Baker Newman & Noyes LLC Portland, Maine F-5 PRECISION PARTNERS, INC. (PRECISION) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 313 $ 963 Trade accounts receivable, less allowance for doubtful accounts of $260,838 and $85,000 at December 31, 1999 and 1998, respectively 23,613 5,719 Inventories 18,404 4,340 Current deferred income taxes 1,303 37 Other current assets 1,916 499 -------- ------- Total current assets 45,549 11,558 Property, plant and equipment, at cost, net 71,611 15,224 Goodwill, net 77,429 34,589 Non-compete agreement, net 933 1,000 Other assets 10,869 950 -------- ------- Total assets $206,391 $63,321 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 11,200 $ -- Accounts payable 7,703 3,215 Accrued expenses 11,406 1,613 Income taxes payable 1,014 232 Deferred revenue 4,700 -- Current installments of long-term debt 2,611 750 Other current liabilities 3,071 -- -------- ------- Total current liabilities 41,705 5,810 Long-term debt, less current portion 120,737 22,250 Non-current deferred taxes 7,817 3,656 Stockholders' equity: Common stock, Class A, $.01 par value, 100 shares authorized, issued and outstanding -- -- Additional paid-in capital 42,042 32,000 Accumulated deficit (5,910) (395) -------- ------- Total stockholders' equity 36,132 31,605 -------- ------- Total liabilities and stockholders' equity $206,391 $63,321 ======== =======
SEE ACCOMPANYING NOTES. F-6 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) CONSOLIDATED STATEMENTS OF OPERATIONS
PRECISION --------------------------------- PERIOD FROM PREDECESSOR SEPTEMBER 9, ---------------------------------- YEAR ENDED 1998 (INCEPTION) NINE MONTH PERIOD YEAR ENDED DECEMBER 31, THROUGH ENDED SEPTEMBER 30, DECEMBER 31, 1999 DECEMBER 31, 1998 1998 1997 ------------- ----------------- ------------------- ------------ (IN THOUSANDS) Net sales $123,188 $12,602 $24,106 $33,870 Cost of sales 93,434 9,090 16,326 24,581 -------- ------- ------- ------- Gross profit 29,754 3,512 7,780 9,289 Selling, general and administrative expenses 24,840 3,134 3,374 4,571 -------- ------- ------- ------- Operating income 4,914 378 4,406 4,718 Other income (expense): Investment income 245 -- 103 1,197 Interest expense (12,812) (526) (37) (85) Gain on sale of property and equipment -- -- -- 29 Other 8 (138) (91) (6) -------- ------- ------- ------- (Loss) income before income taxes (7,645) (286) 4,381 5,853 (Benefit) provision for income taxes (2,130) 109 1,677 2,310 -------- ------- ------- ------- Net (loss) income $ (5,515) $ (395) $ 2,704 $ 3,543 ======== ======= ======= =======
SEE ACCOMPANYING NOTES. F-7 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B COMMON COMMON RETAINED STOCK STOCK EARNINGS TOTAL -------- -------- -------- -------- (IN THOUSANDS) PREDECESSOR: Balance at January 1, 1997 $25 $25 $13,701 $13,751 Net income -- -- 3,543 3,543 Dividend paid -- -- (200) (200) --- --- ------- ------- Balance at December 31, 1997 25 25 17,044 17,094 Net income -- -- 2,704 2,704 Redemption of shares (6) (6) (11,521) (11,533) --- --- ------- ------- Balance at September 30, 1998 $19 $19 $ 8,227 $ 8,265 === === ======= =======
CLASS A ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL -------- ---------- ----------- -------- PRECISION: Initial capitalization at September 9, 1998.......... $ -- $32,000 $ -- $32,000 Net loss............................................. -- -- (395) (395) ------- ------- ------- ------- Balance at December 31, 1998......................... -- 32,000 (395) $31,605 Additional capitalization at time of reorganization..................................... -- 10,035 -- 10,035 Capital contributions................................ -- 7 -- 7 Net loss............................................. -- -- (5,515) (5,515) ------- ------- ------- ------- Balance at December 31, 1999......................... $ -- $42,042 $(5,910) $36,132 ======= ======= ======= =======
SEE ACCOMPANYING NOTES. F-8 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) CONSOLIDATED STATEMENTS OF CASH FLOWS
PRECISION --------------------------------------- PREDECESSOR PERIOD FROM SEPTEMBER 9, ---------------------------------- YEAR ENDED 1998 (INCEPTION) NINE MONTH PERIOD YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 1997 ------------ ------------------------ ------------------- ------------ (IN THOUSANDS) OPERATING ACTIVITIES Net (loss) income $ (5,515) $ (395) $ 2,704 $ 3,543 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 8,525 658 806 1,052 Amortization 4,432 447 -- -- Gain on sale of fixed assets -- -- -- (29) Loss (gain) on trading securities -- -- 200 (836) Purchase of trading securities -- -- (3,382) (4,826) Proceeds from the sale of trading securities -- -- 9,564 3,197 Deferred income taxes (1,510) (22) (315) 115 Changes in operating assets and liabilities, net of acquisitions: Trade accounts receivable (5,531) 772 (805) (1,277) Inventories (4,345) 1,413 (1,623) (471) Income taxes receivable -- -- 364 -- Other current assets (7,190) (267) 4 57 Accounts payable 1,551 385 87 (184) Accrued expenses 7,553 (130) 97 142 Income taxes payable (192) (107) 354 (674) Deferred revenue -- -- 183 (53) Other current liabilities 7,620 -- -- -- -------- -------- -------- ------- Net cash provided by (used in) operating activities 5,398 2,754 8,238 (244) INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment -- -- -- 30 Proceeds from sale of Sukee Arena -- -- 260 -- Purchase of property, plant and equipment (10,260) (751) (623) (928) Payment of deferred acquisition costs -- (342) -- -- Acquisition of subsidiaries, net of cash (111,277) (53,483) -- -- Payment for non-compete agreement -- (1,000) -- -- Proceeds from available-for-sale securities -- -- 500 (500) Proceeds from maturities of held-to- maturity securities -- -- 808 1,382 Proceeds from note receivable, stockholder 90 -- 175 100 -------- -------- -------- ------- Net cash (used in) provided by investing activities (121,447) (55,576) 1,120 84 FINANCING ACTIVITIES Proceeds from revolving line of credit 11,200 Repayment of long-term debt (250) (595) (283) (305) Proceeds from long-term debt 100,000 23,000 -- 400
F-9 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PRECISION --------------------------------------- PREDECESSOR PERIOD FROM SEPTEMBER 9, ---------------------------------- YEAR ENDED 1998 (INCEPTION) NINE MONTH PERIOD YEAR ENDED DECEMBER 31, THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 1997 ------------ ------------------------ ------------------- ------------ (IN THOUSANDS) Contribution of capital $ 10,042 $ 32,000 $ -- $ -- Payment of debt issue costs (5,593) (660) -- -- Common stock redemption -- -- (11,673) -- Dividends paid -- -- -- (200) -------- -------- -------- ------- Net cash provided by (used in) financing activities 115,399 53,745 (11,956) (105) -------- -------- -------- ------- Net increase (decrease) in cash and cash equivalents (650) 923 (2,598) (265) Cash and cash equivalents, beginning of period 963 40 2,638 2,903 -------- -------- -------- ------- Cash and cash equivalents, end of period $ 313 $ 963 $ 40 $ 2,638 ======== ======== ======== ======= SUPPLEMENTARY INFORMATION FOR THE STATEMENT OF CASH FLOWS: Interest payments $ 7,897 $ 548 $ 34 $ 84 Income tax payments $ 547 $ 253 $ 1,276 $ 2,868 Non-cash investing and financing activities - purchase of software under financing agreements $ 344 $ -- $ -- $ --
SEE ACCOMPANYING NOTES. F-10 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Precision Partners, L.L.C. (LLC) was incorporated on September 9, 1998 for the purpose of acquiring and operating companies in the business of manufacturing and supplying complex precision metal parts, toolings and assemblies for original equipment manufacturers ("OEMS"). On September 30, 1998, investors contributed approximately $32 million of capital to LLC which was then contributed by LLC to two wholly-owned subsidiaries, Mid State Acquisition Corp. and Galaxy Acquisition Corp., established to acquire on September 30, 1998 all of the outstanding capital stock of Mid State Machine Products ("Mid State") and Galaxy Industries Corporation ("Galaxy") (the "1998 Acquisitions"). The total purchase price including transaction expenses was approximately $54,483,000 and was financed by the proceeds of the contributed capital and borrowings under the Company's credit facility. The purchase price was allocated to the estimated fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting as follows: Current assets $12,472,000 Property, plant and equipment 15,131,000 Goodwill 35,036,000 Other assets 1,007,000 Current liabilities (5,553,000) Deferred taxes, non-current (3,610,000)
In February, 1999 Precision Partners, Inc. ("Precision" or "Company") was formed as a wholly-owned subsidiary of Precision Partners Holdings, Inc. (Holdings) which is a wholly-owned subsidiary of LLC. On March 19, 1999 as part of a reorganization, LLC contributed through Holdings to Precision its investments and related equity in Galaxy, Mid State and Precision Partners Management Corporation ("Management Corporation"), which comprised substantially all of the equity of LLC. Simultaneous with this reorganization, Precision issued $100,000,000 of 12% Senior Subordinated Notes (the "Notes") in order to purchase all of the issued and outstanding capital stock of Certified Fabricators, Inc. and its sister company Calbrit Design, Inc. (together, "Certified") and to purchase substantially all of the assets and assume certain liabilities of General Automation, Inc. ("General Automation") and Nationwide Precision Products Corp. ("Nationwide"). Also, on September 1, 1999, Precision purchased all of the issued and outstanding capital stock of Gillette Machine & Tool, Inc. ("Gillette") using existing cash and borrowings under Precision's credit facility. The acquisitions of Certified, General Automation, Nationwide, and Gillette are referred to collectively as the "1999 Acquisitions." Subsequent to this reorganization, capital totaling approximately $42 million had been contributed to LLC by investors; this capital has been contributed through Holdings to Precision. F-11 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The 1999 Acquisitions were financed through the net proceeds of the issuance of the Notes, together with borrowings under our credit facilities, an equity contribution of approximately $10,000,000 and available cash. The total purchase price, including transaction expenses, was approximately $116,388,000, and the purchase price was allocated to estimated fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting as follows: Current assets $27,848,000 Property, plant, and equipment 54,658,000 Goodwill 45,641,000 Other assets 309,000 Current liabilities (6,466,000) Deferred taxes, non-current (5,602,000)
The excess of the purchase price over the net fair value of the assets acquired was allocated to goodwill, which is being amortized over 20 years. We are still in the process of obtaining appraisals for certain assets and there are also contingent payments which may subject the purchase price to future refinements. The purchase price for one company acquired in 1999 included a $4 million escrow to be paid out upon the company meeting certain operating targets through April 30, 1999. Such targets were not met and, accordingly, the escrow has been returned to Precision, thereby reducing the purchase price and the resulting goodwill by $4 million. The acquisitions which have been accounted for under the purchase method of accounting have been included in results of operations since the date of the acquisitions. The Company's unaudited pro forma revenues and net loss, after giving effect to the 1999 and 1998 Acquisitions, as if each such acquisition had occurred on January 1, 1998, were $149,749,000 and $3,738,000 and $147,078,000 and $488,000 for 1999 and 1998, respectively. Prior to the 1998 Acquisitions, LLC had substantially no operations and prior to the 1999 Acquisitions, Precision had substantially no operations. For financial statement presentation purposes, the reorganization is being accounted for as if it had occurred on September 9, 1998 in a manner similar to a pooling of interests. Therefore, operations for the period from September 9, 1998 through December 31, 1998 are shown only for Precision and consist of the operations of Mid State and Galaxy from the date of acquisition through December 31, 1998 and of LLC from inception (September 9, 1998) through December 31, 1998. Similarly, 1999 operations are shown for Precision and consist of the operations of Mid State and Galaxy for the entire year, of LLC from January 1, 1999 through March 19, 1999 and the 1999 Acquisitions from the date of acquisition through December 31, 1999. Since Precision is treated as having commenced operations in September 1998, Mid State is considered the predecessor for financial reporting purposes. The predecessor financial statements include the operations of Mid State and its wholly-owned subsidiaries for the periods reported. All significant intercompany balances and transactions for both the Company's financial statements and the Predecessor's financial statements have been eliminated in consolidation. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the actual amounts reported in the financial statement and accompanying notes. Actual results could differ from those estimates. F-12 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank demand deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company is materially dependent on a small group of customers. During the year ended December 31, 1999, 26.5%, 7.4%, and 6.8% of the Company's sales were to three customers. As of December 31, 1999, the Company's receivables from these three customers were approximately $4,674,000, $4,717,000 and $1,125,000. During the period from September 9, 1998 through December 31, 1998, 60.5%, 14.8%, and 11.2% of the Company's sales were to three customers. As of December 31, 1998, the Company's receivables from these three customers were approximately $1,906,000, $782,000, and $686,000. The Predecessor was materially dependent on a single customer representing 74% and 72% of sales for the nine month period ended September 30, 1998 and year ended December 31, 1997, respectively. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. The Company does not require collateral or security for these receivables. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid investments which are readily convertible into cash with original maturities of 90 days or less. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments consisting of cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities are stated at expected settlement amounts which approximate fair value. The carrying amounts of the note payable to the bank and the line of credit approximate fair value due to the variable rate interest feature on the related debt. Management believes the carrying amount of the subodinated notes is not materially different from the estimated fair value based on prevailing interest rates for similar notes. INVENTORIES Inventories are stated at the lower of cost or market. The Predecessor used the first-in, first out (FIFO) method for pricing material and the last-in, first-out (LIFO) method for labor and overhead. At the acquisition date, the Company valued the inventories at fair value which approximated the FIFO method and will account for inventories on a FIFO basis. DEBT ISSUE COSTS The Company incurred costs related to obtaining financing. These costs are being amortized on a straight line basis over the term of the related debt. The difference between the straight line method and interest method for amortizing debt issue costs is not significant. F-13 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEFERRED ACQUISITION AND OFFERING COSTS The Company has deferred $6,261,617 of costs related to issuance of the Notes. The costs related to the Notes will be amortized over the term of the Notes and the accumulated amortization of those costs totaled $1,077,137 as of December 31, 1999. DEPRECIATION AND AMORTIZATION Buildings, machinery and equipment, and furniture and fixtures are depreciated using both straight line and declining balance methods over the estimated useful lives of the individual assets. The lives are five to seven years on furniture and fixtures, five to ten years for machinery and equipment, twenty years for land improvements and forty years for building and improvements. Leasehold improvements are amortized on a straight line basis over the lesser of the estimated service lives or the terms of the leases. LONG-LIVED ASSETS The Company accounts for its long-lived assets under FASB No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. INTANGIBLES The excess of cost over the fair market value of net assets acquired (goodwill) is amortized on a straight-line basis over 20 years. Accumulated amortization was $3,831,100 and $450,000 as of December 31, 1999 and 1998, respectively. In connection with the acquisition of one of its subsidiaries, the Company entered into a non-compete agreement with the seller for $1,000,000. The $1,000,000 is amortized on a straight line basis over the non-compete period. Accumulated amortization at December 31, 1999 is approximately $67,000. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION which is effective for fiscal years beginning after December 15, 1997. This statement changes the way that companies report information about operating segments in financial statements. The Company adopted this statement during 1998 and determined that it is one reportable segment and such adoption had no material effect on the financial statements. In June 1998, the Financial Accounting Standards Board issued FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal periods beginning after June 15, 2000. The adoption of this statement is not expected to have a material effect on the financial statements. F-14 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ADVERTISING COSTS Advertising costs are expensed as incurred and amounted to approximately $214,408 for the year ended December 31, 1999, $61,188 for the period from September 9, 1998 through December 31, 1998 and $222,738 and $230,115 for the nine month period ended September 30, 1998 and the year ended December 31, 1997, respectively. INCOME TAXES The Company accounts for taxes under the liability method where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. REVENUE RECOGNITION Sales are recorded when products are shipped to customers. Revenues from long-term contracts are recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to estimated total costs of the contract. Total costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Contract revisions are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. STOCK COMPENSATION Precision has elected to account for stock-based compensation to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. EARNINGS PER SHARE Earnings per share is not presented for either Precision or the Predecessor since such amounts are not considered meaningful. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to current year presentation. F-15 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORIES AND COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Inventories consist of the following at December 31:
1999 1998 ---------- ---------- (IN THOUSANDS) Raw material $ 2,575 $1,122 Work in process 13,978 2,968 Finished goods 2,365 300 ------- ------ 18,918 4,390 Less reserves for obsolescence 514 50 ------- ------ $18,404 $4,340 ======= ======
Information regarding contract costs, estimating earnings, and progress billings consists of the following at:
DECEMBER 31, 1999 ------------ Costs incurred on uncompleted contracts $ 9,510 Estimated earnings 1,187 ------- 10,697 Less net progress billings 7,893 ------- Costs and estimated earnings on uncompleted contracts included in work in process inventory $ 2,804 =======
There were no significant billings in excess of net costs and estimated earnings on uncompleted contracts. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, which are valued at cost, consists of the following at December 31:
1999 1998 ---------- ---------- (IN THOUSANDS) Building and improvements $ 4,799 $ 2,034 Leasehold improvements 2,079 749 Machinery and equipment 72,868 12,935 Furniture, fixtures and other 2,567 164 ------- ------- 82,313 15,882 Less accumulated depreciation and amortization 10,702 658 ------- ------- $71,611 $15,224 ======= =======
4. INVESTMENT SECURITIES Gross unrealized holding gains for investments categorized as held to maturity were $0 and $3,615 for the nine month period ended September 30, 1998, and for the year ended December 31, 1997, respectively. F-16 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENT SECURITIES (CONTINUED) Net income includes gross realized gains (losses) of approximately ($200,000) and $652,000 for the nine month period ended September 30, 1998 and the year ended December 31, 1997, respectively. 5. DEBT Precision maintains a line of credit of $25,000,000, which matures on March 31, 2005, under which it can borrow funds or secure letters of credit at prevailing market rates. As of December 31, 1999, we had outstanding draws on the line of credit totaling $11,200,000 (9.85% at December 31, 1999). The revolving line of credit is secured by accounts receivable and inventory of Precision. Advances under the line are available to us based upon 85% of outstanding eligible accounts receivable and 50% of eligible inventories. Associated with the line of credit is a commitment fee of 0.5% per annum payable in arrears on the last day of each quarter. The fee is calculated from the closing date, March 19, 1999, to the date the revolving commitments have been terminated, computed at the committment fee rate on the actual daily amount of available revolving commitment of such lending during the period. As of December 31, 1999, the Company had approximately $12,600,000 available under the revolving credit facility. Long-term debt consists of the following at December 31:
1999 1998 ------------ ------------ (IN THOUSANDS) Precision Partners, Inc. 12% Senior Subordinated Notes due 2009, interest paid semiannually on March 15 and September 15 commencing on September 15, 1999. $100,000 $ -- Note payable to a bank, due in quarterly principal installments plus interest at a variable rate (8.44% as of December 31, 1999), maturing March 31, 2005. Quarterly principal installments of $805,000 begin on June 30, 2000, increasing to $920,000 on June 30, 2001, $1,150,000 on June 30, 2002, $1,380,000 on June 30, 2003, and $1,495,000 on June 30, 2004, secured by all assets of Precision Partners and its subsidiaries. 23,000 -- Financial software financing agreement, due in twelve quarterly installments of $32,471, including interest at 7.8%. 265 -- Director and officer insurance premium financing agreement due in six quarterly installments of $28,997, including interest at 7.15%. 83 -- Note payable to a bank, due in quarterly principal installments plus interest at a variable rate (9.00% at December 31, 1998), refinanced on March 19, 1999. -- 23,000 -------- ------- 123,348 23,000 Less current installments 2,611 750 -------- ------- $120,737 $22,250 ======== =======
Pursuant to the terms entered into in conjunction with the March 19, 1999 issuance of the Notes, the interest payable on the Notes increased from 12.00% to 12.50% on September 16, 1999 and from 12.50% to 12.75% on December 16, 1999. This increase in the interest rate is a contractual obligation which has arisen because the Notes were not registered with the SEC within 180 days of their initial issuance. Until the registration of the Notes is complete and effective, the interest rate will increase by an additional 0.25% per annum for each 90-day period subsequent to December 16, 1999, but the additional interest shall not exceed 1.0% per annum regardless of the effective date of the registration. F-17 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT (CONTINUED) The company has unamortized deferred costs of $5,184,480 related to the Notes and the $23,000,000 term loan and credit facility. The costs are being amortized over the life of the related Notes, term loan and credit facility. Aggregate future maturities of long-term debt are as follows: 2000--$2,611,000; 2001--$3,686,000; 2002--$4,402,000; 2003--$5,290,000; 2004--$5,865,000; thereafter--$101,494,000. Under the terms of the note payable to the bank, the Company is required to maintain certain leverage, interest coverage, and fixed charge coverage ratios on a consolidated basis. The company was in compliance with all of the restrictive covenants at December 31, 1999. The indenture governing the Notes contains covenants that limit our and some of our subsidiaries' ability to incur additional debt, pay dividends on or redeem or repurchase capital stock, enter into transactions with affiliates and transfer or sell assets, among other things. 6. INCOME TAXES The income tax provision (benefit) is as follows:
PRECISION ------------------------------- PERIOD FROM PREDECESSOR SEPTEMBER 9, ---------------------------- 1998 (INCEPTION) NINE MONTH YEAR ENDED THROUGH PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 1997 ------------ ---------------- ------------- ------------ (IN THOUSANDS) Current federal $ -- $ 40 $1,553 $1,723 Current state 303 91 439 472 ------- ---- ------ ------ Total current tax provision 303 131 1,992 2,195 ------- ---- ------ ------ Deferred federal (1,917) (28) (237) 46 Deferred state (516) 6 (78) 69 ------- ---- ------ ------ Total deferred tax provision (benefit) (2,433) (22) (315) 115 ------- ---- ------ ------ Total tax provision $(2,130) $109 $1,677 $2,310 ======= ==== ====== ======
The difference between the effective rate reflected in the income tax expense (benefit) and the amount determined by applying the statutory U.S. rate of 34% to income (loss) before income tax F-18 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) expense (benefit) for the period September 9, 1998 through December 31, 1998, the nine month period ended September 30, 1998 and the year ended December 31, 1997 is analyzed below:
PRECISION ------------------------------- PERIOD FROM PREDECESSOR SEPTEMBER 9, ---------------------------- 1998 (INCEPTION) NINE MONTH YEAR ENDED THROUGH PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, 1999 1998 1998 1997 ------------ ---------------- ------------- ------------ (IN THOUSANDS) Income tax expense (benefit) at statutory rate $(2,599) $(97) $1,489 $1,990 Permanent differences, primarily goodwill 672 159 (46) (56) State income tax, net of federal income tax benefit (203) 47 239 376 Other -- -- (5) -- ------- ---- ------ ------ Total tax provision $(2,130) $109 $1,677 $2,310 ======= ==== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and (liabilities) are as follows:
PRECISION --------------------------- DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) Net operating losses $ 1,097 $ 5 Tax credit carryforwards 576 243 Other accruals and reserves 1,806 217 Property, plant and equipment (9,041) (3,708) Inventories (176) (176) Goodwill amortization (433) -- Deferred tax asset valuation allowance (343) (200) ------- ------- Net deferred tax liability $(6,514) $(3,619) ======= ======= Net non-current deferred tax liability $(7,817) $(3,656) Net current deferred tax asset 1,303 37 ------- ------- Net deferred tax liability $(6,514) $(3,619) ======= =======
7. PROFIT SHARING/401K PLANS The Company's subsidiaries sponsor defined contribution plans covering all their employees. Pension expense related to these plans, which are generally based on partial matching of employee contributions, amounted to $672,643 for the year ended December 31, 1999, $123,447 for the period from September 9, 1998 (inception) to December 31, 1998 and $335,950 and $407,426 for the nine month period ended September 30, 1998 and the year ended December 31, 1997, respectively. F-19 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES The Company leases certain property and equipment under operating leases. Rent expense totaled approximately $2,407,000 and $276,898 for the year ended December 31, 1999 and the period from September 9, 1998 (inception) to December 31, 1998, respectively. Rent expense for the nine month period ended September 30, 1998 and year ended December 31, 1997, was $369,378 and $564,500, respectively. Minimum rental commitments under noncancellable operating leases are as follows: 2000--$3,441,181; 2001--$3,499,464; 2002--$3,242,202; 2003--$2,330,696; 2004--$2,054,525; thereafter--$3,219,614. 9. STOCK OPTION PLAN In April 1999 Holdings approved an Incentive Stock Option Plan (Plan) for certain employees including employees of Precision and Precision's wholly-owned subsidiaries for the issuance of up to 2,700,000 shares of Holdings common stock. During 1999, 2,454,000 options were granted with an exercise price of $.1875, which was the market value of Holdings common stock at the date of grant as determined by management and the Board of Directors. At December 31, 1999, 74,343 options had been exercised and 645,000 options had been forfeited leaving 1,734,657 options outstanding at December 31, 1999. These options vest up to a period of four years. The impact of accounting for the employee stock options under the fair value method provided for under Financial Accounting Standards Board Statement No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION is immaterial to the Company's financial statements. 10. LITIGATION Precision or its subsidiaries are defendants from time to time in lawsuits and disputes arising in the normal course of business. Management believes that the ultimate outcome of those matters will not have a materially adverse effect on the consolidated financial position, results of operations, or cash flows. 11. YEAR 2000 (UNAUDITED) We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our on-going business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers and suppliers. We expended $0.9 million on Year 2000 readiness efforts in 1999. These efforts including replacing some outdated, non-compliant hardware and noncompliant software, as well as identifying and remediating Year 2000 problems. F-20 PRECISION PARTNERS, INC. (PRECISION) AND MID STATE MACHINE PRODUCTS (PREDECESSOR) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SUBSEQUENT EVENTS To support recently signed sales contracts, which will require new facilities, machinery, and equipment of approximately $35,000,000, the Company plans to enter into operating lease agreements to meet those requirements. F-21 REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP To the Board of Directors of Precision Partners, Inc. We have audited the accompanying balance sheets of General Automation, Inc. as of March 19, 1999 and December 31, 1998, and the related statements of income, stockholder's equity, and cash flows for the period from January 1, 1999 to March 19, 1999 and each of the two years in the period ended December 31, 1998. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Automation, Inc. at March 19, 1999 and December 31, 1998, and the results of its operations and its cash flows for the period from January 1 to March 19, 1999 and for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. March 10, 2000 /s/ Ernst & Young LLP Dallas, Texas F-22 GENERAL AUTOMATION, INC. BALANCE SHEETS
MARCH 19, DECEMBER 31, 1999 1998 ---------- ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 464 $ 678 Trade accounts receivable, net of allowance for doubtful accounts of $65,000 at March 19, 1999 and December 31, 1998 2,952 2,734 Inventories 870 694 Prepaid expenses and other 20 31 ------- ------- Total current assets 4,306 4,137 Property, plant and equipment, at cost, net 8,731 9,046 Receivables from employees 131 135 ------- ------- Total assets $13,168 $13,318 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt $ 89 $ 89 Accounts payable 471 631 Accrued state income taxes 27 141 Accrued real estate tax 211 272 Other accrued expenses 244 153 ------- ------- Total current liabilities 1,042 1,286 Long-term debt, less current portion 50 57 Stockholder's equity: Common stock, $100 par value; 1,000 authorized shares; 900 issued shares (including 616 shares in treasury stock); and 284 shares outstanding 90 90 Retained earnings 12,841 12,740 Less: Cost of common stock in treasury (855) (855) ------- ------- Total stockholder's equity 12,076 11,975 ------- ------- Total liabilities and stockholder's equity $13,168 $13,318 ======= =======
SEE ACCOMPANYING NOTES. F-23 GENERAL AUTOMATION, INC. STATEMENTS OF INCOME
PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1 TO ------------------------- MARCH 19, 1999 1998 1997 --------------- -------- -------- (IN THOUSANDS) Sales $ 4,464 $19,776 $16,520 Cost of sales 2,270 11,080 10,388 ------- ------- ------- Gross profit 2,194 8,696 6,132 Selling, general and administrative expenses 525 2,055 1,855 Special recovery -- (70) (720) Other operating (income) expenses (16) 23 35 ------- ------- ------- Operating income 1,685 6,688 4,962 Other income (expense): Interest income 19 86 97 Interest expense (1) (16) (32) ------- ------- ------- Income before income taxes 1,703 6,758 5,027 Provision for state income taxes 18 102 76 ------- ------- ------- Net income $ 1,685 $ 6,656 $ 4,951 ======= ======= =======
SEE ACCOMPANYING NOTES. F-24 GENERAL AUTOMATION, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON TREASURY RETAINED STOCK STOCK EARNINGS TOTAL -------- -------- -------- -------- (IN THOUSANDS) Balance at December 31, 1996 $90 $ (855) $ 8,238 $ 7,473 Net income -- -- 4,951 4,951 Distributions -- -- (2,329) (2,329) --- ------ ------- ------- Balance at December 31, 1997 90 (855) 10,860 10,095 Net income -- -- 6,656 6,656 Distributions -- -- (4,776) (4,776) --- ------ ------- ------- Balance at December 31, 1998 90 (855) 12,740 11,975 Net income -- -- 1,685 1,685 Distributions -- -- (1,584) (1,584) --- ------ ------- ------- Balance at March 19, 1999 $90 $ (855) $12,841 $12,076 === ====== ======= =======
SEE ACCOMPANYING NOTES. F-25 GENERAL AUTOMATION, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM YEAR ENDED JANUARY 1 TO DECEMBER 31, MARCH 19, ------------------- 1999 1998 1997 ------------ -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income $ 1,685 $6,656 $4,951 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 340 1,427 1,178 (Gain) loss on sale of property, plant and equipment -- (9) 13 Changes in operating assets and liabilities: Trade accounts receivable (218) (578) (945) Inventories (176) (6) (144) Receivables from employees 4 80 44 Prepaid expenses and other 11 (10) 1 Accounts payable (160) (415) (132) Accrued expenses and taxes (83) 124 99 ------- ------ ------ Net cash provided by operating activities 1,403 7,269 5,065 INVESTING ACTIVITIES Purchase of property, plant and equipment, net of deposit on machinery (26) (3,612) (1,907) Proceeds from sale of property, plant and equipment -- 153 9 Proceeds from (payments on) cash surrender value stockholder's life insurance -- 197 (17) ------- ------ ------ Net cash used in investing activities (26) (3,262) (1,915) FINANCING ACTIVITIES Distributions to stockholder (1,584) (4,776) (2,329) Payment of long-term debt (7) (81) (79) Payment on note payable to bank -- -- (487) ------- ------ ------ Net cash used in financing activities (1,591) (4,857) (2,895) ------- ------ ------ Net (decrease) increase in cash and cash equivalents (214) (850) 255 Cash and cash equivalents, beginning of period 678 1,528 1,273 ------- ------ ------ Cash and cash equivalents, end of period $ 464 $ 678 $1,528 ======= ====== ====== Supplementary information for the statement of cash flows: Interest payments $ 1 $ 16 $ 32 State income tax payments $ 21 -- 35
SEE ACCOMPANYING NOTES. F-26 GENERAL AUTOMATION, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS General Automation, Inc. (the Company) machines and sells precision screw machine and other products to serve as component parts to a wide variety of manufacturers (e.g., automotive, surgical equipment, and aerospace). BASIS OF PRESENTATION The financial statements include all accounts of General Automation, Inc. Pursuant to a contract with Precision Partners Holdings, Inc. ("Holdings") that was signed on February 5, 1999, the Company agreed to sell substantially all of the Company's assets and Holdings agreed to assume substantially all of the Company's liabilities. The contract was assigned by Holdings to its wholly-owned subsidiary, Precision Partners, Inc., and the transaction was closed on March 19, 1999. The financial statements are presented on a historical cost basis and do not include any adjustments related to the purchase transaction. USE OF ESTIMATES The preparation of the 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid investments which are readily convertible into cash with original maturities of 90 days or less. INVENTORIES Inventories are stated at the lower of cost or market. The Company uses the first in, first out (FIFO) method of determining cost for its inventories. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank demand deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company is materially dependent on a small group of customers. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. DEPRECIATION Buildings, machinery and equipment, and furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the individual assets. The general range of estimated lives is 15 to 39 years for buildings and improvements, five to seven years for machinery and equipment, five years for automobiles, and five to seven years for office furniture and equipment. F-27 GENERAL AUTOMATION, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company elected by consent of its stockholder to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under these provisions, the taxable income of the Company is reported directly in the sole stockholder's individual tax returns. LONG-LIVED ASSETS The Company evaluates the carrying value of its long-lived assets under Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. REVENUE RECOGNITION Sales are recorded when products are shipped to a customer. 2. INVENTORIES Inventories consist of the following:
MARCH 19, DECEMBER 31, 1999 1998 --------- ------------ (IN THOUSANDS) Raw materials $234 $205 Work in process 432 318 Finished goods 204 171 ---- ---- $870 $694 ==== ====
3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
MARCH 19, DECEMBER 31, 1999 1998 --------- ------------ (IN THOUSANDS) Land $ 480 $ 480 Buildings 4,099 4,099 Machinery and equipment 12,761 12,741 Furniture, fixtures and other 728 723 ------- ------ 18,068 18,043 Less accumulated depreciation 9,337 8,997 ------- ------ Property, plant and equipment, net $ 8,731 $9,046 ======= ======
F-28 GENERAL AUTOMATION, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. DEBT As of March 19, 1999 and December 31, 1998, the Company had no outstanding bank borrowings. The Company has a note payable to a former stockholder (a party related to the current stockholder) related to the purchase of the former stockholder's interest in the Company. The note payable requires a monthly payment of $8,333, which includes annual interest at 10.0%. Aggregate future maturities as of March 19, 1999 of the note payable are as follows, remainder of 1999--$89,477 and 2000--$49,414. As of March 19, 1999 and December 31, 1998 the Company was technically in default on its note payable to a former stockholder because the Company terminated an insurance policy that served as collateral for the note payable, and the proceeds from the policy were distributed to the sole stockholder. No actions have been taken by the former stockholder and the note payable obligation was current at March 19, 1999. 5. BENEFIT PLAN 401(K) The Company sponsors a 401(k) plan covering substantially all full-time employees who meet age and service requirements. Discretionary contributions to the 401(k) plan amounted to $70,000 and $78,000 for the years ended December 31, 1998 and 1997, respectively. The contribution for the period ended March 19, 1999 has not yet been determined. 6. RELATED PARTY TRANSACTIONS, LEASE OBLIGATIONS, AND CONTINGENCIES The Company leases certain warehouse space from a limited liability company whose owners are the sole stockholder and his children. The lease is for a term of one year through May 1999 and requires payments of $10,000 per month plus the payment of all insurance, real estate tax, and maintenance costs. The Company paid and expensed $24,000, $131,970, and $0 related to such lease for the period ended March 19, 1999 and the years ended December 31, 1998 and 1997, respectively. Also, in conjunction with such arrangement, the Company guaranteed a mortgage loan related to the warehouse. The guaranteed mortgage was originally $275,000 and as of March 19, 1999, was approximately $233,000. The Company leases a jet aircraft from a business owned by the sole stockholder. The jet aircraft lease was for a term of three years through December 31, 1999, and requires payments of $10,000 per month, plus $60 per engine hour operated, and plus all operating expenses. In conjunction with the jet aircraft lease, the Company has a sublease obligation for a hangar that houses the jet aircraft. The current hangar lease was renewed on March 31, 1998, for a term of three years and requires payments of $5,650 per month. The Company recorded expenses of $186,928, $528,962 and $576,339; for the jet aircraft and hangar leases in the period ended March 19, 1999 and the years ended December 31, 1998 and 1997, respectively. Future minimum lease commitments for the jet aircraft, hangar and warehouse amount to $140,850 for 1999; $67,800 for 2000; and $16,950 for 2001. 7. SPECIAL CHARGE (RECOVERY) The Company incurred a $1,315,000 loss due to the embezzlement of funds by a former contracted (i.e., not an employee of the Company) accountant. The loss was discovered and expensed in 1996. F-29 GENERAL AUTOMATION, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. SPECIAL CHARGE (RECOVERY) (CONTINUED) Recoveries of amounts from the accountant and insurance company were received and recorded as income in 1997 and 1998. 8. MAJOR CUSTOMERS The Company has two major customers which accounted for 57.2%, 48.1% and 54.4% of the Company's sales for the period ended March 19, 1999 and the years ended December 31, 1998 and 1997, respectively. As of March 19, 1999 and December 31, 1998, the Company's receivables from these two customers were $1,849,780 and $1,651,905, respectively. 9. YEAR 2000 (UNAUDITED) We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our on-going business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers and suppliers. F-30 REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP The Board of Directors Precision Partners, Inc. We have audited the accompanying combined balance sheets as of March 19, 1999 and October 31, 1998, of the companies listed in Note 1, and the related combined statements of operations, stockholders' equity, and cash flows for the period from November 1, 1998 to March 19, 1999, and for each of the two years in the period ended October 31, 1998. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position at March 19, 1999 and October 31, 1998, of the companies listed in Note 1, and the combined results of their operations and their cash flows for the period from November 1, 1998 to March 19, 1999, and for each of the two years in the period ended October 31, 1998, in conformity with accounting principles generally accepted in the United States. March 10, 2000 /s/ Ernst & Young LLP Dallas, Texas F-31 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. COMBINED BALANCE SHEETS
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 2,859 $ 2,890 Trade accounts receivable 2,889 4,086 Net costs and estimated earnings in excess of billings on uncompleted contracts 4,131 4,641 Other current assets 153 7 ------- ------- Total current assets 10,032 11,624 Property and equipment, net 10,785 11,338 Due from related parties 760 795 Notes receivable from stockholders 768 727 Deposits and other assets 35 210 ------- ------- Total assets $22,380 $24,694 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 1,400 $ 1,400 Accounts payable 906 1,520 Accrued expenses 1,042 1,304 Current portion of notes payable and capital lease obligations 1,949 2,042 Billings in excess of net costs and estimated earnings on uncompleted contracts 225 185 Notes payable to stockholders 95 25 Income taxes payable 977 1,795 ------- ------- Total current liabilities 6,594 8,271 Notes payable and capital lease obligations, less current portion 6,879 7,354 Deferred income taxes 943 896 Commitments Stockholders' equity: Common stock, no par value: Authorized shares - 25,000 Certified; 1,000,000 Calbrit Issued and outstanding shares at March 19, 1999 and October 31, 1998 - 9,305 Certified; 2,041 Calbrit 93 93 Retained earnings 7,871 8,080 ------- ------- Total stockholders' equity 7,964 8,173 ------- ------- Total liabilities and stockholders' equity $22,380 $24,694 ======= =======
SEE ACCOMPANYING NOTES. F-32 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER PERIOD FROM 31, NOVEMBER 1, 1998 ------------------- TO MARCH 19, 1999 1998 1997 ------------------ -------- -------- (IN THOUSANDS) Sales $ 9,465 $37,433 $30,377 Cost of sales 7,712 27,209 21,136 ------- ------- ------- Gross profit 1,753 10,224 9,241 Selling, general and administrative expenses 1,347 4,813 4,999 Related party rent expense 268 460 352 ------- ------- ------- Operating income 138 4,951 3,890 Other income (expense): Interest income 43 126 80 Interest expense (362) (1,092) (651) Miscellaneous income 2 7 79 ------- ------- ------- (317) (959) (492) ------- ------- ------- (Loss) income before income taxes (179) 3,992 3,398 Provision for income taxes 30 1,689 1,315 ------- ------- ------- Net income (loss) $ (209) $ 2,303 $ 2,083 ======= ======= =======
SEE ACCOMPANYING NOTES. F-33 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED EARNINGS TOTAL ------------ ----------------- -------- (IN THOUSANDS) Balance at October 31, 1996 $93 $3,694 $3,787 Net income -- 2,083 2,083 --- ------ ------ Balance at October 31, 1997 93 5,777 5,870 Net income -- 2,303 2,303 --- ------ ------ Balance at October 31, 1998 93 8,080 8,173 Net loss -- (209) (209) --- ------ ------ Balance at March 19, 1999 $93 $7,871 $7,964 === ====== ======
SEE ACCOMPANYING NOTES. F-34 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, PERIOD FROM NOVEMBER 1, ----------------------- 1998 TO MARCH 19, 1999 1998 1997 ----------------------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss) $ (209) $ 2,303 $ 2,083 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 821 2,027 1,242 Provision for deferred income taxes 47 378 205 Changes in operating assets and liabilities: Trade accounts receivable 1,197 118 (1,605) Net costs and estimated earnings in excess of billings on uncompleted contracts 510 (426) (974) Other current assets (146) (4) 1 Deposits and other assets 175 47 (2) Due from stockholders (41) (436) (16) Accounts payable (614) 308 280 Accrued expenses (262) (259) 388 Billings in excess of net costs and estimated earnings on uncompleted contracts 40 52 7 Income taxes payable (818) (54) 112 ------ ------- ------- Net cash provided by operating activities 700 4,054 1,721 INVESTING ACTIVITIES Purchases of property and equipment (14) (724) (447) ------ ------- ------- Net cash used in investing activities (14) (724) (447) FINANCING ACTIVITIES Proceeds from stockholders' notes payable 117 125 420 Repayments of stockholders' notes payable (47) (170) (350) Payments on line of credit -- -- 218 Repayments of notes payable and capital lease obligations (822) (2,096) (1,202) Repayments (advances) from related parties 35 (163) (546) ------ ------- ------- Net cash used in financing activities (717) (2,304) (1,460) ------ ------- ------- Net increase (decrease) in cash and cash equivalents (31) 1,026 (186) Cash and cash equivalents, beginning of period 2,890 1,864 2,050 ------ ------- ------- Cash and cash equivalents, end of period $2,859 $ 2,890 $ 1,864 ====== ======= =======
SEE ACCOMPANYING NOTES. F-35 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Certified Fabricators, Inc.'s principal activities relate to the manufacture and assembly of highly sophisticated structural steel components. Calbrit Design, Inc.'s principal activity is the technical design and drawings of parts used in the aerospace industry. BASIS OF PRESENTATION The combined financial statements include all accounts of Certified Fabricators, Inc. and Calbrit Design, Inc. ("the Company") which are under common control. All significant intercompany balances and transactions have been eliminated in the combination. On November 6, 1998, the Company entered into an agreement with Precision Partners, L.L.C. ("LLC") to sell all of the outstanding common stock of the Company. The agreement was assigned by LLC to a wholly-owned subsidiary, Precision Partners Holdings, Inc. ("Holdings") which was in turn assigned to Holdings' wholly-owned subsidiary, Precision Partners, Inc. The transaction was completed on March 19, 1999. The combined financial statements are presented on a historical cost basis and do not include any adjustments related to the purchase transaction. USE OF ESTIMATES The preparation of the 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. STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers highly liquid investments with original maturities of 90 days or less to be cash equivalents. The following table sets forth certain non-cash transactions excluded from the statements of cash flows:
YEAR ENDED PERIOD FROM OCTOBER 31, NOVEMBER 1, 1998 --------------- TO MARCH 19, 1999 1998 1997 ---------------------- ------ ------ (IN THOUSANDS) Acquisition of equipment through notes payable and capital leases $254 $3,678 $5,807 Forgiveness of advances to former stockholder -- -- 21
REVENUE RECOGNITION Revenues from contracts are recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to estimated total costs of the contract. Total costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Contract revisions are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. F-36 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reasonably estimated. The asset, "Net costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of net costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. CONCENTRATION OF CREDIT RISK The Company sells to customers throughout the United States. The Company is materially dependent on a small group of customers. During the period ended March 19, 1999 and the years ended October 31, 1998 and 1997, the Company had a total of four customers whose sales represented 10% or more of sales in certain or all years. Sales to these customers were approximately 79%, 81% and 79% of total sales for the period ended March 19, 1999 and the years ended October 31, 1998 and 1997, respectively. These customers also represented 71% and 72% of the accounts receivable balance at March 19, 1999 and October 31, 1998, respectively. Sales to customers are subject to cancellation which can occur due to cancellation clauses given by the manufacturer to its customer. The Company has, nevertheless, maintained a strong relationship with these customers and, providing it continues to meet shipment schedules and quality standards, management believes that its trade accounts receivable credit risk exposure is limited. No other customer represented more than 10% of the Company's annual total sales. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's expectations and amounts have been provided for doubtful accounts as deemed necessary. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization expenses are calculated using the straight-line method. The depreciation and amortization methods are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows: Machinery and equipment 3 to 20 Furniture, fixtures and other 3 to 14 Leasehold improvements 5 to 39
Leasehold improvements are amortized over the shorter of the term of the lease or the life of the improvements. Maintenance and repairs are charged to expense as incurred. Renewals and improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in income. LONG-LIVED ASSETS The Company accounts for its long-lived assets under FASB No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires F-37 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. ADVERTISING COSTS Advertising costs are expensed as incurred and were approximately $12,000, $191,000 and $66,000 for the period ended March 19, 1999 and years ended October 31, 1998 and 1997, respectively. INCOME TAXES The Company utilizes the liability method of accounting for income taxes as set forth in FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability method, deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist principally of cash and cash equivalents, receivables, net costs and estimated earnings in excess of billings on uncompleted contracts, payables, and billings in excess of net costs and estimated earnings on uncompleted contracts. The Company believes all of the financial instruments' recorded values approximate current values. 2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Information regarding contract costs, estimated earnings, and progress billings consisted of the following at:
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) Costs incurred on uncompleted contracts $ 11,867 $11,077 Estimated earnings 2,197 1,552 -------- ------- 14,064 12,629 Less net progress billings 10,158 8,173 -------- ------- $ 3,906 $ 4,456 ======== =======
F-38 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (CONTINUED) The above amounts are included in the Company's balance sheets under the following captions at:
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) Net costs and estimated earnings in excess of billings on uncompleted contracts $ 4,131 $ 4,641 Billings in excess of net costs and estimated earnings on uncompleted contracts (225) (185) -------- ------- $ 3,906 $ 4,456 ======== =======
3. DUE FROM RELATED PARTIES The Company has advanced monies to a partnership for use in financing various properties. The partnership is 100% owned by the stockholders of the Company. At March 19, 1999 and October 31, 1998, the Company has advanced $760,000 and $795,000, respectively. 4. NOTES RECEIVABLE FROM STOCKHOLDERS Notes receivable from stockholders consisted of the following at:
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) 6% note receivable, interest accrues monthly, due on demand $220 $215 6% note receivable, interest accrues monthly, due on demand 91 89 10% note receivable, interest accrues monthly, with principal and interest due November 2002 85 82 10% note receivable, interest accrues monthly, with principal and interest due November 2002 28 27 Note receivable, interest and payment terms undetermined 172 157 Note receivable, interest and payment terms undetermined 172 157 ---- ---- $768 $727 ==== ====
F-39 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at:
OCTOBER MARCH 19, 31, 1999 1998 --------- -------- (IN THOUSANDS) Machinery and equipment $17,416 $17,152 Furniture, fixtures and other 1,877 1,876 Leasehold improvements 1,117 1,114 ------- ------- 20,410 20,142 Less accumulated depreciation and amortization 9,625 8,804 ------- ------- $10,785 $11,338 ======= =======
6. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS The Company maintains a $3,000,000 credit line under which it can borrow funds or secure letters of credit at prevailing market rates. The credit line is renewable each year on April 30. As of March 19, 1999, $1,400,000 was outstanding. The revolving line of credit is secured by accounts receivable and all other assets of the Company. Interest accrues beginning at the date of advance at the bank's base rate plus .25% (the bank's base rate at March 31, 1999 was 8.00%). Advances under the line are available to the Company based upon 80% of outstanding eligible accounts receivable. Eligible accounts receivable consist of those accounts which are less than ninety days from the date of invoice. The unused portion of the credit line is subject to withdrawal at the discretion of the Company. Under the terms of the line of credit, the Company is required to maintain minimum levels of tangible net worth, current ratio, working capital and maximum level of debt to tangible net worth. Subsequent to the balance sheet date, the Company sold all of the outstanding common stock to Precision Partners, Inc. The outstanding draws on the credit line were paid off as a result of that transaction. Notes payable, including capital lease obligations, consisted of the following at (in thousands):
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) Notes payable to stockholders, interest of 8.5%, monthly installments range from $2 to $3, due 12/31/97 to 1/31/98 $ -- $ 25 Notes payable to stockholders, interest of 8.5%, monthly installments, $2, due 1/5/00 95 -- ------ ------ $ 95 $ 25 ====== ====== Installment contracts with vendors, interest ranging from 10.1% to 25.7%, monthly installments totaling from $1 to $14, due 1/31/98 to 3/31/00, secured by equipment $ 93 $ 238 Term loans with finance companies, interest ranging from 4.7% to 10.8%, monthly installments totaling from $1 to $71, due 2/28/00 to 7/31/01, secured by equipment 8,402 8,726
F-40 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) Installment loans with finance companies, interest ranging from 6.2% to 10.3%, monthly installments totaling from $1 to $6, secured by equipment $ 333 $ 294 Interim loan with finance companies, bearing 11.3% interest, fixed interest paid monthly, due on demand, secured by equipment -- 138 ------ ------ 8,828 9,396 Less current portion 1,949 2,042 ------ ------ $6,879 $7,354 ====== ======
Aggregate future maturities of notes payables at March 19, 1999 are as follows, in thousands: 1999 $1,527 2000 1,924 2001 1,873 2002 1,994 2003 1,510
Interest paid to third parties was $362,000, $1,092,000 and $651,000, for the period from November 1, 1998 to March 19, 1999, and for the years ended October 31, 1998, and 1997, respectively. Pursuant to the purchase transaction completed on March 19, 1999, the Company's debt was paid by Precision Partners, Inc. 7. INCOME TAXES The income tax provision (benefit) is as follows:
PERIOD FROM NOVEMBER 1, 1998 TO OCTOBER 31, MARCH 19, ------------------- 1999 1998 1997 ------------------------------- -------- -------- (IN THOUSANDS) Current federal $ 31 $1,256 $1,084 Current state 12 55 26 ---- ------ ------ Total current tax provision 43 1,311 1,110 Deferred federal (12) 274 257 Deferred state (1) 104 (52) ---- ------ ------ Total deferred tax provision (benefit) (13) 378 205 ---- ------ ------ Total tax provision $ 30 $1,689 $1,315 ==== ====== ======
The difference between the effective rate reflected in the income tax provision for income taxes and the amount determined by applying the statutory U.S. rate to income before income taxes for the F-41 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998 and 1997 is analyzed below:
PERIOD FROM NOVEMBER 1, YEAR ENDED 1998 TO OCTOBER 31, MARCH 19, ------------------- 1999 1998 1997 ----------- -------- -------- (IN THOUSANDS) Tax provision (benefit) at statutory rate $(61) $1,357 $1,155 Valuation allowance 65 -- -- State income tax, net of federal income tax benefit 8 104 (17) Permanent differences 12 44 27 Other 6 184 150 ---- ------ ------ Total income tax provision $ 30 $1,689 $1,315 ==== ====== ======
The Company reported deferred tax liabilities and assets as follows at:
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) Deferred tax liabilities: Tax over book depreciation $(1,096) $(1,013) ------- ------- Total deferred tax liabilities (1,096) (1,013) Deferred tax assets: Accrued expenses 18 11 Tax credit carryforwards 90 60 Other 45 46 ------- ------- Total deferred tax assets 153 117 ------- ------- Net deferred tax liabilities $ (943) $ (896) ======= =======
At March 19, 1999, the Company has approximately $60,000 of California manufacturing investment credits and $30,000 of federal alternative minimum tax credits, which do not expire. In addition, the Company has approximately $190,000 of net operating loss carryforwards which expire in 2020. Income taxes paid in the period 1999, 1998 and 1997 were approximately $100,000, $1,365,000 and $943,000, respectively. 8. COMMITMENTS WITH RELATED AND UNRELATED PARTIES The Company's operations are conducted in four buildings, all of which are owned by a partnership that includes the Company's principal stockholders (the Partnership). The principal stockholders own a 100% interest in the Partnership at March 31, 1999. One building is leased from the Partnership under a noncancellable ten year lease agreement with a monthly rent of $15,000. The lease agreement dated February 1, 1993 expires February 1, 2003. Under the leasing agreement, the F-42 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS WITH RELATED AND UNRELATED PARTIES (CONTINUED) Company is required to pay property taxes and common area charges (maintenance, utilities and property insurance) attributable to the lease. Total rent expense for the related party operating lease for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998, and 1997 was $75,000, $180,000 and $180,000, respectively. The second building is leased from the Partnership under a noncancellable ten year lease agreement with varying monthly rents starting at $25,000 on May 1, 1997 and increasing to $30,000 on May 1, 1999. The lease agreement dated May 1, 1997 expires April 30, 2007. Total rent expense for the related party operating lease for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998 and 1997 was $125,000, $269,000 and $184,000, respectively. The Company subleases a portion of this space under a non-cancelable two year agreement with monthly rental income of approximately $11,000. The sublease is dated May 1, 1997 and expires on April 30, 2000. Total rent expense, net of sublease income, for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998 and 1997 was $70,000, $135,000 and $117,000, respectively. The third building was previously leased from an unrelated party under a noncancellable lease agreement expiring December 31, 1998 with an option to purchase the property. The lease provided for monthly rents of $10,000 through December 31, 1997 and $10,000 through December 31, 1998. The Partnership exercised the option to purchase the property in May 1997. The Company now leases from the Partnership under a noncancellable five year lease agreement with a monthly rent of $10,000. The agreement, dated May 16, 1997 expires May 16, 2002. Total rent expense for this related party operating lease for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998, and 1997 was $50,000, $120,000, and $118,000, respectively. The fourth building is leased from the Partnership under a noncancellable ten year lease agreement with a monthly rent of $2,500. The lease agreement dated January 1, 1998 expires on December 31, 2003. Total rent expense for the related party operating lease for the period from November 1, 1998 to March 19, 1999 and the year ended October 31, 1998 was $12,500 and $25,000, respectively. The Company leased an additional warehouse facility under a noncancellable lease agreement with an unrelated party. The monthly rent on the aforementioned lease was $10,000 and expired on August 31, 1998. The Company subsequently entered into a new lease agreement with the same monthly rent of $11,000 that will expire on August 31, 2001. Total rent expense for the operating lease for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998, and 1997 was $56,000, $121,000 and $118,000, respectively. Total rent expense for all of the Company's facilities under noncancellable operating lease agreements, net of sublease income, for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998, and 1997 was $264,000, $632,000, and $586,000, respectively. The Company leases machinery and equipment from a related party under a month to month lease agreement with monthly rents of $4,000. The Company has assisted two affiliated entities in obtaining financing. The affiliated entities have recorded the assets and liabilities on their books. The Company, however, has guaranteed the indebtedness outstanding of $3,395,000 and $3,490,000 at March 31, 1999 and October 31, 1998, respectively. F-43 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS WITH RELATED AND UNRELATED PARTIES (CONTINUED) Future rental commitments for the remaining years of all noncancellable operating leases are as follows:
UNRELATED RELATED PARTIES-- SUBLEASE TOTAL PARTIES FACILITIES INCOME COMMITMENTS -------- ---------- -------- ----------- (IN THOUSANDS) Years ending October 31: 1999 $ 357 $240 $ (78) $ 519 2000 713 270 (134) 849 2001 738 194 (45) 887 2002 700 32 -- 732 2003 550 5 -- 555 Thereafter 1,648 -- -- 1,648 ------ ---- ----- ------ $4,706 $741 $(257) $5,190 ====== ==== ===== ======
9. CAPITAL LEASES The following is an analysis of leased property under capital leases included in property and equipment (Note 5) at:
MARCH 19, OCTOBER 31, 1999 1998 --------- ----------- (IN THOUSANDS) Machinery and equipment $ 1,507 $ 1,507 Furniture, fixtures and other 714 714 Leasehold improvements 10 10 ------- ------- 2,231 2,231 Less accumulated amortization 1,388 1,268 ------- ------- $ 843 $ 963 ======= =======
Amortization of equipment under capital leases is included in depreciation and amortization in the accompanying Combined Statements of Cash Flows. F-44 CERTIFIED FABRICATORS, INC. AND CALBRIT DESIGN, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. CAPITAL LEASES (CONTINUED) The following is a schedule of future minimum lease payments under capital lease agreements together with the present value of the net minimum lease payments included in notes payable (Note 6) as of March 19, 1999, in thousands: Years ending October 31: 1999 $163 2000 137 2001 27 ---- 327 Less amount representing interest at rates from 6.2% to 16.5% 26 ---- Present value of net minimum lease payments $301 ====
10. PROFIT SHARING/401K PLANS The Company sponsors a profit sharing plan covering all eligible employees whereby the Company may contribute the lesser of $30,000 or 15% of annual compensation. The Company may make discretionary contributions to the profit sharing plan annually in amounts determined by management. Profit sharing contributions for the period from November 1, 1998 to March 19, 1999 and the years ended October 31, 1998, and 1997 were $0, $150,000, and $500,000, respectively. The Company also sponsors a 401K plan (the Plan) covering all eligible employees whereby the Company may make matching contributions on the first 6% of employee contributions in an amount or percentage determined by the Company, if any. Matching contributions vest over a seven year period or 100% at normal retirement as defined by the Plan. No matching contributions have been made through March 19, 1999. 11. YEAR 2000 (UNAUDITED) We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our on-going business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adveresly affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers and suppliers. F-45 REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP The Board of Directors Precision Partners, Inc. We have audited the balance sheet of Nationwide Precision Products Corp. as of March 19, 1999, and the related statements of income, stockholders' equity and cash flows for the period from June 1, 1998 to March 19, 1999. These financial statements are the responsibility of the management of Nationwide Precision Products Corp. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Parlec, Inc. (a corporation in which Nationwide Precision Products Corp. has a 44% interest), have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the financial statements relates to data included for Parlec, it is based solely on their report. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Precision Products Corp. as of March 19, 1999, and the results of its operations and its cash flows for the period from June 1, 1998 to March 19, 1999 in conformity with accounting principles generally accepted in the United States. February 25, 2000 /s/ Ernst & Young LLP Dallas, Texas F-46 REPORT OF INDEPENDENT AUDITORS, INSERO, KASPERSKI, CIACCIA & CO., P.C. The Board of Directors Nationwide Precision Products Corp. We have audited the balance sheet of Nationwide Precision Products Corp., as of May 31, 1998, and the related statements of income, stockholders' equity and cash flows for each of the two years in the period ended May 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Precision Products Corp. at May 31, 1998, and the results of its operations and its cash flows for each of the two years in the period ended May 31, 1998, in conformity with generally accepted accounting principles. June 29, 1998 /s/ Insero, Kasperski, Ciaccia & Co., P.C. Rochester, New York F-47 NATIONWIDE PRECISION PRODUCTS CORP. BALANCE SHEETS
MARCH 19, MAY 31, 1999 1998 --------- -------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 442 $ 183 Accounts receivable, net of allowance for doubtful accounts of $30,838 at March 19, 1999 and May 31, 1998 3,522 3,590 Accounts receivable from affiliate -- 592 Inventories 2,683 3,301 Prepaid expenses and other current assets 98 133 ------- ------- Total current assets 6,745 7,799 Property, plant and equipment, at cost, net 17,580 17,008 Investment in Parlec, Inc. 4,821 2,598 Notes receivable from officers -- 295 Notes receivable from employee -- 105 Cash surrender value of officers' life insurance, net of loans of $0 at March 19, 1999 and $769,523, at May 31, 1998 -- 297 Debt issue costs, net 82 100 Federal tax deposit 273 274 ------- ------- Total assets $29,501 $28,476 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 1,109 $ -- Accounts payable and accrued expenses 1,329 4,258 Current maturities of long-term debt and capital lease obligations 2,564 2,065 ------- ------- Total current liabilities 5,002 6,323 Long-term debt and capital lease obligations, less current portion 9,370 8,842 Stockholders' equity: Common stock, no par value; 700 shares authorized, 600 issued and outstanding 3 3 Additional paid-in capital 275 275 Retained earnings 14,851 13,033 ------- ------- Total stockholders' equity 15,129 13,311 ------- ------- Total liabilities and stockholders' equity $29,501 $28,476 ======= =======
SEE ACCOMPANYING NOTES. F-48 NATIONWIDE PRECISION PRODUCTS CORP. STATEMENTS OF INCOME
PERIOD FROM YEAR ENDED MAY 31, JUNE 1, 1998 ------------------- TO MARCH 19, 1999 1998 1997 ------------------ -------- -------- (IN THOUSANDS) Sales $22,141 $28,440 $23,251 Cost of sales 17,056 22,239 18,549 ------- ------- ------- Gross profit 5,085 6,201 4,702 Bonuses 773 895 640 Selling, general and administrative expenses 1,880 2,113 1,938 ------- ------- ------- Operating income 2,432 3,193 2,124 Interest expense, net 529 682 646 ------- ------- ------- Income before equity in net (loss) income of investee 1,903 2,511 1,478 Equity in net (loss) income of investee (85) 373 284 ------- ------- ------- Net income $ 1,818 $ 2,884 $ 1,762 ======= ======= =======
SEE ACCOMPANYING NOTES. F-49 NATIONWIDE PRECISION PRODUCTS CORP. STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL PAID-IN RETAINED COMMON STOCK CAPITAL EARNINGS TOTAL ------------ ------------------ -------- -------- (IN THOUSANDS) Balance at June 1, 1996 $3 $275 $ 9,767 $10,045 Net income -- -- 1,762 1,762 Distributions -- -- (800) (800) -- ---- ------- ------- Balance at May 31, 1997 3 275 10,729 11,007 Net income -- -- 2,884 2,884 Distributions -- -- (580) (580) -- ---- ------- ------- Balance at May 31, 1998 3 275 13,033 13,311 Net income -- -- 1,818 1,818 -- ---- ------- ------- Balance at March 19, 1999 $3 $275 $14,851 $15,129 == ==== ======= =======
SEE ACCOMPANYING NOTES. F-50 NATIONWIDE PRECISION PRODUCTS CORP. STATEMENTS OF CASH FLOWS
PERIOD FROM YEAR ENDED MAY 31, JUNE 1, 1998 ------------------- TO MARCH 19, 1999 1998 1997 ------------------ -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income $ 1,818 $ 2,884 $ 1,762 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,469 1,662 1,532 Equity in net loss (income) of investee 85 (373) (284) Changes in operating assets and liabilities: Accounts receivable 68 (1,287) 867 Accounts receivable from affiliate 592 (424) 49 Inventories (650) (634) (766) Prepaid expenses 35 (35) 14 Federal tax deposit 1 197 87 Accounts payable and accrued expenses (2,929) 2,136 267 ------- ------- ------- Net cash provided by operating activities 489 4,126 3,528 INVESTING ACTIVITIES Purchase of property, plant and equipment (2,023) (4,945) (557) Increase in investment in minority interest of investee (1,040) -- -- Cash surrender value of officers' life insurance 297 (14) (41) Repayments from officers and employees 400 135 175 ------- ------- ------- Net cash used in investing activities (2,366) (4,824) (423) FINANCING ACTIVITIES Borrowings of long-term debt 3,000 3,500 -- Repayments of long-term debt (1,973) (2,228) (2,207) Borrowings under line of credit 1,109 -- -- Distributions -- (580) (800) ------- ------- ------- Net cash provided by (used in) financing activities 2,136 692 (3,007) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 259 (6) 98 Cash and cash equivalents, beginning of period 183 189 91 ------- ------- ------- Cash and cash equivalents, end of period $ 442 $ 183 $ 189 ======= ======= ======= Supplementary information for the statement of cash flows: Interest payments $ 600 $ 748 $ 750 Note receivable and inventory converted to equity in investee $ 1,618 -- --
SEE ACCOMPANYING NOTES. F-51 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Nationwide Precision Products Corp. ("the Company"), located in Rochester, New York, manufactures precision machined parts, extrusions and castings for a customer base primarily in the United States. The Company has a 44% interest in Parlec, Inc., a producer of tooling and tool measuring equipment utilized by manufacturing companies primarily in the United States, Canada and Western Europe, located in Rochester, New York. On December 4, 1998, the Company entered into an agreement with Precision Partners, L.L.C. ("LLC") to sell substantially all of its assets exclusive of its investment in Parlec and certain other assets, and for LLC to assume certain liabilities. The agreement was assigned by LLC to a wholly-owned subsidiary, Precision Partners Holdings, Inc. ("Holdings") which was in turn assigned to Holdings' wholly-owned subsidiary, Precision Partners, Inc. The acquistion was completed on March 19, 1999. The financial statements are presented on a historical cost basis and do not include any adjustments related to the purchase transaction. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the actual amounts reported in the financial statement and accompanying notes. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank demand deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid investments which are readily convertible into cash with original maturities of 90 days or less. INVENTORIES Inventories are stated at the lower of cost or market. The Company uses the first-in, first-out (FIFO) method of determining cost for the majority of its inventories. REVENUE RECOGNITION Sales are recorded when products are shipped to a customer. DEPRECIATION Buildings, machinery and equipment, and furniture and fixtures are depreciated using both straight-line and declining balance methods over the estimated useful lives of the individual assets. The F-52 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) lives are five to ten years for equipment, twenty years for land improvements and forty years for building and improvements. INCOME TAXES The Company has elected to be treated as an S Corporation for Federal and New York State income tax purposes under the provisions of subchapter S of the Internal Revenue Code. Under these provisions, the taxable income of the Company is reported directly on the stockholders' individual tax returns. LONG-LIVED ASSETS The Company accounts for its long-lived assets under Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to current year presentation. 2. INVENTORIES Inventories consist of the following:
MARCH 19, MAY 31, 1999 1998 --------- -------- (IN THOUSANDS) Raw materials $1,353 $2,416 Work-in-process 206 449 Finished goods 1,357 686 ------ ------ 2,916 3,551 Reserve for obsolescence (233) (250) ------ ------ $2,683 $3,301 ====== ======
F-53 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are valued at cost and consist of the following:
MARCH 19, MAY 31, 1999 1998 --------- -------- (IN THOUSANDS) Land and improvements $ 980 $ 980 Buildings and improvements 5,343 5,187 Machinery and equipment 26,585 24,778 Furniture, fixtures and other 670 610 ------- ------- 33,578 31,555 Less accumulated depreciation 15,998 14,547 ------- ------- Property, plant and equipment, net $17,580 $17,008 ======= =======
4. DEBT At March 19, 1999, the Company has $4,862,219 of unused letters-of-credit with a bank to guarantee payment of the Industrial Revenue Bonds. A letter-of-credit fee is charged at approximately 1% of the outstanding balance. The Company has available a $2,000,000 working capital line-of-credit. Borrowings on the line bear interest at the Bank's prime rate (7.75% at March 31, 1999). The outstanding balance on this line is $1,109,000 at March 19, 1999. There was no outstanding balance at May 31, 1998. The Company has available a $600,000 equipment line-of-credit to fund future equipment purchases for specific contracts. Borrowings on this line bear interest at the Bank's prime rate (7.75% at March 19, 1999). There were no outstanding balances on this line at March 19, 1999 and May 31, 1998. F-54 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. DEBT (CONTINUED) Long-term debt consists of the following:
MARCH 31, MAY 31, 1999 1998 --------- -------- (IN THOUSANDS) Capital lease obligation consisting of a Tax Exempt Industrial Revenue Bond, variable interest on outstanding balance (3.10% at March 31, 1999), maturing 2004. No principal payments are required until 2003. $ 3,325 $ 3,325 Capital lease obligation consisting of a Taxable Industrial Revenue Bond, variable interest rate on outstanding balance (5.20% at March 31, 1999), maturing 2003. Principal installment of $180,000 began in fiscal 1996 and increase by $20,000 per year through maturity. 1,435 1,675 Note payable to bank, $68,750 monthly plus 7.67% interest, matured July, 1998. -- 138 Note payable to bank, $25,000 monthly plus 8.25% interest, maturing December, 1999. 225 475 Note payable to bank, $31,250 monthly plus 8.035% interest, maturing April, 2000. 406 719 Note payable to bank, $41,667 monthly plus 7.74% interest, maturing May, 2000. 583 1,000 Note payable to bank, $71,445 monthly, including interest at 7.7%, maturing July, 2003. 3,101 3,500 Note payable to bank, $58,698 monthly, including interest at 6.5%, maturing September, 2003. 2,792 -- Deferred compensation payable to a former employee requiring yearly payments of $15,000, including imputed interest at 9%, maturing 2005. 67 75 ------- ------- 11,934 10,907 Less current portion 2,564 2,065 ------- ------- $ 9,370 $ 8,842 ======= =======
The Company's debt is collateralized by substantially all of the Company's assets. Aggregate future maturities of long-term debt are as follows: 2000--$2,564,000; 2001--$1,686,000; 2002--$1,680,000; 2003--$1,792,000; 2004--$4,194,000; thereafter--$18,000. CAPITAL LEASE OBLIGATION On December 1, 1994, the Company entered into an agreement to purchase land, construct an addition to its facility in Henrietta, New York and to extend the County of Monroe Industrial Development Agency (COMIDA) lease term of the 1986 bonds which related to the original building construction. The new bonds are ten-year Industrial Development Revenue Bonds (IRB) issued through the COMIDA and originally totaled $5,600,000. The Company leases the building under a ten-year agreement with COMIDA. At the end of the lease term, the Company has an option to purchase the property for one dollar, thus the lease has been capitalized for financial reporting purposes. F-55 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. DEBT (CONTINUED) The present value of future minimum lease payments based on current prevailing interest rates as of March 31, 1999, is as follows, in thousands: Years ending March 31, 2000 $ 470 2001 477 2002 481 2003 485 2004 488 Thereafter 3,381 ------- 5,782 Less amount representing interest 1,022 ------- Present value of future minimum lease payments $ 4,760 =======
5. PROFIT SHARING/401(K) PLANS The Company, along with Parlec, Inc., sponsors a profit sharing and 401(k) plan covering their employees. The Plan is a discretionary profit sharing plan where contributions are determined annually by the Board of Directors. No contributions were made during the periods presented. In addition, the Company makes matching contributions equal to 50% of the employee's elective deferrals up to a maximum of $250 per year. Matching contributions totaled approximately $28,000, $27,400, and $16,500 for the period from June 1, 1998 to March 19, 1999, and the years ended May 31, 1998 and 1997, respectively. 6. RELATED PARTIES NOTES RECEIVABLE FROM OFFICERS During 1991 and 1993, the President of the Company (Michael Nuccitelli) borrowed various monies to purchase interests in Parlec, Inc. (Parlec), a manufacturing company related through common management and the real estate partnership that owns the Parlec facility. Interest accrues at rates that approximate market rates (6.25% at March 19, 1999) and is payable annually. The balance outstanding on these notes was $0 and $295,000 at March 19, 1999 and May 31, 1998, respectively. INVESTMENT IN PARLEC, INC. In May 1994, the Company purchased 30% of the outstanding shares of Parlec, Inc. The aggregate purchase price for these share was $1,200,000. The investment has been accounted for using the equity method of accounting. At the date of acquisition, the investment in Parlec exceeded the Company's share of the underlying net assets by $1,055,400. This amount is being amortized as goodwill on a straight-line basis over 40 years. In December 1998, the Company purchased 200,000 shares, or an additional 14% of the outstanding shares of Parlec. The aggregate purchase price for the shares was $2,658,000, which consisted of cash and inventory of $1,040,000 and $1,268,000, respectively, and the "forgiveness" of a 1993 loan due to the Company from Parlec of $350,000 which was included in the Investment in F-56 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. RELATED PARTIES (CONTINUED) Parlec, Inc. On the date of the transaction, the additional investment in Parlec exceeded the Company's share of the underlying net assets by approximately $1,576,000. This amount will be amortized over 40 years beginning in 1999. The following summarized balance sheet is presented for Parlec, Inc. as of March 19, 1999 and May 31, 1998:
MARCH 19, MAY 31, 1999 1998 --------- -------- (IN THOUSANDS) Assets Current assets $ 9,554 $ 8,564 Fixed and other assets 7,194 7,323 ------- ------- $16,748 $15,887 ======= ======= Liabilities Current liabilities $ 6,663 $ 7,086 Long-term debt 3,452 4,149 Other long-term debt (Nationwide) -- 350 ------- ------- 10,115 11,585 Stockholders' Equity 6,633 4,302 ------- ------- Total $16,748 $15,887 ======= =======
The following summarized statements of operations is presented for Parlec, Inc. for the period from June 1, 1998 to March 19, 1999 and the years ended May 31, 1998 and 1997:
PERIOD FROM YEAR ENDED MAY 31, JUNE 1, 1998 TO ------------------- MARCH 19, 1999 1998 1997 ---------------- -------- -------- (IN THOUSANDS) Sales $20,133 $24,541 $17,381 Cost of sales 15,819 16,650 11,053 ------- ------- ------- Gross profit $ 4,314 $ 7,891 $ 6,328 ======= ======= ======= Net (loss) income, before tax $ (327) $ 1,329 $ 1,033 ======= ======= =======
SALES During the period from June 1, 1998 to March 19, 1999 and the years ended May 31, 1998 and 1997 the Company had sales to Parlec, Inc. of approximately $1,617,550, $2,672,000 and $2,559,000 respectively. As of March 19, 1999 and May 31, 1998, amounts due from Parlec, Inc. were approximately $309,000 and $572,000, respectively. F-57 NATIONWIDE PRECISION PRODUCTS CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. MAJOR CUSTOMERS During the period from June 1, 1998 to March 19, 1999 and the years ended May 31, 1998 and 1997, 68%, 70% and 71%, respectively, of the Company's sales were to three customers. As of March 19, 1999 and May 31, 1998, the Company's receivables from these three customers were approximately $1,734,541 and $2,701,000, respectively. 8. YEAR 2000 (UNAUDITED) We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our on-going business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers and suppliers. F-58 REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP The Board of Directors Precision Partners, Inc. We have audited the balance sheet of Gillette Machine & Tool Co., Inc. ("Gillette") as of August 31, 1999, and the related statements of income and retained earnings and cash flows for the period from March 1, 1999 to August 31, 1999. These financial statements are the responsibility of Gillette's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gillette at August 31, 1999, and the results of its operations and its cash flows for the period from March 1, 1999 to August 31, 1999 in conformity with accounting principles generally accepted in the United States. March 10, 2000 /s/ Ernst & Young LLP Dallas, Texas F-59 REPORT OF INDEPENDENT AUDITORS, BONADIO & CO., LLP The Board of Directors Precision Partners, Inc. We have audited the combined balance sheet of Gillette Machine & Tool Co., Inc. ("Gillette") as of February 28, 1999, and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of Gillette's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gillette at February 28, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. August 27, 1999 /s/ Bonadio & Co., LLP Rochester, New York F-60 GILLETTE MACHINE & TOOL CO., INC. BALANCE SHEETS
AUGUST 31, 1999 FEBRUARY 28, 1999 --------------- ----------------- (IN THOUSANDS) ASSETS Current assets: Cash $ -- $ 68 Accounts receivable 1,948 1,742 Due from related party -- 87 Inventories 3,159 3,489 Prepaid expenses 142 50 ---------- ---------- Total current assets 5,249 5,436 Property, plant and equipment, net 1,698 1,890 Deferred tax asset, net 97 163 ---------- ---------- Total assets $ 7,044 $ 7,489 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Cash overdraft $ 224 $ -- Demand note payable 267 300 Current portion of long-term debt 170 164 Accounts payable 832 906 Accrued expenses 290 363 Accrued income taxes 43 171 Due to related party 57 134 Due to stockholders -- 323 ---------- ---------- Total current liabilities 1,883 2,361 Long-term debt, net of current portion 480 640 Stockholders' equity: Common stock, Class A, voting, par value $2, 5,000 shares authorized, 375 shares issued and outstanding 1 1 Common stock, Class B, non-voting, par value $2, 45,000 shares authorized, 3,375 shares issued and outstanding 7 7 Retained earnings 4,673 4,480 ---------- ---------- Total stockholders' equity 4,681 4,488 ---------- ---------- Total liabilities and stockholders' equity $ 7,044 $ 7,489 ========== ==========
SEE ACCOMPANYING NOTES. F-61 GILLETTE MACHINE & TOOL CO., INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
PERIOD FROM MARCH 1, 1999 TO YEAR ENDED AUGUST 31, 1999 FEBRUARY 28, 1999 ------------------------- ----------------- (IN THOUSANDS) Sales $ 7,977 $ 13,469 Cost of goods sold 5,387 10,195 -------- -------- Gross profit 2,590 3,274 Selling, general and administrative expenses 2,345 2,724 -------- -------- Income from operations 245 550 Other income (expense): Miscellaneous income 46 62 Interest expense (50) (94) Gain on sale of equipment 62 38 -------- -------- Other income, net 58 6 -------- -------- Income before income taxes 303 556 Income tax expense 110 199 -------- -------- Net income 193 357 Retained earnings, beginning of period 4,480 4,123 -------- -------- Retained earnings, end of period $ 4,673 $ 4,480 ======== ========
SEE ACCOMPANYING NOTES. F-62 GILLETTE MACHINE & TOOL CO., INC. STATEMENTS OF CASH FLOWS
PERIOD FROM MARCH 1, 1999 TO AUGUST 31, YEAR ENDED 1999 FEBRUARY 28, 1999 ------------- ----------------- (IN THOUSANDS) Operating activities: Net income $ 193 $ 357 Adjustments to reconcile net income to net cash provided by operating activities: Deferred tax expense (benefit) 66 (30) Depreciation and amortization 247 620 Gain on sale of equipment (62) (38) Changes in operating assets and liabilities: Accounts receivable (206) (1) Due to/from related party 10 67 Inventories 330 (1,074) Prepaid expenses (92) (6) Prepaid income taxes -- 16 Accounts payable and cash overdraft 150 175 Accrued expenses (73) 80 Accrued income taxes (128) 171 Customer advances -- (69) ----- ------- Net cash provided by operating activities 435 268 Investing activities: Purchases of property, plant and equipment (58) (357) Proceeds from the sale of equipment 65 38 ----- ------- Net cash provided by (used in) investing activities 7 (319) Financing activities: Payments on demand note payable (33) (116) Borrowings on long-term debt -- 115 Payments on long-term debt (154) (126) (Decrease) increase in due to stockholders (323) 203 ----- ------- Net cash (used in) provided by financing activities (510) 76 ----- ------- (Decrease) increase in cash (68) 25 Cash at beginning of period 68 43 ----- ------- Cash at end of period $ -- $ 68 ===== =======
SEE ACCOMPANYING NOTES. F-63 GILLETTE MACHINE & TOOL CO., INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Gillette Machine & Tool Co., Inc. (the "Company") is a manufacturer of precision machined components for customers located primarily in the northeast United States operating in a variety of industries. BASIS OF PRESENTATION On June 17, 1999 the Company entered into an agreement with Precision Partners, Inc. to sell all of the outstanding common stock of the Company. The transaction was completed on September 1, 1999. The financial statements are presented on a historical cost basis and do not include any adjustments related to the purchase. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term, highly liquid investments which are readily convertible into cash with original maturities of 90 days or less. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank demand deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. REVENUE RECOGNITION Sales are recorded when products are shipped to a customer. INVENTORIES Inventories are stated at the lower of cost or market. The Company uses the first-in, first-out (FIFO) method of determining cost. DEPRECIATION AND AMORTIZATION Property, plant and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to twenty-four years. 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. F-64 GILLETTE MACHINE & TOOL CO., INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS The company accounts for its long-lived assets under Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing to the fair value of the asset to its carrying amount. INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. 2. INVENTORIES Inventories consist of the following at:
AUGUST 31, FEBRUARY 28, 1999 1999 ----------- ------------ (IN THOUSANDS) Raw materials $ 74 $ 71 Work-in-process 2,607 2,596 Finished goods 528 872 ----------- ----------- 3,209 3,539 Less reserve for obsolescence 50 50 ----------- ----------- $ 3,159 $ 3,489 =========== ===========
3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at:
AUGUST 31, FEBRUARY 28, 1999 1999 ----------- ------------ (IN THOUSANDS) Machinery and equipment $ 7,922 $ 8,207 Leasehold improvements 1,187 1,184 Office equipment 460 437 Vehicles 181 170 ----------- ----------- 9,750 9,998 Less accumulated depreciation and amortization 8,052 8,108 ----------- ----------- $ 1,698 $ 1,890 =========== ===========
F-65 GILLETTE MACHINE & TOOL CO., INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. FINANCING ARRANGEMENTS The Company may borrow up to $3,500,000 under the terms of an annually renewable line-of-credit agreement with a bank. Amounts borrowed bear interest at the bank's prime rate, are collateralized by substantially all assets of the Company, and are guaranteed by the estate of Frank P. Gillette. There were no amounts outstanding at August 31, 1999. Long term debt consists of the following at:
FEBRUARY 28, AUGUST 31, 1999 1999 ---------------- ------------ (IN THOUSANDS) Note payable to bank in monthly installments of $7,397, including interest at 7.94% through November 2001 $ 194 $ 223 Note payable to the estate of Frank P. Gillette in monthly installments of $3,029, including interest at 9.5% through February 2007 197 206 Note payable to the estate of Frank P. Gillette in monthly installments of $500, including interest at 9.5% through May 2025 155 158 Note payable to bank in monthly installments of $2,282, including interest at 7.25% through February 2004 104 115 Note payable to bank in monthly installments of $4,437, including interest at 7.55% through February 2001 -- 102 ---------- -------- 650 804 Less current portion 170 164 ---------- -------- $ 480 $ 640 ========== ========
The notes payable to bank are collateralized by substantially all assets of the Company and are guaranteed by the stockholders of the Company and the estate of Frank P. Gillette. All debt was subsequently paid at September 1, 1999 pursuant to the terms of the Stock Purchase Agreement between the former stockholders of Gillette and Precision Partners, Inc. (See Note 1). Interest paid for the period ended August 31, 1999 and year ended February 28, 1999 was approximately $50,000 and $91,000, respectively. 5. INCOME TAXES Deferred taxes are provided in the financial statements for significant temporary differences arising from assets and liabilities whose bases are different for financial reporting and income tax purposes. The primary differences are attributable to inventory, depreciation, alternative minimum tax credit carryforwards and investment tax credit carryforwards. F-66 GILLETTE MACHINE & TOOL CO., INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) The benefit (provision) for income taxes consists of the following:
YEAR ENDED PERIOD FROM MARCH 1, 1999 FEBRUARY 28, TO AUGUST 31, 1999 1999 ------------------------- ------------ (IN THOUSANDS) Current $ 46 $ 229 Deferred 64 (30) --------- --------- $ 110 $ 199 ========= =========
The tax effect of temporary differences that give rise to the net deferred tax asset are as follows:
AUGUST 31, FEBRUARY 28, 1999 1999 ---------- ------------ (IN THOUSANDS) Deferred tax asset: Inventory reserve $ 19 $ 20 Accrued expenses 22 20 Alternative minimum tax credit 157 192 Net operating loss carryforward--New York -- 10 New York State investment tax credit 187 187 --------- --------- 385 429 Deferred tax liability: Accelerated depreciation (288) (266) --------- --------- Net deferred tax asset $ 97 $ 163 ========= =========
At August 31, 1999, the Company has investment tax credits of approximately $290,000 available to reduce future New York State tax liabilities. These credits will begin to expire in 2005. The provision for income taxes differs from the "expected" provision for the periods (computed by applying the U.S. Federal corporate income tax rate of 34% to income before income taxes) as follows:
YEAR ENDED PERIOD FROM MARCH 1, 1999 FEBRUARY 28, TO AUGUST 31, 1999 1999 ------------------------- ------------ (IN THOUSANDS) Computed "expected" tax expense $ 105 $ 189 State income taxes, net of Federal income tax benefit 7 33 Other, net (2) (23) --------- --------- $ 110 $ 199 ========= =========
F-67 GILLETTE MACHINE & TOOL CO., INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. RELATED PARTY TRANSACTIONS LEASING The Company has a lease for its facilities with the estate of Frank P. Gillette through 2001. This lease is renewable for additional five year periods. Rent expense was approximately $87,667 and $158,200 for the period March 1, 1999 to August 31, 1999 and the year ended February 28, 1999, respectively. Pursuant to the terms of the Stock Purchase Agreement between Precision Partners and the former stockholders, a new lease was executed as of September 1, 1999 with two five year terms plus two additional five year options to renew. Future minimum annual lease payments for the years ending August 31 are: 2000 $ 282,438 2001 282,438 2002 282,438 2003 282,438 2004 282,438 Thereafter 1,412,190
MANUFACTURING SERVICES The Company purchases machining services at agreed upon rates from a partnership in which the Company's stockholders are the partners. The Company also sells labor to the partnership at agreed upon rates. The Company sold labor totaling $193,662 and $400,577 to the partnership and purchased machining services totaling $401,349 and $817,540 from the partnership for the six months ended August 31, 1999 and the year ended February 28, 1999, respectively. Pursuant to the terms of the Stock Purchase Agreement between Precision Partners and the former shareholders of the Company, the Partnership was dissolved effective September 1, 1999. 7. PROFIT-SHARING PLAN The Company contributes to a profit sharing and 401(k) plan. The Company matched employee contributions up to 3% of their eligible compensation in 1999. Profit-sharing contributions to the plan are at the discretion of the Board of Directors and are allocated to eligible employees based on wages. The Company accrued approximately $106,000 for the six months ended August 31, 1999 and contributed approximately $182,000 to the Plan for the year ended February 28, 1999. 8. MAJOR CUSTOMERS During the period from March 1, 1999 to August 31, 1999, 68% of the Company's sales were to two customers. As of August 31, 1999, the Company's receivables from these two customers were approximately $1,421,000. During the year ended February 28, 1999, 78% of the Company's sales were to four customers. As of February 28, 1999, the Company's receivables from these four customers were approximately $1,399,000. F-68 GILLETTE MACHINE & TOOL CO., INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. YEAR 2000 (UNAUDITED) We did not experience any significant malfunctions or errors in our operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, we do not expect any significant impact to our on-going business as a result of the "Year 2000 issue." However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly, or year end. We believe that any such problems are likely to be minor and correctable. In addition, we could still be negatively impacted if our customers or suppliers are adversely affected by the Year 2000 or similar issues. We currently are not aware of any significant Year 2000 or similar problems that have arisen for our customers and suppliers. F-69 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRECISION PARTNERS, INC. OFFER TO EXCHANGE 12% SENIOR SUBORDINATED NOTES DUE 2009 FOR ITS OUTSTANDING 12% SENIOR SUBORDINATED NOTES DUE 2009 [LOGO] -------- PROSPECTUS MAY 8, 2000 -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. DELAWARE GENERAL CORPORATION LAW The Delaware General Corporation Law ("DGCL") permits a corporation to indemnify any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation), whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding. Such expenses may be paid by the corporation in advance in accordance with the provisions of the DGCL. To be indemnified, such person must have acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, that the person had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, does not of itself create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The DGCL also permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the DGCL. CERTIFICATE OF INCORPORATION Article Seven of the Certificate of Incorporation (the "Certificate of Incorporation") for Precision Partners, Inc. (the "Company") provides that the Company will, to the fullest extent permitted or required by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons to whom it will have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein will not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and will continue as to a person who has ceased to be a director, officer, employee or agent and will inure to the benefit of the heirs, executors and administrators of such person. Any repeal or modification of Article Seven will not adversely affect any right or protection existing thereunder immediately prior to such repeal or modification. BY-LAWS Article Four of the Company's By-laws ("Article Four") provides that the Company (1) shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he or she is or was II-1 a director or an officer of the Company and (2) except as otherwise required by Section 3 of Article Four, may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he or she is or was an employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent of or participant in another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts actually and reasonably incurred by such person in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. The By-laws further provide that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent of or participant in another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. To the extent that a person who is or was a director, officer, employee or agent of the Company has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 or Section 2 of Article Four, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. Any indemnification under Section 1 or Section 2 of Article Four (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in said Sections 1 and 2. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Expenses incurred by any person who may have a right of indemnification under Article Four in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he or she is entitled to be indemnified by the. Company pursuant to Article Four. II-2 The indemnification provided by Article Four shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of or participant in another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of such person's status as such, whether or not the Company would have the power to indemnify him or her against such liability under the provisions of Article Four, Section 145 of the General Company Law of the State of Delaware or otherwise. NATIONWIDE NEW YORK BUSINESS CORPORATION LAW The New York Business Corporation Law ("NYBCL") permits a corporation to indemnify any person made or threatened to be made a party to an action or proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor), including an action by or in the right of another corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director of officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that the person, the person's testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or any appeal therein. To be indemnified, such person must have acted in good faith, for a purpose which he reasonably believed to be in, 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 action or proceedings, in addition, had no reasonable cause to believe that such person's conduct was unlawful. The termination of any such civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of NOLO CONTENDERE or its equivalent, does not of itself create a presumption that the person did not act in good faith, for a purpose which such person reasonably believed to be in, 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, or that such person had reasonable cause to believe such person's conduct was unlawful. Where indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys' fees, during the pendency of the litigation as are necessary in connection with such person's defense therein, if the court shall find that such person has, by such person's pleadings or during the course of the litigation, raised genuine issues of fact or law. The NYBCL also permits a corporation to purchase and maintain insurance (1) to indemnify the corporation for any obligation which it incurs as a result of the indemnification of directors and officers under the NYBCL, (2) to indemnify directors and officers in instances in which they may be indemnified by the corporation under the NYBCL, and (3) to indemnify directors and officers in instances in which they may not otherwise be indemnified by the corporation under the NYBCL. AMENDED CERTIFICATE OF INCORPORATION AND BYLAWS Nationwide's Certificate of Incorporation, as amended, and its Bylaws, provide for indemnification of all persons to the fullest extent permitted by the NYBCL, and also authorize Nationwide to II-3 purchase and maintain insurance to indemnify such persons, whether or not such persons can be indemnified under the NYBCL; except that Nationwide's bylaws do not extend indemnification to persons who were or are serving at Nationwide's request as an agent of or participant in an employee benefit plan. Nationwide's bylaws also permit the advancement of expenses under certain circumstances. MID STATE MAINE BUSINESS CORPORATION ACT The Maine Business Corporation Act (the "MBCA") permits a corporation to indemnify any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that such person was or is a director, officer, employee or agent of the corporation, or was or is serving at the request of the corporation as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan, or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Such expenses may be paid by the corporation in advance in accordance with the provisions of the MBCA. To be indemnified, such person must have acted (i) honestly or (ii) in the reasonable belief that his or her action was in or not opposed to the best interests of the corporation or its shareholders or, in the case of a person serving as a fiduciary of an employee benefit plan or trust, in or not opposed to the best interests of that plan or trust, or its participants or beneficiaries, or, in the case of any criminal action or proceeding, such person must have acted without reasonable cause to believe that such person's conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order or conviction adverse to convict that person, or by settlement or pleas of NOLO CONTENDERE or its equivalent, does not of itself create a presumption that the person did not act honestly or in the reasonable belief that his or her action was in or not opposed to the best interests of the corporation or its shareholders or, in the case of a person serving as a fiduciary of an employee benefit plan or trust, in or not opposed to the best interests of that plan or trust or its participants or beneficiaries and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. The MBCA also permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify such person against such liability under the MBCA. CERTIFICATE OF ORGANIZATION AND AMENDED AND RESTATED BYLAWS Mid State's Certificate of Organization contains no provision for indemnification. However, its Amended and Restated Bylaws provide that Mid State shall indemnify persons to the extent permitted by the MBCA, including the advancement of expenses, except that such indemnification does not extend to trustees, partners, fiduciaries, or employees or agents of a pension or other employee benefit plan. The Amended and Restated Bylaws of Mid State also provide that Mid State may purchase and maintain insurance on behalf of such persons to the extent permitted by the MBCA, whether or not such persons can be indemnified under its bylaws; except that Mid State may not purchase or maintain such insurance to indemnify trustees, partners, fiduciaries, or employees or agents of a pension or other employee benefit plan. II-4 GENERAL AUTOMATION ILLINOIS BUSINESS CORPORATION ACT The Illinois Business Corporation Act ("IBCA") permits a corporation to indemnify any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred or paid by such person in connection with such action, suit or proceeding. Such expenses may be paid by the corporation in advance in accordance with the provisions of the IBCA. To be indemnified, such person must have acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, does not of itself create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of General Automation, and, with respect to any criminal action or proceeding, that the person had no reasonable cause to believe that his or her conduct was unlawful. The IBCA also permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the IBCA. ARTICLES OF INCORPORATION AND BYLAWS General Automation's Articles of Incorporation contain no provision for indemnification. However, its Bylaws provide that General Automation will indemnify persons to the extent permitted by the IBCA; except that such indemnification does not extend to persons who were or are serving at General Automation's request as an agent of or participant in an employee benefit plan. The bylaws also permit General Automation to purchase and maintain insurance to indemnify such persons, whether or not such persons can be indemnified under its bylaws. CERTIFIED CALIFORNIA GENERAL CORPORATION LAW The California General Corporation Law (the "CGCL") permits a corporation to indemnify any person who was or is a director, officer, employee or other agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or who was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of the predecessor corporation, (other than an action by or in right of the corporation), against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred by such person in connection with any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative. To be indemnified, such person must have acted (i) in good faith and (ii) in a manner he or she reasonably believed to be in the best interests of the corporation; and, in the case of a criminal II-5 proceeding, such person must have acted without reasonable cause to believe that his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent does not of itself create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. In respect of any action by or in right of the corporation, a corporation may indemnify any person who was or is an agent of the corporation against expenses actually and reasonably incurred by such person in connection with the defense or settlement of the action if he or she acted (i) in good faith and (ii) in a manner he or she believed to be in the best interests of the corporation and its shareholders. The CGCL also permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation , or is or was serving at the request of the corporation as a director, officer, employee or agent of or participant in another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him or her against such liability under its bylaws, the CGCL, or otherwise. ARTICLES OF INCORPORATION AND AMENDED AND RESTATED BYLAWS Certified's Articles of Incorporation contain no provision for indemnification. However, its Amended and Restated Bylaws provide that Certified will indemnify all persons to the extent permitted by the CGCL and may purchase and maintain insurance to indemnify such persons, whether or not such persons can be indemnified under its bylaws, the CGCL, or otherwise. Certified's bylaws also permit the advancement of expenses. GILLETTE NEW YORK GENERAL CORPORATION LAW See the discussion of applicable provisions of the NYBCL above under "--Nationwide." RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS Gillette's Restated Certificate of Incorporation and its Bylaws provide for indemnification of all persons to the fullest extent permitted by the NYBCL, and also authorize Gillette to purchase and maintain insurance to indemnify such persons, whether or not such persons can be indemnified under the NYBCL. Gillette's bylaws also permit the advancement of expenses under certain circumstances. GALAXY MICHIGAN BUSINESS CORPORATION ACT The Michigan Business Corporation Act (the "Michigan BCA") permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (other than an action by or in the right of the corporation), by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation or its shareholders, and with respect to any II-6 criminal action or proceeding, if the person had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, does not of itself create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation or its shareholders, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. The Michigan BCA also permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the corporation would have power to indemnify him or her against liability under the Michigan BCA. ARTICLES OF INCORPORATION AND AMENDED AND RESTATED BYLAWS Galaxy's Articles of Incorporation contain no provision for indemnification. However, its Amended and Restated Bylaws provide that Galaxy will indemnify all persons to the fullest extent authorized or by the Michigan BCA and also authorize Galaxy to purchase and maintain insurance to indemnify such persons, whether or not such persons can be indemnified under the Michigan BCA. Galaxy's bylaws also permit the advancement of expenses under certain circumstances. ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (a) Exhibits
EXHIBIT NUMBER ITEM - --------------------- ---- 2.1 Merger Agreement dated September 30, 1998 by and among Galaxy Industries Corporation, Kenneth Smith, Galaxy Holding Co., Inc., Robert H. Leidel Revocable Living Trust, Betty A. Leidel Revocable Living Trust, Michael Leidel, Cheryl Brooks, and Galaxy Acquisition, Inc. 2.2 Redemption and Merger Agreement dated September 17, 1998 by and among Mid State Machine Products, S. Douglas Sukeforth, Mid State Holdings Co., Inc. and Mid State Acquisition Inc. 2.3 Asset Purchase Agreement dated February 5, 1999 by and among General Automation, Inc., Max Starr, and Precision Partners Holding Company 2.4 Asset Purchase Agreement dated February 11, 1999 by and among Nationwide Precision Products Corp., certain of its stockholders and Nationwide Acquisition Delaware, Inc. 2.5 Stock Purchase Agreement dated February 19, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc., certain of their selling shareholders and Precision Partners, Inc. 2.6 Stock Purchase Agreement dated August 27, 1999 by and among Gillette Machine & Tool Co., Inc., Gillette Machine & Equipment Company, certain of their selling shareholders and and Precision Partners, Inc. 2.7 Agreement of Merger dated as of May 28, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc. and Precision Partners, Inc. and filed with the Secretary of State of the State of California on July 7, 1999
II-7
EXHIBIT NUMBER ITEM - --------------------- ---- 3.1 Amended & Restated Certificate of Incorporation of Precision Partners, Inc. 3.2 Bylaws of Precision Partners, Inc. 3.3 Certificate of Incorporation of Nationwide (together with all amendments thereto) 3.4 By-laws of Nationwide 3.5 Certificate of Incorporation of Mid State (together with all amendments thereto) 3.6 Amended and Restated By-laws of Mid State 3.7 Articles of Incorporation of General Automation (together with all amendments thereto) 3.8 By-laws of General Automation 3.9 Articles of Incorporation of Certified (together with all amendments thereto) 3.10 Amended and Restated By-laws of Certified 3.11 Restated Certificate of Incorporation of Gillette 3.12 By-laws of Gillette 3.13 Articles of Incorporation of Galaxy 3.14 Amended and Restated By-laws of Galaxy *4.1 Indenture dated as of March 19, 1999 among Precision Partners, Inc., as Company, the Guarantors named therein and The Bank of New York, as trustee 4.2 First Supplemental Indenture dated October 15, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee. 4.3 Second Supplemental Indenture dated October 29, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee. *4.4 Form of Initial Notes (included in Exhibit 4.1) *4.5 Form of Exchange Notes (included in Exhibit 4.1) 4.6 Registration Rights Agreement dated as of March 19, 1999 among Precision Partners, Inc., Salomon Smith Barney and NationsBanc Montgomery Securities LLC *5.1 Opinion of Jones, Day, Reavis & Pogue, counsel to Precision Partners, Inc. *5.2 Opinion of Robert Gregory, Attorney at Law, counsel to Mid State *5.3 Opinion of Thav Gross Steinway & Bennett, counsel to Galaxy *10.1 Credit Agreement (the "Credit Agreement") dated as of March 19, 1999 among Precision Partners, Inc., the guarantors and lenders named therein, Citibank, N.A., as Administrative Agent, Bank of America National Trust and Savings Association, as Syndication Agent, and Sun Trust Bank, Atlanta, as Documentation Agent 10.2 Waiver and Amendment to the Credit Agreement dated August 9, 1999 among Precision Partners, Inc., the guarantors and lenders named therein, and Citicorp U.S.A., Inc. 10.3 General Electric Gas Turbine Systems Source Operation Agreement dated December 1, 1998 by and between General Electric and Mid State 10.4 Purchase Agreement dated October 26, 1999 between Caterpillar Inc. and Galaxy.
II-8
EXHIBIT NUMBER ITEM - --------------------- ---- 10.5 Purchase Agreement dated February 1, 2000 between Dana Corporation--Spicer Heavy Axle & Brake Division and Nationwide. 12.1 Statement re: computation of ratios 21.1 List of subsidiaries of the Company *23.1 Consent of Ernst & Young LLP *23.2 Consent of Baker Newman & Noyes *23.3 Consent of Insero, Kasperski Ciaccia & Co., P.C. *23.4 Consent of Bonadio & Co., LLP *23.5 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) *24.1 Powers of Attorney *25.1 Statement on Form T-1 of the eligibility of the trustee 27.1 Financial Data Schedule of the Company 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Letter to DTC Participants 99.4 Form of Letter to Clients 99.5 Form of Instruction to Book-Entry Transfer Participants
- ------------------------ * Filed herewith. All other exhibits have been previously filed. ITEM 22. UNDERTAKINGS. The Registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. II-9 (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (5) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrants have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities registered, the Registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-10 SIGNATURES Pursuant to the requirements of the Securities Act, Precision Partners, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. PRECISION PARTNERS, INC. By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * Chief Executive Officer and Director ------------------------------------------- (Principal Executive Officer) Dr. James E. Ashton * Vice President and Chief Financial Officer ------------------------------------------- (Principal Financial and Accounting Officer) Ronald M. Miller * Vice President--Operations ------------------------------------------- Melvin Johnson * Director ------------------------------------------- David W.M. Harvey * Director ------------------------------------------- Richard Detweiler * Director ------------------------------------------- John F. Megrue * Director ------------------------------------------- William J. Gumina /s/ ROBERT WOMACK Chairman and Director ------------------------------------------- Robert Womack
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-11 SIGNATURES Pursuant to the requirements of the Securities Act, Certified Fabricators, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. CERTIFIED FABRICATORS, INC. By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * President and Chief Executive Officer ------------------------------------------- (Principal Executive Officer) Richard Fagan * Vice President, Treasurer, ------------------------------------------- Secretary and Director Ronald M. Miller (Principal Financial and Accounting Officer) * Chairman and Director ------------------------------------------- Dr. James E. Ashton * Director ------------------------------------------- William J. Gumina
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-12 SIGNATURES Pursuant to the requirements of the Securities Act, Galaxy Industries Corporation has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. GALAXY INDUSTRIES CORPORATION By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * President and Chief Executive Officer ------------------------------------------- (Principal Executive Officer) Byrdell C. Goldsmith * Vice President, Treasurer, ------------------------------------------- Secretary and Director Ronald M. Miller (Principal Financial and Accounting Officer) * Chairman and Director ------------------------------------------- Dr. James E. Ashton * Director ------------------------------------------- William J. Gumina
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-13 SIGNATURES Pursuant to the requirements of the Securities Act, Mid State Machine Products. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. MID STATE MACHINE PRODUCTS By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * President and Chief Executive Officer ------------------------------------------- (Principal Executive Officer) S. Douglas Sukeforth * Vice President, Treasurer, ------------------------------------------- Secretary and Director Ronald M. Miller (Principal Financial and Accounting Officer) * Chairman and Director ------------------------------------------- Dr. James E. Ashton * Director ------------------------------------------- William J. Gumina
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-14 SIGNATURES Pursuant to the requirements of the Securities Act, General Automation, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. GENERAL AUTOMATION, INC. By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * President and Chief Executive Officer ------------------------------------------- (Principal Executive Officer) Edward R. Gajewski * Vice President, Treasurer, ------------------------------------------- Secretary and Director Ronald M. Miller (Principal Financial and Accounting Officer) * Chairman and Director ------------------------------------------- Dr. James E. Ashton * Director ------------------------------------------- William J. Gumina
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-15 SIGNATURES Pursuant to the requirements of the Securities Act, Nationwide Precision Products Corp. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. NATIONWIDE PRECISION PRODUCTS CORP. By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * President and Chief Executive Officer ------------------------------------------- (Principal Executive Officer) Ronald S. Ricotta * Vice President, Treasurer, ------------------------------------------- Secretary and Director Ronald M. Miller (Principal Financial and Accounting Officer) * Chairman and Director ------------------------------------------- Dr. James E. Ashton * Director ------------------------------------------- William J. Gumina
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-16 SIGNATURES Pursuant to the requirements of the Securities Act, Gillette Machine & Tool Co., Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irving, in the State of Texas, on May 5, 2000. GILLETTE MACHINE & TOOL CO., INC. By: /s/ RONALD M. MILLER ----------------------------------------- Ronald M. Miller VICE PRESIDENT, TREASURER AND SECRETARY
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities indicated on May 5, 2000.
SIGNATURE TITLE --------- ----- * President ------------------------------------------- (Principal Executive Officer) Darren J. Gillette * Vice President, Treasurer, ------------------------------------------- Secretary and Director Ronald M. Miller (Principal Financial and Accounting Officer) * Chairman and Director ------------------------------------------- Dr. James E. Ashton * Director ------------------------------------------- William J. Gumina
* By: /s/ RONALD M. MILLER ---------------------------------------- Ronald M. Miller Pursuant to Powers of Attorney filed herewith or previously with the Securities and Exchange Commission
II-17 INDEX TO EXHIBITS
EXHIBIT NUMBER ITEM - --------------------- ---- 2.1 Merger Agreement dated September 30, 1998 by and among Galaxy Industries Corporation, Kenneth Smith, Galaxy Holding Co., Inc., Robert H. Leidel Revocable Living Trust, Betty A. Leidel Revocable Living Trust, Michael Leidel, Cheryl Brooks, and Galaxy Acquisition, Inc. 2.2 Redemption and Merger Agreement dated September 17, 1998 by and among Mid State Machine Products, S. Douglas Sukeforth, Mid State Holdings Co., Inc. and Mid State Acquisition Inc. 2.3 Asset Purchase Agreement dated February 5, 1999 by and among General Automation, Inc., Max Starr, and Precision Partners Holding Company 2.4 Asset Purchase Agreement dated February 11, 1999 by and among Nationwide Precision Products Corp., certain of its stockholders and Nationwide Acquisition Delaware, Inc. 2.5 Stock Purchase Agreement dated February 19, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc., certain of their selling shareholders and Precision Partners, Inc. 2.6 Stock Purchase Agreement dated August 27, 1999 by and among Gillette Machine & Tool Co., Inc., Gillette Machine & Equipment Company, certain of their selling shareholders and and Precision Partners, Inc. 2.7 Agreement of Merger dated as of May 28, 1999 by and among Certified Fabricators Inc., Calbrit Design, Inc. and Precision Partners, Inc. and filed with the Secretary of State of the State of California on July 7, 1999 3.1 Amended and Restated Certificate of Incorporation of Precision Partners, Inc. 3.2 Bylaws of Precision Partners, Inc. 3.3 Certificate of Incorporation of Nationwide (together with all amendments thereto) 3.4 By-laws of Nationwide 3.5 Certificate of Incorporation of Mid State (together with all amendments thereto) 3.6 Amended and Restated By-laws of Mid State 3.7 Articles of Incorporation of General Automation (together with all amendments thereto) 3.8 By-laws of General Automation 3.9 Articles of Incorporation of Certified (together with all amendments thereto) 3.10 Amended and Restated By-laws of Certified 3.11 Restated Certificate of Incorporation of Gillette 3.12 By-laws of Gillette 3.13 Articles of Incorporation of Galaxy 3.14 Amended and Restated By-laws of Galaxy *4.1 Indenture dated as of March 19, 1999 among Precision Partners, Inc., as Company, the Guarantors named therein and The Bank of New York, as trustee 4.2 First Supplemental Indenture dated October 15, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee.
EXHIBIT NUMBER ITEM - --------------------- ---- 4.3 Second Supplemental Indenture dated October 29, 1999, among Precision Partners, Inc. and The Bank of New York, as trustee. *4.4 Form of Initial Notes (included in Exhibit 4.1) *4.5 Form of Exchange Notes (included in Exhibit 4.1) 4.6 Registration Rights Agreement dated as of March 19, 1999 among Precision Partners, Inc., Salomon Smith Barney and NationsBanc Montgomery Securities LLC *5.1 Opinion of Jones, Day, Reavis & Pogue, counsel to Precision Partners, Inc. *5.2 Opinion of Robert Gregory, Attorney at Law, counsel to Mid State *5.3 Opinion of Thav Gross Steinway & Bennett, counsel to Galaxy *10.1 Credit Agreement (the "Credit Agreement") dated as of March 19, 1999 among Precision Partners, Inc., the guarantors and lenders named therein, Citibank, N.A., as Administrative Agent, Bank of America National Trust and Savings Association, as Syndication Agent, and Sun Trust Bank, Atlanta, as Documentation Agent 10.2 Waiver and Amendment to the Credit Agreement dated August 9, 1999 among Precision Partners, Inc., the guarantors and lenders named therein, and Citicorp U.S.A., Inc. *10.3 General Electric Gas Turbine Systems Source Operation Agreement dated December 1, 1998 by and between General Electric and Mid State *10.4 Purchase Agreement dated October 26, 1999 between Caterpillar Inc. and Galaxy. *10.5 Purchase Agreement dated February 1, 2000 between Dana Corporation--Spicer Heavy Axle & Brake Division and Nationwide. 12.1 Statement re: computation of ratios 21.1 List of subsidiaries of the Company *23.1 Consent of Ernst & Young LLP *23.2 Consent of Baker Newman & Noyes *23.3 Consent of Insero, Kasperski Ciaccia & Co., P.C. *23.4 Consent of Bonadio & Co., LLP *23.5 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) *24.1 Powers of Attorney *25.1 Statement on Form T-1 of the eligibility of the trustee 27.1 Financial Data Schedule of the Company 99.1 Form of Letter of Transmittal 99.2 Form of Notice of Guaranteed Delivery 99.3 Form of Letter to DTC Participants 99.4 Form of Letter to Clients 99.5 Form of Instruction to Book-Entry Transfer Participants
- ------------------------ * Filed herewith. All other exhibits have been previously filed. EX-4.1 2 EXHIBIT 4.1 PRECISION PARTNERS, INC., as Company, THE GUARANTORS named herein and THE BANK OF NEW YORK, as Trustee up to $150,000,000 12% Senior Subordinated Notes due 2009 -------------------- INDENTURE Dated as of March 19, 1999 -------------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE TABLE TIA SECTION INDENTURE SECTION 310(a)(1).................................................. 7.9; 7.10 (a)(2).................................................. 7.10 (a)(3).................................................. N.A. (a)(4).................................................. N.A. (b)..................................................... 7.10 (c)..................................................... N.A. 311(a)..................................................... 7.11 (b)..................................................... 7.11 312(a)..................................................... N.A. (b)..................................................... 13.3 (c)..................................................... 13.3 313(a)..................................................... 7.6 (b)(1).................................................. 7.6 (b)(2).................................................. N.A. (c)..................................................... N.A. (d)..................................................... N.A. 314(a)..................................................... 4.2; 4.10; 13.2 (a)(4).................................................. 4.9 (b)..................................................... N.A. (c)(1).................................................. N.A. (c)(2).................................................. N.A. (c)(3).................................................. N.A. (d)..................................................... N.A. (e)..................................................... N.A. (f)..................................................... 4.10 315(a)..................................................... N.A. (b)..................................................... N.A. (c)..................................................... N.A. (d)..................................................... N.A. (e)..................................................... N.A. 316(a)..................................................... 13.6 (a)(1)(A)............................................... 6.5 (a)(1)(B)............................................... 6.4 (a)(2).................................................. N.A. (b)..................................................... 6.7 317(a)(1).................................................. 6.9 (a)(2).................................................. 6.9 (b)..................................................... 2.4 318(a)..................................................... 13.1 N.A. means Not Applicable. Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1. Definitions....................................................1 SECTION 1.2. Other Definitions.............................................35 SECTION 1.3. Incorporation by Reference of Trust Indenture Act.................................................36 SECTION 1.4. Rules of Construction.........................................36 ARTICLE 2 THE SECURITIES SECTION 2.1. Form and Dating...............................................37 SECTION 2.2. Execution and Authentication..................................38 SECTION 2.3. Registrar and Paying Agent....................................39 SECTION 2.4. Paying Agent To Hold Money in Trust...........................40 SECTION 2.5. Securityholder Lists..........................................40 SECTION 2.6. Transfer and Exchange.........................................41 SECTION 2.7. Replacement Securities........................................44 SECTION 2.8. Outstanding Securities........................................45 SECTION 2.9. Temporary Securities..........................................46 SECTION 2.10. Cancellation..................................................46 SECTION 2.11. Defaulted Interest............................................46 SECTION 2.12. CUSIP Numbers.................................................46 SECTION 2.13. Restrictive Legends...........................................47 SECTION 2.14. Special Transfer Provisions...................................49 ARTICLE 3 REDEMPTION SECTION 3.1. Optional Redemption...........................................52 SECTION 3.2. Notices to Trustee............................................53 SECTION 3.3. Selection of Securities To Be Redeemed........................54 SECTION 3.4. Notice of Redemption..........................................54 SECTION 3.5. Effect of Notice of Redemption................................55 SECTION 3.6. Deposit of Redemption Price...................................55 SECTION 3.7. Securities Redeemed in Part...................................56 -i- ARTICLE 4 COVENANTS SECTION 4.1. Payment of Securities........................................56 SECTION 4.2. Reports to Holders...........................................56 SECTION 4.3. Limitation on Incurrence of Additional Indebtedness.................................................57 SECTION 4.4. Limitation on Restricted Payments............................58 SECTION 4.5. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries.................................................62 SECTION 4.6. Limitation on Asset Sales....................................64 SECTION 4.7. Limitation on Transactions with Affiliates...................69 SECTION 4.8. Change of Control............................................71 SECTION 4.9. Compliance Certificate.......................................74 SECTION 4.10. Further Instruments and Acts.................................75 SECTION 4.11. Limitation on Liens..........................................75 SECTION 4.12. Limitation on Preferred Stock of Restricted Subsidiaries......................................76 SECTION 4.13. Payment of Taxes and Other Claims............................76 SECTION 4.14. Additional Subsidiary Guarantees.............................76 SECTION 4.15. Prohibition on Incurrence of Senior Subordinated Debt........77 SECTION 4.16. Conduct of Business..........................................77 SECTION 4.17. Limitation on Designations of Unrestricted Subsidiaries......78 SECTION 4.18. Maintenance of Office or Agency..............................79 SECTION 4.19. Corporate Existence..........................................80 ARTICLE 5 SUCCESSOR COMPANY SECTION 5.1. Merger, Consolidation and Sale of Assets.....................81 SECTION 5.2. Successor Corporation Substituted............................83 -ii- ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.1. Events of Default............................................83 SECTION 6.2. Acceleration.................................................86 SECTION 6.3. Other Remedies...............................................87 SECTION 6.4. Waiver of Past Defaults......................................87 SECTION 6.5. Control by Majority..........................................88 SECTION 6.6. Limitation on Suits..........................................88 SECTION 6.7. Rights of Holders To Receive Payment.........................89 SECTION 6.8. Collection Suit by Trustee...................................89 SECTION 6.9. Trustee May File Proofs of Claim.............................89 SECTION 6.10. Priorities...................................................89 SECTION 6.11. Undertaking for Costs........................................90 SECTION 6.12. Waiver of Stay or Extension Laws.............................90 ARTICLE 7 TRUSTEE SECTION 7.1. Duties of Trustee............................................91 SECTION 7.2. Rights of Trustee............................................93 SECTION 7.3. Individual Rights of Trustee.................................94 SECTION 7.4. Trustee's Disclaimer.........................................94 SECTION 7.5. Notice of Defaults...........................................94 SECTION 7.6. Reports by Trustee to Holders................................95 SECTION 7.7. Compensation and Indemnity...................................95 SECTION 7.8. Replacement of Trustee.......................................97 SECTION 7.9. Successor Trustee by Merger..................................98 SECTION 7.10. Eligibility; Disqualification................................99 SECTION 7.11. Preferential Collection of Claims Against Company............99 ARTICLE 8 DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.1. Discharge of Liability on Securities; Defeasance...................................................99 SECTION 8.2. Conditions to Defeasance....................................101 SECTION 8.3. Application of Trust Money..................................104 SECTION 8.4. Repayment to Company........................................104 SECTION 8.5. Indemnity for Government Obligations........................105 SECTION 8.6. Reinstatement...............................................105 -iii- ARTICLE 9 AMENDMENTS SECTION 9.1. Without Consent of Holders..................................106 SECTION 9.2. With Consent of Holders.....................................107 SECTION 9.3. Compliance with Trust Indenture Act.........................108 SECTION 9.4. Revocation and Effect of Consents and Waivers...............108 SECTION 9.5. Notation on or Exchange of Securities.......................109 SECTION 9.6. Trustee To Sign Amendments..................................109 ARTICLE 10 SUBORDINATION OF THE SECURITIES SECTION 10.1. Agreement To Subordinate....................................109 SECTION 10.2. Liquidation; Dissolution; Bankruptcy........................111 SECTION 10.3. No Payment on Securities in Certain Circumstances...............................................112 SECTION 10.4. Payments May Be Paid Prior to Dissolution.................................................114 SECTION 10.5. When Securities Must Be Paid Over...........................115 SECTION 10.6. Notices by the Company......................................115 SECTION 10.7. Subrogation.................................................115 SECTION 10.8. Relative Rights.............................................115 SECTION 10.9. Subordination May Not Be Impaired by the Company.....................................................116 SECTION 10.10. Distribution of Notice to Representative....................116 SECTION 10.11. Rights of Trustee and Paying Agent..........................117 SECTION 10.12. Consent of Holders of Specified Senior Debt........................................................117 SECTION 10.13. Contractual Subordination...................................118 ARTICLE 11 GUARANTEES SECTION 11.1. Guarantees..................................................118 SECTION 11.2. Limitation on Liability.....................................121 -iv- SECTION 11.3. Successors and Assigns......................................121 SECTION 11.4. No Waiver...................................................121 SECTION 11.5. Modification................................................122 SECTION 11.6. Release of Guarantor........................................122 SECTION 11.7. Execution of Supplemental Indenture for Future Guarantors...........................................122 ARTICLE 12 SUBORDINATION OF GUARANTEES SECTION 12.1. Agreement To Subordinate....................................123 SECTION 12.2. Liquidation; Dissolution; Bankruptcy........................124 SECTION 12.3. No Payment on Securities in Certain Circumstances...............................................125 SECTION 12.4. Payments May Be Paid Prior to Dissolution...................127 SECTION 12.5. When Securities Must Be Paid Over...........................128 SECTION 12.6. Notices by a Guarantor......................................128 SECTION 12.7. Subrogation.................................................128 SECTION 12.8. Relative Rights.............................................129 SECTION 12.9. Subordination May Not Be Impaired by the Guarantor...................................................129 SECTION 12.10. Distribution or Notice to Representative..............................................130 SECTION 12.11. Rights of Trustee and Paying Agent..........................130 SECTION 12.12. Consent of Holders of Guarantor Senior Debt........................................................131 SECTION 12.13. Contractual Subordination...................................131 ARTICLE 13 MISCELLANEOUS SECTION 13.1. Trust Indenture Act Controls................................131 SECTION 13.2. Notices.....................................................131 SECTION 13.3 Communication by Holders with Other Holders.....................................................133 SECTION 13.4. Certificate and Opinion as to Conditions Precedent...................................................133 SECTION 13.5. Statements Required in Certificate or Opinion.....................................................133 SECTION 13.6. When Securities Disregarded.................................134 -v- SECTION 13.7. Rules by Trustee, Paying Agent and Registrar...................................................134 SECTION 13.8. Legal Holidays..............................................134 SECTION 13.9. Governing Law...............................................134 SECTION 13.10. No Recourse Against Others..................................135 SECTION 13.11. Successors..................................................135 SECTION 13.12. Multiple Originals..........................................135 SECTION 13.13. Table of Contents; Headings.................................135 SECTION 13.14. Severability Clause.........................................135 Signatures...................................................................136 Exhibit A - Form of Security.................................................A-1 Exhibit B - Form of Exchange Security........................................B-1 Exhibit C - Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors.............................................C-1 Exhibit D - Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S.....................................................D-1 Exhibit E - Form of Guarantee................................................E-1 Note: This Table of Contents shall not, for any purpose, be deemed to be part of the Indenture. -vi- INDENTURE dated as of March 19, 1999, among PRECISION PARTNERS, INC.,a Delaware corporation (the "Company"), the Company's subsidiaries signatory hereto (each a "Guarantor") and THE BANK OF NEW YORK, a New Yorkbanking corporation, as trustee(the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company's 12% Senior Subordinated Notes due 2009 (the"Securities"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1.......DEFINITIONS. "1999 Acquisitions" means the acquisition on the Issue Date of all of the issued and outstanding capital stock of Certified and of certain assets and liabilities of General Automation, Inc. and Nationwide Precision Products Corp.. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or at the time it merges or consolidates with the Company or any of the Restricted Subsidiaries or assumed by the Company or any Restricted Subsidiary in connection with the acquisition of assets from such Person and in each case whether or not such Indebtedness is incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Restricted Subsidiary or such acquisition, merger or consolidation. "Adjusted Net Assets" of a Guarantor at any date means the lesser of the amount by which (x) the fair value of the property of such Guarantor exceeds the total amount of its liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Guarantee of such Guarantor at such date, and (y) the present fair salable value of the assets of such Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Guarantor on its debts -2- (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date and after giving effect to any collection from any Subsidiary of such Guarantor in respect of the obligations of such Subsidiary under such Guarantor's Guarantee), excluding debt in respect of the Guarantee, as they become absolute and matured. "Affiliate" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. 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; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged with or into the Company or any Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted Subsidiary of the assets of any Person (other than a Restricted Subsidiary) that constitute all or substantially all of the assets of such Person or comprise any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer (other than the granting of a Lien in accordance with this Indenture) for value by the Company or any of the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Restricted Subsidiary of (a) any Capital Stock of any Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary); or (b) any other property or assets of the Company or any Restricted Subsidiary other than in the ordinary course of business; PROVIDED, HOWEVER, that Asset Sales will not include (i) a transaction or series of related transactions for which the Company or the Restricted Subsidiar -3- ies receive aggregate consideration of less than $1.0 million, (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted by Section 5.1, (iii) any Restricted Payment made in accordance with Section 4.4, (iv) the sale, lease, conveyance, disposition or other transfer of property or equipment that has become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or any Restricted Subsidiary, (v) the creation or realization of any Permitted Lien, (vi) the sale of receivables or other assets pursuant to a receivables or asset securitization or similar program, (vii) any disposition the making of which is a Permitted Investment, (viii) the sale of any Cash Equivalents owned by the Company or any of its Subsidiaries and (ix) any exchange of like property pursuant to Section 1031 of the Code. "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each day that is not a Legal Holiday. "Capital Stock" means: (i)with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person; and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity interests of such Person. -4- "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Carlisle" means Carlisle Enterprises L.P. "Cash Equivalents" means: (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250,000,000; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank -5- meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds that invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "Certified" means Certified Fabricators, Inc. and Calbrit Design, Inc. "Change of Control" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of this Indenture); (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of this Indenture); or (iii) any Person or Group, other than the Permitted Holders, becomes the beneficial owner, directly or indirectly, of more than 50% of the total voting power of the Capital Stock of the Company, and the Permitted Holders beneficially own, directly or indirectly in the aggregate, a lesser percentage of the total voting power of the Capital Stock of the Company than such Person or Group and do not have the right or ability by voting power, contract, or otherwise to elect or designate for election a majority of the Board of Directors (or any analogous governing body) of the Company; or (iv) following the consummation of an initial public offering of the Company, the replacement of a majority of the Board of Directors of the Company or Holdings over a two-year period from the directors who constituted the Board of Directors of the Company or Holdings, as the case may be, at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company or Holdings, as the case -6- may be, then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of, such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated EBITDA" means, with respect to the Company, for any period, the sum (without duplication) of: (i) Consolidated Net Income; and (ii) to the extent Consolidated Net Income has been reduced thereby: (A) all income taxes of the Company and the Restricted Subsidiaries paid or accrued in accordance with GAAP for such period (other than income taxes attributable to extraordinary or nonrecurring gains or taxes attributable to Asset Sales outside the ordinary course of business); (B) Consolidated Interest Expense; (C) Consolidated Non-cash Charges, less any non-cash items increasing Consolidated Net Income for such period; (D) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary or is merged or consolidated with the Company or any Restricted Subsidiary but after the first day of the -7- relevant Four Quarter Period as used in the definition of "Consolidated Fixed Charge Coverage Ratio"; (E) the aggregate amount of any earn-out payments or bonuses paid to the selling stockholders of Mid State and Galaxy during the relevant Four Quarter Period; (F) in the case of a successor to the Company by consolidation or merger or as a transferee of the Company's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets but after the first day of the relevant Four Quarter Period as used in the definition of "Consolidated Fixed Charge Coverage Ratio"; and (G) monitoring fees paid by Holdings to SKM and Carlisle in an amount not to exceed $350,000 in the aggregate during the Four-Quarter Period; all as determined on a consolidated basis for the Company and the Restricted Subsidiaries in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, with respect to the Company, the ratio of Consolidated EBITDA of the Company during the four most recent full consecutive fiscal quarters (the "Four-Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of the Company for the Four-Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro forma basis for the period of such calculation to: (i) the incurrence or repayment of any Indebtedness of the Company or any of the Restricted Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repay -8- ment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four-Quarter Period; and (ii) any Asset Sales or other dispositions or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Company or one of the Restricted Subsidiaries (including any Person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness) and also including any Consolidated EBITDA (including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X under the Exchange Act) occurring during the Four-Quarter Period or at any time subsequent to the last day of the Four-Quarter Period and on or prior to the Transaction Date as if such Asset Sale or Asset Acquisition or other disposition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four-Quarter Period. If the Company or any of the Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence will give effect to the incurrence of such guaranteed Indebtedness as if the Company or any Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio": (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter will be deemed to have accrued at a fixed rate per annum equal to -9- the rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, will be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. For purposes of this definition, whenever pro forma effect is to be given to an Asset Acquisition, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness incurred in connection therewith, the pro forma calculations shall be determined on a basis consistent with Regulation S-X under the Exchange Act, which determination shall be made in good faith by a responsible financial or accounting officer of the Company and such pro forma calculations may include such pro forma adjustments for nonrecurring non-cash items that the Company considers reasonable and quantifiable in order to reflect the ongoing impact of any such transaction on the Company's results of operations. "Consolidated Fixed Charges" means, with respect to the Company for any period, the sum, without duplication, of: (i) Consolidated Interest Expense; plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of the Company (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local income tax rate of the Company, expressed as a decimal. -10- "Consolidated Interest Expense" means, with respect to the Company for any period, the sum of, without duplication: (i) the aggregate of the interest expense of the Company and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP (excluding fees and expenses incurred in connection with the offer and sale of the Securities), including without limitation, (a) any amortization of debt discount, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, with respect to the Company, for any period, the aggregate net income (or loss) of the Company and the Restricted Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom: (a) after-tax gains and losses from Asset Sales or abandonments or reserves relating thereto other than in the ordinary course of business; (b) after tax items classified as extraordinary or nonrecurring gains or losses; (c) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Restricted Subsidiary or is merged or consolidated with the Company or any Restricted Subsidiary; (d) the net income (but not loss) of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is restricted by a contract, operation of law -11- or otherwise (except for restrictions existing pursuant to clause (9) of Section 4.5); (e) the net income of any Person, other than a Restricted Subsidiary, except to the extent of cash dividends or distributions paid to the Company or to a Restricted Subsidiary by such Person; (f) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued); and (g) in the case of a successor to the Company by consolidation or merger or as a transferee of the Company's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "Consolidated Non-cash Charges" means, with respect to the Company, for any period, the aggregate depreciation, amortization and other non-cash expenses of the Company and the Restricted Subsidiaries reducing Consolidated Net Income of the Company for such period, determined on a consolidated basis in accordance with GAAP (excluding any such charge that requires an accrual of or a reserve for cash charges for any future period). "Credit Agreement" means the Credit Agreement dated as of the Issue Date by and among the Company, the guarantors named therein, the lenders named therein, Citibank, N.A., as administrative agent, Bank of America National Trust and Savings Association, as syndication agent, and Sun Trust Bank, Atlanta, as documentation agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder (provided that such increase in borrowings is permitted by Section 4.3 (including the definition of Permitted Indebtedness)) or adding Restricted Subsidiaries as additional borrowers or guarantors thereunder) -12- all or any portion of the Indebtedness under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company or any Restricted Subsidiary against fluctuations in currency values. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice of both would be, an Event of Default. "Depository" means The Depository Trust Company, its nominees and their respective successors. "Designated Senior Debt" means (i) Indebtedness under or in respect of the Credit Agreement and (ii) any other Indebtedness constituting Senior Debt that, at the time of determination, has an aggregate principal amount of at least $25,000,000 and is specifically designated in the instrument evidencing such Senior Debt as "Designated Senior Debt" by the Company. "Disqualified Capital Stock" means that portion of any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event (other than a Change of Control), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is mandatorily exchangeable for Indebtedness, or is redeemable, or exchangeable for Indebtedness, at the sole option of the holder thereof (except upon the occurrence of a Change of Control) on or prior to the final maturity date of the Securities. "Domestic Restricted Subsidiary" means a Restricted Subsidiary incorporated or otherwise organized or existing under the laws of the United States, any state thereof or any territory or possession of the United States. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto, -13- and the rules and regulations of the SEC promulgated thereunder. "Exchange Securities" means the 12% Senior Subordinated Notes due 2009 to be issued in exchange for the Initial Securities pursuant to the Registration Rights Agreement or, with respect to the Initial Securities issued under this Indenture subsequent to the Issue Date pursuant to Section 2.2, a registration agreement substantially identical to the Registration Rights Agreement. "fair market value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value will be determined by the Board of Directors of the Company acting reasonably and in good faith and will be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "Foreign Restricted Subsidiary" means any Restricted Subsidiary that is organized and existing under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia. "Four-Quarter Period" has the meaning set forth under the definition of "Consolidated Fixed Charge Coverage Ratio". "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accounts and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "Galaxy" means Galaxy Industries Corporation. "guarantee" means as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or -14- indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. A guarantee will include, without limitation, any agreement to maintain or preserve any other Person's financial condition or to cause any other Person to achieve certain levels of operating results. "Guarantee" means the guarantee of the Securities by each Guarantor, substantially in the form of Exhibit E. "Guarantor" means (i) each Subsidiary of the Company guaranteeing the Securities as of the Issue Date and (ii) each other Person that in the future executes a Guarantee pursuant to Section 4.14 or otherwise; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its Guarantee is released in accordance with the terms of this Indenture. "Guarantor Senior Debt" means, with respect to any Guarantor, (i) the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of such Guarantor, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Guarantee of such Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of: -15- (x) all monetary obligations of every nature of the Company or any Guarantor with respect to the Credit Agreement, including, without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities; (y) all Interest Swap Obligations; and (z) all obligations under Currency Agreements; in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include: (i) any Indebtedness of such Guarantor owing to a Subsidiary of such Guarantor or any Affiliate of such Guarantor or any of such Affiliate's Subsidiaries; (ii) Indebtedness to, or guaranteed on behalf of, any stockholder, director, officer or employee of such Guarantor or any Subsidiary of such Guarantor including, without limitation, amounts owed for compensation); (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services; (iv) Indebtedness represented by Disqualified Capital Stock; (v) any liability for federal, state, local or other taxes owed or owing by such Guarantor; (vi) Indebtedness incurred in violation of Section 4.3; (vii) Indebtedness that, when incurred and without respect to any election under Section 1111(b) of Title 11, United States Code, is without recourse to such Guarantor; and -16- (viii) any Indebtedness that is, by its express terms, subordinated in right of payment to any other Indebtedness of such Guarantor. "Harvey" means Harvey Equity Partners, L.L.C. "Holder" or "Securityholder" means a Person in whose name a Security is registered. The Holder of a Security will be treated as the owner of such Security for all purposes. "Holdings" means Precision Partners Holding Company or any successor or assign thereof that owns 100% of the Qualified Capital Stock of the Company. "incur" has the meaning set forth under Section 4.3. "Indebtedness" means, with respect to any Person, without duplication: (i) all Obligations of such Person for borrowed money; (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (iii) all Capitalized Lease Obligations of such Person; (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property or services, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade or other accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted); (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction; -17- (vi) guarantees and other contingent obligations in respect of Indebtedness of any other Person referred to in clauses (i) through (v) above and clause (viii) below; (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) that are secured by any Lien on any property or asset of such first Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured; (viii) all Obligations under currency agreements and all interest swap obligations of such Person; and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price will be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness will be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value will be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "Indenture" means this Indenture as amended or supplemented from time to time by one or more supplemental indentures entered into pursuant to the applicable provisions hereof or otherwise in accordance with the terms hereof. -18- "Independent Financial Advisor" means a firm (i) that does not, and whose directors, officers and employees and Affiliates do not, have a direct or indirect financial interest in the Company and (ii) that, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "Initial Purchasers" means Salomon Smith Barney Inc. and NationsBanc Montgomery Securities LLC. "Initial Securities" means, collectively, (i) the 12% Senior Subordinated Notes due 2009 of the Company issued on the Issue Date and (ii) one or more series securities that are issued under this Indenture subsequent to the Issue Date pursuant to Section 2.2, in each case for so long as such securities constitute Restricted Securities. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person, whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and will include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, (i) any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or (ii) any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person. "Investment" shall exclude extensions of trade credit by the Company and the Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be. If the Company or any Restricted Subsidiary sells or otherwise disposes of less than all of the Capital Stock of any Restricted Subsidiary (the "Referent Subsidiary") such that, af -19- ter giving effect to any such sale or disposition, the Referent Subsidiary shall ceaseto be a Restricted Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Capital Stock of the Referent Subsidiary not sold or disposed of. "Issue Date" means March 19, 1999. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "LLC" means Precision Partners, L.L.C. "Mid State" means Mid State Machine Products. "Moody's" means Moody's Investors Service, Inc. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest), received by the Company or any of the Restricted Subsidiaries from such Asset Sale net of: (a) actual expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, sales commissions and relocation expenses); (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements; -20- (c) repayments of Indebtedness secured by the property or assets subject to such Asset Sale that is required to be repaid in connection with such Asset Sale; (d) provision for minority interest holders in any Restricted Subsidiary as a result of such Asset Sale; (e) payments of unassumed liabilities (not constituting Indebtedness) relating to the assets sold at the time of, or within 30 days after, the date of such Asset Sale; and (f) appropriate amounts to be determined by the Company or any Restricted Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Non-U.S. Person" means a person who is not a U.S. Person, as defined in Regulation S. "Note Pro Rata Share" means the amount of the applicable Net Proceeds Offer Amount obtained by multiplying the amount of such Net Proceeds Offer Amount by a fraction, (i) the numerator of which is the aggregate principal amount of Securities outstanding at the time of the applicable Asset Sale with respect to which the Company is required to use the Net Proceeds Offer Amount to repay or make a Net Proceeds Offer or repay and (ii) the demoninator of which is the sum of (a) the aggregate accreted value and/or principal amount, as the case may be, of all Other Indebtedness outstanding at the time of the applicable Asset Sale and (b) the aggregate principal amount of all Securities outstanding at the time of the applicable Net Proceeds Offer with respect to which the Company is required to use the applicable Net Proceeds Offer Amount to offer to repay or make a Net Proceeds Offer or repay. -21- "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means the Chairman of the Board, any Vice Chairman, the Chief Executive Officer, the Chief Financial Officer, Chief Operating Officer, the President, any Executive Vice President, any Vice President (or any such other officer that performs similar duties), the Secretary, the Treasurer, the Assistant Secretary or the Assistant Treasurer of the Company. "Officers' Certificate" means with respect to any Person a certificate signed by two Officers, one of which is the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Executive Vice President, or any such other officer that performs similar duties. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Holders" means (i) SKM and (ii) any Person "controlled" (as defined in the definition of "Affiliate") by one or more Persons identified in clause (i) of this definition. "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Securities, this Indenture and any Guarantees issued on the Issue Date, not to exceed an aggregate principal amount of $100 million; (ii) Indebtedness incurred pursuant to the Credit Agreement in an aggregate principal amount at any time outstanding not to exceed the greater of (a) $50 million and (b) the sum of (x) 85% of the book value of the accounts receivable of the Company and its Restricted Subsidiaries on a consolidated basis plus (y) 50% of the book -22- value of the inventory of the Company and its Restricted Subsidiaries on a consolidated basis plus (z) $25 million; (iii) other Indebtedness of the Company and the Restricted Subsidiaries outstanding on the Issue Date reduced by the amount of any proceeds from Asset Sales used to repay such Indebtedness pursuant to Section 4.6; (iv) Interest Swap Obligations of the Company covering Indebtedness of the Company or any Guarantor and Interest Swap Obligations of any Restricted Subsidiary covering Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such Interest Swap Obligations are entered into to protect the Company and the Restricted Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with this Indenture to the extent the notional principal amount of such Interest Swap Obligations does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligations relates; (v) Indebtedness under Currency Agreements; provided that in the case of Currency Agreements which relate to Indebtedness, such Currency Agreements do not increase the Indebtedness of the Company and the Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Indebtedness of a Restricted Subsidiary to the Company or another Restricted Subsidiary for so long as such Indebtedness is held by the Company or a Restricted Subsidiary, in each case subject to no Lien held by a Person other than the Company or a Restricted Subsidiary; provided that if as of any date any Person other than the Company or a Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Restricted Subsidiary for so long as such Indebtedness is held by a Re -23- stricted Subsidiary, in each case subject to no Lien; provided that if as of any date any Person other than a Restricted Subsidiary owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness, such date will be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is extinguished within five Business Days of incurrence; (ix) Indebtedness of the Company or any of the Restricted Subsidiaries represented by letters of credit for the account of the Company or such Restricted Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance, performance or surety bonds entered into in the ordinary cause of business or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness; (xi) Purchase Money Indebtedness and Capitalized Lease Obligations (and any Indebtedness incurred to Refinance such Purchase Money Indebtedness or Capitalized Lease Obligations) not to exceed $10.0 million at any one time outstanding; (xii) guarantees of the obligations of Restricted Subsidiaries; (xiii) Indebtedness of the Company or any of its Restricted Subsidiaries arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from guarantees, letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries, incurred or assumed in connection with the disposition of any business, any Asset Sale or any disposition of the -24- Capital Stock of a Restricted Subsidiary other than guarantees or similar credit support by the Company or any of its Restricted Subsidiaries of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Capital Stock for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of all such Indebtedness in the nature of such guarantees will at no time exceed the gross proceeds actually received by the Company from the sale of such business, assets or Capital Stock; (xiv) reimbursement obligations relating to undrawn standby letters of credit (other than under the Credit Agreement) issued in the ordinary course of business; (xv) Indebtedness of Foreign Restricted Subsidiaries in an aggregate amount not to exceed $7.5 million; and (xvi) additional Indebtedness of the Company and the Guarantors in an aggregate principal amount not to exceed $12.5 million at any one time outstanding (which amount may, but need not, be incurred under the Credit Agreement). "Permitted Investments" means: (i) Investments by the Company or any Restricted Subsidiary in any Person that is or will become immediately after such Investment a Restricted Subsidiary or that will merge or consolidate into the Company or a Restricted Subsidiary; (ii) Investments in the Company or any Restricted Subsidiary by any Restricted Subsidiary; provided that any Indebtedness evidencing such Investment is unsecured and subordinate to the Securities; (iii) Investments in cash and Cash Equivalents; (iv) loans and advances to employees, officers and directors of the Company and the Restricted Subsidiaries in the ordinary course of business for bona fide business -25- purposes not in excess of $1.0 million at any time outstanding; (v) Currency Agreements and Interest Swap Obligations entered into in the ordinary course of the Company's or a Restricted Subsidiary's businesses and otherwise in compliance with this Indenture; (vi) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (vii) Investments made by the Company or the Restricted Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with Section 4.6; (viii) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, provided that such trade terms may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (ix) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (x) lease, utility and other similar deposits in the ordinary course of business; (xi) Investments paid for solely in Qualified Capital Stock of the Company; (xii) Investments acquired by the Company or a Restricted Subsidiary as a result of a foreclosure by, or other transfer of title to, the Company or such Restricted Subsidiary with respect to any secured Investment; (xiii) loans and advances to employees, officers and directors of the Company and the Restricted Subsidiaries -26- in the ordinary course of business to purchase Capital Stock (or options therefor) of the Company in an amount not to exceed $1.5 million in the aggregate outstanding at any one time; and (xiv) additional Investments not to exceed $10.0 million at any one time outstanding. "Permitted Liens" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or any Restricted Subsidiary will have set aside on its books such reserves as may be required pursuant to GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as will be required by GAAP will have been made in respect thereof; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; -27- (v) easements, rights-of-way, zoning restrictions and other similar charges, restrictions or encumbrances in respect of real property or minor imperfections of title which do not, in the aggregate, impair in any material respect the ordinary conduct of the business of the Company and the Restricted Subsidiaries taken as a whole; (vi) any interest or title of a lessor under any Capitalized Lease Obligation; provided that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation; (vii) purchase money Liens securing Indebtedness incurred to finance property or assets of the Company or any Restricted Subsidiary acquired in the ordinary course of business, and Liens securing Indebtedness which Refinances any such Indebtedness; PROVIDED, HOWEVER, that (A) the related purchase money Indebtedness (or Refinancing Indebtedness) shall not exceed the lesser of the fair market value and the cost of such property or assets plus the aggregate amount of fees and expenses incurred in connection therewith and shall not be secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets so acquired and (B) the Lien securing the purchase money Indebtedness will be created within 90 days of such acquisition; (viii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (ix) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (x) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of the Re -28- stricted Subsidiaries, including rights of offset and set-off; (xi) Liens securing Interest Swap Obligations, which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under this Indenture; (xii) Liens securing Indebtedness under Currency Agreements; (xiii) Liens securing Acquired Indebtedness (and any Indebtedness which Refinances such Acquired Indebtedness) incurred in accordance with Section 4.3; provided that (A) such Liens secured the Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and were not granted in connection with, or in anticipation of the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and (B) such Liens do not extend to or cover any property or assets of the Company or of any of the Restricted Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary; (xiv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xv) Liens arising pursuant to Sale and Leaseback Transactions entered into in compliance with this Indenture; (xvi) Liens on the Capital Stock or other securities of an Unrestricted Subsidiary that secures indebtedness or other obligations of such Unrestricted Subsidiary; (xvii) any encumbrance or restriction (including put and call arrangements) with respect to the Capital Stock of any joint venture, partnership or similar arrangement pursuant to any joint venture, partnership or similar agreement; and -29- (xviii) Liens securing Indebtedness that otherwise may be incurred under this Indenture in an aggregate amount not to exceed $5 million. "Person" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Principal" of a Security means the principal of the Security plus the premium, if any, payable on the Security which is due or overdue or is to become due at the relevant time. "Private Exchange Securities" has the meaning provided in the Registration Rights Agreement. "Private Placement Legend" means the legend initially set forth on the securities in the form set forth in Section 2.13. "Purchase Money Indebtedness" means Indebtedness of the Company or any Restricted Subsidiary incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of any property, provided that the aggregate principal amount of such Indebtedness does not exceed the lesser of the fair market value of such property and such purchase price or cost. "Qualified Capital Stock" means any Capital Stock that is not Disqualified Capital Stock. "Qualified Institutional Buyer" or "QIB" has the meaning specified in Rule 144A under the Securities Act. "Refinance" means in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebted -30- ness in whole or in part. "Refinanced" and "Refinancing" will have correlative meanings. "Refinancing Indebtedness" means any Refinancing by the Company or any Restricted Subsidiary of Indebtedness incurred in accordance with Section 4.3 (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix) and (xi) through (xvi) inclusive of the definition of Permitted Indebtedness), in each case that does not: (1) result in an increase in the aggregate principal amount of any Indebtedness provided that the amount of any premium reasonably necessary to Refinance such Indebtedness and the amount of reasonable expenses incurred by the Company in connection with such Refinancing shall not be deemed an increase in the aggregate principal amount of the Indebtedness to be Refinanced; (2) create Indebtedness (A) the portion of which is scheduled to mature prior to the Securities with a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) with a final maturity earlier than the final maturity of the Indebtedness being Refinanced or the Securities, whichever is later; provided that if such Indebtedness being Refinanced is Indebtedness of the Company or a Guarantor, then such Refinancing Indebtedness will be Indebtedness solely of the Company and/or Guarantors. "Registration Rights Agreement" means the Registration Rights Agreement dated the Issue Date by and among the Company, the Guarantors and the Initial Purchasers. "Regulation S" means Regulation S under the Securities Act. "Replacement Assets" means assets and property that will be used in the business of the Company and/or its Restricted Subsidiaries as existing on the Issue Date or in a business the same, similar or reasonably related thereto (including Capital Stock of a Person that becomes a Restricted -31- Subsidiary if such Person is engaged in businesses that comply with Section 4.16). "Representative" means the indenture trustee or other trustee, agent or representative in respect of any Designated Senior Debt; provided that if, and for so long as, any Designated Senior Debt lacks such a representative, then the Representative for such Designated Senior Debt will at all times constitute the holders of a majority in outstanding principal amount of such Designated Senior Debt in respect of any Designated Senior Debt. "Responsible Officer" means, when used with respect to the Trustee, any officer assigned to the Corporate Trust Office, including any vice president, assistant vice president, assistant treasurer or any other officer of the Trustee to whom any corporate trust matter is referred because of his or her knowledge or familiarity with the particular subject. "Restricted Security" has the meaning assigned to such term in Rule 144(a)(3) under the Securities Act; PROVIDED, HOWEVER, that the Trustee will be entitled to request and conclusively rely on an Opinion of Counsel with respect to whether any Security constitutes a Restricted Security. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board of Directors of the Company, by a Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with Section 4.17. Any such Designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of such covenant. "Rule 144A" means Rule 144A under the Securities Act. "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Restricted Subsidiary of any property, whether owned by the Company or any Restricted Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such Person or to any other Person from whom funds have been or are to be advanced by -32- such Person on the security of such Property other than between the Company and a Restricted Subsidiary or between Restricted Subsidiaries. "SEC" means the U.S. Securities and Exchange Commission, as from time to time constituted, or if at any time after the execution of this Indenture the SEC is not existing and performing the applicable duties now assigned to it, then the body or bodies performing such duties at such time. "Securities" means the Initial Securities, the Exchange Securities and the Private Exchange Securities. "Securities Act" means the Securities Act of 1933, as amended, or any successor statute or statutes thereto, and the rules and regulations of the SEC promulgated thereunder. "Senior Debt" means: (i) the principal of, premium, if any, and interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on any Indebtedness of the Company, whether outstanding on the Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness shall not be senior in right of payment to the Securities. Without limiting the generality of the foregoing, "Senior Debt" shall also include the principal of, premium, if any, interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) on, and all other amounts owing in respect of: (x) all monetary obligations of every nature of the Company, under the Credit Agreement, including, without limitation, obligations to pay principal and -33- interest reimbursement obligations under letters of credit, fees, expenses and indemnities; (y) all Interest Swap Obligations; and (z) all obligations under Currency Agreements, in each case whether outstanding on the Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt" will not include: (i) any Indebtedness of the Company to a Restricted Subsidiary or any Affiliate of the Company or any of such Affiliate's Subsidiaries; (ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director, officer or employee of the Company or any Restricted Subsidiary (including without limitation, amounts owed for compensation); (iii) Indebtedness to trade creditors and other amounts incurred in connection with obtaining goods, materials or services; (iv) Indebtedness represented by Disqualified Capital Stock; (v) Indebtedness incurred in violation of Section 4.3; and (vi) any Indebtedness that is, by its express terms, subordinated in right of payment to any other Indebtedness of the Company or a Restricted Subsidiary and senior in right of payment to the Securities. "Significant Subsidiary" means, with respect to any Person, any Restricted Subsidiary of such Person that satisfies the criteria for a "significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Act. "SKM" means Saunders Karp & Megrue, L.P. -34- "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred). "Subsidiary," with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances will at the time be owned, directly or indirectly, by such Person or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "S&P" means Standard and Poor's Ratings Service. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C.77aaa-77bbbb) as in effect on the date of this Indenture, except as provided in Section 9.3. "Transaction Date" has the meaning set forth under the definition of Consolidated Fixed Charge Coverage Ratio. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to and in compliance with Section 4.17. Any such designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of such covenant. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including -35- any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the sum of the total of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. SECTION 1.2.......OTHER DEFINITIONS. TERM DEFINED IN SECTION ---- ------------------ "Affiliate Transaction" 4.7 "Agent Members" 2.6 "Bankruptcy Law" 6.1 "Change of Control Offer" 4.8 "Change of Control Payment Date" 4.8 "Covenant Defeasance" 8.1 "Custodian" 6.1 "Default Notice" 10.3(a) "Designation" 4.17 "Designation Amount" 4.17 "Event of Default" 6.1 "Global Securities" 2.1(b) "Guaranteed Obligations" 11.1 "Guarantor Default Notice" 12.3(a) "Guarantor Non-payment Default" 12.3(a) "Guarantor Payment Blockage Period 12.3(a) "Guarantor Payment Default" 12.3(a) "Legal Defeasance" 8.1 "Net Proceeds Offer" 4.6 "Net Proceeds Offer Amount" 4.6 "Net Proceeds Offer Payment Date" 4.6 "Net Proceeds Offer Trigger Date" 4.6 "Non-payment Default" 10.3(a) "notice of acceleration" 6.2 -36- "Other Indebtedness" 4.6 "Participants" 2.6 "Paying Agent" 2.3 "Payment Blockage Period" 10.3(c) "payment default" 6.1 "Payment Default" 10.3(a) "Physical Securities" 2.1 "Qualified Equity Offering" 3.1 "Reference Date" 4.4 "Registrar" 2.3 "Restricted Payment" 4.4 "Revocation" 4.17 "Securities Register" 2.3 "Surviving Entity" 6.1 SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. This Indenture is subject to the mandatory provisions of the TIA, which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the Securities means the Company and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.4. RULES OF CONSTRUCTION. Unless the context otherwise requires: -37- (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) "including" means including without limitation; (5) words in the singular include the plural and words in the plural include the singular; (6) the principal amount of any non-interest-bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the Company dated such date prepared in accordance with GAAP; (7) all references to $, US$, dollars or United States dollars shall refer to the lawful currency of the United States; and (8) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE 2 THE SECURITIES SECTION 2.1. FORM AND DATING. (a) The Securities and the Trustee's certificate of authentication shall be substantially in the form of EXHIBIT A, which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities and the Trustee's certificate of authentication relating thereto shall be substantially in the form of EXHIBIT B hereto. The Securities may have notations, legends or endorsements required by law, stock exchange rules, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Security shall be dated the date of its authentication. If required, the Securities may bear the appropriate legend regarding any original issue dis -38- count for federal income tax purposes. Each Security shall have an executed Guarantee from each of the Guarantors. The terms and provisions contained in the Securities, annexed hereto as EXHIBITS A AND B, shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (b) GLOBAL SECURITIES. The Securities offered and sold in reliance on Rule 144A and Securities offered and sold in reliance on Regulation S shall be issued initially in the form of one or more permanent Global Securities ("Global Securities") in definitive, fully registered form without interest coupons, in substantially the form of EXHIBIT A, which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Trustee, at the Trustee's principal corporate trust office in New York City, as custodian for the Depository, and registered in the name of the Depository or a nominee of the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided and shall bear the legend set forth in Section 2.13. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee in the limited circumstances hereinafter provided. Securities issued in exchange for interests in Global Securities pursuant to Section 2.6 may be issued in the form of permanent certificated Securities in registered form in substantially the form set forth in EXHIBIT A (the "Physical Securities"). All Securities offered and sold in reliance on Regulation S shall remain in the form of a Global Security until the consummation of the Exchange Offer pursuant to the Registration Rights Agreement; PROVIDED, HOWEVER, that all of the time periods specified in the Registration Rights Agreement to be complied with by the Company have been so complied with. SECTION 2.2. EXECUTION AND AUTHENTICATION. An Officer of the Company shall sign the Securities and an Officer of each Guarantor shall sign such Guarantor's Guarantee, in each -39- case by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate and make available for delivery (i) Initial Securities for original issue in an aggregate principal amount of $150,000,000, $100,000,000 of which is being issued on the Issue Date and (ii) Exchange Securities and Private Exchange Securities, as the case may be, from time to time for issue only in exchange for a like principal amount of Initial Securities, in each case, upon a written order of the Company signed by an Officer of the Company. Such order shall specify the amount of the Securities to be authenticated and the date on which the Securities are to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed $150,000,000 except as provided in Section 2.7. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate the Securities, upon the consent of the Company to such appointment. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.3. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar, acting on behalf of and as agent for the Company, shall keep a register (the "Securities Register") of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency -40- agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.7. The Company may act as Paying Agent, Registrar, co-Registrar or transfer agent. The Company initially appoints the Trustee as Registrar and Paying Agent in connection with the Securities, until such time as the Trustee has resigned or a successor has been appointed. Any of the Registrar, the Paying Agent or any other agent may resign upon 30 days' notice to the Company. SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to each due date of the principal and interest on any Security, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal and interest when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of or interest on the Securities and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.5. SECURITYHOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a -41- list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders; PROVIDED that as long as the Trustee is the Registrar, no such list need be furnished. SECTION 2.6. TRANSFER AND EXCHANGE. The Securities shall be issued in registered form and shall be transferable only upon the surrender of a Security for registration of transfer. When a Security is presented to the Registrar or a co-registrar with a request to register a transfer, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Registrar shall record in the Securities Register the transfer as requested, and thereupon one or more new Securities in the same aggregate principal amount shall be issued to the designated assignee or transferee and the old Security will be returned to the Company. When Securities are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall make the exchange as requested, in the same manner, if the same requirements are met. To permit registration of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities and each of the Guarantors shall execute a Guarantee thereon at the Registrar's or co-registrar's request. The Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section. The Company shall not be required to make and the Registrar need not register transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, -42- and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture will evidence the same debt and will be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. With respect to Global Securities: (1) Each Global Security authenticated under this Indenture shall (i) be registered in the name of the Depository designated for such Global Security or a nominee thereof, (ii) be deposited with such Depository or a nominee thereof or custodian therefor, (iii) bear legends as set forth in Section 2.13 and (iv) constitute a single Security for all purposes of this Indenture. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Securities, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. (2) Transfers of a Global Security shall be limited to transfers in whole but not in part to the Depository, its successors or their respective nominees. Interests of beneficial owners in a Global Security may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 2.14. In addition, a Global Security is exchangeable for certificated Securities if (i) the Depository (x) notifies the Company that it is unwilling or unable to continue as a Depository for such Global Security and fails to appoint a successor depository within 90 days or (y) if at any time the Depository ceases to be a clearing agency registered under the Exchange Act,(ii) the Company, at its option executes and delivers to the Trus- -43- tee a notice that such Global Security shall be so transferable, registrable, and exchangeable, and such transfers shall be registrable or (iii) there shall have occurred and be continuing an Event of Default or an event that, with the giving of notice or lapse of time or both, would constitute an Event of Default with respect to the Securities represented by such Global Security. Any Global Security that is exchangeable for certificated Securities pursuant to the preceding sentence will be transferred to, and registered and exchanged for, certificated Securities in authorized denominations, without legends applicable to a Global Security, and registered in such names as the Depository holding such Global Security may direct. Subject to the foregoing, a Global Security is not exchangeable, except for a Global Security of like denomination to be registered in the name of the Depository or its nominee. In the event that a Global Security becomes exchangeable for certificated Securities, (i) certificated Securities will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof, (ii) payment of principal, any repurchase price, and interest on the certificated Securities will be payable, and the transfer of the certificated Securities will be registrable, at the office or agency of the Company maintained for such purposes, and (iii) no service charge will be made for any registration or transfer or exchange of the certificated Securities, although the Company may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith. (3) Securities issued in exchange for a Global Security or any portion thereof shall have an aggregate principal amount equal to that of such Global Security or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depository shall designate and shall bear the applicable legends provided for herein. Any Global Security to be exchanged in whole shall be surrendered by the Depository to the Trustee. With respect to any Global Security to be exchanged in part, either such Global Security shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depository or its nominee with respect to such Global Security, the principal amount thereof -44- shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and deliver the Security issuable on such exchange to or upon the order of the Depository or an authorized representative thereof. (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section 2.6, Section 2.7, 2.9, 2.14 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depository for such Global Security or a nominee thereof. Members of, or participants in, the Depository ("Participants") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository or by the Trustee as the custodian of the Depository or under such Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Participants, the operation of customary practices of such Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Security. SECTION 2.7. REPLACEMENT SECURITIES. If a mutilated Security is surrendered to the Trustee or Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security and the Guarantors shall execute a Guarantee thereof if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trus- -45- tee and the Company. Such Holder shall furnish an indemnity bond sufficient in the judgment of the Company, the Guarantors and the Trustee to protect the Company, the Guarantors, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss that any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their expenses in replacing a Security. Every replacement Security issued pursuant to the terms of this Section shall constitute an additional obligation of the Company and the Guarantors under this Indenture. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 2.8. OUTSTANDING SECURITIES. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. Subject to the provisions of Section 13.6, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the security. If a Security is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced Security is held by a bona fide purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date or, pursuant to Section 8.1(a), within 91 days prior thereto, money sufficient to pay all principal and interest payable on that redemption or maturity date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, then on and after such date such Securities (or portions thereof) cease to be outstanding and on and after such redemption or maturity date interest on them ceases to accrue. -46- SECTION 2.9. TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities and deliver them in exchange for temporary securities. SECTION 2.10. CANCELLATION. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment or cancellation and deliver such canceled Securities to the Company. The Trustee shall from time to time provide the Company a list of all Securities that have been canceled as requested by the Company. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancellation. SECTION 2.11. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Securities, the Company shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner in accordance with Section 4.1. The Company may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.12. CUSIP NUMBERS. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that -47- reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. SECTION 2.13. RESTRICTIVE LEGENDS. Each Global Security and Physical Security that constitutes a Restricted Security or is sold in compliance with Regulation S shall bear the following legend (the "Private Placement Legend") on the face thereof until after the second anniversary of the later of the Issue Date and the last date on which the Company or any Affiliate of the Company was the owner of such Security (or any predecessor security) (or such shorter period of time as permitted by Rule 144(k) under the Securities Act or any successor provision thereunder) (or such longer period of time as may be required under the Securities Act or applicable state securities laws in the Opinion of Counsel for the Company, unless otherwise agreed by the Company and the Holder thereof): THIS NOTE (AND ANY GUARANTEE THEREOF) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND NEITHER THIS SECURITY (NOR ANY GUARANTEE THEREOF) NOR ANY INTEREST OR PARTICIPATION HEREIN (OR THEREIN) MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER HEREOF, BY ITS ACCEPTANCE OF THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE THERETO UNDER RULE 144(k) UNDER THE SECURITIES ACT WHICH IS APPLICABLE TO THIS SECURITY (THE "RESALE RESTRICTION TERMINATION DATE") OTHER THAN (1) TO THE ISSUER OR ITS SUBSIDIARIES, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144a UNDER THE SECURITIES ACT ("RULE 144a"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144a PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, IN EACH CASE TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFI- -48- CATE OF TRANSFER ON THE REVERSE OF THIS SECURITY IF THIS SECURITY IS NOT IN BOOK-ENTRY FORM), (3) TO A NON-"U.S. PERSON" IN AN "OFFSHORE TRANSACTION" (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY IF THIS SECURITY IS NOT IN BOOK-ENTRY FORM), (4) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE, OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PRIORITY OR THE PROPERTY OF SUCH INVESTOR ACCOUNT OR ACCOUNTS BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL, AND SUBJECT TO THE RIGHT OF THE ISSUER OR THE TRUSTEE FOR THE SECURITIES PRIOR TO ANY SUCH SALE, PLEDGE OR OTHER TRANSFER PURSUANT TO CLAUSE (4) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER ON OR AFTER THE RESALE RESTRICTION TERMINATION DATE. Each Global Security shall also bear the following legend on the face thereof: UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR securities IN DEFINITIVE FORM, THIS security MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY ANY SUCH NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO AN ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INAS- -49- MUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.14 OF THE INDENTURE. SECTION 2.14. SPECIAL TRANSFER PROVISIONS. (a) TRANSFERS TO NON-QIB INSTITUTIONAL ACCREDITED INVESTORS AND NON-U.S. PERSONS. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to any Non-U.S. Person: (i) the Registrar shall register the transfer of any Security constituting a Restricted Security whether or not such Security bears the Private Placement Legend, if (x) the requested transfer is after the second anniversary of the Issue Date (PROVIDED, HOWEVER, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Security, or portion thereof, at any time on or prior to the second anniversary of the Issue Date) or (y)in the case of a transfer to a Non-U.S. Person, the proposed transferor has delivered to the Registrar a certificate substantially in the form of EXHIBIT D hereto; and (ii) if the proposed transferor is an Agent Member holding a beneficial interest in the Global Security, upon receipt by the Registrar of (x) the certificate, if any, required by paragraph (i) above and (y) written instructions given in accordance with the Depository's and the Registrar's procedures, whereupon (a) the Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of outstanding Physical Securities) a decrease in the principal amount of such Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and (b) if the transfer includes a transfer of outstanding Physical Securities the Company shall execute, -50- the Guarantors shall execute the Guarantees in respect of, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and amount. (b) TRANSFERS TO QIBS. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to a QIB (excluding transfers to Non-U.S. Persons): (i) the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (ii) if the proposed transferee is an Agent Member, and the Securities to be transferred consist of Physical Securities which after transfer are to be evidenced by an interest in a Global Security, upon receipt by the Registrar of written instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of such Global Security in an amount equal to the principal amount of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Securities so transferred. -51- (c) PRIVATE PLACEMENT LEGEND. Upon the transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless (i) the requested transfer is after the second anniversary of the Issue Date (PROVIDED, HOWEVER, that neither the Company nor any Affiliate of the Company has held any beneficial interest in such Security, or portion thereof, at any time prior to or on the second anniversary of the Issue Date), or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) GENERAL. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.6 or this Section 2.14. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time during the Registrar's normal business hours upon the giving of reasonable written notice to the Registrar. (e) TRANSFERS OF SECURITIES HELD BY AFFILIATES. Any certificate (i) evidencing a Security that has been transferred to an Affiliate of the Company within two years after the Issue Date, as evidenced by a notation on the Assignment Form for such transfer or in the representation letter delivered in respect thereof or (ii) evidencing a Security that has been acquired from an Affiliate (other than by an Affiliate) in a transaction or a chain of transactions not involving any public offering, shall, until two years after the last date on which either the Company or any Affiliate of the Company was an owner -52- of such Security, in each case, bear a legend in substantially the form set forth in Section 2.13 hereof, unless otherwise agreed by the Company (with written notice thereof to the Trustee). The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Agent Members or beneficial owners of interests in any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. ARTICLE 3 REDEMPTION SECTION 3.1 OPTIONAL REDEMPTION. (a) Except as set forth in the following paragraph, the Securities are not redeemable before March 15, 2004. Thereafter, the Company may redeem the Securities at its option, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on March 15th of the year set forth below:
YEAR PERCENTAGE ---- ---------- 2004 ................................................... 106.000% 2005 ................................................... 104.000% 2006 ................................................... 102.000% 2007 and thereafter .................................... 100.000%
-53- In addition, the Company must pay accrued and unpaid interest on the Securities redeemed. (b) At any time, or from time to time, on or prior to March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Qualified Equity Offerings (as defined below) to redeem up to 35% of the Securities originally issued at a redemption price equal to 112.000% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of redemption; provided that: (1) at least 65% of the principal amount of Securities originally issued remains outstanding immediately after any such redemption; and (2) the Company makes such redemption not more than 180 days after the consummation of any such Qualified Equity Offering. As used in the preceding paragraph, "Qualified Equity Offering" means a primary offering of Qualified Capital Stock, or rights, warrants or options to acquire Qualified Capital Stock, of the Company, Holdings or LLC in the United States of at least $25 million to Persons who are not Affiliates of the Company or Holdings; PROVIDED that, in the case of any such offering of Qualified Capital Stock of Holdings or LLC, all the net proceeds thereof necessary to pay the aggregate redemption price (plus accrued interest to the redemption date) of the Securities to be redeemed pursuant to the preceding paragraph are contributed to the Company. SECTION 3.2. NOTICES TO TRUSTEE. If the Company elects to redeem Securities pursuant to Section 3.1, it shall notify the Trustee in writing of the redemption date, the principal amount of Securities to be redeemed and the paragraph of the Securities pursuant to which the redemption will occur. The Company shall give each notice to the Trustee provided for in this Section at least 45 days before the redemption date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate from the Company to the effect that such redemption will comply with the provisions herein. -54- SECTION 3.3. SELECTION OF SECURITIES TO BE REDEEMED. If less than all the Securities are to be redeemed at any time, the Trustee shall select the Securities to be redeemed either (i) in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed or (ii) if the Securities are not then listed on a national securities exchange, on a PRO RATA basis, by lot or by such other method that the Trustee in its sole discretion shall deem to be fair and appropriate. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. In the event the Company is required to make an offer to repurchase Securities pursuant to Sections 4.6 or 4.8 and the amount available for such offer is not evenly divisible by $1,000, the Trustee shall promptly refund to the Company any remaining funds, which in no event will exceed $1,000. SECTION 3.4. NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before a date for redemption of Securities, the Company shall mail a notice of redemption by first-class mail to the registered address appearing in the Security Register of each Holder of Securities to be redeemed. The notice shall identify the Securities (including CUSIP numbers, if any) to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; -55- (5) if fewer than all the outstanding Securities are to be redeemed, the identification and principal amounts of the particular Securities to be redeemed; (6) that, unless the Company defaults in making such redemption payment, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Securities pursuant to which the Securities called for redemption are being redeemed; (8) the CUSIP number, if any, printed on the Securities being redeemed; and (9) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's sole expense. In such event, the Company shall provide the Trustee with the information required by this Section. SECTION 3.5. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Securities called for redemption shall become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest to the redemption date. Such notice if mailed in the manner herein provided shall be conclusively presumed to have been given, whether or not the Holder receives such notice. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.6. DEPOSIT OF REDEMPTION PRICE. Prior to 11:00 a.m. (New York City time) on the redemption date, the Company shall deposit with the Trustee or Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest (if any) on all Securities or -56- portions thereof to be redeemed on that date other than Securities or portions of Securities called for redemption which have been delivered by the Company to the Trustee for cancellation. SECTION 3.7. SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered, except that if a Global Security is so surrendered, the Company shall execute, and the Trustee shall authenticate and deliver to the Depository for such Global Security, without service charge, a new Global Security in denomination equal to and in exchange for the unredeemed portion of the principal of the Global Security so surrendered. ARTICLE 4 COVENANTS SECTION 4.1. PAYMENT OF SECURITIES. The Company will promptly pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal and interest will be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due. The Company will pay interest on overdue principal at 1% per annum in excess of the rate per annum set forth in the Securities, and it will pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 4.2. REPORTS TO HOLDERS. The Company will deliver to the Trustee within 15 days after the filing of the same with the SEC, copies of the quarterly and annual reports and of the information, documents and other reports, if any, that the Company is required to file with the SEC pursuant to -57- Section 13 or 15(d) of the Exchange Act. Furthermore, notwithstanding that the Company may not be subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, the Company will file with the SEC, to the extent permitted, and provide the Trustee and Holders with copies of such annual and quarterly reports and such information, documents and other reports specified in Section 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA Section 314(a). Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable form information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 4.3. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, acquire, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur") any Indebtedness (other than Permitted Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company or any Guarantor may incur Indebtedness (including, without limitation, Acquired Indebtedness) and the Restricted Subsidiaries that are not Guarantors may incur Acquired Indebtedness, in each case if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0 if such date of incurrence is on or prior to March 15, 2002 and 2.25 to 1 thereafter. For purposes of determining compliance with this Section 4.3, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness or is entitled to be incurred pursuant to the prior -58- sentence, the Company will, in its sole discretion, classify such item of Indebtedness in any manner that complies with this Section 4.3 and such item of Indebtedness will be treated as having been incurred pursuant to only one of such categories of Permitted Indebtedness (or divided and classified in more than one of such categories of Permitted Indebtedness) or pursuant to the prior sentence. Accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this Section 4.3. SECTION 4.4. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause or permit any of the Restricted Subsidiaries to, directly or indirectly: (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company or in options, warrants or other rights to purchase Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock; (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock; or (c) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b) and (c) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto: (i) a Default or an Event of Default shall have occurred and be continuing; or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with Section 4.3; or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for -59- such purpose, if other than in cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of: (A) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company earned during the period beginning on the first day of the fiscal quarter commencing prior to the Issue Date and through the end of the most recent fiscal quarter for which financial statements are available prior to the date such Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (B) 100% of the aggregate net cash proceeds and the fair market value of property other than cash (as determined in good faith by the Company) received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date of Qualified Capital Stock of the Company or of other Indebtedness or securities converted to or exchanged for Qualified Capital Stock of the Company; plus (C) without duplication of any amounts included in clause (iii)(B) above, 100% of the aggregate net cash proceeds of any contribution to the equity capital of the Company (other than the Disqualified Capital Stock) received by the Company (excluding, in the case of clauses (iii)(B) and (C), any net proceeds from a Qualified Equity Offering to the extent used to redeem the Securities); plus (D) an amount equal to the lesser of: (a) the sum of the fair market value of the Capital Stock of an Unrestricted Subsidiary owned by the Company and/or a -60- Restricted Subsidiary and the aggregate amount of all Indebtedness of such Unrestricted Subsidiary owed to the Company and each Restricted Subsidiary on the date of Revocation of such Unrestricted Subsidiary as an Unrestricted Subsidiary in accordance with Section 4.17; and (b) the Designation Amount with respect to such Unrestricted Subsidiary on the date of the Designation of such Subsidiary as an Unrestricted Subsidiary in accordance with Section 4.17; plus (E) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date, an amount equal to the lesser of the return of capital with respect to such Investment and the initial amount of such Investment which was treated as a Restricted Payment, less, in either case, the cost of the disposition of such Investment and net of taxes. Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend or distribution within 60 days after the date of declaration of such dividend if the dividend or distribution would have been permitted on the date of declaration; (2) any dividend or distribution in respect of or the repurchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Company, either (i) solely by conversion into or in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Restricted Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; -61- (3) so long as no Default or Event of Default shall have occurred and be continuing, repurchases of Capital Stock (or options therefor) of the Company from current or former officers, directors, employees or consultants pursuant to equity ownership or compensation plans or stockholders agreements not to exceed $1.0 million in any year (with unused amounts in any calendar year being carried over to succeeding calendar years, but not to exceed $1.5 million in any one year); (4) payments pursuant to any tax sharing arrangement between the Company or any of the Restricted Subsidiaries and any other Person with which the Company or such Restricted Subsidiary files a consolidated tax return or with which the Company or such Restricted Subsidiary is part of a consolidated group for tax purposes not to exceed the amount the Company would be required to pay on a stand-alone basis; (5) the purchase or redemption of Securities following a Change of Control after the Company shall have complied with the provisions under Section 4.8, including payment of the purchase price pursuant to a Change of Control Offer; (6) the payment to Holdings of up to $800,000 in the aggregate in any fiscal year for Holdings to pay annual monitoring fees to SKM and Carlisle; (7) the payment of consulting and advisory fees to Harvey in connection with the 1999 Acquisitions or any future acquisition and related expenses; (8) the declaration and payment of dividends to holders of any class or series of Disqualified Capital Stock of the Company issued in accordance with Section 4.3; and (9) so long as no Default or Event of Default shall have occurred and be continuing, other Restricted Payments in an aggregate amount not to exceed $5 million. -62- In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (1) and (2)(ii) will be included in such calculation. SECTION 4.5. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company will not, and will not cause or permit any of the Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to: (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Restricted Subsidiary; or (c) transfer any of its property or assets to the Company or any other Restricted Subsidiary; except for such encumbrances or restrictions existing under or by reasons of: (1) applicable law; (2) this Indenture, the Securities or the Guarantees; (3) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Restricted Subsidiary; (4) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (5) the Credit Agreement; -63- (6) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; (7) any other agreement entered into after the Issue Date that contains encumbrances and restrictions that are not materially more restrictive with respect to any Restricted Subsidiary than those in effect with respect to such Restricted Subsidiary pursuant to agreements as in effect on the Issue Date; (8) agreements governing Permitted Indebtedness; (9) customary bank credit agreements Incurred pursuant to clause (xv) of the definition of Permitted Indebtedness; (10) customary restrictions on the transfer of any property or assets arising under a security agreement governing a Lien permitted under this Indenture; (11) customary restrictions with respect to a Restricted Subsidiary pursuant to an agreement that has been entered into in connection with the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary; (12) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature discussed in clause (c) above on the property so acquired; (13) secured Indebtedness otherwise permitted to be incurred pursuant to Section 4.3 and Section 4.11 that limit the right of the debtor to dispose of the assets securing such Indebtedness; (14) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; and -64- (15) any agreement governing Refinancing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (4), (5), (6), (8) or (13) above; PROVIDED, HOWEVER, that the provisions relating to such encumbrance or restriction contained in any such Refinancing Indebtedness are not materially more restrictive than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (2), (4), (5), (6), (8) or (13) above. SECTION 4.6. LIMITATION ON ASSET SALES. The Company will not, and will not permit any of the Restricted Subsidiaries to, consummate an Asset Sale unless: (i) the Company or the applicable Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Board of Directors of the Company); (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents or Replacement Assets and is received at the time of such disposition (provided that the amount of (x) any Indebtedness of the Company or any Guarantor that is actually assumed by the transferee in such Asset Sale and from which the Company and the Guarantors are fully and unconditionally released, (y) Indebtedness of a Restricted Subsidiary that is no longer such as a result of such Asset Sale (to the extent the Company and each other Restricted Subsidiary us released from any guarantee thereof) and (z) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash shall each be deemed to be cash for purposes of clause (i) above); and (iii) upon the consummation of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to -65- apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof either: (A) to prepay any Senior Debt or Guarantor Senior Debt and, in the case of any Senior Debt or Guarantor Senior Debt under any revolving credit facility, effect a permanent reduction in the availability under such revolving credit facility; (B) to acquire Replacement Assets; or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii) (B). On the 361st day after an Asset Sale or such earlier date, if any, as the Board of Directors of the Company or of such Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds that have not been applied on or before such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 60 days following the applicable Net Proceeds Offer Trigger Date, all outstanding Securities up to a maximum principal amount of Securities equal to the Note Pro Rata Share, at a purchase price in cash equal to 100% of the principal amount of Securities, plus accrued and unpaid interest (including additional interest, if any) thereon, if any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any non-cash consideration received by the Company or any Restricted Subsidiary, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration) or Cash Equivalents, then such conversion or disposition will be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof will be applied in accordance with this Section 4.6. -66- The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $10 million resulting from one or more Asset Sales or deemed Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $10 million, shall be applied as required pursuant to this paragraph). In the event that any other Indebtedness of the Company that ranks equally to in right of payment with the Securities requires that such Indebtedness be repaid or repurchased upon the consummation of any Asset Sale (the "Other Indebtedness"), the Company may use the Net Proceeds Offer Amount otherwise required to be used to repay or repurchase such Other Indebtedness and to make a Net Proceeds Offer so long as the amount of such Net Proceeds Offer Amount available to be applied to purchase the Securities is not less than the Note Pro Rata Share. With respect to any Net Proceeds Offer Amount, the Company shall make the Net Proceeds Offer in respect thereof at the same time as the analogous repayment or repurchase is made under any Other Indebtedness and the date of purchase in respect thereof shall be the same under this Indenture as the repayment or purchase of any Other Indebtedness. With respect to any Net Proceeds Offer effected pursuant to this covenant, to the extent that the principal amount of the Securities tendered pursuant to such Net Proceeds Offer exceeds the Note Pro Rata Share to be applied to the purchase thereof, such Securities will be purchased PRO RATA based on the principal amount of such Securities tendered by each holder. In the event of the transfer of substantially all (but not all) of the property and assets of the Company and the Restricted Subsidiaries as an entirety to a Person in a transaction permitted under Section 5.1, which transaction does not constitute a Change of Control, the successor corporation will be deemed to have sold the properties and assets of the Company and the Restricted Subsidiaries not so transferred for purposes of this Section 4.6 and shall comply with the provisions of this Section 4.6 with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value of such properties and assets of the Company or the Restricted Subsidiaries -67- deemed to be sold will be deemed to be Net Cash Proceeds for purposes of this Section 4.6. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 30 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and will comply with the procedures set forth below. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Securities in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Securities in an amount exceeding the Net Proceeds Offer Amount, Securities of tendering Holders will be purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer will remain open for a period of 20 Business Days or such longer period as may be required by law. If not fully subscribed, the Company may retain and use the remaining Net Cash Proceeds for any purpose not otherwise prohibited by this Indenture. The notice, that will govern the terms of the Net Proceeds Offer, will include such disclosures as are required by law and shall state: (i) that the Net Proceeds Offer is being made pursuant to this Section 4.6; (ii) the purchase price (including the amount of accrued interest, if any) to be paid for Securities purchased pursuant to the Net Proceeds Offer and the purchase date; (iii) that any Security not tendered for payment will continue to accrue interest in accordance with the terms thereof; (iv) that, unless the Company defaults on making the payment, any Security accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Net Proceeds Offer Payment Date; (v) that Holders accepting the offer to have their Securities purchased pursuant to the Net Proceeds Offer will be required to surrender their Securities to the Pay- -68- ing Agent at the address specified in the notice prior to the close of business on the purchase date; (vi) that Holders will be entitled to withdraw their acceptance if the Paying Agent receives, not later than the close of business on the second Business Day prior to the purchase date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Securities purchased; (vii) that Holders whose Securities are purchased only in part will be issued new Securities in a principal amount equal to the unpurchased portion of the Securities surrendered; PROVIDED that each Security purchased and each such new Security issued shall be in an original principal amount in denominations of $1,000 and integral multiples thereof; (viii) any other procedures that a Holder must follow to accept an Net Proceeds Offer or effect withdrawal of such acceptance; and (ix) the name and address of the Paying Agent. On the purchase date, the Company will (i) accept for payment Securities or portions thereof tendered pursuant to the Net Proceeds Offer in accordance with this Section 4.6, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the purchase price, plus accrued interest, if any, of all Securities to be purchased in accordance with this Section 4.6 and (iii) deliver to the Trustee Securities so accepted together with an Officers' Certificate stating the Securities or portions thereof tendered to and accepted for payment by the Company. For purposes of this Section 4.6, the Trustee will act as the Paying Agent. The Paying Agent will promptly (but in any case no later than 10 calendar days after the Net Proceeds Payment Date) mail or deliver to the Holders of Securities so accepted payment in an amount equal to the purchase price for such Securities, and the Company shall execute and -69- issue, and the Trustee shall promptly authenticate and mail to such Holders, a new Note equal in principal amount to any unpurchased portion of the Security surrendered; PROVIDED that each such new Security shall be issued in an original principal amount in denominations of $1,000 and integral multiples thereof. The Company will send to the Trustee and the Holders of Securities on or as soon as practicable. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of this Indenture by virtue thereof. SECTION 4.7. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are not materially less favorable than those that would have reasonably been expected in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $5.0 million shall be approved by the Board of Directors of the Company or such Restricted Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Restricted -70- Subsidiary enters into an Affiliate Transaction (or series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $10.0 million, the Company or such Restricted Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in clause (a) shall not apply to: (i) employment, consulting and compensation arrangements and agreements of the Company or any Restricted Subsidiary consistent with past practice or approved by a majority of the disinterested members of the Board of Directors of the Company (or a committee comprised of disinterested directors); (ii) reasonable fees and compensation paid to and indemnity provided on behalf of officers, directors, employees, consultants or agents of the Company or any Restricted Subsidiary as determined in good faith by the Company's Board of Directors or senior management, including, without limitation, any issuance or grant of stock options, bonuses or similar rights to such employees, officers and directors; (iii) transactions exclusively between or among the Company and any of the Restricted Subsidiaries or exclusively between or among such Restricted Subsidiaries, PROVIDED such transactions are not otherwise prohibited by this Indenture; (iv) Restricted Payments permitted to be made pursuant to Section 4.4; (v) the payment to Holdings of up to $800,000 in the aggregate in any fiscal year for Holdings to pay annual monitoring fees to SKM and Carlisle; -71- (vi) the payment of consulting and advisory fees to Harvey in connection with the 1999 Acquisitions or any future acquisition and related expenses; (vii) payments to the selling stockholders of Mid State, Galaxy and Certified pursuant to the relevant acquisition agreements or documents delivered in connection therewith (whether in cash or in the form of bonus compensation, a note or other security); (viii) Permitted Investments; (ix) in connection with a public offering of Common Stock of the Company, Holdings or any Restricted Subsidiary, loans or advances, having a maturity of one year or less after the date first made, to employees to finance the purchase by such employees of such Common Stock; (x) the issuance or sale of any Qualified Capital Stock of the Company or of any Guarantor; and (xi) the payment of all fees and expenses related to the 1999 Acquisitions, the Credit Agreement and the offering of the Securities on the Issue Date (whether paid at or subsequent to the closing of such transactions). SECTION 4.8. CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each Holder will have the right to require that the Company purchase all or a portion of such Holder's Securities pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest, if any, thereon to the date of purchase. (b) Prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control, the Company will be required to use its reasonable efforts to: (i) repay in full and terminate all commitments under all Indebtedness under the Credit Agreement and all other Senior Debt the terms of which require repayment upon a Change of Control or offer to repay in full and -72- terminate all commitments under all Indebtedness under the Credit Agreement and all other such Senior Debt and to repay the Indebtedness owed to each lender which has accepted such offer; or (ii) obtain the requisite consents under the Credit Agreement and all other Senior Debt to permit the repurchase of the Securities as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Securities pursuant to the provisions described below. (c) Within 30 days following the date upon which the Change of Control occurred, the Company must send, by first class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day prior to the Change of Control Payment Date. Such notice shall state: (i) that the Change of Control Offer is being made pursuant to this Section 4.8 and that all Securities tendered and not withdrawn shall be accepted for payment; (ii) the purchase price (including the amount of accrued interest) and the Change of Control Payment Date; (iii) that any Security not tendered shall continue to accrue interest; (iv) that, unless the Company defaults in making payment therefor, any Security accepted for payment pursuant -73- to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (v) that Holders electing to have a Security purchased pursuant to a Change of Control Offer shall be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date; (vi) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the second business day prior to the Change of Control Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have such Securities purchased; (vii) that Holders whose Securities are purchased only in part shall be issued new Securities in a principal amount equal to the unpurchased portion of the Securities surrendered; PROVIDED, HOWEVER, that each Security purchased and each new Note issued shall be in an original principal amount of $1,000 or integral multiples thereof; and (viii) the circumstances and relevant facts regarding such Change of Control. On the Change of Control Payment Date, the Company shall, to the extent permitted by law, (i) accept for payment all Securities or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to the aggregate Change of Control Payment in respect of all Securities or portions thereof so tendered and (iii) deliver, or cause to be delivered, to the Trustee for cancellation the Securities so accepted together with an Officers' Certificate stating that such Securities or portions thereof have been tendered to and purchased by the Company. The Paying Agent will promptly either (x) pay to the -74- Holder against presentation and surrender (or, in the case of partial payment, endorsement) of the Global Notes or (y) in the case of certificated Securities, mail to each Holder of Securities the Change of Control Payment for such Securities, and the Trustee will promptly authenticate and deliver to the Holder of the Global Notes a new Global Note or Securities or, in the case of Definitive Notes, mail to each Holder new certificated Securities, as applicable, equal in principal amount to any unpurchased portion of the Securities surrendered, if any, provided that each new certificated Securities. (d) The Company's obligation to make a Change of Control Offer may be discharged if a third party makes the Change of Control Offer in the manner and at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer to be made by the Company and such third party purchases all Securities properly tendered under such Change of Control Offer. (e) The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of this Indenture by virtue thereof. SECTION 4.9. COMPLIANCE CERTIFICATE. The Company will deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate, one of the signers of which shall be the principal executive, financial or accounting officer of the Company, stating that in the course of the performance by the signers of their duties as Officers of the Company they would normally have knowledge of any Default and whether or not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Company is taking or proposes to take with respect thereto. The Company also shall comply with TIA Section 314(a)(4). -75- SECTION 4.10. FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.11 LIMITATION ON LIENS. The Company will not, and will not cause or permit any of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property or assets of the Company or any of the Restricted Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless: (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Securities, the Securities are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens; and (ii) in all other cases, the Securities are equally and ratably secured with the obligations so secured until such obligations are no longer secured by a Lien, except for: (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens securing Senior Debt, Guarantor Senior Debt or Indebtedness of a Restricted Subsidiary that is not a Guarantor that is permitted to be incurred under this Indenture; (C) Liens securing the Securities and any Guarantees; (D) Liens in favor of the Company or a Restricted Subsidiary; -76- (E) Liens securing Refinancing Indebtedness incurred to Refinance any Indebtedness which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions of this Indenture; PROVIDED, HOWEVER, that such Liens do not extend to or cover any property or assets of the Company or any of the Restricted Subsidiaries not securing the Indebtedness so Refinanced (other than improvements, additions or accessions thereto); and (F) Permitted Liens. SECTION 4.12 LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any of the Restricted Subsidiaries to issue any Preferred Stock (other than to the Company or to a Restricted Subsidiary) or permit any Person (other than the Company or a Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. SECTION 4.13 PAYMENT OF TAXES AND OTHER CLAIMS. The Company will, and will cause each of its Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, all taxes, assessments and governmental charges levied or imposed upon its or its Subsidiaries' income, profits or property; PROVIDED, HOWEVER, that neither the Company nor any of its Subsidiaries shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate negotiations or proceedings and for which disputed amounts adequate reserves have been made in accordance with GAAP. SECTION 4.14 ADDITIONAL SUBSIDIARY GUARANTEES. If the Company or any Restricted Subsidiary transfers or causes to be transferred, in one transaction or a series of related transactions, any property with a book value in excess of $500,000 to any Domestic Restricted Subsidiary that is not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall organize, acquire or otherwise invest in another Domestic Restricted Subsidiary having total assets with a book value in excess of $500,000, then such transferee or acquired or other Restricted Subsidiary shall: -77- (1) execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Securities and this Indenture on the terms set forth in this Indenture; and (2) deliver to the Trustee an Opinion of Counsel that such supplemental indenture has been duly authorized, executed and delivered by such Restricted Subsidiary and constitutes a legal, valid, binding and enforceable obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes of this Indenture. The obligations of each Guarantor under its Guarantee will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor (including, without limitation, any guarantees under the Credit Agreement) and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under this Indenture, result in the obligations of the Guarantor under the Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Guarantor that makes a payment for distribution under a Guarantee is entitled to a contribution from each other Guarantor in a PRO RATA amount based on the Adjusted Net Assets of each Guarantor. SECTION 4.15 PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Company will not, and will not permit any Guarantor to, incur or suffer to exist Indebtedness that is senior in right of payment to the Securities or the Guarantee of such Guarantor and subordinate in right of payment to any other Indebtedness of the Company or such Guarantor, as the case may be. SECTION 4.16. CONDUCT OF BUSINESS. The Company will not, and will not permit any Restricted Subsidiary to, engage in any businesses which are not either: (i) the same, similar or related to the businesses in which the Company or any of the -78- Restricted Subsidiaries are engaged on the Issue Date, (ii) businesses acquired through an acquisition after the Issue Date which are not material to the Company and the Restricted Subsidiaries, taken as a whole, or (iii) Permitted Investments. SECTION 4.17 LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may designate any Subsidiary of the Company (other than a Subsidiary of the Company that owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under this Indenture (a "Designation") only if: (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such Subsidiary has total assets greater than $1,000 and (a) no Default shall have occurred and be continuing after giving effect to such Designation; and (b) the Company would be permitted under this Indenture to make an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the sum of (i) the fair market value of the Capital Stock of such Subsidiary owned by the Company and/or any of the Restricted Subsidiaries on such date and (ii) the aggregate amount of Indebtedness of such Subsidiary owed to the Company and the Restricted Subsidiaries on such date; and (c) after giving effect to such designation, the Company would be permitted to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.3 at the time of Designation (assuming the effectiveness of such Designation). In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment in the Designation Amount pursuant to Section 4.4 for all purposes of this Indenture. The Company will not, -79- and will not permit any Restricted Subsidiary to, at any time (x) provide direct or indirect credit support for or a guarantee of any Indebtedness of any Unrestricted Subsidiary (including of any undertaking agreement or instrument evidencing such Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any Indebtedness that provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except, in the case of clause (x) or (y), to the extent permitted under Section 4.4. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary ("Revocation"), whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if: (a) no Default shall have occurred and be continuing at the time and after giving effect to such Revocation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiaries outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. All Designations and Revocations must be evidenced by an Officers' Certificate of the Company delivered to the Trustee certifying compliance with the foregoing provisions. SECTION 4.18 MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain, in the Borough of Manhattan, the City of New York, an office or agency (which may be an office or agency of the Trustee, Registrar or co-Registrar), where Securities may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change -80- in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee's principal corporate trust office in New York City as set forth in Section 13.2. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee's principal corporate trust office in New York City as set forth in Section 13.2 as an agency of the Company in accordance with Section 2.3. SECTION 4.19 CORPORATE EXISTENCE. Subject to Article 5 and Section 4.6, the Company will do or cause to be done, at its own cost and expense, all things necessary to, and will cause each of its Restricted Subsidiaries to, preserve and keep in full force and effect the corporate or partnership existence and rights (charter and statutory), licenses and/or franchises of the Company and each of its Restricted Subsidiaries; PROVIDED, HOWEVER, that the Company or any of its Restricted Subsidiaries shall not be required to preserve any such rights, licenses or franchises if the Board of Directors shall reasonably determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and the Subsidiaries, taken as a whole. -81- ARTICLE 5 SUCCESSOR COMPANY SECTION 5.1. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, and will not cause or permit any Guarantor (other than any Guarantor whose Guarantee is to be released in accordance with the terms of the Guarantee and this Indenture in connection with any transaction complying with the provisions of Section 4.6) to, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Restricted Subsidiaries) whether as an entirety or substantially as an entirety to any Person unless: (i) either: (1) the Company or such Guarantor shall be the surviving or continuing corporation; or (2) the Person (if other than the Company or such Guarantor) formed by such consolidation or into which the Company or such Guarantor is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and the Restricted Subsidiaries substantially as an entirety (the "Surviving Entity"): (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia; and (y) shall expressly assume, by supplemental indenture (in form and substance reasonably satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if -82- any, and interest on all of the Securities and the performance of every covenant of the Securities, the Guarantee, if applicable, this Indenture and, if then effect, the Registration Rights Agreement on the part of the Company or such Guarantor to be performed or observed. (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction) on a pro forma basis, the Company or such Surviving Entity, as the case may be, shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.3; PROVIDED that a Guarantor may merge into the Company or another Guarantor without complying with this clause (ii); (iii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of this Indenture and that all conditions precedent in this Indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries the Capital Stock of which constitutes all or substantially all of -83- the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation, combination or merger of the Company or a Guarantor or any transfer of all or substantially all of the assets of the Company in accordance with the this Article V, in which the Company or such Guarantor is not the continuing corporation, the Surviving Entity formed by such consolidation or into which the Company or such Guarantor is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Guarantor under this Indenture, the Securities and the Guarantees with the same effect as if such Surviving Entity had been named as such and, except in the case of a conveyance, transfer or lease, the Company or such Guarantor, as the case may be, shall be released from the obligation to pay the principal of and interest on the Securities or in respect of its Guarantee, as the case may be, and all of the Company's or such Guarantor's other obligations and covenants under the Securities, this Indenture and its Guarantee, if applicable. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs upon: (i) the failure to pay interest on any Securities when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by Article 10 or Article 12 of this Indenture); (ii) the failure to pay the principal on any Securities, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase Securities tendered pursuant to a Change of Control Offer or a Net Proceeds Of- -84- fer) (whether or not such payment shall be prohibited by Article 10 or Article 12 of this Indenture); (iii) a default in the observance or performance of any other covenant or agreement contained in this Indenture, which default continues for a period of 45 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Securities (except in the case of a default with respect to Section 5.1, which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) a default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or of any Restricted Subsidiary (or the payment of which is guaranteed by the Company or any Restricted Subsidiary), whether such Indebtedness now exists or is created after the Issue Date, which default (a) is caused by a failure to pay principal of such Indebtedness after notice and the lapse of any applicable grace period provided in such Indebtedness on the date of such default (a "payment default") or (b) results in the acceleration of such Indebtedness prior to its express maturity (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days) and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a payment default or the maturity of which has been so accelerated (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days), aggregates $7.5 million; (v) one or more judgments in an aggregate amount in excess of $7.5 million not covered by adequate insurance shall have been rendered against the Company or any of the Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and nonappealable; -85- (vi) the Company or any Significant Subsidiary of the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary of the Company in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary of the Company or for any substantial part of the property of the Company or Significant Subsidiary; (C) orders the winding up or liquidation of the Company or any Significant Subsidiary of the Company; (or any similar relief is granted under any foreign laws) and the order or decree remains unstayed and in effect for 60 days; and (viii) any Guarantee of a Significant Subsidiary ceases to be in full force and effect or any Guarantee of a Significant Subsidiary declared to be null and void and unenforceable or any Guarantee of a Significant Subsidiary is found to be invalid or any of the Guarantors that is a Significant Subsidiary denies its liability under its -86- Guarantee (other than by reason of release of a Guarantor in accordance with the terms of this Indenture). The term "Bankruptcy Law" means Title 11, United States Code, as amended, or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, Trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. The Company will provide an Officers' Certificate to the Trustee promptly upon the Company obtaining knowledge of any Default or Event of Default (PROVIDED that the Company shall provide such certification at least annually whether or not it knows of any Default or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. SECTION 6.2. ACCELERATION. If an Event of Default (other than an Event of Default specified in Section 6.1(vi) or (vii)) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Securities may declare the principal of, premium, if any, and accrued interest on all the Securities to be due and payable by notice in writing to the Company and (if given by the Holders) the Trustee specifying the respective Events of Default and that it is a "notice of acceleration," and the same shall become immediately due and payable. If an Event of Default specified in Section 6.1(vi) or (vii) occurs and is continuing, then all unpaid principal of, premium, if any, and accrued and unpaid interest on all of the outstanding Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration with respect to the Securities as described in the preceding paragraph, the Holders of a majority in principal amount of the then outstanding Securities may rescind and cancel such declaration and its consequences: (i) if the rescission would not conflict with any judgment or decree; -87- (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration; (iii) to the extent the payment of such interest is lawful, if interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid; (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances; and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the Trustee shall have received an Officers' Certificate and an Opinion of Counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.3. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are, to the extent permitted by law, cumulative. SECTION 6.4. WAIVER OF PAST DEFAULTS. The Holders of a majority in aggregate principal amount of the Securities then outstanding by notice to the Trustee may waive any past or existing Default and its consequences except for (i) a Default in the payment of the principal of or interest on a Security or (ii) a Default in respect of a provision that under Section 9.2 cannot be amended without the consent of each Securityholder -88- affected. When a Default is waived, it is deemed cured, and any Event of Default arising therefrom shall be deemed to have been cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.5. CONTROL BY MAJORITY. The Holders of a majority in aggregate principal amount of the Securities then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.1, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability; PROVIDED, HOWEVER, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification from the Securityholders satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. SECTION 6.6. LIMITATION ON SUITS. A Holder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate principal amount of the Securities then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (5) the Holders of a majority in aggregate principal amount of the Securities then outstanding do not give the -89- Trustee a direction inconsistent with the request during such 60-day period. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal, premium (if any) or interest on the Securities held by such Holder, on or after the respective due dates expressed in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.8. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.1(i) or (ii) occurs and is continuing, the Trustee may recover judgment in its own name and as Trustee of an express trust against the Company for the whole amount then due and owing (together with interest on any unpaid interest to the extent lawful) and the amounts provided for in Section 7.7. SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.7. SECTION 6.10. PRIORITIES. If the Trustee collects any money or property pursuant to this Article 6, it shall pay -90- out the money or property in the following order, subject to applicable law: FIRST: to the Trustee for amounts due under Section 7.7; SECOND: to Holders for amounts due and unpaid on the Securities for principal (including any premium) and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal (including any premium) and interest, respectively; and THIRD: to the Company. The Trustee may, upon prior written notice to the Company, fix a record date and payment date for any payment to Securityholders pursuant to this Section. At least 15 days before such record date, the Company shall mail to each Securityholder and the Trustee a notice that states the record date, the payment date and amount to be paid. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7 or a suit by Holders of more than 10% in aggregate principal amount of the outstanding Securities. SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the extent it may lawfully do so) shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) -91- hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 TRUSTEE SECTION 7.1. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent Person would exercise or use under the circumstances in the conduct of such Person's own affairs. (b) Except during the continuance of an Event of Default: (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: -92- (1) this paragraph does not limit the effect of paragraph (b) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Sections 6.2 and 6.5 hereof. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section and to the provisions of the TIA. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) The Trustee shall have no responsibility to examine or review and shall have no liability for the contents of any documents submitted to or delivered to any Holder of Securities by the Company in the nature of a solicitation or an official statement or offering circular, whether preliminary or final. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. -93- SECTION 7.2. RIGHTS OF TRUSTEE. Subject to Section 7.1, (a) The Trustee may conclusively rely on any document reasonably believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any reasonable action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; PROVIDED, HOWEVER, that the Trustee's conduct does not constitute willful misconduct or negligence. (e) The Trustee may consult with counsel of its selection, and the advice or Opinion of Counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect to any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel; (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. -94- (g) Except with respect to Section 4.1, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article 4. In addition, the Trustee shall not be deemed to have knowledge of any Default of Event of Default except (i) any Default or Event of Default occurring pursuant to Sections 6.1(i), 6.1(ii) and 4.1 or (ii) any Default or Event of Default of which a Responsible Officer shall have received written notification or obtained actual knowledge. (h) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed by the Trustee with due care. SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.4. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. SECTION 7.5. NOTICE OF DEFAULTS. If a Default occurs and is continuing and if it is known to a responsible Officer of the Trustee, the Trustee shall mail to each Securityholder notice of the Default within 30 days after it is known by a Responsible Officer or written notice is received by the Trustee. Except in the case of a Default in payment of principal of or interest on any Security (including payments pursuant to the mandatory redemption provisions of such Security, if -95- any), the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS. As promptly as practicable after each May 15 beginning with the May 15 following the date of this Indenture, and in any event prior to July 15 in each year, the Trustee shall mail to each Securityholder a brief report dated as of May 15 that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b). Prior to delivery to the Holders, the Trustee shall deliver to the Company a copy of any report it delivers to Holders pursuant to this Section 7.6. A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange (if any) on which the Securities are listed. The Company agrees to notify promptly the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.7. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time such reasonable compensation for its services as the Company and the Trustee shall from time to time agree in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to such compensation for its services, except any such expense, disbursement or advance as may arise from its negligence, willful misconduct or bad faith. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Trustee shall provide the Company reasonable notice of any expenditure not in the ordinary course of business; PROVIDED that prior approval by the Company of any such expenditure shall not be a requirement for the making of such expenditure nor for reimbursement by the Company thereof. The Company shall indemnify each of the Trustee and any predecessor Trustees against any and all loss, damage, claim, liability or expense (including attorneys' fees and expenses and taxes, -96- other than taxes applicable to the Trustee's compensation hereunder) incurred by it in connection with the acceptance or administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder. The Company will be entitled to participate therein and may assume the defense thereof, including the employment of counsel reasonably acceptable to such Trustee and payment of all fees and expenses relating to the assumption of the defense by the Company. A Trustee shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Trustee unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense and employ counsel on a timely basis or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Trustee and the Company and such shall have reasonably concluded, based on the advice of its counsel, that representation of such indemnified party and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Company shall not have the right to assume the defense of such action, suit or proceeding on behalf of the Trustee. The Trustee may have separate counsel at its own expense. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by the Trustee through the Trustee's own willful misconduct, negligence or bad faith. The Company need not pay for any settlement made without its written consent, which shall not be unreasonably withheld. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest on particular Securities. The Company's payment obligations pursuant to this Section shall survive the discharge of this Indenture. When the Trustee incurs expenses after the occurrence of a Default -97- specified in Section 6.1(vi) or (vii) with respect to the Company, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.8. REPLACEMENT OF TRUSTEE. The Trustee may resign at any time upon 30 days notice to the Company. The Holders of a majority in principal amount of the Securities then outstanding may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or (4) the Trustee otherwise becomes incapable of acting. Subject to the TIA, the Trustee is permitted to engage in other transactions; PROVIDED that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. If the Trustee resigns, is removed by the Company or by the Holders of a majority in principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the -98- successor Trustee, subject to the lien provided for in Section 7.7. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring Trustee. SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee, PROVIDED that such corporation shall be eligible under this Article 7 and TIA Section 310(a). In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. -99- SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times satisfy the requirements of TIA Section 310(a). The Trustee shall have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(B); PROVidED, HOWever, that there shall be excluded from the operation of TIA Section 310(b)(1) any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. ARTICLE 8 DISCHARGE OF INDENTURE; DEFEASANCE SECTION 8.1. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE. (a) This Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the Securities, as expressly provided for in this Indenture) as to all outstanding Securities when: (1) either: (i) all the Securities theretofore authenticated and delivered (except lost, stolen or destroyed Securities which have been replaced or paid and Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation; or -100- (ii) all Securities not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Securities not theretofore delivered to the Trustee for cancellation, for principal of, premium, if any, and interest on the Securities to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (2) the Company has paid all other sums payable under this Indenture by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent under this Indenture relating to the satisfaction and discharge of this Indenture have been complied with. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate from the Company that all conditions precedent provided for herein relating to satisfaction and discharge of this Indenture have been complied with and at the cost and expense of the Company. (b) Subject to Sections 8.1(c) and 8.2, the Company at any time may terminate (i) all of its obligations under the Securities and this Indenture ("Legal Defeasance") or (ii) its obligations under Sections 4.2 through 4.8 and 4.11 through 4.17 and the operation of Sections 6.1(iii), 6.1(iv), 6.1(v), 6.1(vi) and 6.1(vii) (but only with respect to a Significant Subsidiary), 6.1(viii) and 5.1 ("Covenant Defeasance"). The Company may exercise Legal Defeasance notwithstanding its prior exercise of Covenant Defeasance. Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Securities, except for: -101- (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the Securities when such payments are due; (ii) the Company's obligations with respect to the Securities concerning issuing temporary Securities, registration of Securities, mutilated, destroyed, lost or stolen Securities and the maintenance of an office or agency for payments; (iii) the rights, powers, trust, duties and immunities of the Trustee and the Company's obligations in connection therewith; and (iv) the Legal Defeasance provisions of this Indenture. If the Company exercises Covenant Defeasance, a failure to comply with such obligations shall not constitute a Default or Event of Default with respect to the Securities. In the event of Covenant Defeasance, those events described under Section 6.1 (except those events described in Section 6.1(i), (ii), (iv),(vi) and (vii)) will no longer constitute an Event of Default with respect to the Securities. If the Company exercises Legal Defeasance or Covenant Defeasance, each Guarantor will be released from all of its obligations under Article 11. Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 7.7, 7.8, 8.3, 8.4, 8.5 and 8.6 shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.7, 8.4 and 8.5 shall survive. SECTION 8.2. CONDITIONS TO DEFEASANCE. The Company may exercise Legal Defeasance or Covenant Defeasance only if: (1) the Company irrevocably deposits with the Trustee, in trust, for the benefit of the Holders cash in U.S. -102- dollars, non-callable U.S. Government Obligations, or a combination thereof, in such amounts as will be sufficient (through the payment of principal and interest), to pay the principal of, premium, if any, and interest on the Securities on the stated date of payment thereof or on the applicable redemption date, as the case may be; (2) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that: (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling; or (B) since the date of this Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (3) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (4) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; -103- (5) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (6) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (7) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; (8) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that: (A) the trust funds will not be subject to any rights of holders of Senior Debt, including, without limitation, those arising under this Indenture; and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (9) such Legal Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest with respect to any securities of the Company; (10) such Legal Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940, as amended, unless such trust shall be registered under such Act or exempt from registration thereunder; -104- (11) no event or condition shall exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the Securities on the date of such deposit; and (12) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent under this Indenture to either Legal Defeasance or Covenant Defeasance, as the case may be, have been complied with. Notwithstanding the foregoing, the Opinion of Counsel required by clauses (2)(B) and (3) above with respect to a Legal Defeasance need not be delivered if all Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable or (ii) will become due and payable on the maturity date within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. Opinions of Counsel required to be delivered under this Section may have qualifications customary for opinions of the type required and counsel delivering such Opinions of Counsel may rely on certificates of the Company or government or other officials customary for opinions of the type required, including certificates certifying as to matters of fact. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.3. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations either directly or through the Paying Agent (including the Company acting as its own Paying Agent as the Trustee may determine) and in accordance with this Indenture to the payment of principal of and interest on the Securities. SECTION 8.4. REPAYMENT TO COMPANY. The Trustee and the Paying Agent shall notify the Company of any excess money or Securities held by them at any time and shall promptly turn -105- over to the Company upon request any excess money or securities held by them at any time. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Securityholders entitled to the money must look to the Company for payment as general creditors. SECTION 8.5. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations other than any such tax, fee or other charge which by law is for the account of the Holders of the defeased Securities; PROVIDED that the Trustee shall be entitled to charge any such tax, fee or other charge to such Holder's account. SECTION 8.6. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; PROVIDED, HOWEVER, that, (a) if the Company has made any payment of interest on or principal of any Securities following the reinstatement of their obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent and (b) unless otherwise required by any legal proceeding or any order or judgment of any court or governmental authority, the Trustee or Paying Agent shall return all such money and U.S. Government Obligations to the Company promptly after receiving a written request therefor at any time, if such reinstatement of the Company's obligations has occurred and continues to be in effect. -106- ARTICLE 9 AMENDMENTS SECTION 9.1. WITHOUT CONSENT OF HOLDERS. The Company, the Guarantors and the Trustee may amend this Indenture or the Securities without notice to or consent of any Securityholder, so long as such change does not, in the opinion of the Trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an Opinion of Counsel: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Article 5 of this Indenture; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; (4) to add Guarantees with respect to the Securities; (5) to release Guarantors when permitted by this Indenture; (6) to secure the Securities; (7) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (8) to make any change that does not adversely affect the rights of any Securityholder; or (9) to comply with any requirements of the SEC in connection with qualifying this Indenture under the TIA. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not -107- impair or affect the validity of an amendment under this section. SECTION 9.2. WITH CONSENT OF HOLDERS. The Company, the Guarantors and the Trustee may amend this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding. However, without the consent of each Securityholder affected, an amendment may not: (1) reduce the amount of Securities whose Holders must consent to an amendment; (2) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Securities; (3) reduce the principal of or change or have the effect of changing the fixed maturity of any Securities, or change the date on which any Securities may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (4) make any Securities payable in money other than that stated in the Securities; (5) make any change in provisions of this Indenture protecting the right of each Holder to receive payment of principal of and interest on such Securities on or after the stated due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of the then outstanding Securities to waive Defaults or Events of Default; (6) amend, change or modify in any material respect the obligation of the Company to make and consummate a Change of Control Offer after the occurrence of a Change of Control or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated or modify any of the provisions or definitions with respect thereto; -108- (7) modify or change any provision of this Indenture or the related definitions affecting the subordination or ranking of the Securities or any Guarantee in a manner which adversely affects the Holders; or (8) release any Guarantor from any of its obligations under its Guarantee or this Indenture otherwise than in accordance with the terms of this Indenture. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing such amendment. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment under this Section. SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. An amendment or waiver becomes effective once the requisite number of consents are received by the Company or the Trustee. After an amendment or waiver becomes effective, it shall bind every Securityholder. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed, then notwithstanding the immediately preceding paragraph, those Persons who were Securityholders at such record date (or their duly designated -109- proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.5. NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determine, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any amendment authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.1) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment complies with the provisions of Article 9 of this Indenture. ARTICLE 10 SUBORDINATION OF THE SECURITIES SECTION 10.1. AGREEMENT TO SUBORDINATE. Notwithstanding any other provision to the contrary in this Indenture, the Company covenants and agrees, and each Holder by accepting a Security covenants and agrees, that the payment of all Obligations under or in connection with the Indebtedness now or hereafter evidenced by the Securities is subordinate in right -110- of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt of the Company, whether outstanding on the Issue Date or thereafter incurred, including all Obligations of the Company under the Credit Agreement. The subordination provisions set forth in this Article are for the benefit of, and shall be enforceable directly by, the holders of Senior Debt. Each Holder authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate, in the sole discretion of the Trustee, to acknowledge or effectuate the subordination between the Holders and the holders of Senior Debt of the Company as provided in this Article and appoints the Trustee as such Holder's attorney-in-fact for any and all such purposes, including, in the event of any voluntary or involuntary liquidation or dissolution of the Company, whether total or partial, or in a bankruptcy, reorganization, insolvency, receivership, dissolution, assignment for the benefit of creditors, marshalling of assets or similar proceeding relating to the Company or its property, the timely filing of a claim for the unpaid balance of such Holder's Securities in the form required in said proceeding and cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 20 days before the expiration of the time to file such claim or claims, then the Representative is hereby authorized to have the right to file and is hereby authorized to file an appropriate claim for and on behalf of the Holders; PROVIDED, HOWEVER, that any such claim filed by the Representative shall be superseded by the claim, if any, subsequently filed by the Trustee. Each Holder by accepting a Security acknowledges and agrees that the subordination provision set forth in this Article are, and are intended to be, an inducement and consideration to each holder of any Senior Debt of the Company, whether such Senior Debt was created before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to have relied upon such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt, and such holder is made an obli- -111- gee hereunder and may enforce directly such subordination provisions. SECTION 10.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any payment or distribution of the assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up reorganization, assignment for the benefit or creditors or marshaling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Company of its properties, whether voluntary or involuntary: (a) all Obligations due upon all Senior Debt shall first be paid in full in cash or Cash Equivalents, or such payment is duly provided for to the satisfaction of the holders of Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on the Securities or for the acquisition of any of the Securities for cash or property or otherwise; and (b) until the Senior Debt of the Company is paid in full in cash any payment or distribution to which Holders would be entitled but for this Article shall be made to holders of such Senior Debt, as their interests may appear. Upon any prepayment, payment or distribution referred to in this Article, the Trustee and the Holders shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such proceedings are pending for the purpose of ascertaining the identity of Persons entitled to participate in such payment or distribution, the holders of Senior Debt, the amount thereof or payable thereon and all other facts pertinent thereto or to this Article, and the Trustee and the Holders shall be entitled to rely upon a certificate of the liquidating trustee or agent or other Person (including any Representative of holders of Senior Debt of the Company) making any payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the identity of Persons entitled to participate in such payment or distribution, the holders of Senior Debt, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other -112- facts pertinent thereto or to this Article. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person, as a holder of Senior Debt, to participate in any payment or distribution pursuant to this Section, the Trustee may requires such Person (at the expense of the Holders) to furnish evidence to the reasonable satisfaction of the Trustee, acting in good faith, as to the amount of such Senior Debt held by such Person, as to the extent to which such Person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such Person under this Section, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive payment. The consolidation or merger of the Company with or into any Person, or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the Company's assets to any Person, upon the terms and conditions set forth in Article 5, shall not be deemed to be liquidation, dissolution or reorganization or similar proceeding relating to the Company for purposes of this Section if the Person formed by or surviving such consolidation or merger, or to which such sale, assignment, transfer, lease, conveyance or other disposition is made, shall, as a part of such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition, comply with the conditions set forth in Article 5. If a payment or distribution is made to Holders that, due to the subordination provisions, should not have been made to them, such Holders are required to hold it in trust for the holders of Senior Debt of the Company and pay it over to them as their interests may appear. SECTION 10.3. NO PAYMENT ON SECURITIES IN CERTAIN CIRCUMSTANCES. (a) If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees with respect to, any Senior Debt (a "Payment Default"), no payment of any kind of character shall -113- be made by or on behalf of the Company or any other Person on its behalf with respect to any Obligations on the Securities or to acquire any of the Securities for cash or property or otherwise. In addition, if any event of default other than a Payment Default (a "Non-payment Default") occurs and is continuing with respect to any Designated Senior Debt, as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt, permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof and if the Representative for the respective issue of Designated Senior Debt gives written notice of the Non-payment Default to the Trustee (a "Default Notice"), then, unless and until all Non-payment Defaults have been cured or waived or have ceased to exist or the Trustee receives notice from the Representative for the respective issue of Designated Senior Debt terminating the Payment Blockage Period (as defined below), during the 180 days after the delivery of such Default Notice (the "Payment Blockage Period"), neither the Company nor any other Person on its behalf shall (x) make any payment of any kind or character with respect to any Obligations on the Securities or (y) acquire any of the Securities for cash or property or otherwise. For all purposes of this Section 10.3(a), in no event will a Payment Blockage Period extend beyond 180 days from the date the payment on the Securities was due and only one such Payment Blockage Period may be commenced within any 360 consecutive days. No Non-payment Default which existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for commencement of a second Payment Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such Non-payment Default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action or any breach of any financial covenants for a period commencing after the date of commencement of such Payment Blockage Period, that in either case, would give rise to a Non-payment Default pursuant to any provisions under which a Non-payment Default previously existed or was continuing shall constitute a new Non-payment Default for this purpose). (b) In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Holder -114- when such payment is prohibited by Section 10.3(a), such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Debt (PRO RATA to such holders on the basis of the respective amount of Senior Debt held by such holders) or their respective Representatives, as their respective interests may appear. The Trustee shall be entitled to rely on information regarding amounts then due and owing on the Senior Debt, if any, received from the holders of Senior Debt (or their Representatives) or, if such information is not received from such holders or their Representatives, from the Company and only amounts included in the information provided to the Trustee shall be paid to the holders of Senior Debt. Nothing contained in this Article 10 shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Section 6.02 or to pursue any rights or remedies hereunder; PROVIDED that all Senior Debt thereafter due or declared to be due shall first be paid in full in cash or Cash Equivalents before the Holders are entitled to receive any payment to any kind or character with respect to the Obligations on the Securities. SECTION 10.4. PAYMENTS MAY BE PAID PRIOR TO DISSOLUTION. Nothing contained in this Article 10 or elsewhere in this Indenture shall prevent (i) the Company, except under the conditions described in Sections 10.2 and 10.3, from making payments at any time for the purposes of making payments of principal of and interest on the Securities, or from depositing with the Trustee any moneys for such payments, or (ii) in the absence of actual knowledge of the Trustee that a given payment would be prohibited by Section 10.2 or 10.3, the application by the Trustee of any moneys deposited with it for the purpose of making such payments of principal of and interest on the Securities to the Holders entitled thereto unless at least one Business Day prior to the date upon which such payment would otherwise become due and payable, the Trustee shall have received the written notice provided for in Section 10.2(a) or in Section 10.6 (PROVIDED that, notwithstanding the foregoing, such application shall otherwise be subject to the provisions of the first sentence of Section 10.2(a) and Section 10.3). The Company shall give prompt written notice to the Trustee of -115- any dissolution, winding-up, liquidation or reorganization of the Company. SECTION 10.5. WHEN SECURITIES MUST BE PAID OVER. In the event that any payment on the Securities is made to the Trustee or the Holders that, because of this Article, should not have been so made or may not be paid over to the Holders, such payment shall be held by the Trustee or the Holders who receive such payment, as the case may be, for the benefit of, and shall forthwith be paid over or delivered to, the holders of the Senior Debt of the Company remaining unpaid or their Representatives, as their interests may appear, to the extent necessary to irrevocably and indefeasibly pay such Senior Debt in full in cash in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Debt. SECTION 10.6. NOTICES BY THE COMPANY. The Company shall promptly notify the Trustee, each Paying Agent and the Representative of any facts known to the Company that would cause a payment on the Securities to violate this Article, but failure to give such notice shall not affect the subordination provided in this Article of the Securities to Senior Debt. Without limiting the foregoing, if payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify the Representative of the acceleration. SECTION 10.7. SUBROGATION. After all Senior Debt is irrevocably and indefeasibly paid in full in cash and until the Securities are paid in full, Holders shall be subrogated to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to Holders have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt which otherwise would have been made to Holders is not, as between the Company and the Holders, payment by the Company on Senior Debt. SECTION 10.8. RELATIVE RIGHTS. This Article defines the relative rights of Holders and holders of Senior Debt. Nothing in this Indenture shall: -116- (a) impair, as between the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium (if any) and interest on the Securities in accordance with their terms; (b) affect the relative rights of Holders and creditors of the Company other than holders of Senior Debt; or (c) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Senior Debt to receive prepayment, payments and distributions otherwise payable to Holders. If the Company fails because of this Article to pay the principal of, premium (if any) or interest on a Security on the due date or upon the acceleration thereof, the failure is still a Default or Event of Default. SECTION 10.9. SUBORDINATION MAY NOT BE IMPAIRED BY THE COMPANY. No right of any holder of Senior Debt of the Company to enforce the subordination of the Indebtedness evidenced by the Securities shall be impaired by (a) any act or failure to act by the Company or by its failure to comply with this Indenture, (b) any release of any collateral or any guarantor or any Person of the Company's obligations under the Senior Debt, (c) any amendment, supplement, extension, renewal, restatement or other modification of the Senior Debt, (d) any settlement or compromise of any Senior Debt, (e) the unenforceability of any of the Senior Debt or (f) the failure of any holder of Senior Debt to pursue claims against the Company. The terms of the subordination provisions contained in this Article 10 will not apply to payments from money or the proceeds of U.S. Government Obligations held in trust by the Trustee for the payment of principal of and interest on the Securities pursuant to and in accordance with the provisions described in Article 8. SECTION 10.10. DISTRIBUTION OF NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Debt of the Company, the distribution may be made and the notice given to their Representative (if any). -117- SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT. The Trustee or any Paying Agent may continue to make payments in respect of the Securities and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payment unless, not less than three Business Days prior to the date of any such payment, a Responsible Officer of the Trustee receives written notice reasonably satisfactory to it that payments in respect of the Securities may not be made under this Article. Only the Company, a Representative (satisfactorily identified to the Trustee) or a holder of a class of Senior Debt that has no Representative (satisfactorily identified to the Trustee) may give the notice. Prior to the receipt of such notice, the Trustee and any Paying Agent shall be entitled in all respects to assume that no such facts exist. In any case, the Trustee shall have no responsibility to the holders of Senior Debt for payments made to Holders by the Company or any Paying Agent unless cash payments are made at the direction of the Trustee after receipt of such notice referred to above. Neither the Trustee nor any Paying Agent shall be deemed to owe any fiduciary duty to the holders of Senior Debt. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be liable to any holder of Senior Debt if it shall mistakenly pay over or deliver to Holders, the Company or any other Person moneys or assets to which any holder of Senior Debt shall be entitled by virtue of this Article 10 or otherwise. SECTION 10.12. CONSENT OF HOLDERS OF SENIOR DEBT. The provisions of this Article (including the definitions contained in this Article and references to this Article contained in this Indenture) shall not be amended, waived or modified in a manner that would adversely affect the rights of the holders of any Senior Debt of the Company, and no such amendment, waiver or modification shall become effective, unless the hold- -118- ers of such Senior Debt shall have consented in writing (in accordance with the provisions of the agreement governing such Senior Debt) to such amendment, waiver or modification. SECTION 10.13. CONTRACTUAL SUBORDINATION. This Article 10 represents a bona fide agreement of contractual subordination pursuant to Section 510(b) of the United States Bankruptcy Code. ARTICLE 11 GUARANTEES SECTION 11.1. GUARANTEES. Each Guarantor hereby unconditionally and irrevocably guarantees, jointly and severally, to each Holder and to the Trustee and its successors and assigns (a) the full and punctual payment of principal of, premium, if any, and interest on the Securities when due, whether at maturity, by acceleration, by redemption or otherwise, and all other monetary obligations of the Company under this Indenture and the Securities and (b) the full and punctual performance within applicable grace periods of all other obligations of the Company under this Indenture and the Securities (all the foregoing being hereinafter collectively called the "Guaranteed Obligations"). Each Guarantor further agrees that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice or further assent from such Guarantor and that such Guarantor will remain bound under this Article 11 notwithstanding any extension or renewal of any Guaranteed Obligation. Each Guarantor waives presentation to, demand of, payment from and protest to the Company of any of the Guaranteed Obligations and also waives notice of protest for nonpayment. Each Guarantor waives notice of any default under the Securities or the Guaranteed Obligations. The obligations of each Guarantor hereunder shall not be affected by (a) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other Person under this Indenture, the Securities or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Secu- -119- rities or any other agreement; (d) the release of any security held by any Holder or the Trustee for the Guaranteed Obligations or any of them; (e) the failure of any Holder or the Trustee to exercise any right or remedy against any other guarantor of the Guaranteed Obligations; or (f) any change in the ownership of such Guarantor. Each Guarantor further agrees that its Guarantee herein constitutes a guarantee of payment, performance and compliance when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of the Guaranteed Obligations. Each Guarantee is, to the extent and in the manner set forth in Article 12, subordinated and subject in right of payment to the prior payment in full of the principal of and premium, if any, and interest on all Guarantor Senior Debt giving such Guarantee and each Guarantee is made subject to such provisions of this Indenture. Except as expressly set forth in Sections 8.2, 11.2 and 11.6, the obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Securities or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Guarantor or would otherwise operate as a discharge of such Guarantor as a matter of law or equity. -120- Each Guarantor further agrees that its Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of, premium, if any, or interest on any Guaranteed Obligation is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Guarantor by virtue hereof, upon the failure of the Company to pay the principal of, premium, if any, or interest on any Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, or to perform or comply with any other Guaranteed Obligation, each Guarantor hereby promises to and will, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid amount of such Guaranteed Obligations, (ii) accrued and unpaid interest on such Guaranteed Obligations (but only to the extent not prohibited by law) and (iii) all other monetary Guaranteed Obligations of the Company to the Holders and the Trustee. Each Guarantor agrees that it shall not be entitled to any right of subrogation in respect of any Guaranteed Obligations guaranteed hereby until payment in full of all Guaranteed Obligations and all obligations to which the Guaranteed Obligations are subordinated as provided in Article 12. Each Guarantor further agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Guaranteed Obligations hereby may be accelerated as provided in Article 6 for the purposes of such Guarantor's Guarantee herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such Obligations as provided in Article 6, such Obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purposes of this Section. Each Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees) incurred by -121- the Trustee or any Holder in enforcing any rights under this Section. SECTION 11.2. LIMITATION ON LIABILITY. Any term or provision of this Indenture to the contrary notwithstanding, the maximum aggregate amount of the obligations guaranteed hereunder by any Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. To effectuate the foregoing intention, the obligations of each Guarantor shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations hereunder, result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal, state or foreign law. Each Guarantor that makes a payment or distribution under a Guarantee shall be entitled to a contribution from each other Guarantor in an amount based on the consolidated net worth of each Guarantor. SECTION 11.3. SUCCESSORS AND ASSIGNS. This Article 11 shall be binding upon each Guarantor and its successors and assigns and shall enure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. SECTION 11.4. NO WAIVER. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article 11 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified -122- are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article 11 at law, in equity, by statute or otherwise. SECTION 11.5. MODIFICATION. No modification, amendment or waiver of any provision of this Article 11, nor the consent to any departure by any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 11.6. RELEASE OF GUARANTOR. A Guarantor may, by execution and delivery to the Trustee of a supplemental indenture satisfactory to the Trustee, be released from its Guarantee upon the sale of all of its Capital Stock, or all or substantially all of the assets of the applicable Guarantor, to any Person that is not a Subsidiary of the Company, if such sale is made in compliance with this Indenture. SECTION 11.7. EXECUTION OF SUPPLEMENTAL INDENTURE FOR FUTURE GUARANTORS. Each Subsidiary which is required to become a Guarantor pursuant to Section 4.14 shall, and the Company shall cause each such Subsidiary to, promptly execute and deliver to the Trustee a supplemental indenture in the form of Exhibit F hereto pursuant to which such Subsidiary shall become a Guarantor under this Article 11 and shall guarantee the Obligations. Concurrently with the execution and delivery of such supplemental indenture, the Company shall deliver to the Trustee an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized, executed and delivered by such Subsidiary and that, subject to the application of bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer and other similar laws relating to creditors' rights generally and to the principles of equity, whether considered in a proceeding at law or in equity, the Guarantee of such Guarantor is a legal, valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms. -123- ARTICLE 12 SUBORDINATION OF GUARANTEES SECTION 12.1. AGREEMENT TO SUBORDINATE. Notwithstanding any other provision to the contrary in this Indenture, each Guarantor covenants and agrees, and each Holder by accepting a Security covenants and agrees, that all payments by such Guarantor in respect of its Guarantee are subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Guarantor Senior Debt, whether outstanding on the Issue Date or thereafter incurred, including all Obligations of the Company and such Guarantor under the Credit Agreement. The subordination provisions set forth in this Article are for the benefit of, and shall be enforceable directly by, the holders of Guarantor Senior Debt. Each Holder authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate, in the sole discretion of the Trustee, to acknowledge or effectuate the subordination between the Holders and the holders of Guarantor Senior Debt as provided in this Article and appoints the Trustee as such Holder's attorney-in-fact for any and all such proposes, including, in the event of any voluntary or involuntary liquidation or dissolution of a Guarantor, whether total or partial, or in a bankruptcy, reorganization, insolvency, receivership, dissolution, assignment for the benefit of creditors, marshalling of assets or similar proceeding relating to a Guarantor or its property, the timely filing of a claim for the unpaid balance of such Holder's Securities in the form required in said proceeding and cause said claim to be approved. If the Trustee does not file a property claim or proof to debt in the form required in such proceeding prior to 20 days before the expiration of the time to exile such claim or claims, then the Representative is hereby authorized to have the right to file and is hereby authorized to file an appropriate claim for and on behalf of the Holders; PROVIDED, HOWEVER, that any such claim filed by such Representative shall be superseded by the claim, if any, subsequently filed by the Trustee. Each Holder by accepting a Security acknowledges and agrees that the subordination provisions set forth in this Ar- -124- ticle are, and are intended to be, an inducement and consideration to each holder of Guarantor Senior Debt, whether such Guarantor Senior Debt was created before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Guarantor Senior Debt, and such holder of Guarantor Senior Debt shall be deemed conclusively to have relied upon such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Guarantor Senior Debt, and such holder is made an obligee hereunder and may enforce directly such subordination provisions. SECTION 12.2. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any payment or distribution of the assets of any Guarantor of any kind or character, whether in cash, property or securities, to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors or marshalling of assets of the Company or in a bankruptcy, reorganization, insolvency, receivership or other similar proceeding relating to the Company of its properties, whether voluntary or involuntary: (a) all Obligations due upon all Guarantor Senior Debt shall first be paid in cash or Cash Equivalents, or such payment is duly provided for to the satisfaction of the holders of Guarantor Senior Debt, before any payment or distribution of any kind or character is made on account of any Obligations on the Securities or for the acquisitions of any of the Securities for cash or property or allowances; and (b) until the Guarantor Senior Debt of such Guarantor is paid in full, any payment or distribution to which Holders would be entitled but for this Article shall be made to holders of Guarantor Senior Debt, as their interests may appear. Upon any payment or distribution referred to in this Article, the Trustee and the Holders shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such proceedings are pending for the purpose of ascertaining the identity of Persons entitled to participate in such payment or distribution, the holders of Guarantor Senior Debt, the amount thereof or payable thereon and all other facts per- -125- tinent thereto or to this Article, and the Trustee and the Holders shall be entitled to rely upon a certificate of the liquidating trustee or agent or other Person (including any Representative of holders of Guarantor Senior Debt) making any payment or distribution to the Trustee or to the Holders for the purpose of ascertaining the identity of Persons entitled to participate in such payment or distribution, the holders of Guarantor Senior Debt, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person, as a holder of Guarantor Senior Debt, to participate in any payment or distribution pursuant to this Section, the Trustee may request such Person (at the expense of the Holders) to furnish evidence to the reasonable satisfaction of the Trustee, acting in good faith, as to the amount of such Guarantor Senior Debt held by such Person, as to the extent to which such Person is entitled to participate in such payment or distribution, and as to the other facts pertinent to the rights of such Person under this Section, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive payment. The consolidation or merger of a Guarantor with or into any Person, or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Guarantor's assets to any Person, in compliance with the terms and conditions set forth in Article 5, shall not be deemed to be a liquidation, dissolution or reorganization or similar proceeding relating to such Guarantor for purposes of this Section. SECTION 12.3. NO PAYMENT ON SECURITIES IN CERTAIN CIRCUMSTANCES. (a) If any default occurs and is continuing in the payment when due, whether at maturity, upon any redemption, by declaration or otherwise, of any principal of, interest on, unpaid drawings for letters of credit issued in respect of, or regularly accruing fees with respect to, any Guarantor Senior Debt (a "Guarantor Payment Default"), no payment of any kind or character shall be made by or on behalf of the Company or any -126- other Person on its behalf with respect to any Obligations on the Securities or to acquire any of the Securities for cash or property or otherwise. In addition, if any event of default other than a Guarantor Payment Default (a "Guarantor Non-payment Default") occurs and is continuing with respect to any Designated Senior Debt, as such event of default is defined in the instrument creating or evidencing such Designated Senior Debt, permitting the holders of such Designated Senior Debt then outstanding to accelerate the maturity thereof and if the Representative for the respective issue of Designated Senior Debt gives written notice of the Guarantor Non-payment Default to the Trustee (a "Guarantor Default Notice"), then, unless and until all Guarantor Non-payment Defaults have been cured or waived or have ceased to exist or the Trustee receives notice from the Representative for the respective issue of Designated Senior Debt terminating the Guarantor Payment Blockage Period (as defined below), during the 180 days after the delivery of such Guarantor Default Notice (the "Guarantor Payment Blockage Period"), neither the Company nor any other Person on its behalf shall (x) make any payment of any kind or character with respect to any Obligations on the Securities or (y) acquire any of the Securities for cash or property or otherwise. For all purposes of this Section 12.3(a), in no event will a Guarantor Payment Blockage Period extend beyond 180 days from the date the payment on the Securities was due and only one such Guarantor Payment Blockage Period may be commenced within any 360 consecutive days. No Guarantor Non-payment Default which existed or was continuing on the date of the commencement of any Guarantor Payment Blockage Period with respect to the Designated Senior Debt shall be, or be made, the basis for commencement of a second Guarantor Payment Blockage Period by the Representative of such Designated Senior Debt whether or not within a period of 360 consecutive days, unless such Guarantor Non-payment Default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action or any breach of any financial covenants for a period commencing after the date of commencement of such Guarantor Payment Blockage Period, that in either case, would give rise to a Guarantor Non-payment Default pursuant to any provisions under which a Guarantor Non-payment Default previously existed or was continuing shall constitute a new Guarantor Non-payment Default for this purpose). -127- (b) In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee or any Holder when such payment is prohibited by Section 12.3(a), such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Guarantor Senior Debt (PRO RATA to such holders on the basis of the respective amount of Guarantor Senior Debt held by such holders) or their respective Representatives, as their respective interests may appear. The Trustee shall be entitled to rely on information regarding amounts then due and owing on the Guarantor Senior Debt, if any, received from the holders of Guarantor Senior Debt (or their Representatives) or, if such information is not received from such holders or their Representatives, from the Company and only amounts included in the information provided to the Trustee shall be paid to the holders of Guarantor Senior Debt. Nothing contained in this Article 12 shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Section 6.02 or to pursue any rights or remedies hereunder; PROVIDED that all Guarantor Senior Debt thereafter due or declared to be due shall first be paid in full in cash or Cash Equivalents before the Holders are entitled to receive any payment to any kind or character with respect to the Obligations on the Securities. SECTION 12.4. PAYMENTS MAY BE PAID PRIOR TO DISSOLUTION. Nothing contained in this Article 12 or elsewhere in this Indenture shall prevent (i) the Company, except under the conditions described in Sections 12.2 and 12.3, from making payments at any time for the purposes of making payments of principal of and interest on the Securities, or from depositing with the Trustee any moneys for such payments, or (ii) in the absence of actual knowledge of the Trustee that a given payment would be prohibited by Section 12.2 or 12.3, the application by the Trustee of any moneys deposited with it for the purpose of making such payments of principal of and interest on the Securities to the Holders entitled thereto unless at least one Business Day prior to the date upon which such payment would otherwise become due and payable, the Trustee shall have received the written notice provided for in Section 12.2(a) or in Section 12.6 (PROVIDED that, notwithstanding the foregoing, such application shall otherwise be subject to the provisions -128- of the first sentence of Section 12.2(a) and Section 12.3). The Company shall give prompt written notice to the Trustee of any dissolution, winding-up, liquidation or reorganization of the Company. SECTION 12.5. WHEN SECURITIES MUST BE PAID OVER. In the event that any payment is made on the Securities to the Trustee or the Holders that, because of this Article, should not have been so made or may not be paid over to the Holders, such payment shall be held by the Trustee or the Holders who receive such payment, as the case may be, for the benefit of, and shall forthwith be paid over or delivered to, the holders of the Guarantor Senior Debt remaining unpaid or their Representatives, as their interests may appear, to the extent necessary to irrevocably and indefeasibly pay such Guarantor Senior Debt in full in cash or in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Guarantor Senior Debt. SECTION 12.6. NOTICES BY A GUARANTOR. Each Guarantor shall promptly notify the Trustee, each Paying Agent and the Representative of any facts known to such Guarantor that would cause a payment on the Securities to violate this Article, but failure to give such notice shall not affect the subordination provided in this Article of any Subsidiary Guarantee to holders of Guarantor Senior Debt. Without limiting the foregoing, if payment of the Securities is accelerated because of an Event of Default, the Guarantors shall promptly notify the Representative of the acceleration. SECTION 12.7. SUBROGATION. After all Guarantor Senior Debt is irrevocably and indefeasibly paid in full in cash and until the Securities are paid in full, Holders shall be subrogated to the rights of holders of Guarantor Senior Debt of the respective Guarantors to receive distributions applicable to Guarantor Senior Debt to the extent that distributions otherwise payable to Holders have been applied to the payment of Guarantor Senior Debt. A distribution made under this Article to holders of Guarantor Senior Debt which otherwise should have been made to Holders is not, as between a Guarantor and the Holders, payment by such Guarantor on Guarantor Senior Debt. -129- SECTION 12.8. RELATIVE RIGHTS. This Article defines the relative rights of Holders and holders of Guarantor Senior Debt. Nothing in this Indenture shall: (a) impair, as between a Guarantor and the Holders, the obligation of a Guarantor, which is absolute and unconditional, to make any payment in accordance with the terms of its Guarantee; (b) affect the relative rights of Holders and creditors of a Guarantor other than holders of Guarantor Senior Debt; or (c) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Guarantor Senior Debt to receive prepayment, payments and distributions otherwise payable to Holders. If a Guarantor fails because of this Article to pay the principal of (or premium, if any) or interest on a Security on the due date or upon the acceleration thereof, the failure is still a Default or Event of Default. SECTION 12.9. SUBORDINATION MAY NOT BE IMPAIRED BY THE GUARANTOR. No right of any holder of Guarantor Senior Debt to enforce the subordination of the Obligation of a Guarantor pursuant to its Guarantee shall be impaired by (a) any act or failure to act by such Guarantor or by its failure to comply with this Indenture, (b) any release of any collateral or any guarantor or any Person or such Guarantor's obligations under Guarantor Senior Debt, (c) any amendment, supplement, extension, renewal, restatement or other modification of any Guarantor Senior Debt, (d) any settlement or compromise of any Guarantor Senior Debt, (e) the unenforceability of any of the Guarantor Senior Debt or (f) the failure of any holder of Guarantor Senior Debt to pursue claims against such Guarantor. The terms of the subordination provisions contained in this Article 12 will not apply to payments from money or the proceeds of U.S. Government Obligations held in trust by the Trustee for the payment of principal of and interest on the Securities pursuant to and in accordance with the provisions described in Article 8. -130- SECTION 12.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Guarantor Senior Debt, the distribution may be made and the notice given to their Representative (if any). SECTION 12.11. RIGHTS OF TRUSTEE AND PAYING AGENT. The Trustee or any Paying Agent may continue to make payments in respect of the Securities and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payment unless, not less than three Business Days prior to the date of any such payment, a Responsible Officer of the Trustee receives written notice reasonably satisfactory to it that payments in respect of the Securities may not be made under this Article. Only a Guarantor, a Representative (satisfactorily identified to the Trustee) or a holder of a class of Guarantor Senior Debt that has no Representative (satisfactorily identified to the Trustee) may give the notice. Prior to the receipt of such notice, the Trustee and any Paying Agent shall be entitled in all respects to assume that no such facts exist. In any case, the Trustee shall have no responsibility to the holders of Guarantor Senior Debt for payments made to Holders by a Guarantor or any Paying Agent unless such payments are made at the direction of the Trustee after receipt of such notice referred to above. Neither the Trustee nor any Paying Agent shall be deemed to owe any fiduciary duty to the holders of Guarantor Senior Debt. With respect to the holders of Guarantor Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article 12, and no implied covenants or obligations with respect to the holders of Guarantor Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be liable to any holders of Guarantor Senior Debt if it shall mistakenly pay over or deliver to Holders, the Company or any other Person moneys or assets to which any holder of Guarantor Senior Debt shall be entitled by virtue of this Article 12 or otherwise. The Trustee in its individual or any other capacity may hold Guarantor Senior Debt with the same rights it would have if it were not Trustee. -131- This Section is solely for the benefit of the Trustee and any Paying Agent and shall not limit the obligations of the Holders under Section 12.5. SECTION 12.12. CONSENT OF HOLDERS OF GUARANTOR SENIOR DEBT. The provisions of this Article (including the definitions contained in this Article and references to this Article contained in this Indenture) shall not be amended, waived or modified in a manner that would adversely affect the rights of the holders of any Guarantor Senior Debt, and no such amendment, waiver or modification shall become effective, unless the holders of such Guarantor Senior Debt shall have consented in writing (in accordance with the provisions of the Agreement governing such Guarantor Senior Debt) to such amendment, waiver or modification. SECTION 12.13. CONTRACTUAL SUBORDINATION. This Article represents a bona fide agreement of contractual subordination pursuant to Section 510(b) of the United States Bankruptcy Code. ARTICLE 13 MISCELLANEOUS SECTION 13.1. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. If this Indenture excludes any provision of the TIA that is required to be included, such provision shall be deemed included herein. SECTION 13.2. NOTICES. Any notice or communication shall be in writing and delivered in person, by overnight courier or facsimile (if to the Company, with receipt confirmed by an Officer) or mailed by first-class mail addressed as follows: -132- IF TO THE COMPANY OR ANY GUARANTOR: Precision Partners, Inc. 5605 N. MacArthur Blvd. Suite 760 Irving, Texas 75038 Attention: Chief Financial Officer With copies to: Jones Day Reavis & Pogue 599 Lexington Avenue New York, New York 10022 Attention: Sandy Kaynor, Esq. IF TO THE TRUSTEE: The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed or sent by overnight courier or facsimile to a Securityholder shall be sent to the Securityholder at the Securityholder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so sent within the time prescribed. Failure to send a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is sent in the manner provided above, it is duly given, whether or not the addressee receives it. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. -133- SECTION 13.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 13.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee to the extent required by the TIA or this Indenture: (1) an Officers' Certificate (which in connection with the original issuance of the Securities need only be executed by one Officer for the Company) in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 13.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (1) a statement that the individual making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion -134- as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with; PROVIDED, that an Opinion of Counsel can rely as to matters of fact on an Officers' Certificate or a certificate of a public official. SECTION 13.6. WHEN SECURITIES DISREGARDED. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee actually knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 13.7. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Trustee shall provide the Company reasonable notice of such rules. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 13.8. LEGAL HOLIDAYS. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 13.9. GOVERNING LAW. This Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflict of laws to the extent that the application of the laws of another jurisdiction would be required thereby. -135- SECTION 13.10. NO RECOURSE AGAINST OTHERS. No recourse for the payment of the principal of, premium, if any, or interest on any of the Securities or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture, or in any of the Securities or because of the creation of any Indebtedness represented hereby and thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company or any Successor Person thereof. Each Holder, by accepting a Security, waives and releases all such liability. The waiver and release shall be part of the consideration for the issuance of the Securities. SECTION 13.11. SUCCESSORS. All agreements of the Company in this Indenture and the Securities shall bind the Company's successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 13.12. MULTIPLE ORIGINALS. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 13.13. TABLE OF CONTENTS; HEADINGS. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 13.14. SEVERABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -136- IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. THE COMPANY: PRECISION PARTNERS, INC. By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Chief Financial Officer GUARANTORS: CERTIFIED FABRICATORS, INC. By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Vice President GENERAL AUTOMATION, INC. By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Vice President NATIONWIDE PRECISION PRODUCTS CORP By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Vice President -137- MID STATE MACHINE PRODUCTS By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Vice President GALAXY INDUSTRIES CORPORATION By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Vice President CALBRIT DESIGN, INC. By: /s/ Ronald M. Miller ---------------------------------- Name: Ronald M. Miller Title: Vice President TRUSTEE: THE BANK OF NEW YORK, as Trustee By: /s/ Remo J. Reale ---------------------------------- Name: Remo J. Reale Title: Assistant Vice President EXHIBIT A FACE OF SECURITY UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS NOTE (AND ANY GUARANTEE THEREOF) HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND NEITHER THIS SECURITY (NOR ANY GUARANTEE THEREOF) NOR ANY INTEREST OR PARTICIPATION HEREIN (OR THEREIN) MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER HEREOF, BY ITS ACCEPTANCE OF THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE OFFERED, SOLD PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE THERETO UNDER RULE 144(K) UNDER THE SECURITIES ACT WHICH IS APPLICABLE TO THIS SECURITY (THE "RESALE RESTRICTION TERMINATION DATE") OTHER THAN (1) TO THE ISSUER OR ITS SUBSIDIARIES, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLE BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN A-1 ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, IN EACH CASE TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICTED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OR TRANSFER ON THE REVERSE OF THIS SECURITY IF THIS SECURITY IS NOT IN BOOK-ENTRY FORM), (3) TO A NON-"U.S. PERSON" IN AN "OFFSHORE TRANSACTION" (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY IF THIS SECURITY IS NOT IN BOOK-ENTRY FORM), (4) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT, IF AVAILABLE OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH INVESTOR ACCOUNT OR ACCOUNT BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL, AND SUBJECT TO THE RIGHT OF THE ISSUER OR THE TRUSTEE FOR THE SECURITIES PRIOR TO ANY SUCH SALE, PLEDGE OR OTHER TRANSFER PURSUANT TO CLAUSE (4) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER ON OR AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY ANY SUCH NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO AN ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRE- A-2 SENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.14 OF THE INDENTURE. A-3 No. $100,000,000 12% Senior Subordinated Notes Due 2009 CUSIP No. 740301 AA4 PRECISION PARTNERS, INC., a Delaware corporation, promises to pay to Cede & Co., or registered assigns, the principal sum of One Hundred Million Dollars on March 19, 2009. Interest Payment Dates: March 15 and September 15. Record Dates: March 1 and September 1. Additional provisions of this Security are set forth on the reverse side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. PRECISION PARTNERS, INC. By: ------------------------------------ Name: Title: Dated: March 19, 1999 TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By: The Bank of New York, as Trustee ------------------------------------ Authorized Signatory A-4 Date of Authentication: March 19, 1999 A-5 REVERSE OF SECURITY 12% SENIOR SUBORDINATED note DUE 2009 1. INTEREST PRECISION PARTNERS, INC., a Delaware corporation (such entity, and its successors and assigns under the Indenture hereinafter referred to, and each other entity which is required to become the Company pursuant to the Indenture, and its successors and assigns under the Indenture, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on March 15th and September 15th of each year, commencing September 15, 1999. Interest on the Securities will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from, March 19, 1999. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at 1% per annum in excess of the rate borne by the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. METHOD OF PAYMENT The Company will pay interest on the Securities (except defaulted interest) to the Persons who are registered holders of Securities at the close of business on the record date immediately preceding the interest payment date even if Securities are canceled on registration of transfer or registration of exchange (including pursuant to an Exchange Offer (as defined in the applicable Registration Rights Agreement)) after the record date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender. The Company may deliver any such interest A-6 payment to the Paying Agent or to a Holder's registered address. 3. PAYING AGENT AND REGISTRAR Initially, The Bank of New York, a New York banking corporation ("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Company may act as Paying Agent, Registrar, co-Registrar or transfer agent. 4. INDENTURE The Company issued the Securities under an Indenture dated as of March 19, 1999 (the "Indenture"), among the Company, the Guarantors and the Trustee. This Security is one of a duly authorized issue of Initial Securities of the Company designated as its 12% Senior Subordinated Notes due 2009 (the "Initial Securities"). The Securities include the Initial Securities, the Exchange Securities (as defined in the Indenture) and the Unrestricted Securities, as defined below, issued in exchange for the Initial Securities pursuant to the Registration Rights Agreement or, with respect to the Initial Securities issued under the Indenture subsequent to the Issue Date, a registration agreement substantially identical to the Registration Rights Agreement with the Initial Purchasers. The Initial Securities and the Unrestricted Securities are treated as a single class of securities under the Indenture. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of those terms. Any conflict between this Security and the Indenture will be governed by the Indenture. The Securities are unsecured senior subordinated obligations of the Company limited to $150,000,000 aggregate principal amount (subject to Section 2.7 of the Indenture), A-7 $100,000,000 aggregate principal amount of which was issued on the Issue Date. The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the existence of liens, the payment of dividends on, and redemption of, the Capital Stock of the Company and its Subsidiaries, restricted payments, the sale or transfer of assets and Subsidiary stock, the issuance or sale of Capital Stock of Restricted Subsidiaries, the investments of the Company and the Restricted Subsidiaries, consolidations, mergers and transfers of all or substantially all the assets of the Company, and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and certain of its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium and interest, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Guarantors have unconditionally guaranteed the Obligations on a SENIOR SUBORDINATED basis pursuant to the terms of the Indenture. 5. OPTIONAL REDEMPTION Except as set forth in the following paragraph, the Securities are not redeemable before March 15, 2004. Thereafter, the Company may redeem the Securities at its option, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on March 15th of the year set forth below: A-8 YEAR PERCENTAGE ---- ---------- 2004 ................................................. 106.000% 2005 ................................................. 104.000% 2006 ................................................. 102.000% 2007 and thereafter .................................. 100.000% In addition, the Company must pay accrued and unpaid interest on the Securities redeemed. At any time, or from time to time, on or prior to March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Qualified Equity Offerings (as defined below) to redeem up to 35% of the Securities issued at a redemption price equal to 112.000% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of redemption; provided that: (1) at least 65% of the principal amount of Securities originally issued remains outstanding immediately after any such redemption; and (2) the Company makes such redemption not more than 180 days after the consummation of any such Qualified Equity Offering. As used in the preceding paragraph, "Qualified Equity Offering" means a primary offering of Qualified Capital Stock, or rights, warrants or options to acquire Qualified Capital Stock, of the Company, Holdings or LLC in the United States of at least $25 million to Persons who are not Affiliates of the Company or Holdings; provided that, in the case of any such offering of Qualified Capital Stock of Holdings or LLC, all the net proceeds thereof necessary to pay the aggregate redemption price (plus accrued interest to the redemption date) of the Securities to be redeemed pursuant to the preceding paragraph are contributed to the Company. 6. NOTICE OF REDEMPTION Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the re- A-9 demption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. If a notice or communication is sent in the manner provided in the Indenture, it is duly given, whether or not the addressee receives it. Failure to send a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. 7. CHANGE OF CONTROL Upon the occurrence of a Change of Control, each Holder of Securities will have the right to require the Company to purchase all or any part of the Securities of such Holder at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date) as provided in, and subject to the terms of, the Indenture. 8. THE REGISTRATION RIGHTS AGREEMENT The holder of this Security is entitled to the benefits of a Registration Rights Agreement, dated as of [ ], 1999, among the Company, the Guarantors and the Initial Purchasers named therein (as such may be amended from time to time, the "Registration Rights Agreement"). Capitalized terms used in this subsection but not defined herein have the meanings assigned to them in the Registration Rights Agreement. In the event that (i) neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the SEC within 180 days after the Closing Date, (ii) the Exchange Offer Registration Statement has not been de- A-10 clared effective within 181 days after the Closing Date, (iii) neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective within 210 days after the Closing Date, or (iv) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of the Securities at any time that the Company is obligated to maintain the effectiveness thereof pursuant to the Registration Rights Agreement (each such event referred to in clauses (i) through (iv) above being referred to herein as a "Registration Default"), interest ("Special Interest") will accrue on this Security (in addition to the interest described above) from and including the date on which any Registration Default shall occur but excluding the date on which all Registration Defaults have been cured. Special Interest shall accrue at a rate of 0.50% per annum during the 90-day period immediately following the occurrence of any Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall Special Interest accrue at a rate in excess of 1.00% per annum. 9. SUBORDINATION The Securities are subordinated to Senior Debt of the Company, as defined in the Indenture. To the extent provided in the Indenture, Senior Debt of the Company must be paid before the Securities may be paid. In addition, each Guarantee is subordinated to Guarantor Senior Debt of the relevant Guarantor, as defined in the Indenture. The Company and each Guarantor agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give it effect and appoints the Trustee as attorney-in-fact for such purpose. 10. DENOMINATIONS; TRANSFER; EXCHANGE The Securities are in registered form, without coupons, and in denominations of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange Securities in accor- A-11 dance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture, including any transfer tax or other similar governmental charge payable in connection therewith. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. 11. PERSONS DEEMED OWNERS The registered Holder of this Security may be treated as the owner of it for all purposes. 12. UNCLAIMED MONEY If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 13. DISCHARGE AND DEFEASANCE Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity, as the case may be. 14. AMENDMENT, WAIVER Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the consent of the Holders of at least a majority in principal amount outstanding of the Securities and (ii) any past default or compliance with any provision may be waived with the consent A-12 of the Holders of a majority in principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company, the Guarantors and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, to comply with Article 5 of the Indenture, to provide for uncertificated Securities in addition to or in place of certificated Securities, to add guarantees with respect to the Securities, to secure the Securities, to add additional covenants or surrender rights and powers conferred on the Company, to make any change that does not adversely affect the rights of any Securityholder or to comply with any request of the SEC in connection with qualifying the Indenture under the TIA. 15. DEFAULTS AND REMEDIES Under the Indenture, Events of Default include: (i) the failure to pay interest on any notes when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by the subordination provisions of the indenture); (ii) the failure to pay the principal on any notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by the subordination provisions of the indenture); (iii) a default in the observance or performance of any other covenant or agreement contained in the indenture which default continues for a period of 45 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the trustee or the Holders of at least 25% of the outstanding principal amount of the notes (except in the case of a default with respect to Section 5.1, which will constitute A-13 an Event of Default with such notice requirement but without such passage of time requirement); (iv) a default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or of any Restricted Subsidiary (or the payment of which is guaranteed by the Company or any Restricted Subsidiary), whether such Indebtedness now exists or is created after the Issue Date, which default (a) is caused by a failure to pay principal of such Indebtedness after notice and the lapse of any applicable grace period provided in such Indebtedness on the date of such default (a "payment default") or (b) results in the acceleration of such Indebtedness prior to its express maturity (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days) and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a payment default or the maturity of which has been so accelerated (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days), aggregates $7.5 million; (v) one or more judgments in an aggregate amount in excess of $7.5 million not covered by adequate insurance shall have been rendered against the Company or any of the Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and nonappealable; (vi) the Company or any Significant Subsidiary of the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor; A-14 (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary of the Company in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary of the Company or for any substantial part of the property of the Company or Significant Subsidiary; (C) orders the winding up or liquidation of the Company or any Significant Subsidiary of the Company; (or any similar relief is granted under any foreign laws) and the order or decree remains unstayed and in effect for 60 days; or (viii) any Guarantee of a Significant Subsidiary ceases to be in full force and effect or any Guarantee of a Significant Subsidiary declared to be null and void and unenforceable or any Guarantee of a Significant Subsidiary is found to be invalid or any of the Guarantors that is a Significant Subsidiary denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the indenture). If an Event of Default occurs and is continuing (other than under clauses (vi) or (vii)), the Trustee or the Holders of at least 25% in principal amount of the Securities then outstanding may declare all the Securities to be due and payable. If an Event of Default pursuant to clause (vi) or A-15 (vii) occurs, the Securities will become immediately due and payable due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. 16. TRUSTEE DEALINGS WITH THE COMPANY Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or any of its Affiliates and may otherwise deal with the Company or any of its Affiliates with the same rights it would have if it were not Trustee. 17. NO RECOURSE AGAINST OTHERS No recourse for the payment of the principal of, premium, if any, or interest on any of the Securities or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture, or in any of the Securities or because of the creation of any Indebtedness represented hereby and thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company, a Guarantor or any Successor Person thereof. Each Holder, by accepting a Security, waives and releases all such liability. A-16 18. GUARANTEES This Security will be entitled to the benefits of certain Guarantees, if any, made for the benefit of the Holders. Reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and obligations thereunder of the Guarantors, the Trustee and the Holders. 19. GOVERNING LAW The Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflict of laws to the extent that the application of the laws of another jurisdiction would be required thereby. 20. AUTHENTICATION This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 21. ABBREVIATIONS Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gift to Minors Act). 22. CUSIP NUMBERS Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of re- A-17 demption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Securityholder upon written request and without charge to the Securityholder a copy of the Indenture. Requests may be made as follows: A-18 If to the Company: Precision Partners, Inc. 5605 N. MacArthur Blvd. Suite 760 Irving, Texas 75038 Attention: Chief Financial Officer If to the Trustee: The Bank of New York 101 Barclay Street New York, New York 10286 Attention: Corporate Trust Trustee Administration A-19 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint __________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: Your Signature: ---------------------- ----------------------------- Sign exactly as your name appears on the other side of this Security. Signature Guarantee: ------------------------------------------------------------ (Signature must be guaranteed) Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the [Registrar], which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the [Registrar] in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the SEC of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Security (which effectiveness shall not have been suspended or terminated at A-20 the date of the transfer) and (ii) [ ], the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer: A-21 [CHECK ONE] (1) __ to the Company or a subsidiary thereof; or (2) __ pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended; or (3) __ to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or (4) __ outside the United states to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act of 1933, as amended; or (5) __ pursuant to the exemption from registration provided by Rule 144 under the Securities Act of 1933, as amended; or (6) __ pursuant to an effective registration statement under the Securities Act of 1933, as amended; or (7) __ pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended. and unless the box below is checked, the undersigned confirms that such Note is not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act of 1933, as amended (an "Affiliate"): |_| The transferee is an Affiliate of the Company. Unless one of the items is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any person other than the registered Holder thereof; PROVIDED, HOWEVER, that if item (3), (4), (5) or (7) is checked, the Company or the Trustee may require, A-22 prior to registering any such transfer of the Securities, in their sole discretion, such written legal opinions, certifications (including an investment letter in the case of box (3) or (4)) and other information as the Trustee or the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended. If none of the foregoing items are checked, the Trustee or Registrar shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.14 of the Indenture shall have been satisfied. Date: Your Signature: ---------------------- ----------------------------- (Sign exactly as name appears on the other side of this Security.) Signature Guarantee: ------------------------------------------------------------ (Signature must be guaranteed) Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the [Registrar], which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the [Registrar] in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-23 TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuer as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ------------------- ------------------------------------------- NOTICE: To be executed by an executive officer A-24 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: |_| If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount: $ Date: Your Signature: ---------------------- ----------------------------- (Sign exactly as your name appears on the other side of the Security) Signature Guarantee: ------------------------------------------------------------ (Signature must be guaranteed) Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the [Registrar], which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the [Registrar] in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-25 EXHIBIT B FACE OF SECURITY UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR securities IN DEFINITIVE FORM, THIS security MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY ANY SUCH NOMINEE OF THE DEPOSITORY, OR BY THE DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO AN ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.14 OF THE INDENTURE. B-2 No. $100,000,000 12% Senior Subordinated Notes Due 2009 CUSIP No. [ ] PRECISION PARTNERS, INC., a Delaware corporation, promises to pay to Cede & Co., or registered assigns, the principal sum of One Hundred Million Dollars on March 19, 2009. Interest Payment Dates: March 15 and September 15. Record Dates: March 1 and September 1. Additional provisions of this Security are set forth on the reverse side of this Security. IN WITNESS WHEREOF, the Company has caused this Security to be signed manually or by facsimile by its duly authorized officers. PRECISION PARTNERS, INC. By: ------------------------------------ Name: Title: Dated: March 19, 1999 TRUSTEE'S CERTIFICATE OF AUTHENTICATION The Bank of New York, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By: The Bank of New York, as Trustee ---------------------------------------- Authorized Signatory B-3 Date of Authentication: March 19, 1999 B-4 REVERSE OF SECURITY 12% SENIOR SUBORDINATED NOTE DUE 2009 1. INTEREST PRECISION PARTNERS, INC., a Delaware corporation (such entity, and its successors and assigns under the Indenture hereinafter referred to, and each other entity which is required to become the Company pursuant to the Indenture, and its successors and assigns under the Indenture, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semiannually on March 15th and September 15th of each year, commencing September 15, 1999. Interest on the Securities will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from, March 19, 1999. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at 1% per annum in excess of the rate borne by the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. METHOD OF PAYMENT The Company will pay interest on the Securities (except defaulted interest) to the Persons who are registered holders of Securities at the close of business on the record date immediately preceding the interest payment date even if Securities are canceled on registration of transfer or registration of exchange (including pursuant to an Exchange Offer (as defined in the applicable Registration Rights Agreement)) after the record date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender. The Company may deliver any such interest B-5 payment to the Paying Agent or to a Holder's registered address. 3. PAYING AGENT AND REGISTRAR Initially, The Bank of New York, a New York banking corporation ("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice. The Company may act as Paying Agent, Registrar, co-Registrar or transfer agent. 4. INDENTURE The Company issued the Securities under an Indenture dated as of March 19, 1999 (the "Indenture"), among the Company, the Guarantors and the Trustee. This Security is one of a duly authorized issue of Unrestricted Securities of the Company designated as its 12% Senior Subordinated Notes due 2009 (the "Unrestricted Securities"). The Securities include the 12% Senior Subordinated Notes due 2009 (the "Initial Securities"), the Exchange Securities (as defined in the Indenture) and the Unrestricted Securities, as defined below issued in exchange for the Initial Securities pursuant to the Registration Rights Agreement or, with respect to the Initial Securities issued under the Indenture subsequent to the Issue Date, a registration agreement substantially identical to the Registration Rights Agreement with the Initial Purchasers. The Initial Securities and the Unrestricted Securities are treated as a single class of securities under the Indenture. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of those terms. Any conflict between this Security and the Indenture will be governed by the Indenture. The Securities are unsecured senior subordinated obligations of the Company limited to $150,000,000 aggregate B-6 principal amount (subject to Section 2.7 of the Indenture). The Indenture imposes certain limitations on the incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the existence of liens, the payment of dividends on, and redemption of, the Capital Stock of the Company and its Subsidiaries, restricted payments, the sale or transfer of assets and Subsidiary stock, the issuance or sale of Capital Stock of Restricted Subsidiaries, the investments of the Company and Restricted Subsidiaries, consolidations, mergers and transfers of all or substantially all the assets of the Company, and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and certain of its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. To guarantee the due and punctual payment of the principal, premium and interest, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Guarantors have unconditionally guaranteed the Obligations on a SENIOR SUBORDINATED basis pursuant to the terms of the Indenture. 5. OPTIONAL REDEMPTION Except as set forth in the following paragraph, the Securities are not redeemable before March 15, 2004. Thereafter, the Company may redeem the Securities at its option, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on March 15th of the year set forth below: B-7 YEAR PERCENTAGE ---- ---------- 2004 .............................................. 106.000% 2005 .............................................. 104.000% 2006 .............................................. 102.000% 2007 and thereafter ............................... 100.000% In addition, the Company must pay accrued and unpaid interest on the Securities redeemed. At any time, or from time to time, on or prior March 15, 2002, the Company may, at its option, use the net cash proceeds of one or more Qualified Equity Offerings (as defined below) to redeem up to 35% of the Securities issued at a redemption price equal to 112.000% of the principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of redemption; provided that: (3) at least 65% of the principal amount of Securities originally issued remains outstanding immediately after any such redemption; and (4) the Company makes such redemption not more than 180 days after the consummation of any such Qualified Equity Offering. As used in the preceding paragraph, "Qualified Equity Offering" means a primary offering of Qualified Capital Stock, or rights, warrants or options to acquire Qualified Capital Stock, of the Company, Holdings or LLC in the United States of at least $25 million to Persons who are not Affiliates of the Company or Holdings; provided that, in the case of any such offering of Qualified Capital Stock of Holdings or LLC, all the net proceeds thereof necessary to pay the aggregate redemption price (plus accrued interest to the redemption date) of the Securities to be redeemed pursuant to the preceding paragraph are contributed to the Company. 6. NOTICE OF REDEMPTION Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the re- B-8 demption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued interest on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. If a notice or communication is sent in the manner provided in the Indenture, it is duly given, whether or not the addressee receives it. Failure to send a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. 7. CHANGE OF CONTROL Upon the occurrence a Change of Control, each Holder of Securities will have the right to require the Company to purchase all or any part of the Securities of such Holder at a purchase price in cash equal to 101% of the principal amount of the Securities thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date) as provided in, and subject to the terms of, the Indenture. 8. SUBORDINATION The Securities are subordinated to Senior Debt of the Company, as defined in the Indenture. To the extent provided in the Indenture, Senior Debt of the Company must be paid before the Securities may be paid. In addition, each Guarantee is subordinated to Guarantor Senior Debt of the relevant Guarantor, as defined in the Indenture. The Company and each Guarantor agrees, and each Holder by accepting a Security agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give it effect and appoints the Trustee as attorney-in-fact for such purpose. B-9 9. DENOMINATIONS; TRANSFER; EXCHANGE The Securities are in registered form, without coupons, and in denominations of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture, including any transfer tax or other similar governmental charge payable in connection therewith. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or any Securities for a period of 15 days before a selection of Securities to be redeemed or 15 days before an interest payment date. 10. PERSONS DEEMED OWNERS The registered Holder of this Security may be treated as the owner of it for all purposes. 11. UNCLAIMED MONEY If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. DISCHARGE AND DEFEASANCE Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Securities to redemption or maturity, as the case may be. B-10 13. AMENDMENT, WAIVER Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended with the consent of the Holders of at least a majority in principal amount outstanding of the Securities and (ii) any past default or compliance with any provision may be waived with the consent of the Holders of a majority in principal amount outstanding of the Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Securityholder, the Company, the Guarantors and the Trustee may amend the Indenture or the Securities to cure any ambiguity, omission, defect or inconsistency, to comply with Article 5 of the Indenture, to provide for uncertificated Securities in addition to or in place of certificated Securities, to add guarantees with respect to the Securities, to secure the Securities, to add additional covenants or surrender rights and powers conferred on the Company, to make any change that does not adversely affect the rights of any Securityholder or to comply with any request of the SEC in connection with qualifying the Indenture under the TIA. 14. DEFAULTS AND REMEDIES Under the Indenture, Events of Default include: (i) the failure to pay interest on any notes when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment shall be prohibited by the subordination provisions of the indenture); (ii) the failure to pay the principal on any notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a payment to purchase notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or not such payment shall be prohibited by the subordination provisions of the indenture); B-11 (iii) a default in the observance or performance of any other covenant or agreement contained in the indenture which default continues for a period of 45 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the trustee or the Holders of at least 25% of the outstanding principal amount of the notes (except in the case of a default with respect to Section 5.1, which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) a default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company or of any Restricted Subsidiary (or the payment of which is guaranteed by the Company or any Restricted Subsidiary), whether such Indebtedness now exists or is created after the Issue Date, which default (a) is caused by a failure to pay principal of such Indebtedness after notice and the lapse of any applicable grace period provided in such Indebtedness on the date of such default (a "payment default") or (b) results in the acceleration of such Indebtedness prior to its express maturity (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days) and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a payment default or the maturity of which has been so accelerated (and such acceleration is not rescinded, or such Indebtedness is not repaid, within 30 days), aggregates $7.5 million; (v) one or more judgments in an aggregate amount in excess of $7.5 million not covered by adequate insurance shall have been rendered against the Company or any of the Restricted Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and nonappealable; B-12 (vi) the Company or any Significant Subsidiary of the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; or (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary of the Company in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary of the Company or for any substantial part of the property of the Company or Significant Subsidiary; (C) orders the winding up or liquidation of the Company or any Significant Subsidiary of the Company; (or any similar relief is granted under any foreign laws) and the order or decree remains unstayed and in effect for 60 days; or (viii) any Guarantee of a Significant Subsidiary ceases to be in full force and effect or any Guarantee of a Significant Subsidiary declared to be null and void and unenforceable or any Guarantee of a Significant Subsidiary is B-13 found to be invalid or any of the Guarantors that is a Significant Subsidiary denies its liability under its Guarantee (other than by reason of release of a Guarantor in accordance with the terms of the indenture). If an Event of Default occurs and is continuing (other than under clauses (vi) or (vii)), the Trustee or the Holders of at least 25% in principal amount of the Securities then outstanding may declare all the Securities to be due and payable. If an Event of Default pursuant to clause (vi) or (vii) occurs, the Securities will become immediately due and payable due and payable immediately upon the occurrence of such Events of Default. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Securities unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing Default (except a Default in payment of principal or interest) if it determines that withholding notice is in the interest of the Holders. 15. TRUSTEE DEALINGS WITH THE COMPANY Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or any of its Affiliates and may otherwise deal with the Company or any of its Affiliates with the same rights it would have if it were not Trustee. 16. NO RECOURSE AGAINST OTHERS No recourse for the payment of the principal of, premium, if any, or interest on any of the Securities or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of B-14 the Company in the Indenture, or in any of the Securities or because of the creation of any Indebtedness represented hereby and thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company, a Guarantor or any Successor Person thereof. Each Holder, by accepting a Security, waives and releases all such liability. 17. GUARANTEES This Security will be entitled to the benefits of certain Guarantees, if any, made for the benefit of the Holders. Reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and obligations thereunder of the Guarantors, the Trustee and the Holders. 18. GOVERNING LAW The Indenture and the Securities shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflict of laws to the extent that the application of the laws of another jurisdiction would be required thereby. 19. AUTHENTICATION This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 20. ABBREVIATIONS Customary abbreviations may be used in the name of a Securityholder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gift to Minors Act). B-15 21. CUSIP NUMBERS Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures the Company has caused CUSIP numbers to be printed on the Securities and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Securityholder upon written request and without charge to the Securityholder a copy of the Indenture. Requests may be made as follows: If to the Company: Precision Partners, Inc. 5605 N. Mac Arthur Blvd. Suite 760 Irving, Texas 75038 Attention: Chief Financial Officer If to the Trustee: The Bank of New York 101 Barclay Street New York, New York 10286 Attention: Corporate Trust Trustee Administration B-16 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint __________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: Your Signature: ---------------------- ----------------------------- Sign exactly as your name appears on the other side of this Security. Signature Guarantee: ------------------------------------------------------------ (Signature must be guaranteed) Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the [Registrar], which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the [Registrar] in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. B-17 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount: $ Date: Your Signature: ---------------------- ----------------------------- (Sign exactly as your name appears on the other side of the Security) Signature Guarantee: ------------------------------------------------------------ (Signature must be guaranteed) Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the [Registrar], which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the [Registrar] in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. B-18 EXHIBIT C Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors [ ], [ ] [ ] [ ] [ ] Ladies and Gentlemen: In connection with our proposed purchase of 12% Senior Subordinated Notes due 2009 (the "Securities") of Precision Partners, Inc., a Delaware corporation (the "Company"), we confirm that: 1. We have received a copy of the Offering Memorandum (the "Offering Memorandum"), dated March 16, 1999, relating to the Securities and such other information as we deem necessary in order to make our investment decision. We acknowledge that we have read and agreed to the matters stated in the section entitled "Notice to Investors" of such Offering Memorandum. 2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture relating to the Securities (the "Indenture") as described in the Offering Memorandum and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"), and all applicable State securities laws. 3. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold C-1 within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Securities, we will do so only (i) to the Company or any subsidiary thereof, (ii) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined in Rule 144A promulgated under the Securities Act), (iii) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee (as defined in the Indenture) a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Securities (the form of which letter can be obtained from the Trustee), (iv) outside the United States in accordance with Rule 904 of Regulation S promulgated under the Securities Act to non-U.S. persons, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (vi) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. 4. We understand that, on any proposed resale of any Securities, we will be required to furnish to the Trustee and the Company such certification, legal opinions and other information as the Trustee and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our invest- C-2 ment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be. 6. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. C-3 You, the Company, the Trustee and others are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: ------------------------------------ Name: Title: C-4 EXHIBIT D Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S ------------------------ [ ], [ ] [ ] [ ] [ ] [ ] Re: Precision Partners, Inc. (the "Company") 12% Senior Subordinated Notes due 2009 (the "Securities") ---------------------------------------- Ladies and Gentlemen: In connection with our proposed sale of $100,000,000 aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; D-1 (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) we have advised the transferee of the transfer restrictions applicable to the Securities. You, the Company and counsel for the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ------------------------------------ Authorized Signature D-2 EXHIBIT E GUARANTEE For value received, the undersigned hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of this Security the cash payments in United States dollars of principal of, premium, if any, and interest on this Security (and including Additional Interest payable thereon) in the amounts and at the times when due and interest on the overdue principal, premium, if any, and interest, if any, of this Security, if lawful, and the payment or performance of all other obligations of the Company under the Indenture (as defined below) or the Securities, to the Holder of this Security and the Trustee, all in accordance with and subject to the terms and limitations of this Security, Article Eleven of the Indenture and this Guarantee. This Guarantee will become effective in accordance with Article Eleven of the Indenture and its terms shall be evidenced therein. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Security. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture dated as of March 19, 1999, among Precision Partners, Inc., a Delaware corporation, as issuer (the "Company"), each of the Guarantors named therein and The Bank of New York, as trustee (the "Trustee"), as amended or supplemented (the "Indenture"). The obligations of the undersigned to the Holders of Securities and to the Trustee pursuant to this Guarantee and the Indenture are expressly set forth in Article Eleven of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee and all of the other provisions of the Indenture to which this Guarantee relates. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Each Guarantor hereby agrees to submit to the jurisdiction of the courts of E-1 the State of New York in any action or proceeding arising out of or relating to this Guarantee. This Guarantee is subject to release upon the terms set forth in the Indenture. E-2 IN WITNESS WHEREOF, each Guarantor has caused its Guarantee to be duly executed. CERTIFIED FABRICATORS, INC. By: ------------------------------------ Name: Title: GENERAL AUTOMATION, INC. By: ------------------------------------ Name: Title: NATIONWIDE PRECISION PRODUCTS CORP. By: ------------------------------------ Name: Title: MID STATE MACHINE PRODUCTS By: ------------------------------------ Name: Title: E-3 GALAXY INDUSTRIES CORPORATION By: ------------------------------------ Name: Title: CALBRIT DESIGN, INC. By: ------------------------------------ Name: Title: E-4 EX-5.1 3 EXHIBIT 5.1 Exhibit 5.1 May 5, 2000 Precision Partners, Inc. and the Subsidiary Guarantors named on Annex A hereto c/o Precision Partners, Inc. 5605 N. MacArthur Boulevard, Suite 760 Irving, Texas 75038 Re: $100,000,000 12% Senior Subordinated Notes Due 2009 --------------------------------------------------- Ladies and Gentlemen: We have acted as counsel to Precision Partners, Inc., a Delaware corporation (the "Company"), and the Subsidiary Guarantors listed in Annex A hereto (the "Subsidiary Guarantors"), in connection with the proposed issuance and exchange of up to $100,000,000 aggregate principal amount of the Company's 12% Senior Subordinated Notes due 2009 (the "New Notes") for an equal principal amount of the Company's 12% Senior Subordinated Notes due 2009 outstanding on the date hereof (the "Old Notes"), to be issued pursuant to the Indenture dated as of March 19, 1999 (as amended by the First Supplemental Indenture thereto, dated October 15, 1999, and the Second Supplemental Indenture thereto, dated October 29, 1999, the "Indenture"), by and among the Company, as issuer, the Subsidiary Guarantors, as guarantors, and The Bank of New York, as trustee (the "Trustee"). The Old Notes are, and the New Notes will be, guaranteed (each a "Subsidiary Guarantee") on a joint and several basis by each of the Subsidiary Guarantors. We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion, and based thereupon we are of the opinion that: 1. The New Notes have been duly authorized, and when duly executed by authorized officers of the Company and authenticated by the Trustee, and issued in accordance with the Indenture and the Registration Rights Agreement, will be binding obligations of the Company. 2. Each Subsidiary Guarantee has been duly authorized, executed and delivered by authorized officers of each Subsidiary Guarantor, and constitutes a valid and binding obligation of the applicable Subsidiary Guarantor. Precision Partners, Inc. May 5, 2000 Page 2 For purposes of the opinions expressed in Paragraph 2 above with respect to Galaxy Industries Corporation and Mid State Machine Products, we have assumed the due authorization, execution and delivery of their respective Subsidiary Guarantee. The opinions expressed herein are limited to the federal laws of the United States of America, the laws of the States of New York, Illinois and California the General Corporation Law of the State of Delaware, as currently in effect. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement on Form S-4 filed by the Company and the Subsidiary Guarantors to register the exchange of the New Notes for the Old Notes (and the Guarantee by each Subsidiary Guarantor of the New Notes) under the Securities Act of 1933 and to the reference to us under the caption "Legal Matters" in the Prospectus constituting a part of such Registration Statement. Very truly yours, /s/ Jones, Day, Reavis & Pogue Annex A NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- Mid State Machine Products Maine Galaxy Industries Corporation Michigan Certified Fabricators, Inc. California General Automation, Inc. Illinois Nationwide Precision Products Corp. New York Gillette Machine & Tool Co., Inc. New York EX-5.2 4 EXHIBIT 5.2 Robert B. Gregory Attorney at Law PO Box 760 Damariscotta, Maine 04543 May 5, 2000 Mid State Machine Products c/o Precision Partners, Inc. 5605 N. MacArthur Boulevard, Suite 760 Irving, Texas 75038 Re: Guarantee of $100,000,000 12% Senior Subordinated Notes ------------------------------------------------------- due 2009 of Precision Partners, Inc. ------------------------------------ Ladies and Gentlemen: We have acted as counsel to Mid State Machine Products, a Maine corporation (the "Company") in connection with the proposed issuance and exchange of up to $100,000,000 aggregate principal amount of 12% Senior Subordinated Notes due 2009 (the "New Notes") of Precision Partners, Inc., the Company's parent ("Precision"), for an equal principal amount of Precision's 12% Senior Subordinated Notes due 2009 outstanding on the date hereof (the "Old Notes"), to be issued pursuant to the Indenture dated as of March 19, 1999 (as amended by the First Supplemental Indenture thereto, dated October 15, 1999, and the Second Supplemental Indenture thereto, dated October 29, 1999, the "Indenture"), by and among Precision, as issuer, the Company and the other Subsidiary Guarantors named therein, as guarantors, and The Bank of New York, as trustee (the "Trustee"). The Old Notes are, and the New Notes will be, guaranteed (each a "Subsidiary Guarantee") on a joint and several basis by the Company and each of the other Subsidiary Guarantors. We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion, and based thereupon we are of the opinion that the Subsidiary Guarantee has been duly authorized, executed and delivered by the Company. The opinions expressed herein are limited to the laws of the State of Maine, as currently in effect. We hereby consent to the filing of this opinion as Exhibit 5.2 to the Registration Statement on Form S-4 filed by the Company to register its Subsidiary Guarantee of the New Notes under the Securities Act of 1933 and to the reference to us under the caption "Legal Matters" in the Prospectus constituting a part of such Registration Statement. Very truly yours, /s/ Robert B. Gregory Robert B. Gregory EX-5.3 5 EXHIBIT 5.3 [LETTERHEAD OF THAV, GROSS, STEINWAY & BENNETT] May 5, 2000 Galaxy Industries Corporation c/o Precision Partners, Inc. 5605 N. MacArthur Boulevard, Suite 760 Irving, Texas 75038 Re: Guarantee of $100,000,000 12% Senior Subordinated ------------------------------------------------- Notes due 2009 OF Precision Partners, Inc. ------------------------------------------ Ladies and Gentlemen: As local counsel to Galaxy Industries Corporation, a Michigan corporation (the "Company") we are furnishing this opinion in connection with the proposed issuance and exchange of up to $100,000,000 aggregate principal amount of 12% Senior Subordinated Notes due 2009 (the "New Notes") of Precision Partners, Inc., the Company's parent ("Precision"), for an equal principal amount of Precision's 12% Senior Subordinated Notes due 2009 outstanding on the date hereof (the "Old Notes"), to be issued pursuant to the Indenture dated as of March 19, 1999 (as amended by the First Supplemental Indenture thereto, dated October 15, 1999, and the Second Supplemental Indenture thereto, dated October 29, 1999, the "Indenture"), by and among Precision, as issuer, the Company and the other Subsidiary Guarantors named therein, as guarantors, and The Bank of New York, as trustee (the "Trustee"). The Old Notes are, and the New Notes will be, guaranteed (each a "Subsidiary Guarantee") on a joint and several basis by the Company and each of the other Subsidiary Guarantors. In so acting, we have examined the following documents received from the Company: Unanimous Written Consent Action of the Board of Directors of Galaxy Industries Corporation, Officer's Certificate in Support of Legal Opinion - Galaxy Industries Corporation(1), Officer's Certificate in Support of Legal Opinion - Precision Partners, Inc., and the Subsidiary Guarantee. We have relied upon the accuracy of such documents as of the date and time this opinion is tendered to the designated recipient and have assumed the completeness of such documents, as well as the genuineness of the signatures, authenticity of the documents and the conformity of such documents to originals of all documents purporting to be copies, as well as the delivery of such documents. We have also assumed that: (i) the Subsidiary Guarantee, the New Notes, Old Notes and the Indenture, and all related instruments and documents do not contain within such documents an express or implied requirement or representation that the entry into such documents be approved by the stockholders of the Company; (ii) the Unanimous Written Consent Action of the Board of Directors of Galaxy Industries Corporation, a copy of which is atttached hereto as Exhibit "A," has not been rescinded or modified since such date; and (iii) that the Bylaws and Articles of Incorporation of the Company have not been amended or otherwise modified since March 30, 2000. Based upon the foregoing, we are of the opinion that the Subsidiary Guarantee has been duly authorized, executed and delivered by the Company. The opinions expressed herein are limited to the laws of the State of Michigan, as currently in effect. We hereby consent to the filing of this opinion as Exhibit 5.3 to the Registration Statement on Form S-4 filed by the Company to register its Subsidiary Guarantee of the New Notes under the Securities Act of 1933 and to the reference to us under the caption "Legal Matters" in the Prospectus constituting a part of such Registration Statement. Very truly yours, - ----------- (1) The Unanimous Written Consent Action of the Board of Directors of Galaxy Industries Corporation and the Subsidiary Guarantee are attached as exhibits to the Officer's Certificate in Support of Legal Opinion - Galaxy Industries Corporation. EX-10.1 6 EXHIBIT 10.1 Exhibit 10.1 EXECUTION COPY - -------------------------------------------------------------------------------- CREDIT AGREEMENT among PRECISION PARTNERS, INC., as Borrower, The Several Guarantors From Time to Time Hereof, The Several Lenders from Time to Time Parties Hereto. CITICORP U.S.A., INC., as Administrative Agent NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent, Dated as of March 19, 1999 SALOMON SMITH BARNEY INC., as Arranger - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS........................................................................................1 1.1 Defined Terms......................................................................................1 1.2 Other Definitional Provisions.....................................................................30 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS...................................................................31 2.1 Term Commitments..................................................................................31 2.2 Revolving Commitments; Borrowing Base Prepayments.................................................31 2.3 Procedure for Borrowing; Scheduled Repayments.....................................................31 2.4 Commitment Fees, etc..............................................................................33 2.5 Termination or Reduction of Commitments...........................................................33 2.6 Optional Prepayments..............................................................................33 2.7 Mandatory Prepayments and Commitment Reductions...................................................33 2.8 Conversion and Continuation Options...............................................................35 2.9 Limitations on Eurodollar Tranches................................................................35 2.10 Interest Rates and Payment Dates..................................................................36 2.11 Computation of Interest and Fees..................................................................36 2.12 Inability to Determine Interest Rate..............................................................37 2.13 Pro Rata Treatment and Payments...................................................................37 2.14 Requirements of Law...............................................................................39 2.15 Taxes.............................................................................................40 2.16 Indemnity.........................................................................................41 2.17 Change of Lending Office..........................................................................42 2.18 Replacement of Lenders............................................................................42 SECTION 3. LETTERS OF CREDIT.................................................................................43 3.1 L/C Commitment....................................................................................43 3.2 Procedure for Issuance of Letter of Credit........................................................43 3.3 Fees and Other Charges............................................................................44 3.4 L/C Participations................................................................................44 3.5 Reimbursement Obligation of the Borrower..........................................................45 3.6 Indemnification; Nature of Issuing Lender's Duties................................................45 3.7 Letter of Credit Payments.........................................................................47 3.8 Applications......................................................................................47 SECTION 4. REPRESENTATIONS AND WARRANTIES....................................................................47 4.1 Financial Condition...............................................................................47 4.2 No Change.........................................................................................49 4.3 Corporate Existence; Compliance with Law..........................................................49 4.4 Corporate Power; Authorization; Enforceable Obligations...........................................50 4.5 No Legal Bar......................................................................................50 4.6 Litigation........................................................................................50 4.7 No Default........................................................................................50 4.8 Ownership of Property; Liens......................................................................50 4.9 Intellectual Property.............................................................................51 4.10 Taxes.............................................................................................51 4.11 Federal Regulations...............................................................................51 4.12 Labor Matters.....................................................................................51
- i - 4.13 ERISA.............................................................................................51 4.14 Investment Company Act; Other Regulations.........................................................52 4.15 Subsidiaries......................................................................................52 4.16 Use of Proceeds...................................................................................52 4.17 Environmental Matters.............................................................................52 4.18 Accuracy of Information, etc......................................................................54 4.19 Security Documents................................................................................54 4.20 Solvency..........................................................................................55 4.21 Senior Debt.......................................................................................55 4.22 Year 2000 Matters.................................................................................55 4.23 Regulation H......................................................................................56 4.24 Licenses and Permits; Compliance with Laws........................................................56 SECTION 5. CONDITIONS PRECEDENT..............................................................................56 5.1 Conditions to Initial Extension of Credit.........................................................56 5.2 Conditions to Each Extension of Credit............................................................62 SECTION 6. AFFIRMATIVE COVENANTS.............................................................................62 6.1 Financial Statements..............................................................................62 6.2 Certificates; Other Information...................................................................63 6.3 Payment of Obligations............................................................................65 6.4 Maintenance of Existence; Compliance..............................................................65 6.5 Maintenance of Property; Insurance................................................................65 6.6 Inspection of Property; Books and Records; Discussions............................................65 6.7 Notices...........................................................................................66 6.8 Environmental Laws................................................................................67 6.9 Additional Collateral, etc........................................................................68 6.10 Year 2000 Matters.................................................................................70 6.11 Post-Closing Surveys..............................................................................70 SECTION 7. NEGATIVE COVENANTS................................................................................70 7.1 Financial Condition Covenants.....................................................................70 7.2 Indebtedness......................................................................................72 7.3 Liens.............................................................................................73 7.4 Fundamental Changes...............................................................................75 7.5 Disposition of Property...........................................................................75 7.6 Restricted Payments...............................................................................76 7.7 Investments.......................................................................................76 7.8 Modifications of Certain Instruments..............................................................78 7.9 Transactions with Affiliates......................................................................78 7.10 Sales and Leasebacks..............................................................................78 7.11 Changes in Fiscal Periods.........................................................................78 7.12 Negative Pledge Clauses...........................................................................78 7.13 Clauses Restricting Precision Group Member Distributions..........................................78 7.14 Lines of Business.................................................................................79 7.15 Amendments to Acquisition Documents...............................................................79 7.16 Designated Senior Debt Provisions.................................................................79 7.17 Limitation on Holdco Business.....................................................................79 SECTION 8. EVENTS OF DEFAULT.................................................................................80 SECTION 9. THE AGENTS........................................................................................83
- ii - 9.1 Appointment.......................................................................................83 9.2 Delegation of Duties..............................................................................84 9.3 Exculpatory Provisions............................................................................84 9.4 Reliance by Agents................................................................................84 9.5 Notice of Default.................................................................................85 9.6 Non-Reliance on Any Agent and Other Lenders.......................................................85 9.7 Indemnification...................................................................................86 9.8 Agent in Its Individual Capacity..................................................................86 9.9 Successor Agents..................................................................................86 9.10 Authorization to Release Liens....................................................................87 SECTION 10. MISCELLANEOUS.....................................................................................87 10.1 Amendments and Waivers............................................................................87 10.2 Notices...........................................................................................88 10.3 No Waiver; Cumulative Remedies....................................................................89 10.4 Survival of Representations and Warranties........................................................89 10.5 Payment of Expenses and Taxes.....................................................................90 10.6 Successors and Assigns; Participations and Assignments............................................91 10.7 Adjustments; Setoff...............................................................................93 10.8 Counterparts......................................................................................93 10.9 Severability......................................................................................94 10.10 Integration.......................................................................................94 10.11 Governing Law.....................................................................................94 10.12 Submission to Jurisdiction; Waivers...............................................................94 10.13 Acknowledgments...................................................................................95 10.14 Confidentiality...................................................................................95 10.15 Waivers of Jury Trial.............................................................................95
- iii - ANNEX: A Pricing Grid SCHEDULES: 1.1A Commitments 1.lB Mortgaged Property 4.4 Consents, Authorizations, Filings and Notices 4.15 Subsidiaries 4.19(a) UCC Filing Jurisdictions - Security Agreement 4.19(b) UCC Filing Jurisdictions - Securities Pledge Agreement 4.19(c) Mortgage Recording Jurisdictions 5.1 (b) Precision Reorganization 5.1(e) Indebtedness 7.2(d) Existing Indebtedness 7.3(f) Existing Liens 7.5 Certain Property to Be Sold 7.7 Existing Investments EXHIBITS: A-1 Form of Holdco Guarantee A-2 Form of Subsidiary Guarantee B-1 Form of Borrowing Base Certificate B-2 Form of Compliance Certificate C-1 Form of Closing Certificate C-2 Form of Solvency Certificate C-3 Form of Environmental Certificate D Form of Mortgage E Form of Assignment and Acceptance F Form of Legal Opinion of Jones, Day, Reavis & Pogue G Form of Exemption Certificate H-1 Form of Notice of Borrowing H-2 Form of Notice of Conversion/Continuation I Form of Security Agreement J Form of Local Counsel Opinion K Form of Securities Pledge Agreement - iv - CREDIT AGREEMENT, dated as of March 19, 1999, among PRECISION PARTNERS, INC., a Delaware corporation (the "BORROWER"), PRECISION PARTNERS HOLDING COMPANY, a Delaware corporation, MID STATE MACHINE PRODUCTS, a Maine corporation, GALAXY INDUSTRIES CORPORATION, a Michigan corporation, CERTIFIED FABRICATORS, INC., a California corporation, CALBRIT DESIGN, INC., a California corporation, GENERAL AUTOMATION, INC., an Illinois corporation, and NATIONWIDE PRECISION PRODUCTS CORP., a New York corporation, the several banks and other financial institutions or entities from time to time parties to this Agreement (the "LENDERS"), CITICORP U.S.A., INC., as administrative agent, NATIONSBANK, N.A., as syndication agent, and SUNTRUST BANK, ATLANTA, as documentation agent. The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1. "ACQUISITION AGREEMENTS": the collective reference to the Galaxy Acquisition Agreement, the Mid State Acquisition Agreement, the Certified Fabricators Acquisition Documentation, the General Automation Acquisition Documentation and the Nationwide Acquisition Documentation. "ACQUISITION DOCUMENTATION": collectively, (a) the Acquisition Agreements and all schedules, exhibits and annexes thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith and (b) the employment agreements entered into on September 30, 1998 with S. Douglas Sukeforth and Kenneth Smith, in each case as amended, supplemented or otherwise modified from time to time in accordance with Section 7.15. "ACQUISITIONS" means, collectively, the Certified Acquisition, the General Automation Acquisition and the Nationwide Acquisition. "ADJUSTMENT DATE": as defined in the Pricing Grid. "ADMINISTRATIVE AGENT": Citicorp U.S.A., Inc., together with its affiliates, as the administrative agent for the Lenders under this Agreement and the other Loan Documents, together with any of its successors. "AFFILIATE": as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "AGENT-RELATED PERSONS": the Agents, and any successor agent pursuant to Section 9.9, together with their respective Affiliates (including, in the case of Citicorp U.S.A., Inc., as a Lender and Salomon Smith Barney Inc., as Arranger), and the officers, directors, employees, agents, advisors and attorneys-in-fact of such Persons and Affiliates. "AGENTS": means the Administrative Agent, Syndication Agent and Documentation Agent. -2- "AGGREGATE EXPOSURE": with respect to any Lender at any time, an amount equal to (a) until the Closing Date, the aggregate amount of such Lender's Commitments at such time and (b) thereafter, the sum of (i) the aggregate then unpaid principal amount of such Lender's Term Loans and (ii) the amount of such Lender's Revolving Commitments then in effect or, in the case of Revolving Lenders, if the Revolving Commitments have been terminated, the amount of such Lender's Revolving Extensions of Credit then outstanding. "AGGREGATE EXPOSURE PERCENTAGE": with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender's Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time. "AGREEMENT": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "APPLICABLE MARGIN": a rate PER ANNUM equal to 225 bps in the case of Eurodollar Loans and 200 bps in the case of Base Rate Loans; PROVIDED, that on and after the date that is three months after the Closing Date, the Applicable Margin will be determined pursuant to the Pricing Grid. "APPLICATION": an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to open a Letter of Credit. "ASSET SALE": (a) any Disposition of property or series of related Dispositions of property (excluding any such Disposition permitted by clause (a), (b), (c) or (d) of Section 7.5) that yields net proceeds after all reasonable third-party transaction costs to the Precision Group Members (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $1,000,000 and (b) any sale or issuance by any Precision Group Member (other than Holdco) of its Capital Stock (excluding sales or issuances to a Wholly Owned Qualified Precision Group Member). "ASSIGNEE": as defined in Section 10.6(c). "ASSIGNMENT AND ACCEPTANCE": an Assignment and Acceptance, substantially in the form of Exhibit E. "ASSIGNOR": as defined in Section 10.6(c). "AVAILABLE REVOLVING COMMITMENT": as to any Revolving Lender at any time, an amount equal to the excess, if any, of (a) such Lender's Revolving Commitment then in effect over (b) such Lender's Revolving Extensions of Credit then outstanding. "BANK OF AMERICA": Bank of America National Trust and Savings Association. "BASE RATE": a fluctuating interest rate PER ANNUM in effect from time to time, which rate PER ANNUM shall at all times be equal to the higher of (a) the rate of interest announced publicly by Citibank, N.A. in New York, New York, from time to time, as Citibank, N.A.'s base rate and (b) 0.50% PER ANNUM above the Federal Funds Effective Rate. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate. "BASE RATE LOANS": Loans the rate of interest applicable to which is based upon the Base Rate. "BENEFITTED LENDER": as defined in Section 10.7(a). -3- "BOARD": the Board of Governors of the Federal Reserve System of the United States (or any successor). "BORROWER": as defined in the preamble hereto. "BORROWING BASE": as of any date of determination, an amount equal to the sum of (a) 85% of Eligible Receivables as of such date and (b) 50% of Eligible Inventory as of such date. "BORROWING BASE CERTIFICATE": a certificate substantially in the form of Exhibit B-1. "BORROWING DATE": any Business Day specified by the Borrower as a date on which the Borrower requests the relevant Lenders to make Loans hereunder. "BUSINESS": as defined in Section 4.17(b). "BUSINESS DAY": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close, PROVIDED, that with respect to notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market "CAPITAL ASSET EXCHANGE": a substantially contemporaneous exchange, or series of related exchanges, of assets constituting property, plant or equipment for like-kind assets that are useful in the business of the Precision Group Members and that have a fair market value (determined in good faith by the Borrower) at least equal to the fair market value of the exchanged assets; PROVIDED that no Capital Asset Exchange shall exceed $3,000,000 in fair market value. "CAPITAL EXPENDITURES": for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "CAPITAL LEASE OBLIGATIONS": as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property or a combination thereof which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "CAPITAL STOCK": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "CARLISLE GROUP": the collective reference to Carlisle Enterprises and its Control Investment Affiliates. "CASH EQUIVALENTS": means (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (b) U.S. dollar denominated time deposits and certificates of deposit of (i) any Lender, (ii) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (iii) any bank whose short-term -4- commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank being an "APPROVED BANK"), in each case with maturities of not more than 270 days from the date of acquisition, (c) commercial paper and variable or fixed rate notes issued by any Approved Bank (or by the parent company thereof) or any variable rate notes issued by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent thereof) or better by Moody's and maturing within six months of the date of acquisition, (d) repurchase agreements entered into by any Person with a bank or trust company (including any of the Lenders) or recognized securities dealers having capital and surplus in excess of $500,000,000 for direct obligations issued by or fully guaranteed by the Untied States in which such Person shall have a perfected first priority security interest (subject to no other Liens) and having, on the date of purchase thereof, a fair market value of at least 100% of the amount of the repurchase obligations, (e) Investments, classified in accordance with GAAP as current assets, in money market investment programs registered under the Investment Company Act of 1940, as amended, which are administered by reputable financial institutions having capital of at least $500,000,000 and the portfolios of which are limited to Investments of the character described in the foregoing clauses (a) through (d) and (f) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b)(ii) or (iii). "CERTIFIED ACQUISITION": the acquisition by the Borrower of 100% of the Capital Stock of Certified Fabricators pursuant to the Certified Fabricators Acquisition Documentation and on terms satisfactory to the Administrative Agent. "CERTIFIED FABRICATORS": the collective reference to Certified Fabricators, Inc., a California corporation, and Calbrit Design, Inc., a California corporation. "CERTIFIED FABRICATORS ACQUISITION DOCUMENTATION": the documentation effecting the Certified Acquisition, including all schedules, exhibits and annexes thereto and all side letters and agreements affecting the terms thereof and entered into in connection therewith. "CITICORP USA": Citicorp U.S.A., Inc. "CLOSING DATE": the date on which the conditions precedent set forth in Section 5.1 shall have been satisfied, which date is March 19, 1999. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL": all property of the Loan Parties, now owned or hereafter acquired, of whatever kind or nature pledged as collateral for the obligations under any Security Document. "COLLATERAL ASSIGNMENT": the Collateral Assignment of Sublease, Subordination, Non-disturbance and Attornment to be executed and delivered by Nationwide in favor of and for the benefit of the Administrative Agent for the benefit of the Lenders. "COMMITMENT": as to any Lender, the sum of the Term Commitment and the Revolving Commitment of such Lender. "COMMITMENT FEE RATE": 50 bps PER ANNUM; PROVIDED, that on and after the date that is three months after the Closing Date, the Commitment Fee Rate will be determined pursuant to the Pricing Grid. -5- "COMMONLY CONTROLLED ENTITY": an entity, whether or not incorporated, that is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes the Borrower and that is treated as a single employer under Section 414 of the Code. "COMPLIANCE CERTIFICATE": a certificate duly executed by a Responsible Officer substantially in the form of Exhibit B-2. "CONFIDENTIAL INFORMATION MEMORANDUM": a Confidential Information Memorandum relating to the credit facilities contemplated by this Agreement in the form approved by the Borrower and provided to potential Lenders. "CONSOLIDATED CURRENT ASSETS": at any date, all amounts (other than cash and Cash Equivalents) that would, in conformity with GAAP, be set forth opposite the caption "total current assets" (or any like caption) on a consolidated balance sheet of any Person at such date. "CONSOLIDATED CURRENT LIABILITIES": at any date, all amounts that would, in conformity with GAAP, be set forth opposite the caption "total current liabilities" (or any like caption) on a consolidated balance sheet of any Person at such date, but excluding (a) the current portion of any Funded Debt of such Person and (b) without duplication of clause (a) above, all Indebtedness consisting of Revolving Loans to the extent otherwise included therein. "CONSOLIDATED EBITDA": for any Person for any period, Consolidated Net income for such period PLUS, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans and any Subordinated Indebtedness), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) accruals for or expenses of performance-based bonus payments made to S. Douglas Sukeforth pursuant to his employment agreement in an aggregate amount not to exceed $3,000,000 and performance-based bonus payments made to Kenneth Smith pursuant to his employment agreement in an aggregate amount not to exceed $3,000,000, (f) any extraordinary, unusual or non-recurring expenses (including expenses incurred in connection with the Acquisitions and any Permitted Acquisition) or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, non-cash losses on sales of assets outside of the ordinary course of business) acceptable to the Lenders, PROVIDED that any cash amounts referred to in this clause (f) (excluding any amounts referred to in the first parenthetical) shall not, in the aggregate, exceed $1,500,000 for any fiscal year of the Borrower, (g) management fees described in the first parenthetical of Section 7.9, and (h) any other non-cash charges, and MINUS, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary, unusual or nonrecurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other noncash income, all as determined on a consolidated basis. For the purposes of calculating Consolidated EBITDA for any period of four consecutive fiscal quarters (each, a "REFERENCE PERIOD") pursuant to any determination of the Consolidated Leverage Ratio, if during such Reference Period any Precision Group Member shall have made a Material Disposition or Material Acquisition, Consolidated EBITDA for such Reference Period shall be calculated after giving PRO FORMA effect thereto, reasonably acceptable to the Administrative Agent, as if such Material Disposition or Material Acquisition occurred on the first day of such Reference Period. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO": for any Person for any period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Fixed Charges for such period, with Consolidated Fixed Charges calculated after giving PRO FORMA effect to the incurrence or discharge of any Fixed Charge with relation to -6- any Material Acquisition or Material Disposition during such period as if such incurrence or discharge had occurred on the first day of such period. "CONSOLIDATED FIXED CHARGES": for any Person for any period, the sum (without duplication) of (a) Consolidated Interest Expense for such period, (b) Consolidated Lease Expense for such period, (c) total cash tax expense of such Person for such period, (d) scheduled payments made during such period on account of principal of Indebtedness of such Person (including scheduled principal payments in respect of the Term Loans) and (e) Capital Expenditures for such period. "CONSOLIDATED INTEREST COVERAGE RATIO": for any Person for any period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for such period, with Consolidated Interest Expense calculated after giving effect to the incurrence or repayment of any Indebtedness of such Person with relation to any Material Acquisition or Material Disposition during such period as if such incurrence or repayment had occurred on the first day of such period. "CONSOLIDATED INTEREST EXPENSE": for any Person for any period, total cash interest expense (including that attributable to Capital Lease Obligations) of such Person on a consolidated basis for such period with respect to all outstanding Indebtedness of such Person (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Hedge Agreements in respect of such Indebtedness to the extent such net costs are allocable to such period in accordance with GAAP). "CONSOLIDATED LEASE EXPENSE": for any Person for any period, the aggregate amount of fixed and contingent rentals payable by such Person for such period with respect to capital leases of real and personal property, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED LEVERAGE RATIO": as at the last day of any period for any Person, the ratio of (a) Consolidated Total Debt on such day to (b) Consolidated EBITDA for such period. "CONSOLIDATED NET INCOME": for any period for any Person, the consolidated net income (or loss) of such Person, determined on a consolidated basis in accordance with GAAP; PROVIDED that there shall be excluded (a) except as otherwise expressly provided herein, the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of such Person or is merged into or consolidated with such Person, (b) the income (or deficit) of any Person in which such Person has an ownership interest, except to the extent that any such income is actually received by such Person in the form of dividends or similar distributions, and (c) the undistributed earnings of any Subsidiary of such Person to the extent that the distribution of such earnings to such Person is not at the time permitted by the terms of any Contractual Obligation or Requirement of Law applicable to such Subsidiary. "CONSOLIDATED SENIOR LEVERAGE RATIO": as at the last day of any period, the ratio of (a) Consolidated Total Senior Debt on such day to (b) Consolidated EBITDA for such period. "CONSOLIDATED TOTAL DEBT": at any date for any Person, the aggregate principal amount of all Indebtedness less Excess Cash Balances of such Person at such date, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED TOTAL SENIOR DEBT": at any date for any Person, the aggregate principal amount of all Indebtedness of such Person at such date other than Subordinated Indebtedness, less Excess Cash Balances, determined on a consolidated basis in accordance with GAAP. -7- "CONSOLIDATED WORKING CAPITAL": at any date for any Person, the excess of Consolidated Current Assets on such date over Consolidated Current Liabilities on such date. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "CONTROL": as to any Person, the ability of any other Person, directly or indirectly, to exclusively direct or cause the direction of the management and policies of the first Person, whether by contract or otherwise. "CONTROL INVESTMENT AFFILIATE": as to any Person, any other Person that (a) directly or indirectly, is in Control of, is Controlled by, or is under common Control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies. "DEFAULT": any of the events specified in Section 8, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "DISPOSITION": with respect to any property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof (including by way of merger or consolidation and any sale- leaseback transaction). The terms "DISPOSE" and "DISPOSED OF" shall have correlative meanings. "DOCUMENTATION AGENT": Sun Trust, as the documentation agent for the Lenders under this Agreement and the other Loan Documents, together with any of its successors. "DOLLARS" and "$": dollars in lawful currency of the United States. "DOMESTIC SUBSIDIARY": any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States. "ELIGIBLE ACCOUNT DEBTOR": each of General Electric Corporation, Caterpillar Inc., Daimler Chrysler Corporation, New Venture Gear, Mannesmann (Rexroth), LucasVarity (Kelsey-Hayes), Boeing and Xerox Corporation. "ELIGIBLE INVENTORY": all inventory of the Precision Group Members ("INVENTORY"), other than Ineligible Inventory (as defined below), valued at the lower of cost or market value (in each case determined in accordance with GAAP), reduced by the value of reserves which have been recorded by any Precision Group Member with respect to obsolete, slow-moving or excess Inventory. For the purposes of this definition, an item of Inventory shall constitute "Ineligible Inventory" if: (a) such item of Inventory is not assignable or a first priority security interest in such item of Inventory in favor of the Administrative Agent for the benefit of the Lenders has not been obtained and fully perfected by filing Uniform Commercial Code financing statements against the relevant Precision Group Member; (b) such item of Inventory is subject to any Lien whatsoever, other than Liens in favor of the Administrative Agent for the benefit of the Lenders; (c) such item of Inventory (i) is damaged or not in good condition and not saleable consistent with past practices (to the extent not provided for by reserves as described above) or (ii) does not meet all -8- material standards imposed by any Governmental Authority having regulatory authority over such item of Inventory, its use or its sale; (d) such item of Inventory is not currently either readily usable or saleable, at prices approximating at least the cost thereof, in the normal course of the business of the relevant Precision Group Member (to the extent not provided for by reserves as described above); (e) any event shall have occurred or any condition shall exist with respect to such item of Inventory which would substantially impede the ability of the relevant Precision Group Member to continue to use or sell such item of Inventory in the normal course of business; (f) any claim disputing the title of the relevant Precision Group Member to, or right to possession of or dominion over, such item of Inventory shall have been asserted; (g) any representation or warranty contained in this Agreement or in any other Loan Document applicable to either Inventory in general or to any such specific item of Inventory has been breached with respect to such item of Inventory; (h) the relevant Precision Group Member does not have good and marketable title as sole owner of such item of Inventory; (i) such item of Inventory has been consigned to other Persons, or is located at, or in the possession of, a vendor of any Precision Group Member, or is in transit to or from, or held or stored by, third parties, unless (i) the Person holding such Inventory has entered into an agreement, satisfactory in form and substance to the Administrative Agent, providing for the waiver or subordination of any applicable Lien on the part of such Person with respect to such Inventory and providing the Administrative Agent with the right to repossess such Inventory upon the occurrence and during the continuance of an Event of Default and (ii) in the case of consigned inventory, the relevant Precision Group Member, in its capacity as consignor, shall have filed appropriate Uniform Commercial Code financing statements with respect to such Inventory; (j) such item of Inventory is located on a leasehold as to which the lessor has not entered into a landlord's waiver and consent, satisfactory in form and substance to the Administrative Agent, providing a waiver of any applicable Lien and providing the Administrative Agent with the right to receive notice of default, the right to repossess such item of Inventory at any time upon the occurrence or during the continuance of a Default or Event of Default and such other rights as may be acceptable to the Administrative Agent; provided, however, an item of Inventory shall not constitute "Ineligible Inventory" if (i) with respect to each of the Mortgaged Properties located in the state of California, there has been no Lien (either statutorily or at common law) created, incurred or imposed upon any Inventory by the landlord or (ii) with respect to the Mortgaged Properties located in the state of California as of the Closing Date, the landlord has delivered to Administrative Agent within 30 days of the Closing Date a letter whereby such landlord has agreed to provide Administrative Agent with a notice of default by Certified Fabricators under its lease; (k) such item of Inventory is located outside one of the states of the United States; (l) such item of Inventory is evidenced by an Account; (m) such item of Inventory is subject to any licensing, patent, royalty, trademark, trade name or copyright agreements with any third party from whom any Precision Group Member has received notice of -9- a dispute in respect of any such agreement, other than such claim which such Precision Group Member reasonably believes to be immaterial or without merit; (n) except in the case of Inventory owned by Galaxy, Nationwide and Certified, such item of Inventory consists of packing, packaging and/or shipping supplies or materials; or (o) such item of Inventory has been otherwise determined by the Administrative Agent (after consultation with the Borrower), exercising its commercially reasonable discretion, to be unacceptable because the Administrative Agent believes that such item of Inventory is not readily saleable under the customary terms on which it is usually sold (to the extent not provided for by reserves as specified above). "ELIGIBLE RECEIVABLES": the gross outstanding balance, determined in accordance with GAAP and stated on a basis consistent with the historical practices of the Precision Group Members as of the Closing Date, of accounts receivable of any Precision Group Member arising out of sales of goods or services made by any Precision Group Member in the ordinary course of business ("ACCOUNTS"), other than Ineligible Accounts (as defined below), less all finance charges, late fees and other fees that are unearned, and less the value of any accrual which has been recorded by any Precision Group Member with respect to downward price adjustments. For the purposes of this definition, an Account shall constitute an "Ineligible Account" if: (a) the Precision Group Members have not complied with all material Requirements of Law, including, without limitation, all laws, rules, regulations and orders of any governmental or judicial authority relating to truth in lending, billing practices, fair credit reporting, equal credit opportunity, debt collection practices and consumer debtor protection, applicable to such Account (or any related contracts) or affecting the collectability of such Account; (b) such Account is not assignable or a first priority security interest in such Account in favor of the Administrative Agent for the benefit of the Lenders has not been obtained and fully perfected by filing Uniform Commercial Code financing statements against the relevant Precision Group Member; (c) such Account is subject to any Lien whatsoever, other than Liens in favor of the Administrative Agent for the benefit of the Lenders; (d) the relevant Precision Group Member, in order to be entitled to collect such Account, is required to perform any additional service for, or perform or incur any additional obligation to, the Account debtor in respect of such Account; (e) such Account does not constitute a legal, valid and binding irrevocable payment obligation of the Account debtor in respect of such Account to pay the balance thereof in accordance with its terms or is subject to any defense, setoff, recoupment or counterclaim; (f) the Account debtor in respect of such Account is a Precision Group Member or an Affiliate, division or employee of any Precision Group Member; (g) such Account is an account of any Governmental Authority, unless all rights of the relevant Precision Group Member with respect to such Account have been assigned to the Administrative Agent in accordance with the Assignment of Claims Act of 1940, as amended; (h) an estimated or actual loss has been recognized in respect of such Account, as determined in accordance with the usual business practices of the relevant Precision Group Member (each such Account, a "DEFAULTED ACCOUNT"); -10- (i) 20% or more of the aggregate outstanding amount of all Accounts from the Account debtor in respect of such Account and its Affiliates constitutes Defaulted Accounts; (j) any representation or warranty contained in this Agreement or in any other Loan Documents applicable either to Accounts in general or to any such specific Account has been breached with respect to such Account; (k) 50% or more of the outstanding amount of all Accounts from the Account debtor in respect of such Account has become ineligible; (l) the Account debtor in respect of such Account has filed a petition for relief under the United States Bankruptcy Code (or similar action under any successor law or under any comparable law), made a general assignment for the benefit of creditors, had filed against it any petition or other application for relief under the United States Bankruptcy Code (or similar action under any successor law or under any comparable law), failed, suspended business operations, become insolvent, called a meeting of its creditors for the purpose of obtaining any financial concession or accommodation, or had or suffered a receiver or a trustee to be appointed for all or a significant portion of its assets or affairs, in each case except to the extent such matters have been dismissed or terminated or otherwise ceased to be applicable; (m) any portion of such Account has remained unpaid for a period exceeding 90 days from the due date (but only to the extent of such overdue portion) or any Precision Group Member has reason to believe such Account is uncollectable; (n) the sale represented by such Account is to an Account debtor organized or located outside one of the states of the United States; (o) the Account debtor in respect of such Account is a supplier or creditor of any Precision Group Member (but only to the extent of the lesser of (i) the amount owing from such Account debtor to the relevant Precision Group Member pursuant to Accounts that are otherwise eligible and (ii) the amount owing to such Account debtor by the relevant Precision Group Member); (p) such Account is not denominated in Dollars or is payable outside the United States; (q) the sale represented by such Account is on a guaranteed sale, sale-or-return, consignment, or sale on approval basis or is subject to any right of return, setoff or chargeback; (r) the relevant Precision Group Member, or any other party to such Account, is in default in the performance or observance of any of the terms thereof in any material respect; (s) the relevant Precision Group Member does not have good and marketable title to such Account as sole owner of such Account; (t) such Account does not arise from the sale and delivery of goods or rendition of services in the ordinary course of business to the Account debtor in respect of such Account; (u) such Account is on terms other than those normal or customary in the business of the relevant Precision Group Member; (v) such Account has associated payment terms exceeding 100 days from invoice date; -11- (w) except in the case of Accounts owing by any Eligible Account Debtor, if such Account were to constitute an Eligible Receivable, more than 15% of all Eligible Receivables would be owing from the Account debtor in respect of such Account or any of its Affiliates, in which case only that portion of the Eligible Receivables owing from such Account debtor representing amounts in excess of 15% of all Eligible Receivables shall constitute Ineligible Accounts; (x) any amounts payable under or in connection with such Account are evidenced by chattel paper, promissory notes or other instruments, unless such chattel paper, promissory notes or instruments have been endorsed and delivered to the Administrative Agent; (y) such Account has been paid by a check which has been returned for insufficient funds if such check is in an amount of at least $100,000; or (z) such Account has been placed with an attorney or other third party for collection. "ENVIRONMENTAL CERTIFICATE": a certificate duly executed by a Responsible Officer substantially in the form of Exhibit C-3. "ENVIRONMENTAL LAWS": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "EUROCURRENCY LIABILITIES": the meaning specified in Regulation D of the Board, as in effect from time to time. "EURODOLLAR LOANS": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "EURODOLLAR RATE": for any Interest Period for each Eurodollar Tranche, an interest rate PER ANNUM equal to the rate PER ANNUM obtained by DIVIDING (a) the average (rounded upward to the nearest whole multiple of 1/16 of 1% PER ANNUM, if such average is not such a multiple) of the rates PER ANNUM at which deposits in U.S. Dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at approximately 10:00 A.M. (New York time) three Business Days before the first day of such Interest Period in an amount substantially equal to such Eurodollar Tranche and for a period equal to such Interest Period by (b) a percentage equal to 100% MINUS the Eurodollar Rate Reserve Percentage for such Interest Period. The Eurodollar Rate for each Interest Period for each Eurodollar Tranche shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, SUBJECT, HOWEVER, to the provisions of Section 2.13. "EURODOLLAR RATE RESERVE PERCENTAGE": for any Interest Period for each Eurodollar Tranche the reserve percentage (if any) applicable three Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding $1,000,000,000 with respect to liabilities or assets consisting of or including Eurocurrency -12- Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Tranche is determined) having a term equal to such Interest Period. "EURODOLLAR TRANCHE": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "EVENT OF DEFAULT": any of the events specified in Section 8, provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "EXCESS CASH BALANCES": at any date for any Person, the greater of (i) zero and (ii) existing cash balances minus $250,000. "EXCESS CASH FLOW": for any fiscal year of the Precision Group Members, the excess, if any, of (a) the sum, without duplication, of (i) Consolidated Net Income for such fiscal year, (ii) an amount equal to the amount of all non-cash charges (including depreciation and amortization) deducted in arriving at such Consolidated Net Income, (iii) decreases in Consolidated Working Capital for such fiscal year, and (iv) an amount equal to the aggregate net non-cash loss on the Disposition of property by the Precision Group Members during such fiscal year (other than sales of inventory in the ordinary course of business), to the extent deducted in arriving at such Consolidated Net Income, over (b) the sum, without duplication, of (i) an amount equal to the amount of all non-cash income included in arriving at such Consolidated Net Income, (ii) the aggregate amount actually paid by the Precision Group Members in cash during such fiscal year on account of Capital Expenditures (excluding the principal amount of Indebtedness (other than Revolving Loans) incurred in connection with such expenditures and any such expenditures financed with the proceeds of any Reinvestment Deferred Amount), (iii) the aggregate amount of all prepayments of Revolving Loans during such fiscal year to the extent accompanying permanent optional reductions of the Revolving Commitments and all optional prepayments of the Term Loans during such fiscal year, (iv) the aggregate amount of all regularly scheduled principal payments of Funded Debt (including the Term Loans) of the Precision Group Members made during such fiscal year (including any such payments resulting from scheduled permanent reductions of any revolving credit facility), (v) increases in Consolidated Working Capital for such fiscal year, and (vi) an amount equal to the aggregate net non-cash gain on the Disposition of property by the Precision Group Members during such fiscal year (other than sales of inventory in the ordinary course of business), to the extent included in arriving at such Consolidated Net Income. "EXCESS CASH FLOW APPLICATION DATE": as defined in Section 2.7(c). "EXCLUDED FOREIGN SUBSIDIARY": any Foreign Subsidiary in respect of which either (a) the pledge of all of the Capital Stock of such Subsidiary as Collateral or (b) the guaranteeing by such Subsidiary of the Obligations, would, in the good faith judgment of the Borrower, result in adverse tax consequences to the Precision Group Members. "EXISTING CREDIT FACILITY": the credit facility, dated as of September 30, 1998 and as amended to the date hereof, among the Borrower, Galaxy Hold Co., Inc., Mid State Holding Co., Inc., the lenders party thereto and Bank of America National Trust and Savings Association, as administrative agent. "FACILITY": each of (a) the Term Commitments and the Term Loans made thereunder (the "TERM FACILITY") and (b) the Revolving Commitments and the extensions of credit made thereunder (the "REVOLVING FACILITY"). "FEDERAL FUNDS EFFECTIVE RATE": for any period, a fluctuating interest rate PER ANNUM equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with -13- members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FOREIGN SUBSIDIARY": any Subsidiary of Precision that is not a Domestic Subsidiary. "FUNDED DEBT": as to any Person, all Indebtedness of such Person that matures more than one year from the date of its creation or matures within one year from such date but is renewable or extendible, at the option of such Person, to a date more than one year from such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during a period of more than one year from such date, including all current maturities and current sinking fund payments in respect of such Indebtedness whether or not required to be paid within one year from the date of its creation and, in the case of the Borrower, Indebtedness in respect of the Loans. "FUNDING OFFICE": the office of the Administrative Agent specified in Section 10.2 or such other office as may be specified from time to time by the Administrative Agent as its funding office by written notice to the Borrower and the Lenders. "GAAP": generally accepted accounting principles in the United States as in effect from time to time, except that for purposes of Section 7.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent audited financial statements delivered pursuant to Section 4.1 (b). In the event that any "Accounting Change" (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower and the Administrative Agent agree to enter into negotiations in order to amend such provisions of this Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating the financial condition of the Precision Group Members shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower, the Administrative Agent and the Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. "ACCOUNTING CHANGES" refers to changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the SEC. "GALAXY": Galaxy Industries Corporation, a Michigan corporation. "GALAXY ACQUISITION": the acquisition of 100% of the Capital Stock of Galaxy pursuant to the Galaxy Acquisition Agreement. "GALAXY ACQUISITION AGREEMENT": the Merger Agreement, dated as of September 30, 1998, among Galaxy, the Persons listed on Schedule I thereto, Galaxy Hold Co., Inc. and Galaxy Acquisition, Inc. "GENERAL AUTOMATION": GA Acquisition Illinois, Inc., an Illinois corporation to be renamed General Automation, Inc. after the General Automation Acquisition. "GENERAL AUTOMATION ACQUISITION": the acquisition by General Automation of substantially all of the assets and certain of the liabilities of General Automation, Inc., an Illinois corporation, on terms satisfactory to the Administrative Agent. -14- "GENERAL AUTOMATION ACQUISITION DOCUMENTATION": the documentation effecting the General Automation Acquisition, including all schedules, annexes and exhibits thereto and all side letters and agreements affecting the terms thereof or entered into in connection therewith. "GOVERNMENTAL AUTHORITY": any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners). "GUARANTEES": the Holdco Guarantee and the Subsidiary Guarantees, substantially in the form of Exhibits A-1 and A-2, respectively, as the same may be amended, supplemented or otherwise modified from time to time. "GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"), any obligation of (a) the guaranteeing person or (b) another Person (including any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term "Guarantee Obligation" shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "GUARANTORS": the collective reference to Holdco and the Subsidiary Guarantors. "HARVEY GROUP": the collective reference to Harvey & Co. and its Control Investment Affiliates. "HEDGE AGREEMENTS": all swaps, caps, collars or similar arrangements providing for protection against fluctuations in interest rates, currency exchange rates or commodities prices or the exchange of nominal interest obligations, either generally or under specific contingencies. "HOLDCO" means Precision Partners Holding Company, a Delaware corporation. "HOLDCO GUARANTEE": the guarantee by Holdco, substantially in the form of Exhibit A-1. "HOLDCO PREFERRED" means the up to $27 million initial liquidation preference amount of preferred equity issued by Holdco and not paying or accruing dividends. -15- "INDEBTEDNESS": of any Person means, without duplication: (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (c) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person; (d) all obligations of such Person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued obligations incurred in the ordinary course of business); (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed (provided that the amount of such Indebtedness will be limited to the value of the properly subject to such Lien); (f) all guarantees by such Person of Indebtedness of others; (g) all Capital Lease Obligations of such Person; (h) all net payment obligations of such Person in respect of Hedge Agreements; (i) all obligations of such Person with respect to redeemable preferred Capital Stock (or Capital Stock convertible or exchangeable for redeemable preferred stock or Indebtedness) issued by such Person as to which dividends are required to be paid in cash, with the amount of Indebtedness represented thereby being equal to the greater of its voluntary or involuntary purchase price or liquidation preference and maximum repurchase price; and (j) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner. "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "INSOLVENT": pertaining to a condition of Insolvency. "INTELLECTUAL PROPERTY": the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "INTEREST PAYMENT DATE": (a) as to any Base Rate Loan, the last Business Day of each March, June, September and December to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day that is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period and (d) as to any Loan (other than any Revolving Loan that is a Base Rate Loan), the date of any repayment or prepayment made in respect thereof. "INTEREST PERIOD": as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; PROVIDED that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension -16- would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) the Borrower may not select an Interest Period for a particular Facility that would extend beyond the Scheduled Revolving Termination Date or beyond the date final payment is due on the Term Loans, as the case may be; and (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "INVESTMENTS": as defined in Section 7.7. "ISSUING LENDER": Bank of America, in its capacity as issuer under the Existing Credit Facility of the Letter of Credit outstanding on the Closing Date, and Citicorp USA, in its capacity as issuer of any other Letter of Credit hereunder. "L/C COMMITMENT": $2,000,000. "L/C FEE PAYMENT DATE": the last Business Day of each March, June, September and December and the last day of the Revolving Commitment Period. "L/C OBLIGATIONS": at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit that have not then been reimbursed pursuant to Section 3.5. "L/C PARTICIPANTS": the collective reference to all the Revolving Lenders other than the Issuing Lender. "LENDERS": as defined in the preamble hereto. "LETTERS OF CREDIT": as defined in Section 3.1(a). "LIEN": any mortgage, deed of trust, pledge, hypothecation, assignment, claim, charge, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing) or any filing of any financing statement under the Uniform Commercial Code or any other similar notice of Lien under any similar notice or recording statute of any Governmental Authority, including any easement, right-of-way or other encumbrance on title to real property, in each of the foregoing cases whether voluntary or imposed by law, and any agreement to give any of the foregoing. "LOAN": any loan made by any Lender pursuant to this Agreement. "LOAN DOCUMENTS": this Agreement, the Letters of Credit, the Security Documents and the Notes and each of the other documents, agreements, instruments, opinions and certificates now or hereafter executed and delivered in connection herewith and therewith. "LOAN PARTIES": the collective reference to Holdco, the Borrower and each Subsidiary Guarantor. -17- "MAJORITY FACILITY LENDERS": with respect to any Facility, the holders of more than 50% of that portion of the Aggregate Exposure allocated to such Facility. "MATERIAL ACQUISITION" means any acquisition of property or series of related acquisitions of property that (a) constitutes assets comprising all or substantially all of an operating unit of a business or constitutes all or substantially all of the common stock of a Person and (b) involves the payment of consideration by the Precision Group Members in excess of $3,000,000. "MATERIAL ADVERSE EFFECT": (a) a materially adverse effect on the business, condition (financial or otherwise), operations, performance or properties of the Precision Group Members, taken as a whole, (b) a material impairment of the ability of the Precision Group Members, taken as a whole, to perform their collective obligations under the Loan Documents, or (c) a material impairment of the rights of or benefits available to the Administrative Agent and the Lenders under the Loan Documents. "MATERIAL DISPOSITION": means any Disposition of property or series of related Dispositions of property that yields gross proceeds to the Precision Group Members in excess of $3,000,000. "MATERIALS OF ENVIRONMENTAL CONCERN": any pollutant, contaminant, gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous, toxic or other substances, materials, wastes, constituents or chemicals defined or regulated under any applicable Environmental Law, including without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "MID STATE": Mid State Machine Products, a Maine corporation. "MID STATE ACQUISITION": the acquisition of 100% of the Capital Stock of Mid State pursuant to the Mid State Acquisition Agreement. "MID STATE ACQUISITION AGREEMENT": the Redemption and Merger Agreement, dated as of September 17, 1998, among Mid State, S. Douglas Sukeforth, Mid State Holding Co., Inc. and Mid State Acquisition, Inc. "MID STATE FOUNDATION": Mid State Foundation, a foundation organized under the laws of the State of Maine. "MORTGAGED PROPERTIES": the real properties listed on Schedule 1.1B, as to which the Administrative Agent for the benefit of the Lenders shall be granted a Lien pursuant to the Mortgages. "MORTGAGES": each of the fee and leasehold mortgages and deeds of trust made by any Loan Party in favor of or for the benefit of the Administrative Agent for the benefit of the Lenders, substantially in the form of Exhibit D (with such changes thereto as shall be advisable under the law of the jurisdiction in which such mortgage or deed of trust is to be recorded and which shall include, without limitation, the Collateral Assignment), as the same may be amended, supplemented or otherwise modified from time to time. "MULTIEMPLOYER PLAN": a Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NATIONSBANK": NationsBank, N.A. "NATIONWIDE": Nationwide Acquisition Delaware, Inc., a Delaware corporation to be renamed Nationwide Precision Products Corp. after the Nationwide Acquisition. -18- "NATIONWIDE ACQUISITION": the acquisition by Nationwide of substantially all of the assets and certain of the liabilities of Nationwide Precision Products Corporation, a New York corporation, on terms satisfactory to the Administrative Agent. "NATIONWIDE ACQUISITION DOCUMENTATION": the documentation effecting the Nationwide Acquisition including all schedules, annexes and exhibits thereto and all side letters and agreements affecting terms thereof or entered into in connection therewith. "NET CASH PROCEEDS": (a) in connection with any Asset Sale or any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such Asset Sale or Recovery Event, net of attorneys' fees, accountants' fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset that is the subject of such Asset Sale or Recovery Event (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be payable currently as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), and (b) in connection with any issuance or sale of equity securities or debt securities or instruments or the incurrence of loans, the cash proceeds received from such issuance or incurrence, net of attorneys' fees, investment banking fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith. "NON-EXCLUDED TAXES": as defined in Section 2.16(a). "NON-U.S. LENDER": as defined in Section 2.16(d). "NOTES": the collective reference to any promissory note evidencing Loans. "OBLIGATIONS": the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Agents or to any Lender (or, in the case of Hedge Agreements, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Hedge Agreement entered into with any Lender or any affiliate of any Lender or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Agents or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise. "OTHER TAXES": any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document. "PARTICIPANT": as defined in Section 10.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor). -19- "PERMITTED ACQUISITIONS": One or more acquisitions (whether by asset acquisition or the acquisition of Capital Stock of the target) of a Person, division or line of business as an entirety, PROVIDED that: (i) no Default or Event of Default shall have occurred and be continuing (and none shall occur as a result of such acquisition); (ii) no single acquisition exceeds $15 million calculated on the basis of the value ("Value") of the Person, division or line of business being so acquired, including assumed Indebtedness; (iii) the aggregate Value for all such acquisitions during a twelve month period shall not exceed $60 million; (iv) the subject acquisition is of a Person, division or business line similar to the businesses of the Borrower; (v) the substantive terms and conditions of such acquisition are acceptable to the Administrative Agent and (vi) after giving effect to such acquisitions, the Borrower will be in PRO FORMA compliance with the covenants set forth in Section 7.1. "PERMITTED INVESTORS": the collective reference to the Carlisle Group, the Harvey Group and the Saunders Group. "PERMITTED LIENS": as defined in Section 7.3. "PERMITTED SENIOR SUBORDINATED ADD-ON INDEBTEDNESS": Indebtedness of the Borrower issued in original aggregate principal amount not to exceed $60 million in a form and pursuant to terms substantially similar to the Senior Subordinated Notes, the proceeds of which are used solely to fund Permitted Acquisitions. "PERSON": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "PLAN": at a particular time, any employee benefit plan that is covered by Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PRECISION": Precision Partners L.L.C., a Delaware limited liability company. "PRECISION GROUP MEMBERS": the collective reference to the Borrower and each direct or indirect Subsidiary of the Borrower. "PRECISION REORGANIZATION": the corporate reorganization of Precision as set forth in the organizational structure flip-book previously delivered to the Administrative Agent and set forth as Schedule 5.1(b). "PRICING GRID": the pricing grid attached hereto as Annex A. "PRIOR LIENS": Liens which, pursuant to the provisions of any Security Document, are or may be superior to the Lien of such Security Document. "PRO FORMA FINANCIAL STATEMENTS": as defined in Section 4.l(a). "PROJECTIONS": as defined in Section 6.2(c). "PROPERTIES": as defined in Section 4.17(a). "RECOVERY EVENT": shall mean, with respect to any property, real or personal, of any Person, any loss of title with respect to real property or any loss of or damage to or destruction of, or any condemnation or other taking (including by any Governmental Authority) of, such property (including real property) for which such Person -20- receives insurance proceeds or proceeds of a condemnation award or other compensation. "Recovery Event" shall include but not be limited to any taking of any Mortgaged Property or real property of any Loan Party or any part thereof, in or by condemnation or other eminent domain proceedings pursuant to any law, general or special, or by reason of the temporary requisition of the use or occupancy of any Mortgaged Property or real property of any Loan Party or any part thereof, by any Governmental Authority, civil or military. "REFERENCE BANKS": Citicorp U.S.A., Inc. "REFERENCE RATE": the rate of interest in effect for such day as publicly announced from time to time by Citibank, N.A. in New York, New York, as its "reference rate". The "reference rate" is a rate set by Citibank, N.A. based upon various factors including Citibank, N.A.'s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in the reference rate announced by Citibank, N.A. shall take effect at the opening of business on the day specified in the public announcement of such change. "REGISTER": as defined in Section 10.6(d). "REGULATION U": Regulation U of the Board as in effect from time to time. "REIMBURSEMENT OBLIGATION": the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit. "REINVESTMENT DEFERRED AMOUNT": with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by any Precision Group Member in connection therewith that are not applied to prepay the Term Loans or reduce the Revolving Commitments pursuant to Section 2.7(c) as a result of the delivery of a Reinvestment Notice. "REINVESTMENT EVENT": any Asset Sale or Recovery Event in respect of which the Borrower has delivered a Reinvestment Notice. "REINVESTMENT NOTICE": a written notice executed by a Responsible Officer stating that no Event of Default has occurred and is continuing and that the Borrower (directly or indirectly through another Precision Group Member) intends and expects to use all or a specified portion of the Net Cash Proceeds (i) in connection with an Asset Sale to acquire assets useful in its business or (ii) in connection with a Recovery Event to perform a Restoration (as defined in the applicable Security Document). "REINVESTMENT PREPAYMENT AMOUNT": with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire assets useful in the business of the Precision Group Members. "REINVESTMENT PREPAYMENT DATE": with respect to any Reinvestment Event, the earlier of (a) the date occurring twelve months after such Reinvestment Event and (b) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire assets useful in the business of the Precision Group Members with all or any portion of the relevant Reinvestment Deferred Amount. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. -21- "REPORTABLE EVENT": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. Section 4043. "REQUIRED LENDERS": at any time, the holders of more than 50% of (a) until the Closing Date, the Commitments then in effect and (b) thereafter, the sum of (i) the aggregate unpaid principal amount of the Term Loans then outstanding and (ii) the Revolving Commitments then in effect or, in the case of the Revolving Facility, if the Revolving Commitments have been terminated, the Total Revolving Extensions of Credit then outstanding. "REQUIRED PREPAYMENT LENDERS": the Majority Facility Lenders in respect of each Facility. "REQUIREMENT OF LAW": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER": the chief executive officer, president or chief financial officer of the Borrower, but in any event, with respect to financial matters, the chief financial officer of the Borrower. "RESTRICTED PAYMENTS": as defined in Section 7.6. "REVOLVING COMMITMENT": as to any Lender, the obligation of such Lender, if any, to make Revolving Loans and participate in Letters of Credit in an aggregate principal and/or face amount not to exceed the amount set forth under the heading "Revolving Commitment" opposite such Lender's name on Schedule 1.1A or in the Assignment and Acceptance pursuant to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof. "REVOLVING COMMITMENT PERIOD": the period from and including the Closing Date to the Scheduled Revolving Termination Date. "REVOLVING EXTENSIONS OF CREDIT": as to any Revolving Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Loans held by such Lender then outstanding and (b) such Lender's Revolving Percentage of the L/C Obligations then outstanding. "REVOLVING LENDER": each Lender that has a Revolving Commitment or that holds Revolving Loans. "REVOLVING LOANS": as defined in Section 2.2(a). "REVOLVING PERCENTAGE": as to any Revolving Lender at any time, the percentage which such Lender's Revolving Commitment then constitutes of the Total Revolving Commitments (or, at any time after the Revolving Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Revolving Loans then outstanding constitutes of the aggregate principal amount of the Revolving Loans then outstanding). "SAUNDERS GROUP": the collective reference to Saunders Karp & Megrue and its Control Investment Affiliates. "SCHEDULED REVOLVING TERMINATION DATE": March 31, 2005. -22- "SEC": the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority. "SECURITIES PLEDGE AGREEMENT": the Securities Pledge Agreement to be executed and delivered by Holdco as of the Closing Date, substantially in the form of Exhibit K hereto, as the same may be amended, supplemented or otherwise modified from time to time. "SECURITY AGREEMENT": the Security Agreement to be executed and delivered by the Borrower and each Subsidiary Guarantor, substantially in the form of Exhibit I, as the same may be amended, supplemented or otherwise modified from time to time. "SECURITY DOCUMENTS": the collective reference to the Holdco Guarantee, Subsidiary Guarantees, the Security Agreement, the Securities Pledge Agreement, the Mortgages and all other security documents hereafter delivered to the Administrative Agent granting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document. "SENIOR SUBORDINATED INDENTURE" means the Indenture pursuant to which the Borrower issued the Senior Subordinated Notes. "SENIOR SUBORDINATED NOTES" means the 12% Senior Subordinated Notes due 2009 issued by the Borrower on or immediately prior to the date of the initial funding hereunder, the proceeds of which will be used to pay a portion of the consideration payable in connection with the Acquisitions. "SINGLE EMPLOYER PLAN": any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan. "SOLVENCY CERTIFICATE": a certificate duly executed by a Responsible Officer substantially in the form of Exhibit C-2. "SOLVENT": when used with respect to any Person, means that, as of any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise," as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim," and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "SPONSORS": the collective reference to Saunders Karp & Megrue, Carlisle Enterprises and Harvey & Co. "SUBORDINATED INDEBTEDNESS": any Indebtedness which is subordinate or junior in right of payment to the Loans by the express terms of such Indebtedness or pursuant to a separate written agreement, in each case in form and substance satisfactory to the Required Lenders. -23- "SUBSIDIARY": as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the relevant Precision Group Member. Mid State Foundation shall not constitute a Subsidiary for the purposes of this Agreement and the other Loan Documents. "SUBSIDIARY GUARANTEE": each guarantee by a Subsidiary Guarantor, substantially in the form of Exhibit A-2. "SUBSIDIARY GUARANTOR": each Subsidiary of the Borrower, other than Mid State Foundation and any Excluded Foreign Subsidiary. "SUNTRUST": SunTrust Bank, Atlanta. "SYNDICATION AGENT": NationsBank, as the syndication agent for the Lenders under this Agreement and the other Loan Documents, together with any of its Successors. "TERM COMMITMENT": as to any Lender, the obligation of such Lender, if any, to make Term Loans to the Borrower hereunder in an aggregate principal amount not to exceed the amount set forth under the heading "TERM COMMITMENT" opposite such Lender's name on Schedule 1.1A. "TERM LENDER": each Lender that has a Term Commitment or that holds Term Loans. "TERM LOANS": as defined in Section 2.1. "TERM PERCENTAGE": as to any Term Lender at any time, the percentage which such Lender's Term Commitment then constitutes of the aggregate Term Commitments (or, at any time after the Term Commitments have terminated, the percentage which the aggregate principal amount of such Lender's Term Loans then outstanding constitutes of the aggregate principal amount of the Term Loans then outstanding). "TOTAL REVOLVING COMMITMENTS": at any time, the aggregate amount of the Revolving Commitments then in effect. The amount of the Total Revolving Commitment as of the Closing Date is $25,000,000, including the L/C Commitment. "TOTAL REVOLVING EXTENSIONS OF CREDIT": at any time, the aggregate amount of the Revolving Extensions of Credit of the Revolving Lenders outstanding at such time. "TRANSFEREE": any Assignee or Participant. "TYPE": as to any Loan, its nature as a Base Rate Loan or a Eurodollar Loan. "UNAPPLIED EXCESS CASH FLOW": with respect to any fiscal year of the Precision Group Members, an amount equal to 50% of the Excess Cash Flow for such fiscal year. "UNIFORM CUSTOMS": the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. -24- "UNITED STATES": the United States of America. "WHOLLY OWNED QUALIFIED PRECISION GROUP MEMBER": any Loan Party that is a Wholly Owned Subsidiary of the Borrower. "WHOLLY OWNED SUBSIDIARY": as to any Person, any other Person all of the Capital Stock of which (other than directors' qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries. "YEAR 2000 PROBLEM": the inability of computers, as well as embedded microchips in non- computing devices, to perform properly date-sensitive functions with respect to certain dates prior to and after December 31, 1999. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, (i) accounting terms relating to the Precision Group Members not deLmed in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, (ii) the words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation" and (iii) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, Capital Stock, securities, revenues, accounts, leasehold interests and contract rights. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 TERM COMMITMENTS. Subject to the terms and conditions hereof, each Term Lender severally agrees to make a term loan (a "TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the Term Commitment of such Lender. The Term Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.3 and 2.9. The Term Commitments shall automatically terminate on the Closing Date (after giving effect to the borrowings thereunder made on such date). 2.2 REVOLVING COMMITMENTS; BORROWING BASE PREPAYMENTS. (a) Subject to the terms and conditions hereof, each Revolving Lender severally agrees to make revolving credit loans ("REVOLVING LOANS") to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Revolving Percentage of the L/C Obligations then outstanding, does not exceed the amount of such Lender's Revolving Commitment. During the Revolving Commitment Period the Borrower may use the Revolving Commitments by borrowing, prepaying the Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Revolving Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.3 and 2.9. -25- (b) If on any date (including any date on which a Borrowing Base Certificate is delivered pursuant to Section 6.2(e)) the Total Revolving Extensions of Credit as of such date exceed the then applicable Borrowing Base, then, without notice or demand, the Borrower shall, on such date, prepay the Revolving Loans and, if necessary, cash collateralize the Letters of Credit by depositing an amount equal to such excess in a cash collateral account established with the Administrative Agent for the benefit of the Lenders on terms and conditions satisfactory to the Administrative Agent 2.3 PROCEDURE FOR BORROWING; SCHEDULED REPAYMENTS. The Borrower shall give the Administrative Agent irrevocable notice in the form of Exhibit H-1 (which notice must be received by the Administrative Agent prior to (a) 12:00 Noon, New York City time, three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) 11:00 A.M., New York City time, on the requested Borrowing Date, in the case of Base Rate Loans), specifying (i) the amount and Type of Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor. Any Loans made on the Closing Date shall initially be Base Rate Loans and, unless otherwise agreed by the Administrative Agent in its sole discretion, no Loan may be made as, converted into or continued as a Eurodollar Loan having an Interest Period in excess of one month prior to the date that is 60 days after the Closing Date. Each borrowing shall be in an amount equal to (x) in the case of Base Rate Loans, $500,000 or a whole multiple of $100,000 in excess thereof (or, if the then aggregate unutilized Commitments under the relevant Facility are less than $500,000, such lesser amount) and (y) in the case of Eurodollar Loans, $500,000 or a whole multiple of $100,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each relevant Lender thereof. Each relevant Lender will make the amount of its PRO RATA share of each borrowing available to the Administrative Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the relevant Lenders and in like funds as received by the Administrative Agent. (a) The Term Loans of each Term Lender shall mature in 20 quarterly installments, each of which shall be in an amount equal to such Lender's Term Percentage multiplied by the amount set forth below opposite such installment:
INSTALLMENT PRINCIPAL AMOUNT ----------- ---------------- June 30, 2000 $ 805,000.00 September 30, 2000 $ 805,000.00 December 31, 2000 $ 805,000.00 March 31, 2001 $ 805,000.00 June 30, 2001 $ 920,000.00 September 30, 2001 $ 920,000.00 December 31, 2001 $ 920,000.00 March 31, 2002 $ 920,000.00 June 30, 2002 $ 1,150,000.00 September 30, 2002 $ 1,150,000.00 December 31, 2002 $ 1,150,000.00 March 31, 2003 $ 1,150,000.00 June 30, 2003 $ 1,380,000.00 September 30, 2003 $ 1,380,000.00 December 31, 2003 $ 1,380,000.00 March 31, 2004 $ 1,380,000.00
-26-
INSTALLMENT PRINCIPAL AMOUNT ----------- ---------------- June 30, 2004 $ 1,495,000.00 September 30, 2004 $ 1,495,000.00 December 31, 2004 $ 1,495,000.00 March 31, 2005 $ 1,495,000.00
(b) The Borrower shall repay all outstanding Revolving Loans on the Scheduled Revolving Termination Date. 2.4 COMMITMENT FEES, ETC. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Revolving Lender a commitment fee for the period from and including the Closing Date to the date the Revolving Commitments have been terminated, computed at the Commitment Fee Rate on the actual daily amount of the Available Revolving Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the last Business Day of each March, June, September and December and on the date the Revolving Commitments have been terminated, commencing on the first of such dates to occur after the date hereof. (b) The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the dates previously agreed to in writing by the Borrower and the Administrative Agent. 2.5 TERMINATION OR REDUCTION OF COMMITMENTS. The Borrower shall have the right, upon not less than two Business Days' notice to the Administrative Agent, to terminate the Commitments under any Facility or, from time to time, to reduce the amount of such Commitments; PROVIDED that no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the Total Revolving Commitments. Any such reduction shall be in an amount equal to $500,000, or a whole multiple thereof, and shall reduce permanently the relevant Commitments then in effect 2.6 OPTIONAL PREPAYMENTS. The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty, upon irrevocable notice delivered to the Administrative Agent at least two Business Days prior thereto in the case of Eurodollar Loans and at least one Business Day prior thereto in the case of Base Rate Loans, which notice shall specify the date and amount of prepayment and whether the prepayment is of Eurodollar Loans or Base Rate Loans; PROVIDED, that if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.16. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with (except in the case of Revolving Loans that are Base Rate Loans) accrued interest to such date on the amount prepaid. Partial prepayments of Term Loans and Revolving Loans shall be in an aggregate principal amount equal to (a) in the case of Base Rate Loans, $100,000 or a whole multiple thereof and (b) in the case of Eurodollar Loans, $500,000 or a whole multiple of $100,000 in excess thereof. 2.7 MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS. (a) Unless the Required Prepayment Lenders shall otherwise agree, if any Capital Stock shall be issued or sold by Holdco or the Borrower or if any Indebtedness shall be incurred by any Precision Group Member (excluding any Indebtedness incurred in accordance with Section 7.2), an amount equal to 50% of the Net Cash Proceeds thereof (in the case of Capital Stock) or 100% of the Net Cash Proceeds thereof (in the case of Indebtedness) shall be applied on the date of such issuance or incurrence first towards the prepayment of the Term Loans and then towards the reduction of the Revolving Commitments as set forth in Section 2.7(e); PROVIDED, that no such prepayment will be required with respect to any capital contribution made by any Sponsor directly or indirectly to Holdco (and contributed as common equity to the -27- Borrower) for the purpose of funding a particular Capital Expenditure or Permitted Acquisition if such proceeds are used for such Capital Expenditure or Permitted Acquisition substantially concurrently with the making of such capital contribution. (b) Unless the Required Prepayment Lenders shall otherwise agree, if on any date any Precision Group Member shall receive Net Cash Proceeds from any Asset Sale or Recovery Event, then, unless a Reinvestment Notice shall be delivered in respect thereof, such Net Cash Proceeds shall be applied on such date first towards the prepayment of the Term Loans and then towards the reduction of the Revolving Commitments as set forth in Section 2.7(d); PROVIDED, that, notwithstanding the foregoing, (i) the aggregate Net Cash Proceeds of Asset Sales and Recovery Events that may be excluded from the foregoing requirement pursuant to a Rein-vestment Notice shall not exceed $5,000,000 in any fiscal year of the Precision Group Members and (ii) on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Term Loans and the reduction of the Commitments as set forth in Section 2.7(d). (c) Unless the Required Prepayment Lenders shall otherwise agree, if, for any fiscal year of the Precision Group Members commencing with the fiscal year ending December 31, 1999, there shall be Excess Cash Flow, the Borrower shall, on the relevant Excess Cash Flow Application Date, apply 50% of such Excess Cash Flow first towards the prepayment of the Term Loans and then towards the reduction of the Revolving Commitments as set forth in Section 2.7(d); PROVIDED that no such prepayment will be required for so long as the Consolidated Leverage Ratio then in effect is less than 3.0 to 1.0. Each such prepayment and commitment reduction shall be made on a date (an "EXCESS CASH FLOW APPLICATION DATE") no later than five days after the earlier of (i) the date on which the financial statements of the Precision Group Members referred to in Section 6.1 (a), for the final year with respect to which such prepayment is made, are required to be delivered to the Lenders and (ii) the date such financial statements are actually delivered. (d) Amounts to be applied in connection with prepayments and Commitment reductions made pursuant to Section 2.7 shall be applied, first to prepay the Term Loans and, second, to reduce permanently the Revolving Commitments. Amounts applied to prepay Term Loans shall reduce future amortization payments on a PRO RATA basis. Any such reduction of the Revolving Commitments shall be accompanied by prepayment of the Revolving Loans to the extent, if any, that the Total Revolving Extensions of Credit exceed the amount of the Total Revolving Commitments as so reduced, PROVIDED that if the aggregate principal amount of Revolving Loans then outstanding is less than the amount of such excess (because L/C Obligations constitute a portion thereof), the Borrower shall, to the extent of the balance of such excess, replace outstanding Letters of Credit and/or deposit an amount in cash in a cash collateral account established with the Administrative Agent for the benefit of the Lenders on terms and conditions satisfactory to the Administrative Agent. The application of any prepayment pursuant to Section 2.7 shall be made, FIRST, to Base Rate Loans and, SECOND, to Eurodollar Loans. Each prepayment of the Loans under Section 2.7 (except in the case of Revolving Loans that are Base Rate Loans) shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid. (e) Concurrently with the application of any amount pursuant to this Section 2.7, the Borrower shall furnish to the Administrative Agent a certificate setting forth in reasonable detail a calculation of the amount required to be so applied. 2.8 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may elect from time to time to convert Eurodollar Loans to Base Rate Loans by giving the Administrative Agent irrevocable notice of such election in the form of Exhibit H-2 no later than 12:00 Noon, New York City time, one Business Day prior to the effective date thereof, PROVIDED that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans to Eurodollar Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such -28- election in the form of Exhibit H-2 no later than 12:00 Noon, New York City time, three Business Days prior to the effective date thereof, PROVIDED that no Base Rate Loan under a particular Facility may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Administrative Agent or the Majority Facility Lenders in respect of such Facility have determined in its or their sole discretion not to permit such conversions. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. (b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent in the form of Exhibit H-2, and in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, PROVIDED that no Eurodollar Loan under a particular Facility may be continued as such when any Event of Default has occurred and is continuing and the Administrative Agent has or the Majority Facility Lenders in respect of such Facility have determined in its or their sole discretion not to permit such continuations, and PROVIDED, FURTHER, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. 2.9 LIMITATIONS ON EURODOLLAR TRANCHES. Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions and continuations of Eurodollar Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof and (b) no more than six Eurodollar Tranches shall be outstanding at any one time. 2.10 INTEREST RATES AND PAYMENT DATES. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate PER ANNUM equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each Base Rate Loan shall bear interest at a rate PER ANNUM equal to the Base Rate plus the Applicable Margin. (c) (i) If all or a portion of the principal amount of any Loan or Reimbursement Obligation shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), all outstanding Loans and Reimbursement Obligations (whether or not overdue) shall bear interest at a rate PER ANNUM equal to (x) in the case of the Loans, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section PLUS 200 bps or (y) in the case of Reimbursement Obligations, the rate applicable to Base Rate Loans under the Revolving Facility plus 200 bps, and (ii) if all or a portion of any interest payable on any Loan or Reimbursement Obligation or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate PER ANNUM equal to the rate then applicable to Base Rate Loans under the relevant Facility PLUS 200 bps (or, in the case of any such other amounts that do not relate to a particular Facility, the rate then applicable to Base Rate Loans under the Revolving Facility plus 200 bps), in each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, PROVIDED that interest accruing pursuant to paragraph (c) of this Section shall be payable from time to time on demand. -29- 2.11 COMPUTATION OF INTEREST AND FEES. (a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to Base Rate Loans the rate of interest on which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.11(a). 2.12 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Majority Facility Lenders in respect of the relevant Facility that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given, (x) any Eurodollar Loans under the relevant Facility requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Loans under the relevant Facility that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as Base Rate Loans and (z) any outstanding Eurodollar Loans under the relevant Facility shall be converted, on the last day of the then current Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans under the relevant Facility shall be made or continued as such, nor shall the Borrower have the right to convert Loans under the relevant Facility to Eurodollar Loans. 2.13 PRO RATA TREATMENT AND PAYMENTS. (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee and any reduction of the Commitments of the Lenders shall be made PRO RATA according to the respective Term Percentages or Revolving Percentages, as the case may be, of the relevant Lenders. (b) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be made PRO RATA according to the respective outstanding principal amounts of the Term Loans then held by the Term Lenders. The amount of each principal prepayment of the Term Loans shall be applied to reduce the then remaining installments of the Term Loans PRO RATA based upon the then remaining principal amount thereof. Amounts prepaid on account of the Term Loans may not be reborrowed. (c) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Loans shall be made PRO RATA according to the respective outstanding principal amounts of the Revolving Loans then held by the Revolving Lenders. -30- (d) All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Funding Office, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension. (e) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this paragraph shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate PER ANNUM applicable to Base Rate Loans under the relevant Facility, on demand, from the Borrower. (f) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment being made hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective PRO RATA shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three Business Days of such required date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate PER ANNUM equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Administrative Agent or any Lender against the Borrower. 2.14 REQUIREMENTS OF LAW. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any Application or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.15 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of advances, -31- loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount that such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Leader to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction; PROVIDED that the Borrower shall not be required to compensate a Lender pursuant to this paragraph for any amounts incurred more than six months prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor, and PROVIDED FURTHER that, if the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include the period of such retroactive effect. (c) A certificate as to any additional amounts payable pursuant to this Section submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The obligations of the Borrower pursuant to this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.15 TAXES. (a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("NON-EXCLUDED TAXES") or Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, PROVIDED, HOWEVER, that the Borrower shall not be required to increase any such amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lender's failure to comply with the -32- requirements of paragraph (d) or (e) of this Section or (ii) that are United States withholding taxes imposed on amounts payable to such Lender at the time the Lender becomes a party to this Agreement, except to the extent that such Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this paragraph. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of the relevant Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. (d) Each Lender (or Transferee) that is not a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under the laws of the United States of America (or any jurisdiction thereof), or any estate or trust that is subject to federal income taxation regardless of the source of its income (a "NON-U.S. LENDER") shall deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a statement substantially in the form of Exhibit G and a Form W-8, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall not be required to deliver any form pursuant to this paragraph that such Non-U.S. Lender is not legally able to deliver. (e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, PROVIDED that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender's judgment such completion, execution or submission would not materially prejudice the legal position of such Lender. (f) The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.16 INDEMNITY. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense that such Lender may sustain or incur as a consequence of (a) default by the -33- Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of or conversion from Eurodollar Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, convened or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) OVER (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.17 CHANGE OF LENDING OFFICE. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.14 or 2.15(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; PROVIDED, that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and PROVIDED, FURTHER, that nothing in this Section shall affect or postpone any of the obligations of any Borrower or the rights of any Lender pursuant to Section 2.14 or 2.15(a). 2.18 REPLACEMENT OF LENDERS. The Borrower shall be permitted to replace any Lender that (a) requests reimbursement for amounts owing pursuant to Section 2.14 or 2.15(a) or (b) defaults in its obligation to make Loans hereunder, with a replacement financial institution; PROVIDED that (i) such replacement does not conflict with any Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.17 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.14 or 2.15(a), (iv) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.16 if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 10.6 (provided that, unless such replacement Lender agrees to pay such fee, the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.14 or 2.15(a), as the case may be, and (ix) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender. SECTION 3. LETTERS OF CREDIT 3.1 L/C COMMITMENT. (a) Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Revolving Lenders set forth in Section 3.4(a), agrees to issue standby letters of credit ("LETTERS OF CREDIT") for the account of the Borrower on any Business Day during the Revolving Commitment Period in such form as may be approved from time to time by the Issuing Lender; PROVIDED that the Issuing Lender shall have no obligation to issue any Letter of Credit if after giving effect to such issuance, (i) the -34- L/C Obligations would exceed the L/C Commitment or (ii) the aggregate amount of the Available Revolving Commitments would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date that is five Business Days prior to the Scheduled Revolving Termination Date, PROVIDED that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above). (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. (d) The Letter of Credit outstanding on the Closing Date, issued by Bank of America pursuant to the Existing Credit Facility, shall continue to be outstanding pursuant to the terms of this Agreement. 3.2 PROCEDURE FOR ISSUANCE OF LETTER OF CREDIT. The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, with a copy to the Administrative Agent, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of the issuance of each Letter of Credit (including the amount thereof). Any amendment to an outstanding Letter of Credit shall be effected pursuant to procedures comparable to those specified in this Section 3.2. 3.3 FEES AND OTHER CHARGES. (a) The Borrower will pay a fee on all outstanding Letters of Credit at a PER ANNUM rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans under the Revolving Facility, shared ratably among the Revolving Lenders and payable to the Administrative Agent for the account of the Revolving Lenders quarterly in arrears on each L/C Fee Payment Date after the issuance date. In addition, the Borrower shall pay to the Issuing Lender for its own account a fronting fee of 1/4 of 1% PER ANNUM on the undrawn and unexpired amount of each Letter of Credit, payable quarterly in arrears on each L/C Fee Payment Date after the issuance date. (b) In addition to the foregoing fees, the Borrower shall pay or reimburse the Issuing Lender for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit. 3.4 L/C PARTICIPATIONS. (a) The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Leader to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Revolving Percentage in the Issuing Lender's obligations and rights under each Letter of -35- Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Revolving Percentage of the amount of such draft, or any part thereof that is not so reimbursed. (b) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Effective Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 3.4(a) is not made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate PER ANNUM applicable to Base Rate Loans under the Revolving Facility. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its PRO RATA share of such payment in accordance with Section 3.4(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its PRO RATA share thereof; PROVIDED, HOWEVER, that in the event that any such payment received by the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 3.5 REIMBURSEMENT OBLIGATION OF THE BORROWER. The Borrower agrees to reimburse the Issuing Lender on each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender for the amount of (a) such draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender at its address for notices specified herein in lawful money of the United States and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate set forth in (i) until the second Business Day following the date of the applicable drawing, Section 2.11 (b) and (ii) thereafter, Section 2.11(c). 3.6 INDEMNIFICATION; NATURE OF ISSUING LENDER'S DUTIES. (a) In addition to its other obligations under this Section 3, the Borrower hereby agrees to pay, and protect, indemnify and save each Lender harmless from and against, any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) that such lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit or (B) the failure of such Lender to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority (all such acts or omissions, herein called "GOVERNMENT ACTS"). -36- (b) As between the Borrower and the Lenders (including the Issuing Lender), the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. No Lender (including the Issuing Lender) shall be responsible: (A) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (C) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (D) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (E) for any consequences arising from causes beyond the control of such Lender, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of the Issuing Lender's rights or powers hereunder. (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Lender (including the Issuing Lender), under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Lender under any resulting liability to the Borrower or any other Loan Party. It is the intention of the parties that this Credit Agreement shall be construed and applied to protect and indemnify each Lender (including the Issuing Lender) against any and all risks involved in the issuance of the Letters of Credit, all of which risks are hereby assumed by the Borrower (on behalf of itself and each of the other Credit Parties), including, without limitation, any and all Government Acts. No lender (including the Issuing Lender) shall, in any way be, be liable for any failure by such Lender or anyone else to pay any drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of such Lender. (d) Nothing in this Section 3.6 is intended to limit the reimbursement obligations of the Borrower contained elsewhere herein. Unless all Letters of Credit are cash collateralized in amounts and pursuant to arrangements satisfactory to the Issuing Lender or secured by back-up standby letters of credit in form and substance, and issued by an issuer satisfactory to the Issuing Lender (in either case to the extent and in a manner reasonably satisfactory to the Agent and the Issuing Lender), the obligations of the Borrower under this Section 3.6 shall survive the termination of this Credit Agreement. No act or omission of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Lenders (including the Issuing Lender) to enforce any right, power or benefit under this Credit Agreement. (e) Notwithstanding anything to the contrary contained in this Section 3.6, the Borrower shall have no obligation to indemnify any Lender (including the Issuing Lender) in respect of any liability incurred by such Lender (A) arising solely out of the gross negligence or willful misconduct of such Lender, as determined by a court of competent jurisdiction, or (B) caused by such Lender's failure to pay under any Letter of Credit after presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit, as determined by a court of competent jurisdiction, unless such payment is prohibited by any law, regulation, court order or decree. 3.7 LETTER OF CREDIT PAYMENTS. If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit. -37- 3.8 APPLICATIONS. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Agents and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, Holdco and the Borrower hereby jointly and severally represent and warrant to the Agents and each Lender that: 4.1 FINANCIAL CONDITION. (a) The unaudited PRO FORMA consolidated balance sheet and statements of income and cash flows of the Borrower as at, or for the period ending, December 31, 1998 (but using October 31, 1998 latest twelve month figures for Certified) (the "PRO FORMA FINANCIAL STATEMENTS"), copies of which have heretofore been furnished to each Lender, have been prepared giving effect (as if such events had occurred on such date or at the beginning of such period, as applicable) to (i) the consummation of the Acquisitions, (ii) the loans to be made on the Closing Date and the use of proceeds thereof and (iii) the payment of fees and expenses in connection with the foregoing. The Pro Forma Financial Statements have been prepared based on the best information available to the Borrower as of the date of delivery thereof, and present fairly in all material respects on a PRO FORMA basis the estimated financial position of the Borrower as at, or for the period ending, December 31, 1998 (but using October 31, 1998 latest twelve month figures for Certified), assuming that the events specified in the preceding sentence had actually occurred at such date or at the beginning of such period, as applicable. (b) The unaudited consolidated balance sheets of Galaxy as at August 31, 1996, August 31, 1997 and August 31, 1998 and the related consolidated statements of earnings and of retained earnings stockholders' equity and cash flows for the fiscal years ended on such date reviewed by Rehman Robson, CPAs and Consultants, P.C. (with respect to the August 31, 1996 financial statements) and Jenkens, Magnus, Volk & Carroll (with respect to the August 31, 1997 financial statements), present fairly in all material respects the consolidated financial condition of Galaxy as at such date, and the consolidated results of its operations and its consolidated retained earnings, stockholders' equity and cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of Galaxy as at September 30, 1998, and the related unaudited consolidated statements of earnings and retained earnings, stockholders' equity and cash flows for the one-month period ended on such date, present fairly in all material respects the consolidated financial condition of Galaxy as at such date, and the consolidated results of its operations and its consolidated cash flows for the one-month period then ended (subject to normal year-end audit adjustments). During the period from September 30, 1998 to and including the date hereof there has been no Disposition by Galaxy of any material part of its business or property. (c) The audited consolidated balance sheets of Mid State as at December 31, 1995, December 31, 1996 and December 31, 1997, reported on by and accompanied by an unqualified report from Baker, Newman & Noyes LLC and the audited consolidated balance sheet of Mid State as at September 30, 1998, reported on by and accompanied by an unqualified report from Ernest & Young LLP, and the related consolidated statements of earnings and of retained earnings, stockholders' equity and cash flows for the fiscal years ended on such dates (for nine months in the case of the September 30, 1998 balance sheet), present fairly in all material respects the consolidated financial condition of Mid State as at such date, and the consolidated results of its operations and its consolidated retained earnings, stockholders' equity and cash flows for the respective fiscal years then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). During the period from September 30, 1998 to and including the date hereof there has been no Disposition by Mid State of any material part of its business or property. (d) The audited balance sheets of the entity to be acquired in the General Automation Acquisition as at December 31, 1997 and December 31, 1998, and the related statements of earnings and of retained earnings, -38- stockholders' equity and cash flows for the fiscal years ended on such dates and December 31, 1996 reported on by and accompanied by an unqualified report from Ernst & Young LLP, present fairly in all material respects the financial condition of such entity as at such date, and the results of its operations and its retained earnings, stockholders' equity and cash flows for the respective fiscal years then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). During the period from December 31, 1998 to and including the date hereof there has been no Disposition by the entity to be acquired in the General Automation Acquisition of any material part of the business or property of such entity. (e) The audited combined balance sheets of the entities to be acquired in the Certified Acquisition as at October 31, 1997 and October 31, 1998, and the related combined statements of earnings and of retained earnings, stockholders' equity and cash flows for the fiscal years ended on such dates and on October 31, 1996 reported on by and accompanied by an unqualified report from Ernst & Young LLP, present fairly in all material respects the combined financial condition of such entities as at such date, and the combined results of its operations and its combined retained earnings, stockholders' equity and cash flows for the respective fiscal years then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). During the period from October 31, 1998 to and including the date hereof there has been no Disposition by the entities to be acquired in the Certified Acquisition of any material part of the business or property of such entities. (f) The audited balance sheets of the entity to be acquired in the Nationwide Acquisition as at December 31, 1998, May 31, 1998, and May 31, 1997, and the related statements of earnings and of retained earnings, stockholders' equity and cash flows for the fiscal years ended on such dates and May 31, 1996 reported on by and accompanied by unqualified reports from Ernst & Young LLP and Insero, Kasperski, Ciaccia & Co., P.C., present fairly in all material respects the financial condition of such entity as at such date, and the results of its operations and its retained earnings, stockholders' equity and cash flows for the respective fiscal years then ended (for seven months in the case of the December 31, 1998 balance sheet). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). During the period from December 31, 1998 to and including the date hereof there has been no Disposition by the entities to be acquired in the Nationwide Acquisition of any material part of the business or property of such entities. (g) As of the Closing Date, the Precision Group Members do not have any material Guarantee obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in paragraph (b) or (c) above, as the case may be, other than obligations pursuant to the Loan Documents. 4.2 NO CHANGE. Since October 31, 1998 there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect. 4.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each Loan Party (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except as, in the aggregate, could not reasonably be expected to have a Material -39- Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each Loan Party has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and, in the case of the Borrower, to borrow hereunder. Each Loan Party has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the borrowings on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the Acquisitions and the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents, except (i) consents, authorizations, filings and notices described in Schedule 4.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect, except as disclosed in Schedule 4.4 and (ii) the filings referred to in Section 4.19. Each Loan Document has been duly executed and delivered on behalf of each Loan Party party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of each Loan Party party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4.5 NO LEGAL BAR. The execution, delivery and performance of this Agreement and the other Loan Documents, the issuance of Letters of Credit, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of any Precision Group Member and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to any Precision Group Member could reasonably be expected to have a Material Adverse Effect. 4.6 LITIGATION. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against any Loan Party or against any of its properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby or (b) that could reasonably be expected to have a Material Adverse Effect. 4.7 NO DEFAULT. No Loan Party is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 4.8 OWNERSHIP OF PROPERTY; LIENS. Each Loan Party (i) has good and marketable title to all the real properties owned in fee or acquired after the date thereof and (ii) has valid leasehold interests in all leased real properties and is in possession of the real properties purported to be leased thereunder, in each case, free and clear of all Liens, except Liens of the type described as Prior Liens in the Mortgages. Title to all property other than real property is held by each respective Loan Party free and clear of all Liens except for Prior Liens and other Liens expressly permitted to exist on such type of property by the terms of the applicable Security Document. 4.9 INTELLECTUAL PROPERTY. Each Loan Party owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted. No material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of Intellectual Property by each Precision Group Member does not infringe on the rights of any Person in any material respect. -40- 4.10 TAXES. Each Loan Party has filed or caused to be filed all Federal, state and other material tax returns that are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the relevant Loan Party, PROVIDED that in the case of Galaxy any such reserves made prior to the Closing Date need not be in conformity with GAAP so long as they are in a reasonable amount); no tax Lien has been filed, and, to the knowledge of Holdco and the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 4.11 FEDERAL REGULATIONS. No part of the proceeds of any Loans will be used for "buying" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect or for any purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-l, as applicable, referred to in Regulation U. 4.12 LABOR MATTERS. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) there are no strikes or other labor disputes against any Precision Group Member pending or, to the knowledge of the Borrower, threatened; (b) hours worked by and payment made to employees of the Precision Group Members have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters; and (c) all payments due from any Precision Group Member on account of employee health and welfare insurance have been paid or accrued as a liability on the books of the relevant Precision Group Member. 4.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. 4.14 INVESTMENT COMPANY ACT; OTHER REGULATIONS. No Loan Party is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness. 4.15 SUBSIDIARIES. Except as disclosed to the Administrative Agent by the Borrower in writing from time to time after the Closing Date, (a) Schedule 4.15 sets forth the name and jurisdiction of incorporation of each Subsidiary of the Borrower and, as to each such Subsidiary, the percentage of each class of Capital Stock owned by the Borrower or any Precision Group Member, (b) there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than directors' qualifying shares) of any nature -41- relating to any Capital Stock of any Precision Group Member, except as created by the Loan Documents, and (c) there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than stock options granted to employees or directors) of any nature relating to any Capital Stock of Holdco. 4.16 USE OF PROCEEDS. The proceeds of the Term Loans shall be used to finance a portion of the purchase price for the Acquisitions and to refinance the Existing Credit Facility. The proceeds of the Revolving Loans shall be used for working capital and general corporate purposes. 4.17 ENVIRONMENTAL MATTERS. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) the facilities and properties owned, leased or operated by any Precision Group Member (the "PROPERTIES") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances that constitute or constituted a violation of, or could give rise to liability under, any Environmental Law; (b) no Precision Group Member has received or is aware of any claim or notice of violation, alleged violation, non-compliance, liability or potential liability under any Environmental Law of or by any Precision Group Member or with regard to any of the Properties or the business operated by the Precision Group Members (the "BUSINESS"), nor does the Borrower have knowledge or reason to believe that any such claim or notice will be received or is being threatened; (c) Materials of Environmental Concern have not been transported or disposed of by any Precision Group Member or from any of the Properties or in connection with the Business in violation of or in a manner or to a location that could give rise to liability under any Environmental Law, nor have any Materials of Environmental Concern been used, handled, generated, treated, stored or disposed of or released at, on, under or from any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law; (d) no judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened under any Environmental Law to which any Precision Group Member is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements or agreements outstanding which impose any requirements or obligations upon or among Precision Group Members under any Environmental Law; (e) there has been no release or threat of release of Materials of Environmental Concern at, on, under or from any of the Properties, or arising from or related to the operations of the Precision Group Members in connection with any of the Properties or otherwise in connection with the Business, in violation of or in amounts, in a manner or under circumstances that could give rise to liability under Environmental Laws; (f) each of the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, with all applicable Environmental Laws, and there are no Materials of Environmental Concern at, on, under or emanating from the Properties or in violation of any Environmental Law with respect to the Properties or the Business; (g) no Precision Group Member has assumed any liability of any other Person under Environmental Laws; -42- (h) there is no lien imposed on any of the Properties or any other assets of any Precision Group Member under any Environmental Law; and (i) all material environmental investigations, studies, audits or assessments which have been conducted and which are in the possession, custody or control of any Precision Group Member relating (i) to the current or prior business, operations, facilities or Properties of any Precision Group Member or any of their respective predecessors in interest or (ii) to any facility, Properties or other asset now or previously owned, operated, leased or used by any Precision Group Member or any of their respective predecessors in interest have been made available to Lenders. 4.18 ACCURACY OF INFORMATION, ETC. No statement or information contained in this Agreement, any other Loan Document, the Confidential Information Memorandum, or any other document, certificate or statement furnished by or on behalf of any Loan Party to the Administrative Agent or the Lenders, or any of them, for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished any untrue statement of a material fact or omitted to state a material fact necessary to make the statements contained herein or therein not misleading. The projections and PRO FORMA financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Lenders that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. As of the date hereof, the representations and warranties contained in the Acquisition Documentation are true and correct in all material respects. There is no fact known to any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents, the Confidential Information Memorandum or in any other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents. 4.19 SECURITY DOCUMENTS. (a) The Security Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Agents and the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in the Security Agreement, when stock certificates representing such Pledged Stock are delivered to the Administrative Agent, and in the case of the other Collateral described in the Security Agreement, when financing statements and other filings specified on Schedule 4.19(a) in appropriate form are filed in the offices specified on Schedule 4.19(a), the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower and the Subsidiary Guarantors in such Collateral and the proceeds thereof, in each case to the extent a Lien on the relevant Collateral may be perfected by taking any of the actions of the type referred to in this paragraph (a), as security for the Secured Obligations (as defined in the Security Agreement), in each case prior and superior in right to any other Person (except for Prior Liens and other Liens expressly permitted to exist on such type of property by the terms of the Security Agreement). (b) The Securities Pledge Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Agents and the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in the Securities Pledge Agreement, when stock certificates representing such Pledged Stock are delivered to the Administrative Agent, and in the case of the other Collateral described in the Security Agreement, when financing statements and other filings specified on Schedule 4.19(b) in appropriate form are filed in the offices specified on Schedule 4.19(b), the Securities Pledge Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of Holdco in such Collateral and the proceeds thereof, in each case to the extent a Lien on the relevant Collateral may be perfected by taking any of the actions of the type referred to in this paragraph (b), as security for the Secured Obligations (as defined in the Security Pledge Agreement), in each case prior and superior in right to -43- any other Person (except for Liens expressly permitted to exist on such type of property by the terms of the Securities Pledge Agreement). (c) Each of the Mortgages is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on the Mortgaged Properties described therein and proceeds thereof and when the Mortgages are filed in the offices specified on Schedule 4.19(c), each such Mortgage except for the Collateral Assignment shall constitute a fully perfected first priority Lien on, and security interest in, all right title and interest of the applicable Loan Parties in the Mortgaged Properties and the proceeds thereof, as security for the Secured Obligations (as defined in the relevant Mortgage), in each case prior and superior in right to any other Person (except for Prior Liens and other Liens expressly permitted to exist on such type of property by the terms of the relevant Mortgage). (d) Except with respect to Prior Liens and other Liens expressly permitted by the terms of the applicable Security Document and the Liens created by the Security Documents, there is no currently effective financing statement, security agreement, chattel mortgage, real estate mortgage or other document filed or recorded with any filing records, registry, or other public office, that purports to cover, affect or give notice of any present or possible future Lien on, or security interest in, any assets or Property of any Loan Party or rights thereunder. 4.20 SOLVENCY. Each Loan Party is, and after giving effect to any Acquisition and the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent. 4.21 SENIOR DEBT. If any Loan Party has issued, or may issue, Subordinated Indebtedness, the Obligations of such Loan Party will constitute "Senior Debt" (or such equivalent term) of such Loan Party with respect to such Subordinated Indebtedness; the Obligations of each Loan Party constitute such Senior Debt with respect to the Senior Subordinated Notes. 4.22 YEAR 2000 MATTERS. Each of the Loan Parties is making a commercially reasonable effort (i) to assess all areas within its and each of its Subsidiaries' businesses and operations that could be adversely affected by the Year 2000 Problem and (ii) to develop and implement a plan for addressing the Year 2000 Problem on a timely basis. Each Loan Party believes that all computer applications that are material to its or any of its Subsidiaries' business and operations are reasonably expected on a timely basis to be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "YEAR 2000 COMPLIANT"). The Borrower reasonably believes that the Year 2000 Problem, including costs of redemption, could not reasonably be expected to have a Material Adverse Effect. 4.23 REGULATION H. No Mortgage encumbers improved real property that is located in an area that has been identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968. 4.24 LICENSES AND PERMITS; COMPLIANCE WITH LAWS. The Loan Parties hold all governmental permits, licenses, authorizations, consents and approvals (none of which has been modified or rescinded and all of which are in full force and effect) (collectively, the "PERMITS") necessary for the Loan Party to own, lease, and operate their respective Properties and to carry on their respective businesses as now being conducted, except for Permits the failure of which to obtain could not reasonably be expected to have a Material Adverse Effect. The business of the Loan Parties are not being conducted in violation of any applicable requirement of law, permit, concession, grant or other authorization of any Governmental Authority, except for violations that could not reasonably be expected to have a Material Adverse Effect. -44- SECTION 5. CONDITIONS PRECEDENT 5.1 CONDITIONS TO INITIAL EXTENSION OF CREDIT. The agreement of each Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date, of the following conditions precedent: (a) CREDIT AGREEMENT; GUARANTEES, ETC. The Administrative Agent shall have received (i) this Agreement, executed and delivered by the Agents, Holdco, the Borrower and each Person listed on Schedule 1.1 A, (ii) the Guarantees, executed and delivered by Holdco and each Subsidiary Guarantor, and (iii) a Borrowing Base Certificate, dated the Closing Date and setting forth a calculation of the Borrowing Base as of February 28, 1999. (b) PRECISION REORGANIZATION. The Precision Reorganization shall have occurred on the terms set forth on Schedule 5.1(b). The Administrative Agent shall be satisfied with the tax and organizational effects of the Precision Reorganization. (c) ACQUISITION, ETC. The following transactions shall have been consummated and each of the Acquisitions shall have been consummated without any amendment or waiver not approved by the Lenders or all conditions to consummation have been met, but for the financing as a result of this transaction, and in each case on terms and conditions reasonably satisfactory to the Administrative Agent: (i) the General Automation Acquisition Documentation, the Nationwide Acquisition Documentation and the Certified Fabricators Acquisition Documentation shall be reasonably acceptable to the Administrative Agent; and (ii) the Administrative Agent shall have received satisfactory evidence that the fees and expenses to be incurred by such Companies in connection with the Acquisitions and the financing thereof shall not exceed $10,000,000. (d) SENIOR SUBORDINATED NOTES. The Borrower shall have received gross proceeds of $100 million from the issuance of the Senior Subordinated Notes. The terms and conditions of the Senior Subordinated Notes (including, without limitation, as to maturity, interest rate, events of default, subordination and covenants) shall be satisfactory to the Administrative Agent. (e) REPAYMENT OF EXISTING INDEBTEDNESS. Except as set forth in Schedule 5.1(e) hereto, all Indebtedness of the Borrower and Holdco shall have been repaid in full, and all obligations thereunder and security interests relating thereto shall have been discharged, and the Administrative Agent shall have received satisfactory evidence of such repayment and discharge; PROVIDED, that, as to Indebtedness of the Borrower which is to be repaid upon Closing with proceeds hereof (including the Existing Credit Facility), the Administrative Agent shall have received satisfactory evidence in the form of definitive payoff letters verifying that all obligations thereunder and security interests relating thereto shall be repaid and discharged immediately upon receipt by the lenders thereunder (or their agents) of the amounts stated in such payoff letters. (f) REVOLVING DRAW-DOWN. After giving effect to the Acquisitions and the making of any extensions of credit hereunder on the Closing Date, the Total Revolving Extensions of Credit outstanding shall not exceed $1,000,000. (g) PRO FORMA EBITDA; CONSOLIDATED LEVERAGE RATIO. At December 31, 1998 (but using October 31, 1998 latest twelve month figures for Certified), after giving effect to the Acquisitions, the -45- issuance of the Senior Subordinated Notes, the extension of credit hereunder and the repayment of Indebtedness in connection therewith, Consolidated EBITDA shall be no less than $29.9 million and the Consolidated Leverage Ratio shall not exceed 4.1 to 1. (h) FINANCIAL STATEMENTS; ETC. The Administrative Agent shall have received (i) the Pro Forma Financial Statements, (ii) the financial statements referred to in Section 4.1 (b) through (f), (iii) projected financial statements, (which in each case shall be satisfactory to the Administrative Agent), (iv) a certificate of a Responsible Officer of the Borrower demonstrating in reasonable detail that, after giving effect to the Acquisitions, the Borrower shall be in PRO FORMA compliance with the covenants set forth in Section 7.1(a), (b) and (c), and (v) a Solvency Certificate. (i) LEGAL AND CAPITAL STRUCTURE. The Lenders and their counsel shall be satisfied with the capitalization, structure and equity ownership of the Borrower and Holdco after the Acquisitions, including a minimum total common equity investment in the Borrower of $42 million; PROVIDED that if any portion of any investment in Holdco is not in the form of common equity, the terms thereof shall be satisfactory to the Administrative Agent. (j) APPROVALS. All governmental and third party approvals (including landlords' and other consents) necessary in connection with the Acquisitions, the continuing operations of the Precision Group Members and the transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose adverse conditions on the Acquisitions or the financing contemplated hereby. (k) LIEN SEARCHES. The Administrative Agent shall have received the results of a Requests for Information (Form UCC-11), tax lien, judgment lien and pending lawsuit searches or equivalent reports or lien search reports, each of a recent date listing all effective financing statements, lien notices or comparable documents that name any Loan Party as debtor in each of the jurisdictions where assets of the Loan Parties are located (after giving effect to the Acquisitions) and each such Loan Party's principal place of business is located, and such search shall reveal no liens on any of the assets of the Loan Parties except for Prior Liens or discharged on or prior to the Closing Date pursuant to documentation satisfactory to the Administrative Agent. (l) ENVIRONMENTAL AUDIT. The Administrative Agent shall have received (i) an environmental audit with respect to the real properties of the Precision Group Members specified by the Administrative Agent and (ii) an Environmental Certificate. (m) FEES. The Lenders and the Administrative Agent shall have received all fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel), on or before the Closing Date. All such amounts will be paid with proceeds of Loans made on the Closing Date and will be reflected in the funding instructions given by the Borrower to the Administrative Agent on or before the Closing Date. (n) CLOSING CERTIFICATES. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of each Loan Party, dated the Closing Date, substantially in the form of Exhibit C, with appropriate insertions and attachments. (o) LEGAL OPINIONS. The Administrative Agent shall have received the following executed legal opinions: -46- (i) the legal opinion of Jones, Day, Reavis & Pogue, counsel to the Precision Group Members, substantially in the form of Exhibit F; (ii) to the extent consented to by the relevant counsel, each legal opinion, if any, delivered in connection with the Acquisition Agreements, accompanied by a reliance letter in favor of the Lenders; and (iii) the legal opinion of local counsel to the Precision Group Members, substantially in the form of Exhibit J, in each jurisdiction where Collateral is located in form and substance reasonably satisfactory to Administrative Agent. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (p) PLEDGED STOCK; STOCK POWERS; PLEDGED NOTES. The Administrative Agent shall have received (i) the certificates representing the shares of Capital Stock pledged pursuant to any Security Document, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof and (ii) each promissory note (if any) pledged to the Administrative Agent pursuant to the Security Agreement endorsed (without recourse) in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof. (q) FILINGS, REGISTRATIONS AND RECORDINGS. Each document (including any Uniform Commercial Code financing statement or United States Patent, Trademark and Copyright office filings) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by any Security Document), shall be in proper form for filing, registration or recordation. (r) MORTGAGES, ETC. (i) The Administrative Agent shall have received a Mortgage, duly authorized, executed and delivered encumbering each Mortgaged Property in favor of Administrative Agent, for the benefit of the Agents and the Lenders, in form for recording office of each jurisdiction where each such Mortgaged Property is situated, together with such other instruments as shall be necessary or appropriate (in the reasonable judgment of the Administrative Agent) to create a Lien under applicable law, all of which shall be in form and substance reasonably satisfactory to Administrative Agent, which Mortgage (other than the Collateral Assignment) and other instruments shall be effective to create a first priority Lien on such Mortgaged Property subject to no Liens other than Prior Liens applicable to such Mortgaged Property. (ii) The Administrative Agent shall have received, and the title insurance company issuing the policy referred to in clause (iii) below (the "TITLE INSURANCE COMPANY") shall have received, maps or plats of an as-built survey of the sites of the Mortgaged Properties certified to the Administrative Agent and the Title Insurance Company in a manner satisfactory to them, dated a date satisfactory to the Administrative Agent and the Title Insurance Company by an independent professional licensed land surveyor satisfactory to the Administrative Agent and the Title Insurance Company, which maps or plats and the surveys on which they are based shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American -47- Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such maps, plats or surveys the following: (A) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines; (B) the lines of streets abutting the sites and width thereof; (C) all access and other easements appurtenant to the sites; (D) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting the site, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (E) any encroachments on any adjoining property by the building structures and improvements on the sites; (F) if the site is described as being on a filed map, a legend relating the survey to said map; and (G) the flood zone designations, if any, in which the Mortgaged Properties are located. (iii) The Administrative Agent shall have received in respect of each Mortgaged Property a mortgagee's title insurance policy (or policies) or marked up unconditional binder for such incurrence. Each such policy shall (A) be in an amount satisfactory to the Administrative Agent; (B) be issued at ordinary rates; (C) insure that the Mortgage insured thereby creates a valid first Lien on such Mortgaged Property free and clear of all defects and encumbrances, except as disclosed therein; (D) name the Administrative Agent for the benefit of the Lenders as the insured thereunder; (E) be in the form of ALTA Loan Policy - 1970 (Amended 10/17/70 and 10/17/84) (or equivalent policies); (F) contain such endorsements and affirmative coverage as the Administrative Agent may reasonably request (including, without limitation, endorsements on matters relating to usury, first loss, last dollar, zoning, contiguity, revolving credit, doing business, road access, variable rate and so-called comprehensive coverage over covenants and restrictions); (G) contain no exceptions to title other than exceptions for Prior Liens (as set forth in the applicable Mortgage) and other exceptions reasonably acceptable to Administrative Agent; and (H) be issued by title companies satisfactory to the Administrative Agent (including any such title companies acting as co-insurers or reinsurers, at the option of the Administrative Agent). The Administrative Agent shall have received evidence satisfactory to it that all premiums in respect of each such policy, all charges for mortgage recording tax, and all related expenses, if any, have been paid. (iv) The Administrative Agent shall have received, for each parcel of Mortgaged Property located in an area identified by the Federal Emergency Management Agency as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of 1973, each as amended, or any successor laws, flood insurance with policy limits and deductibles in such amounts as set forth under the Mortgage relating to that parcel of Mortgaged Property, and, if no such amount has been established, in such amounts as would be maintained by a prudent operator of property similar in use and configuration to such parcel of Mortgaged Property and located in the locality where such parcel of Mortgaged Property is located. (v) The Administrative Agent shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to in clause (iii) above and a copy of all other material documents affecting the Mortgaged Properties. (vi) The Administrative Agent shall have received an officer's certificate or other evidence reasonably satisfactory to the Administrative Agent that as of the date thereof to such officer's knowledge there (x) has been issued and is in effect a valid and proper certificate of occupancy or other local equivalent, if any, for the use then being made of such Mortgaged Property and that there is not outstanding any citation, violation or similar notice indicating that -48- such Mortgaged Property contains conditions which are not in compliance (except where non-compliance would not result in a material impairment of the value or utility of such Mortgaged Property) with local codes or ordinances relating to building or fire safety or structural soundness, (y) has not occurred any Recovery Event affecting all or any material portion of any Mortgaged Property and (z) are no disputes regarding boundary lines, location, encroachment or possession of any portions of such Mortgaged Property and no state of facts existing which could give rise to any such claim. (s) INSURANCE. The Administrative Agent shall have received insurance certificates satisfying the requirements of the Security Documents. (t) SECURITY AGREEMENT AND SECURITIES PLEDGE AGREEMENT. The Administrative Agent shall have received a Security Agreement executed and delivered by the Borrower, each Subsidiary Guarantor and the Administrative Agent in substantially the form of Exhibit I and the Administrative Agent shall have received a Securities Pledge Agreement executed and delivered by Holdco, in substantially the form of Exhibit K. (u) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on the date of issuance or after giving effect to (1) the Senior Subordinated Notes, (2) any extensions of credit requested to be made on such date, (3) the General Automation Acquisition, (4) the Nationwide Acquisition and (5) the Certified Acquisition. (v) COVENANT COMPLIANCE. After giving effect to the issuance of the Senior Subordinated Notes, the Acquisitions and the payment of related fees and expenses, the Borrower shall be in PRO FORMA compliance with the Financial covenants set forth in Section 7.1 (a), (b) and (c). 5.2 CONDITIONS TO EACH EXTENSION OF CREDIT. The agreement of each Lender to make any extension of credit requested to be made by it on any date (including its initial extension of credit) is subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, except for any such representation and warranty that expressly relates solely to a particular date, in which case such representation and warranty shall have been true and correct on and as of such particular date. (b) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date. (c) CREDIT LIMITATION. In the case of extensions of credit under the Revolving Facility, after giving effect to such extension of credit, the Total Revolving Extensions of Credit shall not exceed the Borrowing Base then in effect. Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in this Section 5.3 have been satisfied. -49- SECTION 6. AFFIRMATIVE COVENANTS The Loan Parties hereby jointly and severally agree that, so long as the Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, each Loan Party shall and, to the extent applicable, shall cause each other Loan Party to: 6.1 FINANCIAL STATEMENTS. Furnish to the Administrative Agent and each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated balance sheet and unaudited consolidating balance sheet of the Borrower as at the end of such year and the related audited consolidated statements of income and of cash flows and the unaudited consolidating statements of income and cash flows for such year, setting forth in each case in comparative form the figures for the previous year, with such audited financial statements reported on without a "going concern" or like qualification or exception, qualification arising out of the scope of the audit or qualification as to possible errors generated by financial reporting and related systems due to the Year 2000 Problem, by Ernst & Young or other independent certified public accountants of nationally recognized standing; (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated and consolidating balance sheets of the Borrower as at the end of such quarter and the related unaudited consolidated and consolidating statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); and (c) as soon as available, but in any event not later than 45 days after the end of each month occurring during each fiscal year of the Borrower (other than the third, sixth, ninth and twelfth such month), the unaudited consolidated and consolidating balance sheets of the Borrower as at the end of such month and the related unaudited consolidated and consolidating statements of income and of cash flows for such month and the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments). All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the cast may be, and disclosed therein). 6.2 CERTIFICATES; OTHER INFORMATION. Furnish to the Administrative Agent (with sufficient copies for each Lender) or, in the case of clause (i) below, to the relevant Lender: (a) concurrently with the delivery of the financial statements referred to in Section 6.1 (a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of any financial statements pursuant to Section 6.1, (i) a certificate of a Responsible Officer stating that, to the best of each such Responsible Officer's knowledge, each Loan Party during such period has observed or performed all of its covenants and other agreements, -50- and satisfied every condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) in the case of quarterly or annual financial statements, (x) a Compliance Certificate containing all information and calculations necessary for determining compliance by the Borrower with the provisions of this Agreement referred to therein as of the last day of the fiscal quarter or fiscal year of the Precision Group Members, as the case may be, and (y) to the extent not previously disclosed to the Administrative Agent, a listing of each new Subsidiary of the Borrower, of any new county or state within the United States where any Loan Party keeps inventory or equipment and of any new fee-owned real property or Intellectual Property acquired by any Loan Party since the date of the most recent list delivered pursuant to this clause (y) (or, in the case of the first such list so delivered, since the Closing Date); (c) as soon as available, and in any event no later than 60 days after the end of each fiscal year of the Borrower, a detailed consolidated and consolidating budget for the following fiscal year (including projected consolidated and consolidating balance sheets of the Borrower as of the end of the following fiscal year, the related consolidated and consolidating statements of projected cash flow, projected changes in financial position and projected income and a description of the underlying assumptions applicable thereto), and, as soon as available, significant revisions, if any, of such budget and projections with respect to such fiscal year (collectively, the "PROJECTIONS"), which Projections shall in each case be accompanied by a certificate of a Responsible Officer stating that such Projections are based on reasonable estimates, information and assumptions and that such Responsible Officer has no reason to believe that such Projections are incorrect or misleading in any material respect; (d) within 45 days after the end of each fiscal quarter of the Borrower, a narrative discussion and analysis of the financial condition and results of operations of the Borrower for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, as compared to the portion of the Projections covering such periods and to the comparable periods of the previous year; (e) as soon as practicable, but in no event later than 15 days after the end of each month, a Borrowing Base Certificate, certifying in reasonable detail the Borrowing Base as of the last day of such month; (f) (i) promptly upon sending or receipt, copies of any and all management letters, and correspondence relating to management letters, sent or received by any Loan Party to or from its auditors and (ii) no later than June 30, 1999, a copy of the Precision Group Members' plan, timetable and budget to address the Year 2000 Problem, together with periodic updates thereof and expenses incurred to date, any third party assessment of the Precision Group Members' Year 2000 remediation efforts, and any Year 2000 contingency plans; (g) no later than 10 Business Days prior to the effectiveness thereof, copies of substantially final drafts of any proposed amendment, supplement, waiver or other modification with respect to the Acquisition Documentation; (h) within five days after the same are sent, copies of all financial statements and reports that any Loan Party sends to the holders of any class of its debt securities or public equity securities and, within five days after the same are filed, copies of all financial statements and reports that any Loan Party may make to, or file with, the SEC; and (i) promptly, such additional financial and other information as any Lender may from time to time reasonably request. -51- 6.3 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the relevant Precision Group Member. 6.4 MAINTENANCE OF EXISTENCE; COMPLIANCE. (a) (i) Preserve, renew and keep in full force and effect its corporate existence and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.5 MAINTENANCE OF PROPERTY; INSURANCE. (a) Keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks (but including in any event public liability, product liability (effective by April 1, 1999) and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business. 6.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Precision Group Members with officers and employees of the Precision Group Members and with its independent certified public accountants. 6.7 NOTICES. Promptly give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of any Loan Party or (ii) litigation, investigation or proceeding that may exist at any time between any Loan Party and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting any Loan Party in which the amount involved is $500,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) any environmental matter of the type described in Section 4.17 (whether or not such matter could reasonably be expected to have a Material Adverse Effect) affecting any Loan Party in which the amount involved is $500,000 or more and not covered by insurance; (e) the following events, as soon as possible and in any event within 30 days after Holdco or the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or -52- the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; (f) any event or condition which, on any day, to the knowledge of the Borrower, has caused the Borrowing Base to change since the date of the most recent Borrowing Base Certificate delivered pursuant to Section 6.2(e) if as a result of such change the Total Revolving Extensions of Credit exceed the Borrowing Base determined as of such day; and (g) any development or event that has had or could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section 6.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the relevant Loan Party proposes to take with respect thereto. 6.8 ENVIRONMENTAL LAWS. (a) Comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws. (c) In the event of the presence of any Materials of Environmental Concern at, on, under or emanating from any Properties which could reasonably be expected to result in liability under or a violation of any Environmental Law, in each case which could reasonably be expected to have a Material Adverse Effect, the applicable Precision Group Member shall undertake, and/or cause any of their respective tenants or occupants to undertake, at their sole expense, any action required pursuant to Environmental Laws to mitigate and eliminate such presence; PROVIDED, HOWEVER, that no Precision Group Member shall be required to comply with any order or directive of any Governmental Authority which is being contested in good faith and by proper proceedings so long as it has maintained adequate reserves with respect to such compliance to the extent required in accordance with GAAP. (d) Each Precision Group Member shall promptly notify the Administrative Agent of the occurrence of any event specified in clause (c) of this Section 6.8 and shall periodically thereafter keep the Administrative Agent informed of any material actions taken in response to such event and the results of such actions. (e) At the written request of Administrative Agent at any time and from time to time, each Precision Group Member shall provide, at such Precision Group Member's sole cost and expense, an environmental site assessment (including, without limitation, the results of any soil, groundwater or other testing conducted if the Administrative Agent directs that such testing be conducted) concerning any Properties or any real property hereafter owned, leased or operated by any Precision Group Member, conducted by an environmental consulting firm proposed by such Precision Group Member and approved by the Administrative Agent indicating the presence or absence of Materials of Environmental Concern and the potential cost of any required investigation or other response or any corrective action in connection with any Materials of Environmental Concern on, at, under or emanating from such Properties and real properties; PROVIDED, HOWEVER, that such request may be made only if (a) there has occurred and is continuing an Event of Default, (b) the Administrative Agent reasonably believes that any -53- Precision Group Member or any Properties and real property is not in material compliance with Environmental Law or (c) circumstances exist that reasonably could be expected to form the basis of a claim under any Environmental Law against such Precision Group Member or any such Properties or real property which could materially and adversely affect the business, condition (financial or otherwise), operations, performance or properties of any Precision Group Member. If any Precision Group Member fails to provide the same within 60 days after such request was made, the Administrative Agent may but is under no obligation to conduct the same, and such Precision Group Member shall grant and hereby grants to the Administrative Agent and its agents access to such Properties and real property and specifically grants the Administrative Agent an irrevocable non-exclusive license, subject to the rights of tenants, to undertake such an assessment, all at such Precision Group Member's sole cost and expense. 6.9 ADDITIONAL COLLATERAL, ETC. (a) With respect to any property acquired after the Closing Date by any Precision Group Member (other than (x) any property described in paragraph (b), (c) or (d) below, (y) any property subject to a Lien expressly permitted by Section 7.3(g,) and (z) property acquired by Mid State Foundation or any Excluded Foreign Subsidiary) as to which the Administrative Agent, for the benefit of the Lenders, does not have a perfected Lien, promptly (i) execute and deliver to the Administrative Agent such amendments to the Security Agreement, the Securities Pledge Agreement, any Mortgage or such other documents as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a security interest in such property and (ii) take all actions necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in such property, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Security Agreement, the Securities Pledge Agreement, any Mortgage or by law or as may be requested by the Administrative Agent. (b) With respect to any fee interest in any real property having a value (together with improvements thereof) of at least $250,000 acquired after the Closing Date by any Precision Group Member (other than (x) any such real property subject to a Lien expressly permitted by Section 7.3(g) and (y) real property acquired by any Excluded Foreign Subsidiary), promptly (i) execute and deliver a first priority Mortgage, in favor of the Administrative Agent, for the benefit of the Lenders, covering such real property, (ii) if requested by the Administrative Agent, provide the Lenders with (x) title and extended coverage insurance covering such real property in an amount at least equal to the purchase price of such real property (or such other amount as shall be reasonably specified by the Administrative Agent) as well as a current ALTA survey thereof, together with a surveyor's certificate and (y) any consents or estoppels reasonably deemed necessary or advisable by the Administrative Agent in connection with such mortgage or deed of trust, each of the foregoing in form and substance reasonably satisfactory to the Administrative Agent and (iii) deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. In addition, the relevant Precision Group Member shall cause the relevant documents described above to be delivered in respect of the leasehold properties of Mid State promptly after the earlier of (i) the date on which its purchase option in respect thereof is exercised and (ii) the date that is 30 days after the Closing Date. (c) With respect to any new Subsidiary (other than an Excluded Foreign Subsidiary) created or acquired after the Closing Date by a Precision Group Member (which, for the purposes of this paragraph (c), shall include any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary), promptly (i) execute and deliver to the Administrative Agent a securities pledge amendment to the Security Agreement as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary that is owned by any Precision Group Member, (ii) deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the relevant Precision Group Member, (iii) cause such new Subsidiary (A) to execute and deliver to Administrative Agent a joinder agreement to the Security Agreement or the Securities Pledge Agreement, as applicable, (B) to take such actions necessary or advisable to grant to the Administrative Agent for the benefit of the Lenders a perfected security interest (subject only to Liens -54- permitted by the applicable Security Document) in the Collateral described in the Security Agreement or the Securities Pledge Agreement, as applicable, with respect to such new Subsidiary, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Security Agreement or the Securities Pledge Agreement, as applicable, or by law or as may be requested by the Administrative Agent, and (C) to deliver to the Administrative Agent a certificate of such Subsidiary, substantially in the form of Exhibit C-1, with appropriate insertions and attachments, and (iv) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. (d) With respect to any new Excluded Foreign Subsidiary created or acquired after the Closing Date by any Precision Group Member, promptly (i) execute and deliver to the Administrative Agent a securities pledge amendment to the Security Agreement or the Securities Pledge Agreement, as applicable, as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary that is owned by any Precision Group Member (other than by any Precision Group Member that is a Foreign Subsidiary) (PROVIDED that in no event shall more than 65% of the total outstanding Capital Stock of any such new Subsidiary be required to be so pledged), (ii) deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the relevant Precision Group Member, and take such other action as may be necessary or, in the opinion of the Administrative Agent, desirable to perfect the Administrative Agent's security interest therein, and (iii) deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. 6.10 YEAR 2000 MATTERS. No later than June 30, 1999, deliver to the Lenders a report reasonably satisfactory to the Administrative Agent demonstrating that each Precision Group Member has developed feasible contingency plans adequately to ensure uninterrupted and unimpaired business operation in the event of failure of its own or a third party's systems or equipment due to the Year 2000 Problem, including those of vendors, customers and suppliers, as well as a general failure of or interruption in its communications and delivery infrastructure. 6.11 POST-CLOSING SURVEYS. As soon as reasonably possible but in no event later than one month after the Closing Date, the Borrower shall, and shall cause each of its applicable Subsidiary Guarantors to, obtain and deliver to the Administrative Agent, counsel to the Administrative Agent and the title company, with respect to the Mortgaged Properties located at (i) 6291 Burnham Avenue, Buena Park, CA 90621, (ii) 6351 Burnham Avenue, Buena Park, CA 90621, (iii) 16031 Carmenita Road, Cerritos, CA 90703, (iv) 200 Tech Park Drive, Town of Henrietta, NY 14623 and (v) 3300 Oakton Street, Skokie, IL 60076, a survey sufficient to cause the title company to (a) remove the survey and unrecorded easements exceptions from, and (b) issue, zoning, survey and so-called comprehensive endorsements to, the title commitments and/or title policies coveting such Mortgaged Properties. SECTION 7. NEGATIVE COVENANTS The Loan Parties hereby jointly and severally agree that, so long as the Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, each Loan Party shall not, and shall not permit any other Loan Party to, directly or indirectly: 7.1 FINANCIAL CONDITION COVENANTS. (a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage Ratio of the Borrower as at the last day of any period of four consecutive fiscal quarters ending during any period set forth below (i) if the -55- Consolidated Senior Leverage Ratio at such time is less than or equal to 2.0 to 1.0, to exceed the ratio set forth below in column A opposite such period, or (ii) if the Consolidated Senior Leverage Ratio at such time is greater than 2.0 to 1.0, to exceed the ratio set forth below in column B opposite such period:
Consolidated PERIOD LEVERAGE RATIO ---------- ---------------- A B Closing Date - December 31, 1999 5.50 to 1.0 1.90 5.00 to 1.0 January 1, 2000 - December 31, 2000 5.00 to 1.0 4.75 to 1.0 January 1, 2001 - December 31, 2001 4.50 to 1.0 4.25 to 1.0 January 1, 2002 - and thereafter 4.50 to 1.0 3.75 to 1.0
(b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the Consolidated Interest Coverage Ratio of the Borrower for any period of four consecutive fiscal quarters ending during any period set forth below (i) if the Consolidated Senior Leverage Ratio at the end of any such period for four consecutive fiscal quarters is less than or equal to 2.0 to 1.0, the ratio shall not be less than that set forth below in column A opposite such period, or (ii) if the Consolidated Senior Leverage Ratio is greater than 2.0 to 1.0, the ratio shall not be less than that set forth below in column B opposite such period:
Consolidated PERIOD INTEREST COVERAGE RATIO ------------ ---------------------------- A B Closing Date - March 31, 1999 1.90 to 1.0 1.90 to 1.0 April 1, 1999 - December 31, 1999 2.00 to 1.0 2.00 to 1.0 January 1, 2000 - December 31, 2000 2.00 to 1.0 2.25 to 1.0 January 1, 2001 - December 31, 2001 2.25 to 1.0 2.50 to 1.0 January 1, 2002 - and thereafter 2.50 to 1.0 2.75 to 1.0
(c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the Consolidated Fixed Charge Coverage Ratio of the Borrower (i) for the quarter ending March 31, 1999 to be less than 0.9 to 1.0; (ii) for the two quarters ending June 30, 1999, to be less than 1.0 to 1.0; (iii) for the three quarters ending September 30, 1999, to be less than 1.0 to 1.0; and (iv) for any period of four consecutive fiscal quarters ending at and after December 31, 1999, to be less than 1.0 to 1.0. (d) CAPITAL EXPENDITURES. Permit the aggregate amount of Capital Expenditures made by the Precision Group Members to exceed the amounts set forth below:
YEAR CAPITAL EXPENDITURES ----- --------------------- Closing Date - December 31, 1999 $10,500,000 January 1, 2000 - December 31, 2000 $10,500,000 January 1, 2001 - December 31, 2001 $11,000,000 JANUARY 1, 2002 - DECEMBER 31, 2002 $12,000,000 JANUARY 1, 2003 - DECEMBER 31, 2003 $12,000,000 JANUARY 1, 2004 AND THEREAFTER $13,000,000
PROVIDED, HOWEVER, that up to an aggregate of $1 million at any one time of unused Capital Expenditures amounts may be carried forward to future periods; and, PROVIDED, FURTHER, that the limits set forth above following the Senior Subordinated Notes shall apply to Capital Expenditures made by the Precision Group Members for the full applicable period. In addition, should any Precision Group Member make an acquisition of the property, assets or -56- capital stock of any entity, the Capital Expenditures limits set forth above shall be increased (i) in the annual period in which such acquisition is effected, by an amount equal to the product of the number of whole fiscal quarters remaining in such annual period and 6% of consolidated net revenue (calculated in accordance with GAAP) of such acquired entity for its most recent four quarter fiscal period ending prior to the date of such acquisition and (ii) in subsequent annual periods, by an amount equal to 6% of the consolidated net revenue (calculated in accordance with GAAP) of the acquired entity for the 12-month period ending on the December 31 prior to the start of each such subsequent annual period. 7.2 INDEBTEDNESS. Create, issue, incur, assume, become liable in respect of or suffer to exist any Indebtedness, except: (a) Indebtedness of any Loan Party pursuant to any Loan Document; (b) Indebtedness (including, if applicable, Indebtedness under any Subordinated Note) of any Wholly Owned Qualified Precision Group Member to the Borrower or any other Wholly Owned Qualified Precision Group Member; (c) Guarantee Obligations incurred in the ordinary course of business by any Precision Group Member of obligations of the Borrower or any Wholly Owned Qualified Precision Group Member; (d) Indebtedness outstanding on the date hereof and listed on Schedule 7.2(d) and any refinancings, refundings, renewals, replacements or extensions thereof (without increasing, or shortening the maturity of, the principal amount thereof on the date hereof); (e) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted by Section 7.3(g) in an aggregate principal amount not to exceed $2.5 million at any one time outstanding; (f) Indebtedness consisting of promissory notes issued in lieu of cash payment of bonuses to chief executive officers of Galaxy and Mid State under their employment agreements as in effect on September 30, 1998; (g) Indebtedness of the Borrower and the guarantors thereof under the Senior Subordinated Notes in an aggregate principal amount not to exceed $100,000,000; (h) Indebtedness of the Borrower and the guarantors thereof consisting of Permitted Senior Subordinated Add-On Indebtedness in aggregate principal amount not to exceed $60 million at any one time outstanding; (i) Indebtedness in connection with any Hedge Agreements entered into to protect the Company from fluctuations in interest rates on its outstanding indebtedness; (j) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is extinguished within 3 Business Days of its incurrence; (k) Guarantee Obligations in respect of the Senior Subordinated Notes or the Permitted Senior Subordinated Add-On Indebtedness; -57- (l) Indebtedness up to $1,000,000 in respect of performance bonds, bid bonds, appeal bonds, surety bonds and similar obligations and trade-related letters of credit, including any of the foregoing incurred to secure health, safety and environmental obligations in the ordinary course of business, and any extension, renewal or refinancing of the foregoing; and (m) additional Indebtedness of the Precision Group Members in an aggregate principal amount (for the Precision Group Members taken together) not to exceed $5.0 million at any one time outstanding. 7.3 LIENS. (i) Create, incur, assume or suffer to exist any Lien upon or with respect to any Collateral except for Prior Liens, Liens in favor of the Administrative Agent for the benefit of the Lenders and other Liens expressly permitted by the terms of the applicable Security Documents and (ii) create, incur, assume or suffer to exist any Lien upon any of their respective property that does not constitute Collateral, whether now owned or hereafter acquired, or sell any such property subject to an understanding or agreement, contingent or otherwise, to repurchase such property (including the sale of accounts receivable with recourse to any Loan Party) or assign any right to receive income, except for Liens expressly permitted by the applicable Security Document and except for the following, which are herein collectively referred to as "PERMITTED LIENS": (a) Liens for taxes, assessments or other governmental charges or liens that are not yet delinquent or are for less than $1,000,000 in the aggregate, that are being contested in good faith by appropriate proceedings; PROVIDED that adequate reserves with respect thereto are maintained on the books of the relevant Precision Group Member in conformity with GAAP; (b) (i) carriers', warehousemen's, mechanics', materialmen's, repairmen's, suppliers', sellers', landlords' or other like Liens and (ii) Liens that have not been registered in accordance with applicable law, in each case arising in the ordinary course of business and not overdue for a period of more than 30 days or that are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, customs or performance bonds, government contracts or other obligations of a like nature incurred in the ordinary course of business and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions, title defects or irregularities, governmental restrictions on the use of property and other similar encumbrances incurred in the ordinary course of business that, in the aggregate, are not substantial in amount and that do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Precision Group Members; (f) Liens in existence on the date hereof listed on Schedule 7.3(f) (including extensions and renewals); PROVIDED that no such Lien is spread to cover any additional property (or category of property, other than proceeds) after the Closing Date and that the principal amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of any Precision Group Member incurred pursuant to Section 7.2(e) to finance the acquisition of fixed or capital assets; PROVIDED that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at -58- any time encumber any property other than the property financed by such Indebtedness and (iii) the amount of Indebtedness secured thereby is not increased; (h) any interest or title of a lessor under any lease entered into by any Precision Group Member in the ordinary course of its business and coveting only the assets so leased; (i) Liens not otherwise permitted by this Section so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds (for the Precision Group Members taken together) $500,000 at any one time; (j) Liens existing on property or assets of any Wholly Owned Subsidiary of the Borrower prior to the acquisition thereof by the Borrower; PROVIDED that (i) any such Lien is not created in contemplation of or in connection with the acquisition of such Wholly-Owned Subsidiary, (ii) such Lien does not apply to any other property or asset of the Borrower or any other Loan Party and (iii) the Indebtedness secured by such Lien is permitted to be incurred hereunder; (k) Liens to secure other Indebtedness permitted under Section 7.2(i); (l) Liens securing judgments for the payment of money in an aggregate amount not in excess of $1,500,000 (except to the extent covered by insurance, which coverage has been affirmed by the insurer), unless such judgments shall remain undischarged for a period of more than 30 consecutive days during which execution shall not be effectively stayed; (m) any leases or subleases to other persons of properties or assets owned or leased by a Precision Group Member; (n) Liens that are contractual rights of setoff (i) relating to the establishment of depository relations with banks not given in connection with the issuance of Indebtedness or (ii) pertaining to pooled deposit and/or sweep accounts of a Precision Group Member to permit satisfaction of overdraft or similar obligations incurred in the ordinary course of business of such Precision Group Member; (o) Liens on proceeds and products and (to the extent constituting a trade-in, substitution or casualty replacement) replacements of, chattel paper and other evidences of ownership of, and accessions to, and general intangibles directly relating to, property to the extent they relate to liens on such property to the extent they relate to Liens on such property that are permitted by any other provision of this Section 7.3; (p) Liens in favor of the Borrower or any Subsidiary Guarantor; (q) Liens in favor of the Trustee under the Senior Subordinated Indenture; and (r) other general Liens not to exceed $1,000,000. 7.4 FUNDAMENTAL CHANGES. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of, all or substantially all of its property or business, except that: (a) any Precision Group Member may be merged or consolidated with or into the Borrower (PROVIDED that the Borrower shall be the continuing or surviving corporation) or, except in the case of the -59- Borrower, with or into any Wholly Owned Qualified Precision Group Member (PROVIDED that a Wholly Owned Qualified Precision Group Member shall be the continuing or surviving corporation); and (b) any Precision Group Member may Dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or, except in the case of the Borrower, to any Wholly Owned Qualified Precision Group Member. 7.5 DISPOSITION OF PROPERTY. Dispose of any of its property, whether now owned or hereafter acquired, or issue or sell any shares of its Capital Stock to any Person, except: (a) (i) the Disposition of obsolete or worn out property in the ordinary course of business and (ii) the Disposition of the property listed on Schedule 7.5; (b) the sale of inventory in the ordinary course of business; (c) Dispositions permitted by Section 7.4(b); (d) (i) the sale or issuance of any Precision Group Member's Capital Stock to any Wholly Owned Qualified Precision Group Member or the Borrower, or (ii) the issuance of Capital Stock of Holdco to Holdco's parent and employees of the Precision Group Members; (e) the Disposition of other property having a fair market value not to exceed $500,000 in the aggregate for any fiscal year of the Precision Group Members; (f) sales, leases or other dispositions of equipment or real or personal property (other than inventory sold in the ordinary course of business), of a Precision Group Member determined by the Board of Directors or senior management of such Precision Group Member to be no longer useful or necessary in the operation of the business of Precision Group Member; PROVIDED that the Net Proceeds thereof shall be applied in accordance with Section 2.7(b); (g) sales, leases or other dispositions of inventory of a Precision Group Member not made in the ordinary course of business determined by the Board of Directors or senior management of such Precision Group Member to be obsolete; PROVIDED that the Net Cash Proceeds thereof shall be applied in accordance with Section 2.7(b); and (h) sales, leases or other dispositions of assets through Capital Asset Exchanges. 7.6 RESTRICTED PAYMENTS. (i) Make any principal payment on, or purchase, defease, repurchase, redeem or otherwise acquire or retire for value, prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness, or (ii) declare or pay any dividend (other than dividends payable solely in common stock of the Person making such dividend) on, or make any payment on account of or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any Capital Stock of any Precision Group Member, whether now or hereafter outstanding, or make any other distribution in respect thereof either directly or indirectly, whether in cash or property or in obligations of any Precision Group Member (collectively, "RESTRICTED PAYMENTS"), except that (x) any Precision Group Member may make Restricted Payments to any Wholly Owned Qualified Precision Group Member or the Borrower and (y) the Borrower may make payments to Holdco to pay management and advisory fees to the Saunders Group and the Carlisle Group in an aggregate amount not to exceed $800,000 in any fiscal year or acquisition transaction fees payable to Saunders Group, Carlisle Group and Harvey Group pursuant to past practice and the Acquisitions. -60- 7.7 INVESTMENTS. Make any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase any Capital Stock, bonds, notes, debentures or other debt securities of, or any assets constituting a business unit of, or make any other investment in, any other Person (all of the foregoing, "INVESTMENTS"), except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) Guarantee Obligations permitted by Section 7.2; (d) loans and advances to employees of the Precision Group Members in the ordinary course of business (including for travel, entertainment and relocation expenses) in an aggregate amount for the Precision Group Members not to exceed $500,000 at any one time outstanding; (e) (i) the Certified Acquisition, (ii) the General Automation Acquisition and the Nationwide Acquisition if made in connection with the Senior Subordinated Notes and (iii) Permitted Acquisitions; (f) intercompany loans in the ordinary course of business by any Precision Group Member in any Person that, prior to such loan, is a Wholly Owned Qualified Precision Group Member or the Borrower; (g) any endorsement of a check or other medium of payment for deposit or collection, or any similar transaction, in each case in the ordinary course of business; (h) Investments acquired by any Precision Group Member in connection with a Disposition permitted by Section 7.5; (i) Investments by any Precision Group Member in Hedge Agreements other than for speculative purposes; (j) Investments acquired by any Precision Group Member (i) in exchange for any other Investment held by any Precision Group Member in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or (ii) as a result of the foreclosure by any Precision Group Member with respect to any secured Investment or other transfer of title with respect to any secured Investment in default; (k) existing Investments described on Schedule 7.7; (l) loans in an aggregate amount of up to $1,000,000 made to holders of Capital Stock of Precision (other than the Sponsors) to finance the purchase of Capital Stock of Precision, so long as promissory notes are issued in connection therewith and pledged as Collateral pursuant to the appropriate Security Document; (m) loans and advances to management of the Precision Group Members to purchase Capital Stock of any Precision Group Member not to exceed $2,000,000 at any one time outstanding, provided that such Capital Stock is pledged to the lender of such Indebtedness on customary terms; and (n) any other investments approved by the Required Lenders. -61- 7.8 MODIFICATIONS OF CERTAIN INSTRUMENTS. Amend, modify, waive or otherwise change, or consent or agree to any material amendment, modification, waiver or other change to, any of the terms of the Indebtedness of any Precision Group Member or the Holdco Preferred; PROVIDED, HOWEVER, that Holdco may engage in stock splits and reclassifications in respect of the Holdco Preferred. 7.9 TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including any purchase, sale, lease or exchange of property, the rendering of any service or the payment of any management, advisory or similar fees (other than management and advisory fees payable to the Saunders Group and the Carlisle Group in an aggregate amount not to exceed $800,000 in any fiscal year or acquisition transaction fees payable to the Saunders Group, the Carlisle Group and the Harvey Group pursuant to past practice and the Acquisitions), with any Affiliate (other than Wholly Owned Qualified Precision Group Members) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of business of the relevant Precision Group Member and (c) upon fair and reasonable terms no less favorable to the relevant Precision Group Member than it would obtain in a comparable arm's-length transaction with a Person that is not an Affiliate. 7.10 SALES AND LEASEBACKS. Enter into any arrangement providing for the leasing to any Precision Group Member of real or personal property that has been or is to be (a) sold or transferred by any Precision Group Member or (b) constructed or acquired by a third party in anticipation of a program of leasing to any Precision Group Member. 7.11 CHANGES IN FISCAL PERIODS. Permit the fiscal year of the Precision Group Members to end on a day other than December 31 or change the Precision Group Members' method of determining fiscal quarters, except that Galaxy shall be permitted to have a fiscal year end of August 31, to change such fiscal year end to December 31 and to correspondingly change its fiscal quarter end dates. 7.12 NEGATIVE PLEDGE CLAUSES. Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of any Precision Group Member to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, other than (a) this Agreement and the other Loan Documents and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby). 7.13 CLAUSES RESTRICTING PRECISION GROUP MEMBER DISTRIBUTIONS. Enter into or suffer to exist or become effective any consensual encumbrance or restriction, other than this Agreement and the other Loan Documents, on the ability of any Precision Group Member to (a) make Restricted Payments in respect of any Capital Stock of such Precision Group Member held by, or pay any Indebtedness owed to, any other Precision Group Member, (b) make loans or advances to, or other Investments in, any other Precision Group Member or (c) transfer any of its assets to any other Precision Group Member, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents, (ii) in the case of clause (c) above, customary non-assignment clauses in leases and other contracts entered into in the ordinary course of business and (iii) any restrictions with respect to a Precision Group Member imposed pursuant to an agreement that has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Precision Group Member that is otherwise permitted hereby. 7.14 LINES OF BUSINESS. (a) Enter into any business, either directly or through any other Precision Group Member, except for those businesses in which the Precision Group Members are engaged on the date of this Agreement (after giving effect to the Acquisition) or that are reasonably related thereto or (b) permit Mid State Foundation to engage in any business activities other than those directly associated with operating a charitable foundation. -62- 7.15 AMENDMENTS TO ACQUISITION DOCUMENTS. (a) Amend, supplement or otherwise modify (pursuant to a waiver or otherwise) the terms and conditions of the indemnities, licenses, purchase price adjustments or executive bonus payments (collectively, "SPECIFIED PROVISIONS") contained in the Acquisition Documentation such that after giving effect thereto such Specified Provisions shall be materially less favorable to the interests of the Loan Parties or the Lenders with respect thereto or (b) otherwise amend, supplement or otherwise modify the terms and conditions of the Acquisition Documentation or any such other documents except for any such amendment, supplement or modification that could not reasonably be expected to have a Material Adverse Effect. 7.16 DESIGNATED SENIOR DEBT PROVISIONS. If any Subordinated Indebtedness issued by a Loan Party contains provisions which enable such Loan Party to designate specifically any "Senior Debt" (or comparable term as defined therein) for the purpose of giving payment blockage notices or any other purpose beneficial to the lenders, or holders, of any such "Senior Debt", such Loan Party shall so designate Indebtedness hereunder and not any other Indebtedness, whether or not such other Indebtedness may constitute "Senior Debt" of such Loan Party. 7.17 LIMITATION ON HOLDCO BUSINESS. Holdco will not engage in businesses other than the holding of the Capital Stock of Precision Partners, Inc., the issuance of unsecured subordinated promissory notes with respect to the consummation of the Acquisitions and the granting of options in respect of its Capital Stock in respect of employee benefit plans of the Precision Group Members. SECTION 8. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) the Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Reimbursement Obligation, or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or (b) any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made; or (c) any Loan Party shall default in the observance or performance of any agreement contained in clause (i) or (ii) of Section 6.4(a), Section 6.7(a) or Section 7 of this Agreement or Sections 5(e) and 10 of the Security Agreement; or (d) any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after notice to the Borrower from the Administrative Agent or the Required Lenders; or (e) any Precision Group Member shall (i) default in making any payment of any principal of any Indebtedness (including any Guarantee Obligation, but excluding the Loans) on the scheduled or original due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or -63- other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; PROVIDED, that a default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $1,500,000; or (f) (i) any Loan Party shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Loan Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Loan Party any case, proceeding or other action of a nature referred to in clause (i) above that (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any Loan Party any case, proceeding or other action seeking issuance of a warrant of attachment, execution, dismount or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Loan Party shall take any action in furtherance of, or indicating its consent to, approval of or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Loan Party shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated finding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Required Lenders, reasonably be expected to have a Material Adverse Effect; or (h) one or more judgments or decrees shall be entered against any Precision Group Member involving in the aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $1,500,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or -64- (i) any Guarantee shall cease, for any reason, to be in full force and effect or any Loan Party or any Affiliate of any Loan Party shall so assert; or (j) (i) any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party or any Affiliate of any Loan Party shall so assert, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby or (ii) Precision shall fail to cause any of its new Subsidiaries to comply with Section 6.9(c); or (k) (i) the Permitted Investors shall cease to have the power to Control Holdco; (ii) any of the Carlisle Group, the Harvey Group or the Saunders Group shall cease to own of record and beneficially an amount of Capital Stock of Precision equal in the aggregate to at least 51% of the amount of Capital Stock of Precision owned by such Group of record and beneficially as of the Closing Date; (iii) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), excluding the Permitted Investors, shall become, or obtain rights (whether by means of warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than 20% of the outstanding Capital Stock of Holdco; or (iv) Holdco shall cease to own, of record and beneficially, directly or indirectly, 100% of each class of outstanding Capital Stock of the Borrower, in each case free and clear of all Liens (except Permitted Liens and Liens created by the Security Agreement); or (l) Holdco shall (i) conduct, transact or otherwise engage in, or commit to conduct, transact or otherwise engage in, any business or operations other than those incidental to its ownership of the Capital Stock of the Borrower, (ii) incur, create, assume or suffer to exist any Indebtedness or other liabilities or financial, obligations, except (x) nonconsensual obligations imposed by operation of law, (y) pursuant to the Loan Documents to which it is a party and (z) obligations with respect to its Capital Stock, or (iii) own, lease, manage or otherwise operate any properties or assets other than the ownership of shares of Capital Stock of any other Precision Group Member; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower declare the Revolving Commitments to be terminated forthwith, whereupon the Revolving Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower shall at such time deposit an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit in a cash collateral account established with the Administrative Agent for the benefit of the Lenders on terms and conditions satisfactory to the Administrative Agent. Amounts held in such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the -65- Borrower hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto). Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower. SECTION 9. THE AGENTS 9.1 APPOINTMENT. Each Lender hereby irrevocably designates and appoints the Agents as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes each Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to such Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or any other Loan Document, no Agent shall have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against any Agent. Without limiting the foregoing, the use of the term "agent" with respect to each Agent is used as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. The Issuing Lender shall act on behalf of the Lenders with respect to Letters of Credit. It is understood and agreed that the Issuing Lender (a) shall have all of the benefits and immunities (i) provided to the Agents in this Section 9 with respect to acts taken or omissions suffered by the Issuing Lender in connection with Letters of Credit as fully as if the term "Agent", as used in this Section 9, included the Issuing Lender with respect to such acts or omissions and (ii) as additionally provided in this Agreement and (b) shall, with respect to the Revolving Lenders, (i) have all of the benefits of the provisions of Section 9.7 as fully as if the term "Agent", as used in Section 9.7, included the Issuing Lender and (ii) have all of the benefits of the provisions of Sections 9.3 and 9.6 as fully as if the term "Agent-Related Persons", as used in Sections 9.3 and 9.6, included the Issuing Lender. 9.2 DELEGATION OF DUTIES. Each Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 9.3 EXCULPATORY PROVISIONS. None of the Agent-Related Persons shall be (i) liable for any action lawfully taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by any Agent-Related Person under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party. The Administrative Agent shall maintain a record of the principal amount of the Loans and L/C Obligations from time to time outstanding and the -66- respective amounts thereof owing to each Lender. Any records maintained by any Agent-Related Person setting forth the names and addresses of the Lenders and the Commitments of, and the principal amount of the Loans owing to, each Lender from time to time shall be conclusive, in the absence of manifest error. 9.4 RELIANCE BY AGENTS. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or telephone message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by such Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. Each Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 9.5 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); PROVIDED that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 9.6 NON-RELIANCE ON ANY AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that none of the Agent-Related Persons has made any representations or warranties to it and that no act by any Agent-Related Person hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to each Agent that it has, independently and without reliance upon any Agent-Related Person or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and all applicable bank regulatory laws relating to the transactions contemplated hereby and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, no Agent-Related Person shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any affiliate of a Loan Party which may come into the possession of any of the Agent-Related Persons. -67- 9.7 INDEMNIFICATION. Whether or not the transactions contemplated hereby are consummated, the Lenders agree to indemnify each Agent and its respective officers, directors, trustees, professional advisors, employees, affiliates, agents and controlling persons (each, a "SECTION 9.7 INDEMNITEE") (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Aggregate Exposure Percentages in effect on the date on which indemnification is sought under this Section 9.7 (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against such Section 9.7 indemnitee in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by such Section 9.7 indemnitee under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the relevant Section 9.7 indemnitee's gross negligence or willful misconduct. The agreements in this Section 9.7 shall survive the repayment of the Loans and all other amounts payable hereunder. 9.8 AGENT IN ITS INDIVIDUAL CAPACITY. Each Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Precision Group Members as though such Agent were not an Agent hereunder and under the other Loan Documents and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, each Agent and its Affiliates may receive information regarding the Precision Group Members or their Affiliates (including information that may be subject to confidentiality obligations in favor of the Precision Group Members or their Affiliates) and acknowledge that neither any Agent nor its Affiliates shall be under an obligation to provide such information to them. With respect to its Loans made or renewed by it and with respect to any Letter of Credit issued or participated in by it, each Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not an Agent, and the terms "Lender" and "Lenders" shall include each Agent in its individual capacity. 9.9 SUCCESSOR AGENTS. Each Agent may resign as an Agent upon 30 days' notice to the Lenders and the Borrower. If an Agent shall resign under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be approved by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of such Agent hereunder. If no successor agent is appointed prior to the effective date of the resignation of the an Agent, such Agent may appoint, after consulting with the Lenders and the Borrower, a successor agent from among the Lenders. Effective upon such appointment by the Required Lenders or by an Agent, and the term "Administrative Agent," "Documentation Agent" or "Syndication Agent," as the case may be, shall mean such successor agent effective upon such appointment and approval, and the former Agent's rights, powers and duties as such Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Agent's resignation as an Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Agent under this Agreement and the other Loan Documents. If no successor agent has accepted appointment as an Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring an Agent's resignation shall nevertheless thereupon become effective and the Lenders shall assume and perform all of the duties of such Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. -68- 9.10 AUTHORIZATION TO RELEASE LIENS. The Administrative Agent is hereby irrevocably authorized by each of the Lenders to release any Lien covering any property of the Precision Group Members that is the subject of a Disposition which is permitted by this Agreement or which has been consented to in accordance with Section 10.1. SECTION 10. MISCELLANEOUS 10.1 AMENDMENTS AND WAIVERS. Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.1. The Required Lenders and each Loan Party party to the relevant Loan Document may, or, with the written consent of the Required Lenders, the Administrative Agent and each Loan Party party to the relevant Loan Document may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; PROVIDED, HOWEVER, that no such waiver and no such amendment, supplement or modification shall (i) forgive the principal amount or extend the final scheduled date of maturity of any Loan, extend the scheduled date of any amortization payment in respect of any Term Loan, reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lender's Revolving Commitment, in each case without the consent of each Lender directly affected thereby; (ii) amend, modify or waive any provision of Section 2.2(b) or increase any percentage specified in the definition of Borrowing Base, in each case without the written consent of all Revolving Lenders; (iii) reduce any percentage specified in the definition of Required Lenders, Majority Facility Lenders or Required Prepayment Lenders, or consent to the assignment or transfer by any Precision Group Member of any of its rights and obligations under this Agreement and the other Loan Documents, in each case without the written consent of all Lenders, (iv) except in connection with any Disposition permitted hereby or approved by the Required Lenders, release any significant part of the Collateral or release any significant Subsidiary Guarantor from its obligations under the Guarantee or any Security Document, in each case without the written consent of all Lenders; (v) reduce the percentage specified in the definition of Majority Facility Lenders with respect to any Facility without the written consent of all Lenders under such Facility; (vi) amend, modify or waive any provision of Section 9 relating to any Agent without the written consent of such Agent; or (vii) amend, modify or waive any provision of Section 3 without the written consent of the Issuing Lender. Notwithstanding anything to the contrary in this Section 10.1, any amendment, supplement or modification to this Agreement made in order to provide additional financing under this Agreement in connection with any Investment permitted hereby or otherwise approved by the Required Lenders, including pursuant to increases in the amount of any Facility or the addition of new facilities (together with changes made to accommodate any such increased Facility or new facility, including those relating to payment application matters and voting matters), may be effected with the approval of the Majority Facility Lenders under each Facility. Any waiver and any amendment, supplement or modification made in accordance with this Section 10.1 shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the Agents and all future holders of the Loans. In the case of any waiver, the Loan Parties, the Lenders and the Agents shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 10.2 NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of Holdco, the -69- Borrower and the Agents, and as set forth in an administrative questionnaire delivered to the Administrative Agent in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower and Holdco: Precision Partners, Inc. 5605 North McArthur Blvd., Suite 760 Irving, Texas 75038 Attention: Ron Miller Telecopy: (972) 580-1550 Telephone: (972) 580-1551 The Administrative Agent: For notices of borrowing, payments and other administrative matters: Citicorp U.S.A., Inc. 399 Park Avenue New York, NY 10022-4600 Attention: Nicolas Erni Telecopy: (212) 793-3963 Telephone: (212) 559-8977 For all other notices (including Compliance Certificates and notices with respect to amendments and waivers): Citicorp U.S.A., Inc. Global Loans Support Services 2 Penns Way Suite 200 New Castle, DE 19720 Attention: Christian Laughton Telecopy: (302) 894-6120 Telephone: (302) 894-6005 The Syndication Agent: NationsBank, N.A. NationsBank Corporate Center 100 North Tryon Street Charlotte, NC 28255-0001 Attention: John J. O'Neill The Documentation Agent: SunTrust Bank, Atlanta 25 Park Place 26th Floor Atlanta, GA 30303 Attention: Susan Hall PROVIDED that any notice, request or demand to or upon any Agent or the Lenders shall not be effective until received. 10.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of any Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan -70- Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder. 10.5 PAYMENT OF EXPENSES AND TAXES. Each of Holdco and the Borrower agrees (a) to pay or reimburse the Administrative Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including the reasonable fees and disbursements of counsel to the Administrative Agent and filing and recording fees and expenses, with statements with respect to the foregoing to be submitted to the Borrower prior to the Closing Date (in the case of amounts to be paid on the Closing Date) and from time to time thereafter on a quarterly basis or such other periodic basis as the Administrative Agent shall deem appropriate, (b) to pay or reimburse each Lender and each Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including the fees and disbursements of counsel to each Lender and of counsel to such Agent, (c) to pay, indemnify, and hold each Lender and each Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, that may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and each Agent and their respective officers, directors, employees, affiliates, agents and controlling persons (each, an "INDEMNITEE") harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Precision Group Members or any of the Properties and the reasonable fees and expenses of legal counsel in connection with claims, actions or proceedings by any Indemnitee against any Loan Party under any Loan Document (all the foregoing in this clause (d), collectively, the "INDEMNIFIED LIABILITIES"); PROVIDED that Holdco and the Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities to the extent such Indemnified Liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. Without limiting the foregoing, and to the extent permitted by applicable law, Holdco and the Borrower agree not to assert and to cause the other Precision Group Members not to assert, and hereby waives and agrees to cause the other Precision Group Members to so waive, all rights for contribution or any other rights of recovery with respect to all claims, demands, penalties, frees, liabilities, settlements, damages, costs and expenses of whatever kind or nature, under or related to Environmental Laws, that any of them might have by statute or otherwise against any Indemnitee. All amounts due under this Section 10.5 shall be payable not later than 15 days after written demand therefor. Statements payable by Holdco or the Borrower pursuant to this Section 10.5 shall be submitted to Ron Miller (Telephone No. (619) 565-7881) (Telecopy No. (619) 565-4660), at the address of the Borrower set forth in Section 10.2, or to such other Person or address as may be hereafter designated by the Borrower in a written notice to the Administrative Agent. The agreements in this Section 10.5 shall survive repayment of the Loans and all other amounts payable hereunder. -71- 10.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. (a) This Agreement shall be binding upon and inure to the benefit of Holdco, the Borrower, the Subsidiary Guarantors, the Lenders, the Agents, all future holders of the Loans and their respective successors and assigns. (b) Any Lender may, without the consent of the Borrower, in accordance with applicable law, at any time sell to one or more banks, financial institutions or other entities (each, a "PARTICIPANT") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents, in no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Loans or any fees payable hereunder, or postpone the date of the final maturity of the Loans, in each case to the extent subject to such participation. The Borrower agrees that if amounts outstanding under this Agreement and the Loans are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; PROVIDED that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 10.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; PROVIDED that, in the case of Section 2.16, such Participant shall have complied with the requirements of said Section; and PROVIDED, FURTHER, that no Participant shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender (an "ASSIGNOR") may, in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Borrower (which consent shall not be unreasonably withheld or delayed), the Issuing Lender (in the case of assignments of Revolving Commitments) and the Administrative Agent, to an additional bank, financial institution or other entity (an "ASSIGNEE") all or any part of its rights and obligations under this Agreement pursuant to an Assignment and Acceptance, executed by such Assignee, such Assignor and any other Person whose consent is required pursuant to this paragraph, and delivered to the Administrative Agent for its acceptance and recording in the Register; PROVIDED that no such assignment to an Assignee (other than any Lender or any affiliate thereof) shall be in an aggregate principal amount of less than $5,000,000 (other than in the case of an assignment of all of a Lender's interests under this Agreement), unless otherwise agreed by the Borrower and the Administrative Agent. Any such assignment need not be ratable as among the Facilities. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment and/or Loans as set forth therein, and (y) the Assignor thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of an Assignor's rights and obligations under this Agreement, such Assignor shall cease to be a party hereto). Notwithstanding any provision of this Section 10.6, the consent of the Borrower shall not be required for any assignment that occurs when an Event of Default pursuant to Section 8(a) or 8(f) shall have occurred and be continuing with respect to the Borrower. -72- (d) The Administrative Agent shall, on behalf of the Borrower, maintain at its address referred to in Section 10.2 a copy of each Assignment and Acceptance delivered to it and a register (the "REGISTER") for the recordation of the names and addresses of the Lenders and the Commitment of, and the principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, each other Loan Party, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of the Loans and any Notes evidencing the Loans recorded therein for all purposes of this Agreement. Any assignment of any Loan, whether or not evidenced by a Note, shall be effective only upon appropriate entries with respect thereto being made in the Register (and each Note shall expressly so provide). (e) Upon its receipt of an Assignment and Acceptance executed by an Assignor, an Assignee and any other Person whose consent is required by Section 10.6(c), together with payment to the Administrative Agent of a registration and processing fee of $4,000, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) record the information contained therein in the Register on the effective date determined pursuant thereto. (f) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section 10.6 concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. (g) The Borrower, upon receipt of written notice from the relevant Lender, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type described in paragraph (f) above. 10.7 ADJUSTMENTS; SETOFF. (a) Except to the extent that this Agreement expressly provides for payments to be allocated to a particular Lender or to the Lenders under a particular Facility, if any Lender (a "BENEFITTED LENDER") shall, at any time after the Loans and other amounts payable hereunder shall immediately become due and payable pursuant to Section 8, receive any payment of all or part of the Obligations owing to it or receive any collateral in respect thereof (whether voluntarily or involuntarily, by setoff, pursuant to events or proceedings of the nature referred to in Section 8(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of the Obligations owing to such other Lender, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of the Obligations owing to each such other Lender, or shall provide such other Lenders with the benefits of any such collateral, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral ratably with each of the Lenders; PROVIDED, HOWEVER, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to Holdco or the Borrower, any such notice being expressly waived by Holdco and the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by Holdco or the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise), to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of Holdco or the Borrower, as the case may be. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender; PROVIDED that the failure to give such notice shall not affect the validity of such setoff and application. -73- 10.8 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 10.9 SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.10 INTEGRATION. This Agreement and the other Loan Documents represent the agreement of Holdco, the Borrower, the Subsidiary Guarantors, the Agents and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by any Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 10.12 SUBMISSION TO JURISDICTION; WAIVERS. Each of Holdco and the Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to Holdco or the Borrower, as the case may be, at its address set forth in Section 10.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 10.13 ACKNOWLEDGMENTS. Each of Holdco and the Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; -74- (b) neither any Agent nor any Lender has any fiduciary relationship with or duty to Holdco or the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Agents and Lenders, on one hand, and Holdco and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among Holdco, the Borrower and the Lenders. 10.14 CONFIDENTIALITY. Each Agent and each Lender agrees to keep confidential all non-public information provided to it by any Loan Party pursuant to this Agreement and the other Loan Documents that is designated by such Loan Party as confidential; PROVIDED that nothing herein shall prevent any Agent or any Lender from disclosing any such information (a) to any other Agent, any other Lender or any affiliate of any Lender, (b) to any Transferee or prospective Transferee that agrees to comply with the provisions of this Section, (c) to its employees, directors, agents, attorneys, accountants and other professional advisors or those of any of its affiliates, (d) upon the request or demand of any Governmental Authority, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (f) if requested or required to do so in connection with any litigation or similar proceeding, (g) that has been publicly disclosed, (h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender's investment portfolio in connection with ratings issued with respect to such Lender, or (i) in connection with the exercise of any remedy hereunder or under any other Loan Document. 10.15 WAIVERS OF JURY TRIAL. HOLDCO, THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. -75- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PRECISION PARTNERS, INC. By: /s/ R. M. MILLER ------------------------------------- Name: Ronald Miller Title: Vice President PRECISION PARTNERS HOLDING COMPANY By: /s/ R. M. MILLER ------------------------------------- Name: Ronald Miller Title: Vice President MID STATE MACHINE PRODUCTS By: /s/ R. M. MILLER ------------------------------------ Name: Ronald Miller Title: Vice President GALAXY INDUSTRIES CORPORATION By: /s/ R. M. MILLER ----------------------------------- Name: Ronald Miller Title: Vice President NATIONWIDE PRECISION PRODUCTS CORP. By: /s/ R. M. MILLER ----------------------------------- Name: Ronald Miller Title: Vice President GENERAL AUTOMATION, INC. By: /s/ R. M. MILLER ------------------------------------- Name: Ronald Miller Title: Vice President CERTIFIED FABRICATORS, INC. By: /s/ R. M. MILLER ------------------------------------- Name: Ronald Miller Title: Vice President CALBRIT DESIGN. INC. By: /s/ R. M. MILLER ------------------------------------ Name: Ronald Miller Title: Vice President CITICORP U.S.A. INC. as Administrative Agent By: /s/ NICOLAS ERNI -------------------------------------- Name: NICOLAS T. ERNI Title: ATTORNEY IN FACT CITICORP U.S.A.. INC. as a Lender and as Issuing Lender By: /s/ NICOLAS ERNI ------------------------------------- Name: NICOLAS T. ERNI Title: ATTORNEY IN FACT NATIONSBANK, N.A., as Syndication Agent By: /s/ JOHN J. O'NEILL -------------------------------------- Name: John J. O'Neill Title: Senior Vice President NATIONSBANK, N.A., as a Lender and as Issuing Lender By: /s/ JOHN J. O'NEILL ------------------------------------- Name: John J. O'Neill Title: Senior Vice President SUNTRUST BANK, ATLANTA as Documentation Agent By: /s/ S. M. HALL ------------------------------------- Name: Susan M. Hall Title: Director SUNTRUST BANK, ATLANTA as a Lender By: /s/ S.M. HALL ------------------------------------- Name: Susan M. Hall Title: Director SUNTRUST BANK, ATLANTA as Documentation Agent By: /s/ C. JONES ------------------------------------- Name: Chris T. Jones Title: Vice President SUNTRUST BANK, ATLANTA as a Lender By: /s/ C. JONES ------------------------------------- Name: Chris T. Jones Title: Vice President [EXHIBIT A-1] FORM OF HOLDCO GUARANTEE GUARANTEE, dated as of March 19, 1999 ("Guarantee"), by Precision Partners Holding Company, a Delaware corporation ("Guarantor"), in favor and for the benefit of Citicorp U.S.A., Inc., having an office at 399 Park Avenue, New York, New York 10022-4600, in its capacity as Administrative Agent (in such capacities and together with any successors in such capacity, the "Administrative Agent") for the ratable benefit of the lending institutions (the "Lenders") from time to time party to the Credit Agreement (as hereinafter defined). RECITALS: A. Pursuant to the Credit Agreement, dated as of March 19, 1999 (as amended from time to time, the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the guarantors from time to time thereunder, the Lenders, the Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent (together with the Syndication Agent and the Administrative Agent, the "Agents"), the Lenders have agreed (i) to make to or for the account of the Borrower certain Term Loans up to an aggregate principal amount of $23,000,000 and certain Revolving Loans up to an aggregate principal amount of $25,000,000 and (ii) to issue certain Letters of Credit for the account of the Borrower. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement. B. It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to the Issuing Lender issuing Letters of Credit under the Credit Agreement that the Guarantor shall have executed and delivered this Guarantee and that this Guarantee shall be in full force and effect. C. This Guarantee is given by the Guarantor in favor of the Administrative Agent for its benefit and the benefit of the Lenders to guarantee all of the Obligations of the Borrower in accordance with the terms of the Credit Agreement. D. All of the Guarantor's obligations hereunder shall be secured pursuant to the Security Documents to which the Guarantor is a party. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as follows: 1. Guarantee. (a) To induce the Lenders to execute and deliver the Credit Agreement and to make the Loans and issue the Letters of Credit upon the terms and conditions set forth in the Credit Agreement, and in consideration thereof, the Guarantor hereby unconditionally and irrevocably (i) guarantees to the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) and at all times thereafter of the Obligations of the Borrower (including amounts which would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code); and (ii) agrees to pay any and all reasonable expenses (including reasonable attorneys' fees and disbursements) which may be paid or incurred by the Lenders or the Agents in -2- enforcing any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, the Guarantor under this Guarantee (collectively, the "Guaranteed Obligations"). (b) The Guarantor agrees that this Guarantee constitutes a guarantee of payment when due and not of collection and waives any right to require that any resort be had by the Agents or any Lender to any of the security held for payment of any of the Guaranteed Obligations or to any balance of any deposit account or credit on the books of the Agents or any Lender in favor of the Borrower or any other Person. (c) No payment or payments made by the Guarantor or any other Person or received or collected by the Lenders (or the Agents on behalf of the Lenders) from the Guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Guaranteed Obligations shall be deemed to modify, release or otherwise affect the liability or obligations of the Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments on the Guaranteed Obligations made to the Lenders (or the Agents on behalf of the Lenders) by the Guarantor or any other Person or payments received or collected by the Lenders (or the Administrative Agent or Agents on behalf of the Lenders) from the Guarantor or any other Person, remain liable for the Guaranteed Obligations until the Guaranteed Obligations are paid in full in cash or cash equivalents. 2. Waiver by Guarantor. The Guarantor hereby waives absolutely and irrevocably any claim which it may have against the Borrower or any of its respective Affiliates by reason of any payment to the Agents, Administrative Agent or any Lender, or to any other Person pursuant to or in respect of this Guarantee, including any claims by way of subrogation, contribution, reimbursement, indemnity or otherwise, until the Guaranteed Obligations have been paid in full. 3. Consent by Guarantor. The Guarantor hereby consents and agrees that, without the necessity of any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, any demand for payment of any of the Guaranteed Obligations made by the Agents, or any Lender may be rescinded by the Lenders (or the Agents on behalf of the Lenders) and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Lenders (or the Agents on behalf of the Lenders); and the Credit Agreement or any other Loan Document, or other guarantee or documents in connection therewith, or any of them, may be amended, modified, supplemented or terminated, in whole or in part, as the Lenders (or the Agents on behalf of the Lenders) may deem advisable from time to time (in accordance with the terms thereof); and any Guarantee or right of offset or any collateral may be sold, exchanged, waived, surrendered or released, all without the necessity of any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, which will remain bound hereunder, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender or release. Neither the Lenders nor the Agents shall have any obligation to protect, secure, perfect or insure any collateral or property at any time held as security for the Guaranteed Obligations or this Guarantee. When making any demand hereunder against the Guarantor, the Agents or the Lenders may, but shall be under no obligation to, make a similar demand on any other Loan Party or any such other guarantor, and any failure by the Agents or the Lenders to make any such demand or to collect any payments from such other Loan Party -3- or any such other guarantor or any release of such other Loan Party or any such other guarantor or of the Guarantor's obligations or liabilities hereunder shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agents or the Lenders against the Guarantor hereunder. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 4. Waivers: Successors and Assigns. The Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Lenders upon this Guarantee or acceptance of this Guarantee, and the Guaranteed Obligations shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guarantee, and all dealings between the Guarantor and any other Loan Party, on the one hand, and the Lenders, on the other hand, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or non-payment to or upon any Loan Party or the Guarantor with respect to the Guaranteed Obligations. This Guarantee shall be construed as a continuing, absolute and unconditional Guarantee of payment without regard to the validity, regularity or enforceability of the Credit Agreement, the other Loan Documents, any of the Guaranteed Obligations or any guarantee therefor or right of offset with respect thereto at any time or from time to time held by the Lenders and without regard to any defense (other than the defense of payment), set off or counterclaim which may at any time be available to or be asserted by any Loan Party against the Lenders, or by any other circumstance whatsoever (with or without notice to or knowledge of the Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Guaranteed Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any other instance, and the obligations and liabilities of the Guarantor hereunder shall not be conditioned or contingent upon the pursuit by the Lenders or any other Person at any time of any right or remedy against any Loan Party or against any other Person which may be or become liable or obligated in respect of all or any part of the Guaranteed Obligations or against any collateral security or guarantee therefor or right of offset with respect thereto. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Lenders, and their respective successors, indorsees, transferees and assigns permitted under the Credit Agreement (including each holder from time to time of Guaranteed Obligations) until all of the Guaranteed Obligations and the obligations of the Guarantor under this Guarantee shall have been satisfied by payment in full in Cash or Cash Equivalents, notwithstanding that from time to time during the term of the Credit Agreement any Loan Party may be released from all of its Guaranteed Obligations thereunder. 5. Guarantee Secured. Payment under this Guarantee is secured by pledges, encumbrances and mortgages of Collateral pursuant to applicable Security Documents in accordance with the Credit Agreement. Reference is hereby made to the Credit Agreement and the applicable Security Documents for a description of the Collateral pledged and the right of the respective parties to such property, to secure all the obligations of the Guarantor hereunder. 6. Rights of Set-Oft. The Lenders, and the Agents on behalf of the Lenders, are each hereby irrevocably authorized upon the occurrence and during the continuance of an Event of Default without notice to the Guarantor (any such notice being expressly waived by the Guarantor to the extent permitted by applicable law) to set off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect or contingent or matured or unmatured, at any time held or owing by the Lenders to or for the credit or the account of the Guarantor, or any part -4- thereof, in such amounts as the Lenders, or the Agents on behalf of the Lenders, may elect, against and on account of the obligations and liabilities of the Guarantor to the Lenders, in any currency, whether arising hereunder or otherwise, as the Lenders, or the Agents on behalf of the Lenders, may elect, whether or not the Lenders, or the Agents on behalf of the Lenders, have made any demand for payment but only to the extent that such obligations, liabilities and claims shall have become due and payable (whether as stated, by acceleration or otherwise). The Lenders, or the Agents on behalf of the Lenders, agree to notify the Guarantor promptly of any such set-off and the application made by the Lenders, or the Agents on behalf of the Lenders; provided, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, under this Section 6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lenders, or the Agents on behalf of the Lenders, may otherwise have. 7. Effectiveness; Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the Lenders upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Loan Party, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Loan Party or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments of Guaranteed Obligations. The Guarantor hereby guarantees that the Guaranteed Obligations will be paid for the ratable benefit of the Lenders without set-off or counterclaim in lawful currency of the United States of America at the office of the Administrative Agent located at 399 Park Avenue, New York, New York 10022-4600. The Guarantor shall make any payments required hereunder upon receipt of written notice thereof from the Agents or Administrative Agent or any Lender; provided, however, that the failure of the Agents or Administrative Agent or any Lender to give such notice shall not affect Guarantor's obligations hereunder. 9. Default. a) To the extent permitted by applicable law, if the Borrower has failed to pay or perform when due its Obligations, accounting for any time periods provided in the Credit Agreement for cure of such failure to pay or perform, then all of the Guaranteed Obligations with respect to the Borrower shall be immediately due and payable by the Guarantor, regardless of whether the payment of the Guaranteed Obligations has been accelerated. b) To the extent permitted by applicable law, if the Guarantor's Obligations, if any, under the Credit Agreement are accelerated, then all of the Guaranteed Obligations shall be immediately due and payable by the Guarantor, regardless of whether the Borrower is in default with respect to its Obligations. 10. Representations and Warranties. To induce the Lenders to enter into the Credit Agreement and to make Loans and to issue the Letter of Credit, the Guarantor represents and warrants to each Lender that the following statements are true, correct and complete on and as of the Closing Date: A. Organization and Powers. (a) The Guarantor is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization and has the corporate power and authority to own its property and assets and to transact the business in which it is currently engaged. (b) The Guarantor has duly qualified as a foreign corporation and is in good standing in all jurisdictions in which the conduct of its business or the ownership of its properties requires such -5- qualification, except where the failure to be so qualified would not have a Material Adverse Effect. (c) The Guarantor has the corporate power and authority and all governmental licenses, authorizations, consents and approvals necessary for the Guarantor to own and carry on its business as now conducted, without limitation, those in compliance with or required by the Environmental Laws other than such licenses, authorizations, consents and approvals the failure to obtain could not reasonably be expected to have a Material Adverse Effect. (d) The Guarantor has all authority to enter into each of the Security Documents to which it is or is to be a party and to carry out the transactions contemplated thereby and to execute and deliver this Guarantee. B. No Violations. Neither the execution, delivery or performance by the Guarantor of any of the Loan Documents to which it is, or is to be, a party, nor compliance with any of the terms and provisions thereof, nor the consummation of any of the transactions contemplated therein, nor the grant and perfection of the security interests pursuant to the Security Documents (a) will contravene any provision of any law, statute, rule, regulation, order, writ, injunction or decree of any Governmental Authority, (b) will conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute (with notice or lapse of time or both) a default under any material contractual obligation of the Guarantor, or (other than as contemplated by the Security Documents) result in the creation or imposition of (or the obligation to create or impose), any Lien upon any of the property or assets of the Guarantor pursuant to any material contractual obligation or (c) will violate any provision of the organizational documents of the Guarantor. C. Approvals. The execution, delivery and performance by the Guarantor of the Loan Documents to which it is, or is to be, a party do not and will not require any, consent or authorization of, filing with, notice to, or other action to, with or by, any Governmental Authority or other Person except as set forth in Section 4.4 of the Credit Agreement. All consents and approvals from or notices to or filings with any Governmental Authority or other Person required to be obtained by Guarantor have been obtained and are in full force and effect except as disclosed in Schedule 4.4 of the Credit Agreement. D. Binding Obligation. This Guarantee constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles (whether enforcement is sought by proceedings in equity or at law). E. Investment Company. The Guarantor is not an "investment company" or a company "controlled" by an "investment company" (as each of such quoted terms is defined or used in the Investment Company Act of 1940, as amended) or subject to regulation under any Requirement of Law (other than Regulation X of the Board) limiting its ability to incur indebtedness for money borrowed or guarantee such indebtedness as contemplated hereby or by any other Credit Document. 11. Ratable Sharing. The Lenders by acceptance of this Guarantee agree among themselves that with respect to all amounts received by them which are applicable to the payment of obligations of the Guarantor under this Guarantee, if the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, exercise their rights hereunder, including, without limitation, acceleration of the obligations of the Guarantor hereunder, equitable adjustment will be made so that, in effect, all such amounts will be shared among the Lenders pro rata based on the relative outstanding Guaranteed Obligations. -6- 12. Merger. If the Guarantor shall merge into or consolidate with another corporation, or liquidate, wind up or dissolve itself in a transaction not prohibited by the Credit Agreement, or if all of the stock of the Guarantor shall be sold or otherwise disposed of in a manner not prohibited by the Credit Agreement, the Guarantor hereby covenants and agrees, that upon any such merger, consolidation, liquidation, or dissolution, the guarantee given in this Guarantee and the due and punctual performance and observance of all of the covenants and conditions of the Credit Agreement to be performed by the Guarantor, shall be expressly assumed (in the event that the Guarantor is not the surviving corporation in the merger) by supplemental agreements substantially similar to this Guarantee reasonably satisfactory in form to the Administrative Agent by the corporation or corporations formed by such consolidation, or into which the Guarantor shall have been merged, or by the corporation or corporations which shall have acquired such property. In addition, the Guarantor shall deliver to the Administrative Agent an Officers' Certificate and an opinion of counsel, each stating that such merger, consolidation or transfer and such supplemental agreements comply with this Guarantee and that all conditions precedent herein provided relating to such transaction have been complied with. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation or corporations, by supplemental agreements substantially similar to this guarantee executed and delivered to the Lenders or the Agents or Administrative Agent and reasonably satisfactory in form to the Administrative Agent of the guarantee given in this Guarantee and the due and punctual performance of all of the covenants and conditions of the Credit Agreement to be performed by the Guarantor, such successor corporation or corporations shall succeed to and be substituted for the Guarantor, with the same effect as if it or they had been named herein as a Guarantor. 13. No Waiver. (a) No failure to exercise and no delay in exercising, on the part of the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other power or right. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. (b) In the event the Lenders, the Agents or the Administrative Agent on behalf of the Lenders, shall have instituted any proceeding to enforce any right, power or remedy under this Guarantee by sale or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Lenders, the Agents or the Administrative Agent on behalf of the Lenders, then and in every such case, the Guarantor, the Lenders and the Agents or the Administrative Agent on behalf of the Lenders, and each Lender shall be restored to its respective former position and rights hereunder, and all rights, remedies and powers of the Lenders, and the Agents or the Administrative Agent on behalf of the Lenders, shall continue as if no such proceeding had been instituted. 14. Notices. All notices, demands, instructions or other communications required or permitted to be given to or made upon any party hereto shall be given in accordance with the provisions of the Credit Agreement and at the address either set forth therein or as provided on the signature page hereof. 15. Amendments, Waivers, etc. No provision of this Guarantee shall be waived, amended, terminated or supplemented except by a written instrument executed by the Guarantor and the Administrative Agent, on behalf of the Lenders and the other Agents. 16. Notice of Exercise. Upon exercise of its rights hereunder, the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, as the case may be, shall provide written notice -7- on the date of such exercise to the Lenders, or the Agents or the Administrative Agent on behalf of the Lenders, as the case may be, of such exercise; provided, however, that the failure by the Agents, the Administrative Agent, or any of the Lenders to provide such written notice shall not in any way relieve the Guarantor of its obligations under this Guarantee. 17. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 18. Submission to Jurisdiction; Waivers. The Guarantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Guarantee and any Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Guarantor as provided in Section 14 hereof; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 19. WAIVERS OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE, THE CREDIT AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 20. Severability of Provisions. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 21. Headings. The Section headings used in this Guarantee are for convenience of reference only and shall not affect the construction of this Guarantee. 22. Future Advances. This Guarantee shall guarantee the payment of any amounts advanced from time to time pursuant to the Credit Agreement. -8- 23. Counterparts. This Guarantee and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. -9- IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer on the day and year first above written. PRECISION PARTNERS HOLDING COMPANY By: ______________________ Name: Title: [EXHIBIT A-2] FORM OF GUARANTEE OF [SUBSIDIARY] GUARANTEE, dated as of March 19, 1999 ("Guarantee"), by [SUBSIDIARY], a [ ] corporation ("Guarantor"), in favor and for the benefit of CITICORP U.S.A., INC., having an office at 399 Park Avenue, New York, New York 10022-4600, in its capacity as Administrative Agent (in such capacities and together with any successors in such capacity, the "Administrative Agent") for the ratable benefit of the lending institutions (the "Lenders") from time to time party to the Credit Agreement (as hereinafter defined). RECITALS: A. Pursuant to the Credit Agreement, dated as of March 19, 1999 (as amended from time to time, the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the guarantors from time to time thereunder, the Lenders, the Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent (together with the Syndication Agent and the Administrative Agent, the "Agents"), the Lenders have agreed (i) to make to or for the account of the Borrower certain Term Loans up to an aggregate principal amount of $23,000,000 and certain Revolving Loans up to an aggregate principal amount of $25,000,000 and (ii) to issue certain Letters of Credit for the account of the Borrower. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement. B. It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to any Lender issuing Letters of Credit under the Credit Agreement that the Guarantor shall have executed and delivered this Guarantee and that this Guarantee shall be in full force and effect. C. This Guarantee is given by the Guarantor in favor of the Administrative Agent for its benefit and the benefit of the Lenders to guarantee all of the Obligations of the Borrower in accordance with the terms of the Credit Agreement. D. All of the Guarantor's obligations hereunder shall be secured pursuant to the Security Documents to which the Guarantor is a party. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as follows: 1. Guarantee. (a) To induce the Lenders to execute and deliver the Credit Agreement and to make the Loans and issue the Letters of Credit upon the terms and conditions set forth in the Credit Agreement, and in consideration thereof, the Guarantor hereby unconditionally and irrevocably (i) guarantees to the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) and at all times thereafter of the Obligations of the Borrower (including -2- amounts which would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code); and (ii) agrees to pay any and all reasonable expenses (including reasonable attorneys' fees and disbursements) which may be paid or incurred by the Lenders or the Agents in enforcing any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, the Guarantor under this Guarantee (collectively, the "Guaranteed Obligations"). (b) The Guarantor agrees that this Guarantee constitutes a guarantee of payment when due and not of collection and waives any right to require that any resort be had by the Agents or any Lender to any of the security held for payment of any of the Guaranteed Obligations or to any balance of any deposit account or credit on the books of the Agents, or any Lender in favor of the Borrower or any other Person. (c) No payment or payments made by the Guarantor or any other Person or received or collected by the Lenders (or the Agents on behalf of the Lenders) from the Guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Guaranteed Obligations shall be deemed to modify, release or otherwise affect the liability or obligations of the Guarantor hereunder which shall, notwithstanding any such payment or payments other than payments on the Guaranteed Obligations made to the Lenders (or the Agents on behalf of the Lenders) by the Guarantor or any other Person or payments on the Guaranteed Obligations received or collected by the Lenders (or the Agents on behalf of the Lenders) from the Guarantor or any other Person, remain liable for the Guaranteed Obligations until the Guaranteed Obligations are paid in full in cash or cash equivalents, subject to the provisions of Section 1(d) hereof. (d) Notwithstanding any other provisions of this Guarantee, the maximum aggregate amount of Guaranteed Obligations which Guarantor agrees to guarantee pursuant to this Guarantee shall equal the lesser of (i) the excess of the fair saleable value of the property of the Guarantor over the total liabilities of the Guarantor (including the maximum amount reasonably expected to become due in respect of contingent liabilities, other than any such contingent liabilities under the Credit Agreement and the other Loan Documents), such excess to be determined on the date of this Guarantee or the date on which, from time to time, such enforcement or realization is effected, whichever is higher and (ii) that amount of Guaranteed Obligations which does not result in a violation of applicable laws relating to fraudulent conveyance, after giving effect to the value of any rights to subrogation, reimbursement, indemnification or contribution (including without limitation rights to contribution from any other Subsidiary Guarantor that has guaranteed the Guaranteed Obligations) whether by agreement or under applicable law. The obligations of the Guarantor hereunder shall be joint and several with the obligations of each other Subsidiary Guarantor. Subject to the preceding sentences, the Guarantor understands, agrees and confirms that this is a guarantee of payment when due and not of collection and that each Lender may, from time to time, enforce this Guarantee up to the full amount of the Guaranteed Obligations owed to such Lender without proceeding against any other Loan Party, against any security for the Guaranteed Obligations, against any other guarantor or under any other guarantee covering the Guaranteed Obligations. Each Subsidiary Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Subsidiary Guarantor in an amount pro rata, based on the net assets of each Subsidiary Guarantor. -3- 2. Waiver by Guarantor. The Guarantor hereby waives absolutely and irrevocably any claim which it may have against the Borrower or any of its respective Affiliates by reason of any payment to the Agents, Administrative Agent or any Lender, or to any other Person pursuant to or in respect of this Guarantee, including any claims by way of subrogation, contribution, reimbursement, indemnity or otherwise, until the Guaranteed Obligations are paid in full. 3. Consent by Guarantor. The Guarantor hereby consents and agrees that, without the necessity of any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, any demand for payment of any of the Guaranteed Obligations made by the Agents or any Lender may be rescinded by the Lenders (or the Agents on behalf of the Lenders) and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Lenders (or the Agents on behalf of the Lenders); and the Credit Agreement or any other Loan Document, or other guarantee or documents in connection therewith, or any of them, may be amended, modified, supplemented or terminated, in whole or in part, as the Lenders (or the Agents on behalf of the Lenders) may deem advisable from time to time (in accordance with the terms thereof); and any Guarantee or right of offset or any collateral may be sold, exchanged, waived, surrendered or released, all without the necessity of any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, which will remain bound hereunder, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender or release. Neither the Lenders nor the Agents shall have any obligation to protect, secure, perfect or insure any collateral or property at any time held as security for the Guaranteed Obligations or this Guarantee. When making any demand hereunder against the Guarantor, the Agents or the Lenders may, but shall be under no obligation to, make a similar demand on any other Loan Party or any such other guarantor, and any failure by the Agents or the Lenders to make any such demand or to collect any payments from such other Loan Party or any such other guarantor or any release of such other Loan Party or any such other guarantor or of the Guarantor's obligations or liabilities hereunder shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agents or the Lenders against the Guarantor hereunder. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 4. Waivers; Successors and Assigns. The Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Lenders upon this Guarantee or acceptance of this Guarantee, and the Guaranteed Obligations shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guarantee, and all dealings between the Guarantor and any other Loan Party, on the one hand, and the Lenders, on the other hand, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or non-payment to or upon any Loan Party or the Guarantor with respect to the Guaranteed Obligations. This Guarantee shall be construed as a continuing, absolute and unconditional Guarantee of payment without regard to the validity, regularity or enforceability of the Credit Agreement, the other Loan Documents, any of the Guaranteed Obligations or any guarantee therefor or right of offset with respect thereto at any time or from time to time held by the Lenders and without regard to any defense (other than the defense of payment), set off or counterclaim which may at any time be available to or be asserted by any Loan Party against the Lenders, or by any other circumstance whatsoever (with or without notice to or knowledge of the Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Guaranteed Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any other instance, and the obligations and liabilities -4- of the Guarantor hereunder shall not be conditioned or contingent upon the pursuit by the Lenders or any other Person at any time of any right or remedy against any Loan Party or against any other Person which may be or become liable or obligated in respect of all or any part of the Guaranteed Obligations or against any collateral security or guarantee therefor or right of offset with respect thereto. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Lenders, and their respective successors, indorsees, transferees and assigns permitted under the Credit Agreement (including each holder from time to time of Guaranteed Obligations) until all of the Guaranteed Obligations and the obligations of the Guarantor under this Guarantee shall have been satisfied by payment in full in Cash or Cash Equivalents, notwithstanding that from time to time during the term of the Credit Agreement any Loan Party may be released from all of its Guaranteed Obligations thereunder. 5. Guarantee Secured. Payment under this Guarantee is secured by pledges, encumbrances and mortgages of Collateral pursuant to applicable Security Documents in accordance with the Credit Agreement. Reference is hereby made to the Credit Agreement and the applicable Security Documents for a description of the Collateral pledged and the right of the respective parties to such property, to secure all the obligations of the Guarantor hereunder. 6. Rights of Set-Off. The Lenders, and the Agents on behalf of the Lenders, are each hereby irrevocably authorized upon the occurrence and during the continuance of an Event of Default without notice to the Guarantor (any such notice being expressly waived by the Guarantor to the extent permitted by applicable law) to set off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect or contingent or matured or unmatured, at any time held or owing by the Lenders to or for the credit or the account of the Guarantor, or any part thereof, in such amounts as the Lenders, or the Agents on behalf of the Lenders, may elect, against and on account of the obligations and liabilities of the Guarantor to the Lenders, in any currency, whether arising hereunder or otherwise, as the Lenders, or the Agents on behalf of the Lenders, may elect, whether or not the Lenders, or the Agents on behalf of the Lenders, have made any demand for payment but only to the extent that such obligations, liabilities and claims shall have become due and payable (whether as stated, by acceleration or otherwise). The Lenders, or the Agents on behalf of the Lenders, agree to notify the Guarantor promptly of any such set-off and the application made by the Lenders, or the Agents on behalf of the Lenders; provided, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lenders, or the Agents on behalf of the Lenders, under this Section 6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lenders, or the Agents on behalf of the Lenders, may otherwise have. 7. Effectiveness; Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the Lenders upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Loan Party, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Loan Party or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments of Guaranteed Obligations. The Guarantor hereby guarantees that the Guaranteed Obligations will be paid for the ratable benefit of the Lenders without set-off or counterclaim in lawful currency of the United States of America at the office of the Administrative Agent located at 399 Park Avenue, New York, New York 10022-4600. The Guarantor shall make any payments required -5- hereunder upon receipt of written notice thereof from the Agents or Administrative Agent or any Lender; provided, however, that the failure of the Agents or Administrative Agent or any Lender to give such notice shall not affect Guarantor's obligations hereunder. 9. Default. a) To the extent permitted by applicable law, if the Borrower has failed to pay or perform when due its Obligations, accounting for any time periods provided in the Credit Agreement for cure of such failure to pay or perform, then all of the Guaranteed Obligations with respect to the Borrower shall be immediately due and payable by the Guarantor, regardless of whether the payment of the Guaranteed Obligations has been accelerated. b) To the extent permitted by applicable law, if the Guarantor's Obligations, if any, under the Credit Agreement are accelerated, then all of Guaranteed Obligations shall be immediately due and payable by the Guarantor, regardless of whether the Borrower is in default with respect to its Obligations. 10. Representations and Warranties. To induce the Lenders to enter into the Credit Agreement and to make Loans and to issue the Letter of Credit, the Guarantor represents and warrants to each Lender that the following statements are true, correct and complete on and as of the Closing Date: A. Organization and Powers. (a) The Guarantor is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization and has the corporate power and authority to own its property and assets and to transact the business in which it is currently engaged. (b) The Guarantor has duly qualified as a foreign corporation and is in good standing in all jurisdictions in which the conduct of its business or the ownership of its properties requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect. (c) The Guarantor has the corporate power and authority and all governmental licenses, authorizations, consents and approvals necessary for the Guarantor to own and carry on its business as now conducted, including, without limitation, those in compliance with or required by the Environmental Laws other than such licenses, authorizations, consents and approvals the failure to obtain could not reasonably be expected to have a Material Adverse Effect. (d) The Guarantor has the corporate authority to enter into each of the Security Documents to which it is or is to be a party and to carry out the transactions contemplated thereby and to execute and deliver this Guarantee. B. No Violations. Neither the execution, delivery or performance by the Guarantor of any of the Loan Documents to which it is, or is to be, a party, nor compliance with any of the terms and provisions thereof, nor the consummation of any of the transactions contemplated therein, nor the grant and perfection of the security interests pursuant to the Security Documents (a) will contravene any provision of any law, statute, rule, regulation, order, writ, injunction or decree of any Governmental Authority, (b) will conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute (with notice or lapse of time or both) a default under any material contractual obligation of the Guarantor, or (other than as contemplated by the Security Documents) result in the creation or imposition of (or the obligation to create or impose), any Lien upon any of the property or assets of the Guarantor pursuant to any material contractual obligation or (c) will violate any provision of the organizational documents of the Guarantor. C. Approvals. The execution, delivery and performance by the Guarantor of the Loan Documents to which it is, or is to be, a party do not and will not require any consent or authorization of, filing with, notice to, or other action to, with or by, any Governmental Authority or other Person except as set forth in Section 4.4 of the Credit Agreement. All consents and approvals from or notices to -6- or filings with any Governmental Authority or other Person required to be obtained by Guarantor have been obtained and are in full force and effect except as disclosed in Schedule 4.4 of the Credit Agreement. D. Binding Obligation. This Guarantee constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles (whether enforcement is sought by proceedings in equity or at law). E. Investment Company. The Guarantor is not an "investment company" or a company "controlled" by an "investment company" (as each of such quoted terms is defined or used in the Investment Company Act of 1940, as amended) or subject to regulation under any Requirement of Law (other than Regulation X of the Board) limiting its ability to incur indebtedness for money borrowed or guarantee such indebtedness as contemplated hereby or by any other Credit Document. 11. Ratable Sharing. The Lenders by acceptance of this Guarantee agree among themselves that with respect to all amounts received by them which are applicable to the payment of obligations of the Guarantor under this Guarantee, if the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, exercise their rights hereunder, including, without limitation, acceleration of the obligations of the Guarantor hereunder, equitable adjustment will be made so that, in effect, all such amounts will be shared among the Lenders pro rata based on the relative outstanding Guaranteed Obligations. 12. Merger. If the Guarantor shall merge into or consolidate with another corporation, or liquidate, wind up or dissolve itself in a transaction not prohibited by the Credit Agreement, or if all of the stock of the Guarantor shall be sold or otherwise disposed of in a manner not prohibited by the Credit Agreement, the Guarantor hereby covenants and agrees, that upon any such merger, consolidation, liquidation, or dissolution, the guarantee given in this Guarantee and the due and punctual performance and observance of all of the covenants and conditions of the Credit Agreement to be performed by the Guarantor, shall be expressly assumed (in the event that the Guarantor is not the surviving corporation in the merger) by supplemental agreements substantially similar to this guarantee reasonably satisfactory in form to the Administrative Agent, by the corporation or corporations formed by such consolidation, or into which the Guarantor shall have been merged, or by the corporation or corporations which shall have acquired such property. In addition, the Guarantor shall deliver to the Administrative Agent on behalf of the Lenders, an Officers' Certificate stating that such merger, consolidation or transfer and such supplemental agreements comply with this Guarantee and that all conditions precedent herein provided relating to such transaction have been complied with. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation or corporations, by supplemental agreements substantially similar to this guarantee executed and delivered to the Administrative Agent on behalf of the Lenders, and reasonably satisfactory in form to the Administrative Agent of the guarantee given in this Guarantee and the due and punctual performance of all of the covenants and conditions of the Credit Agreement to be performed by the Guarantor, such successor corporation or corporations shall succeed to and be substituted for the Guarantor, with the same effect as if it or they had been named herein as a Guarantor. 13. No Waiver. (a) No failure to exercise and no delay in exercising, on the part of the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, -7- power or privilege preclude any other or further exercise thereof, or the exercise of any other power or right. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. (b) In the event the Lenders, the Agents or the Administrative Agent on behalf of the Lenders, shall have instituted any proceeding to enforce any right, power or remedy under this Guarantee by sale or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Lenders, the Agents or the Administrative Agent on behalf of the Lenders, then and in every such case, the Guarantor, the Lenders, the Agents or the Administrative Agent on behalf of the Lenders, and each Lender shall be restored to its respective former position and rights hereunder, and all rights, remedies and powers of the Lenders and the Agents or the Administrative Agent on behalf of the Lenders, shall continue as if no such proceeding had been instituted. 14. Notices. All notices, demands, instructions or other communications required or permitted to be given to or made upon any party hereto shall be given in accordance with the provisions of the Credit Agreement and at the address either set forth therein or as provided on the signature page hereof. 15. Amendments, Waivers, etc. No provision of this Guarantee shall be waived, amended, terminated or supplemented except by a written instrument executed by the Guarantor and the Agents or Administrative Agent, on behalf of the Lenders and the other Agents. 16. Notice of Exercise. Upon exercise of its rights hereunder, the Lenders, or the Agents or Administrative Agent on behalf of the Lenders, as the case may be, shall provide written notice on the date of such exercise to the Lenders, or the Agents or the Administrative Agent on behalf of the Lenders, as the case may be, of such exercise; provided, however, that the failure by the Agents, the Administrative Agent, or any of the Lenders to provide such written notice shall not in any way relieve the Guarantor of its obligations under this Guarantee. 17. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 18. Submission to Jurisdiction; Waivers. The Guarantor hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Guarantee and any Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; -8- (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Guarantor as provided in Section 14 hereof; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 19. WAIVERS OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE, THE CREDIT AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 20. Severability of Provisions. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 21. Headings. The Section headings used in this Guarantee are for convenience of reference only and shall not affect the construction of this Guarantee. 22. Future Advances. This Guarantee shall guarantee the payment of any amounts advanced from time to time pursuant to the Credit Agreement. 23. Counterparts. This Guarantee and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. -9- IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer on the day and year first above written. [GUARANTOR] By: ___________________ Name: Title: [EXHIBIT B-1] FORM OF BORROWING BASE CERTIFICATE Citicorp U.S.A., Inc. as Administrative Agent 399 Park Avenue New York, NY 10022-4600 This certificate is delivered pursuant to Section 6.2(e) of the Credit Agreement dated as of March 19, 1999 (as amended from time to time, the "Credit Agreement") among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC.. as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK. ATLANTA. as Documentation Agent. Capitalized terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. The undersigned hereby certifies that (s)he is an officer of the Borrower and that, as such, is authorized to execute this certificate on behalf of the Precision Group Members and further certifies that: (a) For purposes of this Certificate, the date of determination of the Borrowing Base is[ ], [ ]. (b) the amounts set forth below are a true and correct statement of the calculation of the Borrowing-Base in accordance with the provisions of the Credit Agreement: Gross Accounts ___________ Less Accounts to which the following apply: 1. the Precision Group Members have not complied ___________ with all material Requirements of Law, including, without limitation, all laws, rules, regulations and orders of any governmental or judicial authority relating to truth in lending, billing practices, fair credit reporting, equal credit opportunity, debt collection practices and consumer debtor protection, applicable to such Account (or any related contracts) or affecting the collectibility of such Account; 2. such Account is not assignable or a first ___________ priority security interest in such Account in favor of the Administrative Agent for the benefit of the Lenders has not been obtained and fully perfected by filing Uniform Commercial Code financing statements against the rele- B1-1 vant Precision Group Member; 3. such Account is subject to any Lien ___________ whatsoever, other than Liens in favor of the Administrative Agent for the benefit of the Lenders; 4. the relevant Precision Group Member, in order ___________ to be entitled to collect such Account, is required to perform any additional service for, or perform or incur any additional obligation to, the Account debtor in respect of such Account; 5. such Account does not constitute a legal ___________ valid, and binding irrevocable payment obligation of the Account debtor in respect of such Account to pay the balance thereof in accordance with its terms or is subject to any defense, setoff, recoupment or counterclaim; 6. the Account debtor in respect of such Account ___________ is a Precision Group Member or an Affiliate, division or employee of any Precision Group Member; 7. such Account is an account of any ___________ Governmental Authority, unless all rights of the relevant Precision Group Member with respect to such Account have been assigned to the Administrative Agent in accordance with the Assignment of Claims Act of 1940, as amended; 8. an estimated or actual loss has been ___________ recognized in respect of such Account, as determined in accordance with the usual business practices of the Relevant Precision Group Member (each such Account, a "Defaulted Account"); 9. 20% or more of the aggregate outstanding ___________ amount of all Accounts from the Account debtor in respect of such Account and its Affiliates constitute Defaulted Accounts; 10. any representation or warranty contained in ___________ the Credit Agreement or in any other Loan Documents applicable either to Accounts in general or to any such specific Account has been breached with respect to such Account; 11. 50% or more of the outstanding amount of all ___________ Accounts from the Account debtor in respect of such Account have become ineligible; B1-2 12. the Account debtor in respect of such ___________ Account has filed a petition for relief under the United States Bankruptcy Code (or similar action under any successor law or under any comparable law), made a general assignment for the benefit of creditors, had filed against it any petition or other application for relief under the United States Bankruptcy Code (or similar action under any successor law or under any comparable law), failed, suspended business operations, become insolvent, called a meeting of its creditors for the purpose of obtaining any financial concession or accommodation, or had or suffered a receiver or a trustee to be appointed for all or a significant portion of its assets or affairs, in each case except to the extent such matters have been dismissed or terminated or otherwise ceased to be applicable; 13. any portion of such Account has remained ___________ unpaid for a period exceeding 90 days from the due date (but only to the extent of such overdue portion) or any Precision Group Member has reason to believe such Account is uncollectible; 14. the sale represented by such Account is to ___________ an Account debtor organized or located outside one of the states of the United States; 15. the Account debtor in respect of such ___________ Account is a supplier or creditor of any Precision Group Member (but only to the extent of the lesser of (i) the amount owing from such Account debtor to the relevant Precision Group Member, pursuant to Accounts that are otherwise eligible and (ii) the amount owing to such Account debtor by the relevant Precision Group Member); 16. such Account is not denominated in Dollars ___________ or is payable outside the United States; 17. the sale represented by such Account is on a ___________ guaranteed sale, sale-or-return, consignment, or sale on approval basis or is subject to any right of return, setoff or charge-back; 18. the relevant Precision Group Member, or any ___________ other party to such Account, is in default in the performance or observance of any of the terms thereof in any material respect; 19. the relevant Precision Group Member does not ___________ have good and marketable title to such Account as sole owner of such Account; B1-3 20. Such Account does not arise from the sale ___________ and delivery of goods or rendition of services in the ordinary cause of business to the Account debtor in respect of such Account; 21. such Account is on terms other than those ___________ normal or customary in the business of the relevant Precision Group Member; 22. such Account has associated payment terms ___________ exceeding 100 days from invoice date; 23. except in the case of Accounts owing by any ___________ Eligible Account Debtor, if such Account were to constitute an Eligible Receivable, more than 15% of all Eligible Receivables would be owing from the Account debtor in respect of such Account or any of its Affiliates in which case only that portion of Eligible Receivables owing from such Account debtor representing amounts in excess of 15% of all Eligible Receivables shall constitute Ineligible Accounts; 24. any amounts payable under or in connection ___________ with such Account are evidenced by chattel paper, promissory notes or other instruments, unless such chattel paper, promissory notes or instruments have been endorsed and delivered to the Administrative Agent; 25. such Account has been paid by a check which ___________ has been returned for insufficient funds if such check is in an amount of at least $100,000; or 26. such Account has been placed with an ___________ attorney or other third party for collection. Less any other reserves in respect thereof: ___________ Total Eligible Receivables: ___________ Gross Inventory ___________ Less reserves for obsolete, slow-moving or ___________ excess Inventory: Less Inventory to which the following is ___________ applicable: 1. such item of Inventory is not assignable or a ___________ first priority security interest in such item of Inventory in favor of the Administra- B1-4 tive Agent for the benefit of the Lenders has not been obtained and fully perfected by filing Uniform Commercial Code financing statements against the relevant Precision Group Member; 2. such item of Inventory is subject to any Lien ___________ whatsoever, other than Liens in favor of the Administrative Agent for the benefit of the Lenders; 3. such item of Inventory (i) is damaged or not ___________ in good condition and not saleable consistent with past practices (to the extent not provided for by reserves as described above) or (ii) does not meet all material standards imposed by any Governmental Authority having regulatory authority over such item of Inventory, its use or its sale; 4. such item of Inventory is not currently ___________ either readily usable or salable, at prices approximating at least the cost thereof, in the normal course of the business of the relevant Precision Group Member (to the extent not provided for by reserves as described above); 5. any event shall have occurred or any ___________ condition shall exist with respect to such item of Inventory which would substantially impede the ability of the relevant Precision Group Member to continue to use or sell such item of Inventory in the normal course of business; 6. any claim disputing the title of the relevant ___________ Precision Group Member to, or right to possession of or dominion over, such item of Inventory shall have been asserted; 7. any representation or warranty contained in ___________ the Credit Agreement or in any other Loan Document applicable to either Inventory in general or to any such specific item of Inventory has been breached with respect to such item of Inventory; 8. the relevant Precision Group Member does not ___________ have good and marketable title as sole owner of such item of Inventory; 9. such item of Inventory has been consigned to ___________ other Persons, or is located at, or in the possession of, a vendor of any Precision Group Member, or is in transit to or from, or held or stored by, third parties, unless (i) the Person holding such Inventory has entered into an agreement, satisfactory in form and substance to the Administrative Agent, providing for the waiver or subordination of any applicable Lien on the part of such Person with respect to such Inventory and providing the Administrative Agent with the right to repossess such Inventory B1-5 upon the occurrence and during the continuance of an Event of Default and (ii) in the case of consigned inventory, the relevant Precision Group Member, in its capacity as consignor, shall have filed appropriate Uniform Commercial Code financing statements with respect to such Inventory; 10. such item of Inventory is located on a ___________ leasehold as to which the lessor has not entered into a landlord's waiver and consent, satisfactory in form and substance to the Administrative Agent, providing a waiver of any applicable Lien and providing the Administrative Agent with the right to receive notice of default, the right to repossess such item of Inventory at any time upon the occurrence or during the continuance of a Default or Event of Default and such other rights as may be acceptable to the Administrative Agent; 11. such item of Inventory is located outside ___________ one of the states of the United States; 12. such item of Inventory is evidenced by an ___________ Account; 13. such item of Inventory is subject to any ___________ licensing, patent, royalty, trademark, trade name or copyright agreements with any third party from whom any Precision Group Member has received notice of a dispute in respect of any such agreement other than such claims which such Precision Group Member reasonably believes to be immaterial or without merit; 14. except in the case of Inventory owned by ___________ Galaxy, Nationwide and Certified, such item of Inventory consists of packing, packaging and/or shipping supplies or materials; or 15. such item of Inventory has been otherwise ___________ determined by the Administrative Agent (after consultation with the Borrower), exercising its commercially reasonable discretion, to be unacceptable because the Administrative Agent believes that such item of Inventory is not readily salable under the customary terms on which it is usually sold (to the extent not provided for by reserves as specified above). Less other reserves in respect thereof: ___________ Total Eligible Inventory: ___________ Borrowing Base for such date: 85% of Eligible Receivables ___________ B1-6 50% of Eligible Inventory + ___________ Total ___________ Total Revolving Extensions of Credit Total Loans outstanding ___________ Total L/C Obligations outstanding + ___________ Total ___________ Excess/(Deficit) (Borrowing Base - Total Revolving Extensions of Credit): ___________ IN WITNESS WHEREOF, I have hereto executed this certificate on behalf of the Borrower: By:_________________________ Name: Title: B1-7 [EXHIBIT B-2] FORM OF COMPLIANCE CERTIFICATE Pursuant to Section 6.2(b) of the Credit Agreement, dated as of March 19, 1999, (the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent. and SUNTRUST BANK, ATLANTA, as Documentation Agent, the undersigned, [ ], the [Title] of the Borrower(1) does hereby certify on behalf of the Precision Group Members that (i) to the best of the undersigned's knowledge, during the period from [_________] to [________] (the "Reporting Period")(2): (A) no Subsidiary has been formed or acquired (or, if any such Subsidiary has been formed or acquired, the Precision Group Members have complied with the requirements of the Credit Agreement with respect thereto), (B) None of the Loan Parties has changed its name, its principal place of business or its chief executive office without complying with the requirements of the Credit Agreement and the Security Documents with respect thereto, (C) Other than as previously disclosed by the Borrower on Annex C of the Security Agreement or on Annex B to a prior Compliance Certificate, there is no location within the United States where any Loan Party keeps inventory or equipment (other than as set forth on Annex B hereto). Other than as previously disclosed by the Borrower on Schedules III, IV or V to the Security Agreement or on Annex C to a prior Compliance Certificate, no Intellectual Property has been acquired by any Loan Party (other than as set forth on Annex C hereto). (D) each Loan Party has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in the Credit Agreement and the other Loan Documents to be observed, performed or satisfied by it, and - --------------------------- (1) Individual providing this Certificate must be a Responsible Officer. (2) Reporting period should encompass period from first day of the current (or, in the case of annual financial statements, immediately preceding) fiscal year to the date of the financial statements being delivered. B2-1 (E) no Default or Event of Default has occurred [except __________]; and (ii) as of the date of the financial statements being delivered in connection herewith, the Precision Group Members were in compliance with the covenants set forth in Section 7.1 of the Credit Agreement and the calculations of such covenant compliance set forth on Annex A hereto are based upon such financial statements and are true and correct; (iii) check one: ______ (A) no prepayment based on Excess Cash Flow is required because the Consolidated Leverage Ratio currently in effect is less than 3.0 to 1.0; or ______ (B) the Excess Cash Flow for the fiscal year ending [____] was $_________ and the calculations to support the determination of the amount of such Excess Cash Flow for such period are set forth on Annex A hereto, are based upon such financial statements and are true and correct; and [(iv) the aggregate payments made pursuant to Section 7.8 during the fiscal year ending were $________.] Unless otherwise defined herein, capitalized terms defined in the Credit Agreement and used in this Certificate and the Annexes attached hereto shall have the meanings given to them in the Credit Agreement. IN WITNESS WHEREOF, the undersigned has executed and delivered this certificate as of the day and year set forth below. PRECISION PARTNERS INC. By:____________________ Name: Title: Date: [ ], [ ] B2-2 ANNEX A TO COMPLIANCE CERTIFICATE I. Section 2.8 - Excess Cash Flow For any fiscal year of the Precision Group Members commencing with the fiscal year ending December 31, 1999, unless the Required Prepayment Lenders shall otherwise agree, the Borrower shall apply 50% of the Excess Cash Flow (if any) toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments pursuant to Section 2.8(d): "Excess Cash Flow" for the fiscal year ending[______] equals: (a)(i) the Consolidated Net Income (or loss) of the Precision Group Members, determined on a consolidated basis in accordance with GAAP ___________ MINUS the income (or deficit) of any Person accrued prior to the date it becomes a Precision Group Member or is merged into or consolidated with any Precision Group Member ___________ MINUS the income (or deficit) of any Person (other than a Precision Group Member) in which any Precision Group Member has an ownership interest, except to the extent that any such income is actually received by a Precision Group Member in the form of dividends or similar distributions and ___________ MINUS the undistributed earnings of any Precision Group Member (other than the Borrower) to the extent that the distribution of such earnings to the Borrower is not at the time permitted by the terms of any Contractual Obligation or Requirement of Law applicable to such Precision Group Member ___________ (ii) PLUS an amount equal to the amount of all non-cash charges deducted in arriving at the Consolidated Net Income ___________ (iii) PLUS decreases in Consolidated Working Capital ___________ (iv) PLUS an amount equal to the aggregate net non-cash loss on Disposition of property by the Precision Group Members (other than sales of inventory in the ordinary course of business), to the extent deducted in arriving at such Consolidated Net Income ___________ LESS (b) the sum, without duplication, of- page 1 of Annexes to Compliance Certificate (i) An amount equal to the amount of all non-cash income included in arriving at the Consolidated Net Income ___________ (ii) PLUS the aggregate amount actually paid by the Precision Group Members in cash during such fiscal year on account of Capital Expenditures (excluding the principal amount of Indebtedness (other than Revolving Loans) incurred in connection with such expenditures and any such expenditures financed with the proceeds of any Reinvestment Deferred Amount) ___________ (iii) PLUS the aggregate amount of all prepayments of Revolving Loans during-such fiscal year to the extent accompanying permanent optional reductions of the Revolving Commitments and all optional prepayments of the Term Loans during such fiscal year ___________ (iv) PLUS the aggregate amount of all regularly scheduled principal payments of Funded Debt (including the Term Loans) of the Precision Group Members made during such fiscal year (including any such payments resulting from scheduled permanent reductions of any revolving credit facility) ___________ (v) PLUS increases in Consolidated Working Capital for such fiscal year ___________ (vi) PLUS an amount equal to the aggregate net non-cash gain on the Disposition of property by the Precision Group Members during such fiscal year (other than sales of inventory in the ordinary course of business), to the extent included in arriving at the Consolidated Net Income ___________ page 2 of Annexes to Compliance Certificate II. Section 7.1 - Financial Covenants A. The Consolidated Leverage Ratio as of [_________], calculated in accordance with the Credit Agreement is [ . ] to 1.0. B. The Consolidated Interest Coverage Ratio as of [_______], for four consecutive quarters calculated in accordance with the Credit Agreement is [ . ] to 1.0. C. The Consolidated Fixed Charge Coverage Ratio as of [_______], for four consecutive quarters calculated in accordance with the Credit Agreement is [ . ] to 1.0. D. Capital Expenditures made during the fiscal year ending [ ]: ___________ III. Section 7.2 - Permitted Indebtedness (1) Aggregate Indebtedness secured by Liens permitted by Section 7.3(g) of the Credit Agreement (in an aggregate principal amount not to exceed $2,500,000 at any one time outstanding) ___________ (2) Indebtedness of the Borrower under the Senior Subordinated Notes (not to exceed an aggregate principal amount of $100,000,000) ___________ (3) Indebtedness of the Borrower consisting of Permitted Senior Subordinated Add-On Indebtedness (not to exceed an aggregate principal amount of $60,000,000 at any one time outstanding) ___________ IV. Section 7.3 - Liens (1) Liens not otherwise permitted by Section 7.3 of the Credit Agreement so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds (for the Precision Group Members taken together) $500,000 at any one time ___________ (2) Liens securing judgments for the payment of money in an aggregate amount not in excess of $1,500,000 (except to the extent covered by insurance, which coverage has been affirmed by the insurer), unless such judgments shall remain undischarged for a period of more than page 3 of Annexes to Compliance Certificate 30 consecutive days during which execution shall not be effectively stayed ___________ (3) Other general Liens not to exceed $1,000,000 ___________ V. Section 7.5 - Disposition of Assets Aggregate fair market value of Dispositions (not to exceed $500,000) ___________ VI. Section 7.7 - Permissible Investments, Loans and Advances (1) Aggregate loans and advances to employees of the Precision Group Members in the ordinary course or business (including, without limitation, for travel, entertainment and relocation expenses) (not to exceed $500,000 at any one time outstanding) ___________ (2) Loans in an aggregate amount of up to $1,000,000 made to holders of Capital Stock of Precision (other than the Sponsors) to finance the purchase of Capital Stock of Precision, so long as promissory notes are issued in connection therewith and pledged as Collateral pursuant to the appropriate Security Document ___________ (3) loans and advances to management of the Precision Group Members to purchase Capital Stock of any Precision Group Member not to exceed $2,000,000 at any one time outstanding, provided that such Capital Stock is pledged to the lender of such Indebtedness on customary terms ___________ page 4 of Annexes to Compliance Certificate ANNEX B TO COMPLIANCE CERTIFICATE LOAN PARTY LOCATIONS (OTHER THAN DISCLOSED IN THE SECURITY AGREEMENT OR PRIOR COMPLIANCE CERTIFICATES) page 5 of Annexes to Compliance Certificate ANNEX C TO COMPLIANCE CERTIFICATE COPYRIGHTS AND COPYRIGHT LICENSES (OTHER THAN DISCLOSED IN THE SECURITY AGREEMENT OR PRIOR COMPLIANCE CERTIFICATES) PATENTS AND PATENT LICENSES (OTHER THAN DISCLOSED IN THE SECURITY AGREEMENT OR PRIOR COMPLIANCE CERTIFICATES) TRADEMARKS AND TRADEMARK LICENSES (OTHER THAN DISCLOSED IN THE SECURITY AGREEMENT OR PRIOR COMPLIANCE CERTIFICATES) page 6 of Annexes to Compliance Certificate [EXHIBIT C-1] FORM OF CLOSING CERTIFICATE Pursuant to Section 5.1(n) of the Credit Agreement, dated as of March 19, 1999 (the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent, the undersigned, of [ ], the [title] of the [Loan Party], (the "Company"), hereby certifies as follows: 1. The representations and warranties of the Company set forth in the Credit Agreement and each of the other Loan Documents to which it is a party or which are contained in any certificate, document or financial or other statement furnished pursuant to or in connection with the Credit Agreement or any Loan Document are true and correct in all material respects on and as of the date hereof with the same effect as if made on the date hereof, except for representations and warranties expressly stated to relate to a specific earlier date, in which case such representations and warranties are true and correct in all material respects as of such earlier date; 2. No Default or Event of Default has occurred and is continuing as of the date hereof or will occur after giving effect to the making of the Loans and the issuance of the Letters of Credit requested to be made and/or issued on the date hereof or the consummation of each of the transactions contemplated by the Loan Documents; and 3. [ ] is, and at all times since [ ], has been, the duly elected and qualified [Assistant] Secretary of the Company. The signature set forth on the signature line for such officer below is such officer's true and genuine signature; and the undersigned [Assistant] Secretary of the Company hereby certifies as follows: C1-1 A) There are no liquidation or dissolution proceedings pending or to the knowledge of the [title] of the Company threatened against the Company or any of its Subsidiaries, nor has any other event occurred affecting or threatening the corporate existence of the Company or any of its Subsidiaries; B) Attached hereto as Exhibit A is a true and complete copy of resolutions duly adopted by the Board of Directors of the Company on _____________, 1999; such resolutions have not in any way been amended, modified, revoked or rescinded and have been in full force and effect since their adoption to and including the date hereof and are now in full force and effect; such resolutions are the only corporate proceedings of the Company now in force relating to or affecting the matters referred to therein; C) attached hereto as Exhibit B is a true and complete copy of the By-laws of the Company as in effect at all times since ________ ___, 19__, to and including the date hereof; and D) attached hereto as Exhibit C is a true and complete copy of the Certificate of Incorporation of the Company as in effect at all times since [ ], to and including the date hereof. E) The following persons are now duly elected and qualified officers of the Company, holding the offices indicated next to their respective names below, and such officers have held such offices with the Company at all times since [ ], to and including the date hereof, and the signatures appearing opposite their respective names below are the true and genuine signatures of such officers, and each of such officers is duly authorized to execute and deliver on behalf of the Company, the Loan Documents to which it is a party and any certificate or other document to be delivered by the Company pursuant to any such Loan Document: Name Office Signature ---- ------ --------- _________________ _________________ _________________ Unless otherwise defined herein, capitalized terms which are defined in the Credit Agreement and used herein are so used as so defined. C1-2 IN WITNESS WHEREOF, the undersigned have hereunto set our names. [NAME OF COMPANY] By:_____________________ Name: Title: [NAME OF COMPANY] By:______________________ Name: Title: Date: March 19, 1999 C1-3 [Exhibit C-2] FORM OF SOLVENCY CERTIFICATE March 19, 1999 CITICORP U.S.A., INC., as Administrative Agent, and The Lenders Party to the Credit Agreement Referenced Below Ladies and Gentlemen: Pursuant to Section 5.1(h) of the Credit Agreement, dated as of March 19, 1999 (as amended from time to time, the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement): 1. For purposes of delivering this certificate, the undersigned has: (a) consulted with other officers of the Loan Parties responsible for financial and accounting functions concerning contingent liabilities; and (b) made such other investigations and inquiries as such officer has deemed appropriate. 2. Based upon the foregoing, the undersigned has concluded that, as of the date hereof, before and after giving effect to the Acquisitions, the incurrence of the Loans by the Borrower in an amount equal to the sum of the total Term Commitment and total Revolving Commitment, the execution of the Guarantees, the grant of the security interests in the Collateral (the "Full Transactions"): (a) the fair value and the present fair saleable value of the respective assets of Holdco, the Borrower and each of its Subsidiaries exceeds its respective stated liabilities and identified contingent liabilities; and C2-1 (b) the fair value and present fair saleable value of the respective assets of Holdco, the Borrower and each of its Subsidiaries exceeds its respective probable liability on its debts (including identified contingent liabilities) as such debts become absolute and matured; and (c) Holdco, the Borrower and each of its Subsidiaries will be able to pay its respective debts as they mature; and (d) neither Holdco, the Borrower nor any of its Subsidiaries will have unreasonably small capital for the respective business in which it is engaged and is proposed to be engaged following the consummation of the Full Transactions; and (e) neither Holdco, the Borrower nor any of its Subsidiaries expects that final judgments against it in actions for money damages with respect to pending or threatened litigation will be rendered at a time when, or in an amount such that, it 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 and the cash available to it after taking into account all other anticipated uses of the cash (including the payments on or in respect of debts (including identified contingent liabilities))). 3. To the best knowledge of the undersigned; neither Holdco, the Borrower nor any of its Subsidiaries is entering into the arrangements contemplated by the Credit Agreement or the Loan Documents or intends to make any transfer or incur any obligations thereunder, with actual intent to hinder, delay or defraud either present or future creditors. 4. To the best knowledge of the undersigned. neither Holdco, the Borrower nor any of its Subsidiaries intends to incur, or believes or reasonably should believe that such Person will incur, debts beyond such Person's ability to pay as they become due. This Certificate is being delivered by the undersigned only in his capacity as an officer of the Borrower, and not individually as of the date hereof. PRECISION PARTNERS INC. By: _________________________________ Name: Ronald Miller Title: Chief Financial Officer C2-2 [EXHIBIT C-3] FORM OF ENVIRONMENTAL CERTIFICATE The undersigned does hereby certify as of this 19th day of March, 1999, to the best of his knowledge after due inquiry, as follows: 1. This Certificate is delivered pursuant to Section 5.1(1) of the Credit Agreement, dated as of March 19, 1999 (as amended from time to time, the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement). 2. After giving effect to the transactions contemplated by the Acquisitions, each Loan Party and its Subsidiaries is in compliance with Environmental Laws to the extent contemplated by Section 6.8 of the Credit Agreement. 3. All information furnished to the Agents by or on behalf of any Loan Party relating to the matters addressed in Section 4.17 of the Credit Agreement, taken as a whole, is true and accurate in all material respects and not incomplete by omitting to state anything necessary to make such information not misleading, taken as a whole, nor has any Loan Party withheld any material information from the Agents. The undersigned officer has made or has caused to be made such examination or investigation as is necessary to enable him to express his opinions and make the certifications contained in this Certificate. This Certificate is being delivered by the undersigned officer only in his capacity as an officer of the Borrower, and not individually. C3-1 IN WITNESS WHEREOF. the undersigned officer has caused this Certificate to be duly executed and delivered as of the date hereof. PRECISION PARTNERS INC. By: _______________________ Name: Title: C3-2 Exhibit D to Credit Agreement =============================================================================== TERM LOAN AND REVOLVING CREDIT MORTGAGE, ASSIGNMENT OF LEASES, SECURITY AGREEMENT AND FIXTURE FILING BY ---------------------------- Mortgagor, TO CITICORP U.S.A., INC., as Administrative Agent, Mortgagee Relating to Premises in: __________ County, __________ $____________________ Dated as of: March __, 1999 =============================================================================== This instrument prepared by and, after recording, please return to: William B. Gannett, Esq. Cahill Gordon & Reindel 80 Pine Street New York, NY 10005 ------------------------ TABLE OF CONTENTS Section Heading Page - ------- ------- ---- INTRODUCTION ............................................................ 1 RECITALS ................................................................ 1 GRANTING CLAUSES ........................................................ 2 COVENANTS ............................................................... 4 ARTICLE I WARRANTIES, REPRESENTATIONS AND COVENANTS OF MORTGAGOR ........................................ 5 1.1 Payment ......................................................... 5 1.2 Authority and Validity .......................................... 5 1.3 Good Title ...................................................... 5 1.4 Recording Documentation To Assure Security Interest; Fees and Expenses ................................... 7 1.5 Payment of Taxes, Insurance Premiums, Assessments; Compliance with Law and Insurance Requirements ......................................... 7 1.6 Certain Tax Law Changes ......................................... 11 1.7 Required Insurance Policies ..................................... 11 1.8 Failure To Make Certain Payments ................................ 14 1.9 Inspection ...................................................... 14 1.10 Mortgagor To Maintain Improvements .............................. 15 1.11 Mortgagor's Obligations with Respect to Leases ......................................................... 15 1.12 Transfer Restrictions ........................................... 18 1.13 Destruction; Condemnation ....................................... 19 1.14 Alterations ..................................................... 23 1.15 Hazardous Material .............................................. 24 1.16 Asbestos ........................................................ 25 1.17 Books and Records, Other Information ............................ 26 1.18 No Claims Against Mortgagee ..................................... 26 1.19 Utility Services ................................................ 26 ARTICLE II ASSIGNMENT OF LEASES; SECURITY AGREEMENT; ASSIGNMENT AGREEMENT .............................. 27 2.1 Assignment of Leases, Rents, Issues and Profits ........................................................ 27 2.2 Security Interest in Personal Property .......................... 29 -i- ARTICLE III EVENTS OF DEFAULT AND REMEDIES .............................. 30 3.1 Events of Default ............................................... 30 3.2 Remedies in Case of an Event of Default ......................... 30 3.3 Sale of Mortgaged Property if Event of Default Occurs; Proceeds of Sale ............................... 32 3.4 Additional Remedies in Case of an Event of Default 3.5 Legal Proceedings After an Event of Default ..................... 35 3.6 Remedies Not Exclusive .......................................... 36 ARTICLE IV CERTAIN DEFINITIONS .......................................... 37 ARTICLE V MISCELLANEOUS ................................................. 38 5.1 Severability of Provisions ...................................... 38 5.2 Notices ......................................................... 38 5.3 Covenants To Run with the Land .................................. 38 5.4 Headings ........................................................ 38 5.5 Limitation on Interest Payable .................................. 38 5.6 Indemnity ....................................................... 39 5.7 GOVERNING LAW; TERMS ............................................ 40 5.8 No Merger ....................................................... 40 5.9 Modification in Writing ......................................... 41 5.10 No Credit for Payment of Taxes or Impositions ................................................... 41 5.11 Stamp and Other Taxes ........................................... 41 5.12 Estoppel Certificates ........................................... 41 5.13 Additional Security ............................................. 42 5.14 Release ......................................................... 42 5.15 Certain Expenses of Mortgagee ................................... 42 5.16 Expenses of Collection .......................................... 43 5.17 Business Days ................................................... 43 5.18 Relationship .................................................... 43 5.19 Concerning Mortgagee ............................................ 44 5.20 Future Advances ................................................. 45 5.21 Waiver of Stay .................................................. 45 5.22 Continuing Security Interest; Assignment ........................ 45 5.23 Obligations Absolute ............................................ 46 5.24 Mortgagee's Right To Sever Indebtedness ......................... 46 SIGNATURE ACKNOWLEDGMENTS SCHEDULE A LEGAL DESCRIPTION SCHEDULE B PRIOR LIENS -ii- TERM LOAN AND REVOLVING CREDIT MORTGAGE, ASSIGNMENT OF LEASES, SECURITY AGREEMENT AND FIXTURE FILTNG TERM LOAN AND REVOLVING CREDIT MORTGAGE, ASSIGNMENT OF LEASES, SECURITY AGREEMENT AND FIXTURE FILING ("Mortgage"), dated as of March ___, 1999, made by __________________________, a ___________ corporation, having an office at _________________________, as mortgagor, assignor and debtor (in such capacities and together with any successors in such capacities, "Mortgagor"), in favor of CITICORP U.S.A., INC., having an office at 399 Park Avenue, New York, New York 10022, as mortgagee, assignee and secured party (in such capacities and together with any successors in such capacities, "Mortgagee") as agent for the lending institutions (the "Lenders") from time to time party to the Credit Agreement (as hereinafter defined) RECITALS A. Pursuant to a certain credit agreement, dated as of the date hereof (as amended, amended and restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used herein and not defined shall have the meanings assigned to them in the Credit Agreement), among Precision Partners, Inc., a Delaware corporation (the "Borrower"), Mortgagor, the Subsidiary Guarantors, Holding, the Lenders, Citicorp U.S.A., Inc., as administrative agent for the Lenders ("Administrative Agent"), NationsBank, N.A., as syndication agent ("Syndication Agent"), SunTrust Bank, Atlanta, as documentation agent ("Documentation Agent"; together with Administrative Agent and Syndication Agent, collectively, the "Agents"), the Lenders have agreed (i) to make to or for the account of Borrower certain Term Loans up to an aggregate principal amount of $23,000,000 and certain Revolving Loans up to an aggregate principal amount of $25,000,000 and (ii) to issue certain Letters of Credit for the account of Borrower. B. Mortgagor is the owner of the Mortgaged Property (as hereinafter defined). C. It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to any Lender issuing Letters of Credit under the Credit Agreement that Mortgagor execute and deliver the applicable Loan Documents, including this Mortgage. -2- D. This Mortgage is given by Mortgagor in favor of Mortgagee for its benefit and the benefit of the Lenders and the Agents (collectively, the "Secured Parties") to secure the payment and performance in full when due, whether at stated maturity, by acceleration or otherwise (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the filing of a petition in bankruptcy or the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of (i) all Obligations of Borrower now existing or hereafter arising under or in respect of the Credit Agreement (including, without limitation, Borrower's obligation to pay principal, interest and all other charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in the Credit Agreement), (ii) all Obligations of Mortgagor now existing or hereafter arising under or in respect of the Credit Agreement (including, without limitation, Mortgagor's obligation to pay principal, interest and all other charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in the Credit Agreement) and (iii) without duplication of the amounts described in clauses (i) and (ii), all Obligations of Mortgagor now existing or hereafter arising under or in respect of this Mortgage or any other Security Document, including, without limitation, with respect to all charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in this Mortgage or in any other Security Document, in each case whether in the regular course of business or otherwise (the obligations described in clauses (i), (ii) and (iii), collectively, the "Secured Obligations"). GRANTING CLAUSES: For and in consideration of the sum of Ten Dollars ($10.00) and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor hereby grants, mortgages, bargains, sells, assigns and conveys to Mortgagee, and hereby grants to Mortgagee, a security interest in and upon, all Mortgagor's right, title and interest in, to and under the following property, whether now owned or held or hereafter acquired from time to time (collectively, the "Mortgaged Property"): A. Any and all present estates or interest of Mortgagor in the land described in Schedule A, together with all Mortgagor's reversionary rights in and to any and all ease- 3- ments, rights-of-way, sidewalks, strips and gores of land, drives, roads, curbs, streets, ways, alleys, passages, passageways, sewer rights, waters, water courses, water rights, and all power, air, light and other rights, estates, titles, interests, privileges, liberties, servitudes, licenses, tenements, hereditaments and appurtenances whatsoever, in any way belonging, relating or appertaining thereto, or any part thereof, or which hereafter shall in any way belong, relate or be appurtenant thereto (collectively, the "Land"); B. Any and all estates or interests of Mortgagor in the buildings, structures and other improvements and any and all Alterations (as hereinafter defined) now or hereafter located or erected on the Land, including, without limitation, attachments, walks and ways (collectively, the "Improvements"; together with the Land, the "Premises"); C. Any and all permits, certificates, approvals and authorizations, however characterized, issued or in any way furnished in connection with the Premises, whether necessary or not for the operation and use of the Premises, including, without limitation, building permits, certificates of occupancy, environmental certificates, industrial permits or licenses and certificates of operation; D. Any and all interest of Mortgagor in all machinery, apparatus, equipment, fittings, fixtures, improvements and articles of personal property of every kind and nature whatsoever now or hereafter attached or affixed to the Premises or used in connection with the use and enjoyment of the Premises or the maintenance or preservation thereof, including, without limitation, all utility systems, fire sprinkler and alarm systems, HVAC equipment, boilers, electronic data processing, telecommunications or computer equipment, refrigeration, electronic monitoring, water or lighting systems, power, sanitation, waste removal, elevators, maintenance or other systems or equipment, and all other articles used or useful in connection with the use or operation of any part of the Premises (collectively, the "Equipment"); E. All Mortgagor's right, title and interest as landlord, franchisor, licensor or grantor, in all leases and subleases of space, franchise agreements, licenses, occupancy or concession agreements now existing or hereafter entered into relating in any manner to the Premises or the Equipment and any and all amendments, modifications, supplements and renewals of any thereof (each such lease, license or agreement, together with any such amendment, modification, supplement or -4- renewal, a "Lease"), whether now in effect or hereafter coming into effect, including, without limitation, all rents, additional rents, cash, guaranties, letters of credit, bonds, sureties or securities deposited thereunder to secure performance of the lessee's, franchisee's, licensee's or obligee's obligations thereunder, revenues, earnings, profits and income, advance rental payments, payments incident to assignment, sublease or surrender of a Lease, claims for forfeited deposits and claims for damages, now due or hereafter to become due, with respect to any Lease, any indemnification against, or reimbursement for, sums paid and costs and expenses incurred by Mortgagor under any Lease or otherwise, and any award in the event of the bankruptcy of any tenant under or guarantor of a Lease (collectively, the "Rents"); F. All general intangibles and contract rights relating to the Premises and the Equipment and all reserves, deferred payments, deposits, refunds and claims of every kind or character relating thereto (collectively, the "Contract Rights"); G. All drawings, plans, specifications, file materials, operating and maintenance records, catalogues, tenant lists, correspondence, advertising materials, operating manuals, warranties, guaranties, appraisals, studies and data relating to the Premises or the Equipment or the construction of any Alteration or the maintenance of any Permit (as hereinafter defined); and H. All proceeds of the conversion, voluntary or involuntary, of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation or other awards or payments and refunds of real estate taxes and assessments, including interest thereon (collectively, "Proceeds"); TO HAVE AND TO HOLD the Mortgaged Property unto Mortgagee, for the purpose of securing the payment and performance of the Secured Obligations. COVENANTS Mortgagor warrants, represents and covenants to and for the benefit of Mortgagee as follows: -5- ARTICLE I WARRANTIES, REPRESENTATIONS AND COVENANTS OF MORTGAGOR SECTION 1.1 Payment. Mortgagor shall pay as and when the same shall become due, whether at its stated maturity, by acceleration or otherwise, each and every amount payable by Mortgagor under the Loan Documents. SECTION 1.2 Authority and Validity. Mortgagor represents, warrants and covenants that (i) Mortgagor is duly authorized to execute and deliver this Mortgage, and all corporate and governmental consents, authorizations and approvals necessary or required thereof or have been duly and effectively taken or obtained, (ii) this Mortgage is a legal, valid, binding and enforceable obligation of Mortgagor and (iii) Mortgagor has full corporate power and lawful authority to execute and deliver this Mortgage and to mortgage and grant a security interest in the Mortgaged Property as contemplated herein. SECTION 1.3 Good Title 1.3.1 Mortgagor represents, warrants and covenants that (i) Mortgagor has good and marketable fee simple title to the Premises and the landlord's interest and estate under or in respect of the Leases and good title to the interest it purports to own in and to each of the Permits, the Equipment and the Contract Rights, in each case subject to no deed of trust, mortgage, pledge, security interest, encumbrance, lien, lease, license, easement, assignment, collateral assignment or charge of any kind, including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute or any subordination arrangement in favor of any party other than Mortgagor (collectively, "Liens"; each, a "Lien"), except for those Liens identified on Schedule B (collectively, the "Prior Liens"), (ii) Mortgagor will keep in effect all rights and appurtenances to or that constitute a part of the Mortgaged Property, (iii) Mortgagor will protect, preserve and defend its interest in the Mortgaged Property and title thereto, (iv) Mortgagor will comply with each of the terms, conditions and provisions of any obligation of Mortgagor which is secured by the Mortgaged Property or the noncompliance with which may result in the imposition of a Lien on the Mortgaged Property, (v) Mortgagor will appear and defend -6- the Lien and security interests created and evidenced hereby and the validity and priority of this Mortgage in any action or proceeding affecting or purporting to affect the Mortgaged Property or any of the rights of Mortgagee hereunder, (vi) this Mortgage creates and constitutes a valid and enforceable first Lien on the Mortgaged Property, and, to the extent any of the Mortgaged Property shall consist of personality, a first security interest in the Mortgaged Property, which first Lien and first security interest are and will be subject only to (a) Prior Liens (but not to extensions, amendments, supplements or replacements of Prior Liens unless consented to by Mortgagee) and (b) Liens hereafter created and which, pursuant to the provisions of Section 1.12, are superior to the Lien and security interests created and evidenced hereby, and Mortgagor does now and will forever warrant and defend to Mortgagee and all its successors and assigns such title and the validity and priority of the Lien and security interests created and evidenced hereby against the claims of all persons and parties whomsoever, (vii) there has been issued and there remain in effect each and every certificate of occupancy or use or other Permit currently required for the existing use and occupancy by Mortgagor and its tenants of the Premises and (viii) the Premises comply in all respects with all local zoning, land use, set back or other development and use requirements of Governmental Authorities. 1.3.2 Mortgagor, immediately upon obtaining knowledge of the pendency of any proceedings for the eviction of Mortgagor from the Mortgaged Property or any part thereof by paramount title or otherwise questioning Mortgagor's title to the Mortgaged Property as warranted in this Mortgage, or of any condition that might reasonably be expected to give rise to any such proceedings, shall notify Mortgagee thereof. Mortgagee may participate in such proceedings, and Mortgagor will deliver or cause to be delivered to Mortgagee all instruments requested by Mortgagee to permit such participation. In any such proceedings Mortgagee may be represented by counsel satisfactory to Mortgagee at the expense of Mortgagor. If, upon the resolution of such proceedings, Mortgagor shall suffer a loss of the Mortgaged Property or any part thereof or interest therein and title insurance proceeds shall be payable in connection therewith, such proceeds are hereby assigned to and shall be paid to Mortgagee to be applied as Net Cash Proceeds to the payment of the Secured Obligations in accordance with the provisions of Section 2.8(c) of the Credit Agreement. -7- SECTION 1.4 Recording Documentation To Assure Security Interest; Fees and Expenses. 1.4.1 Mortgagor shall, forthwith after the execution and delivery of this Mortgage and thereafter, from time to time, cause this Mortgage and any financing statement, continuation statement or similar instrument relating to any thereof or to any property intended to be subject to the Lien of this Mortgage to be filed, registered and recorded in such manner and in such places as may be required by any present or future law in order to publish notice of and fully to protect the validity and priority thereof or the Lien hereof purported to be created upon the Mortgaged Property and the interest and rights of Mortgagee therein. Mortgagor shall pay or cause to be paid all taxes and fees incident to such filing, registration and recording, and all expenses incident to the preparation, execution and acknowledgment thereof, and of any instrument of further assurance, and all Federal or state stamp taxes or other taxes, duties and charges arising out of or in connection with the execution and delivery of such instruments. 1.4.2 Mortgagor shall, at the sole cost and expense of Mortgagor, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, mortgages, assignments, notices of assignment, transfers, financing statements, continuation statements and assurances as Mortgagee shall from time to time request, which may be necessary in the judgment of Mortgagee from time to time to assure, perfect, convey, assign, mortgage, transfer and confirm unto Mortgagee, the property and rights hereby conveyed or assigned or which Mortgagor may be or may hereafter become bound to convey or assign to Mortgagee or for carrying out the intention or facilitating the performance of the terms of this Mortgage or the filing, registering or recording of this Mortgage. In the event Mortgagor shall fail after demand to execute any instrument required to be executed by Mortgagor under this subsection 1.4.2, Mortgagee may execute the same as the attorney-in-fact for Mortgagor, such power of attorney being coupled with an interest and irrevocable. SECTION 1.5 Payment of Taxes, Insurance Premiums, Assessments; Compliance with Law and Insurance Requirements. 1.5.1 Unless and to the extent contested by Mortgagor in accordance with the provisions of subsection 1.5.5 hereof, Mortgagor shall pay and discharge, or cause to be paid and discharged, from time to time when the same shall become -8- due, all real estate and other taxes, special assessments, levies, permits, inspection and license fees, all premiums for insurance, all water and sewer rents and charges and all other public charges imposed upon or assessed against the Mortgaged Property or any part thereof or upon the Rents. Mortgagor shall, upon Mortgagee's request, deliver to Mortgagee, receipts evidencing the payment of all such taxes, assessments, levies, fees, rents and other public charges imposed upon or assessed against the Mortgaged Property or any part thereof or the Rents. 1.5.2 From and after the occurrence and during the continuance of an Event of Default (as hereinafter defined), at the option and upon the request of Mortgagee, Mortgagor shall deposit with Mortgagee, on the first day of each month, an amount estimated by Mortgagee to be equal to one-twelfth of the annual taxes, assessments and other items required to be discharged by Mortgagor under subsection 1.5.1. Such amounts shall be held by Mortgagee without interest to Mortgagor and applied to the payment of the obligations in respect of which such amounts were deposited, in such priority as Mortgagee shall determine, on or before the respective dates on which such obligations or any part thereof would become delinquent. Nothing contained in this Section 1.5 shall (i) affect any right or remedy of Mortgagee under any provision of this Mortgage or of any statute or rule of law to pay any such amount as provided above from its own funds and to add the amount so paid, together with interest at a rate per annum (the "Default Rate") equal to the highest rate then payable under the Loan Agreement during such time that any amount remains outstanding, to the Secured Obligations or (ii) relieve Mortgagor of its obligations to make or provide for the payment of the annual taxes, assessments and other charges required to be discharged by Mortgagor under subsection 1.5.1. Mortgagor hereby grants to Mortgagee a security interest in all sums held pursuant to this subsection 1.5.2 to secure payment and performance of the Secured Obligations. During the continuance of any Event of Default, Mortgagee may, at its option, apply all or any part of the sums held pursuant to this subsection 1.5.2 to payment and performance of the Secured Obligations. Mortgagor shall redeposit with Mortgagee an amount equal to all amounts so applied as a condition to the cure, if any, of such Event of Default in addition to fulfillment of any other required conditions. 1.5.3 Unless and to the extent contested by Mortgagor in accordance with the provisions of subsection 1.5.5, Mortgagor shall timely pay, or cause to be paid, all lawful -9- claims and demands of mechanics, materialmen, laborers, government agencies administering worker's compensation insurance, old age pensions and social security benefits and all other claims, judgments, demands or amounts of any nature which, if unpaid, might result in, or permit the creation of, a Lien on the Mortgaged Property or any part thereof, or on the Rents or which might result in forfeiture of all or any part of the Mortgaged Property. 1.5.4 Mortgagor shall maintain, or cause to be maintained, in full force and effect all permits, certificates, authorizations, consents, approvals, licenses, franchises or other instruments now or hereafter required by any Governmental Authority to operate or use and occupy the Premises and the Equipment for its intended uses (collectively, "Permits"; each, a "Permit"). Unless and to the extent contested by Mortgagor in accordance with the provisions of subsection 1.5.5 hereof, Mortgagor shall comply with all requirements set forth in the Permits and all requirements of any law, ordinance, rule, regulation or similar statute or case law (collectively, "Requirements of Law") of any Governmental Authority applicable to all or any part of the Mortgaged Property or the condition, use or occupancy of all or any part thereof or any recorded deed of restriction, declaration, covenant running with the land or otherwise, now or hereafter in force. Mortgagor shall not initiate, join in, or consent to any change in the zoning or any other permitted use classification of the Premises without the prior written consent of Mortgagee. 1.5.5 Mortgagor may at its own expense contest the amount or applicability of any of the obligations described in subsections 1.5.1, 1.5.3 or 1.5.4 by appropriate legal proceedings, prosecution of which operates to prevent the collection or enforcement thereof and the sale or forfeiture of the Mortgaged Property or any part thereof to satisfy such obligations; provided however, that in connection with such contest, Mortgagor shall, at the option of Mortgagee, have made provision for the payment or performance of such contested obligation on Mortgagor's books if and to the extent required by GAAP or deposited with Mortgagee to hold for the benefit of Mortgagor a sum sufficient to pay and discharge such obligation and Mortgagee's estimate of all interest and penalties related thereto. Any such deposit (and any income earned thereon) not otherwise used to pay such obligation, interest or penalties shall be promptly returned to Mortgagor. Notwithstanding the foregoing provisions of this subsection 1.5.5, (i) no contest of any such obligations may be pursued -10- by Mortgagor if such contest would expose Mortgagee or any Lender to any possible criminal liability or, unless Mortgagor shall have furnished a bond or other security thereof or satisfactory to Mortgagee or such Lender, as the case may be, any additional civil liability for failure to comply with such obligations and (ii) if at any time payment or performance of any obligation contested by Mortgagor pursuant to this subsection 1.5.5 shall become necessary to prevent the delivery of a tax or similar deed conveying the Mortgaged Property or any portion thereof because of nonpayment or nonperformance, Mortgagor shall pay or perform the same, in sufficient time to prevent the delivery of such tax or similar deed or such termination or forfeiture. 1.5.6 Mortgagor shall not take any action that could be the basis for termination, revocation or denial of any insurance coverage required to be maintained under this Mortgage or that could be the basis for a defense to any claim under any insurance policy maintained in respect of the Premises or the Equipment and Mortgagor shall otherwise comply in all respects with the requirements of any insurer that issues a policy of insurance in respect of the Premises or the Equipment; provided, however, that Mortgagor may, at its own expense and after notice to Mortgagee, (i) contest the applicability or enforceability of any such requirements by appropriate legal proceedings, prosecution of which does not constitute a basis for cancellation or revocation of any insurance coverage required under Section 1.7 hereof or (ii) cause the insurance policy containing any such requirement to be replaced by a new policy complying with the provisions of Section 1.7. 1.5.7 Mortgagor shall, promptly upon receipt of any written notice regarding any failure by Mortgagor to pay or discharge any of the obligations described in subsection 1.5.1, 1.5.3, 1.5.4 or 1.5.6, furnish a copy of such notice to Mortgagee. 1.5.8 In the event that the proceeds of any tax claim are paid after Mortgagee has exercised its right to foreclose the Lien of this Mortgage, such proceeds shall be paid to Mortgagee to satisfy any deficiency remaining after such foreclosure. Mortgagee shall retain its interest in the proceeds of any tax claim during any redemption period. The amount of any such proceeds in excess of any deficiency claim of Mortgagee shall reasonably promptly be released to Mortgagor. -11- SECTION 1.6 Certain Tax Law Changes. In the event of the passage after the date of this Mortgage of any law deducting from the value of real property, for the purpose of taxation, amounts in respect of any Lien thereon or changing in any way the laws for the taxation of mortgages or debts secured by mortgages for state or local purposes or the manner of the collection of any such taxes, and imposing a tax, either directly or indirectly, on this Mortgage or any other Loan Document, Mortgagor shall promptly pay to Mortgagee such amount or amounts as may be necessary from time to time to pay such tax. SECTION 1.7 Required Insurance Policies. 1.7.1 Mortgagor shall maintain in respect of the Premises and the Equipment the following insurance coverages: (i) Physical hazard insurance on an "all risk" basis covering, without limitation, hazards commonly covered by fire and extended coverage, lightning, windstorm, civil commotion, hail, riot, strike, water damage, sprinkler leakage, collapse and malicious mischief, in an amount equal to the full replacement cost of the Improvements and all Equipment, with such deductibles as Mortgagee may from time to time require, and, if Mortgagee shall not have imposed any such requirements, with such deductibles as would be maintained by a prudent operator of property similar in use and configuration to the Premises and located in the locality where the Premises are located. "Full replacement cost" means the Cost of Construction (as hereinafter defined) to replace the Improvements and the Equipment, exclusive of depreciation, excavation, foundation and footings, as determined from time to time (but not less frequently than once every twelve (12) months) by a Person selected by Mortgagor and reasonably acceptable to Mortgagee; (ii) Comprehensive general liability insurance against claims for bodily injury, death or property damage occurring on, in or about the Premises and any adjoining streets, sidewalks and passageways, and covering any and all claims, including, without limitation, all legal liability to the extent insurable imposed upon Mortgagee and all court costs and attorneys' fees, arising out of or connected with the possession, use, leasing, operation or condition of the Premises with policy limits and deductibles in such amounts as Mortgagee may from time to time require, and, if Mortgagee shall not -12- have imposed such requirements, in such amounts as from time to time would be maintained by a prudent operator of property similar in use and configuration to the Premises and located in the locality where the Premises are located; (iii) Worker's compensation insurance as required by the laws of the state where the Premises are located to protect Mortgagor and Mortgagee against claims for injuries sustained in the course of employment at the Premises; (iv) Explosion insurance in respect of any boilers and similar apparatus located on the Premises or comprising any Equipment, with policy limits and deductibles in such amounts as Mortgagee may from time to time require, and, if Mortgagee shall not have imposed any such requirements, in such amounts as would be maintained by a prudent operator of property similar in use and configuration to the Premises and the Equipment and located in the locality where the Premises and Equipment are located; (v) Business interruption insurance and/or loss of "rental value" insurance covering one year of loss, the term "rental value" to mean the sum of (a) the total estimated gross rental income from tenant occupation of the Improvements as furnished and equipped under Leases and (b) the total amount of all other charges which are the legal obligation of the tenants, lessees and sublessees of the Premises under Leases; (vi) If the Premises are located in an area identified by the Federal Emergency Management Agency as an area having special flood hazards pursuant to the National Flood Insurance Act of 1968 or the Flood Disaster Protection Act of 1973, each as amended, or any successor laws, flood insurance with policy limits and deductibles in such amounts as Mortgagee may from time to time reasonably require, and, if Mortgagee shall not have imposed any such requirements, in such amounts as would be maintained by a prudent operator of property similar in use and configuration to the Premises and located in the locality where the Premises are located; and (vii) Such other insurance, against such risks and with policy limits and deductibles in such amounts as Mortgagee may from time to time require, and, if no such -13 - requirements shall have been imposed, in such amounts as would be maintained by a prudent operator of property similar in use and configuration to the Premises and located in the locality where the Premises are located. 1.7.2 All insurance policies required by this Section 1.7 shall be in form satisfactory to Mortgagee. All insurance policies in respect of the coverages required by subsections 1.7.1(i), 1.7.1(iv), 1.7.1(v), 1.7.1(vi) and, if applicable, 1.7.l(vii), shall be in amounts at least sufficient to prevent coinsurance liability, and all losses thereunder shall be payable to Mortgagee, as loss payee, pursuant to a standard non-contributory New York mortgagee endorsement. All insurance policies in respect of the coverages required by subsections 1.7.1(ii) and, if applicable, 1.7.1(vii) shall name Mortgagee as an additional insured. Each policy of insurance required under this Section 1.7 shall provide that it may not be modified, reduced, cancelled or otherwise terminated without at least thirty (30) days' prior written notice to Mortgagee and shall permit Mortgagee to pay any premium thereof or within thirty (30) days after receipt of any notice stating that such premium has not been paid when due. All insurance policies required hereunder shall provide that all losses thereunder shall be payable notwithstanding any act or negligence of Mortgagor or its agents or employees which otherwise might have resulted in a forfeiture of all or a part of such insurance payments. The policy or policies of such insurance or certificates of insurance evidencing the required coverages, and all renewals or extensions thereof, shall be delivered to Mortgagee. Settlement of any claim under any of the insurance policies referred to in this Section 1.7, if such claim involves (in the reasonable judgment of Mortgagee) loss in excess of $250,000, shall require the prior written approval of Mortgagee, and Mortgagor shall use reasonable efforts to cause each such policy to contain a provision to such effect. 1.7.3 At least ten (10) days prior to the expiration of any insurance policy required by this Section 1.7, a policy or policies renewing or extending such expiring policy or renewal or extension certificates or other reasonable evidence of renewal or extension and that the applicable policies are in full force and effect shall be delivered to Mortgagee. 1.7.4 Mortgagor shall not purchase separate insurance policies concurrent in form or contributing in the event of loss with those policies required to be maintained under this Section 1.7, unless Mortgagee is included thereon as a -14- named insured and, if applicable, with loss payable to Mortgagee under an endorsement containing the provisions described in subsection 1.7.2. Mortgagor shall immediately notify Mortgagee whenever any such separate insurance policy is obtained and shall promptly deliver to Mortgagee the policy or certificate evidencing such insurance. 1.7.5 Mortgagor shall, immediately upon receipt of any written notice of any failure by Mortgagor to pay any insurance premium in respect of any insurance policy required to be maintained under this Section 1.7, furnish a copy of such notice to Mortgagee. 1.7.6 In the event that the proceeds of any insurance claim are paid after Mortgagee has exercised its right to foreclose the Lien of this Mortgage, such proceeds shall be paid to Mortgagee to satisfy any deficiency remaining after such foreclosure. Mortgagee shall retain its interest in the policies of insurance required to be maintained pursuant to this Mortgage during any redemption period. SECTION 1.8 Failure To Make Certain Payments. If Mortgagor shall fail to perform any of the covenants contained in this Mortgage, including, without limitation, Mortgagor's covenants to (i) pay the premiums in respect of all required insurance coverages, (ii) pay taxes and assessments, (iii) make repairs, (iv) discharge liens and encumbrances or (v) pay or perform any obligations of Mortgagor under the Leases, Mortgagee may, but shall not be obligated to, make advances to perform such covenant on Mortgagor's behalf, and all sums so advanced shall be included in the Secured Obligations and, to the extent permitted by applicable law, shall be secured hereby. Mortgagor shall repay on demand all sums so advanced by Mortgagee on behalf of Mortgagor, with interest at the Default Rate from the date of payment by Mortgagee to the date of reimbursement. Neither the provisions of this Section 1.8 nor any action taken by Mortgagee pursuant to the provisions of this Section 1.8 shall prevent any such failure to observe any covenant contained in this Mortgage from constituting an Event of Default. Mortgagee shall not be bound to inquire into the validity of any tax, lien or imposition which Mortgagor fails to pay as and when required hereby and which Mortgagor does not contest in accordance with the terms hereof. SECTION 1.9 Inspection. Mortgagor shall permit Mortgagee, by its agents, accountants and attorneys, to visit and inspect the Premises at such reasonable times as may be requested by Mortgagee. -15- SECTION 1.10 Mortgagor To Maintain Improvements. Mortgagor shall not commit or suffer any waste on the Premises or with respect to any Equipment or make any change in the use of the Premises or any Equipment. Mortgagor represents and warrants that (i) the Premises are served by all utilities required or necessary for the current use thereof, (ii) all streets necessary to serve the Premises are completed and serviceable and have been dedicated and accepted as such by the appropriate Governmental Authorities and (iii) Mortgagor has access to the Premises from public roads sufficient to allow Mortgagor and its tenants and invitees to conduct its and their businesses at the Premises in accordance with sound commercial practices. Mortgagor shall, at all times, maintain the Premises and Equipment in good, safe and insurable operating order, condition and repair and shall make all repairs, structural or nonstructural, when necessary. Mortgagor shall (a) except as permitted in Section 1.14, not alter the occupancy or use of all or any part of the Premises without the prior written consent of Mortgagee and (b) do all other acts which from the character or use of the Premises and Equipment may be necessary or appropriate to maintain and preserve their value. Mortgagor shall not remove, demolish or alter, except as permitted in Section 1.14, the design or structural character of any Improvement now or hereafter erected upon all or any part of the Premises, or permit any such removal, demolition or alteration, without the prior written consent of Mortgagee, except that items constituting Equipment may be removed if such removal is temporary and for the purpose of making repairs or such items are immediately replaced with similar items of Equipment having a value and utility for their intended purposes that is not less than the value and such utility of the Equipment so removed. SECTION 1.11 Mortgagor's Obligations with Respect to Leases. 1.11.1 Subject to the provisions of subsection 1.11.2 herein, Mortgagor will manage and operate the Mortgaged Property in a reasonably prudent manner and will not without the prior written consent of Mortgagee enter into any Lease of all or any part of the Premises. 1.11.2 Mortgagor shall not: (i) receive or collect, or permit the receipt or collection of, any rental or other payments under any Lease more than one month in advance of the respective period in respect of which they are to accrue, except -16- that (a) in connection with the execution and delivery of any Lease or of any amendment to any Lease, rental payments thereunder may be collected and received in advance in an amount not in excess of one month's rent and/or a reasonable security deposit may be required thereunder and (b) Mortgagor may receive and collect escalation and other charges in accordance with the terms of each Lease; (ii) assign, transfer or hypothecate (other than to Mortgagee hereunder) any rental or other payment under any Lease whether then due or to accrue in the future, the interest of Mortgagor as lessor under any Lease or the rents, issues, revenues, profits or other income of the Mortgaged Property; (iii) enter into any Lease after the date hereof that does not contain terms to the effect as follows: (a) such Lease and the rights of the tenant thereunder (including, without limitation, any options to purchase or rights of first offer or refusal) shall be subject and subordinate to the rights of Mortgagee under and the Lien of this Mortgage; (b) such Lease has been assigned as collateral security by Mortgagor as landlord thereunder to Mortgagee under this Mortgage; (c) in the case of any foreclosure hereunder, the rights and remedies of the tenant in respect of any obligations of any successor landlord thereunder shall be limited to the equity interest of such successor landlord in the Premises and any successor landlord shall not (1) be liable for any act, omission or default of any prior landlord under the Lease, (2) be required to make or complete any tenant improvements or capital improvements or repair, restore, rebuild or replace the demised premises or any part thereof in the event of damage, casualty or condemnation or (3) be required to pay any amounts to tenant arising under the Lease prior to such successor landlord taking possession; (d) the tenant's obligation to pay rent and any additional rent shall not be subject to any abatement, deduction, counterclaim or setoff as against any mortgagee or purchaser upon the foreclo- -17- sure of any of the Premises or the giving or granting of a deed in lieu thereof by reason of a landlord default occurring prior to such foreclosure or delivery of such deed and such mortgagee or purchaser will not be bound by any advance payments of rent in excess of one month or any security deposits unless such security was actually received by Mortgagee (or in the case of a letter of credit, was properly transferred in negotiable form); (e) the tenant agrees to attorn, at the option of Mortgagee or any purchaser of the Premises, upon a foreclosure of the Premises or the giving or granting of a deed in lieu thereof; and (f) the tenant agrees to give notice to Mortgagee of any default by landlord under the Lease and Mortgagee shall have a reasonable time to cure, should Mortgagee so elect, any default of landlord prior to tenant exercising any rights of tenant to terminate or cancel such Lease. (iv) enter into any amendment or modification of any Lease which would change the unexpired term thereof or decrease the amount of the rents or other amounts payable thereunder or impair the value or utility of the Mortgaged Property or the security provided by this Mortgage; (v) enter into any further lease or sublease of the property subject to any Lease without the prior written consent of Mortgagee, unless such Lease is not amended in any respect and the primary obligor under such Lease is not released in any respect from its responsibilities and liabilities under such Lease as a result of such lease or sublease; (vi) terminate (whether by exercising any contractual right of Mortgagor to recapture leased space or otherwise) or permit the termination of any Lease or accept surrender of all or any portion of the space demised under any Lease prior to the end of the term thereof or accept assignment of any Lease to Mortgagor unless: (a) the tenant under such Lease has not paid the equivalent of two months' rent and Mortgagor has made reasonable efforts to collect such rent; or -18- (b) Mortgagor shall deliver to Mortgagee an Officer's Certificate to the effect that Mortgagor has entered into a new Lease (or Leases) for the space covered by the terminated or assigned Lease with a term (or terms) which expire(s) no earlier than the date on which the terminated or assigned Lease was to expire (excluding renewal options), and with a tenant (or tenants) having a creditworthiness (as reasonably determined by Mortgagor) sufficient to pay the rent and other charges due under the new Lease (or Leases), and the tenant(s) shall have commenced paying rent, including all operating expenses and other amounts payable under the new Lease (or Leases) without any abatement or concession; or (vii) waive, excuse, condone or in any manner discharge or release any tenants of or from the obligations of such tenants under their respective Leases or guarantors of tenants from obligations under any guarantees of the Leases except in the ordinary and prudent course of business with due regard for the security afforded Mortgagee thereby. 1.11.3 Mortgagor shall timely perform and observe all the terms, covenants and conditions required to be performed and observed by Mortgagor under each Lease and shall at all times do all things necessary to require performance by the lessee, franchisee, licensee or grantee under each Lease of all obligations, covenants and agreements by such party to be performed thereunder. Mortgagor shall promptly notify Mortgagee of the receipt of any notice from any lessee under any Lease claiming that Mortgagor is in default in the performance or observance of any of the terms, covenants or conditions thereof to be performed or observed by Mortgagor and will cause a copy of each such notice to be promptly delivered to Mortgagee. SECTION 1.12 Transfer Restrictions. Except as provided in Section 1.11, Mortgagor may not, without the prior written consent of Mortgagee, further mortgage, encumber, hypothecate, sell, convey or assign all or any part of the Mortgaged Property or suffer any of the foregoing to occur by operation of law or otherwise. Notwithstanding the provisions of the foregoing sentence, so long as no Event of Default shall have occurred and be continuing, Mortgagor shall have the right to suffer, in respect of the Mortgaged Property, the Liens in respect of amounts payable or obligations to be performed by Mortgagor pursuant to subsections 1.5.1, 1.5.3 and -19- 1.5.4; provided, however, that such amounts are not yet due and payable or are being contested in accordance with the provisions of subsection 1.5.5. Each of the Liens and other transfers permitted by this Section 1.12 shall in all respects be subject and subordinate in priority to the Lien and security interests created and evidenced hereby except to the extent the law or regulation creating or authorizing such Lien provides that such Lien must be superior to the Lien and security interest created and evidenced hereby. SECTION 1.13 Destruction; Condemnation. 1.13.1 Destruction; Insurance Proceeds. If there shall occur any damage to, or loss or destruction of, the Improvements, Equipment, or any part of any thereof (each, a "Destruction"), Mortgagor shall promptly send to Mortgagee a notice setting forth the nature and extent of such Destruction. The proceeds of any insurance payable in respect of such Destruction are hereby assigned and shall be paid to Mortgagee. All such proceeds, together with any interest earned thereon, less the amount of any expenses incurred in litigating, arbitrating, compromising or settling any claim arising out of such Destruction (the "Net Proceeds"), shall be applied in accordance with the provisions of subsections 1.13.3, 1.13.4 and 1.13.5. 1.13.2 Condemnation; Assignment of Award. If there shall occur any taking of the Mortgaged Property or any part thereof, in or by condemnation or other eminent domain proceedings pursuant to any law, general or special, or by reason of the temporary requisition of the use or occupancy of the Mortgaged Property or any part thereof, by any Governmental Authority, civil or military (each, a "Taking"), Mortgagor shall immediately notify Mortgagee upon receiving notice of such Taking or commencement of proceedings therefor. Mortgagee may participate in any proceedings or negotiations which might result in any Taking, and Mortgagor shall deliver or cause to be delivered to Mortgagee all instruments requested by it to permit such participation. Mortgagee may be represented by counsel satisfactory to it at the expense of Mortgagor in connection with any such participation. Mortgagor shall pay all fees, costs and expenses incurred by Mortgagee in connection with any Taking and in seeking and obtaining any award or payment on account thereof. Any proceeds, award or payment in respect of any Taking are hereby assigned and shall be paid to Mortgagee. Mortgagor shall take all steps necessary to notify the condemning authority of such assignment. Such proceeds, award or payment, together with any interest -20- earned thereon, less the amount of any expenses incurred in litigating, arbitrating, compromising or settling any claim arising out of such Taking (the "Net Award"), shall be applied in accordance with the provisions of subsections 1.13.3, 1.13.4 and 1.13.5. 1.13.3 Restoration. In the event Mortgagor is permitted or required to apply a Net Award or Net Proceeds, in accordance with the provisions of Section 2.7(c) of the Credit Agreement and such Net Award or Net Proceeds is in an amount less than or equal to $250,000, Mortgagor shall apply such Net Award or Net Proceeds to perform a restoration (each, a "Restoration") of the Premises and Equipment. In the event Mortgagor elects to perform a Restoration, Mortgagor shall give written notice (each, a "Restoration Election Notice") of such election to Mortgagee within thirty (30) days after the date that Mortgagor receives notice of collection by Mortgagee of the applicable Net Proceeds or Net Award, as the case may be. In the event Mortgagee does not receive a Restoration Election Notice within such 30-day period, Mortgagee may apply any such Net Proceeds or Net Award held by Mortgagee to the payment of the Secured Obligations in accordance with the provisions of Section 2.7(c) of the Credit Agreement or, at the option of Mortgagee, may continue to hold such Net Proceeds or Net Award as additional collateral to secure the performance by Mortgagor of the Secured Obligations. In the event Mortgagor elects to perform any Restoration contemplated by this subsection 1.13.3, Mortgagee shall release such Net Award or Net Proceeds to Mortgagor as soon as practicable following receipt of a Restoration Election Notice but in no event more than fifteen (15) days following such receipt. Mortgagor shall, within fifteen (15) days following the date of its receipt of any proceeds in respect of a Destruction or Taking, as the case may be, commence and diligently continue to perform the Restoration of that portion or portions of the Improvements and Equipment subject to such Destruction or affected by such Taking so that, upon the completion of the Restoration, the Premises and Equipment will be in the same condition and shall be of at least equal value and utility for its intended purposes as the Premises and Equipment was immediately prior to such Destruction or Taking. Mortgagor shall so complete such Restoration with its own funds to the extent that the amount of any Net Award or Net Proceeds is insufficient for such purpose. 1.13.4 Major Restoration. In the event Mortgagor is permitted or required to apply a Net Award or Net Proceeds in accordance with the provisions of Section 2.7(c) of the -21- Credit Agreement and such Net Award or Net Proceeds is in an amount greater than $250,000, Mortgagee shall apply such Net Award or Net Proceeds, as the case may be, to perform a Restoration of the Premises and Equipment. In the event a Restoration is to be performed under this subsection 1.13.4, Mortgagee shall not release any part of the Net Award or the Net Proceeds except in accordance with the provisions of subsection 1.13.5, and Mortgagor shall, prior to commencing any work to effect a Restoration of the Premises and Equipment, promptly (but in no event later than ninety (90) days following any Destruction or Taking) furnish to Mortgagee: (i) complete plans and specifications (the "Plans and Specifications") for the Restoration; (ii) a certificate (an "Architect's Certificate") of an independent, reputable architect or engineer acceptable to Mortgagee and licensed in the state where the Premises is located (a) listing all permits and approvals required by law in connection with the Restoration, (b) stating that all permits and approvals required by law to commence work in connection with the Restoration have been obtained, (c) stating that the Plans and Specifications have been reviewed and approved by the signatory thereto, (d) stating such signatory's estimate (an "Estimate") of the costs of completing the Restoration and (e) stating that upon completion of such Restoration in accordance with the Plans and Specifications, the value and utility of the Premises and the Equipment will be approximately equal to or greater than the value and utility thereof immediately prior to the Destruction or Taking relating to such Restoration; and (iii) if the Estimate exceeds the Net Proceeds or Net Award, as the case may be, a surety bond for, guarantee of, or irrevocable letter of credit (a "Letter of Credit") or other irrevocable and unconditional commitment to provide funds (each, a "Commitment") for the payment of the excess cost of such Restoration, payable to or in favor of Mortgagee, as Administrative Agent, which bond, guaranty, Letter of Credit or Commitment (A) shall be signed by a surety or sureties or guarantor(s), as the case may be, acceptable to Mortgagee and, in the case of a Letter of Credit or Commitment, shall be provided by a Lender or other financial institution having capital and surplus in excess of $500 million as shown in its most recent available statement of financial condition and (B) shall be in an amount not less than the excess of the -22- amount of the Estimate over the amount of the Net Award or Net Proceeds, as the case may be, then held by Mortgagee for application toward the cost of such Restoration. Mortgagee shall have the right to review and approve the Plans and Specifications. Promptly upon any approval of the Plans and Specifications by Mortgagee, Mortgagor shall commence and diligently continue to perform the Restoration in accordance with such approved Plans and Specifications. Mortgagor shall so complete such Restoration with its own funds to the extent that the amount of any Net Award or Net Proceeds is insufficient for such purpose. 1.13.5 Restoration Advances Following Destruction or Taking of Mortgaged Property. In the event Mortgagor shall be required or permitted to perform a Restoration of the Premises and Equipment as provided in subsection 1.13.4, Mortgagee shall apply any Net Proceeds or the Net Award held by Mortgagee on account of the applicable Destruction or Taking to the payment of the cost of performing such Restoration and shall pay portions of the same, from time to time, to Mortgagor or, at Mortgagee's option, exercised from time to time, directly to the contractors, subcontractors, materialmen, laborers, engineers, architects, and other persons rendering services or material for such Restoration, subject to the following conditions: (i) Each request for payment shall be made on at least ten (10) days' prior notice to Mortgagee and shall be accompanied by an Architect's Certificate stating (a) that all the Restoration work then completed has been done in compliance with the Plans and Specifications, as approved by Mortgagee, and in accordance with all provisions of law, (b) the sums requested are required to reimburse Mortgagor for payments by Mortgagor to, or are due to, the contractors, subcontractors, materialmen, laborers, engineers, architects, or other persons rendering services or materials for the Restoration, and that, when added to the sums, if any, previously paid out by Mortgagee, such sums do not exceed the cost of the Restoration to the date of such Architect's Certificate, (c) whether or not the Estimate continues to be accurate, and if not, what the entire cost of such Restoration is then estimated to be, and (d) that the amount of the Net Proceeds or Net Award, as the case may be, remaining after giving effect to such payment will be sufficient on completion of the Restoration to pay for the same in full -23- (including, in detail, an estimate by trade of the remaining costs of completion); (ii) Each request for payment shall be accompanied by an opinion of counsel to Mortgagor (which counsel shall be independent and acceptable to Mortgagee), or a title insurance policy, binder or endorsement in form and substance satisfactory to Mortgagee confirming that (a) all Liens (other than Prior Liens) covering that part of the Restoration previously paid for, if any, have been waived and (b) there has not been filed with respect to all or any part of the Premises any Lien (other than Prior Liens) which is not discharged of record and which could have priority over the Lien of this Mortgage in respect of any part of the Secured Obligations; and (iii) The final request for any payment after the Restoration has been completed shall be accompanied by an Architect's Certificate listing all certificates, permits, licenses, waivers, other documents, or any combination of the foregoing required by law in connection with or as a result of such Restoration and stating that all of the same have been obtained. In the event that there shall be any surplus after application of the Net Award or the Net Proceeds to Restoration of the Improvements and the Equipment, such surplus shall be applied as Net Cash Proceeds in accordance with Section 2.7(b) of the Credit Agreement or, at the option of Mortgagee, shall be held by Mortgagee as additional collateral to secure the performance by Mortgagor of the Secured Obligations. SECTION 1.14 Alterations. Mortgagor shall not, without the prior written consent of Mortgagee, make any addition, modification or change (each, an "Alteration"), structural or nonstructural, to the Premises that costs more to effect than $100,000. Whether or not Mortgagee has consented to the making of any Alteration, Mortgagor shall (i) complete each Alteration promptly, in a good and workmanlike manner and in compliance with all applicable local laws, ordinances and requirements and (ii) pay when due all claims for labor performed and materials furnished in connection with such Alteration, unless contested in accordance with the provisions of subsection 1.5.5. -24- SECTION 1.15 Hazardous Material. 1.15.1 Mortgagor represents and warrants that (i) it has obtained all permits, licenses and other authorizations which are required with respect to the ownership and operation of its business and the Mortgaged Property under any and all applicable Environmental Laws, (ii) it is in compliance with all terms and conditions of the required permits, licenses and authorizations, and is also in compliance with Environmental Laws, including, without limitation, all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws, (iii) there is no civil, criminal or administrative action, suit, demand, claim, hearing, notice or violation, investigation, proceeding, notice of demand letter pending or threatened against it or any subsidiary under the Environmental Laws which could result in a fine, penalty or other cost or expense and (iv) there are no past or present events, conditions, circumstances, activities, practices, incidents, actions or plans which may reasonably be expected to interfere with or prevent compliance with the Environmental Laws, or which may give rise to any common law or legal liability, including, without limitation, liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other Environmental Law or related common law theory or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing or notice of violation, study or investigation, based on or related to the manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the environment, of any Hazardous Materials which could result in a fine, penalty or other cost or expense. 1.15.2 Mortgagor shall (i) materially comply with any and all present and future Environmental Laws, (ii) not release, store, treat, handle, generate, discharge or dispose of any Hazardous Materials on, under or from the Mortgaged Property in violation of or in a manner that could result in any material liability under any present and future Environmental Law and (iii) take all necessary steps to initiate and expeditiously complete all remedial, corrective and other action to eliminate any such effect. In the event Mortgagor fails to comply with the covenants in the preceding sentence, Mortgagee may, in addition to any other remedies set forth herein, as agent for and at Mortgagor's sole cost and expense, cause any necessary remediation, removal or response action relating to Hazardous Materials to be taken and Mortgagor -25- shall provide to Mortgagee and its agents and employees access to the Mortgaged Property for such purpose. Any costs or expenses incurred by Mortgagee for such purpose shall be immediately due and payable by Mortgagor and shall bear interest at the Default Rate. Mortgagee shall have the right at any time that the Secured Obligations are outstanding, at the sole cost and expense of Mortgagor, to conduct an environmental audit of the Mortgaged Property by such persons or firms appointed by Mortgagee, and Mortgagor shall cooperate in all respects in the conduct of such environmental audit, including, without limitation, by providing access to the Mortgaged Property and to all records relating thereto. To the extent that any environmental audit identifies conditions which violate, or could be expected to give rise to liability or obligations under, Environmental Laws, Mortgagor agrees to expeditiously correct any such violation or respond to conditions giving rise to such liability or obligations in a manner which complies with the Environmental Laws and mitigates associated health and environmental risks. Mortgagor shall indemnify and hold Mortgagee and each Lender harmless from and against all loss, cost, damage (including, without limitation, consequential damages) or expense (including, without limitation, reasonable attorneys' and consultants' fees and disbursements and the allocated costs of staff counsel) that Mortgagee or such Lender may sustain by reason of the assertion against Mortgagee or such Lender by any party of any claim relating to such Hazardous Materials on, under or from the Mortgaged Property or actions taken with respect thereto as authorized hereunder. The foregoing indemnification shall survive repayment of all Secured Obligations and any release or assignment of this Mortgage. SECTION 1.16 Asbestos. Mortgagor shall not install nor permit to be installed in or removed from the Mortgaged Property, asbestos or any asbestos-containing material (collectively, "ACM") except in compliance with all applicable Environmental Laws, and with respect to any ACM currently present in the Mortgaged Property, Mortgagor shall promptly either Ci) remove any ACM which such Environmental Laws require to be removed or (ii) otherwise comply with such Environmental Laws with respect to such ACM, all at Mortgagor's sole cost and expense. If Mortgagor shall fail so to remove any ACM or otherwise comply with such laws or regulations, Mortgagee may, in addition to any other remedies set forth herein, take reasonable or necessary steps to eliminate any ACM from the Mortgaged Property or otherwise comply with applicable law, regulations or orders and Mortgagor shall provide to Mortgagee and its agents and employees access to the Mortgaged Property for -26- such purpose. Any costs or expenses incurred by Mortgagee for such purpose shall be immediately due and payable by Mortgagor and bear interest at the Default Rate. Mortgagor shall indemnify and hold Mortgagee and each Lender harmless from and against all loss, cost, damage (including, without limitation, consequential damages) and expense (including, without limitation, reasonable attorneys' and consultants' fees and disbursements and the allocated costs of staff counsel) that Mortgagee or such Lender may sustain, as a result of the presence of any ACM and any removal thereof or compliance with all applicable Environmental Laws. The foregoing indemnification shall survive repayment of all Secured Obligations and any release or assignment of this Mortgage. SECTION 1.17 Books and Records. Other Information. 1.17.1 Mortgagor shall keep proper books of record and account in which full, true and correct entries shall be made of all dealings or transactions of or in relation to the Mortgaged Property and the business and affairs of Mortgagor relating to the Mortgaged Property. Mortgagee and its authorized representatives shall have the right at reasonable times and upon reasonable notice to examine the books and records of Mortgagor relating to the operation of the Mortgaged Property. 1.17.2 Mortgagor shall, at any and all times, within a reasonable time after written request by Mortgagee, furnish or cause to be furnished to Mortgagee, in such manner and in such detail as may be reasonably requested by Mortgagee, additional information with respect to the Mortgaged Property. SECTION 1.18 No Claims Against Mortgagee. Nothing contained in this Mortgage shall constitute any consent or request by Mortgagee, express or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Premises or any part thereof, nor as giving Mortgagor any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Mortgagee in respect thereof or any claim that any Lien based on the performance of such labor or services or the furnishing of any such materials or other property is prior to the Lien of this Mortgage. SECTION 1.19 Utility Services. Mortgagor shall pay, or cause to be paid, when due all charges for all public -27- or private utility services, all public or private rail and highway services, all public or private communication services, all sprinkler systems, all protective services and any other services of whatever kind or nature at any time rendered to or in connection with the Premises or any part thereof, shall comply with all contracts relating to any such services and shall do all other things required for the maintenance and continuance of all such services to the extent required to fulfill the obligations set forth in Section 1.10. ARTICLE II ASSIGNMENT OF LEASES; SECURITY AGREEMENT; ASSIGNMENT AGREEMENT SECTION 2.1 Assignment of Leases, Rents, Issues and Profits. 2.1.1 Mortgagor absolutely, presently and irrevocably assigns, transfers and sets over to Mortgagee, and grants to Mortgagee subject to the terms and conditions hereof, all Mortgagor's estate, right, title, interest, claim and demand as landlord to collect rent and other sums due under all existing Leases and any other Leases, including, without limitation, all extensions of the terms of the Leases (such assigned rights, "Mortgagor's Interest"), as follows: (i) the immediate and continuing right to receive and collect Rents payable by all tenants or other parties pursuant to the Leases; (ii) all claims, rights, powers, privileges and remedies of Mortgagor, whether provided for in any Lease or arising by statute or at law or in equity or otherwise, consequent on any failure on the part of any tenant to perform or comply with any term of any Lease; (iii) all rights to take all actions upon the happening of a default under any Lease as shall be permitted by such Lease or by law, including, without limitation, the commencement, conduct and consummation of proceedings at law or in equity; and (iv) the full power and authority, in the name of Mortgagor or otherwise, to enforce, collect, receive and receipt for any and all of the foregoing and to do any and all other acts and things whatsoever which Mortgagor -28- or any landlord is or may be entitled to do under the Leases. 2.1.2 Any Rents receivable by Mortgagee hereunder, after payment of all proper costs and charges, shall be applied to all amounts due and owing under and as provided in this Mortgage and the Credit Agreement. Mortgagee shall be accountable to Mortgagor only for Rents actually received by Mortgagee pursuant to this assignment. The collection of such Rents and the application thereof shall not cure or waive any Event of Default or waive, modify or affect notice of Event of Default or invalidate any act done pursuant to such notice. 2.1.3 So long as no Event of Default shall have occurred and be continuing, Mortgagor shall have a license to collect and apply the Rents and to enforce the obligations of tenants under the Leases. Immediately upon the occurrence and during the continuance of any Event of Default, the license granted in the immediately preceding sentence shall cease and terminate, with or without any notice, action or proceeding or the intervention of a receiver appointed by a court. Upon such Event of Default and during the continuance thereof, Mortgagee may, to the fullest extent permitted by the Leases, (i) exercise any of Mortgagor's rights under the Leases, (ii) enforce the Leases, (iii) demand, collect, sue for, attach, levy, recover, receive, compromise and adjust, and make, execute and deliver receipts and releases for all Rents or other payments that may then be or may thereafter become due, owing or payable with respect to the Leases and (iv) generally, do, execute and perform any other act, deed, matter or thing whatsoever that ought to be done, executed and performed in and about or with respect to the Leases, as fully as allowed or authorized by Mortgagor's Interest. 2.1.4 Upon the occurrence and during the continuance of an Event of Default, Mortgagor shall, at the direction of Mortgagee, further authorize and direct the tenant under each Lease to pay directly to, or as directed by, Mortgagee all Rents accruing or due under its Lease without proof to the tenant of the occurrence and continuance of such Event of Default. Mortgagor hereby authorizes the tenant under each Lease to rely upon and comply with any notice or demand from Mortgagee for payment of Rents to Mortgagee and Mortgagor shall have no claim against any tenant for Rents paid by such tenant to Mortgagee pursuant to such notice or demand. 2.1.5 Mortgagor at its sole cost and expense shall use commercially reasonable efforts to enforce the Leases in -29- accordance with their terms. Neither this Mortgage nor any action or inaction on the part of Mortgagee shall release any tenant under any Lease, any guarantor of any Lease or Mortgagor from any of their respective obligations under the Leases or constitute an assumption of any such obligation on the part of Mortgagee. No action or failure to act on the part of Mortgagor shall adversely affect or limit the rights of Mortgagee under this Mortgage or, through this Mortgage, under the Leases. 2.1.6 All rights, powers and privileges of Mortgagee herein set forth are coupled with an interest and are irrevocable, subject to the terms and conditions hereof, and Mortgagor shall not take any action under the Leases or otherwise which is inconsistent with this Mortgage or any of the terms hereof and any such action inconsistent herewith or therewith shall be void. Mortgagor shall, from time to time, upon request of Mortgagee, execute all instruments and further assurances and all supplemental instruments and take all such action as Mortgagee from time to time may reasonably request in order to perfect, preserve and protect the interests intended to be assigned to Mortgagee hereby. 2.1.7 Mortgagor shall not, unilaterally or by agreement, subordinate, amend, modify, extend, discharge, terminate, surrender, waive or otherwise change any term of any of the Leases in any manner which would violate this Mortgage. If the Leases shall be amended as permitted hereby, they shall continue to be subject to the provisions hereof without the necessity of any further act by any of the parties hereto. 2.1.8 Nothing contained herein shall operate or be construed to (i) obligate Mortgagee to perform any of the terms, covenants or conditions contained in the Leases or otherwise to impose any obligation upon Mortgagee with respect to the Leases (including, without limitation, any obligation arising out of any covenant of quiet enjoyment contained in the Leases in the event that any tenant under a Lease shall have been joined as a party defendant in any action by which the estate of such tenant shall be terminated) or (ii) place upon Mortgagee any responsibility for the operation, control, care, management or repair of the Premises. SECTION 2.2 Security Interest in Personal Property. 2.2.1 This Mortgage shall constitute a security agreement and shall create and evidence a security interest or common law Lien in all the Equipment and in all the other -30- items of Mortgaged Property in which a security interest may be granted or a common law pledge created pursuant to the Uniform Commercial Code as in effect in the state in which the Premises are located or under the common law in such state collectively, "Personal Property"). 2.2.2 Upon the occurrence of any Event of Default, in addition to the remedies set forth in Article III, Mortgagee shall have the power to sell the Personal Property in accordance with the Uniform Commercial Code as enacted in the state in which the Premises are located or under other applicable law. It shall not be necessary that any Personal Property offered be physically present at any such sale or constructively in the possession of Mortgagee or the person conducting the sale. 2.2.3 Upon the occurrence and during the continuance of any Event of Default, Mortgagee may sell the Personal Property or any part thereof at public or private sale with notice to Mortgagor as hereinafter provided. The proceeds of any such sale, after deducting all expenses of Mortgagee in taking, storing, repairing and selling the Personal Property (including, without limitation, attorneys' fees and legal expenses), shall be applied in the manner set forth in subsection 3.3.3. At any sale, public or private, of the Personal Property or any part thereof, Mortgagee may purchase any or all of the Personal Property offered at such sale. 2.2.4 Mortgagee shall give Mortgagor reasonable notice of any sale of any of the Personal Property pursuant to the provisions of this Section 2.2. Notwithstanding the provisions of Section 5.2, any such notice shall conclusively be deemed to be reasonable and effective if such notice is mailed at least five (5) days prior to any sale, by first class or certified mail, postage prepaid, to Mortgagor at its address determined in accordance with the provisions of Section 5.2. ARTICLE III EVENTS OF DEFAULT AND REMEDIES SECTION 3.1 Events of Default. It shall be an Event of Default hereunder if there shall have occurred and be continuing an Event of Default under the Credit Agreement. SECTION 3.2 Remedies in Case of an Event of Default. If any Event of Default shall have occurred and be -31- continuing, Mortgagee may at its option, in addition to any other action permitted under this Mortgage or the Credit Agreement or by law, statute or in equity, take one or more of the following actions: 3.2.1 by written notice to Mortgagor, declare the entire unpaid amount of the Secured Obligations to be due and payable immediately; 3.2.2 personally, or by its agents or attorneys, (i) enter into and upon and take possession of all or any part of the Premises together with the books, records and accounts of Mortgagor relating thereto and, exclude Mortgagor, its agents and servants wholly therefrom, (ii) use, operate, manage and control the Premises and the Equipment and conduct the business thereof, (iii) maintain and restore the Premises and the Equipment, (iv) make all necessary or proper repairs, renewals and replacements and such useful Alterations thereto and thereon as Mortgagee may deem advisable, (v) manage, lease and operate the Premises and carry on the business thereof and exercise all rights and powers of Mortgagor with respect thereto either in the name of Mortgagor or otherwise or (vi) collect and receive all earnings, revenues, rents, issues, profits and income of the Mortgaged Property and every part thereof. Mortgagee shall be under no liability for or by reason of any such taking of possession, entry, removal or holding, operation or management except that any amounts so received by Mortgagee shall be applied as follows: FIRST: to pay costs and expenses (including, without limitation, attorneys' fees and expenses) of so entering upon, taking possession of, holding, operating and managing the Mortgaged Property or any part thereof, and any taxes, assessments or other charges which Mortgagee may consider necessary or desirable to pay, and any other amounts due to Mortgagee; SECOND: without duplication of amounts applied pursuant to clause FIRST above, to the indefeasible payment in full in cash of the Secured Obligations in accordance with the terms of the Credit Agreement; and THIRD: the balance, if any, to the Person lawfully entitled thereto (including Mortgagor or its successors or assigns), if all conditions to the release of this Mortgage shall have been fulfilled, but if any such condition shall not have been fulfilled, to be held by Mortgagee and thereafter applied to any future payments re- -32- quired to be made in accordance with clauses FIRST and SECOND above. 3.2.3 with or without entry, personally or by its agents or attorneys, (i) sell the Mortgaged Property and all estate, right, title and interest, claim and demand therein at one or more sales in one or more parcels, in accordance with the provisions of Section 3.3 or (ii) institute and prosecute proceedings for the complete or partial foreclosure of the Lien and security interests created and evidenced hereby; or 3.2.4 take such steps to protect and enforce its rights whether by action, suit or proceeding at law or in equity for the specific performance of any covenant, condition or agreement in the Credit Agreement and the other Loan Documents, or in aid of the execution of any power granted in this Mortgage, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Mortgagee shall elect. SECTION 3.3 Sale of Mortgaged Property if Event of Default Occurs; Proceeds of Sale. 3.3.1 If any Event of Default shall have occurred and be continuing, Mortgagee may institute an action to foreclose this Mortgage or take such other action as may be permitted and available to Mortgagee at law or in equity for the enforcement of the Credit Agreement and realization on the Mortgaged Property and proceeds thereon through power of sale or to final judgment and execution thereof for the Secured Obligations, and in furtherance thereof Mortgagee may sell the Mortgaged Property at one or more sales, as an entirety or in parcels, at such time and place, upon such terms and after such notice thereof as may be required or permitted by law or statute or in equity. Mortgagee may execute and deliver to the purchaser at such sale a conveyance of the Mortgaged Property in fee simple and an assignment or conveyance of all Mortgagor's Interest in the Leases and the Mortgaged Property, each of which conveyances and assignments shall contain recitals as to the Event of Default upon which the execution of the power of sale herein granted depends, and Mortgagor hereby constitutes and appoints Mortgagee the true and lawful attorney in fact of Mortgagor to make any such recitals, sale, assignment and conveyance, and all of the acts of Mortgagee as such attorney in fact are hereby ratified and confirmed. Mortgagor agrees that such recitals shall be binding and conclusive upon Mortgagor and that any assignment or conveyance to be made by Mortgagee shall divest Mortgagor of all right, -33- title, interest, equity and right of redemption, including any statutory redemption, in and to the Mortgaged Property. The power and agency hereby granted are coupled with an interest and are irrevocable by death or dissolution, or otherwise, and are in addition to any and all other remedies which Mortgagee may have hereunder, at law or in equity. So long as the Secured Obligations, or any part thereof, remain unpaid, Mortgagor agrees that possession of the Mortgaged Property by Mortgagor, or any person claiming under Mortgagor, shall be as tenant, and, in case of a sale under power or upon foreclosure as provided in this Mortgage, Mortgagor and any person in possession under Mortgagor, as to whose interest such sale was not made subject, shall, at the option of the purchaser at such sale, then become and be tenants holding over, and shall forthwith deliver possession to such purchaser, or be summarily dispossessed in accordance with the laws applicable to tenants holding over. In case of any sale under this Mortgage by virtue of the exercise of the powers herein granted, or pursuant to any order in any judicial proceeding or otherwise, the Mortgaged Property may be sold as an entirety or in separate parcels in such manner or order as Mortgagee in its sole discretion may elect. One or more exercises of powers herein granted shall not extinguish or exhaust such powers, until the entire Mortgaged Property is sold or all amounts secured hereby are paid in full. 3.3.2 In the event of any sale made under or by virtue of this Article III, the entire principal of, and interest in respect of the Secured Obligations, if not previously due and payable, shall, at the option of Mortgagee, immediately become due and payable, anything in this Mortgage to the contrary notwithstanding. 3.3.3 The proceeds of any sale made under or by virtue of this Article III, together with any other sums which then may be held by Mortgagee under this Mortgage, whether under the provisions of this Article III or otherwise, shall be applied as follows: FIRST: to pay the costs and expenses incurred by Mortgagee in enforcing its remedies under this Mortgage; SECOND: to pay the costs and expenses of the sale and of any receiver of the Mortgaged Property or any part thereof appointed pursuant to subsection 3.5.2; THIRD: without duplication of the amounts applied pursuant to clauses FIRST and SECOND above, to the inde- -34- feasible payment in full in cash of the Secured Obligations in accordance with the terms of the Credit Agreement; and FOURTH: the balance, if any, to the Person lawfully entitled thereto (including Mortgagor or its successors or assigns). 3.3.4 Mortgagee (on behalf of any Lender or on its own behalf) or any Lender or any of their respective Affiliates may bid for and acquire the Mortgaged Property or any part thereof at any sale made under or by virtue of this Article III and, in lieu of paying cash therefor, may make settlement for the purchase price by crediting against the purchase price the unpaid amounts (whether or not then due) owing to Mortgagee, or such Lender in respect of the Secured Obligations, after deducting from the sales price the expense of the sale and the reasonable costs of the action or proceedings and any other sums that Mortgagee or such Lender is authorized to deduct under this Mortgage. 3.3.5 Mortgagee may adjourn from time to time any sale by it to be made under or by virtue of this Mortgage by announcement at the time and place appointed for such sale or for such adjourned sale or sales, and, Mortgagee, without further notice or publication, may make such sale at the time and place to which the same shall be so adjourned. 3.3.6 If the Premises is comprised of more than one parcel of land, Mortgagee may take any of the actions authorized by this Section 3.3 in respect of any or a number of individual parcels. SECTION 3.4 Additional Remedies in Case of an Event of Default. 3.4.1 Mortgagee shall be entitled to recover judgment as aforesaid either before, after or during the pendency of any proceedings for the enforcement of the provisions of this Mortgage, and the right of Mortgagee to recover such judgment shall not be affected by any entry or sale hereunder, or by the exercise of any other right, power or remedy for the enforcement of the provisions of this Mortgage, or the foreclosure of, or absolute conveyance pursuant to, this Mortgage. In case of proceedings against Mortgagor in insolvency or bankruptcy or any proceedings for its reorganization or involving the liquidation of its assets, Mortgagee shall be entitled to prove the whole amount of principal and interest and -35- other payments, charges and costs due in respect of the Secured Obligations to the full amount thereof without deducting therefrom any proceeds obtained from the sale of the whole or any part of the Mortgaged Property; provided, however, that in no case shall Mortgagee receive a greater amount than the aggregate of such principal, interest and such other payments, charges and costs (with interest at the Default Rate) from the proceeds of the sale of the Mortgaged Property and the distribution from the estate of Mortgagor. 3.4.2 Any recovery of any judgment by Mortgagee and any levy of any execution under any judgment upon the Mortgaged Property shall not affect in any manner or to any extent the Lien and security interests created and evidenced hereby upon the Mortgaged Property or any part thereof, or any conveyances, powers, rights and remedies of Mortgagee hereunder, but such conveyances, powers, rights and remedies shall continue unimpaired as before. 3.4.3 Any moneys collected by Mortgagee under this Section 3.4 shall be applied in accordance with the provisions of subsection 3.3.3. SECTION 3.5 Legal Proceedings After an Event of Default. 3.5.1 After the occurrence of any Event of Default and immediately upon the commencement of any action, suit or legal proceedings to obtain judgment for the Secured Obligations or any part thereof, or of any proceedings to foreclose the Lien and security interest created and evidenced hereby or otherwise enforce the provisions of this Mortgage or of any other proceedings in aid of the enforcement of this Mortgage, Mortgagor shall enter its voluntary appearance in such action, suit or proceeding. 3.5.2 Upon the occurrence and during the continuance of an Event of Default, Mortgagee shall be entitled forthwith as a matter of right, concurrently or independently of any other right or remedy hereunder either before or after declaring the Secured Obligations or any part thereof to be due and payable, to the appointment of a receiver without giving notice to any party and without regard to the adequacy or inadequacy of any security for the Secured Obligations or the solvency or insolvency of any person or entity then legally or equitably liable for the Secured Obligations or any portion thereof. Mortgagor hereby consents to the appointment of such receiver. Notwithstanding the appointment of any receiver, -36- Mortgagee shall be entitled as pledgee to the possession and control of any cash, deposits or instruments at the time held by or payable or deliverable under the terms of the Credit Agreement to Mortgagee. 3.5.3 Mortgagor shall not (i) at any time insist upon, or plead, or in any manner whatsoever claim or take any benefit or advantage of any stay or extension or moratorium law, any exemption from execution or sale of the Mortgaged Property or any part thereof, wherever enacted, now or at any time hereafter in force, which may affect the covenants and terms of performance of this Mortgage, (ii) claim, take or insist on any benefit or advantage of any law now or hereafter in force providing for the valuation or appraisal of the Mortgaged Property, or any part thereof, prior to any sale or sales of the Mortgaged Property which may be made pursuant to this Mortgage, or pursuant to any decree, judgment or order of any court of competent jurisdiction or (iii) after any such sale or sales, claim or exercise any right under any statute heretofore or hereafter enacted to redeem the property so sold or any part thereof. To the extent permitted by applicable law, Mortgagor hereby expressly (i) waives all benefit or advantage of any such law or laws, including, without limitation, any statute of limitations applicable to this Mortgage, (ii) waives any and all rights to trial by jury in any action or proceeding related to the enforcement of this Mortgage, (iii) waives any objection which it may now or hereafter have to the laying of venue of any action, suit or proceeding brought in connection with this Mortgage and further waives and agrees not to plead that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum and (iv) covenants not to hinder, delay or impede the execution of any power granted or delegated to Mortgagee by this Mortgage but to suffer and permit the execution of every such power as though no such law or laws had been made or enacted. Mortgagee shall not be liable for any incorrect or improper payment made pursuant to this Article III in the absence of gross negligence or willful misconduct. SECTION 3.6 Remedies Not Exclusive. No remedy conferred upon or reserved to Mortgagee by this Mortgage is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Mortgage or now or hereafter existing at law or in equity. Any delay or omission of Mortgagee to exercise any right or power accruing on any Event of Default shall not impair any such right or power and shall not be construed to be a waiver of or acquiescence -37- in any such Event of Default. Every power and remedy given by this Mortgage may be exercised from time to time concurrently or independently, when and as often as may be deemed expedient by Mortgagee in such order and manner as Mortgagee, in its sole discretion, may elect. If Mortgagee accepts any moneys required to be paid by Mortgagor under this Mortgage after the same become due, such acceptance shall not constitute a waiver of the right either to require prompt payment, when due, of all other sums secured by this Mortgage or to declare an Event of Default with regard to subsequent defaults. If Mortgagee accepts any moneys required to be paid by Mortgagor under this Mortgage in an amount less than the sum then due, such acceptance shall be deemed an acceptance on account only and on the condition that it shall not constitute a waiver of the obligation of Mortgagor to pay the entire sum then due, and Mortgagor's failure to pay the entire sum then due shall be and continue to be a default hereunder notwithstanding acceptance of such amount on account. ARTICLE IV CERTAIN DEFINITIONS The following terms shall have the following respective meanings: "Cost of Construction" means the sum, so far as it relates to the reconstructing, renewing, restoring or replacing of the Improvements, of (i) obligations incurred or assumed by Mortgagor or undertaken by tenants pursuant to the terms of the Leases for labor, materials and other expenses and to contractors, builders and materialmen; (ii) the cost of contract bonds and of insurance of all kinds that may reasonably be deemed by Mortgagor to be desirable or necessary during the course of construction; (iii) the expenses incurred or assumed by Mortgagor for test borings, surveys, estimates, any Plans and Specifications and preliminary investigations therefor or, and for supervising construction, as well as for the performance of all other duties required by or reasonably necessary for proper construction; (iv) ad valorem property taxes levied upon the Premises during performance of any Restoration; and (v) any costs or other charges in connection with obtaining title insurance and counsel opinions that may be required or necessary in connection with a Restoration. "Governmental Authority" shall mean any federal, state, local or foreign court, agency, authority, board, bu- -38- reau, commission, department, office or instrumentality of any nature whatsoever or any governmental or quasi-governmental unit, whether now or hereafter in existence, or any officer or official thereof, having jurisdiction over the Mortgagor or the Mortgaged Property. ARTICLE V MISCELLANEOUS SECTION 5.1 Severability of Provisions. Any provision of this Mortgage which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 5.2 Notices. Unless otherwise provided herein or in the Credit Agreement, any notice or other communication herein required or permitted to be given shall be given in the manner set forth in the Credit Agreement, if to Mortgagor or Mortgagee, addressed to it at the address set forth in the Credit Agreement, or as to either party at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 5.2; provided, however, that notices to Mortgagee shall not be effective until received by Mortgagee. SECTION 5.3 Covenants To Run with the Land. All of the grants, covenants, terms, provisions and conditions in this Mortgage shall run with the Land and shall apply to, and bind the successors and assigns of, Mortgagor. If there shall be more than one mortgagor, the covenants and warranties hereof shall be joint and several. SECTION 5.4 Headings. The Section headings used in this Mortgage are for convenience of reference only and shall not affect the construction of this Mortgage. SECTION 5.5 Limitation on Interest Payable. It is the intention of the parties to conform strictly to the usury laws, whether state or federal, that are applicable to the transaction of which this Mortgage is a part. All agreements between Mortgagor and Mortgagee whether now existing or hereafter arising and whether oral or written, are hereby ex- -39- pressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid by Mortgagor for the use, forbearance or detention of the money to be loaned under the Credit Agreement or any related document, or for the payment or performance of any covenant or obligation contained herein or in the Credit Agreement or any related document, exceed the maximum amount permissible under applicable federal or state usury laws. If under any circumstances whatsoever fulfillment of any such provision, at the time performance of such provision shall be due, shall involve exceeding the limit of validity prescribed by law, then the obligation to be fulfilled shall be reduced to the limit of such validity. If under any circumstances Mortgagor shall have paid an amount deemed interest by applicable law, which would exceed the highest lawful rate, such amount that would be excessive interest under applicable usury laws shall be applied to the reduction of the principal amount owing in respect of the Secured Obligations and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal and any other amounts due hereunder, the excess shall be refunded to Mortgagor. All sums paid or agreed to be paid for the use, forbearance or detention of the principal under any extension of credit by Mortgagee shall, to the extent permitted by applicable law, and to the extent necessary to preclude exceeding the limit of validity prescribed by law, be amortized, prorated, allocated and spread from the date of this Mortgage until payment in full of the Secured Obligations so that the actual rate of interest on account of such principal amounts is uniform throughout the term hereof. SECTION 5.6 Indemnity. Mortgagor agrees to indemnify, pay and hold harmless Mortgagee and each of the Secured Parties and the officers, directors, employees, agents and Affiliates of Mortgagee and each of the Secured Parties (collectively called the "Indemnitees") from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs (including, without limitation, settlement costs), expenses or disbursements of any kind or nature whatsoever (including, without limitation, reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto), which may be imposed on, incurred by or asserted against that Indemnities, in any manner relating to or arising out of this Mortgage or any other Loan Document (including, without limitation, any misrepresentation by Mortgagor in this Mortgage or any other Loan Document) (the "Indemnified Li- -40- abilities"); provided, however, that Mortgagor shall have no obligation to an Indemnitee hereunder with respect to Indemnified Liabilities if it has been determined by a final decision (after all appeals and the expiration of time to appeal) by a court of competent jurisdiction that such Indemnified Liability arose from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Mortgagor shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. The obligations of Mortgagor contained in this Section 5.6 shall survive the termination of this Mortgage and the discharge of Mortgagor's other obligations under this Mortgage and the other Loan Documents. Any amount paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations secured by the Mortgaged Property. SECTION 5.7 GOVERNING LAW; TERMS. THIS MORTGAGE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR MORTGAGED PROPERTY ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE. MORTGAGOR AGREES THAT SERVICE OF PROCESS IN ANY PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PAID, TO MORTGAGOR AT ITS ADDRESS PROVIDED FOR IN SECTION 5.2 HEREOF EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY MORTGAGOR REFUSES TO ACCEPT SERVICE, MORTGAGOR HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF MORTGAGEE TO BRING PROCEEDINGS AGAINST MORTGAGOR IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 5.8 No Merger. The rights and estate created by this Mortgage shall not, under any circumstances, be held to have merged into any other estate or interest now owned or hereafter acquired by Mortgagee unless Mortgagee shall have consented to such merger in writing. -41- SECTION 5.9 Modification in Writing. No amendment, modification, supplement, termination or waiver of or to any provision of this Mortgage, nor consent to any departure by Mortgagor therefrom, shall be effective unless the same shall be done in accordance with the terms of the Credit Agreement and unless in writing and signed by Mortgagee. Any amendment, modification or supplement of or to any provision of this Mortgage, any waiver of any provision of this Mortgage and any consent to any departure by Mortgagor from the terms of any provision of this Mortgage shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Mortgage or any other Loan Document, no notice to or demand on Mortgagor in any case shall entitle Mortgagor to any other or further notice or demand in similar or other circumstances. SECTION 5.10 No Credit for Payment of Taxes or Impositions. Mortgagor shall not be entitled to any credit against the principal, premium, if any, or interest payable under the Credit Agreement, and Mortgagor shall not be entitled to any credit against any other sums which may become payable under the terms thereof or hereof, by reason of the payment of any tax or other impositions on the Mortgaged Property or any part thereof. SECTION 5.11 Stamp and Other Taxes. Subject to the provisions of subsection 1.5.5 relating to permitted contests, Mortgagor shall pay any United States documentary stamp taxes, with interest and fines and penalties, and any mortgage recording taxes, with interest and fines and penalties, that may hereafter be levied, imposed or assessed under or upon or by reason of this Mortgage or the Secured Obligations or any instrument or transaction affecting or relating to either thereof and in default thereof Mortgagee may advance the same and the amount so advanced shall be payable by Mortgagor to Mortgagee within ten (10) days after demand therefor, together with interest thereon at the Default Rate. SECTION 5.12 Estoppel Certificates. Mortgagor shall, from time to time, upon thirty (30) days' prior written request of Mortgagee, execute, acknowledge and deliver to Mortgagee a certificate signed by an authorized officer or officers stating that this Mortgage, the Credit Agreement and the other Loan Documents are unmodified and in full force and effect (or, if there have been modifications, that this Mortgage, the Credit Agreement or such Loan Document, as applicable, is in full force and effect as modified and setting forth -42- such modifications) and stating the date to which principal and interest have been paid on the Loans. SECTION 5.13 Additional Security. Without notice to or consent of Mortgagor and without impairment of the Lien and rights created by this Mortgage, Mortgagee may accept (but Mortgagor shall not be obligated to furnish) from Mortgagor or from any other Person or Persons, additional security for the Secured Obligations. Neither the giving of this Mortgage nor the acceptance of any such additional security shall prevent Mortgagee from resorting, first, to such additional security, and, second, to the security created by this Mortgage without affecting Mortgagee's Lien and rights under this Mortgage. SECTION 5.14 Release. The Mortgaged Property shall be released from the Lien of this Mortgage in accordance with the provisions of the Credit Agreement or at such time as all Secured Obligations have been paid in full and the Commitments of the Lenders to make any Loan or issue any Letter of Credit under the Credit Agreement shall have expired or been sooner terminated. Mortgagee, on the written request and at the expense of Mortgagor, will execute and deliver such proper instruments of release and satisfaction or assignment as may reasonably be requested to evidence such release or assignment, and any such instrument, when duly executed by Mortgagee and duly recorded by Mortgagor in the places where this Mortgage is recorded, shall conclusively evidence the release or assignment of this Mortgage. SECTION 5.15 Certain Expenses of Mortgagee. If any action, suit or other proceeding affecting the Mortgaged Property or any part thereof be commenced, in which action, suit or proceeding Mortgagee is made a party or participates or in which the right to use the Mortgaged Property or any part thereof is threatened, or in which it becomes necessary in the judgment of Mortgagee to defend or uphold the Lien of this Mortgage (including, without limitation, any action, suit or proceeding to establish or uphold the compliance of the Improvements with any Requirements of Law), then all amounts paid or incurred by Mortgagee for the expense of any such action, suit or other proceeding or to protect its rights therein (whether or not it is made or becomes a party thereto) or otherwise to enforce or defend the rights and Lien created by this Mortgage, shall be paid by Mortgagor upon demand together with interest at the Default Rate from the date of the payment or incurring thereof to the date of repayment, and any such amount and the interest thereon shall be a Lien on the Mortgaged Property, prior to any right, or right to, interest -43- in, or claim upon the Mortgaged Property attaching or accruing subsequent to or otherwise subordinate to the Lien of this Mortgage, and the same shall be deemed to be secured hereby. All other amounts paid, advanced or incurred by Mortgagee in order to secure and protect the Lien of this Mortgage or other security provided hereunder shall be a like Lien on the Mortgaged Property and be deemed to be secured hereby. SECTION 5.16 Expenses of Collection. Mortgagor will upon demand pay to Mortgagee the amount of any and all expenses, including the fees and expenses of its counsel and the fees and expenses of any experts and agents, which Mortgagee may incur in connection with (i) the collection of the Secured Obligations, (ii) the enforcement and administration of this Mortgage, (iii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Mortgaged Property, (iv) the exercise or enforcement of any of the rights of Mortgagee or any Secured Party hereunder or (v) the failure by Mortgagor to perform or observe any of the provisions hereof. All amounts payable by Mortgagor under this Section 5.16 shall be due upon demand and shall be part of the Secured Obligations. Mortgagor's obligations under this Section shall survive the termination of this Mortgage and the discharge of Mortgagor's other obligations hereunder. SECTION 5.17 Business Days. In the event any time period or any date provided in this Mortgage ends or falls on a day other than a Business Day, then such time period shall be deemed to end and such date shall be deemed to fall on the next succeeding Business Day, and performance herein may be made on such Business Day, with the same force and effect as if made on such other day. SECTION 5.18 Relationship. The relationship of Mortgagee to Mortgagor hereunder is strictly and solely that of lender and borrower and mortgagor and mortgagee and nothing contained in the Credit Agreement, this Mortgage or any other document or instrument now existing and delivered in connection therewith or otherwise in connection with the Secured Obligations is intended to create, or shall in any event or under any circumstance be construed as creating a partnership, joint venture, tenancy-in-common, joint tenancy or other relationship of any nature whatsoever between Mortgagee and Mortgagor other than as lender and borrower and mortgagor and mortgagee. -44- SECTION 5.19 Concerning Mortgagee. 5.19.1 Mortgagee shall be entitled to rely upon any written notice, statement, certificate, order or other document or any telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper person, and, with respect to all matters pertaining to this Mortgage and its duties hereunder, upon advice of counsel selected by it. 5.19.2 With respect to any of its rights and obligations as a Lender, Mortgagee shall have and may exercise the same rights and powers hereunder. The term "Lenders," "Lender" or any similar terms shall, unless the context clearly otherwise indicates, include Mortgagee in its individual capacity as a Lender. Mortgagee may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Mortgagor or any entity related to or affiliated with Mortgagor to the same extent as if Mortgagee were not acting as administrative agent. 5.19.3 If any item of Mortgaged Property also constitutes collateral granted to Mortgagee under any other deed of trust, mortgage, security agreement, pledge or instrument of any type, in the event of any conflict between the provisions of this Mortgage and the provisions of such other deed of trust, mortgage, security agreement, pledge or instrument of any type in respect of such collateral, Mortgagee, in its sole discretion, shall select which provision or provisions shall control. 5.19.4 Mortgagee has been appointed as Administrative Agent pursuant to the Credit Agreement. The actions of Mortgagee hereunder are subject to the provisions of the Credit Agreement. Mortgagee shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of Mortgaged Property), in accordance with this Mortgage and the Credit Agreement. Mortgagee may resign and a successor Mortgagee may be appointed in the manner provided in the Credit Agreement. Upon the acceptance of any appointment as Mortgagee by a successor Mortgagee, that successor Mortgagee shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Mortgagee under this Mortgage, and the retiring Mortgagee shall thereupon be discharged from its duties and obligations under this Mortgage. After any retiring Mortgagee's resignation, the provi- -45- sions of this Mortgage shall inure to its benefit as to any actions taken or omitted to be taken by it under this Mortgage while it was Mortgagee. SECTION 5.20 Future Advances. This Mortgage may secure future advances. The maximum aggregate amount of all advances of principal under the Credit Agreement that may be outstanding hereunder at any time is $48,000,000. SECTION 5.21 Waiver of Stay. 5.21.1 Mortgagor agrees that in the event that Mortgagor or any property or assets of Mortgagor shall hereafter become the subject of a voluntary or involuntary proceeding under the Bankruptcy Code or Mortgagor shall otherwise be a party to any federal or state bankruptcy, insolvency, moratorium or similar proceeding to which the provisions relating to the automatic stay under Section 362 of the Bankruptcy Code or any similar provision in any such law is applicable, then, in any such case, whether or not Mortgagee has commenced foreclosure proceedings under this Mortgage, Mortgagee shall be entitled to relief from any such automatic stay as it relates to the exercise of any of the rights and remedies (including, without limitation, any foreclosure proceedings) available to Mortgagee as provided in this Mortgage or in any other Security Document. 5.21.2 Mortgagee shall have the right to petition or move any court having jurisdiction over any proceeding described in subsection 5.21.1 for the purposes provided therein, and Mortgagor agrees (i) not to oppose any such petition or motion and (ii) at Mortgagor's sole cost and expense, to assist and cooperate with Mortgagee, as may be requested by Mortgagee from time to time, in obtaining any relief requested by Mortgagee, including, without limitation, by filing any such petitions supplemental petitions, requests for relief, documents, instruments or other items from time to time requested by Mortgagee or any such court. SECTION 5.22 Continuing Security Interest; Assignment. This Mortgage shall create a continuing security interest in the Mortgaged Property and shall (i) be binding upon Mortgagor, its successors and assigns and (ii) inure, together with the rights and remedies of Mortgagee hereunder, to the benefit of Mortgagee and the other Secured Parties and each of their respective successors, transferees and assigns; no other Persons (including, without limitation, any other creditor of Mortgagor) shall have any interest herein or any right or -46- benefit with respect hereto. Without limiting the generality of the foregoing clause (ii), any Lender may assign or otherwise transfer any indebtedness held by it secured by this Mortgage to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender, herein or otherwise, subject however, to the provisions of the Credit Agreement. SECTION 5.23 Obligations Absolute. All obligations of Mortgagor hereunder shall be absolute and unconditional irrespective of: (i) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of Mortgagor or any other Credit Party; (ii) any lack of validity or enforceability of the Credit Agreement, any Letter of Credit, any other Loan Document, or any other agreement or instrument relating thereto; (iii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Credit Agreement, any Letter of Credit, any other Loan Document, or any other agreement or instrument relating thereto; (iv) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Secured Obligations; (v) any exercise or non-exercise, or any waiver of any right, remedy, power or privilege under or in respect of this Mortgage or any other Loan Document except as specifically set forth in a waiver granted pursuant to the provisions of Section 5.9 hereof; or (vi) any other circumstances which might otherwise constitute a defense available to, or a discharge of, Mortgagor. SECTION 5.24 Mortgagee's Right To Sever Indebtedness. 5.24.1 Mortgagor acknowledges that (a) the Mortgaged Property does not constitute the sole source of security -47- for the payment and performance of the Secured Obligations and that the Secured Obligations are also secured by property of Mortgagor and its Affiliates in other jurisdictions (all such property, collectively, the "Collateral"), (b) the number of such jurisdictions and the nature of the transaction of which this instrument is a part are such that it would have been impracticable for the parties to allocate to each item of Collateral a specific loan amount and to execute in respect of such item a separate credit agreement or hedge agreement and (c) Mortgagor intends that Mortgagee have the same rights with respect to the Mortgaged Property, in foreclosure or otherwise, that Mortgagee would have had if each item of Collateral had been secured, mortgaged or pledged pursuant to a separate credit agreement or hedge agreement, mortgage or security instrument. In furtherance of such intent, Mortgagor agrees that Mortgagee may at any time by notice (an "Allocation Notice") to Mortgagor allocate a portion (the "Allocated Indebtedness") of the Secured Obligations to the Mortgaged Property and sever from the remaining Secured Obligations the Allocated Indebtedness. From and after the giving of an Allocation Notice with respect to the Mortgaged Property, the Secured Obligations hereunder shall be limited to the extent set forth in the Allocation Notice and (as so limited) shall, for all purposes, be construed as a separate loan obligation of Mortgagor unrelated to the other transactions contemplated by the Credit Agreement, any other Loan Document or any document related to any thereof. To the extent that the proceeds on any foreclosure of the Mortgaged Property shall exceed the Allocated Indebtedness, such proceeds shall belong to Mortgagor and shall not be available hereunder to satisfy any Secured Obligations of Mortgagor other than the Allocated Indebtedness. In any action or proceeding to foreclose the Lien of this Mortgage or in connection with any power of sale foreclosure or other remedy exercised under this Mortgage commenced after the giving by Mortgagee of an Allocation Notice, the Allocation Notice shall be conclusive proof of the limits of the Secured Obligations hereby secured, and Mortgagor may introduce, by way of defense or counterclaim, evidence thereof in any such action or proceeding. Notwithstanding any provision of this Section 5.24, the proceeds received by Mortgagee pursuant to this Mortgage shall be applied by Mortgagee in accordance with the provisions of subsection 3.3.3 hereof. 5.24.2 Mortgagor hereby waives to the greatest extent permitted under law the right to a discharge of any of the Secured Obligations under any statute or rule of law now or hereafter in effect which provides that foreclosure of the Lien of this Mortgage or other remedy exercised under this -48- Mortgage constitutes the exclusive means for satisfaction of the Secured Obligations or which makes unavailable a deficiency judgment or any subsequent remedy because Mortgagee elected to proceed with a power of sale foreclosure or such other remedy or because of any failure by Mortgagee to comply with laws that prescribe conditions to the entitlement to a deficiency judgment. In the event that, notwithstanding the foregoing waiver, any court shall for any reason hold that Mortgagee is not entitled to a deficiency judgment, Mortgagor shall not (a) introduce in any other jurisdiction such judgment as a defense to enforcement against Mortgagor of any remedy in the Credit Agreement or any other Loan Document or (b) seek to have such judgment recognized or entered in any other jurisdiction, and any such judgment shall in all events be limited in application only to the state or jurisdiction where rendered. 5.24.3 In the event any instrument in addition to the Allocation Notice is necessary to effectuate the provisions of this Section 5.24, including, without limitation, any amendment to this Mortgage, any substitute promissory note or affidavit or certificate of any kind, Mortgagee may execute, deliver or record such instrument as the attorney-in-fact of Mortgagor. Such power of attorney is coupled with an interest and is irrevocable. 5.24.4 Notwithstanding anything set forth herein to the contrary, the provisions of this Section 5.24 shall be effective only to the maximum extent permitted by law. -S1- IN WITNESS WHEREOF, Mortgagor has caused this Mortgage to be duly executed and delivered under seal the day and year first above written. ________________________________________ Mortgagor By:_____________________________________ Name: Title: ACKNOWLEDGMENT STATE OF ____________) ) ss. COUNTY OF ___________) I, the undersigned, a notary public in and for said County, in the State aforesaid, DO HEREBY CERTIFY that ________________________________ personally known to me to be the ______________________ of _________________, a _____________ corporation, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such __________________________, he/she signed and delivered the said instrument and caused the corporate seal of said corporation to be affixed thereto, pursuant to authority given by the Board of Directors of said corporation, as his/her free and voluntary act and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and official seal this day of ____________, 19_____ _____________________________________ Notary Public My commission expires:________________ Schedule A [Legal Description] [to come from title policy] Schedule B (Prior Liens) [to come from title policy] [EXHIBIT E] FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement, dated as of March 19, 1999 (as amended from time to time, the "Credit Agreement"), among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. 11. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below (but not prior to the registration of the information contained herein in the Register pursuant to Section 10.6(d) of the Credit Agreement), the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the amounts and percentages set forth below of the Loans owing to the Assignor which are outstanding on the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 10.6(b) and (c) of the Credit Agreement, a copy of which has been received by each such party. From and after the Effective Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the Loan Documents and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 12. The Assignor hereby instructs the Administrative Agent to make all payments from and including the Effective Date hereof in respect of the interest assigned hereby, directly to the Assignee. The Assignor and the Assignee agree that all interest and fees accrued up to, but not including, the Effective Date of the assignment and delegation being made hereby are the property of the Assignor, and not the Assignee. The Assignee agrees that, upon receipt of any such interest or fees accrued up to the Effective Date, or any other payments in respect of the interest assigned hereby applicable to the period prior to the Effective Date, the Assignee will promptly remit the same to the Assignor in the same funds received by the Assignee. 13. The Assignor and the Assignee agree that all interest and fees accruing from and after the Effective Date of the assignment and delegation being made hereby are the property of the Assignee, and not the Assignor. The Assignor agrees that, upon receipt of any such interest or fees accruing from and after the Effective Date or any other payments in respect of the interest assigned hereby applicable to the period from and after the Effected Date, the Assignor will promptly remit the same to the Assignee in the same funds received by the Assignor. E-1 14. This assignment shall be made without recourse to or warranty by the Assignor, except as set forth herein. Assignee represents and warrants that it is a Person to which assignments are permitted pursuant to Section 10.6 of the Credit Agreement. Assignor represents and warrants, as of the Effective Date, that it is the legal and beneficial owner of the interest being assigned and delegated by it hereunder and that such interest is free and clear of any pledge, encumbrance or other adverse claim or interest created by Assignor. 15. This Assignment and Acceptance is being delivered to the Administrative Agent together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, the forms specified in Section 2.15(d) of the Credit Agreement, duly completed and executed by such Assignee, and (ii) if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in the form of Annex I hereto. 16. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: [ ] Legal Name of Assignor: [ ] Legal Name of Assignee: [ ] Assignee's Address for Notices: [ ] Phone: [ ] Fax: [ ] Attention: [ ] Effective Date of Assignment: [ ] Term Percentage Term Commitment Principal Amount Assigned (to 8 decimal places) - --------------- ------------------------- --------------------- [$ ] [ ] Revolving Percentage Revolving Commitment Principal Amount Assigned (to 8 decimal places) - -------------------- ------------------------- --------------------- [$ ] [ ] E-2 The terms set forth above are hereby agreed to: Accepted(3) [ASSIGNOR], CITICORP U.S.A., INC., as Administrative Agent as Assignor By: _____________________ By: ______________________________ Name: Name Title: Title: [ASSIGNEE], PRECISION PARTNERS INC. as Assignee By: _____________________ By: ______________________________ Name: Name Title: Title: - --------------------- (3) To be completed to the extent consents are required under Section 10.6 of the Credit Agreement. E-3 ANNEX I ADMINISTRATIVE QUESTIONNAIRE BORROWER: Precision Partners Inc. OPERATIONS LETTER OF CREDIT LEGAL LOAN CONTACT CONTACT COUNSEL ---- ------- ------- ------- OFFICER ------- NAME: __________ __________ __________ __________ ___ ___ ___ ___ TITLE: __________ __________ __________ __________ ___ ___ ___ ___ ADDRESS: __________ __________ __________ __________ ___ ___ ___ ___ __________ __________ __________ __________ ___ ___ ___ ___ __________ __________ __________ __________ ___ ___ ___ ___ TELEPHONE: __________ __________ __________ __________ ___ ___ ___ ___ FACSIMILE #: __________ __________ __________ __________ ___ ___ ___ ___ E-MAIL __________ __________ __________ __________ ADDRESS: ___ ___ ___ ___ [ASSIGNEE] By: ____________________________________ Name: Title: E-4 ANNEX B PAYMENT INSTRUCTIONS BORROWER: Precision Partners Inc. U.S. DOLLARS (FED WIRE INSTR) ----------------------------- Pay to: _____________________________ _____________________________ (Name of Bank) _____________________________ (Address) _____________________________ (City, State, Zip) __________ _____________ (ABA#) (Account #) _____________________________ (Attention) PAYMENT INSTRUCTIONS U.S. DOLLARS (FED WIRE INSTRUCTIONS) ------------------------------------ Pay to: [ ] [ ] ABA # Attn: Commercial Lending Services Dept. Ref: [ ] [ASSIGNEE] By: ____________________________________ Name: Title: E-5 EXHIBIT F [Letterhead of Jones, Day, Reavis & Pogue] March 19, 1999 Citicorp U.S.A., Inc., as Administrative Agent, and the Lenders Referred to Below 399 Park Avenue New York, New York 10022-4600 Re: Credit Agreement among Calbrit Design, Inc., Certified Fabricators, Inc., Galaxy Industries Corporation, General Automation, Inc., Mid State Machine Products, Nationwide Precision Products Corp., Precision Partners Holding Company, Precision Partners, Inc., the Lenders named therein, and Citicorp U.S.A., Inc., as Administrative Agent, NationsBank, N.A., as Syndication Agent and Sun Trust Bank, Atlanta, as Documentation Agent Ladies and Gentlemen: We have acted as special New York, California, Illinois and Texas counsel for Precision Partners, Inc., a Delaware corporation (the "Borrower"), Calbrit Design, Inc., a California corporation ("Calbrit Design"), Certified Fabricators, Inc., a California corporation ("Certified Fabricators"), Galaxy Industries Corporation, a Michigan corporation ("Galaxy Industries"), General Automation, Inc., an Illinois corporation ("General Automation"), Mid State Machine Products, a Maine corporation ("Mid State Machine"), Nationwide Precision Products Corp., a New York corporation ("Nationwide") and Precision Partners Holding Company, a Delaware corporation ("Precision Holding"), in connection with the Credit Agreement, dated as of the date hereof (the "Credit Agreement"), among the Borrower, Calbrit Design, Certified Fabricators, Galaxy Industries, General Automation, Mid State Machine, Nationwide, Precision Holding, the lenders named therein (collectively, the "Lenders"), Citicorp U.S.A., Inc., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), NationsBank. N.A., as Syndication Agent, and Sun Trust Bank, Atlanta, as Documentation Agent. Calbrit Design, Certified Fabricators, Galaxy Industries, General Automation, Mid State Machine and Nationwide are referred to herein collectively as the "Precision Subsidiaries" and each individually as a "Precision Subsidiary." The Precision Subsidiaries and Precision Holding are referred to as the "Precision Parties" and each as a "Precision Party." The Borrower and the Precision Parties are referred to herein collectively as the "Loan Parties" and each individually as a "Loan Party." This opinion letter is delivered to you pursuant to Section 5.1(o) of the Credit Agreement. Capitalized terms used herein and not otherwise defined herein have the meanings assigned to such terms in the Credit Agreement. The Uniform Commercial Code, as amended and in effect in the State of New York, is referred to herein as the "NY UCC." The Uniform Commercial Code, as amended and in effect in the State of California, is referred to herein as the "CA UCC." The Uniform Commercial Code, as amended and in effect in the State of Illinois, is referred to herein as the "IL UCC." The Uniform Commercial Code, as amended and in effect in the State of Texas, is referred to herein as the "TX UCC." The NY UCC, the CA UCC, the IL UCC and TX UCC, as applicable, are referred to herein collectively as the "UCC" and section references to the UCC used herein are to the comparable sections of the NY UCC, CA UCC, IL UCC and TX UCC. With your permission, all assumptions and statements of reliance herein have been made without any independent investigation or verification on our part except to the extent otherwise expressly stated, and we express no opinion with respect to the subject matter or accuracy of the assumptions or items upon which we have relied. This opinion letter is subject to, and is to be construed in accordance with, the principles and limitations set forth in the Special Report by the TriBar Opinion Committee, U.C.C. Security Interest Opinions, 49 Bus. Law. 362 (1993). In connection with the opinions expressed herein, we have examined such documents, records and matters of law as we have deemed necessary for the purposes of this opinion. We have examined, among other documents, the following: (a) An executed copy of the Credit Agreement; (b) An executed copy of the Holdco Guarantee; (c) An executed copy of the Guarantee by each Precision Subsidiary; (d) An executed copy of the Security Agreement; (e) An executed copy of the Securities Pledge Agreement; (f) An executed copy of the Collateral Assignment of Sublease, Subordination, Non-disturbance and Attornment Agreement assigning the sublease of the premises located at 200 Tech Park Drive, Henrietta, New York (the "New York Collateral Assignment"); (g) An executed copy of the respective mortgages encumbering the premises located at 6291 Burnham Avenue, Buena Park, California, 6351 Burham Avenue, Buena Park, California, 6530 Altura Blvd., Buena Park, California and 16031 Carmenita Road, Cerritos, California, respectively (the "California Mortgages"); (h) An executed copy of the respective mortgages encumbering the premises located at 3300 Oakton Street, Skokie, Illinois and 8124 North Ridgeway Avenue, Skokie, Illinois, respectively (the "Illinois Mortgages"); (i) Unfiled copies of certain UCC-1 financing statements naming the Borrower (collectively, the "Borrower Financing Statements") or a Precision Party (collectively, the "Precision Party Financing Statements," and together with the Borrower Financing Statements, the "Financing Statements"), as the case may be, as debtor and the Administrative Agent as secured party, forms of which are 2 attached hereto as Annex A, which Borrower Financing Statements we understand will be filed in the office of the Secretary of State of Texas (the "Borrower Filing Office") and which Precision Party Financing Statements we understand will be filed, as the case may be, in the offices shown on Annex C attached hereto (collectively, the "Precision Party Filing Offices" and collectively with the Borrower Filing Office, the "Filing Offices"); and (j) The respective Officer's Certificates of the Borrower and each of the Loan Parties delivered to us in connection with this opinion letter (as to each such company, the "Officer's Certificate," and, collectively, the "Officer's Certificates"). The documents referred to in items (a) through (e) above are referred to herein collectively as the "Non-Mortgage Documents." The documents referred to in items (f) through (h) above are referred to herein collectively as the "Mortgages." The documents referred to in items (a) through (h) above are referred to herein collectively as the "Documents." In all such examinations, we have assumed the legal capacity of all natural persons executing documents, the genuineness of all signatures, the authenticity of original and certified documents and the conformity to original or certified copies of all copies submitted to us as conformed or reproduction copies. As to various questions of fact relevant to the opinions expressed herein, we have relied upon, and assume the accuracy of, representations and warranties contained in the Documents and certificates and oral or written statements and other information of or from representatives of the Loan Parties and others and assume compliance on the part of all parties to the Documents with their covenants and agreements contained therein. In connection with the opinions expressed in clause (a) of paragraph 1 below, we have relied solely upon certificates of public officials. With respect to the opinions expressed in clauses (i) and (iii)(A) of paragraph 2 below, our opinions are limited (x) to our actual knowledge, if any, of the specially regulated business activities and properties of each Loan Party based solely upon the Officer's Certificate for such Loan Party and (y) to our review of only those laws and regulations that, in our experience, are normally applicable to transactions of the type contemplated by the Documents. Based upon the foregoing, and subject to the limitations, qualifications and assumptions set forth herein, we are of the opinion that: 1. Each of the Borrower, Calbrit Design, Certified Fabricators, General Automation, Nationwide, and Precision Holding (the "Specified Loan Parties" and each a "Specified Loan Party") (a) is a corporation validly existing and in good standing under the laws of the state of its formation and (b) has the corporate power and authority to execute, deliver and perform its obligations under the Documents to which it is a party. All of the issued and outstanding capital stock of each Precision Subsidiary is held of record by the Borrower. 2. The execution and delivery by each Specified Loan Party to the Administrative Agent and the Lenders of the Documents to which such Specified Loan Party is a party, and the performance of its obligations thereunder and the granting of the security interests provided for in the Security Agreement, the Securities Pledge Agreement and the Mortgages to which such Specified Loan Party is a party have been duly authorized by all necessary corporate action by each such Specified Loan Party. The execution and delivery to the Administrative Agent and the 3 Lenders by each Loan Party of each of the Documents to which it is a party, and the performance of its obligations thereunder, and the granting by each Loan Party of the security interests provided for in the Security Agreement, the Securities Pledge Agreement and the Mortgages to which such Loan Party is a party (i) do not require under present law any filing or registration by any Loan Party, with, or approval, permit, authorization, license or consent to any Loan Party of, any governmental agency or authority of the State of New York, the State of California, the State of Delaware pursuant to the General Corporation Law of the State of Delaware (the "DGCL"), the State of Texas, the State of Illinois or the United States of America that has not been made or obtained, except for such filings, registrations, approvals, permits, authorizations, licenses and consents (A) required in the ordinary course of business in connection with the performance by any Loan Party of its obligations under certain covenants contained in the Documents, (B) required to perfect the security interests and liens created under the Security Agreement, the Securities Pledge Agreement and the Mortgages, and (C) required pursuant to securities and other laws that may be applicable to the disposition of any Collateral, and (ii) do not contravene any provision of the Certificate of Incorporation or Articles of Association, as the case may be, or the bylaws of the Specified Loan Parties, and (iii) do not violate (A) any present law, or present regulation of any governmental agency or authority, of the States of New York, California, Texas or Illinois or of the United States of America in each case known by us to be applicable to any Loan Party or its property, except as disclosed on Schedule 4.4 to the Credit Agreement, (B) the DGCL or (C) any agreement binding upon any Loan Party or its respective property, except as disclosed on Schedule 4.4 to the Credit Agreement, or any court decree or order binding upon any Loan Party or its respective property (this opinion being limited (x) to those agreements, decrees or orders listed on Annex B hereto and (y) in that we express no opinion with respect to any violation not ascertainable from the face of any such agreement, decree or order, or arising under or based upon any cross default provision insofar as it relates to a default under an agreement not listed on Annex B, or arising under or based upon any covenant of a financial or numerical nature or requiring computation), and (iv) will not result in or require the creation or imposition of any security interest or lien pursuant to the provisions of any agreement binding upon any Loan Party on its properties other than the security interests created by the Security Agreement, the Securities Pledge Agreement and the Mortgages to which such Specified Loan Party is a party and any rights of set-off or other liens in favor of the Administrative Agent or the Lenders arising under any of the Documents or applicable law (this opinion being limited to those agreements listed on Annex B). 3. Each of the Documents has been duly executed and delivered on behalf of each Specified Loan Party that is a party thereto, and each of the Non-Mortgage Documents and the New York Collateral Assignment constitutes an obligation of each Loan Party that is a party thereto enforceable against such Loan Party under the laws of the State of New York in accordance with its terms. 4. The borrowings by the Borrower under the Credit Agreement and the application of the proceeds thereof as provided in the Credit Agreement will not violate Regulation U or X of the Board of Governors of the Federal Reserve System. 5. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," or of a "subsidiary company" of a 4 "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 6. Upon the making of the initial loans under the Credit Agreement, the provisions of the Security Agreement are sufficient to create in favor of the Administrative Agent for the benefit of the Lenders a valid security interest in all right, title and interest of the Loan Parties in those items and types of Pledged Collateral (as defined in the Security Agreement and the Securities Pledge Agreement) in which a security interest may be created under Article 9 of the NY UCC (such Pledged Collateral hereinafter called the "Article 9 Collateral"). 7. Upon creation of such security interest in the Article 9 Collateral and due filing of the Financing Statements with the Filing Offices, the Administrative Agent will have, for the benefit of the Lenders, a perfected security interest in that portion of the Article 9 Collateral in which a security interest is perfected by filing a financing statement under the Uniform Commercial Code as in effect in each of the states where a relevant Filing Office is located. 8. Upon the making of the initial loans under the Credit Agreement, the Security Agreement and the Securities Pledge Agreement, together with physical delivery of the certificated securities identified on Schedule I-A to the Security Agreement and Schedule I to the Securities Pledge Agreement (the "Pledged Securities") to the Administrative Agent, for the benefit of the Lenders, in the State of New York creates in favor of the Administrative Agent, for the benefit of the Lenders, as security for the Secured Obligations (as defined in the Security Agreement and the Securities Pledge Agreement) a perfected security interest under the NY UCC in each Loan Party's right, title and interest in the Pledged Securities pledged and so delivered by such Loan Party. 9. Upon the making of the initial loans under the Credit Agreement, the Security Agreement, together with physical delivery of the instruments identified in Schedule II to the Security Agreement (the "Pledged Notes") to the Administrative Agent for the benefit of the Lenders, in the State of New York, creates in favor of the Administrative Agent, for the benefit of the Lenders, as security for the Secured Obligations (as defined in the Security Agreement), a perfected security interest under the NY UCC in each Loan Party's right, title and interest in the Pledged Notes pledged and so delivered by such Loan Party. 10. The obligations of the Borrower under the Credit Agreement and the obligations of each Precision Subsidiary under its respective Subsidiary Guarantee constitute Senior Debt and Guarantor Senior Debt, respectively, as defined in the Senior Subordinated Indenture. 11. A court of the State of Texas applying Texas law should enforce the choice of law provisions contained in the Loan Documents and apply the law of the State of New York to the Loan Documents. The opinion expressed in this paragraph 11 is based upon Section 35.51 of the Tex. Bus. & Com. Code Ann., which became effective on September 1, 1993. To our knowledge, no court has yet construed this statute, and our opinion is therefore limited by any subsequent judicial interpretation thereof. For purposes of the opinion expressed in this paragraph 11, we (i) express no opinion as to the determination of the law governing any issue relating to the transfer, creation, nature or recordation of any interest in real property, or the method for foreclosure on real property, or any issue that a statute of the United States provides is governed by the laws of another jurisdiction, and (ii) have assumed that (A) the Loan Documents constitute the 5 valid and binding obligation of each of the parties thereto (other than the Company and the Guarantors) enforceable against each of such parties in accordance with its terms, and (B) payments delivered to the Administrative Agent pursuant to the Credit Agreement will be delivered in the State of New York, the Administrative Agent is a resident of the State of New York and maintains its principal office in the State of New York from which it conducted a substantial part of the negotiations relating to the Loan Documents and the transactions contemplated thereby, and/or a substantial part of such negotiations, including the execution of the Loan Documents by the Administrative Agent, occurred in the State of New York. 12. While we are aware of no case that presents facts identical to those involved in the transactions contemplated by the Loan Documents, and consequently cannot provide an unqualified opinion with respect to this matter, we believe that, in a properly presented case, an Illinois court or a federal court applying Illinois law would, under the conflict of laws principles observed by the courts of Illinois, give effect to the parties' choice of the law of the State of New York set forth in the Loan Documents. In arriving at this conclusion, we have relied upon Illinois state and federal case law, which provides that parties to a multijurisdictional transaction are free to designate the law that will govern any future dispute arising out of the contract. Wonderlic Agency, Inc. v. Acceleration Corp., 624 F. Supp. 801, 803 (N.D. Ill. 1984); Hofeld v. Nationwide Life Ins. Co., 59 Ill. 2d 522, 529, 322 N.E.2d 454, 458 (Ill. 1975); Fister/Warren v. Basins, Inc., 217 Ill. App. 3d 958, 578 N.E.2d 37, 40 (Ill. App.), appeal denied, 142 Ill. 2d 653, 584 N.E.2d 129 (Ill. 1991). Courts applying Illinois law have held that express choice of law provisions are valid and should be enforced unless the choice of law provision contravenes Illinois public policy or there is no reasonable relationship between the chosen forum and the parties or the transaction. Mastrobuono v. Shearson Lehman Hutton, 20 F.3d 713, 719 (7th Cir. 1994), rev'd on other grounds, 115 S. Ct. 1212 (1995); Hartford v. Burne Int'l Security Services, 172 Ill. App. 3d 184, 187, 526 N.E.2d 463, 464 (Ill. App. 1988), appeal denied, 124 Ill. 2d 562, 535 N.E.2d 914 (Ill. 1989); Potomac Leasing Co. v. Chuck's Pub, Inc., 156 Ill. App. 3d 755, 509 N.E.2d 751, 753-55 (Ill. App. 1987). Based on the current applicable case law, we do not anticipate that a court applying Illinois law would find that any of these exceptions apply to the Loan Documents, and that, in the present circumstances, we believe that the parties' stipulation that the law of New York should control should be given effect except to the extent that the Loan Documents address rights or remedies relating to property interests having their situs in Illinois or deal with matters subject to Illinois regulation. This opinion is based upon our understanding that the transactions provided for in the Loan Documents were negotiated primarily in New York, the principal Loan Documents were executed, delivered and are to be performed primarily in New York, and the Administrative Agent has its chief place of business in the State of New York. 13. The choice of law provisions set forth in the Loan Documents that select the law of the State of New York as the governing law for such Loan Documents are enforceable under the laws of the State of California, subject to the qualifications set forth in this paragraph below. (a) The California Supreme Court has upheld express contractual choice of law provisions with respect to substantive (as opposed to procedural) matters between and among sophisticated parties to a commercial transaction where the jurisdiction whose law has been chosen to govern has a substantial relationship to the transaction or there is another reasonable basis for the parties' choice of law and the application of the law of the chosen jurisdiction would not be contrary to a fundamental policy of the State of California. 6 Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 84 P.2d 1148, 11 Cal. Rptr. 2d 330 (1992). The Nedlloyd court took a position contrary to that of certain prior decisions of intermediate appellate courts of the State of California and federal courts sitting in, and applying the laws of, the State of California that distinguished between contractual and tortious claims. The Nedlloyd court held that "a valid choice-of-law clause, which provides that a specified body of law 'governs' the 'agreement' between the parties, encompasses all causes of action arising from or related to that agreement, regardless of how they are characterized, including tortious breaches of duties emanating from the agreement or the legal relationships it creates." Nedlloyd at 470. Thus, we express no opinion as to the substantive law that would be applied in an action between or among parties to the Loan Documents if a court were to characterize the issue at stake as one that does not arise from or relate to the Loan Documents. (b) The California Supreme Court has not set forth all of the factors to be considered in determining the existence of a substantial relationship to a transaction, but some of the factors considered by intermediate appellate and federal courts sitting in, and applying the laws of the State of California include, inter alia: (i) the place of performance of the agreement; (ii) the place of execution of the agreement; (iii) the location from which and to which proceeds are disbursed; (iv) the place of the last act which effectuated the agreement; (v) the location of the parties; (vi) the place where the terms of the agreement were negotiated; (vii) the existence of a choice of law clause; and (viii) the sophistication of the parties and commercial nature of the transaction. No case expressly analyzes all of these factors in deciding whether, on the facts before the court, a substantial relationship exists, but it is clear that ultimately the determination is fact-intensive. It is our understanding that, and our opinion concerning enforceability of the choice of law provisions in the Loan Documents will be governed by the law of the State of New York is based upon, the following assumptions: (I) the transactions contemplated by the Loan Documents will be performed in substantial part in the State of New York; (II) the Loan Documents will be executed and delivered in the State of New York and effectuated in substantial part in the State of New York; (III) the Loan Documents were negotiated primarily in the State of New York; and (IV) the Administrative Agent has its chief place of business in the State of New York. (c) We further advise you that, in evaluating whether the application of the law of the chosen state is violative of a fundamental California policy, California courts and federal courts sitting in, and applying the laws of, the State of California should evaluate each individual issue separately. It is impossible to determine in the abstract whether any individual claim will violate a fundamental policy of the State of California, and we are not in a position to opine that any and all matters that could be raised would not be violative of a fundamental public policy of the State of California. Thus, we cannot and do not opine that the choice of law provisions contained within the Loan Documents will be upheld in every instance. (d) In particular with respect to obtaining of or enforcement of any deficiency judgement, we direct your attention to the limitations and qualifications set forth above in this letter; and with respect to usury, we note that the case law in California is divided as to whether California has a strong or fundamental public policy against usury. See, e.g., Ury 7 v. Jeweler's Acceptance Corp., 227 Cal. App. 2d 11, 38 Cal. Rptr. 376 (1964); and Sarlot-Kantarjian v. First-Pennsylvania Mortgage Trust, 599 F.2d 915 (9th Cir. 1995). But see, e.g., Gamer v. duPont Galore Forgan, Inc., 65 Cal. App. 3d 280, 135 Cal. Rptr. 230 (1976); and Mencor Enterprises, Inc. v. Hets Equities Corporation, 190 Cal. App. 3d 432, 235 Cal. Rptr. 464 (1987). To our Actual Knowledge, there is no pending litigation, governmental proceeding or investigation that (A) seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the transactions contemplated by the Documents or (B) questions the legality or validity of any of the Documents or seeks to recover damages or obtain other relief in connection with the Documents. As used herein, "Actual Knowledge" has the meaning provided for the "Opinion Giver's Actual Knowledge" in the Legal Opinion Accord of the ABA Section of Business Law (1991). The opinions set forth above are subject to the following qualifications: (A) Our opinions above as to enforceability are subject to (i) applicable bankruptcy, insolvency, reorganization, fraudulent transfer, voidable preference, moratorium or similar laws, and related judicial doctrines, from time to time in effect affecting creditors' rights and remedies generally, (ii) general principles of equity (including, without limitation, standards of materiality, good faith, fair dealing and reasonableness, equitable defenses and limits on the availability of equitable remedies), whether such principles are considered in a proceeding at law or in equity, and (iii) the qualification that certain provisions of the Documents may be unenforceable in whole or in part under the laws (including judicial decisions) of the State of New York or the United States of America. (B) We express no opinion as to the enforceability of any provision in the Documents: (i) permitting the Administrative Agent, any Lender or any other person or entity to sell or otherwise dispose of, or purchase, any collateral subject thereto, or enforce any other right or remedy thereunder (including without limitation any self-help or taking- possession remedy), except in compliance with the UCC and other applicable federal, state, local and foreign laws; (ii) establishing standards for the performance of the obligations of good faith, diligence, reasonableness and care prescribed by the UCC or of any of the obligations referred to in Section 9-501(3) of the UCC; (iii) limiting the ability of any Loan Party or other person or entity to transfer voluntarily or involuntarily (by way of sale, creation of a security interest, attachment, levy, garnishment or other judicial process) its right, title or interest in or to any Collateral subject thereto or other property, including as contemplated by 9-311 and 9-318 of the UCC; (iv) waiving any rights to trial by jury; 8 (v) relating to indemnification, contribution or exculpation in connection with violations of any securities laws or statutory duties or public policy, or in connection with willful, reckless or unlawful acts or gross negligence of the indemnified or exculpated party or the party receiving contribution; (vi) providing that any person or entity purchasing a participation from a Lender or other person or entity pursuant thereto may exercise set-off or similar rights with respect to such participation or that any Lender or other person or entity may exercise set-off rights other than in accordance with and pursuant to applicable law; (vii) relating to forum selection to the extent that the forum is a federal court; (viii) relating to forum selection to the extent that any relevant action or proceeding does not arise out of or relate to such Document or to the extent that the enforceability of any such provision is to be determined by any court other than a court of the State of New York or relates to a choice of any forum other than the State of New York; (ix) relating to choice of governing law to the extent that the enforceability of any such provision is to be determined by any court other than a court of the State of New York or the State of Texas other than the Mortgages which choose a governing law other than the law of the State of New York; (x) specifying that provisions thereof may be waived only in writing, to the extent that an oral agreement or an implied agreement by trade practice or course of conduct has been created that modifies any provision of the Documents; (xi) relating to exculpation of any party in connection with its own negligence that a court would determine in the circumstances under applicable law to be unfair or insufficiently explicit; or (xii) giving any person or entity the power to accelerate obligations or foreclose upon collateral without any notice to the obligor. (C) Our opinions as to enforceability are subject to the effect of generally applicable rules of law that: (i) limit the availability of a remedy under certain circumstances when another remedy has been elected; (ii) may, where less than all of a contract may be unenforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange; (iii) govern and afford judicial discretion regarding the determination of damages and entitlement to attorneys' fees and other costs; and 9 (iv) may permit a party that has materially failed to render or offer performance required by the contract to cure that failure unless (a) permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance, or (b) it was important in the circumstances to the aggrieved party that performance occur by the date stated in the contract. (D) We express no opinion as to the enforceability of (i) any purported waiver, release, variation, disclaimer, consent or other agreement to similar effect (all of the foregoing, collectively, a "Waiver") by any Loan Party under any of the Documents to the extent limited by Sections 1-102(3) or 9-501(3) of the UCC or other provisions of applicable law (including judicial decisions), or to the extent that such a Waiver applies to a right, claim, duty, defense or ground for discharge otherwise existing or occurring as a matter of law (including judicial decisions), except to the extent that such a Waiver is effective under and is not prohibited by or void or invalid under Section 9-501 of the UCC or other provisions of applicable law (including judicial decisions) or (ii) any Waiver in the Documents insofar as it relates to causes or circumstances that would operate as a discharge or release of, or defense available to, any Loan Party thereunder as a matter of law (including judicial decisions), except to the extent that such a Waiver is effective under and is not prohibited by or void or invalid under applicable law (including judicial decisions). (E) We express no opinion as to the enforceability, creation or perfection of the security interests purported or intended to be created or perfected pursuant to any Document in any item of Collateral (other than the Pledged Securities and Pledged Notes) subject to any restriction on or prohibition against transfer in any security, instrument or document evidencing or relating to such item. (F) Our security interest opinions are subject to the effect thereon of Sections 9-307, 9-314 and 9-315 of the UCC and do not apply to any Collateral constituting consumer goods or inventory of a retail merchant as defined in Section 9102(f) of the CA UCC. (G) We express no opinion as to the application of, and our opinions above are subject to the effect, if any, of, any applicable fraudulent conveyance, fraudulent transfer, fraudulent obligation or preferential transfer law, any applicable bulk sale or transfer law, and any law governing the liquidation or dissolution of, or the distribution of assets of, any person or entity (including, without limitation, any law relating to the payment of dividends or other distributions on capital stock or the repurchase of capital stock). (H) Provisions in a guarantee that provide that the guarantor's liability thereunder shall not be affected by actions or failures to act on the part of the recipient of the guarantee or by amendments or waivers of provisions of documents governing the guaranteed obligations might not be enforceable under circumstances in which such actions, failures to act, amendments or waivers so radically change the essential nature of the terms and conditions of the guaranteed obligations that, in effect, a new contract has arisen between such recipient and the primary obligor on whose behalf the guarantee was issued. We also bring to your attention that guarantors may have the rights and remedies of a "debtor" under the UCC. (I) We note that the obligations of the Loan Parties are intended to be secured both by personal property and by the California Mortgages, describing interests in real property situated in 10 the State of California. We express no opinions in this letter concerning the California Mortgages except to the extent set forth in paragraphs 2 and 3. Please refer to the separate opinion letter of even date herewith issued by our Los Angeles, California office for our opinions expressed concerning the California Mortgages and the assumptions, qualifications and limitations on those opinions. Furthermore, we advise you that the assumptions, qualifications and limitations set forth in the opinion letter of even date herewith issued by our Los Angeles, California office may be applicable to limit the rights and remedies available to the Lenders under the Documents which are the subject of this opinion letter. (J) We have made no examination of and express no opinion as to (i) the nature or extent of any Loan Party's rights in or title to any of the Pledged Collateral purported to be conveyed or encumbered by any Document, (ii) the accuracy of any description of Pledged Collateral, (iii) except to the extent noted in paragraphs 3, 6-9 above, the enforceability, creation or perfection of liens or security interests purported or intended to be created or perfected pursuant to any Document; (iv) the priority of liens or security interests purported or intended to be created or perfected pursuant to any Document; (v) the existence of any liens, restrictions, easements or encumbrances on any Pledged Collateral purported to be encumbered by a Document; or (vi) the transferability of or effectiveness of any permit, license, franchise or certificate or other rights or privileges with respect to any Pledged Collateral (other than the Pledged Notes and Pledged Securities). (K) For purposes of our opinions above insofar as they relate to Mid State Machine and Galaxy Industries, we have assumed (i) that each of Mid State Machine and Galaxy Industries is a corporation existing and in good standing in its jurisdiction of incorporation, has all requisite power and authority, and has obtained all requisite corporate, shareholder, third party and governmental authorizations, consents and approvals, and made all requisite filings and registrations, necessary to execute, deliver and perform the Documents to which it is a party and to grant the security interests contemplated thereby (except to the extent noted in paragraph 2 above), and that such execution, delivery, performance and grant will not violate or conflict with any law, rule, regulation, order, decree, judgment, instrument or agreement binding upon or applicable to Mid State Machine or Galaxy Industries or their respective properties (except to the extent noted in paragraph 2 above), and (ii) the Documents to which each of Mid State Machine and Galaxy Industries are a party have been duly authorized, executed and delivered by each of Mid State Machine and Galaxy Industries. (L) To the extent it may be relevant to the opinions expressed herein, we have assumed that the parties to the Documents other than the Loan Parties have the power to enter into and perform such documents and to consummate the transactions contemplated thereby and that such documents have been duly authorized, executed and delivered by, and constitute legal, valid and binding obligations of, such parties. We are admitted to practice in the States of New York, California, Texas and Illinois. The opinions expressed herein are limited to the federal laws of the United States of America and the laws of the State of New York and, to the extent relevant to the opinions expressed in paragraphs 1, 2, 3, 11, 12 and 13 above, the DGCL and the laws of the States of California, Illinois and Texas, each as currently in effect (except that only the laws of the State of Texas are implicated by the opinions in paragraph 11, only the laws of the State of Illinois are implicated by the opinions in paragraph 12 and only the laws of the State of California are implicated by the opinions in 11 paragraph 13). Our opinions in paragraphs 6, 8 and 9 are limited to Article 9 of the NY UCC and our opinions in paragraph 7 are limited to Article 9 of the UCC. Because of the foregoing limitations, opinion paragraphs 6 through 9 do not address (i) laws of jurisdictions other than the States of New York, California, Illinois and Texas or laws of the States of New York, California, Illinois and Texas except that paragraph 7 addresses Article 9 of the NY UCC, the CA UCC, the IL UCC and the TX UCC and paragraphs 6, 8 and 9 address Article 9 of the NY UCC, (ii) collateral of a type not subject to Article 9 of the UCC, or (iii) under Section 9-103 of the UCC what law governs perfection of the security interests granted in the collateral covered by this opinion letter. We express no opinion with respect to any Article 9 Collateral of a type described in Section 9-401(1)(a) or (b) of the UCC. We express no opinion as to the compliance or noncompliance, or the effect of the compliance or noncompliance, of the Administrative Agent, Documentation Agent, Syndication Agent or any Lender with any state or federal laws or regulations applicable to it by reason of its status as or affiliation with a federally insured depository institution. The opinions expressed herein are solely for the benefit of the addressees hereof and their successors and assigns in connection with the transaction referred to herein and may not be relied on by such addressees for any other purpose or in any manner or for any purpose by any other person or entity. Very truly yours, /s/ Jones, Day, Reavis & Pogue 12 ANNEX A FINANCING STATEMENTS ANNEX B AGREEMENTS, ORDERS AND DECREES Certified Fabricators, Inc. / Calbrit Designs, Inc. (1) Lease between Certified Fabricators, Inc. and Certified Fabricators (the general partnership) for 6291 Burnham, Buena Park, CA, dated 1/30/98 (2) Lease between Certified Fabricators, Inc. and Certified Fabricators (the general partnership) for 6332 Burnham, Buena Park, CA, dated 12/29/97 (3) Lease between Certified Fabricators, Inc. and Certified Fabricators (the general partnership) for 6351 Burnham, Buena Park, CA, dated 5/16/97 (4) Lease between Certified Fabricators, Inc. and Certified Fabricators (the general partnership) for 6530 Altura, Buena Park, CA, dated 3/19/97 (5) Lease between Carolyn Blywise Living Trust and Certified Fabricators, Inc. for 16031 Carmenita Road, Cerritos, dated 2/22/95. (6) Lease for office property at 6280 Manchester Blvd. #300, Buena Park between Urban Properties, Inc. and Certified Fabricators, Inc., dated 3/17/97 (7) Stock Purchase Agreement, with exhibits and schedules thereto by and among Certified Fabricators, Inc., Calbrit Design, Inc., and their stockholders and Precision Partners, Inc. dated 2/19/99 (8) Employment Agreement with Gary Buehler, dated 3/19/99 Galaxy Industries Corporation (1) Business Property Lease by and between G & L Associates, Inc. as Lessor and Galaxy Precision Machining Co. as Lessee regarding the property at 7777 Rhonda Drive, Township of Canton, County of Wayne, State of Michigan, dated 4/10/97 (2) Merger Agreement among Galaxy Industries Corporation, Kenneth Smith Galaxy Holding Co., Inc., Robert H. Leidel Revocable Living Trust, Betty A. Leidel Revocable Living Trust, Michael Leidel, Cheryl Brooks, and Galaxy Acquisition, Inc., with exhibits and schedules thereto, dated 9/30/98 (3) Employment Agreement with Ken Smith, dated 9/30/98 General Automation, Inc. (1) Asset Purchase Agreement, by and among General Automation, Inc., Max Starr and Precision Partners Holding Company with exhibits and schedules thereto, dated 2/5/99 (2) Employment Agreement with Max Starr, dated 3/19/99 Mid State Machine Products (1) General Electric gas turbine systems sourcing operation by and between General Electric and Mid State, dated 12/1/98 (2) Lease, by and between, S. Douglas Sukeforth and Rita Sukeforth and Precision Partners Management Corp., for premises known as 1501 Verti Drive, Winslow, Maine, dated 11/01/98 (3) Redemption and Merger Agreement among Mid State Machine Products, S. Douglas Sukeforth, Mid State Holdings Co, Inc. and Mid State Acquisition Inc., with exhibits and schedules thereto, dated 9/17/98 (4) Employment Agreement with S. Douglas Sukeforth, dated 9/30/98 Nationwide Precision Products Corp. (1) Lease for real property located at 200 Tech Park Drive Rochester. New York, dated 3/19/99. (2) Asset Purchase Agreement between Nationwide Precision Products Corp., Nationwide Acquisition Delaware, Inc. and John Nucitilli, Robert Nucitilli, and Michael Nucitilli, with exhibits and schedules thereto, dated 2/11/99 (3) Employment Agreement with Ron Ricotta, dated 3/19/99 Precision Partners, Inc. (1) Consent to Sublease by and among Crescent Real Estate Funding Two, LP and Hekimian Laboratories, Inc. and Precision Partners Management Corp., dated 10/27/98 (2) Senior Subordinated Indenture 2 ANNEX C FILING OFFICES Name of Pledgor Filing Location 1. Calbrit Design, Inc. Secretary of State of Texas Secretary of State of California Orange County, California 2. Certified Fabricators, Inc. Secretary of State of Texas Secretary of State of California Orange County, California Los Angeles County, California 3. Galaxy Industries Corporation Secretary of State of Texas 4. General Automation, Inc. Secretary of State of Texas Secretary of State of Illinois Cook County, Illinois 5. Mid State Machine Products Secretary of State of Texas 6. Nationwide Precision Products Secretary of State of Texas Corporation Secretary of State of New York Monroe County, New York 7. Precision Partners, Inc. Secretary of State of Texas 8. Precision Partners Holding Company Secretary of State of Texas [EXHIBIT G] FORM OF EXEMPTION CERTIFICATE Reference is made to the Credit Agreement, dated as of March 19, 1999 as amended, supplemented or otherwise modified from time to time, the ("Credit Agreement") among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent. Capitalized terms used herein that are not defined herein shall have the meanings ascribed to them in the Credit Agreement. _______________________________ (the "Non-U.S. Lender") is providing this certificate pursuant to Section 2.15(d) of the Credit Agreement. The Non-U.S. Lender hereby represents and warrants that: 17. The Non-U.S. Lender is the sole record and beneficial owner of the [Loans] [L/C Obligations] in respect of which it is providing this certificate. 18. The Non-U.S. Lender is not a "bank" for purposes of Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). In this regard, the Non-U.S. Lender further represents and warrants that: (a) the Non-U.S. Lender is not subject to regulatory or other legal requirements as a bank in any jurisdiction; and (b) the Non-U.S. Lender has not been treated as a bank for purposes of any tax, securities law or other filing or submission made to any Governmental Authority, any application made to a rating agency or qualification for any exemption from tax, securities law or other legal requirements; 19. The Non-U.S. Lender is not a 10-percent shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code; and 20. The Non-U.S. Lender is not a controlled foreign corporation receiving interest from a related person within the meaning of Section 881(c)(3)(C) of the Code. G-1 IN WITNESS WHEREOF, the undersigned has duly executed this certificate. [NAME OF NON-U.S. LENDER] By:________________________ Name: Title: Date: __________________ G-2 [EXHIBIT H-1] FORM OF NOTICE OF BORROWING Date: _____________,____ Citicorp U.S.A., Inc. as Administrative Agent 399 Park Avenue New York, NY 10022-4600 RE: Credit Agreement dated as of March 19, 1999 (the "Credit Agreement") among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent Ladies and Gentlemen: The undersigned, the Borrower, refers to the Credit Agreement, the capitalized terms defined herein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.3 of the Credit Agreement, of the borrowing specified below: 21. 22. The Business Day of the proposed borrowing is ___________, ____. 23. The amount of the proposed borrowing is $__________. 24. The borrowing to be comprised of $__________ of [Base Rate][Eurodollar] Loans. 25. If applicable: The duration of the Interest Period for the Eurodollar Loans included in the borrowing shall be _____ months. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the proposed Borrowing Date, before and after giving effect thereto and to the application of the proceeds therefrom: H1-1 (i) the representations and warranties of the Borrower contained in Section 4 of the Credit Agreement are true and correct as though made on and as of such date (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date); (ii) no Default or Event of Default has occurred and is continuing, or would result from such proposed borrowing; (iii) the proposed borrowing will not cause the aggregate principal amount of all outstanding Revolving Loans plus the aggregate amount of the L/C Obligations to exceed the combined Revolving Commitments of the Lenders; and (iv) the proposed borrowing will not cause the aggregate principal amount of all outstanding Revolving Loans plus the aggregate amount of the L/C Obligations to exceed the Borrowing Base. PRECISION PARTNERS INC. By:________________________ Name: Title: H1-2 [EXHIBIT H-2] FORM OF NOTICE OF CONVERSION/CONTINUATION Date: __________, ____ Citicorp U.S.A., Inc. as Administrative Agent 399 Park Avenue New York, NY 10022-4600 RE: Credit Agreement dated as of March 19, 1999 (the "Credit Agreement") among PRECISION PARTNERS INC., a Delaware Corporation (the "Borrower"), the Guarantors from time to time thereunder, the several banks and other financial institutions or entities from time to time parties to the Credit Agreement (the "Lenders"), CITICORP U.S.A., INC., as Administrative Agent, NATIONSBANK, N.A., as Syndication Agent, and SUNTRUST BANK, ATLANTA, as Documentation Agent. Ladies and Gentlemen: The undersigned, Precision Partners Inc. (the "Borrower"), refers to the Credit Agreement, the capitalized terms being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.8 of the Credit Agreement, of the [conversion] [continuation] of the Loans specified herein, that: 26. The Conversion/Continuation Date is 27. The aggregate amount of the Loans to be [converted] [continued] is $__________. 28. The Loans are to be [converted into] (continued as] [Eurodollar] [Base Rate] Loans. H2-1 29. 30. [If applicable: The duration of the Interest Period for the Loans included in the [conversion] [continuation] shall be ___ months]. PRECISION PARTNERS INC. By:________________________ Name: Title: H2-2 Exhibit I to Credit Agreement ================================================================================ PRECISION PARTNERS, INC. as Borrower and THE OTHER PLEDGORS PARTY HERETO ------------------ SECURITY AGREEMENT Dated as of March 19, 1999 ------------------ CITICORP U.S.A., INC. as Administrative Agent ================================================================================ Table of Contents Page ---- RECITALS ..................................................................... 1 AGREEMENT .................................................................... 2 Section 1. Pledge ....................................................... 2 Section 2. Secured Obligations .......................................... 7 Section 3. No Release ................................................... 7 Section 4. Perfection; Supplements; Further Assurances; Use of Pledged Collateral ..................................... 8 Section 5. Representations, Warranties and Covenants .................... 9 Section 6. Special Provisions Concerning General Collateral .............14 Section 7. Special Provisions Concerning Securities Collateral ..........16 Section 8. Special Provisions Concerning Intellectual Property Collateral .............................................18 Section 9. Special Provisions Concerning Financial Accounts .............21 Section 10. Transfers and Other Liens ...................................23 Section 11. Reasonable Care .............................................23 Section 12. Remedies upon Default; Obtaining the Pledged Collateral upon Event of Default ..................................23 Section 13. Application of Proceeds .....................................27 Section 14. Expenses ....................................................27 Section 15. No Waiver, Cumulative Remedies ..............................28 Section 16. Administrative Agent ........................................28 Section 17. Administrative Agent May Perform; Administrative Agent Appointed Attorney-in-Fact .............................28 Section 18. Indemnity ...................................................29 Section 19. Modification in Writing .....................................29 Section 20. Termination; Release ........................................30 Section 21. Notices .....................................................30 Section 22. Continuing Security Interest; Assignment ....................30 Section 23. GOVERNING LAW; TERMS ........................................30 Section 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS; WAIVER OF JURY TRIAL ..........................................31 Section 25. Severability of Provisions ..................................31 Section 26. Execution in Counterparts ...................................31 Section 27. Headings ....................................................31 Section 28. Obligations Absolute ........................................31 Section 29. Administrative Agent's Right to Sever Indebtedness ..........32 Section 30. Future Advances .............................................33 SIGNATURES SCHEDULE I-A INITIAL PLEDGED SHARES SCHEDULE I-B INITIAL PLEDGED INTERESTS SCHEDULE II INITIAL INTERCOMPANY NOTES SCHEDULE III INITIAL PATENTS SCHEDULE IV INITIAL TRADEMARKS SCHEDULE V INITIAL COPYRIGHTS SCHEDULE VI INITIAL LICENSES -i- SCHEDULE VII INITIAL FINANCIAL ACCOUNTS ANNEX A FINANCING STATEMENTS AND OTHER NECESSARY FILINGS, UCC FILINGS, PATENT AND TRADEMARK FILINGS, AND OTHER FILINGS ANNEX B PRIOR LIENS ANNEX C LOCATIONS OF PLEDGORS EXHIBIT 1 FORM OF ISSUER ACKNOWLEDGMENT EXHIBIT 2 FORM OF FINANCIAL ACCOUNT CONSENT AGREEMENT EXHIBIT 3 FORM OF SECURITIES PLEDGE AGREEMENT EXHIBIT 4 FORM OF JOINDER AGREEMENT -ii- SECURITY AGREEMENT SECURITY AGREEMENT (the "Agreement"), dated as of March 19, 1999 made by PRECISION PARTNERS, INC., a Delaware corporation having an office at 5605 N. MacArthur Blvd., Suite 760, Irving, Texas 75038 (the "Borrower"), and EACH OF THE SUBSIDIARY GUARANTORS LISTED ON THE SIGNATURE PAGES HERETO OR FROM TIME TO TIME PARTY HERETO BY EXECUTION OF A JOINDER AGREEMENT (collectively, the "Subsidiary Guarantors"), as pledgors, assignors and debtors (the Borrower, together with the Subsidiary Guarantors, in such capacities and together with any successors in such capacities, the "Pledgors", and each, a "Pledgor"), in favor of CITICORP U.S.A., INC., having an office at 399 Park Avenue, New York, New York 10022, in its capacity as administrative agent for the lending institutions (the "Lenders") from time to time party to the Credit Agreement (as hereinafter defined), as pledgee, assignee and secured party (in such capacity and together with any successors in such capacity, the "Administrative Agent"). RECITALS: A. Pursuant to a certain credit agreement, dated as of the date hereof (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Credit Agreement), among the Borrower, the Subsidiary Guarantors, Precision Partners Holding Company ("Holding"), the Lenders, the Administrative Agent, NationsBank, N.A., as syndication agent ("Syndication Agent"), and Sun-Trust Bank, Atlanta, as the documentation agent ("Documentation Agent"; together with Administrative Agent and Syndication Agent, collectively, the "Agents"), the Lenders have agreed (i) to make to or for the account of the Borrower certain Term Loans up to an aggregate principal amount of $23,000,000 and certain Revolving Loans up to an aggregate principal amount of $25,000,000 and (ii) to issue certain Letters of Credit for the account of the Borrower. B. Each of Holding and the Subsidiary Guarantors has executed and delivered to the Administrative Agent a certain guarantee instrument (each, a "Guarantee") pursuant to which, among other things, each of Holding and the Subsidiary Guarantors has guaranteed the obligations of the Borrower under the Credit Agreement and the other Loan Documents, and each of Holding and the Subsidiary Guarantors desires that its Guarantee be secured hereunder. C. Each Pledgor is or will be the legal and/or beneficial owner of the Pledged Collateral (as hereinafter defined) to be pledged by it hereunder. D. It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to any Lender issuing Letters of Credit under the Credit Agreement that each Pledgor execute and deliver the applicable Loan Documents, including this Agreement. E. This Agreement is given by each Pledgor in favor of the Administrative Agent for its benefit and the benefit of the Lenders and the Agents (collectively, the "Secured Parties") to secure the payment and performance of all of the Secured Obligations (as defined in Section 2). -2- AGREEMENT: NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgors and the Administrative Agent hereby agree as follows: Section 1. Pledge. As collateral security for the payment and performance when due of all the Secured Obligations, each Pledgor hereby pledges, assigns, transfers and grants to the Administrative Agent for its benefit and the benefit of the Secured Parties, a continuing first priority security interest in and to and pledge of, subject only to Prior Liens, all of the right, title and interest of such Pledgor in, to and under the following property, wherever located, whether now existing or hereafter arising or acquired from time to time (collectively, the "Pledged Collateral"): (a) all "accounts", as such term is defined in the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction (the "UCC"), and in any event including, without limitation, all of such Pledgor's rights to any and all (i) accounts, accounts receivable, margin accounts, futures positions, book debts, instruments, documents, contracts, contract rights, choses in action, notes, drafts, acceptances, chattel paper and other forms of obligations and receivables now or hereafter owned or held by or payable to such Pledgor relating in any way to or arising from the sale or lease of goods or the rendering of services by such Pledgor or any other party, including the right to payment of any interest or finance charge with respect thereto, together with all merchandise represented by any of the accounts, (ii) all such merchandise that may be reclaimed or repossessed or returned to such Pledgor, (iii) all of such Pledgor's rights as an unpaid vendor, including stoppage in transit, reclamation, replevin and sequestration, (iv) all assets pledged, assigned, hypothecated or granted to, and all letters of credit, guarantee claims, Liens, and security interests held by, Pledgor to secure payment of any accounts and which are delivered for or on behalf of any account debtor, (v) all accessions to all of the foregoing described properties and interests in properties, (vi) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection with the foregoing, (vii) all evidences of the filing of financing statements and other statements and the registration of other instruments in connection therewith and amendments thereto, notices to other creditors or secured parties and certificates from filing or other registration offices, (viii) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, (ix) all customer lists and invoices and (x) all general intangibles arising out of such Pledgor's rights in any goods, the sale of which give rise to any of the foregoing (collectively, the "Receivables"); (b) all "inventory", as such term is defined in the UCC, of such Pledgor wherever located and of every class, kind and description and, in any event including, without limitation, (i) all goods, merchandise, raw materials, work-in-process, returned goods, finished goods, samples and consigned goods (to the extent of the consignee's interest therein), materials and supplies of any kind or nature which are or might be used in connection with the manufacture, printing, publication, packing, shipping, advertising, selling or finishing of any such goods and all other products, goods, materials and supplies, (ii) all inventory as is temporarily out of such Pledgor's custody or possession, items in transit and any returns and repossessions upon any Receivables and (iii) all substitutions therefor or replacements thereof, and all additions and accessions thereto (collectively, the "Inventory"); (c) any and all sale, service, performance and equipment or property lease contracts, agreements and grants (whether written or oral, or third party or intercompany), and any other document (whether written or oral,) between such Pledgor and third parties, and all assignments, amend- -3- ments, restatements, supplements, extensions, renewals, replacements or modifications thereof, including, without limitation, Acquisition Documentation (collectively, the "Contracts", and each, a "Contract"); (d) all "equipment", as such term is defined in the UCC, and, in any event including, without limitation, all machinery, apparatus, equipment, office machinery, electronic data-processing equipment, computers and computer hardware and software (whether owned or licensed), furniture, conveyors, tools, materials, storage and handling equipment, automotive equipment, motor vehicles, tractors, trailers and other like property, whether or not the title thereto is governed by a certificate of title or ownership, and all other equipment of every kind and nature owned by such Pledgor or in which such Pledgor may have any interest (to the extent of such interest) and all modifications, renewals, improvements, alterations, repairs, substitutions, attachments, additions, accessions and other property now or hereafter affixed thereto or used in connection therewith, all replacements and all parts therefor and together with all substitutes for any of the foregoing (collectively, the "Equipment"); (e) all "general intangibles", as such term is defined in the UCC, and, in any event including, without limitation, (i) all of such Pledgor's rights, title and interest in, to and under all Contracts, (ii) all manuals, blueprints, know-how, warranties and records in connection with the Equipment; (iii) any and all other rights, claims, choses-in-action and causes of action of such Pledgor against any other Person and the benefits of any and all collateral or other security given by any other Person in connection therewith; (iv) all lists, books, records, ledgers, print-outs, files (whether in printed form or stored electronically), tapes and other papers or materials containing information relating to any of the Pledged Collateral including, without limitation, all customer lists, identification of suppliers, data, plans, blueprints, specification designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, standards, processing standards, performance standards, catalogs, research data, computer and automatic machinery software and programs and the like pertaining to operations by such Pledgor or the Pledged Collateral, field repair data, sales data and other information relating to sales of products now or hereafter manufactured, distributed or franchised by such Pledgor, accounting information pertaining to such Pledgor's operations or any of the Pledged Collateral and all media in which or on which any of the information or knowledge or data or records relating to such operations or any of the Pledged Collateral may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; (v) all licenses, consents, permits, variances, certifications and approvals of any federal, state, local, foreign or other governmental or administrative (including self-regulatory) body, instrumentality, department or agency or any court, tribunal, administrative hearing body, arbitration panel, commission or other similar dispute-resolving body including, without limitation, those governing the regulation and protection of the environment (each, a "Governmental Authority") (or any Person acting on behalf of a Governmental Authority) now or hereafter held by such Pledgor pertaining to operations now or hereafter conducted by such Pledgor or any Pledged Collateral now or hereafter held by such Pledgor, and (vi) all rights to refund or indemnification to the extent the foregoing relate to any Pledged Collateral and income tax refunds to the extent relating to any Pledged Collateral, claims for tax or other refunds against any city, county or state or federal government, or any agency or authority or other subdivision thereof relating to any Pledged Collateral (collectively, the "Intangibles"); (f) all insurance policies held by such Pledgor or naming such Pledgor as insured, additional insured or loss payee (including, without limitation, casualty insurance, liability insurance, property insurance and business interruption insurance), all such insurance policies entered into after the date hereof other than insurance policies (or certificates of insurance evidencing such insurance poli- -4- cies) relating to health and welfare insurance and life insurance policies in which such Pledgor is not named as beneficiary (i.e., insurance policies that are not "Key Man" insurance policies) and all rights, claims and recoveries relating thereto (including all dividends, returned premiums and other rights to receive money in respect of any of the foregoing) (collectively, the "Insurance Policies"); (g) such Pledgor's right to receive the surplus funds, if any, which are payable to such Pledgor following the termination of any employee pension plan and the satisfaction of all liabilities of participants and beneficiaries under such plan in accordance with applicable law (collectively, the "Pension Plan Reversions"); (h) the issued and outstanding shares of capital stock of each Person described in Schedule I-A annexed hereto and each other corporation hereafter acquired or formed by such Pledgor (which are and shall remain at all times until this Agreement terminates, certificated shares), including the certificates representing the Pledged Shares and any interest of such Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares and all Additional Shares (as hereinafter defined) (collectively, the "Pledged Shares"); provided, however, that such Pledgor shall not be required to pledge shares possessing more than 65% of the voting power of all classes of capital stock entitled to vote of any Subsidiary which is a controlled foreign corporation (as defined in Section 957(a) of the Internal Revenue Code of 1986, as amended from time to time (the "Tax Code")) and, in any event, shall not be required to pledge the shares of stock of any Subsidiary otherwise required to be pledged pursuant to this subsection 1(h) to the extent that such pledge would constitute an investment of earnings in United States property under Section 956 (or a successor provision) of the Tax Code, which investment would trigger an increase in the gross income of a United States shareholder of such Pledgor pursuant to Section 951 (or a successor provision) of the Tax Code; (i) all additional shares of capital stock of whatever class of any issuer of the Pledged Shares from time to time acquired by such Pledgor in any manner (which are and shall remain at all times until this Agreement terminates, certificated shares), including the certificates representing such additional shares and any interest of such Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (collectively, the "Additional Shares"); (j) all membership interests and/or partnership interests, as applicable, of each Person described in Schedule I-B annexed hereto and each other limited liability company or partnership hereafter acquired or formed by such Pledgor, together with all rights, privileges, authority and powers of such Pledgor in and to each such Person or under the membership or partnership agreement of each such Person (the "Operative Agreements"), and the certificates, instruments and agreements, if any, representing such membership or partnership interests (collectively, the "Initial Pledged Interests"); (k) all options, warrants, rights, agreements, additional membership or partnership interests or other interests relating to each such Person described in clause (j) above or any interest in any such Person, including, without limitation, any right relating to the equity or membership or partnership interests in any such Person or under the Operative Agreement of any such Person, from time to time acquired by such Pledgor in any manner and the certificates, instruments and agreements, if any, representing such additional interests (collectively, the "Additional Interests"; together with the Initial Pledged Interests, the "Pledged Interests"; the Pledged Interests, together with the Pledged Shares and the items or types of Pledged Collateral described in subsection 1(n) of this Agreement, collectively, the "Pledged Securities"); -5- (l) all intercompany notes described in Schedule II annexed hereto (and each other intercompany note hereafter acquired by such Pledgor) and all certificates or instruments evidencing such intercompany notes and all proceeds thereof, all accessions thereto and substitutions therefor (collectively, the "Intercompany Notes"); (m) all dividends, cash, options, warrants, rights, instruments, distributions, returns of capital or principal, income, interest, profits and other property, interests (debt or equity) or proceeds, including as a result of a split, revision, reclassification or other like change of the Pledged Securities, from time to time received, receivable or otherwise distributed to such Pledgor in respect of or in exchange for any or all of the Pledged Securities or Intercompany Notes (collectively, "Distributions"); (n) without affecting the obligations of such Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which any Person listed in Schedule I-A or Schedule I-B annexed hereto is not the surviving entity, all shares of each class of the capital stock of the successor corporation or interests or certificates of the successor limited liability company or partnership owned by such Pledgor (unless such successor is such Pledgor itself) formed by or resulting from such consolidation or merger; (o) all patents issued or assigned to and all patent applications and registrations made by such Pledgor, including, without limitation, the patents, patent applications, registrations and recordings listed in Schedule III annexed hereto, together with any and all (i) rights and privileges arising under applicable law with respect to such Pledgor's use of any patents, (ii) inventions and improvements described and claimed therein, (iii) reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (iv) income, fees, royalties, damages, claims and payments now and hereafter due and/or payable thereunder and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (v) rights corresponding thereto throughout the world, and (vi) rights to sue for past, present and future infringements thereof (collectively, the "Patents"); (p) all trademarks (including service marks), logos, federal and state trademark registrations and applications made by such Pledgor, common law trademarks and trade names owned by or assigned to such Pledgor and all registrations and applications for the foregoing, including, without limitation, the registrations and applications listed in Schedule IV annexed hereto, together with any and all (i) rights and privileges arising under applicable law with respect to such Pledgor's use of any trademarks, (ii) reissues, continuations, extensions and renewals thereof, (iii) income, fees, royalties, damages and payments now and hereafter due and/or payable thereunder and with respect thereto, including, without limitation, damages, claims and payments for past, present or future infringements thereof, (iv) rights corresponding thereto throughout the world and (v) rights to sue for past, present and future infringements thereof (collectively, the "Trademarks"); (q) all copyrights (whether statutory or common law) owned by or assigned to such Pledgor, including, without limitation, the copyrights, registrations and applications listed in Schedule V annexed hereto, together with any and all (i) rights and privileges arising under applicable law with respect to such Pledgor's use of any copyrights, (ii) reissues, renewals, continuations and extensions thereof, (iii) income, fees, royalties, damages, claims and payments now and hereafter due and/or payable with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) rights corresponding thereto throughout the world and (v) rights to sue for past, present and future infringements thereof (collectively, the "Copyrights"); -6- (r) all license and distribution agreements and covenants not to sue with any other party with respect to any Patent, Trademark, or Copyright, whether such Pledgor is a licensor or licensee, distributor or distributee under any such license or distribution agreement including, without limitation, the license and distribution agreements listed in Schedule VI annexed hereto, along with any and all (i) renewals, extensions, supplements and continuations thereof, (ii) income, fees, royalties, damages, claims and payments now and hereafter due and/or payable thereunder and with respect thereto, including, without limitation, damages and payments for past, present or future infringements or violations thereof, (iii) rights to sue for past, present and future infringements or violations thereof and (iv) any other rights to use, exploit or practice any or all of the Patents, Trademarks or Copyrights (collectively, the "Licenses"); (s) the entire goodwill connected with such Pledgor's business including, without limitation, (i) all goodwill connected with the use of and symbolized by any of the Intellectual Property Collateral (as hereinafter defined) in which such Pledgor has any interest, (ii) all know-how, trade secrets, customer lists, proprietary information, inventions, methods, procedures, formulae, descriptions, name plates, catalogs, confidential information, consulting agreements, engineering contracts and such other assets which relate to such goodwill and (iii) all product lines of such Pledgor's business (collectively, the "Goodwill"); (t) all financial accounts and all investment property (as defined in the UCC) of such Pledgor, including, without limitation, (i) the financial accounts maintained with the financial institutions (each such financial institution, or any financial institution which shall satisfy the conditions set forth in subsection 9(b) of this Agreement, a "Financial Intermediary") identified in Schedule VII annexed hereto, (ii) all moneys, financial assets (as defined in the UCC), checks, drafts, securities and instruments deposited or required to be deposited in such accounts, (iii) all investments and all certificates and instruments, if any, from time to time representing or evidencing any other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the foregoing items listed under subclauses (i) and (ii), and (iv) each consent or other agreement from time to time entered into by such Pledgor with any financial institution at which any of the financial accounts is maintained and all rights of such Pledgor under each such consent or agreement; (u) all "documents", as such term is defined in the UCC, including, without limitation, all receipts of such Pledgor covering, evidencing or representing Inventory or Equipment (collectively, the "Documents"); (v) all "instruments", as such term is defined in the UCC, including, without limitation, all promissory notes, drafts, bills of exchange or acceptances (collectively, the "Instruments"); (w) any and all other property or assets of such Pledgor whether tangible or intangible, fixed or liquid; and (x) all "proceeds", as such term is defined in the UCC or under other relevant law, and in any event including, without limitation, any and all (i) proceeds of any insurance (except payments made to a Person which is not a party to this Agreement), indemnity, warranty, guaranty or claim payable to the Administrative Agent or to such Pledgor from time to time with respect to any of the Pledged Collateral, (ii) payments (in any form whatsoever) made or due and payable to such Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Collateral by any Governmental Authority (or any Person acting on -7- behalf of a Governmental Authority), (iii) instruments representing obligations to pay amounts in respect of the Pledged Collateral, (iv) products of the Pledged Collateral and (v) other amounts from time to time paid or payable under or in connection with any of the Pledged Collateral (collectively, the "Proceeds"); provided, however, that Pledged Collateral shall not include any items of property described in Granting Clauses (c), (e), (v) and (r) to the extent that such Pledgor is expressly prohibited from granting a Lien thereon or applicable law provides for the involuntary forfeiture thereof in the event that a Lien is granted thereon without the consent of the appropriate Person or Governmental Authority; provided, further, that in the event of the termination or elimination of any prohibition or requirement for any consent contained in any law, rule, regulation, contract, license, franchise, authorization, agreement, grant or other document, or upon the granting of any consent, the items of property so excluded from the definition of Pledged Collateral by virtue of the immediately preceding proviso shall (without any act or delivery by any Person) constitute Pledged Collateral hereunder; The Pledged Securities, the Intercompany Notes, the Distributions and the Proceeds relating thereto are collectively referred to as the "Securities Collateral". The Patents, Trademarks, Copyrights, Licenses, Goodwill and the Proceeds relating thereto are collectively referred to as the "Intellectual Property Collateral". The property described in clause (t) above and the Proceeds relating thereto are collectively referred to as the "Financial Account Collateral". The Pledged Collateral other than the Securities Collateral, the Intellectual Property Collateral and the Financial Account Collateral is collectively referred to as the "General Collateral". Section 2. Secured Obligations. This Agreement secures, and the Pledged Collateral is collateral security for, the payment and performance in full when due, whether at stated maturity, by acceleration or otherwise (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the filing of a petition in bankruptcy or the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of (i) all Obligations of the Borrower now existing or hereafter arising under or in respect of the Credit Agreement (including, without limitation, the obligations of the Borrower to pay principal, interest and all other charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in the Credit Agreement), (ii) all Obligations of Holding and the Subsidiary Guarantors now existing or hereafter arising under or in respect of the Credit Agreement (including, without limitation, the obligations of Holding and each Subsidiary Guarantor to pay principal, interest and all other charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in the Credit Agreement) and (iii) without duplication of the amounts described in clauses (i) and (ii) above, all Obligations of the Pledgors now existing or hereafter arising under or in respect of this Agreement or any other Security Document, including, without limitation, all charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in this Agreement or in any other Security Document, in each case whether in the regular course of business or otherwise (the obligations described in clauses (i), (ii) and (iii) of this Section 2, collectively, the "Secured Obligations"). Section 3. No Release. Nothing set forth in this Agreement shall relieve any Pledgor from the performance of any term, covenant, condition or agreement on such Pledgor's part to be performed or observed under or in respect of any of the Pledged Collateral or from any liability to any Person under or in respect of any of the Pledged Collateral or shall impose any obligation on the Administrative Agent or any other Secured Party to perform or observe any such term, covenant, condition or agreement on such Pledgor's part to be so performed or observed or shall impose any liability on the Administrative Agent or any other Secured Party for any act or omission on the part of such Pledgor relating thereto or for any breach of any representation or warranty on the part of such Pledgor contained in this Agreement or any other Loan Document, or under or in respect of -8- the Pledged Collateral or made in connection herewith or therewith, except upon any exercise of remedies pursuant to Section 12 whereby such Pledgor no longer has any rights, title or interest in or to such Pledged Collateral. The obligations of each Pledgor referred to in this Section 3 shall survive the termination of this Agreement and the discharge of such Pledgor's other obligations under this Agreement and the other Loan Documents. Section 4. Perfection; Supplements; Further Assurances; Use of Pledged Collateral. (a) Delivery of Certificated Securities Collateral. All certificates, agreements or instruments representing or evidencing the Securities Collateral, to the extent not previously delivered to the Administrative Agent, shall immediately upon receipt thereof by any Pledgor be delivered to and held by or on behalf of the Administrative Agent pursuant hereto. All certificated Securities Collateral shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall have the right, at any time upon the occurrence and during the continuance of any Event of Default and without notice to any Pledgor, to endorse, assign or otherwise transfer to or to register in the name of the Administrative Agent or any of its nominees or endorse for negotiation any or all of the Securities Collateral, without any indication that such Securities Collateral is subject to the security interest hereunder. In addition, the Administrative Agent shall have the right at any time after the occurrence and during the continuance of a Default to exchange certificates representing or evidencing Pledged Securities for certificates of smaller or larger denominations. (b) Perfection of Uncertificated Securities Collateral. If any issuer of Pledged Securities is organized in a jurisdiction which does not permit the use of certificates to evidence equity ownership, or if any of the Pledged Securities are at any time not evidenced by certificates of ownership, then each applicable Pledgor shall, to the extent permitted by applicable law, record such pledge on the equity-holder register or the books of the issuer, cause the issuer to execute and deliver to the Administrative Agent an acknowledgment of the pledge of such Pledged Securities substantially in the form of Exhibit 1 annexed hereto, execute any customary pledge forms or other documents necessary or appropriate to complete the pledge and give the Administrative Agent the right to transfer such Pledged Securities pursuant to the terms hereof and provide to the Administrative Agent an opinion of counsel, in form and substance satisfactory to the Administrative Agent, confirming such pledge. (c) Financing Statements and Other Filings. The only filings, registrations and recordings necessary and appropriate to create, preserve, protect and perfect the security interest granted by each Pledgor to the Administrative Agent pursuant to this Agreement in respect of the Pledged Collateral are listed in Annex A annexed hereto. All such filings, registrations and recordings have been filed, registered and recorded contemporaneously with the execution of the Loan Documents. Each Pledgor agrees that at any time and from time to time, it will execute and, at the sole cost and expense of the Pledgors file and refile, or permit the Administrative Agent to file and refile, such financing statements, continuation statements and other documents (including, without limitation, this Agreement), in form reasonably acceptable to the Administrative Agent, in such offices (including, without limitation, the United States Patent and Trademark Office and the United States Copyright Office) as the Administrative Agent may reasonably deem necessary or appropriate, wherever required or permitted by law in order to perfect, continue and maintain a valid, enforceable, first priority security interest, subject only to Prior Liens, in the Pledged Collateral as provided herein and to preserve the other rights and interests granted to the Administrative Agent hereunder, as against third parties, with respect to any Pledged Collateral. Each Pledgor authorizes the Administrative Agent to file any such financing or -9- continuation statement or other document without the signature of such Pledgor where permitted by law. (d) Motor Vehicles. At any time after the occurrence and during the continuance of an Event of Default, each Pledgor shall, upon the request of the Administrative Agent, deliver to the Administrative Agent originals of the certificates of title or ownership for the motor vehicles (and any other Equipment covered by certificates of title or ownership owned by it) with the Administrative Agent listed therein as lienholder; provided, however, that each Pledgor shall not be obligated to deliver to the Administrative Agent originals of the certificates of title or ownership for the motor vehicles (and any other Equipment covered by certificates of title owned by it) if the originals have been previously delivered to the lienholder of a Prior Lien. (e) Supplements; Further Assurances. Each Pledgor agrees to do such further acts and things, and to execute and deliver to the Administrative Agent such additional assignments, agreements, supplements, powers and instruments, as the Administrative Agent may reasonably deem necessary or appropriate, wherever required or permitted by law, in order to perfect, preserve and protect the security interest in the Pledged Collateral as provided herein and the rights and interests granted to the Administrative Agent hereunder, to carry into effect the purposes of this Agreement or better to assure and confirm unto the Administrative Agent or permit the Administrative Agent to exercise and enforce its respective rights, powers and remedies hereunder with respect to any Pledged Collateral. Without limiting the foregoing, each Pledgor shall make, execute, endorse, acknowledge, file or refile and/or deliver to the Administrative Agent from time to time such lists, descriptions and designations of the Pledged Collateral, copies of warehouse receipts, receipts in the nature of warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, supplements, additional security agreements, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments or the Administrative Agent deems reasonably necessary or appropriate. The Administrative Agent may institute and maintain, in its own name or in the name of any Pledgor, such suits and proceedings as the Administrative Agent may be advised by counsel shall be reasonably necessary or expedient to prevent any impairment of the security interest in or perfection of the Pledged Collateral. All of the foregoing shall be at the sole cost and expense of the Pledgors. (f) Use and Pledge of Pledged Collateral. Unless an Event of Default shall have occurred and be continuing, the Administrative Agent shall from time to time execute and deliver, upon written request of any Pledgor and at the sole cost and expense of the Pledgors, any and all instruments, certificates or other documents, in a form reasonably requested by such Pledgor, necessary or appropriate in the reasonable judgment of such Pledgor to enable such Pledgor to continue to exploit, license, use, enjoy and protect the Pledged Collateral, except as may be prohibited by the terms of this Agreement or the Credit Agreement. The Pledgors and the Administrative Agent acknowledge that this Agreement is intended to grant to the Administrative Agent for the benefit of the Secured Parties a security interest in and Lien upon the Pledged Collateral and shall not constitute or create a present assignment of any of the Pledged Collateral. Section 5. Representations; Warranties and Covenants. Each Pledgor represents, warrants and covenants as follows: (a) Perfection Actions; Prior Liens. Upon the completion of the deliveries, filings and other actions contemplated in subsections 4(a) through 4(c) hereof and subsections 9(a) and 9(b) -10- hereof, the security interest granted to the Administrative Agent for the benefit of the Secured Parties pursuant to this Agreement in and to the Pledged Collateral (other than Pledged Collateral covered by certificates of title or ownership) will constitute a perfected security interest therein, superior and prior to the rights of all other Persons therein other than with respect to (i) the Liens identified on Annex B relating to the items of Pledged Collateral identified on such annex, (ii) Subordinate Liens (as hereinafter defined) of the type described in clauses (g), (h), (j), (l), (m), (n) and (r) of the definition of Permitted Liens on Pledged Collateral acquired after the date hereof and that attached prior to the Lien granted hereunder or upon the acquisition of such Pledged Collateral and (iii) Subordinate Liens (as hereinafter defined) of the type described in clauses (a) and (b) of the definition of Permitted Liens which created or authorized under any law or regulation of any applicable Governmental Authority if and to the extent that the law or regulation creating or authorizing such Lien provides that such Lien is superior to the Lien and security interest created and evidenced hereby (the Liens described in clauses (i), (ii) and (iii), "Prior Liens"). (b) No Liens. Such Pledgor is as of the date hereof, and, as to Pledged Collateral acquired by it from time to time after the date hereof, such Pledgor will be, the sole direct and beneficial owner of all Pledged Collateral pledged by it hereunder free from any Lien or other right, title or interest of any Person other than (i) Prior Liens, (ii) the Lien and security interest created by this Agreement and (iii) Subordinate Liens. Pledgor shall defend the Pledged Collateral pledged by it hereunder against all claims and demands of all Persons at any time claiming any interest therein adverse to the Administrative Agent or any other Secured Party. There is no agreement, and Pledgor shall not enter into any agreement or take any other action, that would result in the imposition of any other Lien, restrict the transferability of any of the Pledged Collateral or otherwise impair or conflict with such Pledgor's obligations or the rights of the Administrative Agent hereunder. "Subordinate Liens" shall mean (A) with respect to the General Collateral, Permitted Liens applicable to such Pledged Collateral (provided, however, that with respect to Liens of the type described in clauses (a) and (b) of the definition of Permitted Liens, such applicable Pledgor shall comply with the provisions of subsection 5(o) of this Agreement) and (B) with respect to all other Pledged Collateral, Liens of the type described in clauses (a) and (l) of the definition of Permitted Liens (provided, however, that with respect to Liens of the type described in clauses (a) and (l) of the definition of Permitted Liens, such applicable Pledgor shall comply with the provisions of subsection 5(o) of this Agreement). (c) Other Financing Statements. There is no (nor will be any) valid or effective financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind in the Pledged Collateral other than those relating to (i) Prior Liens, (ii) this Agreement and (iii) Subordinate Liens, and so long as any of the Secured Obligations remain unpaid or the Commitments of the Lenders to make any Loan or to issue any Letter of Credit shall not have expired or been sooner terminated, no Pledgor shall execute, authorize or permit to be filed in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to any Pledged Collateral, except, in each case, financing statements filed or to be filed in respect of and covering the security interests granted by such Pledgor pursuant to this Agreement and financing statements relating to Prior Liens or Subordinate Liens. (d) Chief Executive Office; Change of Name. The chief executive office of such Pledgor is located at the address indicated next to its name in Annex C annexed hereto. Such Pledgor shall not -11- move its chief executive office, except to such new location as such Pledgor may establish in accordance with the last sentence of this subsection 5(d). Such Pledgor shall not establish a new location for its chief executive office nor shall it change its name until (i) it shall have given the Administrative Agent not less than thirty (30) days' prior written notice of its intention so to do, clearly describing such new location or name and providing such other information in connection therewith as the Administrative Agent may reasonably request and (ii) with respect to such new location or name, such Pledgor shall have taken all action reasonably satisfactory to the Administrative Agent to maintain the perfection and priority of the security interest of the Administrative Agent for the benefit of the Secured Parties in the Pledged Collateral intended to be granted hereby, including, without limitation, obtaining waivers of landlord's or warehouseman's liens with respect to such new location. (e) Location of Equipment. All Equipment held on the date hereof by such Pledgor is located at the addresses indicated next to its name in Annex C annexed hereto. All Equipment now held or subsequently acquired shall be kept at one or more of the locations listed in Annex C annexed hereto, or such new location as such Pledgor may establish if (i) it shall have given to the Administrative Agent at least thirty (30) days' prior written notice of its intention so to do, clearly describing such new location and providing such other information in connection therewith as the Administrative Agent may reasonably request, and (ii) with respect to such new location, such Pledgor shall have taken all action reasonably satisfactory to the Administrative Agent to maintain the perfection and priority of the security interest of the Administrative Agent for the benefit of the Secured Parties in the Pledged Collateral intended to be granted hereby, including, without limitation, obtaining waivers of landlord's or warehouseman's liens with respect to such new location. (f) Due Authorization and Issuance. All of the Pledged Shares have been, and to the extent hereafter issued will be upon such issuance, duly authorized, validly issued and fully paid and non-assessable. All of the Initial Pledged Interests have been fully paid for, and there is no amount or other obligation owing by any Pledgor to any issuer of the Initial Pledged Interests in exchange for or in connection with the issuance of the Initial Pledged Interests or any Pledgor's status as a partner or a member of any issuer of the Initial Pledged Interests. (g) No Violations, etc. The pledge of the Pledged Securities pursuant to this Agreement does not violate Regulation T, U or X of the Federal Reserve Board. (h) No Options, Warrants, etc. There are no options, warrants, calls, rights, commitments or agreements of any character to which such Pledgor is a party or by which it is bound obligating such Pledgor to issue, deliver or sell or cause to be issued, delivered or sold, additional Pledged Securities or obligating such Pledgor to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. There are no voting trusts or other agreements or understandings to which such Pledgor is a party with respect to the transfer, voting or exercise of any other right of the equity interests of any issuer of the Pledged Securities. (i) No Claims. Such Pledgor owns or has rights to use all the Pledged Collateral pledged by it hereunder and all rights with respect to any of the foregoing used in, necessary for or material to such Pledgor's business as currently conducted and as contemplated to be conducted pursuant to the Loan Documents, except for Permits the failure to obtain which could not reasonably be expected to have a Material Adverse Effect. The use by such Pledgor of such Pledged Collateral and all such rights with respect to the foregoing do not infringe on the rights of any Person in any material respect. No -12- material claim has been made and remains outstanding that such Pledgor's use of any Pledged Collateral does or may violate the rights of any third Person. (j) Authorization, Enforceability. Such Pledgor has the corporate power and authority and the legal right to pledge and grant a security interest in all the Pledged Collateral pledged by it pursuant to this Agreement, and this Agreement constitutes the legal, valid and binding obligation of such Pledgor, enforceable against such Pledgor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles (whether enforcement is sought by proceedings in equity or at law). (k) No Conflicts, Consents, etc. Neither the execution and delivery of this Agreement by each Pledgor nor the consummation of the transactions herein contemplated nor the fulfillment of the terms hereof (i) violates any charter or by-laws or other organizational document of such Pledgor or any issuer of Pledged Securities, (ii) violates the terms of any agreement, indenture, mortgage, deed of trust, equipment lease, instrument or other document to which such Pledgor is a party, or by which it may be bound or to which any of its properties or assets may be subject, which violation or conflict would have a Material Adverse Effect, or a material adverse effect on the value of the Pledged Collateral or an adverse effect on the security interests hereunder, (iii) conflicts with any law, order, rule or regulation applicable to any such Pledgor of any Governmental Authority having jurisdiction over such Pledgor or its property, or (iv) results in or requires the creation or imposition of any Lien (other than the Lien contemplated hereby) upon or with respect to any of the property now owned or hereafter acquired by such Pledgor. No consent of any party (including, without limitation, equityholders or creditors of such Pledgor or any account debtor under a Receivable) and no consent, authorization, approval, license or other action by, and no notice to or filing with, any Governmental Authority or regulatory body or other Person is required for (x) the pledge by such Pledgor of the Pledged Collateral pledged by it pursuant to this Agreement or for the execution, delivery or performance of this Agreement by such Pledgor, (y) the exercise by the Administrative Agent of the rights provided for in this Agreement or (z) the exercise by the Administrative Agent of the remedies in respect of the Pledged Collateral pursuant to this Agreement except for the filings contemplated hereby. In the event that the Administrative Agent desires to exercise any remedies, voting or consensual rights or attorney-in-fact powers set forth in this Agreement and determines it reasonably necessary to obtain any approvals or consents of any Governmental Authority or any other Person therefor, then, upon the reasonable request of the Administrative Agent, such Pledgor agrees to use its best efforts to assist and aid the Administrative Agent to obtain as soon as practicable any reasonably necessary approvals or consents for the exercise of any such remedies, rights and powers. (l) Pledged Collateral. All information set forth herein, including the schedules and annexes attached hereto, and all information contained in any documents, schedules and lists heretofore delivered to any Secured Party in connection with this Agreement, in each case, relating to the Pledged Collateral, is accurate and complete in all material respects. The Pledged Collateral described on the schedules attached hereto constitutes all of the property of such type of Pledged Collateral owned or held by the Pledgors. (m) Insurance. No Pledgor shall take any action that impairs the rights of the Administrative Agent or any Secured Party in the Pledged Collateral. Each Pledgor shall at all times keep the Inventory and Equipment insured, at such Pledgor's own expense, against fire, theft and all other risks to which the Pledged Collateral may be subject and are usually insured against in the same general area -13- by companies engaged in the same or a similar business, in such amounts and with such deductibles as would be maintained by a prudent operator in the same general area as such Pledgor of businesses similar to the business of such Pledgor. Each policy or certificate with respect to such insurance shall be endorsed to the Administrative Agent's reasonable satisfaction for the benefit of the Administrative Agent (including, without limitation, by naming the Administrative Agent as an additional named insured as the Administrative Agent may reasonably request) and such policy or certificate shall be delivered to the Administrative Agent. Each such policy shall state that it cannot be cancelled without 30 days' prior written notice to the Administrative Agent At least 30 days prior to the expiration of any such policy of insurance, each Pledgor shall deliver to the Administrative Agent an extension or renewal policy or an insurance certificate evidencing renewal or extension of such policy. If any Pledgor shall fail to insure such Pledged Collateral to the Administrative Agent's reasonable satisfaction, the Administrative Agent shall have the right (but shall be under no obligation) to advance funds to procure or renew or extend such insurance, and such Pledgor agrees to reimburse the Administrative Agent for all costs and expenses thereof, with interest on all such funds from the date advanced until paid in full at the highest rate then in effect under the Credit Agreement. (n) Insurance Proceeds. Any proceeds of insurance received by any Pledgor shall be applied by it as provided in Section 2.7(b) of the Credit Agreement. In the event that any Pledgor is permitted to and elects to apply such proceeds to the repair or replacement of any item of Pledged Collateral, such Pledgor shall upon its receipt of such proceeds promptly commence and diligently continue to perform such repair or promptly effect such replacement. Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent shall have the option to apply any proceeds of insurance received by any Pledgor in respect of the Pledged Collateral toward the payment of the Secured Obligations in accordance with Section 13 hereof or to continue to hold such proceeds as additional collateral to secure the performance by the Pledgors of the Secured Obligations. (o) Payment of Taxes; Compliance with Laws; Claims. Each Pledgor shall pay prior to the date on which any penalties would attach thereto all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials, warehousing and supplies) against, the Pledged Collateral. Each Pledgor shall comply with all laws, rules and regulations applicable to the Pledged Collateral the failure to comply with which would have a Material Adverse Effect. Notwithstanding the foregoing, each Pledgor may at its own expense contest the amount or applicability of any of the obligations described in the preceding sentences of this subsection 5(o) by appropriate legal or administrative; provided, however, that in connection with such contest, such Pledgor shall (i) have made provision for the payment of such contested amount on such Pledgor's books if and to the extent required by generally accepted accounting principles, and (ii) during the continuance of a Default at the option and upon the request of the Administrative Agent, have deposited with the Administrative Agent a sum sufficient to pay and discharge such obligation and the Administrative Agent's estimate of all interest and penalties related thereto. Notwithstanding the foregoing provisions of this subsection 5(o), (x) no contest of any such obligation may be pursued by such Pledgor if such contest would expose the Administrative Agent or any other Secured Party to (A) any possible criminal liability or (B) unless such Pledgor shall have furnished a bond or, other security therefor reasonably satisfactory to the Administrative Agent, any other affected Secured Party, any additional civil liability for failure to comply with such obligation and (y) if at any time payment of any obligation imposed upon such Pledgor by this subsection 5(o) shall become necessary to prevent the imposition of remedies because of non-payment, such Pledgor shall pay the same in sufficient time to prevent the imposition of remedies in respect of such default or prospective default. -14- Section 6. Special Provisions Concerning General Collateral. (a) Special Representations and Warranties. As of the time when each of its Receivables arises, each Pledgor shall be deemed to have represented and warranted that such Receivable and all records, papers and documents relating thereto (i) are genuine and correct and in all material respects what they purport to be, (ii) represent the legal, valid and binding obligation of the account debtor, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability, evidencing indebtedness unpaid and owed by such account debtor, arising out of the performance of labor or services or the sale or lease and delivery of the merchandise listed therein or out of an advance or a loan, not subject to the fulfillment of any contract or condition whatsoever or to any defenses, set-offs or counterclaims except with respect to refunds, returns and allowances in the ordinary course of business, or stamp or other taxes, (iii) will, in the case of a Receivable, except for the original or duplicate original invoice sent to a purchaser evidencing such purchaser's account, be the only original writings evidencing and embodying such obligation of the account debtor named therein, and (iv) are in compliance and conform with, in all material respects, all applicable federal, state and local laws and applicable laws of any relevant foreign jurisdiction. (b) Maintenance of Records. Each Pledgor shall keep and maintain at its own cost and expense complete records of each Receivable, in a manner consistent with prudent business practice, including, without limitation, records of all payments received, all credits granted thereon, all merchandise returned and all other documentation relating thereto. Each Pledgor shall, at such Pledgor's sole cost and expense, upon the Administrative Agent's demand made at any time after the occurrence and during the continuance of any Event of Default, deliver all tangible evidence of Receivables, including, without limitation, all documents evidencing Receivables and any books and records relating thereto to the Administrative Agent or to its representatives (copies of which evidence and books and records may be retained by such Pledgor). Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent may transfer a full and complete copy of any Pledgor's books, records, credit information, reports, memoranda and all other writings relating to the Receivables to and for the use by any Person that has acquired or is contemplating acquisition of an interest in the Receivables or the Administrative Agent's security interest therein without the consent of any Pledgor. (c) Legend. Each Pledgor shall legend, at the request of the Administrative Agent made at any time after the occurrence of any Event of Default and in form and manner satisfactory to the Administrative Agent, the Receivables and the other books, records and documents of such Pledgor evidencing or pertaining to the Receivables with an appropriate reference to the fact that the Receivables have been assigned to the Administrative Agent for the benefit of the Secured Parties and that the Administrative Agent has a security interest therein. (d) Modification of Terms, etc. No Pledgor shall rescind or cancel any indebtedness evidenced by any Receivable or modify any material term thereof or make any adjustment with respect thereto except in the ordinary course of business consistent with prudent business practice, or extend or renew any such indebtedness except in the ordinary course of business consistent with prudent business practice or compromise or settle any material dispute, claim, suit or legal proceeding relating thereto or sell any Receivable or interest therein without the prior written consent of the Administrative Agent. Each Pledgor shall timely fulfill all obligations on its part to be fulfilled under or in connection with the Receivables. -15- (e) Collection. Each Pledgor shall cause to be collected from the account debtor of each of the Receivables, as and when due (including, without limitation, Receivables that are delinquent, such Receivables to be collected in accordance with generally accepted commercial collection procedures), any and all amounts owing under or on account of such Receivable, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Receivable, except that any Pledgor may, with respect to a Receivable, allow in the ordinary course of business (i) a refund or credit due as a result of returned or damaged or defective merchandise and (ii) such extensions of time to pay amounts due in respect of Receivables and such other modifications of payment terms or settlements in respect of Receivables as shall be commercially reasonable in the circumstances, all in accordance with such Pledgor's ordinary course of business consistent with its collection practices as in effect from time to time. The costs and expenses (including, without limitation, reasonable attorneys' fees) of collection, in any case, whether incurred by any Pledgor, the Administrative Agent or any Secured Party, shall be paid by the Pledgors. (f) Instruments. Each Pledgor shall deliver to the Administrative Agent, within five days after receipt thereof by such Pledgor, any Instrument evidencing Receivables which is in the principal amount of $100,000 or more. Any Instrument delivered to the Administrative Agent pursuant to this subsection 6(f) shall be appropriately endorsed (if applicable) to the order of the Administrative Agent, as agent for the Secured Parties, and shall be held by the Administrative Agent as further security hereunder; provided however, that so long as no Default shall have occurred and be continuing, the Administrative Agent shall, promptly upon request of such Pledgor, make appropriate arrangements for making any Instrument pledged by such Pledgor available to such Pledgor for purposes of presentation, collection or renewal (any such arrangement to be effected, to the extent deemed reasonably appropriate by the Administrative Agent, against trust receipt or like document). (g) Cash Collateral. Upon the occurrence and during the continuance of any Event of Default, if the Administrative Agent so directs, each Pledgor shall cause all payments on account of the Receivables to be held by the Administrative Agent as cash collateral in accordance with the provisions of subsections 9(e) and 9(f) hereof. Without notice to or assent by any Pledgor, the Administrative Agent may apply any or all amounts then or thereafter held as cash collateral in the manner provided in subsections 9(e) and 9(f). The costs and expenses (including, without limitation, reasonable attorneys fees) of collection, whether incurred by the Administrative Agent or any Secured Party, shall be paid by the Pledgors. (h) Maintenance of Equipment. Each Pledgor shall cause the Equipment that is useful and necessary in its business to be maintained and preserved in good condition, repair and working order, as when new, ordinary wear and tear excepted, to the extent consistent with current business practice in accordance with any manufacturer's manual, and shall forthwith, or in the case of any loss or damage which (individually or in the aggregate) exceeds $100,000 to any of such Equipment (of which prompt notice shall be given to the Administrative Agent) as quickly as commercially practicable after the occurrence thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith which are necessary or desirable in the conduct of such Pledgor's business. (i) Warehouse Receipts Non-Negotiable. If any warehouse receipt or receipt in the nature of a warehouse receipt is issued after the date hereof with respect to any of the Inventory, the applicable Pledgor shall not permit such warehouse receipt or receipt in the nature thereof to be "negotiable" (as such term is used in Section 7-104 of the UCC or under other relevant law). -16- (j) Consents to Assignment of Contracts. To the extent that any material contract or other agreement or any Pledgor would constitute a Contract hereunder but for the exclusions contained in the provisos in the definition of "Contracts" hereunder, such Pledgor shall use its reasonable best efforts to cause the counterparty thereto to deliver the consent contemplated in the provisos of such definition within 30 days after the date hereof. For purposes of this subsection 6(j), "best efforts" shall not require such Obligor to pay or cause to be paid any renumeration to any such counterparty in order to obtain such consent to the extent that it would be commercially unreasonable to do so. (k) Fair Labor Standards Act. Any goods now or hereafter produced by each Pledgor included in the Pledged Collateral have been and will be produced in substantial compliance with the requirements of the Fair Labor Standards Act of 1938, as amended. Section 7. Special Provisions Concerning Securities Collateral. (a) Pledge of Additional Securities. Each Pledgor shall, upon obtaining any Pledged Securities or Intercompany Notes of any Person, accept the same in trust for the benefit of the Administrative Agent and promptly (and in any event within five Business Days) deliver to the Administrative Agent a pledge amendment, duly executed by such Pledgor, in substantially the form of Exhibit 3 annexed hereto (each, a "Pledge Amendment"), and the certificates and other documents required under subsections 4(a) and 4(b) in respect of the additional Pledged Securities or Intercompany Notes that are to be pledged pursuant to this Agreement, and confirming the attachment of the Lien hereby created on and in respect of such additional property. Each Pledgor hereby authorizes the Administrative Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Securities or Intercompany Notes listed on any Pledge Amendment delivered to the Administrative Agent shall for all purposes hereunder be considered Pledged Collateral. (b) Voting Rights; Distributions; etc. (i) So long as no Event of Default shall have occurred and be continuing: (A) Each Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Securities Collateral or any part thereof for any purpose not inconsistent with the terms or purposes of this Agreement or any other Loan Document; provided, however, that no Pledgor shall in any event exercise such rights in any manner which may have an adverse effect on the value of the Pledged Collateral or the security intended to be provided by this Agreement. (B) Each Pledgor shall be entitled to receive and retain, and to utilize free and clear of the Lien of this Agreement, any and all Distributions, but only if and to the extent made in accordance with the provisions of the Credit Agreement, provided however, that any and all such Distributions consisting of rights or interests in the form of securities shall be forthwith delivered to the Administrative Agent to hold as Pledged Collateral and shall, if received by any Pledgor, be received in trust for the benefit of the Administrative Agent, be segregated from the other property or funds of such Pledgor and be forthwith delivered to the Administrative Agent as Pledged Collateral in the same form as so received (with any necessary endorsement). -17- (C) The Administrative Agent shall be deemed without further action or formality to have granted to each Pledgor all necessary consents relating to voting rights and shall, if necessary, upon written request of any Pledgor and at the sole cost and expense of the Pledgors, from time to time execute and deliver (or cause to be executed and delivered) to such Pledgor all such instruments as such Pledgor may reasonably request in order to permit such Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to subsection 7(b)(i)(A) hereof and to receive the Distributions which it is authorized to receive and retain pursuant to subsection 7(b)(i)(B) hereof. (ii) Upon the occurrence and during the continuance of any Event of Default: (A) All rights of each Pledgor to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to subsection 7(b)(i)(A) hereof without any action or the giving of any notice shall cease, and all such rights shall thereupon become vested in the Administrative Agent, which shall thereupon have the sole right to exercise such voting and other consensual rights. (B) All rights of each Pledgor to receive Distributions which it would otherwise be authorized to receive and retain pursuant to subsection 7(b)(i)(B) hereof shall cease and all such rights shall thereupon become vested in the Administrative Agent, which shall thereupon have the sole right to receive and hold as Pledged Collateral such Distributions. (iii) Each Pledgor shall, at its sole cost and expense, from time to time execute and deliver to the Administrative Agent appropriate instruments as the Administrative Agent may reasonably request in order to permit the Administrative Agent to exercise the voting and other rights which it may be entitled to exercise pursuant to subsection 7(b)(ii)(A) hereof and to receive all Distributions which it may be entitled to receive under subsection 7(b)(ii)(B) hereof. (iv) All Distributions that are received by any Pledgor contrary to the provisions of subsection 7(b)(ii)(B) hereof shall be received in trust for the benefit of the Administrative Agent, shall be segregated from other funds of such Pledgor and shall immediately be paid over to the Administrative Agent as Pledged Collateral in the same form as so received (with any necessary endorsement). (c) No New Securities. Each Pledgor shall cause each issuer of the Pledged Securities not to issue any stock or other securities or equity interests in addition to or in substitution for the Pledged Securities issued by such issuer, except to such Pledgor. (d) Operative Agreements. Each Pledgor has delivered to the Administrative Agent true, correct and complete copies of the Operative Agreements. The Operative Agreements are in full force and effect, have not as of the date hereof been amended or modified, and there is no existing default by any party thereunder or any event that, with the giving of notice of passage of time or both, would constitute a default by any party thereunder. Each Pledgor shall deliver to the Administrative Agent a copy of any notice of default given or received by it under any Operative Agreement within ten (10) days after such Pledgor gives or receives such notice. No Pledgor will terminate or agree to terminate any -18- Operative Agreement or make any amendment or modification to any Operative Agreement that may have an adverse effect on the value of the Pledged Interests or the security intended to be provided by this Agreement. (e) Defaults, etc. Such Pledgor is not in default in the payment of any portion of any mandatory capital contribution, if any, required to be made under any agreement to which such Pledgor is a party relating to the Pledged Securities pledged by it, and such Pledgor is not in violation of any other material provisions of any such agreement to which such Pledgor is a party, or otherwise in default or violation thereunder. No Pledged Securities pledged by such Pledgor are subject to any defense, offset or counterclaim, nor have any of the foregoing been asserted or alleged against such Pledgor by any Person with respect thereto, and as of the date hereof, there are no certificates, instruments, documents or other writings (other than the Operative Agreements and certificates, if any, delivered to the Administrative Agent) that evidence any Pledged Securities of such Debtor. Section 8. Special Provisions Concerning Intellectual Property Collateral. (a) Grant of License. For the purpose of enabling the Administrative Agent, during the continuance of an Event of Default, to exercise rights and remedies under Section 12 hereof at such time as the Administrative Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, each Pledgor hereby grants to the Administrative Agent, to the extent assignable, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to such Pledgor) to use, assign, license or sublicense any of the Intellectual Property Collateral now owned or hereafter acquired by such Pledgor, wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout hereof. (b) Registrations. Except pursuant to licenses and other user agreements entered into by any Pledgor in the ordinary course of business, that are listed in Schedule VI annexed hereto, on and as of the date hereof (i) each Pledgor owns and possesses the right to use, and has done nothing to authorize or enable any other Person to use, any Copyright, Patent or Trademark listed in Schedules III, IV and V, and (ii) all registrations listed in Schedules III, IV and V are valid and in full force and effect (c) No Violations or Proceedings. To each Pledgor's knowledge, on and as of the date hereof, (i) except as set forth in Schedule VI annexed hereto, there is no violation by others of any right of such Pledgor with respect to any Copyright, Patent or Trademark listed in Schedules III, IV and V annexed hereto, respectively, pledged by it under the name of such Pledgor, (ii) such Pledgor is not infringing, in any material respect, upon any Copyright, Patent or Trademark of any other Person and (iii) no proceedings have been instituted or are pending against such Pledgor or, to such Pledgor's knowledge, threatened, and no material claim against such Pledgor has been received by such Pledgor, alleging any such violation, except as may be set forth in Schedule VI. (d) Protection of Administrative Agent's Security. On a continuing basis, each Pledgor shall, at its sole cost and expense, (i) promptly following its becoming aware thereof, notify the Administrative Agent of (A) any adverse determination in any proceeding in the United States Patent and Trademark Office or the United States Copyright Office with respect to any Patent, Trademark or Copyright or (B) the institution of any proceeding or any adverse determination in any federal, state or local court or administrative body regarding such Pledgor's claim of ownership in or right to use any of the Intellectual Property Collateral, its right to register the Intellectual Property Collateral or its right to -19- keep and maintain such registration in full force and effect, (ii) maintain and protect the Intellectual Property Collateral necessary for the operation of such Pledgor's business as presently conducted and as contemplated by the Credit Agreement, (iii) not permit to lapse or become abandoned any Intellectual Property Collateral necessary for the operation of such Pledgor's business as presently conducted and as contemplated by the Credit Agreement, and not settle or compromise any pending or future litigation or administrative proceeding with respect to the Intellectual Property Collateral necessary for the operation of such Pledgor's business as presently conducted, in each case, without the consent of the Administrative Agent, (iv) upon such Pledgor obtaining knowledge thereof, promptly notify the Administrative Agent in writing of any event which may reasonably be expected to adversely affect the value or utility of the Intellectual Property Collateral or any portion thereof necessary for the operation of such Pledgor's business as presently conducted, the ability of such Pledgor or the Administrative Agent to dispose of the Intellectual Property Collateral or any portion thereof or the rights and remedies of the Administrative Agent in relation thereto, including, without limitation, a levy or threat of levy or any legal process against the Intellectual Property Collateral or any portion thereof, (v) not license the Intellectual Property Collateral other than licenses entered into by such Pledgor in, or incidental to, the ordinary course of business, or amend or permit the amendment of any of the licenses in a manner that adversely affects the right to receive payments thereunder, or in any manner that would impair the value of the Intellectual Property Collateral or the Lien on the Intellectual Property Collateral intended to be granted to the Administrative Agent for the benefit of the Secured Parties, without the consent of the Administrative Agent, (vi) until the Administrative Agent exercises its rights to make collection, diligently keep adequate records respecting the Intellectual Property Collateral and (vii) furnish to the Administrative Agent from time to time statements and amended schedules further identifying and describing the Intellectual Property Collateral and such other materials evidencing or reports pertaining to the Intellectual Property Collateral as the Administrative Agent may from time to time reasonably request, all in reasonable detail. (e) After-Acquired Property. If any Pledgor shall, at any time before the Secured Obligations have been paid in full or the Commitments of the Lenders to make any Loan or to issue any Letter of Credit have expired or been sooner terminated (i) obtain any rights to any additional Intellectual Property Collateral or (ii) become entitled to the benefit of any additional Intellectual Property Collateral or any renewal or extension thereof, including any reissue, division, continuation, or continuation-in-part of any Patent, or any improvement on any Patent, the provisions of this Agreement shall automatically apply thereto and any such item enumerated in clauses (i) or (ii) of this subsection 8(e) with respect to such Pledgor shall automatically constitute Intellectual Property Collateral if such would have constituted Intellectual Property Collateral at the time of execution of this Agreement and be subject to the Lien created by this Agreement without further action by any party other than actions required to perfect such Lien. Each Pledgor shall promptly provide to the Administrative Agent written notice of any of the foregoing. Each Pledgor agrees, promptly following a request by the Administrative Agent, to confirm the attachment of the Lien created by this Agreement to any rights described in clauses (i) and (ii) of this subsection 8(e) if such would have constituted Intellectual Property Collateral at the time of execution of this Agreement by execution of an instrument in form reasonably acceptable to the Administrative Agent. (f) Modifications. Each Pledgor authorizes the Administrative Agent to modify this Agreement by amending Schedules III, IV, V and VI hereto to include any future Intellectual Property Collateral of such Pledgor, including, without limitation, any of the items listed in subsection 8(e). -20- (g) Applications. Each Pledgor shall file and prosecute diligently all applications for the Patents, the Trademarks or the Copyrights now or hereafter pending that would be necessary to the operation of such Pledgor's business as presently conducted and as contemplated by the Credit Agreement to which any such applications pertain, and shall do all acts necessary to preserve and maintain all rights in the Intellectual Property Collateral necessary to the operation of such Pledgor's business as presently conducted and as contemplated by the Credit Agreement. Any and all costs and expenses incurred in connection with any such actions shall be borne by the Pledgors. No Pledgor shall abandon any right to file a Patent, Trademark or Copyright application, or any pending Patent, Trademark or Copyright application or any Patent, Trademark or Copyright necessary for the operation of such Pledgor's business as presently conducted and as contemplated by the Credit Agreement without the consent of the Administrative Agent (h) Litigation. (i) Unless there shall occur and be continuing any Event of Default, each Pledgor shall have the right to commence and prosecute in its own name, as the party in interest, for its own benefit and at the sole cost and expense of the Pledgors, such applications for protection of the Intellectual Property Collateral and suits, proceedings or other actions for infringement, counterfeiting, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Intellectual Property Collateral necessary for the operation of such Pledgor's business as presently conducted. Each Pledgor shall promptly notify the Administrative Agent in writing as to the commencement and prosecution of any such actions, or threat thereof relating to the Intellectual Property Collateral, and shall provide to the Administrative Agent such information with respect thereto as may be reasonably requested by the Administrative Agent. Each Pledgor shall indemnify and hold harmless each Secured Party for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, expenses or disbursements (including reasonable attorneys' fees and expenses) of any kind whatsoever which may be imposed on, incurred by or asserted against such Secured Party in connection with or in any way arising out of such suits, proceedings or other actions. (ii) Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent shall have the right but shall in no way be obligated to file applications for protection of the Intellectual Property Collateral and/or bring suit in the name of any Pledgor, the Administrative Agent or the Secured Parties to enforce the Intellectual Property Collateral and any license thereunder. In the event of such suit, each Pledgor shall, at the request of the Administrative Agent, do any and all lawful acts and execute any and all documents requested by the Administrative Agent in aid of such enforcement and the Pledgors shall promptly, upon demand, reimburse and indemnify the Administrative Agent, as the case may be, for all costs and expenses (including reasonable fees and expenses of counsel) incurred by the Administrative Agent in the exercise of its rights under this subsection 8(h). In the event that the Administrative Agent shall elect not to bring suit to enforce the Intellectual Property Collateral, each Pledgor agrees, at the request of the Administrative Agent, to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement, counterfeiting or other diminution in value of any of the Intellectual Property Collateral by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any person so infringing necessary to prevent such infringement unless such Pledgor has determined that such Intellectual Property Collateral that is the subject of any pending or contemplated infringement or enforcement action or proceeding does not contain -21- or represent any value or utility (other than of an immaterial nature), consistent with prudent business practice. Section 9. Special Provisions Concerning Financial Accounts. At any time after the occurrence and during the continuance of a Default until such time as such Default has been cured, and upon the request of the Administrative Agent, each Pledgor shall comply with the following covenants and make the following representations and warranties: (a) Financial Accounts. Each Pledgor shall, within 30 days of the written request by the Administrative Agent, notify each Financial Intermediary that any Financial Account Collateral maintained with such Financial Intermediary by such Pledgor is under the exclusive dominion and control of the Administrative Agent and that all moneys, financial assets, checks, drafts, securities, instruments and other property deposited with such Financial Intermediary are to be held by such Financial Intermediary for the benefit of the Administrative Agent. Each Pledgor shall, within one Business Day of actual receipt thereof, deposit any payment received by it into a financial account that is subject to a financial account consent agreement substantially in the form of Exhibit 2 annexed hereto (each such agreement, a "Financial Account Consent Agreement" and each financial account subject to a Financial Account Consent Agreement, an "Approved Financial Account") or into the Concentration Account referred to in subsection (b) below. In addition, all Persons that owe money to any Pledgor in excess of $100,000 in the aggregate shall be directed to remit their payments to an Approved Financial Account. If any Pledgor is unable to obtain a Financial Account Consent Agreement from any Financial Intermediary, then such Pledgor shall terminate all financial accounts maintained with such Financial Intermediary and transfer all moneys, financial assets, checks, drafts, securities, instruments and other property deposited therein to another Approved Financial Account. (b) Concentration Account. The Pledgors will establish a concentration account or sub-account (the "Concentration Account") with the Administrative Agent into which all Financial Account Collateral of the Pledgors shall be deposited by 12:00 p.m. New York time on each Business Day, subject to the provisions of subsection 9(c). Each Pledgor hereby agrees that the Concentration Account is under the exclusive dominion and control of the Administrative Agent and all moneys, instruments, securities and other property received in the Concentration Account are to be held for the benefit of the Administrative Agent on behalf of the Secured Parties. Each Pledgor hereby transfers to the Administrative Agent the exclusive dominion and control over the Concentration Account. Notwithstanding the foregoing, the Administrative Agent shall be permitted to designate a Lender that has executed and delivered a Financial Account Consent Agreement and has agreed to be a collateral sub-agent for the Administrative Agent to be the banking or financial institution for the Concentration Account. (c) Dispositions from Concentration Account. Until an Event of Default shall have occurred and be continuing, each Pledgor is hereby authorized by the Administrative Agent to direct on any Business Day the disposition of any and all moneys, financial assets, checks, drafts, securities, instruments and other property deposited in the Concentration Account into one or more Approved Financial Accounts for use by such Pledgor in a manner permitted by the Credit Agreement. The Administrative Agent shall make such disposition by 2:00 p.m. New York time on each such date. (d) Revocation of Withdrawal Right. Upon the occurrence and during the continuance of any Event of Default, the authorization of the Pledgors under subsection 9(c) shall be revoked and all deposits maintained in the Concentration Account or with any Financial Intermediary, and any additional moneys, financial assets, checks, drafts, securities, instruments and other property subsequently -22- maintained with any Financial Intermediary, shall be transferred to a collateral account or sub-account maintained by the Administrative Agent (or a Lender that agrees to be a collateral subagent for the Administrative Agent) in its name as Administrative Agent for the Secured Parties (the "Collateral Account"). All such deposits in any such Collateral Account shall constitute "Pledged Collateral" for all purposes of this Agreement and shall be held by the Administrative Agent as Pledged Collateral for the Secured Obligations or applied to the payment of the Secured Obligations in accordance with Section 13 of this Agreement. The costs and expenses (including reasonable attorney's fees) of collection, whether incurred by any Pledgor or the Administrative Agent (or any sub-agent), shall be borne by the Pledgors. (e) Deposits to Collateral Account. Each Pledgor shall deposit into the Collateral Account from time to time (i) the cash proceeds of any of the Pledged Collateral or any Real Property that is subject to a Mortgage (including pursuant to any disposition thereof), (ii) the cash proceeds of any Recovery Event or loss of title with respect to any Real Property that is subject to a Mortgage (including proceeds of casualty events and proceeds of insurance covering the Pledged Collateral or any Real Property that is subject to a Mortgage), (iii) any cash in respect of any Pledged Collateral which the Administrative Agent is entitled to pursuant to subsection 6(g) or subsection 7(b)(ii) hereof and (iv) any additional amounts that such Pledgor desires to pledge to the Administrative Agent for the benefit of the Secured Parties as additional collateral security hereunder or which such Pledgor is required to pledge as additional collateral security hereunder pursuant to the Loan Documents. (f) Application of Amounts in Collateral Account. The balance from time to time in the Collateral Account shall constitute part of the Pledged Collateral hereunder and shall not constitute payment of the Secured Obligations until applied as hereinafter provided. So long as no Event of Default has occurred and is continuing or will result therefrom, the Administrative Agent shall remit the collected balance outstanding to the credit of the Collateral Account to or upon the order of the respective Pledgor, in periodic installments, if applicable, within two Business Days of (i) submission of reasonable evidence that such amount is to be applied as permitted by Section 2.7(b) of the Credit Agreement and (ii) with respect to any cash proceeds on deposit in the Collateral Account relating to any Real Property that is subject to a Mortgage, satisfaction of the conditions relating thereto set forth in such Mortgage. At any time following the occurrence and during the continuance of an Event of Default, however, the Administrative Agent may (and, if instructed by the Lenders as specified in the Credit Agreement, shall) in its (or their) discretion apply or cause to be applied (subject to collection) the balance from time to time outstanding to the credit of the Collateral Account to the payment of the Secured Obligations in the manner specified in Section 13 hereof subject, however, in the case of amounts deposited in the Letter of Credit Liabilities Sub-Account, to the provisions of subsection 9(h) hereof). The balance from time to time in the Collateral Account shall be subject to withdrawal only as provided herein. (g) Investment of Balance in Collateral Account. Amounts on deposit in the Collateral Account shall be invested from time to time in such Permitted Investments as the respective Pledgor (or, after the occurrence and during the continuance of an Event of Default, the Administrative Agent) shall determine, which Permitted Investments shall be held in the name and be under the control of the Administrative Agent (or any sub-agent); provided, however, that at any time after the occurrence and during the continuance of an Event of Default, the Administrative Agent may (and, if instructed by the Lenders as specified in the Credit Agreement, shall) in its (or their) discretion at any time and from time to time elect to liquidate any such Permitted Investments and to apply or cause to be applied the -23- proceeds thereof to the payment of the Secured Obligations in the manner specified in Section 13 hereof. (h) Cover for Letter of Credit Liabilities. Amounts deposited into the Collateral Account as cover for liabilities in respect of Letters of Credit under the Credit Agreement pursuant to Section 3 thereof shall be held by the Administrative Agent in a separate sub-account designated as the "Letter of Credit Liabilities Sub-Account" (the "Letter of Credit Liability Sub-Account") and, notwithstanding any other provision of this Agreement to the contrary, all amounts held in the Letter of Credit Liabilities Sub-Account shall constitute collateral security first for the liabilities in respect of Letters of Credit outstanding from time to time and second as collateral security for the other Secured Obligations hereunder until such time as all Letters of Credit shall have been terminated and all of the liabilities in respect of Letters of Credit have been paid in full. Section 10. Transfers and Other Liens. No Pledgor shall (a) sell, convey, assign or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral pledged by it hereunder except as permitted by the Credit Agreement, (b) create or permit to exist any Lien upon or with respect to any of the Pledged Collateral pledged by it hereunder other than (i) Prior Liens, (ii) the Liens and security interest granted to the Administrative Agent under this Agreement and (iii) Subordinate Liens or (c) permit any issuer of the Pledged Securities to merge, consolidate or change its legal form, unless (i) permitted by the Credit Agreement or (ii) all of the outstanding equity interests of the surviving or resulting entity are, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding equity interests of any other entity that was merged into or consolidated with such issuer. Section 11. Reasonable Care. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equivalent to that which the Administrative Agent, in its individual capacity, accords its own property consisting of similar instruments or interests, it being understood that neither the Administrative Agent nor any of the Secured Parties shall have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Securities Collateral, whether or not the Administrative Agent or any other Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any Person with respect to any Pledged Collateral. Section 12. Remedies upon Default; Obtaining the Pledged Collateral upon Event of Default. (a) If any Event of Default shall have occurred and be continuing, then and in every such case, the Administrative Agent may: (i) Personally, or by agents or attorneys, immediately take possession of the Pledged Collateral or any part thereof, from any Pledgor or any other Person who then has possession of any part thereof with or without notice or process of law so long as no breach of the peace occurs, and for that purpose may enter upon any Pledgor's premises where any of the Pledged Collateral is located, remove such Pledged Collateral, remain present at such premises to receive copies of all communications and remittances relating to the Pledged Collateral and use in connection with such removal and possession any and all services, supplies, aids and other facilities of any Pledgor; -24- (ii) Demand, sue for, collect or receive any money or property at any time payable or receivable in respect of the Pledged Collateral, including, without limitation, instructing the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Receivables and Contracts) constituting part of the Pledged Collateral to make any payment required by the terms of such instrument or agreement directly to the Administrative Agent, and in connection with any of the foregoing, compromising, settling, extending the time for payment and making other modifications with respect thereto; provided, however, that in the event that any such payments are made directly to any Pledgor, prior to receipt by any such obligor of such instruction, such Pledgor shall segregate all amounts received pursuant thereto in a separate account and pay the same promptly to the Administrative Agent; (iii) Sell, assign, grant a license to use or otherwise liquidate, or direct any Pledgor to sell, assign, grant a license to use or otherwise liquidate, any or all investments made in whole or in part with the Pledged Collateral or any part thereof, and take possession of the proceeds of any such sale, assignment, license or liquidation; (iv) Take possession of the Pledged Collateral or any part thereof, by directing any Pledgor in writing to deliver the same to the Administrative Agent at any place or places so designated by the Administrative Agent that is reasonably convenient to such Pledgor and the Administrative Agent, in which event such Pledgor shall at its own expense: (A) forthwith cause the same to be moved to the place or places designated by the Administrative Agent that is reasonably convenient to such Pledgor and the Administrative Agent and there delivered to the Administrative Agent, (B) store and keep any Pledged Collateral so delivered to the Administrative Agent at such place or places pending further action by the Administrative Agent, and (C) while the Pledged Collateral shall be so stored and kept, provide such security and maintenance services as shall be necessary to protect the same and to preserve and maintain such Pledged Collateral in good condition, ordinary wear and tear excepted. Each Pledgor's obligation to deliver the Pledged Collateral is of the essence of this Agreement; (v) Withdraw all moneys, instruments, securities and other property in any financial account of any Pledgor for application to the Secured Obligations as provided in Section 13 hereof; (vi) Retain and apply the Distributions to the Secured Obligations as provided in Section 13 hereof; and (vii) Exercise any and all rights as beneficial and legal owner of the Pledged Collateral, including, without limitation, perfecting assignment of and exercising any and all voting, consensual and other rights and powers with respect to any Pledged Collateral. Upon application to a court of equity having jurisdiction, the Administrative Agent shall be entitled to a decree requiring specific performance by any Pledgor of such obligation. (b) Remedies; Disposition of the Pledged Collateral. (i) Upon the occurrence and during the continuance of any Event of Default, the Administrative Agent may from time to time exercise in respect of the Pledged Collateral, -25- in addition to the other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC, and the Administrative Agent may also in its sole discretion, without notice except as specified below, sell, assign or grant a license to use the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Administrative Agent may deem commercially reasonable. The Administrative Agent or any other Secured Party or any of their respective Affiliates may be the purchaser, licensee, assignee or recipient of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold, assigned or licensed at such sale, to use and apply any of the Secured Obligations owed to such Person as a credit on account of the purchase price of any Pledged Collateral payable by such Person at such sale. Each purchaser, assignee, licensee or recipient at any such sale shall acquire the property sold, assigned or licensed absolutely free from any claim or right on the part of any Pledgor, and each Pledgor hereby waives, to the fullest extent permitted by law, all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Administrative Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Pledgor hereby waives, to the fullest extent permitted by law, any claims against the Administrative Agent arising by reason of the fact that the price at which any Pledged Collateral may have been sold, assigned or licensed at such a private sale was less than the price which might have been obtained at a public sale, even if the Administrative Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (ii) Each Pledgor acknowledges and agrees that, to the extent notice of sale shall be required by law, ten days' written notice to such Pledgor of the time and place of any public sale or of the time after which any private sale or other intended disposition is to take place shall be commercially reasonable notification of such matters. No notification need be given to any Pledgor if it has signed, after the occurrence of an Event of Default, a statement renouncing or modifying any right to notification of sale or other intended disposition. (c) Waiver of Notice and Claims. Each Pledgor hereby waives, to the fullest extent permitted by applicable law, notice or judicial hearing in connection with the Administrative Agent's taking possession or the Administrative Agent's disposition of any of the Pledged Collateral, including, without limitation, any and all prior notice and hearing for any prejudgment remedy or remedies and any such right which such Pledgor would otherwise have under law, and each Pledgor hereby further waives, to the fullest extent permitted by applicable law: (i) all damages occasioned by such taking of possession, except to the extent caused by gross negligence or willful misconduct of the Administrative Agent, any Secured Party or any agent or employee thereof, (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Administrative Agent's rights hereunder, and (iii) all rights of redemption, appraisal, valuation, stay, extension or moratorium now or hereafter in force under any applicable law. The Administrative Agent shall not be liable for any incorrect or improper payment made pursuant to this Section 12 in the absence of gross negligence or willful misconduct Any sale of, or the grant of options to purchase, or any other realiza- -26- tion upon, any Pledged Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the applicable Pledgor therein and thereto, and shall be a perpetual bar both at law and in equity against such Pledgor and against any and all Persons claiming or attempting to claim the Pledged Collateral so sold, optioned or realized upon, or any part thereof, from, through or under such Pledgor. (d) Certain Sales of Pledged Collateral. Each Pledgor recognizes that, by reason of certain prohibitions contained in law, rules, regulations or orders of any foreign Governmental Authority, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral, to limit purchasers to those who meet the requirements of such foreign Governmental Authority. Each Pledgor acknowledges that any such sales may be at prices and on terms less favorable to the Administrative Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such restricted sale shall be deemed to have been made in a commercially reasonable manner and that, except as may be required by applicable law, the Administrative Agent shall have no obligation to engage in public sales. (e) Each Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Securities Collateral, to limit purchasers to Persons who will agree, among other things, to acquire such Securities Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Each Pledgor acknowledges that any such private sales may be at prices and on terms less favorable to the Administrative Agent than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Securities Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would agree to do so. (f) Notwithstanding the foregoing, each Pledgor shall, upon the occurrence and during the continuance of any Event of Default, at the request of the Administrative Agent, for the benefit of the Administrative Agent, cause any registration, qualification under or compliance with any federal or state securities law or laws to be effected with respect to all or any part of the Securities Collateral as soon as practicable and at the sole cost and expense of the Pledgors. Each Pledgor will use its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Securities Collateral, including, without limitation, registration under the Securities Act (or any similar statute then in effect), appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with any other government requirements. Each Pledgor shall cause the Administrative Agent to be kept advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, shall furnish to the Administrative Agent such number of prospectuses, offering circulars or other documents incident thereto as the Administrative Agent from time to time may request, and shall indemnify and shall cause the issuer of the Securities Collateral to indemnify the Administrative Agent and all others participating in the distribution of such Securities Collateral against all claims, losses, damages and liabilities caused by any untrue statement (or alleged untrue statement) of a -27- material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading. (g) If the Administrative Agent determines to exercise its right to sell any or all of the Securities Collateral, upon written request, the applicable Pledgor shall from time to time furnish to the Administrative Agent all such information as the Administrative Agent may request in order to determine the number of securities included in the Securities Collateral which may be sold by the Administrative Agent as exempt transactions under the Securities Act and the rules of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. Section 13. Application of Proceeds. The proceeds received by the Administrative Agent in respect of any sale of, collection from or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by the Administrative Agent of its remedies as a secured creditor as provided in Section 12 hereof shall be applied, together with any other sums then held by the Administrative Agent pursuant to this Agreement, promptly by the Administrative Agent as follows: First, to the payment of all costs and expenses, fees, commissions and taxes of such sale, collection or other realization, including, without limitation, reasonable compensation to the Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Administrative Agent in connection therewith, together with interest on each such amount at the highest rate then in effect under the Credit Agreement from and after the date such amount is due, owing or unpaid until paid in full; Second, to the payment of all other costs and expenses of such sale, collection or other realization, including, without limitation, reasonable compensation to the Lenders and their agents and counsel and all costs, liabilities and advances made or incurred by the Lenders in connection therewith, together with interest on each such amount at the highest rate then in effect under the Credit Agreement from and after the date such amount is due, owing or unpaid until paid in full; Third, without duplication of amounts applied pursuant to clauses First and Second above, to the indefeasible payment in full in cash, pro rata, of interest, principal and other amounts constituting Secured Obligations in accordance with the terms of the Credit Agreement; and Fourth, the balance, if any, to the Person lawfully entitled thereto (including the Pledgors or their respective successors or assigns). In the event that any such proceeds are insufficient to pay in full the items described in clauses First through Third of this Section 13, the Pledgors shall remain liable for any deficiency. Section 14. Expenses. Each Pledgor will upon demand pay to the Administrative Agent the amount of any and all expenses, including the reasonable fees and expenses of its counsel and the fees and expenses of any experts and agents which the Administrative Agent may incur in connection with (a) the collection of the Secured Obligations, (b) the enforcement and administration of this Agreement, (c) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (d) the exercise or enforcement of any of the rights of the Administrative Agent or any Secured Party hereunder or (e) the failure by any Pledgor to perform or observe any of the provisions hereof. All amounts payable by any Pledgor under -28- this Section 14 shall be due upon demand and shall be part of the Secured Obligations. Each Pledgor's obligations under this Section 14 shall survive the termination of this Agreement and the discharge of such Pledgor's other obligations hereunder. Section 15. No Waiver; Cumulative Remedies. (a) No failure on the part of the Administrative Agent to exercise, no course of dealing with respect to, and no delay on the part of the Administrative Agent in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy; nor shall the Administrative Agent be required to look first to, enforce or exhaust any other security, collateral or guaranties. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law. (b) In the event that the Administrative Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Administrative Agent, then and in every such case, the Pledgors, the Administrative Agent and each other Secured Party shall be restored to their respective former positions and rights hereunder with respect to the Pledged Collateral, and all rights, remedies and powers of the Administrative Agent and the other Secured Parties shall continue as if no such proceeding had been instituted. Section 16. Administrative Agent. The Administrative Agent has been appointed as Administrative Agent pursuant to the Credit Agreement. The actions of the Administrative Agent hereunder are subject to the provisions of the Credit Agreement. The Administrative Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of Pledged Collateral), in accordance with this Agreement and the Credit Agreement. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be liable for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Administrative Agent may resign and a successor Administrative Agent may be appointed in the manner provided in the Credit Agreement. Upon the acceptance of any appointment as the Administrative Agent by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent under this Agreement, and the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was the Administrative Agent. Section 17. Administrative Agent May Perform; Administrative Agent Appointed Attorney-in-Fact. If any Pledgor shall fail to do any act or thing that it has covenanted to do hereunder or if any warranty on the part of any Pledgor contained herein shall be breached, the Administrative Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach, and may expend funds for such purpose. Any and all amounts so expended by the Administrative Agent shall be paid by the Pledgors promptly upon demand therefor, with interest at the highest rate then in effect under the Credit Agreement during the period from and including the date on which such funds were so expended to the date of repayment. Each Pledgor's obligations under this Section 17 shall survive the termination of this Agreement and the discharge of such Pledgor's other obligations under this Agreement, the Credit Agreement and the other Loan Documents. -29- Each Pledgor hereby appoints the Administrative Agent its attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor, or otherwise, from time to time after the occurrence and during the continuance of a Default in the Administrative Agent's discretion to take any action and to execute any instrument consistent with the terms of this Agreement and the other Loan Documents which the Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement. The foregoing grant of authority is a power of attorney coupled with an interest and such appointment shall be irrevocable for the term of this Agreement. Each Pledgor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. Section 18. Indemnity. (a) Indemnity. Each Pledgor agrees to indemnify, pay and hold harmless the Administrative Agent and each of the other Secured Parties and the officers, directors, employees, agents and Affiliates of the Administrative Agent and each of the other Secured Parties (collectively, the "Indemnitees") from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs (including, without limitation, settlement costs), expenses or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) which may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of this Agreement or any other Loan Document (including, without limitation, any misrepresentation by any Pledgor in this Agreement or any other Loan Document) (the "indemnified liabilities"); provided, however, that no Pledgor shall have any obligation to an Indemnitee hereunder with respect to indemnified liabilities if it has been determined by a final decision (after all appeals and the expiration of time to appeal) of a court of competent jurisdiction that such indemnified liability arose from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, each Pledgor shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all indemnified liabilities incurred by the Indemnitees or any of them. (b) Survival. The obligations of the Pledgors contained in this Section 18 shall survive the termination of this Agreement and the discharge of the Pledgors' other obligations under this Agreement and under the other Loan Documents. (c) Reimbursement. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations secured by the Pledged Collateral. Section 19. Modification in Writing. No amendment, modification, supplement, termination or waiver of or to any provision of this Agreement, nor consent to any departure by any Pledgor therefrom, shall be effective unless the same shall be made in accordance with the terms of the Credit Agreement and unless in writing and signed by the Administrative Agent. Any amendment, modification or supplement of or to any provision of this Agreement, any waiver of any provision of this Agreement and any consent to any departure by any Pledgor from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement or any other Loan Document, no notice to or demand on any Pledgor in any case shall entitle any Pledgor to any other or further notice or demand in similar or other circumstances. -30- Section 20. Termination; Release. When all the Secured Obligations have been paid in full and the Commitments of the Lenders to make any Loan or to issue any Letter of Credit under the Credit Agreement shall have expired or been sooner terminated, this Agreement shall terminate. Upon termination of this Agreement or any release of Pledged Collateral in accordance with the provisions of the Credit Agreement, the Administrative Agent shall, upon the request and at the sole cost and expense of the Pledgors, forthwith assign, transfer and deliver to Pledgor, against receipt and without recourse to or warranty by the Administrative Agent, such of the Pledged Collateral to be released (in the case of a release) as may be in possession of the Administrative Agent and as shall not have been sold or otherwise applied pursuant to the terms hereof, and, with respect to any other Pledged Collateral, proper documents and instruments (including UCC-3 termination statements or releases) acknowledging the termination of this Agreement or the release of such Pledged Collateral, as the case may be. Section 21. Notices. Unless otherwise provided herein or in the Credit Agreement, any notice or other communication herein required or permitted to be given shall be given in the manner set forth in the Credit Agreement, as to any Pledgor, addressed to it at the address of the Borrower set forth in the Credit Agreement and as to the Administrative Agent, addressed to it at the address set forth in the Credit Agreement, or in each case at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 21. Section 22. Continuing Security Interest; Assignment. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (i) be binding upon the Pledgors, their respective successors and assigns and (ii) inure, together with the rights and remedies of the Administrative Agent hereunder, to the benefit of the Administrative Agent and the other Secured Parties and each of their respective successors, transferees and assigns. No other Persons (including, without limitation, any other creditor of any Pledgor) shall have any interest herein or any right or benefit with respect hereto. Without limiting the generality of the foregoing clause (ii), any Lender may assign or otherwise transfer any indebtedness held by it secured by this Agreement to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender, herein or otherwise, subject however, to the provisions of the Credit Agreement. Each Affiliate of the Borrower which from time to time after the initial date of this Agreement is required under the Credit Agreement to pledge any assets to the Administrative Agent for the benefit of the Secured Parties may become a party hereto upon execution and delivery to the Administrative Agent of a joinder agreement substantially in the form attached hereto as Exhibit 4 and upon such execution and delivery shall be deemed to be a "Guarantor" and a "Pledgor" for all purposes hereunder. Section 23. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCLUDING (TO THE GREATEST EXTENT PERMITTED BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK, AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Section 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS; WAIVER OF JURY TRIAL. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY PLEDGOR WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS OF ANY THEREOF, AND BY -31- EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PLEDGOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH PLEDGOR AGREES THAT SERVICE OF PROCESS IN ANY PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS SET FORTH IN THE CREDIT AGREEMENT OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. IF ANY AGENT APPOINTED BY ANY PLEDGOR REFUSES TO ACCEPT SERVICE, SUCH PLEDGOR HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT TO BRING PROCEEDINGS AGAINST ANY PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION. THE PLEDGORS AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 25. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 26. Execution in Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all such counterparts together shall constitute one and the same agreement. Section 27. Headings. The Section headings used in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. Section 28. Obligations Absolute. All obligations of each Pledgor hereunder shall be absolute and unconditional irrespective of: (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of any Pledgor; (b) any lack of validity or enforceability of the Credit Agreement, any Letter of Credit or any other Loan Document, or any other agreement or instrument relating thereto; (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Credit Agreement, any Letter of Credit or any other Loan Document, or any other agreement or instrument relating thereto; (d) any pledge, exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Secured Obligations; -32- (e) any exercise, non-exercise or waiver of any right, remedy, power or privilege under or in respect of this Agreement or any other Loan Document except as specifically set forth in a waiver granted pursuant to the provisions of Section 19 hereof; or (f) any other circumstances which might otherwise constitute a defense available to, or a discharge of, any Pledgor. Section 29. Administrative Agent's Right to Sever Indebtedness. (a) Each Pledgor acknowledges that (i) the Pledged Collateral does not constitute the sole source of security for the payment and performance of the Secured Obligations and that the Secured Obligations may also be secured by other types of property of the Pledgors in other jurisdictions (all such property, collectively, the "Collateral"), (ii) the number of such jurisdictions and the nature of the transaction of which this instrument is a part are such that it would have been impracticable for the parties to allocate to each item of Collateral a specific loan amount and to execute in respect of such item a separate credit agreement and (iii) each Pledgor intends that the Administrative Agent have the same rights with respect to the Pledged Collateral, in any judicial proceeding relating to the exercise of any right or remedy hereunder or otherwise, that the Administrative Agent would have had if each item of Collateral had been pledged or encumbered pursuant to a separate credit agreement and security instrument. In furtherance of such intent, each Pledgor agrees to the greatest extent permitted by law that the Administrative Agent may at any time by notice (an "Allocation Notice") to such Pledgor allocate a portion of the Secured Obligations (the "Allocated Indebtedness") to all or a specified portion of the Pledged Collateral and sever from the remaining Secured Obligations the Allocated Indebtedness. From and after the giving of an Allocation Notice with respect to any of the Pledged Collateral, the Secured Obligations hereunder shall be limited to the extent set forth in the Allocation Notice and (as so limited) shall, for all purposes, be construed as a separate credit obligation of such Pledgor unrelated to the other transactions contemplated by the Credit Agreement, any other Loan Document or any document related to any thereof. To the extent that the proceeds of any judicial proceeding relating to the exercise of any right or remedy hereunder of the Pledged Collateral shall exceed the Allocated Indebtedness, such proceeds shall belong to such Pledgor and shall not be available hereunder to satisfy any Secured Obligations of such Pledgor other than the Allocated Indebtedness. In any action or proceeding to exercise any right or remedy under this Agreement which is commenced after the giving by the Administrative Agent of an Allocation Notice, the Allocation Notice shall be conclusive proof of the limits of the Secured Obligations hereby secured, and such Pledgor may introduce, by way of defense or counterclaim, evidence thereof in any such action or proceeding. Notwithstanding any provision of this Section 29 the proceeds received by the Administrative Agent pursuant to this Agreement shall be applied by the Administrative Agent in accordance with the provisions of Section 13 hereof. (b) Each Pledgor hereby waives to the greatest extent permitted under law the right to a discharge of any of the Secured Obligations under any statute or rule of law now or hereafter in effect which provides that the exercise of any particular right or remedy as provided for herein (by judicial proceedings or otherwise) constitutes the exclusive means for satisfaction of the Secured Obligations or which makes unavailable any further judgment or any other right or remedy provided for herein because the Administrative Agent elected to proceed with the exercise of such initial right or remedy or because of any failure by the Administrative Agent to comply with laws that prescribe conditions to the entitlement to such subsequent judgment or the availability of such subsequent right or remedy. In the event that, notwithstanding the foregoing waiver, any court shall for any reason hold that such subsequent judgment or action is not available to the Administrative Agent, no Pledgor shall (i) introduce in -33- any other jurisdiction any judgment so holding as a defense to enforcement against such Pledgor of any remedy in the Credit Agreement or any other Loan Document or (ii) seek to have such judgment recognized or entered in any other jurisdiction, and any such judgment shall in all events be limited in application only to the state or jurisdiction where rendered and only with respect to the collateral referred to in such judgment. (c) In the event any instrument in addition to the Allocation Notice is necessary to effectuate the provisions of this Section 29, including, without limitation, any amendment to this Agreement, any substitute promissory note or affidavit or certificate of any kind, the Administrative Agent may execute and deliver such instrument as the attorney-in-fact of any Pledgor. Such power of attorney is coupled with an interest and is irrevocable. (d) Notwithstanding anything set forth herein to the contrary, the provisions of this Section 29 shall be effective only to the maximum extent permitted by law. Section 30. Future Advances. This Agreement shall secure the payment of any amounts advanced from time to time pursuant to the Credit Agreement. -S1- IN WITNESS WHEREOF, the Pledgors and the Administrative Agent have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first above written. PRECISION PARTNERS, INC., as Pledgor By: ___________________________________ Name: Title: MID STATE MACHINE PRODUCTS, as Pledgor By: ___________________________________ Name: Title: GALAXY INDUSTRIES CORPORATION, as Pledgor By: ___________________________________ Name: Title: CERTIFIED FABRICATORS, INC., as Pledgor By: ___________________________________ Name: Title: CALBRIT DESIGN, INC., as Pledgor By: ___________________________________ Name: Title: -S2- GENERAL AUTOMATION, INC., as Pledger By: ___________________________________ Name: Title: NATIONWIDE PRECISION PRODUCTS CORP., as Pledgor By: ___________________________________ Name: Title: CITICORP U.S.A., INC.. as Administrative Agent By: ___________________________________ Name: Title: SCHEDULE I-A Initial Pledged Shares Pledgor: _________________ PERCENTAGE OF ALL ISSUED CAPITAL OR NUMBER OTHER EQUITY CLASS CERTIFICATE OF INTERESTS OF ISSUER OF STOCK NO(S). SHARES ISSUER - ------ -------- ------ ------ ------------- Note: A separate sheet should be used for each Pledgor pledging shares. SCHEDULE I-B Initial Pledged Interests Pledgor: _________________ PERCENTAGE OF ALL ISSUED CAPITAL OR TYPE NUMBER OTHER EQUITY OF CERTIFICATE OF INTERESTS OF ISSUER INTEREST NO(S). SHARES ISSUER - ------ -------- ------ ------ ------------- Note: A separate sheet should be used for each Pledgor pledging interests. SCHEDULE II Initial Intercompany Notes Pledgor: _________________ PRINCIPAL DATE OF INTEREST MATURITY ISSUER AMOUNT ISSUANCE RATE DATE - ------ --------- -------- -------- -------- Note: A separate sheet should be used for each Pledgor pledging notes. SCHEDULE III Initial Patents Pledgor: _________________ Registrations: REGISTRATION REGISTRATION NUMBER DATE COUNTRY DESCRIPTION - ------------ ------------ ------- ----------- Applications: APPLICATION APPLICATION NUMBER DATE COUNTRY DESCRIPTION - ----------- ------------ ------- ----------- Note: A separate sheet should be used for each Pledgor pledging Patents. SCHEDULE IV Initial Trademarks Pledgor: _________________ Registrations: REGISTRATION REGISTRATION NUMBER DATE COUNTRY DESCRIPTION - ------------ ------------ ------- ----------- Applications: APPLICATION APPLICATION NUMBER DATE COUNTRY DESCRIPTION - ----------- ------------ ------- ----------- Note: A separate sheet should be used for each Pledgor pledging Trademarks. SCHEDULE V Initial Copyrights Pledgor: _________________ DATE COUNTRY DESCRIPTION - ---- ------- ----------- Note: A separate sheet should be used for each Pledgor pledging Copyrights. SCHEDULE VI Initial Licenses Pledgor: _________________ Note: A separate sheet should be used for each Pledgor pledging Licenses. SCHEDULE VII Initial Financial Accounts Pledgor: _________________ NAME OF ADDRESS ACCOUNT FINANCIAL AND ABA NAME AND INSTITUTION NUMBER NUMBER - ----------- ------- -------- ANNEX A Financial Statements and Other Necessary Filings UCC Filing Patent and Trademark Filings Other Filings ANNEX B Prior Liens Secured Party Jurisdiction Location Date Number Comment - ------------- ------------ -------- ---- ------ ------- ANNEX C Locations of Pledgors Chief Executive Tax ID Pledgor Office Number Other Locations - ------- --------------- ------ --------------- Note: A separate sheet should be used for each Pledgor pledging Financial Accounts. EXHIBIT 1 Form of Issuer Acknowledgment The undersigned hereby (i) acknowledges receipt of a copy of that certain security agreement (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Agreement"; capitalized terms used herein but not defined herein have the meanings given such terms in the Agreement), dated as of March ___, 1999, among Precision Partners, Inc., the Subsidiary Guarantors and Citicorp U.S.A., Inc., as Administrative Agent (in such capacity and together with any successors in such capacity, the "Administrative Agent"), (ii) agrees promptly to note on its books the security interests granted and confirmed under the Agreement, (iii) agrees that it will comply with instructions of the Administrative Agent with respect to the applicable Securities Collateral without further consent by the applicable Pledgor, (iv) agrees to notify the Administrative Agent upon obtaining knowledge of any interest in favor of any Person in the applicable Securities Collateral that is adverse to the interest of the Administrative Agent therein and (v) waives any right or requirement at any time hereafter to receive a copy of the Agreement in connection with the registration of any Securities Collateral thereunder in the name of the Administrative Agent or its nominee or the exercise of voting rights by the Administrative Agent or its nominee. [NAME OF ISSUER] By: __________________________________ Name: Title: Note: This form should be signed by each issuer of uncertificated Securities Collateral. EXHIBIT 2 Form of Financial Account Consent Agreement [Name of Pledgor] [Address of Pledgor] [Date] [Name and address of Financial Institution] Ladies and Gentlemen: We refer to account numbers ___________ and _____________ (the "Financial Accounts") maintained with [Name of Financial Institution] (the "Financial Institution") by [Name of Pledgor] (the "Company") and into which certain moneys, instruments, securities and other property are or may be deposited from time to time. The Company has granted to Citicorp U.S.A., Inc. as administrative agent (in such capacity and together with any successors in such capacity, the "Administrative Agent") for the benefit of the Secured Parties under, and as defined in, that certain security agreement (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Agreement"), dated as of March ____, 1999, among Precision Partners, Inc. (the "Borrower"), the subsidiary guarantors from time to time party thereto and the Administrative Agent, a security interest in all moneys, instruments, securities and other property deposited therein and all certificates or other instruments, if any, representing or evidencing the Financial Accounts. It is a condition to the continued maintenance of the Financial Accounts with the Financial Institution that the Financial Institution agrees to this letter agreement. The parties hereto agree as follows: 1. The Financial Institution hereby confirms that the Company has established with it the Financial Accounts. The Financial Institution hereby agrees that from and after the date hereof the Financial Accounts shall be under the exclusive dominion and control of the Administrative Agent and all moneys, instruments, securities and other property of the Company received in connection therewith, whether or not deposited in the Financial Accounts, shall be held solely for the benefit of the Administrative Agent. Except as otherwise provided herein, the Financial Accounts shall be subject to written instructions only from the Administrative Agent. 2. The Financial Institution hereby agrees to do the following: (a) follow its usual operating procedures for the handling of any remittance received in the Financial Accounts that contains restrictive endorsements, irregularities, such as a variance between the written and numerical amounts, undated or postdated items, missing signature and incorrect payee; -2- (b) endorse and process all eligible checks and other remittance items not covered by subparagraph (a) above and deposit such checks and other remittance items in the Financial Accounts; and (c) maintain a record of all checks and other remittance items received in the Financial Accounts and, in addition to providing the Company with photostats, vouchers and enclosures of checks and other remittance items received on a daily basis, as well as a monthly statement, furnish to the Administrative Agent, free of any service charge payable by the Administrative Agent, its regular Lender statement with respect to the Financial Accounts, with the words "________________, as the Administrative Agent, Re: [Name of Borrower]" included thereon so that there is no confusion as to ownership of the Financial Accounts and so that the Administrative Agent is able to properly identify the Financial Accounts. 3. [The Financial Institution hereby agrees that no later than 12:00 p.m. on each business day on which transactions may be made with respect to the Financial Accounts, without further notice or instruction of any kind, to transfer (by wire transfer) the total of all immediately available funds or credits in each Financial Account to the concentration account, account no. _________________, ABA # ___________, reference: [Name of Borrower] (the "Concentration Account") maintained by the Company with the Administrative Agent at its office located at ______________________.] [The Administrative Agent hereby instructs the Financial Institution to follow the instructions of the Company with respect to the disposition of any and all moneys, instruments, securities and other property deposited in the Financial Accounts as directed by the Company unless and until the Financial Institution has received written instructions to the contrary from the Administrative Agent, in which case the Financial Institution agrees to follow such instructions from the Administrative Agent.] The Financial Institution hereby agrees that the Administrative Agent will be entitled to all rights and remedies to which a person in control of "financial assets" (within the meaning of Section 8-102(a)(9) of the Uniform Commercial Code as in effect in the State of New York (the "UCC")) is entitled pursuant to Part 5 of Article 8 of the UCC and Article 9 of the UCC, and [, subject to the provisions of the immediately preceding paragraph,] the Financial Institution agrees to follow the instructions of the Administrative Agent with respect to the disposition of any and all moneys, instruments, securities, and other property deposited in the Financial Accounts. Without limiting the foregoing, if at any time the Financial Institution shall receive an "entitlement order" (within the meaning of Section 8-102(a)(8) of the UCC) issued by the Administrative Agent and relating to the Financial Accounts, the Financial Institution shall comply with such entitlement order without further consent of the Borrower, the Company or any other person or entity. The Financial Institution hereby agrees that it shall be a "securities intermediary" within the meaning of Section 8-102(a)(14) of the UCC and that the Financial Accounts shall be maintained as "securities accounts" (as such term is defined in Section 8-501(a) of the UCC) to the extent that any "investment property" (as defined in Section 9-115 of the UCC) is maintained in or in respect of the Financial Accounts and that each item of investment property credited to a Financial Account shall be treated as a financial asset. The Financial Institution further agrees that all securities or other investment property underlying any financial assets credited to any Financial Account shall be registered in the name of the Financial Institution, endorsed to it or in blank or credited to another securities account maintained in its name. -3- 4. Except for the claims and interest of the Administrative Agent and the Company in the Financial Accounts, the Financial Institution hereby acknowledges that it does not know of any claim to, or interest in, the Financial Accounts or in any financial asset credited thereto. If any person or entity asserts any lien, encumbrance or adverse claim (including any writ, garnishment, judgment, warrant of attachment, execution or similar process) against the Financial Accounts or in any financial asset carried therein, the Financial Institution will promptly notify the Administrative Agent, the Borrower and the Company thereof. 5. The Financial Institution hereby waives and agrees not to assert, claim or endeavor to exercise, and by executing this letter agreement bars and estops itself from asserting, claiming or exercising, and the Financial Institution acknowledges that it has not heretofore received a notice from any other party asserting, claiming or exercising, any right of setoff, banker's lien or other purported form of claim with respect to the Financial Accounts and funds from time to time therein. The Financial Institution shall have no rights in the Financial Accounts or the funds therein. To the extent that it may ever have any such rights, the Financial Institution hereby expressly subordinates all such rights to all rights of the Administrative Agent. 6. The Financial Institution shall not be liable for any action taken or omitted by it with respect to the Financial Accounts on the instructions of the Administrative Agent, except to the extent of any gross negligence or willful misconduct on the part of the Financial Institution, and the Financial Institution shall not have any duty or responsibility to ascertain whether any such instructions are consistent with the Agreement or the other Loan Documents relating thereto. The Financial Institution may rely on any certificate, statement, request, agreement or other instrument it believes in good faith to be genuine and to have been signed or presented by or on behalf of the Administrative Agent. In maintaining the Financial Accounts hereunder, the Financial Institution may consult with counsel and shall be fully protected with respect to any action taken or omitted by it in good faith on advice of counsel and shall have no liability hereunder except for its bad faith, willful misconduct or gross negligence with respect to its obligations hereunder. 7. The Company agrees to indemnify the Financial Institution against and save the Financial Institution harmless from any and all claims, liabilities, reasonable costs and expenses, including reasonable out-of-pocket fees and expenses of counsel, for anything done or omitted by the Financial Institution in good faith in connection with this letter agreement, including reasonable costs and expenses of defending itself against any claim or liability; provided, however, that the Financial Institution shall not have the right to be indemnified hereunder for its bad faith, gross negligence or willful misconduct. 8. The Financial Institution may terminate this letter agreement only upon thirty days' prior written notice to that effect to the Company and the Administrative Agent and by canceling the Financial Accounts maintained with it and transferring all funds, if any, in such Financial Accounts to another Financial Account pursuant to the instructions of the Administrative Agent. After any such termination, the Financial Institution shall nonetheless remain obligated promptly to transfer to the Concentration Account anything from time to time received in respect of the Financial Accounts. 9. This letter agreement shall be binding upon the parties hereto and their respective successors and assigns. This letter agreement may be executed in counterparts, each of which will be deemed an original and all of which taken together shall constitute one and the same instrument. -S1- THE "SECURITIES INTERMEDIARY'S JURISDICTION" WITHIN THE MEANING OF SECTION 8-110(E) OF THE UCC IS AND SHALL CONTINUE TO BE THE STATE OF NEW YORK. THIS LETTER AGREEMENT SHALL BE GOVERNED BY THE LAWS OF the STATE OF NEW YORK, EXCLUDING (TO THE GREATEST EXTENT PERMITTED BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. Very truly yours, [NAME OF PLEDGOR] By: ____________________________________ Name: Title: CITICORP U.S.A., INC., as Administrative Agent By: ____________________________________ Name: Title: Acknowledged and agreed to as of the date first above written. [FINANCIAL INSTITUTION] By: ____________________________ Name: Title: EXHIBIT 3 Form of Securities Pledge Amendment PLEDGE AMENDMENT This Pledge Amendment, dated ______________, is delivered pursuant to Section 7 of the Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Security Agreement, dated as of March ___, 1999, among the undersigned, certain other Pledgors and Citicorp U.S.A., Inc., as the Administrative Agent (the "Agreement"; capitalized terms used herein and not defined shall have the meanings assigned to them in the Agreement). The undersigned hereby pledges, assigns, transfers and grants to the Administrative Agent for its benefit and the benefit of the Secured Parties, a first priority security interest in and to all of the undersigned's rights, title and interest in and to the Pledged Securities and/or Intercompany Notes listed on this Pledge Amendment and agrees that such Pledged Securities and/or Intercompany Notes shall be deemed to be and shall become part of the Pledged Collateral and shall secure all Secured Obligations. _______________________________________ as Pledgor By: __________________________________ Name: Title: Pledged Securities PERCENTAGE OF ALL NUMBER ISSUED CAPITAL OR CLASS PAR CERTIFICATE OF OTHER EQUITY ISSUER OF STOCK VALUE NO(S). SHARES INTERESTS OF ISSUER - ------ -------- ----- ----------- ------ ------------------- Intercompany Notes ISSUER PRINCIPAL DATE OF INTEREST MATURITY] - ------ AMOUNT ISSUANCE RATE DATE] --------- -------- EXHIBIT 4 Form of Joinder Agreement [Name of New Pledgor] [Address of New Pledgor] [Date] Citicorp U.S.A., Inc., as Administrative Agent ___________________________ ___________________________ Attention: ________________ Ladies and Gentlemen: Reference is made to the Security Agreement (the "Agreement"), dated as of March ___, 1999, made by Precision Partners, Inc., (the "Borrower"), each of the Subsidiary Guarantors listed on the signature pages thereto or from time to time party thereto by execution of a joinder agreement and Citicorp U.S.A., Inc., as administrative agent for the Secured Parties. Capitalized terms used herein but not otherwise defined herein have the meanings given such terms in the Agreement. This letter supplements the Agreement and is delivered by the undersigned, ______________ (the "New Pledgor"), pursuant to Section 22 of the Agreement. The New Pledgor hereby agrees to be bound as a Guarantor and as a Pledgor by all of the terms, covenants and conditions set forth in the Agreement to the same extent that it would have been bound if it had been a signatory to the Agreement on the execution date of the Agreement. The New Pledgor hereby makes each of the representations and warranties and agrees to each of the covenants applicable to the Pledgors contained in the Agreement. The New Pledgor hereby pledges, assigns, transfers and grants to the Administrative Agent, for its benefit and the Secured Parties, a first priority security interest in and to all of its right, title and interest in and to the Pledged Collateral. Attached hereto are supplements to each of the schedules and annexes to the Agreement with respect to the New Pledgor. Such supplements shall be deemed to be part of the Agreement. This agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all such counterparts together shall constitute one and the same agreement. -2- THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCLUDING (TO THE GREATEST EXTENT PERMITTED BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. -S1- IN WITNESS WHEREOF, the New Pledgor has caused this Agreement to be executed and delivered by its duly authorized officer as of the date first above written. [NEW PLEDGOR] By:________________________________ Name: Title: AGREED TO AND ACCEPTED: Citicorp U.S.A., Inc., as Administrative Agent By: _____________________ Name: Title: (Schedules and Annexes to be attached] Exhibit J to the Credit Agreement [FORM OF OPINION OF LOCAL COUNSEL] January __, 1999 Citicorp U.S.A., Inc., as Administrative Agent and The Lenders which are signatories to the Credit Agreement referenced herein Ladies and Gentlemen: We have acted as special counsel in the state of [ ] (the "State") to Precision Partners, Inc., a [ ] corporation ("Borrower") and each of the entities set forth in Schedule A annexed hereto (the "State Entities"; together with Borrower, the "Obligors"), in connection with (i) the consummation of the transactions contemplated by that certain credit agreement dated as of January __, 1999 (the "Credit Agreement"; unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Credit Agreement), among Borrower, the Subsidiary Guarantors, Holding, the lending institutions which are signatories to the Credit Agreement (collectively, the "Lenders"), Syndication Agent, Documentation Agent, and Citicorp U.S.A., Inc., as administrative agent for the Lenders (in such capacities, the "Administrative Agent"; together with Syndication Agent and Documentation Agent, the "Agents") and (ii) the execution and delivery today and the consummation of the transactions contemplated by each of the Security Documents, including, without limitation, the UCC-1 financing statements (collectively, the "Financing Statements") relating to the Collateral, naming the Obligors as debtors thereunder and Citicorp U.S.A., Inc., as Administrative Agent and secured party thereunder. There has been furnished to us for review the final forms of (i) the Credit Agreement, (ii) the Security Documents and (iii) the Financing Statements (collectively, the "Documents"). We have reviewed such instruments, documents and agreements as we have deemed necessary or appropriate to enable us to render the opinions hereinafter set forth. In rendering the opinions hereinafter set forth, we have assumed that (i) there has occurred due execution and delivery of the Documents and all documentation in connection -2- therewith and (ii) each of the Obligors owns the Collateral pledged by it pursuant to the Security Documents. In addition, the opinions contained in Paragraphs 2 and 3 below are qualified to the extent that enforceability of any of the Security Documents may be limited by (i) bankruptcy, insolvency, moratorium, reorganization or other laws relating to creditors' rights generally, and (ii) general principles of equity, whether considered in an action at law or in equity. Subject to the foregoing assumptions and qualifications, we are of the opinion that: 1. Neither the Agents nor the Lenders are required (a) to be qualified to transact business, file any designation for service of process, or file any reports or pay any taxes in the State, (b) to comply with any statutory or regulatory requirement applicable only to financial institutions chartered or qualified to do business in the State, in each case, solely by reason of the execution and delivery of any of the Documents or by reason of the participation in any of the transactions under or contemplated by the Documents, including, without limitation, the making and receipt of payments pursuant thereto and the exercise of any remedy thereunder. If it were determined that any such qualification and filing were required, the validity of the Documents would not be affected thereby, but if the Agents or the Lenders were not qualified, the Agents or the Lenders, in the event they institute remedies without the Administrative Agent, as the case may be, would be precluded from enforcing their respective rights in the courts of the State until such time as they are qualified to transact business in the State. The lack of qualification, however, would not result in any waiver of rights or remedies pending such qualification. 2. The Mortgages create and constitute (i) a valid first mortgage lien on the real property described therein (the "Real Property"), (ii) a valid security interest in such of the Mortgaged Property (the "UCC Property") as is subject to the provisions of Article 9 of the Uniform Commercial Code as in effect in the State (the "UCC") and (iii) a valid common law lien on or pledge of such of the Mortgaged Property as is not UCC Property or Real Property (such property, together with the UCC Property, the "Personal Property"). The Mortgages are enforceable against the mortgagors named therein in accordance with their terms. The Mortgages have been duly recorded by the Recorder of [ ] County. -3- 3. Assuming that the Security Agreement is governed by the law of the State for the purpose of rendering the opinions set forth in this paragraph, the Security Agreement creates and constitutes a valid security interest in, lien on or pledge of the Pledged Collateral (as defined therein) and is enforceable against the pledgor named therein in accordance with its terms. 4. The Financing Statements relating to (i) the Mortgages have been properly filed with the Office of the Secretary of State and with the Recorder of [ ] County and (ii) the Security Agreement has been properly filed with the Office of the Secretary of State and with the Recorder of [ ] County. The security interest, lien or pledge created by each Security Document is duly perfected. The Financing Statements adequately identify the Pledged Collateral described therein to provide sufficient notice to third parties of the security interest referenced therein. 5. The recording of the Mortgages and the filing of the Financing Statements with the recorders and in the offices described above are the only actions, recordings or filings necessary to publish notice and protect the validity of and to establish of record the rights of the parties under the Documents, except (i) that continuation statements under the UCC are required to be filed within [ ] months prior to the expiration of [ ] years from the date of filing of the Financing Statements, and (ii) that a security interest in or pledge of [specify collateral] cannot be perfected by filing Financing Statements or recording a Mortgage, but must be perfected by taking physical possession thereof. 6. The priority of the mortgage lien on the Real Property created by the Mortgages with respect to any extension of credit (each, a "Further Advance') secured thereby made or deemed to have been made after the date of recording of the Mortgages, will be the same as the priority of the Mortgages applicable on such date of recording and such priority will not be affected by the rights in and to the Real Property of any third party whose interest in the Real Property attached thereto after the date of such recording but prior to the date of such Further Advance. 7. Subject to appropriate continuation of perfection under the UCC as set forth in paragraph 5 above, the priority of the security interest in, lien on or pledge of the Personal Property and the Pledged Collateral created by the Security Agreement with respect to any Further Advance secured -4- thereby made or deemed to have been made after the date of execution and delivery of the Security Agreement will be the same as the priority of the Security Agreement applicable on the date of execution and delivery thereof and such priority will not be affected by the rights in and to the Personal Property or Pledged Collateral of any third party whose interest in the Personal Property or Pledged Collateral attached thereto after the date of such execution and delivery but prior to the date of such Further Advance. 8. The execution, delivery, recordation and performance by the Agents, the Lenders and the Obligors of the Documents to which each is a party (i) will not violate any existing law, governmental rule or regulation of the State and (ii) do not require any license, permit, authorization, consent or other approval of, any exemption by, or any registration, recording of filing with, any court, administrative agency or other governmental authority of the State, except for the filing of the Financing Statements as set forth in paragraph 4. 9. Neither the Agents nor the Lenders shall be liable for any loss, cost, expense or liability (including, without limitation, clean-up, corrective action or response costs, penalties, fines or other impositions of governmental agencies and judgments of private or public litigants) in respect of any matter arising out of or relating to or under any Environmental Laws of the State by reason of the execution and delivery of or participation in any of the transactions under or contemplated by any of the Documents, including, without limitation, the making and receipt of payments pursuant thereto and the exercise of any remedy under any of the Documents. The laws of the State do not provide for a statutory or regulatory lien in favor of any governmental entity for liability under the Environmental Laws of the State. Under the laws of the State, there are no statutory or regulatory requirements which will be imposed on the Agents or the Lenders relating to the granting of a mortgage or security interest in the Real Property that (i) require any notification or certification to the State or any applicable political subdivision thereof of such mortgage or security interest, or (ii) in the event of a discharge of any Hazardous Materials (as defined in the Mortgages), impose responsibility or liability on the part of the Agents or any of the Lenders for the undertaking of remedial measures to alleviate environmental contamination resulting from such discharge. -5- 10. The Administrative Agent is permitted under the laws of the State without naming all of the Lenders in any applicable legal proceeding to exercise remedies under the Documents for the realization of any of the Collateral in its own name, as administrative agent. 11. No taxes or other charges, including, without limitation, intangible or documentary stamp taxes, mortgage or recording taxes, transfer taxes or similar charges, are payable to the State or to any jurisdiction therein on account of the execution and delivery of the Documents or the creation of the indebtedness evidenced or secured by any of the Documents or the recording or filing of any of the Security Documents, except for nominal filing or recording fees, which filing or recording fees have been paid. 12. The zoning classification of the Real Property is [ ]. The Real Property, including the current uses and configurations thereof, complies in all respects with all applicable state and local planning, zoning and land development laws, regulations and ordinances. 13. All Permits (as defined in the Mortgages) in respect of the use and occupancy of the Real Property are in full force and effect and are sufficient to permit the current use and occupancy of the Real Property by the Obligors. 14. No official violation notices or similar instruments have been issued in respect of the Real Property. 15. The Secured Obligations (as defined in each Security Document) do not violate any of the usury laws, regulations or ordinances of the State, or of any other applicable political subdivision or locality within the State. 16. The transfer of all or any portion of the Collateral in connection with the exercise of any remedy under the Mortgages, including, without limitation, by way of judicial foreclosure, will not restrict, affect or impair the liability of the Obligors with respect to the indebtedness secured thereby or the beneficiary's rights or remedies to the foreclosure or enforcement of any other security interest or liens securing such indebtedness. The laws of the State do not require a lienholder to elect to pursue its remedies either against mortgaged real property or personal property where such lienholder holds security interests and liens on both real and personal property of debtor. -6- 17. A state or federal court in the State applying the State's choice of law principles will give effect to the provisions in the Documents (other than the Mortgages) which select the laws of the State of New York as the governing law thereof and will apply such laws, rather than the laws of the State, to the enforceability, construction and application thereof. We are admitted to practice in the State. We express no opinion as to matters under or involving the laws of any jurisdiction other than the laws of the United States and the State and its political subdivisions. The foregoing opinions may be relied on by any successor or assignee of your interest under the Documents, but may not be relied upon or distributed to any other person without our consent. Very truly yours, -7- Schedule A List of State Entities [List out all State Entities with assets or offices in the State] Exhibit K to Credit Agreement ================================================================================ PRECISION PARTNERS HOLDING COMPANY as Pledgor -------------------- SECURITIES PLEDGE AGREEMENT Dated as of March 19, 1999 -------------------- CITICORP U.S.A., INC. as Administrative Agent ================================================================================ Table of Contents Page ---- RECITALS .................................................................... 1 AGREEMENT ................................................................... 1 Section 1. Pledge ........................................................ 2 Section 2. Secured Obligations ........................................... 3 Section 3. No Release .................................................... 3 Section 4. Perfection; Supplements; Further Assurances; Use of Pledged Collateral ............................................ 4 Section 5. Representations, Warranties and Covenants ..................... 5 Section 6. Special Provisions Concerning Securities Collateral ........... 7 Section 7. Transfers and Other Liens ..................................... 9 Section 8. Reasonable Care ............................................... 10 Section 9. Event of Default and Remedies ................................. 10 Section 10. Application of Proceeds ...................................... 12 Section 11. Expenses ..................................................... 13 Section 12. No Waiver; Cumulative Remedies ............................... 13 Section 13. Administrative Agent ......................................... 14 Section 14. Administrative Agent May Perform; Administrative Agent Appointed Attorney-in-Fact .............................. 14 Section 15. Indemnity .................................................... 14 Section 16. Modification in Writing ...................................... 15 Section 17. Termination; Release ......................................... 15 Section 18. Notices ...................................................... 15 Section 19. Continuing Security Interest; Assignment ..................... 16 Section 20. GOVERNING LAW; TERMS ......................................... 16 Section 21. CONSENT TO JURISDICTION AND SERVICE OF PROCESS; WAIVER OF JURY TRIAL ............................................ 16 Section 22. Severability of Provisions ................................... 17 Section 23. Execution in Counterparts .................................... 17 Section 24. Headings ..................................................... 17 Section 25. Obligations Absolute ......................................... 17 Section 26. Future Advances .............................................. 17 SIGNATURES SCHEDULE I-A INITIAL PLEDGED SHAPES SCHEDULE I-B INITIAL PLEDGED INTERESTS ANNEX A FINANCING STATEMENTS AND OTHER NECESSARY FILINGS, UCC FILINGS, AND OTHER FILINGS ANNEX B LOCATIONS OF PLEDGOR EXHIBIT 1 FORM OF ISSUER ACKNOWLEDGMENT EXHIBIT 2 FORM OF SECURITIES PLEDGE AGREEMENT EXHIBIT 3 FORM OF JOINDER AGREEMENT -i- SECURITIES PLEDGE AGREEMENT SECURITIES PLEDGE AGREEMENT (the "Agreement'), dated as of March 19, 1999 made by PRECISION PARTNERS HOLDING COMPANY, a Delaware corporation (in such capacity and together with any successors in such capacity, "Pledgor") in favor of CITICORP U.S.A., INC., having an office at 399 Park Avenue, New York, New York 10022, in its capacity as administrative agent for the lending institutions (the "Lenders") from time to time party to the Credit Agreement (as hereinafter defined), as pledgee, assignee and secured party (in such capacity and together with any successors in such capacity, the "Administrative Agent"). RECITALS: A. Pursuant to a certain credit agreement, dated as of the date hereof (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Credit Agreement), among Precision Partners, Inc. (the "Borrower"), the Subsidiary Guarantors, Pledgor, the Lenders, the Administrative Agent, NationsBank, N.A., as syndication agent ("Syndication Agent"), and SunTrust Bank, Atlanta, as the documentation agent ("Documentation Agent"; together with Administrative Agent and Syndication Agent, collectively, the "Agents"), the Lenders have agreed (i) to make to or for the account of the Borrower certain Term Loans up to an aggregate principal amount of $23,000,000 and certain Revolving Loans up to an aggregate principal amount of $25,000,000 and (ii) to issue certain Letters of Credit for the account of the Borrower. B. Pledgor has executed and delivered to the Administrative Agent a certain guarantee instrument (each, a "Guarantee") pursuant to which, among other things, Pledgor has guaranteed the obligations of the Borrower under the Credit Agreement and the other Loan Documents, and Pledgor desires that its Guarantee be secured hereunder. C. Pledgor is or will be the legal and/or beneficial owner of the Pledged Collateral (as hereinafter defined) to be pledged by it hereunder. D. It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to any Lender issuing Letters of Credit under the Credit Agreement that Pledgor execute and deliver the applicable Loan Documents, including this Agreement. E. This Agreement is given by Pledgor in favor of the Administrative Agent for its benefit and the benefit of the Lenders and the Agents (collectively, the "Secured Parties") to secure the payment and performance of all of the Secured Obligations (as defined in Section 2). AGREEMENT: NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Pledgor and the Administrative Agent hereby agree as follows: -2- Section 1. Pledge. As collateral security for the payment and performance when due of all the Secured Obligations, Pledgor hereby pledges, assigns, transfers and grants to the Administrative Agent for its benefit and the benefit of the Secured Parties, a continuing first priority security interest in and to and pledge of all of the right, title and interest of Pledgor in, to and under the following property, wherever located, whether now existing or hereafter arising or acquired from time to time (collectively, the "Pledged Collateral"): (a) the issued and outstanding shares of capital stock of each Person described in Schedule I-A annexed hereto and each other corporation hereafter acquired or formed by Pledgor (which are and shall remain at all times until this Agreement terminates, certificated shares), including the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares and all Additional Shares (as hereinafter defined) (collectively, the "Pledged Shares"); provided, however, that Pledgor shall not be required to pledge shares possessing more than 65% of the voting power of all classes of capital stock entitled to vote of any Subsidiary which is a controlled foreign corporation (as defined in Section 957(a) of the Internal Revenue Code of 1986, as amended from time to time (the "Tax Code")) and, in any event, shall not be required to pledge the shares of stock of any Subsidiary otherwise required to be pledged pursuant to this subsection 1(a) to the extent that such pledge would constitute an investment of earnings in United States property under Section 956 (or a successor provision) of the Tax Code, which investment would trigger an increase in the gross income of a United States shareholder of Pledgor pursuant to Section 951, (or a successor provision) of the Tax Code; (b) all additional shares of capital stock of whatever class of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which are and shall remain at all times until this Agreement terminates, certificated shares), including the certificates representing such additional shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares (collectively, the "Additional Shares"); (c) all membership interests and/or partnership interests, as applicable, of each Person described in Schedule I-B annexed hereto and each other limited liability company or partnership hereafter acquired or formed by Pledgor, together with all rights, privileges, authority and powers of Pledgor in and to each such Person or under the membership or partnership agreement of each such Person (the "Operative Agreements"), and the certificates, instruments and agreements, if any, representing such membership or partnership interests (collectively, the "Initial Pledged Interests"); (d) all options, warrants, rights, agreements, additional membership or partnership interests or other interests relating to each such Person described in clause (c) above or any interest m any such Person, including, without limitation, any right relating to the equity or membership or partnership interests in any such Person or under the Operative Agreement of any such Person, from time to time acquired by Pledgor in any manner and the certificates, instruments and agreements, if any, representing such additional interests (collectively, the "Additional Interests"; together with the Initial Pledged Interests, the "Pledged Interests"; the Pledged Interests, together with the Pledged Shares and the items or types of Pledged Collateral described in subsection 1(f) of this Agreement, collectively, the "Pledged Securities"); (e) all dividends, cash, options, warrants, rights, instruments, distributions, returns of capital or principal, income, interest, profits and other property, interests (debt or equity) or proceeds, including as a result of a split, revision, reclassification or other like change of the Pledged Securities, -3- from time to time received, receivable or otherwise distributed to Pledgor in respect of or in exchange for any or all of the Pledged Securities (collectively, "Distributions"); (f) without affecting the obligations of Pledgor under any provision prohibiting such action hereunder or under the Credit Agreement, in the event of any consolidation or merger in which any Person listed in Schedule I-A or Schedule I-B annexed hereto is not the surviving entity, all shares of each class of the capital stock of the successor corporation or interests or certificates of the successor limited liability company or partnership owned by Pledgor (unless such successor is Pledgor itself) formed by or resulting from such consolidation or merger; and (g) all "proceeds", as such term is defined in the UCC or under other relevant law, and in any event including, without limitation, any and all (i) proceeds of any insurance (except payments made to a Person which is not a party to this Agreement), indemnity, warranty, guaranty or claim payable to the Administrative Agent or to Pledgor from time to time with respect to any of the Pledged Collateral, (ii) payments (in any form whatsoever) made or due and payable to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Collateral by any Governmental Authority (or any Person acting on behalf of a Governmental Authority), (iii) instruments representing obligations to pay amounts in respect of the Pledged Collateral, (iv) products of the Pledged Collateral and (v) other amounts from time to time paid or payable under or in connection with any of the Pledged Collateral (collectively, the "Proceeds"). The Pledged Securities, the Distributions and the Proceeds relating thereto are collectively referred to as the "Securities Collateral". Section 2. Secured Obligations. This Agreement secures, and the Pledged Collateral is collateral security for, the payment and performance in full when due, whether at stated maturity, by acceleration or otherwise (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the filing of a petition in bankruptcy or the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of (i) all Obligations of the Borrower now existing or hereafter arising under or in respect of the Credit Agreement (including, without limitation, the obligations of the Borrower to pay principal, interest and all other charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in the Credit Agreement), (ii) all Obligations of Pledgor and the Subsidiary Guarantors now existing or hereafter arising under or in respect of the Credit Agreement (including, without limitation, the obligations of Pledgor and each Subsidiary Guarantor to pay principal, interest and all other charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in the Credit Agreement) and (iii) without duplication of the amounts described in clauses (i) and (ii) above, all Obligations of Pledgor now existing or hereafter arising under or in respect of this Agreement or any other Security Document, including, without limitation, all charges, fees, expenses, commissions, reimbursements, premiums, indemnities and other payments related to or in respect of the Obligations contained in this Agreement or in any other Security Document, in each case whether in the regular course of business or otherwise (the obligations described in clauses (i), (ii) and (iii) of this Section 2, collectively, the "Secured Obligations"). Section 3. No Release. Nothing set forth in this Agreement shall relieve Pledgor from the performance of any term, covenant, condition or agreement on Pledgor's part to be performed or observed under or in respect of any of the Pledged Collateral or from any liability to any Person under or in respect of any of the Pledged Collateral or shall impose any obligation on the Administrative Agent or any other Secured Party to perform or observe any such term, covenant, condition or agreement on Pledgor's part to be so performed or -4- observed or shall impose any liability on the Administrative Agent or any other Secured Party for any act or omission on the part of Pledgor relating thereto or for any breach of any representation or warranty on the part of Pledgor contained in this Agreement or any other Loan Document, or under or in respect of the Pledged Collateral or made in connection herewith or therewith, except upon any exercise of remedies pursuant to Section 9 whereby Pledgor no longer has any rights, title or interest in or to such Pledged Collateral. The obligations of Pledgor referred to in this Section 3 shall survive the termination of this Agreement and the discharge of Pledgor's other obligations under this Agreement and the other Loan Documents. Section 4. Perfection; Supplements; Further Assurances; Use of Pledged Collateral. (a) Delivery of Certificated Securities Collateral. All certificates, agreements or instruments representing or evidencing the Securities Collateral, to the extent not previously delivered to the Administrative Agent, shall immediately upon receipt thereof by Pledgor be delivered to and held by or on behalf of the Administrative Agent pursuant hereto. All certificated Securities Collateral shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall have the right, at any time upon the occurrence and during the continuance of any Event of Default and without notice to Pledgor, to endorse, assign or otherwise transfer to or to register in the name of the Administrative Agent or any of its nominees or endorse for negotiation any or all of the Securities Collateral, without any indication that such Securities Collateral is subject to the security interest hereunder. In addition, the Administrative Agent shall have the right at any time after the occurrence and during the continuance of a Default to exchange certificates representing or evidencing Pledged Securities for certificates of smaller or larger denominations. (b) Perfection of Uncertificated Securities Collateral. If any issuer of Pledged Securities is organized in a jurisdiction which does not permit the use of certificates to evidence equity ownership, or if any of the Pledged Securities are at any time not evidenced by certificates of ownership, then Pledgor shall, to the extent permitted by applicable law, record such pledge on the equityholder register or the books of the issuer, cause the issuer to execute and deliver to the Administrative Agent an acknowledgment of the pledge of such Pledged Securities substantially in the form of Exhibit 1 annexed hereto, execute any customary pledge forms or other documents necessary or appropriate to complete the pledge and give the Administrative Agent the right to transfer such Pledged Securities pursuant to the terms hereof and provide to the Administrative Agent an opinion of counsel, in form and substance satisfactory to the Administrative Agent, confirming such pledge. (c) Financing Statements and Other Filings. The only filings, registrations and recordings necessary and appropriate to create, preserve, protect and perfect the security interest granted by Pledgor to the Administrative Agent pursuant to this Agreement in respect of the Pledged Collateral are listed in Annex A annexed hereto. All such filings, registrations and recordings have been filed, registered and recorded contemporaneously with the execution of the Loan Documents. Pledgor agrees that at any time and from time to time, it will execute and, at the sole cost and expense of the Pledgor file and refile, or permit the Administrative Agent to file and refile, such financing statements, continuation statements and other documents (including, without limitation, this Agreement), in form reasonably acceptable to the Administrative Agent, in such offices as the Administrative Agent may reasonably deem necessary or appropriate, wherever required or permitted by law in order to perfect, continue and maintain a valid, enforceable, first priority security interest in the Pledged Collateral as provided herein and to preserve the other rights and interests granted to the Administrative Agent hereunder, as against third parties, with respect to any Pledged Collateral. Pledgor authorizes the Administrative Agent to -5- file any such financing or continuation statement or other document without the signature of Pledgor where permitted by law. (d) Supplements; Further Assurances. Pledgor agrees to do such further acts and things, and to execute and deliver to the Administrative Agent such additional assignments, agreements, supplements, powers and instruments, as the Administrative Agent may reasonably deem necessary or appropriate, wherever required or permitted by law, in order to perfect, preserve and protect the security interest in the Pledged Collateral as provided herein and the rights and interests granted to the Administrative Agent hereunder, to carry into effect the purposes of this Agreement or better to assure and confirm unto the Administrative Agent or permit the Administrative Agent to exercise and enforce its respective rights, powers and remedies hereunder with respect to any Pledged Collateral. Without limiting the foregoing, Pledgor shall make, execute, endorse, acknowledge, file or refile and/or deliver to the Administrative Agent from time to time such lists, descriptions and designations of the Pledged Collateral, schedules, confirmatory assignments, supplements, additional security agreements, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments the Administrative Agent deems reasonably necessary or appropriate. The Administrative Agent may institute and maintain, in its own name or in the name of Pledgor, such suits and proceedings as the Administrative Agent may be advised by counsel shall be reasonably necessary or expedient to prevent any impairment of the security interest in or perfection of the Pledged Collateral. All of the foregoing shall be at the sole cost and expense of Pledgor. (e) Use and Pledge of Pledged Collateral. Unless an Event of Default shall have occurred and be continuing, the Administrative Agent shall from time to time execute and deliver, upon written request of Pledgor and at the sole cost and expense of Pledgor, any and all instruments, certificates or other documents, in a form reasonably requested by Pledgor, necessary or appropriate in the reasonable judgment of Pledgor to enable Pledgor to continue to exploit, license, use, enjoy and protect the Pledged Collateral, except as may be prohibited by the terms of this Agreement or the Credit Agreement. Pledgor and the Administrative Agent acknowledge that this Agreement is intended to grant to the Administrative Agent for the benefit of the Secured Parties a security interest in and Lien upon the Pledged Collateral and shall not constitute or create a present assignment of any of the Pledged Collateral. Section 5. Representations, Warranties and Covenants. Pledgor represents, warrants and covenants as follows: (a) Perfection Actions; Prior Liens. Upon the completion of the deliveries, filings and other actions contemplated in subsections 4(a) through 4(c) hereof, the security interest granted to the Administrative Agent for the benefit of the Secured Parties pursuant to this Agreement in and to the Pledged Collateral will constitute a perfected security interest therein, superior and prior to the rights of all other Persons. (b) No Liens. Pledgor is as of the date hereof, and, as to Pledged Collateral acquired by it from time to time after the date hereof, Pledgor will be, the sole direct and beneficial owner of all Pledged Collateral pledged by it hereunder free from any Lien or other right, title or interest of any Person other than the Lien and security interest created by this Agreement. Pledgor shall defend the Pledged Collateral pledged by it hereunder against all claims and demands of all Persons at any time claiming any interest therein adverse to the Administrative Agent or any other Secured Party. There is no agreement, and Pledgor shall not enter into any agreement or take any other action, that would result -6- in the imposition of any other Lien, restrict the transferability of any of the Pledged Collateral or otherwise impair or conflict with Pledgor's obligations or the rights of the Administrative Agent hereunder. (c) Other Financing Statements. There is no (nor will be any) valid or effective financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind in the Pledged Collateral other than those relating to this Agreement, and so long as any of the Secured Obligations remain unpaid or the Commitments of the Lenders to make any Loan or to issue any Letter of Credit shall not have expired or been sooner terminated, Pledgor shall not execute, authorize or permit to be filed in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to any Pledged Collateral, except, in each case, financing statements filed or to be filed in respect of and covering the security interests granted by Pledgor pursuant to this Agreement. (d) Chief Executive Office; Change of Name. The chief executive office of Pledgor is located at the address indicated next to its name in Annex B annexed hereto. Pledgor shall not move its chief executive office, except to such new location as Pledgor may establish in accordance with the last sentence of this subsection 5(d). Pledgor shall not establish a new location for its chief executive office nor shall it change its name until (i) it shall have given the Administrative Agent not less than thirty (30) days' prior written notice of its intention to do so, clearly describing such new location or name and providing such other information in connection therewith as the Administrative Agent may reasonably request and (ii) with respect to such new location or name, Pledgor shall have taken all action reasonably satisfactory to the Administrative Agent to maintain the perfection and priority of the security interest of the Administrative Agent for the benefit of the Secured Parties in the Pledged Collateral intended to be granted hereby. (e) Due Authorization and Issuance. All of the Pledged Shares have been, and to the extent hereafter issued will be upon such issuance, duly authorized, validly issued and fully paid and non-assessable. All of the Initial Pledged Interests have been fully paid for, and there is no amount or other obligation owing by Pledgor to any issuer of the Initial Pledged Interests in exchange for or in connection with the issuance of the Initial Pledged Interests or Pledgor's status as a partner or a member of any issuer of the Initial Pledged Interests. (f) No Violations, etc. The pledge of the Pledged Securities pursuant to this Agreement does not violate Regulation T, U or X of the Federal Reserve Board. (g) No Options, Warrants, etc. There are no options, warrants, calls, rights, commitments or agreements of any character to which Pledgor is a party or by which it is bound obligating Pledgor to issue, deliver or sell or cause to be issued, delivered or sold, additional Pledged Securities or obligating Pledgor to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. There are no voting trusts or other agreements or understandings to which Pledgor is a party with respect to the transfer, voting or exercise of any other right of the equity interests of any issuer of the Pledged Securities. (h) No Claims. Pledgor owns or has rights to use all the Pledged Collateral pledged by it hereunder. (i) Authorization, Enforceability. Pledgor has the corporate power and authority and the legal right to pledge and grant a security interest in all the Pledged Collateral pledged by it pursuant to -7- this Agreement, and this Agreement constitutes the legal, valid and binding obligation of Pledgor, enforceable against Pledgor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles (whether enforcement is sought by proceedings in equity or at law). (j) No Conflicts, Consents, etc. Neither the execution and delivery of this Agreement by Pledgor nor the consummation of the transactions herein contemplated nor the fulfillment of the terms hereof (i) violates any charter or by-laws or other organizational document of Pledgor or any issuer of Pledged Securities, (ii) violates the terms of any agreement, indenture, mortgage, deed of trust, equipment lease, instrument or other document to which Pledgor is a party, or by which it may be bound or to which any of its properties or assets may be subject, which violation or conflict would have a Material Adverse Effect, or a material adverse effect on the value of the Pledged Collateral or an adverse effect on the security interests hereunder, (iii) conflicts with any law, order, rule or regulation applicable to any Pledgor of any Governmental Authority having jurisdiction over Pledgor or its property, or (iv) results in or requires the creation or imposition of any Lien (other than the Lien contemplated hereby) upon or with respect to any of the property now owned or hereafter acquired by Pledgor. No consent of any party (including, without limitation, equityholders or creditors of Pledgor or any account debtor under a Receivable) and no consent, authorization, approval, license or other action by, and no notice to or filing with, any Governmental Authority or regulatory body or other Person is required for (x) the pledge by Pledgor of the Pledged Collateral pledged by it pursuant to this Agreement or for the execution, delivery or performance of this Agreement by Pledgor, (y) the exercise by the Administrative Agent of the rights provided for in this Agreement or (z) the exercise by the Administrative Agent of the remedies in respect of the Pledged Collateral pursuant to this Agreement except for the filings contemplated hereby. In the event that the Administrative Agent desires to exercise any remedies, voting or consensual rights or attorney-in-fact powers set forth in this Agreement and determines it reasonably necessary to obtain any approvals or consents of any Governmental Authority or any other Person therefor, then, upon the reasonable request of the Administrative Agent, Pledgor agrees to use its best efforts to assist and aid the Administrative Agent to obtain as soon as practicable any reasonably necessary approvals or consents for the exercise of any such remedies, rights and powers. (k) Pledged Collateral. All information set forth herein, including the schedules and annexes attached hereto, and all information contained in any documents, schedules and lists heretofore delivered to any Secured Party in connection with this Agreement, in each case, relating to the Pledged Collateral, is accurate and complete in all material respects. The Pledged Collateral described on the schedules attached hereto constitutes all of the property of such type of Pledged Collateral owned or held by Pledgor. (l) No Impairment. Pledgor shall not take any action that impairs the rights of the Administrative Agent or any Secured Party in the Pledged Collateral. Section 6. Special Provisions Concerning Securities Collateral. (a) Pledge of Additional Securities. Pledgor shall, upon obtaining any Pledged Securities of any Person, accept the same in trust for the benefit of the Administrative Agent and promptly (and in any event within five Business Days) deliver to the Administrative Agent a pledge amendment, duly executed by Pledgor, in substantially the form of Exhibit 2 annexed hereto (each, a "Pledge Amendment"), and the certificates and other documents required under subsections 4(a) and 4(b) in respect of -8- the additional Pledged Securities that are to be pledged pursuant to this Agreement, and confirming the attachment of the Lien hereby created on and in respect of such additional property. Pledgor hereby authorizes the Administrative Agent to attach each Pledge Amendment to this Agreement and agrees that all Pledged Securities listed on any Pledge Amendment delivered to the Administrative Agent shall for all purposes hereunder be considered Pledged Collateral. (b) Voting Rights; Distributions; etc. (i) So long as no Event of Default shall have occurred and be continuing: (A) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Securities Collateral or any part thereof for any purpose not inconsistent with the terms or purposes of this Agreement or any other Loan Document; provided, however, that Pledgor shall not in any event exercise such rights in any manner which may have an adverse effect on the value of the Pledged Collateral or the security intended to be provided by this Agreement. (B) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the Lien of this Agreement, any and all Distributions, but only if and to the extent made in accordance with the provisions of the Credit Agreement; provided, however, that any and all such Distributions consisting of rights or interests in the form of securities shall be forthwith delivered to the Administrative Agent to hold as Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of the Administrative Agent, be segregated from the other property or funds of Pledgor and be forthwith delivered to the Administrative Agent as Pledged Collateral in the same form as so received (with any necessary endorsement). (C) The Administrative Agent shall be deemed without further action or formality to have granted to Pledgor all necessary consents relating to voting rights and shall, if necessary, upon written request of Pledgor and at the sole cost and expense of the Pledgor, from time to time execute and deliver (or cause to be executed and delivered) to Pledgor all such instruments as Pledgor may reasonably request in order to permit Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to subsection 6(b)(i)(A) hereof and to receive the Distributions which it is authorized to receive and retain pursuant to subsection 6(b)(i)(B) hereof. (ii) Upon the occurrence and during the continuance of any Event of Default (A) All rights of Pledgor to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to subsection 6(b)(i)(A) hereof without any action or the giving of any notice shall cease, and all such rights shall thereupon become vested in the Administrative Agent, which shall thereupon have the sole right to exercise such voting and other consensual rights. (B) All rights of Pledgor to receive Distributions which it would otherwise be authorized to receive and retain pursuant to subsection 6(b)(i)(B) hereof shall cease and all such rights shall thereupon become vested in the Administrative Agent, -9- which shall thereupon have the sole right to receive and hold as Pledged Collateral such Distributions. (iii) Pledgor shall, at its sole cost and expense, from time to time execute and deliver to the Administrative Agent appropriate instruments as the Administrative Agent may reasonably request in order to permit the Administrative Agent to exercise the voting and other rights which it may be entitled to exercise pursuant to subsection 6(b)(ii)(A) hereof and to receive all Distributions which it may be entitled to receive under subsection 6(b)(ii)(B) hereof. (iv) All Distributions that are received by Pledgor contrary to the provisions of subsection 6(b)(ii)(B) hereof shall be received in trust for the benefit of the Administrative Agent, shall be segregated from other funds of Pledgor and shall immediately be paid over to the Administrative Agent as Pledged Collateral in the same form as so received (with any necessary endorsement). (c) No New Securities. Pledgor shall cause each issuer of the Pledged Securities not to issue any stock or other securities or equity interests in addition to or in substitution for the Pledged Securities issued by such issuer, except to Pledgor. (d) Operative Agreements. Pledgor has delivered to the Administrative Agent true, correct and complete copies of the Operative Agreements. The Operative Agreements are in full force and effect, have not as of the date hereof been amended or modified, and there is no existing default by any party thereunder or any event that, with the giving of notice of passage of time or both, would constitute a default by any party thereunder. Pledgor shall deliver to the Administrative Agent a copy of any notice of default given or received by it under any Operative Agreement within ten (10) days after Pledgor gives or receives such notice. Pledgor will not terminate or agree to terminate any Operative Agreement or make any amendment or modification to any Operative Agreement that may have an adverse effect on the value of the Pledged Interests or the security intended to be provided by this Agreement. (e) Defaults, etc. Pledgor is not in default in the payment of any portion of any mandatory capital contribution, if any, required to be made under any agreement to which Pledgor is a party relating to the Pledged Securities pledged by it, and Pledgor is not in violation of any other material provisions of any such agreement to which Pledgor is a party, or otherwise in default or violation thereunder. No Pledged Securities pledged by Pledgor are subject to any defense, offset or counterclaim, nor have any of the foregoing been asserted or alleged against Pledgor by any Person with respect thereto, and as of the date hereof, there are no certificates, instruments, documents or other writings (other than the Operative Agreements and certificates, if any, delivered to the Administrative Agent) that evidence any Pledged Securities of Pledgor. Section 7. Transfers and Other Liens. Pledgor shall not (a) sell, convey, assign or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral pledged by it hereunder except as permitted by the Credit Agreement, (b) create or permit to exist any Lien upon or with respect to any of the Pledged Collateral pledged by it hereunder other than the Liens and security interest granted to the Administrative Agent under this Agreement or (c) permit any issuer of the Pledged Securities to merge, consolidate or change its legal form, unless (i) permitted by the Credit Agreement or (ii) all of the outstanding equity interests of the surviving or resulting entity are, upon such merger or consolidation, pledged hereunder and no cash, secu- -10- rities or other property is distributed in respect of the outstanding equity interests of any other entity that was merged into or consolidated with such issuer. Section 8. Reasonable Care. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equivalent to that which the Administrative Agent, in its individual capacity, accords its own property consisting of similar instruments or interests, it being understood that neither the Administrative Agent nor any of the Secured Parties shall have responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Securities Collateral, whether or not the Administrative Agent or any other Secured Party has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any Person with respect to any Pledged Collateral. Section 9. Event of Default and Remedies. (a) Remedies Upon Event of Default. If any Event of Default shall have occurred and be continuing, then and in every such case, the Administrative Agent may: (i) Retain and apply the Distributions to the Secured Obligations as provided in Section 16 hereof; and (ii) Exercise any and all rights as beneficial and legal owner of the Pledged Collateral, including, without limitation, perfecting assignment of and exercising any and all voting, consensual and other rights and powers with respect to any Pledged Collateral. (iii) In addition to the other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC, and the Administrative Agent may also in its sole discretion, without notice except as specified below, sell or assign the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Administrative Agent may deem commercially reasonable. The Administrative Agent or any other Secured Party or any of their respective Affiliates may be the purchaser, licensee, assignee or recipient of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold or assigned at such sale, to use and apply any of the Secured Obligations owed to such Person as a credit on account of the purchase price of any Pledged Collateral payable by such Person at such sale. Each purchaser, assignee or recipient at any such sale shall acquire the property sold or assigned absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives, to the fullest extent permitted by law, all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Administrative Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives, to the fullest extent permitted by law, any claims against the Administrative Agent arising by reason of the fact that the price at which any Pledged -11- Collateral may have been sold or assigned at such a private sale was less than the price which might have been obtained at a public sale, even if the Administrative Agent accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. Pledgor acknowledges and agrees that, to the extent notice of sale shall be required by law, ten days' written notice to Pledgor of the time and place of any public sale or of the time after which any private sale or other intended disposition is to take place shall be commercially reasonable notification of such matters. No notification need be given to Pledgor if it has signed, after the occurrence of an Event of Default, a statement renouncing or modifying any right to notification of sale or other intended disposition. (b) Specific Performance. Upon application to a court of equity having jurisdiction, the Administrative Agent shall be entitled to a decree requiring specific performance by Pledgor of such obligation. (c) Waiver of Notice and Claims. Pledgor hereby waives, to the fullest extent permitted by applicable law, notice or judicial hearing in connection with the Administrative Agent's taking possession or the Administrative Agent's disposition of any of the Pledged Collateral, including, without limitation, any and all prior notice and hearing for any prejudgment remedy or remedies and any such right which Pledgor would otherwise have under law, and Pledgor hereby further waives, to the fullest extent permitted by applicable law: (i) all damages occasioned by such taking of possession, except to the extent caused by gross negligence or willful misconduct of the Administrative Agent, any Secured Party or any agent or employee thereof, (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Administrative Agent's rights hereunder, and (iii) all rights of redemption, appraisal, valuation, stay, extension or moratorium now or hereafter in force under any applicable law. The Administrative Agent shall not be liable for any incorrect or improper payment made pursuant to this Section 19 in the absence of gross negligence or willful misconduct. Any sale of, or the grant of options to purchase, or any other realization upon, any Pledged Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of Pledgor therein and thereto, and shall be a perpetual bar both at law and in equity against Pledgor and against any and all Persons claiming or attempting to claim the Pledged Collateral so sold, optioned or realized upon, or any part thereof, from, through or under Pledgor. (d) Certain Sales of Pledged Collateral. Pledgor recognizes that, by reason of certain prohibitions contained in law, rules, regulations or orders of any foreign Governmental Authority, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Pledged Collateral, to limit purchasers to those who meet the requirements of such foreign Governmental Authority. Pledgor acknowledges that any such sales may be at prices and on terms less favorable to the Administrative Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such restricted sale shall be deemed to have been made in a commercially reasonable manner and that, except as may be required by applicable law, the Administrative Agent shall have no obligation to engage in public sales. (e) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Securities Collateral, to limit purchasers to Persons who will agree, among other things, to acquire such Securities Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable to the Administrative -12- Agent than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Securities Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would agree to do so. (f) Notwithstanding the foregoing, Pledgor shall, upon the occurrence and during the continuance of any Event of Default, at the request of the Administrative Agent, for the benefit of the Administrative Agent, cause any registration, qualification under or compliance with any federal or state securities law or laws to be effected with respect to all or any part of the Securities Collateral as soon as practicable and at the sole cost and expense of Pledgor. Pledgor will use its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Securities Collateral, including, without limitation, registration under the Securities Act (or any similar statute then in effect), appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with any other government requirements. Pledgor shall cause the Administrative Agent to be kept advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, shall furnish to the Administrative Agent such number of prospectuses, offering circulars or other documents incident thereto as the Administrative Agent from time to time may request, and shall indemnify and shall cause the issuer of the Securities Collateral to indemnify the Administrative Agent and all others participating in the distribution of such Securities Collateral against all claims, losses, damages and liabilities caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading. (g) If the Administrative Agent determines to exercise its right to sell any or all of the Securities Collateral, upon written request, Pledgor shall from time to time furnish to the Administrative Agent all such information as the Administrative Agent may request in order to determine the number of securities included in the Securities Collateral which may be sold by the Administrative Agent as exempt transactions under the Securities Act and the rules of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. Section 10. Application of Proceeds. The proceeds received by the Administrative Agent in respect of any sale of, collection from or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by the Administrative Agent of its remedies as a secured creditor as provided in Section 9 hereof shall be applied, together with any other sums then held by the Administrative Agent pursuant to this Agreement, promptly by the Administrative Agent as follows: First, to the payment of all costs and expenses, fees, commissions and taxes of such sale, collection or other realization, including, without limitation, reasonable compensation to the Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Administrative Agent in connection therewith, together with interest on each such amount at the highest rate then in effect under the Credit Agreement from and after the date such amount is due, owing or unpaid until paid in full; -13- Second, to the payment of all other costs and expenses of such sale, collection or other realization, including, without limitation, reasonable compensation to the Lenders and their agents and counsel and all costs, liabilities and advances made or incurred by the Lenders in connection therewith, together with interest on each such amount at the highest rate then in effect under the Credit Agreement from and after the date such amount is due, owing or unpaid until paid in full; Third, without duplication of amounts applied pursuant to clauses First and Second above, to the indefeasible payment in full in cash, pro rata, of interest, principal and other amounts constituting Secured Obligations in accordance with the terms of the Credit Agreement; and Fourth, the balance, if any, to the Person lawfully entitled thereto (including Pledgor or its respective successors or assigns). In the event that any such proceeds are insufficient to pay in full the items described in clauses First through Third of this Section 13, Pledgor shall remain liable for any deficiency. Section 11. Expenses. Pledgor will upon demand pay to the Administrative Agent the amount of any and all expenses, including the reasonable fees and expenses of its counsel and the fees and expenses of any experts and agents which the Administrative Agent may incur in connection with (a) the collection of the Secured Obligations, (b) the enforcement and administration of this Agreement, (c) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (d) the exercise or enforcement of any of the rights of the Administrative Agent or any Secured Party hereunder or (e) the failure by Pledgor to perform or observe any of the provisions hereof. All amounts payable by Pledgor under this Section 11 shall be due upon demand and shall be part of the Secured Obligations. Pledgor's obligations under this Section 11 shall survive the termination of this Agreement and the discharge of Pledgor's other obligations hereunder. Section 12. No Waiver; Cumulative Remedies. (a) No failure on the part of the Administrative Agent to exercise, no course of dealing with respect to, and no delay on the part of the Administrative Agent in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy; nor shall the Administrative Agent be required to look first to, enforce or exhaust any other security, collateral or guaranties. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law. (b) In the event that the Administrative Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Administrative Agent, then and in every such case, Pledgor, the Administrative Agent and each other Secured Party shall be restored to their respective former positions and rights hereunder with respect to the Pledged Collateral, and all rights, remedies and powers of the Administrative Agent and the other Secured Parties shall continue as if no such proceeding had been instituted. Section 13. Administrative Agent. The Administrative Agent has been appointed as Administrative Agent pursuant to the Credit Agreement. The actions of the Administrative Agent hereunder are subject to the provisions of the Credit Agreement. The Administrative Agent shall have the right hereunder to make -14- demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of Pledged Collateral), in accordance with this Agreement and the Credit Agreement. The Administrative Agent may employ agents and attorneys-in-fact in connection herewith and shall not be liable for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Administrative Agent may resign and a successor Administrative Agent may be appointed in the manner provided in the Credit Agreement. Upon the acceptance of any appointment as the Administrative Agent by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent under this Agreement, and the retiring Administrative Agent shall thereupon be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was the Administrative Agent. Section 14. Administrative Agent May Perform; Administrative Agent Appointed Attorney-in-Fact. If Pledgor shall fail to do any act or thing that it has covenanted to do hereunder or if any warranty on the part of Pledgor contained herein shall be breached, the Administrative Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach, and may expend funds for such purpose. Any and all amounts so expended by the Administrative Agent shall be paid by Pledgor promptly upon demand therefor, with interest at the highest rate then in effect under the Credit Agreement during the period from and including the date on which such funds were so expended to the date of repayment. Pledgor's obligations under this Section 14 shall survive the termination of this Agreement and the discharge of Pledgor's other obligations under this Agreement, the Credit Agreement and the other Loan Documents. Pledgor hereby appoints the Administrative Agent its attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, or otherwise, from time to time after the occurrence and during the continuance of a Default in the Administrative Agent's discretion to take any action and to execute any instrument consistent with the terms of this Agreement and the other Loan Documents which the Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement. The foregoing grant of authority is a power of attorney coupled with an interest and such appointment shall be irrevocable for the term of this Agreement. Pledgor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. Section 15. Indemnity. (a) Indemnity. Pledgor agrees to indemnify, pay and hold harmless the Administrative Agent and each of the other Secured Parties and the officers, directors, employees, agents and Affiliates of the Administrative Agent and each of the other Secured Parties (collectively, the "Indemnitees") from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs (including, without limitation, settlement costs), expenses or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) which may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of this Agreement or any other Loan Document (including, without limitation, any misrepresentation by Pledgor in this Agreement or any other Loan Document) (the "indemnified liabilities"); provided, however, that Pledgor shall not have any obligation to an Indemnitee hereunder with respect to indemnified liabilities if it has been determined by a final decision (after all appeals and the expiration of time to appeal) of a court of competent jurisdiction that such indemnified liability arose from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is -15- violative of any law or public policy, Pledgor shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all indemnified liabilities incurred by the Indemnitees or any of them. (b) Survival. The obligations of Pledgor contained in this Section 15 shall survive the termination of this Agreement and the discharge of Pledgor's other obligations under this Agreement and under the other Loan Documents. (c) Reimbursement. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations secured by the Pledged Collateral. Section 16. Modification in Writing. No amendment, modification, supplement, termination or waiver of or to any provision of this Agreement, nor consent to any departure by Pledgor therefrom, shall be effective unless the same shall be made in accordance with the terms of the Credit Agreement and unless in writing and signed by the Administrative Agent. Any amendment, modification or supplement of or to any provision of this Agreement, any waiver of any provision of this Agreement and any consent to any departure by Pledgor from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement or any other Loan Document, no notice to or demand on Pledgor in any case shall entitle Pledgor to any other or further notice or demand in similar or other circumstances. Section 17. Termination; Release. When all the Secured Obligations have been paid in full and the Commitments of the Lenders to make any Loan or to issue any Letter of Credit under the Credit Agreement shall have expired or been sooner terminated, this Agreement shall terminate. Upon termination of this Agreement or any release of Pledged Collateral in accordance with the provisions of the Credit Agreement, the Administrative Agent shall, upon the request and at the sole cost and expense of Pledgor, forthwith assign, transfer and deliver to Pledgor, against receipt and without recourse to or warranty by the Administrative Agent, such of the Pledged Collateral to be released (in the case of a release) as may be in possession of the Administrative Agent and as shall not have been sold or otherwise applied pursuant to the terms hereof, and, with respect to any other Pledged Collateral, proper documents and instruments (including UCC-3 termination statements or releases) acknowledging the termination of this Agreement or the release of such Pledged Collateral, as the case may be. Section 18. Notices. Unless otherwise provided herein or in the Credit Agreement, any notice or other communication herein required or permitted to be given shall be given in the manner set forth in the Credit Agreement, as to Pledgor, addressed to it at the address of the Borrower set forth in the Credit Agreement and as to the Administrative Agent, addressed to it at the address set forth in the Credit Agreement, or in each case at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 18. Section 19. Continuing Security Interest; Assignment. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (i) be binding upon Pledgor, its successors and assigns and (ii) inure, together with the rights and remedies of the Administrative Agent hereunder, to the benefit of the Administrative Agent and the other Secured Parties and each of their respective successors, transferees and assigns. No other Persons (including, without limitation, any other creditor of Pledgor) shall have any interest herein or any right or benefit with respect hereto. Without limiting the generality of the foregoing clause (ii), any Lender may assign or otherwise transfer any indebtedness held by it secured by this Agreement to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to -16- such Lender, herein or otherwise, subject however, to the provisions of the Credit Agreement. Each Affiliate of the Borrower which from time to time after the initial date of this Agreement is required under the Credit Agreement to pledge any assets to the Administrative Agent for the benefit of the Secured Parties may become a party hereto upon execution and delivery to the Administrative Agent of a joinder agreement substantially in the form attached hereto as Exhibit 3, and upon such execution and delivery shall be deemed to be a "Guarantor" and a "Pledgor" for all purposes hereunder. Section 20. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCLUDING (TO THE GREATEST EXTENT PERMITTED BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK, AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Section 21. CONSENT TO JURISDICTION AND SERVICE OF PROCESS; WAIVER OF JURY TRIAL. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS OF ANY THEREOF, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, PLEDGOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. PLEDGOR AGREES THAT SERVICE OF PROCESS IN ANY PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS SET FORTH IN THE CREDIT AGREEMENT OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. IF ANY AGENT APPOINTED BY PLEDGOR REFUSES TO ACCEPT SERVICE, PLEDGOR HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION. PLEDGOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 22. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 23. Execution in Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all such counterparts together shall constitute one and the same agreement. -17- Section 24. Headings. The Section headings used in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. Section 25. Obligations Absolute. All obligations of Pledgor hereunder shall be absolute and unconditional irrespective of: (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of Pledgor; (b) any lack of validity or enforceability of the Credit Agreement, any Letter of Credit or any other Loan Document, or any other agreement or instrument relating thereto; (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Credit Agreement, any Letter of Credit or any other Loan Document, or any other agreement or instrument relating thereto; (d) any pledge, exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Secured Obligations; (e) any exercise, non-exercise or waiver of any right, remedy, power or privilege under or in respect of this Agreement or any other Loan Document except as specifically set forth in a waiver granted pursuant to the provisions of Section 16 hereof; or (f) any other circumstances which might otherwise constitute a defense available to, or a discharge of, Pledgor. Section 26. Future Advances. This Agreement shall secure the payment of any amounts advanced from time to time pursuant to the Credit Agreement. -S1- IN WITNESS WHEREOF, Pledgor and the Administrative Agent have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first above written. PRECISION PARTNERS HOLDING COMPANY, as Pledgor By: _________________________________ Name: Title: CITICORP U.S.A., INC., as Administrative Agent By: _________________________________ Name: Title: SCHEDULE I-A Initial Pledged Shares Pledgor: ______________________ PERCENTAGE OF ALL ISSUED CAPITAL OR NUMBER OTHER EQUITY CLASS CERTIFICATE OF INTERESTS OF ISSUER OF STOCK NO(S). SHARES ISSUER - ------ -------- ------ ------ ------------- Note: A separate sheet should be used for each Pledgor pledging shares. SCHEDULE I-B Initial Pledged Interests Pledgor: _____________________ PERCENTAGE OF ALL ISSUED CAPITAL OR TYPE NUMBER OTHER EQUITY OF CERTIFICATE OF INTERESTS OF ISSUER INTEREST NO(S). SHARES ISSUER - ------ -------- ----------- ------ ------------- ANNEX A Financing Statements and Other Necessary Filings UCC Filing Other Filings ANNEX B Locations of Pledgor Chief Executive Tax ID Pledgor Office Number Other Locations - ------- --------------- ------ --------------- Note: A separate sheet should be used for each Pledgor pledging Financial Accounts. -S1- EXHIBIT 1 Form of Issuer Acknowledgement The undersigned hereby (i) acknowledges receipt of a copy of that certain securities pledge agreement (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Agreement"; capitalized terms used herein but not defined herein have the meanings given such terms in the Agreement), dated as of March ___, 1999, among Precision Partners Holding Company and Citicorp U.S.A., Inc., as Administrative Agent (in such capacity and together with any successors in such capacity, the "Administrative Agent"), (ii) agrees promptly to note on its books the security interests granted and confirmed under the Agreement, (iii) agrees that it will comply with instructions of the Administrative Agent with respect to the applicable Securities Collateral without further consent by Pledgor, (iv) agrees to notify the Administrative Agent upon obtaining knowledge of any interest in favor of any Person in the applicable Securities Collateral that is adverse to the interest of the Administrative Agent therein and (v) waives any right or requirement at any time hereafter to receive a copy of the Agreement in connection with the registration of any Securities Collateral thereunder in the name of the Administrative Agent or its nominee or the exercise of voting rights by the Administrative Agent or its nominee. [NAME OF ISSUER] By: ___________________________________ Name: Title: EXHIBIT 2 Form of Securities Pledge Amendment PLEDGE AMENDMENT This Pledge Amendment, dated ______________, is delivered pursuant to Section 6 of the Agreement referred to below. The undersigned hereby agrees that this Pledge Amendment may be attached to the Securities Pledge Agreement, dated as of March ___, 1999, among the undersigned and Citicorp U.S.A., Inc., as the Administrative Agent (the "Agreement"; capitalized terms used herein and not defined shall have the meanings assigned to them in the Agreement). The undersigned hereby pledges, assigns, transfers and grants to the Administrative Agent for its benefit and the benefit of the Secured Parties, a first priority security interest in and to all of the undersigned's rights, title and interest in and to the Pledged Securities listed on this Pledge Amendment and agrees that such Pledged Securities shall be deemed to be and shall become part of the Pledged Collateral and shall secure all Secured Obligations. PRECISION PARTNERS HOLDING COMPANY, as Pledgor By: ___________________________________ Name: Title: Pledged Securities ------------------ PERCENTAGE OF ALL NUMBER ISSUED CAPITAL OR CLASS PAR CERTIFICATE OF OTHER EQUITY ISSUER OF STOCK VALUE NO(S). SHARES INTERESTS OF ISSUER ------ -------- ----- ----------- ------ ------------------- EXHIBIT 3 Form of Joinder Agreement [Name of New Pledgor] [Address of New Pledgor] [Date] Citicorp U.S.A., Inc., as Administrative Agent ___________________________ ___________________________ Attention: ________________ Ladies and Gentlemen: Reference is made to the Securities Pledge Agreement (the "Agreement"), dated as of March ___, 1999, made by Precision Partners Holding Company ("Pledgor") and Citicorp U.S.A., Inc., as administrative agent for the Secured Parties. Capitalized terms used herein but not otherwise defined herein have the meanings given such terms in the Agreement. This letter supplements the Agreement and is delivered by the undersigned, ______________ (the "New Pledgor"), pursuant to Section 19 of the Agreement. The New Pledgor hereby agrees to be bound as a Guarantor and as a Pledgor by all of the terms, covenants and conditions set forth in the Agreement to the same extent that it would have been bound if it had been a signatory to the Agreement on the execution date of the Agreement. The New Pledgor hereby makes each of the representations and warranties and agrees to each of the covenants applicable to Pledgor contained in the Agreement. The New Pledgor hereby pledges, assigns, transfers and grants to the Administrative Agent, for its benefit and the Secured Parties, a first priority security interest in and to all of its right, title and interest in and to the Pledged Collateral. Attached hereto are supplements to each of the schedules and annexes to the Agreement with respect to the New Pledgor. Such supplements shall be deemed to be part of the Agreement This agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all such counterparts together shall constitute one and the same agreement. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. EXCLUDING (TO -2- THE GREATEST EXTENT PERMITTED BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. -S1- IN WITNESS WHEREOF, the New Pledgor has caused this Agreement to be executed and delivered by its duly authorized officer as of the date first above written. [NEW PLEDGOR] By: ____________________________ Name: Title: AGREED TO AND ACCEPTED: Citicorp U.S.A., Inc., as Administrative Agent By: _____________________ Name: Title: [Schedules and Annexes to be attached] EX-10.3 7 EXHIBIT 10.3 Exhibit 10.3 GENERAL ELECTRIC COMPANY GAS TURBINE SYSTEMS SOURCING OPERATION REFERENCE: AGREEMENT NUMBER: GE - Mid-State - 0002 BETWEEN: General Electric Company (Purchaser) Gas Turbine Sourcing Operation 300 Garlington Road P.O. Box 648 Greenville, SC 29602-0648 And: Mid-State Machine Products, Inc. (Seller) 1501 Verti Drive Winslow, Maine 04901 Whereas the parties wish to enter into a contractual relationship to establish terms, delivery periods, and pricing for the purchase and sale of certain machined products listed in Attachments "A" thru "D" and in consideration of mutual promises, Purchaser and Seller agree as follows: CONTRACT VISION A commitment to fully satisfy the ultimate customer by entering into a long term, mutually beneficial business relationship for a competitive advantage through continuous improvement processes. MUTUAL UNDERSTANDING: * build a creative partnership with multi-functional partnering teams to manage design integration, resource planning and quality * manage the relationship not transactions * commit totally to continuous improvement * manage total cost for mutual profitability * recognize co-destiny in business decisions through long term, productivity-based Agreement * share forecasts, plan long-range * reduce cycles through stocking programs, smooth loading and production control. -1- 1. TERM: The initial term of this agreement starts Nov. 1, 1998 and continues through those dates listed on Attachments "A" thru "D" with an option to extend for subsequent years. 2. TERMINATION: Purchaser or Seller may terminate this agreement at any time upon 180 days prior written notice to the other party. If the agreement is terminated by the purchaser other than for Seller's default, the purchaser is responsible to purchase from the Seller: * Reserve quantities of materials that have been stocked specifically for the Purchaser, provided, however, that in no case shall Purchaser's obligation in this regard exceed 1 year's worth of requirements (prior to any reschedule) or items normally stocked by Seller upon termination taking effect. Purchaser will buy back in accordance with his production schedule and will utilize this inventory prior to other established inventories. * Should potential cost reduction programs require equipment or tooling which is agreed to by both parties and solely beneficial to the Purchaser's process, the Purchaser will reimburse the Seller for all moneys expended but not amortized at the time of termination. Should this occur, Seller agrees to transfer or convey titles to Purchaser any and all such tooling and equipment as requested. 3. SCOPE: Seller shall supply the Purchaser machined products to support the Industrial & Power Systems Business in accordance with the items listed in Attachments "A" thru "D", updated periodically to incorporate the latest revisions. 4. GOAL: The Goal is defined as the ability of the Seller to support the Purchaser with quality parts, having on-time deliveries at competitive pricing. Both parties working together have the responsibility to achieve the Goal. 5. PRICING: A) Base pricing is fixed and shall not increase for the term of this Agreement -2- except for when the Purchaser makes changes in design, materials, or requirements (new prices shall be set on development, drawing amendments or additional parts subsequently amending Attachments "A" thru "D"). 6. PRODUCTIVITY: Seller will continue to implement continuous productivity gains through 6 Sigma project activities. The productivity projects are jointly agreed on by both parties and involve the following types of activities: * Seller manufacturing process improvements, i.e. (cellularization, dedicated equipment, new equipment, upgraded tooling, etc.) * Seller involvement in design to assure manufacturability. * Joint effort at product standardization. * Seller will maximize productivity on fixed processes. * Seller will increase worker productivity. * Inventory control to level load shop activities and to maximize repeatability of similar units. * Purchaser will evaluate suggestions on a timely basis and rapidly implement those that are acceptable. * Purchaser to review their product in depth with the Seller to evaluate the feasibility of the following: A) Reducing testing requirements B) Relaxing tolerances when possible C) Developing similar shapes and features D) Material substitutions E) Redesigning to optimize manufacturability. * Scrap reduction for both mature and development parts. * Review of processes and equipment to ensure quality. * Added volume of similar components. All projects requiring Purchaser's approval will be documented and responded to utilizing the supplier CRS input form. An immediate reduction in the Seller's price will occur upon implementation of a productivity project funded by the Purchaser pursuant to Articles 4 and 5. For a productivity project funded by the Seller, the Seller's price will be reduced only after the Seller's is reimbursed for the tooling, fixturing, and/or equipment -3- purchased for the project by the savings generated from the project pursuant to Articles 4 and 5. In both cases, tooling, fixturing, and/or equipment as identified in the productivity project will become the property of Purchaser upon completion. 7. GENERAL COST SAVINGS: Purchaser agrees to identify those savings and reductions gained through 6 Sigma project activities which are directly related to conducting business with the Seller and to share any savings that can be calculated and audited as directly attributable in terms of credit towards our cost reduction goals. Such examples are as listed: * Reduced transportation costs as compared to existing supplier use. * Reduced applied overhead. * Reduction of total effort extended by Purchaser to maintain program integrity. * Methods Changes 8. ORDERING: Purchase orders shall be issued by the individual Purchaser locations and subject to the Standard GE Conditions of Purchase. If a conflict exists between the terms of this contract and the Conditions of Purchase, the terms of this contract will take precedence FOR COMMERCIAL ORDERS ONLY. On Government orders the Conditions of Purchase shall take precedence. The purchase order shall contain the following specific data: A.) Purchase order number and date B.) Location C.) The FOB point and mode of shipment D.) Name and address of the person representing the Seller and Purchaser Purchase orders may include supplemental agreement clauses applicable to orders relating to the United States Government agreement and sub-contract. It is the intent of this agreement, that each Purchaser, when available, will order and invoice via Electronic Data Interchange (EDI), on a daily basis or as required. Each EDI order will reference the 1ocation's purchase order number, date ordered, and the name of the person entering the order. This method is solely a vehicle for transporting data between the parties. Purchaser commits to place a full 100% of its annual requirements of material and/or equipment covered under this Agreement with the exception of customer directed procurements and any notes appearing on attachments. Purchaser reserves the right on any purchase order issued hereunder for the work covered by this Agreement, to award up to 100% of its requirements to other suppliers in the event that one or more of the following occurs: -4- A.) Seller ceases to remain a qualified supplier pursuant to Purchaser's qualification requirements. B.) Seller is unable to meet Purchaser's delivery, quality, or Goal requirements (Articles 8, 16, and 4, respectively) C.) Seller is in default of any of its obligations under this Agreement or under purchase order issued pursuant to this Agreement. In the event, however, that Purchaser does not achieve this purchase commitment, Seller may continue the relationship, on terms stated, or terminate this Agreement as if Seller had given notice of termination pursuant to Article 2. The preceding sentence states the sole recourse of the Seller for any inability or failure by the Purchaser to meet the stated purchase commitment. 9. CYCLE TIME: Seller is committed to the Goal of continuous improvement on all current cycle for commodities covered under this agreement. 10. AGREEMENT ADMINISTRATION: Contractual agreement review meetings will be held on an as-needed basis, but no fewer than one (1) per calendar year, to mutually evaluate the performance of each of the parties. The GEPS Supplier Scorecard will be the basis for the review with the areas to be addressed will include, but not be limited, to the following: - Information communication quality and accuracy - Purchase volume/payment history - Delivery/order lead time performance - Emergency order handling - Productivity teams status (i.e. Design Integration, Quality and Resource Planning) - Cost reductions implemented/documented -5- At each review, the performance of each participant will be quantified where applicable. Goals to be achieved before the next review will be mutually established. 11. FORECASTING: Purchaser will provide as much forecasting information as possible to assist Seller in establishing and maintaining adequate stocking levels and/or to apply effective production control techniques (i.e. level load shop, perform line of balance, etc.) 12. TERMS OF PAYMENT: Payment by Purchaser shall be Net 45 days following the later date of Seller's invoices or receipt of product and services by Purchaser. Seller will re-bill any unearned discounts beyond 17 calendar days. GE Capital will negotiate payment discounts separately. 13. INVOICING: Invoices will be submitted by Seller to the Purchaser location indicated on the purchase order. Invoices will reference Purchaser's purchase order number and will contain such other information as Purchaser may reasonably request. As referenced in Article 8 "ORDERING" in the future the Seller will invoice the Purchaser via Electronic Data Interchange (EDI). Each EDI invoice must reference the 1ocation's purchase order number, item number, schedule number, and other required data as determined by Purchaser's Accounts Payable Organization. 14. SHIPPING TERMS: All shipments will be FOB Shipping Point, title to said goods to pass to Purchaser upon delivery to Purchaser's dock. Transportation charges to be billed directly to Purchaser by carrier and will be borne by Purchaser. Seller must use Purchaser's designated corporate- agreement careers which are indicated on the purchase order. Risk of loss remains with Seller until delivered to Purchaser. 15. SPECIFICATIONS: Product supplied under this agreement to be either commercial grade or specialty grade as defined by Purchaser's specifications or manufacturer stock number. No substitutions will be allowed without Purchaser's written approval. -6- 16. QUALITY: Seller agrees to meet purchaser's quality requirements and to work towards the established Purchaser's goal of a 6 Sigma Quality Level. Purchaser requirements include: * Process control of critical processes. * Responding to corrective action requests. * Established quality measurements. * Established quality improvement measurements. * A continuous improvement program to increase quality. * A documented quality system. * A documented quality program. * Maintain ISO 9000 Certification. The Seller also agrees to meet all quality requirements defined in Purchaser's supplier product quality plans as set forth in the purchase order. Failure of Seller to meet Purchaser's quality and qualification requirements will result in disqualification. 17. SECRECY AGREEMENT: The technical data and information which has been or may hereafter be furnished to Seller by Purchaser in connection with the Seller's supply of turbine related items, or purchasing services therefore, is the property of Purchaser, and has been furnished solely to enable Seller to render service to Purchaser, and has been furnished solely to enable Seller to render service to Purchaser and with the understanding (1) that Seller will not use or reproduce such technical data and information for any other purpose, (2) that Seller will take all reasonable care to ensure that such technical data and information is not disclosed to other parties, except to enable such parties to render service to Purchaser for products covered under this Agreement provided that in all such cases Seller shall require acceptance of this provision by the other party, (3) that Seller will not furnish, disclose, ship, export or re-export, directly or indirectly, any Purchaser furnished technical data or information (including computer software) and direct products thereof without first receiving the prior written consent of Purchaser and (4) that upon request Seller will promptly return all such technical data and information at any time during or after completion of such supply or purchasing services. The foregoing restrictions on disclosure and use of Purchaser's technical information and data shall not apply to any technical information and data which: -7- a.) is already in Seller's possession at the time of first receipt from Purchaser; or b.) is independently developed by Seller's employees who had not had access to the technical information and data; or c.) is or becomes part of the public domain without breach of this agreement by Seller; or d.) is rightfully obtained by Seller from third persons without restriction or breach by this agreement by Seller. Execution of this agreement by both Purchaser and Seller indicates acceptance of the above provision. 18. INDEMNIFICATION: The Seller agrees to hold harmless and indemnify the Purchaser (its Customer) and other third parties from any rightful claims for personal and property damage and any associated costs, including but not limited to legal expenses, when such claims arise out of the performance of this agreement and are determined to be the result of the willful misconduct, or negligent acts or omissions of the Seller or Seller's agents, employees, or subcontractors. Furthermore, Seller agrees to maintain and provide insurance covering these liabilities in the amount and form as required under the Insurance Clause of this agreement. 19. INSURANCE: The Seller shall comply with the Social Security and Unemployment Insurance Laws, as now or hereafter enforced, and holds the Purchaser harmless against any demands for contribution of taxes with respect to the work payable under any such laws. Without limiting any of the other obligations or liabilities of the Seller, the Seller shall, before commencing work on the Purchaser's or its Customer's premises provide and maintain, until the work is completed and accepted by the Purchaser, minimum insurance coverage as follows:
TYPE OF COVERAGE LIMITS ---------------- ------ Workmen's Compensation, including Statutory coverage under Longshoremen's and Harbor Worker's act, where applicable Employer's Liability $1,000,000 Each Occurrence Comprehensive General Liability $2,000,000 Bodily Injury... Combined Single Limit Property Damage (including coverage for damaged Each Occurrence caused by blasting, collapse or structural injury and/or damage to property in the Seller's care, custody, or control)
-8-
TYPE OF COVERAGE LIMITS ---------------- ------ Contractor's Protective Liability, operations of $1,000,000 covering subcontractors, where applicable Combined Single Limit Bodily Injury... Each Occurrence Property Damage... Contractor's Liability in accordance $1,000,000 with agreement(s) between Purchaser and Seller Combined Single Limit Bodily Injury... Each Occurrence Property Damage... Comprehensive Automobile Liability covering $1,000,000 all owned, hired and non-owned automotive Combined Single Limit equipment used by or with the permission of Each Occurrence the Seller (including the loading and unloading thereof) with the Purchaser included as an additional insured Bodily Injury... Property Damage...
All such insurance policies shall be delivered to the Purchaser, if and when directed by the Purchaser, and in any event, the Seller shall arrange with the insurance carriers to furnish the Purchaser with a completed Certificate of Insurance Form, indicating that the required coverage are in force and will not be canceled or changed until ten (10) days after written notice is given to the Purchaser. -9- 20. PROPRIETARY RIGHTS AND PATENT INDEMNIFICATIONS: (a) If Seller provides Purchaser with one of Seller's "off-the-shelf" items which has been designed and developed by Seller, Purchaser acknowledges that Seller has all proprietary rights to such items, and Seller provides Purchaser with a license to use such items by selling said items to Purchaser. Such items are subject to the patent indemnification provisions of Article 18 of the "Conditions of Purchase". b) If Purchaser and Seller work together to design and develop a product or a process, all proprietary rights in such product or process will belong to Purchaser. Seller agrees to assign all rights in such products or processes to Purchaser. Purchaser reserves the right to assign or license all or part of such proprietary rights to Seller on a case-by-case basis, depending on several factors such as the amount of any development funds provided by Seller, the amount of time spent by Seller's engineers in developing a product or process at Seller's expense, and the amount of risk incurred by Seller with respect to the final commercial acceptability of the product or process. Any such assignment or license will be subject to GE Corporate Policy No. 30-10. The patent indemnification provisions of Article 18 of the "Conditions of Purchase" will not apply when Purchaser owns all proprietary rights; however, when Purchaser assigns or licenses all or part of the proprietary rights to Seller, the patent indemnification provisions of Article 18 of the "Conditions of Purchase" will be reviewed for applicability on a case-by-case basis. (c) If Purchaser provides Seller with specifications for a product or process, and Purchaser has designed and developed the specifications at its own cost through its own employees, consultants, subcontractors, etc., then all proprietary rights to the product or process belong to Purchaser. In this case, the patent indemnification provisions of Article 18 of the "Conditions of Purchase" will not apply to Seller. 21. FORCE MAJEURE: Neither party shall be liable to the other for default or delay in the performance of any of its obligations hereunder due to act of God, accident, fire, flood, storm, riot, war, sabotage, explosion, strike, government law, labor disturbance, national defense requirement, ordinance, rule or regulation, inability to obtain electricity or other type of energy, raw material, labor, equipment, or transportation, or any other cause beyond its reasonable control and without its fault or negligence, or as -10- otherwise provided herein. Seller shall notify Purchaser in writing of any impending delay due to the occurrence of any of the preceding events. In the event of a partial interruption or failure of Seller's sources of product or distribution capability, Purchaser shall have the right to determine the distribution of its allocation among it's locations serviced from Seller's producing points. 22. COMPLETE AGREEMENT: This Agreement, including all matters expressly incorporated herein by reference, and the partnering agreement dated May 8th 1992, constitutes the entire and any agreement between the parties respecting the subject matter hereof, and there are merged herein all prior and pre-existing representations and agreements made by and between Purchaser and Seller. 23. NOTICES: Notices, reports, and other communications made with respect to this agreement shall be given in writing, addressed to the parties at the following addresses or such other addresses as may be designated in writing by either party to the other. All notices required to be given hereunder shall be effective when delivered by hand or when deposited in the United States Mail, with proper postage for First Class Mail - Prepaid.
To Purchasers: Manny Gaspar Others on distribution: Jay Valachovic Walter Rhodes Strategic Sourcing General Electric Company GE Power Systems P.O. Box 648 Greenville, SC 29602 To Seller: Others on distribution: Richard M. Bolduc Douglas Sukeforth Outside Sales Contracts Manager Jim Ashton Ralph Robbins Manager of Sales Mid-State Machine Products, Inc. 1501 Verti Drive Winslow, ME 04901 (207) 873-6136
24. AMENDMENTS AND WAIVERS: No terms or provisions of this agreement may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the party against -11- whom the enforcement of such change, waiver, discharge or termination is sought. 25. GOVERNING LAW: The validity, interpretation and performance of this agreement shall be determined in accordance with the Laws of the State of New York. IN WITNESS WHEREOF THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE EXECUTED: PURCHASER SELLER General Electric Company Mid-State Machine Products, Inc. Power Systems Sourcing Operation 1501 Verti Drive P.O. Box 648, 300 Garlington Road Winslow, ME 04901 Greenville, SC 29602 Signed /s/ Manny Gaspar Signed /s/ Richard M. Bolduc ---------------------------- -------------------------- By: Manny Gaspar By: Richard M. Bolduc Title: Strategic Sourcing Title: Outside Sales Contracts Manager Date 12/01/98 Date 12/01/98 ------------------------------ ---------------------------- Signed: /s/ Jay B. Valachovic Signed: /s/ Ralph Robbins --------------------------- ------------------------- By: Jay Valachovic By: Ralph Robbins Title: Strategic Sourcing Title: Manager of Sales Date: 12/01/98 Date: 12/01/98 --------------------------- -------------------------- rbgeagre November 9, 1998 -12- STANDARD SCRAP AGREEMENT Seller agrees to the following in performing value added work to General Electric owned and consigned materials: - - Parts will be machined by Seller to the drawings and specifications as identified in the purchase order. Should subsequent revisions be identified, the Seller will be notified prior to incorporation, and the purchase order will be amended to show the proper revision. - - It is understood that repair procedures that have been approved by Purchaser will remain acceptable for the duration of this agreement. - - Seller has no liability for latent defects uncovered during its operations and dispositioned as scrap by Purchaser to the extent, the cause of scrap is outside the scope of the purchase order. - - If the scrap rates exceed the allowable percentages as set forth below, the Seller will forfeit their contributed added value (at the pricing defined in the purchase order) as well as the full value of the part consigned by Purchaser. The total amount forfeited will be credited against Sellers current and/or future invoices. - - Seller will notify Purchaser of scrapped parts per an agreed upon procedure initiated at the beginning of this Agreement. The format and frequency of the written report will be established between Purchaser and Seller. Allowable Setup Rates
COMMODITY SCRAP RATE --------- ---------- Nozzles 2.5% Sand Castings 3.0% Forgings (IN706, M152) 2.5% Forgings (steel) 2.5% Shroud Rings 2.5%
Purchaser Seller --------- ------ General Electric Company Power Systems Sourcing Operation Mid-State Machine Products, Inc. Rm 159 Gas Turbine Plant 1501 Verti Drive Greenville, SC 29607 Winslow, MD 04901 Signed: /s/ J. B. Valachovic Signed: /s/ Ralph Robbins ------------------------- ------------------------- By: J. B. Valachovic By: Ralph Robbins ---------------------------- ---------------------------- Title: Sourcing Leader Title: Manager of Sales ------------------------- ------------------------- Date: 12/1/98 Date: 12/1/98 -------------------------- -------------------------- [LOGO] ATTACHMENT A 706/718 INCONEL MACHINING AND UT TESTING CONTRACT Initial term of this contract starts November 1, 1998 and continues through December 31, 2003. This contract includes 100% of the ultrasonic testing and machining of all requirements for Inconel rotor components. revised 11/6/98
1999/2000 INCONEL PRICES (INCLUDES (INCLUDES UT & FPL) UT & FPL) 1996 1998 1996 1998 1996 1999/2000 PART DESCRIPTION PART NO. PRICES GRINDING FPI UT PRICES MACHINING - ---------------- -------- --------- -------- ---- ---- --------- --------- 6FA 1ST STG T/W 109E9194P001 $28,630 $3,810 $25,590 $ 21,780 6FA 2ND STG T/W 109E9196P001 $28,210 $3,910 $25,233 $ 21,323 6FA 3RD STG T/W 109E9196P001 $28,121 $3,910 $25,155 $ 21,245 6FA 1-2 SPACER 109E9195P001 $34,325 $500.0 $2,550 $30,494 $ 27,444 6FA 2-3 SPACER 109E9197P001 $32,380 $500.0 $2,850 $28,824 $ 25,474 6FA AFT SHAFT 109E9199G001 $43,153 $ 5,152.80 $34,200 $ 29,047 7FA 1ST STG T/W 109E5589P001 $36,072 $3,660 $32,102 $ 25,847 7FA 2ND STG T/W 109E5591P001 $36,200 $3,960 $32,251 $ 25,562 7FA 3RD STG T/W 109E5593P001 $34,678 $4,060 $30,927 $ 24,358 7FA 1-2 SPACER 109E5590P001 $40,502 $500.0 $2,800 $35,945 $ 31,527 7FA 2-3 SPACER 109E5606P001 $39,676 $500.0 $3,100 $35,257 $ 28,874 7FA AFT SHAFT 109E5594P001 $50,148 $ 6,147.75 $39,600 $ 32,783 9EC 1ST STG T/W 109E8741P001 $45,676 $4,060 $40,578 $ 36,518 9EC 2ND STG T/W 109E8743P001 $45,976 $4,360 $40,878 $ 36,518 9EC 3RD STG T/W 109E8745P001 $43,978 $4,460 $39,137 $ 34,677 9EC 1-2 SPACER 109E8742P001 $50,481 $500.0 $3,200 $44,760 $ 41,050 9EC 2-3 SPACER 109E8744P001 $49,671 $500.0 $3,600 $44,089 $ 39,989 9EC CONICAL AFT 109E8746P001 $46,804 $41,071 $ 41,071 9FA 1ST STG T/W 109E5254P001 $60,295 $4,060 $44,631 $ 40,571 9FA 2ND STG T/W 109E5256P001 $48,992 $4,360 $43,525 $ 39,165 9FA 3RD STG T/W 109E5258P001 $47,804 $4,460 $42,494 $ 38,034 9FA 1-2 SPACER 109E5255P001 $59,641 $600.0 $3,200 $52,800 $ 49,427 9FA 2-3 SPACER 109E5257P001 $48,700 $600.0 $3,600 $43,149 $ 35,646 9FA AFT SHAFT 109E5259P001 $64,613 $10,613.03 $48,600 $ 37,987
(INCLUDES UT & FPL) 1999/2000 1999/2000 1999/2000 1999/2000 1999/2000 PART DESCRIPTION UT FPI AWS-SLEEVE GRINDING PRICES - ---------------- --------- --------- ---------- --------- --------- 6FA 1ST STG T/W $3,239 $ 25,019 6FA 2ND STG T/W $3,324 $ 24,647 6FA 3RD STG T/W $3,324 $ 24,569 6FA 1-2 SPACER $2,168 $450 $ 30,062 6FA 2-3 SPACER $2,423 $450 $ 28,347 6FA AFT SHAFT $ - $1,250 $4,800 $ 35,097 7FA 1ST STG T/W $3,111 $ 28,958 7FA 2ND STG T/W $3,366 $ 28,928 7FA 3RD STG T/W $3,451 $ 27,809 7FA 1-2 SPACER $2,380 $450 $ 34,357 7FA 2-3 SPACER $2,635 $450 $ 31,959 7FA AFT SHAFT $ - $2,355 $5,500 $ 40,638 9EC 1ST STG T/W $3,451 $ 39,969 9EC 2ND STG T/W $3,706 $ 40,224 9EC 3RD STG T/W $3,791 $ 38,468 9EC 1-2 SPACER $2,720 $450 $ 44,220 9EC 2-3 SPACER $3,060 $450 $ 43,499 9EC CONICAL AFT $ - $ 41,071 9FA 1ST STG T/W $3,451 $ 44,117 9FA 2ND STG T/W $3,706 $ 41,756 9FA 3RD STG T/W $3,791 $ 41,825 9FA 1-2 SPACER $2,720 $540 $ 52,687 9FA 2-3 SPACER $3,080 $540 $ 39,246 9FA AFT SHAFT $ - $3,650 $9,021 $ 50,658 Inconel Page 1
[LOGO] ATTACHMENT A 706/718 INCONEL MACHINING AND UT TESTING CONTRACT Initial term of this contract starts November 1, 1998 and continues through December 31, 2003. This contract includes 100% of the ultrasonic testing and machining of all requirements for Inconel rotor components. revised 11/6/98
1999/2000 INCONEL PRICES (INCLUDES (INCLUDES UT & FPL) UT & FPL) 1596 1998 1996 1998 1596 1999/2000 PART DESCRIPTION PART NO. PRICES GRINDING FPI UT PRICES MACHINING - ---------------- -------- --------- -------- ---- ---- --------- --------- 9H 1ST STAGE T/W 108E4820P901 $4,060 $ 86,574 $ 82,514 9H 2ND STAGE T/W 112E5898P901 $4,360 $ 88,679 $ 84,319 9H 3RD STG T/W 108E4822P901 $4,460 $ 90,007 $ 85,547 9H 4TH STG T/W 108E4823P901 $4,460 $ 85,353 $ 80,893 9H 1-2 SPACER 110E1486P901 $3,200 $154,350 $150,550 9H 2-3 SPACER 110E1487P901 $3,600 $164,587 $160,387 9H 3-4 SPACER 110E1488P901 $3,600 $ 80,737 $ 76,537 9H AFT SHAFT 110E1489P901 $94,272 $ 94,272
(INCLUDES UT & FPL) 1999/2000 1999/2000 1999/2000 1999/2000 1596 PART DESCRIPTION UT FPI AYS-SLEEVE GRINDING PRICES - ---------------- --------- --------- ---------- --------- --------- 9H 1ST STAGE T/W $3,451 $ 85,965 9H 2ND STAGE T/W $3,706 $ 88,025 9H 3RD STG T/W $3,791 $ 89,338 9H 4TH STG T/W $3,791 $ 84,684 9H 1-2 SPACER $2,720 $540 $153,810 9H 2-3 SPACER $3,060 $540 $163,987 9H 3-4 SPACER $3,060 $540 $ 80,187 9H AFT SHAFT $ - $ 94,272
PURCHASER SELLER General Electric Company Mid-State Machine Products, Inc. Power Systems Sourcing Operation 1501 Verti Drive Greenville, SC 29602 Winslow, Me. 04901 Signed /s/ Jay Valachovic Signed /s/ Ralph Robbins ------------------------- ------------------------- By: Jay Valachovic By: Ralph Robbins Title: Strategic Sourcing Title: Manager of Sales Inconel Page 2 ATTACHMENT B RETAINING RING FABRICATION AND MACHINING/ NOZZLE MACHINING CONTRACT INITIAL TERM OF THIS AGREEMENT STARTS NOVEMBER 1, 1998 AND CONTINUES THROUGH DECEMBER 31, 2001. 1999/2000 RETAINING RING/ NOZZLE PRICES
revised 11/23/98 ---------------- 1998 1999/2000 QTY PART DESCRIPTION PART NO. PRICES PRICES COMMENTS --- ---------------- -------- ------ ---------- -------- 62 100 7FA+ retaining ring 109E9916G1/116E1942G1 $56,039.00 $49,122.00 material change and qty disc. 9 8 6FA retaining ring 109E9126G1 $36,751.70 $38,751.70 no opportunities at present 76 73 7E retaining ring 932E3157G3 $15,803.34 $15,295.34 redesign lifting lugs 11 9 9E retaining rings 932E0176G4 $20,159.66 $19,651.66 redesign lifting lugs Note: The above pricing includes all materials and machining to make complete 1998 1999/2000 PART DESCRIPTION PART NO. PRICES PRICES COMMENTS ---------------- -------- ------ ---------- -------- 62 95 7FA+ 3rd stage nozzle 103E3291G1 $23,580.00 $15,327.00 volume driven discount 8 8 9E 3rd stage nozzle 103E5506 $16,594.00 $14,936.00 volume driven discount 15 15 9FA+ 3rd stage nozzle 116E1334 $22,200.00 no history 11 11 9FA+ 3rd stage nozzle 101E2243 $32,000.00 $28,800.00 volume driven discount Note: Nozzle pricing includes all machining except EDM of Seal Slots and cord length. 62 95 7FA+ 3rd stage nozzle 103E3291G1 N/A $18,847.00 volume driven discount 8 8 9E 3rd stage nozzle 103E5506 N/A $18,280.00 volume driven discount 15 15 9FA+ 2nd stage nozzle 116E1334 N/A $27,912.00 volume driven discount 11 11 9FA+ 3rd stage nozzle 101E2243 N/A $32,760.00 volume driven discount Notes: Nozzle pricing includes all machining except EDM of seal slots (no materials) Prices are based on stated volumes or 85% of GE's requirements for each part number Mid State Machine will commit to 5 days cycle time with a minimum of 2 sets in wip per p/n.
Purchaser Seller General Electric Company Mid State Machine Products, Inc. Power Systems Sourcing Operation 1501 Verti Drive Greenville, SC 29602 Winslow, MA 04901 Signed /s/ Manny Gaspar Signed /s/ Ralph Robbins ---------------- ----------------- By: Manny Gaspar By: Ralph Robbins Title: Strategic Sourcing Title: Manager of Sales Page 3 retrings [LOGO] DIAPHRAGM MACHINING CONTRACT ATTACHMENT C Initial term of this agreement starts November 1, 1998 and continues through April 1, 2000. 1999/2000 DIAPHRAGM MACHINING PRICES revised 1123/98
CASTING & MILL ONLY TOTAL TOTAL QTY DESCRIPTION PART NUMBER CASTING MATERIAL PRICE --- ----------- ----------- ---------- ---------- ---------- 64 102 7F 2ND STG 329A3269G16 $10,732.20 $10,732.20 $17,692.93 64 97 7F 3RD STG 329A3274G25 $12,963.00 $12,963.00 $19,164.27 8 6 7E 2ND STG 362A1329G1 $ 6,347.60 $ 6,347.60 $11,465.00 58 55 7E 2ND STG 342A1138G10 $ 6,347.60 $ 6,347.60 $11,465.00
Notes: Workscope includes milling only. Mid-State will distribute the purchase of castings among Western Foundry and Quaker City Castings on a 50/50 dollar volume basis through the end of June 1999. Any casting purchase agreement or direction thereafter, with these (2) suppliers or any new supplier, shall be addressed with GE beforehand. PURCHASER SELLER General Electric Company Mid-State Machine Products, Inc. Power Systems Sourcing Operation 1501 Verti Drive Greenville, SC 29602 Winslow, Me 04901 Signed Manny Gaspar Signed Ralph Robbins ------------------------- ------------------------- By: Manny Gaspar By: Ralph Robbins Title: Strategic Sourcing Title: Manager of Sales Page 4 diaphrams [LOGO] SHROUD MACHINING CONTRACT ATTACHMENT D Initial term of this agreement starts November 1, 1998 and continues through December 31, 2001. 1999/2000 SHROUD PRICES revised 1/23/98
1998 1999/2000 QTY PART DESCRIPTION PART NO. prices prices COMMENTS --- ---------------- -------- ------ ---------- -------- Potential for savings through 4 6 9FA+1st stage shroud 332B6987G1 $ 77,437.00 $ 77,437.00 material substitute 4 6 9FA+2nd stage shroud 332B6968G1 $208,451.00 $297,011.00 Material savings Redesign, material change HR120 bar 11 9 9E uprate inner shroud 213C1430/236C1121G001 $ 53,156.56 $ 43,000.00 stock
PURCHASER SELLER General Electric Company Mid-State Machine Products, Inc. Power Systems Sourcing Operation 1501 Verti Drive Greenville, SC 29602 Winslow, Me 04901 Signed Manny Gaspar Signed Ralph Robbins ------------------------- ------------------------- By: Manny Gaspar By: Ralph Robbins Title: Strategic Sourcing Title: Manager of Sales Page 5 shrouds EX-10.4 8 EXHIBIT 10.4 Exhibit 10.4 PURCHASE AGREEMENT This Agreement is made as of the 26th day of October, 1999, by and between wCaterpillar Inc., a Delaware corporation ("Buyer"), and Galaxy Industries Corporation, a privately held Michigan Corporation, ("Seller"), 41150 Joy Road, Plymouth, Michigan 48170, for purchase and sale of 3406C and 3406E cylinder block assemblies. Buyer and Seller hereby agree as follows: 1. PRODUCTS COVERED BY AGREEMENT - --------------------------------- This Agreement concerns the purchase and sale of 3406C and 3406E cylinder block assemblies for the Caterpillar model 3406C and 3406E engines (such cylinder block assemblies are hereinafter called "Product" and are more particularly identified by the Caterpillar Part numbers specified in Exhibit A), manufactured to Buyer's specifications. 2. PURCHASE AND SALE OF PRODUCT - -------------------------------- Seller will maintain adequate capacity to manufacture not less than 13,750 units of Product annually based on a five day per week work schedule calculated at an eighty (80) percent efficiency factor. Buyer commits to purchase a minimum of 7,500 units of Product annually. Notwithstanding the foregoing purchase requirements obligation, nothing in this Agreement shall preclude Buyer from sourcing Product from suppliers other than Seller in order to enable Buyer to meet governmentally determined local country sourcing or minimum content requirements, whether mandated or established by other means such as quotas, duties or fiscal incentives or penalties. 3. PRODUCT PRICES - ------------------ Prices are effective February 23, 2000 and are as shown in Exhibit A and subsequently adjusted as provided in Section 9. Exhibit A may be modified from time to time by the signed written agreement of both parties. 4. TOOLING - ----------- From time to time, Buyer will issue to Seller durable tooling, fixture and/or gauging purchase orders authorizing Seller to purchase, and to charge back to Buyer, certain durable tooling, fixtures and/or gauging. Such durable tooling, fixtures and/or gauging will not exceed $1,700,000 in cost and is identified in Exhibit B hereto. Buyer shall retain ownership of all such items listed in Exhibit B, and Seller agrees to properly maintain such items at its own expense. 5. TERM - -------- Buyer shall commence its purchases under this Agreement February 23, 2000. Unless terminated pursuant to other provisions herein, this Agreement shall continue until terminated by either party at any time upon not less than twelve (12) months prior written notice to the other party specifying the effective date of termination; provided, however, that in no event shall the effective date of termination be prior to February 23, 2006. 1 6. TERMINATION - -------------- Buyer may terminate this Agreement at any time, either totally or partially, in the event of the following defaults by the Seller which are not cured within thirty (30) days of written notice to the Seller. (a) QUALITY - Products do not consistently meet Buyer's technical, quality, reliability, and other specifications as they exist today and are communicated to Seller from time to time. Buyer will not be liable for any expenses, material, tooling, labor, or burden due to substandard quality. (b) DELIVERY - Seller does not meet all Buyer schedules with timely shipments and daily shipments, if required. Buyer should not have to expedite normal deliveries. It is the obligations of the Seller to maintain an up to schedule condition after a reasonably time period. That time period will be agreed upon by Seller and Buyer for each part number listed in Exhibit A. Upon cases of nondelivery, in addition to any other rights hereunder or provided by law, Buyer has the right to purchase the needed Product on the open market in a commercially reasonable manner, and Buyer and Seller agree to negotiate "cost to cover" charges as well as mitigate Buyer damages. (c) COMPETITIVENESS - Seller fails to be responsive to the market place or fails to remain competitive with other manufacturers of comparable parts in terms of price, quality, quantity, availability, engineering, services, technology, reliability, and timely delivery. For purposes of this contract, prices shown in Exhibit A are deemed to be competitive. (d) SELLER INSOLVENCY - Seller shall become insolvent or otherwise generally be unable to pay debts as they come due, or make a general assignment for the benefit of creditors. (e) SELLER BANKRUPTCY - A petition under any bankruptcy act or similar statute is filed by a creditor or Seller and is not vacated with ten (10) days through court order. (f) DEFAULT GENERALLY - Default by Seller in any obligation owed by Seller to Buyer. Buyer's decision on termination shall be final. Seller has (30) days from postmarked date of written notice to rectify defaults. Buyer will be reasonably in making the final decision. 7. USE OF OTHER SUPPLY SOURCES - ------------------------------- Nothing in this Agreement shall prevent Buyer from seeking other sources for Product if Seller's production capacity is insufficient to meet Buyer's needs. Seller will be provided the opportunity to quote additional volumes. 8. SHIPPING INSTRUCTIONS, TERMS AND CONDITIONS - ----------------------------------------------- Buyer requires 100% on time shipments of the delivery plan to meet production and service requirements. Orders will be placed using Buyer's standard purchase order and shipping instruction forms. Any special freight charges will be Seller's responsibility if necessary to meet not more than one hundred fifteen percent (115%) of Buyer's then current requirements, provided Seller is given not less than twenty (20) days notice of such requirements. The terms and conditions of Buyer's purchase order will govern these purchases to the extent that they are not inconsistent with this Agreement. 2 9. PRICE CONTAINMENT - --------------------- Both Seller and Buyer are committed to controlling and reducing costs, and both recognize that effective cost control is of the essence to this Agreement. While this Agreement is in effect, Seller will maintain a cost control and reduction program with respect to Product, and will review costs on a regular basis for progress toward the objective of maintaining or reducing Seller's prices to Buyer. A constant interaction between Buyer's and Seller's engineering personnel is essential. All documented cost savings on Seller's machining of the cylinder block, whether through the efforts of Seller or Buyer, will be shared on a 50/50 basis. 10. ASSIGNMENT; APPLICABLE LAW - ------------------------------- This Agreement is not assignable by Seller without the written consent of Buyer and will be governed by and construed in accordance with the laws of the State of Illinois, without regard to the conflict of laws provisions thereof. 11. CHANGE IN OWNERSHIP AND CONTROL - ------------------------------------ During this Agreement, if there is a change in the ownership and control of either party, the other party shall have the option of terminating this Agreement immediately by giving written notice thereof. For the purposes of this Section 11, a change in the ownership and control of either Buyer or Seller or a parent company of either party, if appropriate, shall be deemed to have occurred if and when any one or more persons acting individually or jointly hereafter becomes a beneficial owner, directly or indirectly, of securities representing twenty-five percent (25%) or more of the combined voting power of the then outstanding securities of Seller or Buyer or the parent company of either party. 12. QUALITY - ------------ The Quality System Standard QS-9000 Section 1 shall be the fundamental quality system standard applied to the processes required to produce Caterpillar products. In addition, there are Buyer specific quality system and process control elements that shall be included as stated in the Supplier Guideline for preparing Quality Plans and the Engine Division Supplier Certification Guidelines (the "Buyer Standards"). The seller shall develop quality systems and process control programs that are documented in adequate detail that fulfill both the QS-9000 standard and Buyer standards. There may be additional data required based on the type of product being produced and supplied to Caterpillar. The supplier shall provide copies of the Quality Manual, quality systems and process control support documentation upon request by Buyer representatives. Buyer may request the supplier provide periodic statistical data on critical process and product characteristics. Changes to the manufacturing processes and/or product shall be communicated to Buyer prior to implementing the change by completing the Production Part Approval Process (PPAP) and utilizing the Process Change Management process. This will include changes required by Buyer's design changes or changes by the seller to improve the process throughput, cost, quality and/or capability. The Global 8D Problem Solving process shall be the preferred method for documenting problems and corrective actions. Seller shall validate and report metallurgical, dimensional, and soundness data to ensure Buyer's specification are fulfilled. Seller shall retain all records for a minimum of 2 years from the date of the last shipment. Copies of these records shall be provided to Buyer upon request. The seller shall obtain registration to QS-9000 by an accredited registrar by December 31, 2000. 3 13. INDEMNIFICATION - -------------------- Seller agrees to indemnify, defend, and hold buyer harmless against and from all claims, demands, liabilities, loss, damage, cost, and expense, of whatsoever nature, arising from or in any way connected with the injury or death of any person or loss or damage to property as a consequence of, or attributable to, any defect of design, material, or workmanship of Product or failure of Product to conform with Seller's and Buyer's specifications, drawings, and data. 14. FORCE MAJEURE - ------------------ Neither Buyer nor Seller shall be liable for any delay in or failure of performance of their respective obligations hereunder if such performance is rendered impossible by reason of fire, explosion, earthquake, accident, breakdown, strike, drought, embargo, war, riot, act of God or of public enemy, an act of governmental authority, agency or entity, shortage of raw materials, or any other contingency, delay, failure or cause, beyond the reasonable control of the party whose performance is affected, irrespective of whether such contingency is specified herein or is presently occurring or anticipated by either party. Upon the occurrence of any event covered by this provision, Seller and Buyer shall make every effort to continue to maintain as much as possible the supplier-customer relationship established under this Agreement. However, in the event Buyer and Seller is unable to meet its obligations hereunder because of the conditions described above and such inability continues for a period of two (2) months, the other party shall have the right to terminate this Agreement upon thirty (30) days prior written notice. 15. WARRANTY PARTICIPATION - --------------------------- Seller warrants that each Product shall be in full conformity with Seller's and Buyer's specifications, drawings, and data. Seller agrees to credit Caterpillar for any Product covered under the standard warranty provided by Caterpillar to its customers and sold by Seller, which is deemed defective through a joint review process performed by Buyer and Seller, in the amount of Dealer Net Price, limited to three (3) times the purchase order price, plus any reasonable and customary charges for labor performed during normal working hours caused by failure of the Product or its replacement. For any ancillary damage caused by Product failure, where Product was the causal part, as identified through a joint review process, Seller shall credit Buyer for the cost of any and all parts damaged because of the Product failure in the amount of dealer net price, not to exceed a total amount for ancillary damage of $100,000 per calendar year. These costs shall be identified by Caterpillar through its Field Incident Reports and Service Information System. Caterpillar agrees to make available appropriate engineering personnel for review of defective Product as requested by Seller, at Caterpillar's facility. 4 16. MISCELLANEOUS - ------------------ This Agreement and the terms and conditions referenced in any purchase order issued by Buyer in connection with this Agreement (to the extent not inconsistent with this Agreement) constitute the entire agreement and understanding between the parties with respect to the subject matters herein and therein, and supersede and replace any prior agreements and understandings, whether oral or written, between them with respect to such matters. The provisions of this Agreement may be waived, altered, amended or repealed in whole or in part only upon the written consent of all parties to this Agreement. The waiver by either party of any breach of this Agreement shall not be deemed or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous of this Agreement. Invalidation of any of the provisions contained herein, or the application of such invalidation thereof to any person, by legislation, judgment or court order shall in no way affect any of the other provisions hereof or the application thereof to any other person, and the same shall remain in full force and effect unless enforcement as so modified would be unreasonable or grossly inequitable under all the circumstances or would frustrate the purposes hereof. Section headings contained herein are for ease of reference only and shall not be given substantive effect. This Agreement may be signed in one or more counterparts each to be effective as an original. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized representatives as of the date first set forth above. CATERPILLAR INC. GALAXY INDUSTRIES CORPORATION ("BUYER") ("SELLER") By: /s/ W. M. McCowan By: /s/ BUD GOLDSMITH ------------------------- -------------------------------- Title: GESM Title: PRESIDENT/CEO ---------------------- -------------------------------- Date: November 9, 1999 Date: OCTOBER 26, 1999 ---------------------- -------------------------------- By: /s/ C.P. Elwyn ---------------------- Title: Manufacturing Manager ---------------------- Date: December 15, 1999 ---------------------- By: ---------------------- Title: ---------------------- Date: ---------------------- 5 \ EXHIBIT A PRODUCTS: Caterpillar part numbers: 3406C 152-7646 3406E 137-8467 ANNUALIZED VOLUME PRICING: FOB Galaxy's Canton, Michigan plant. 3406C
Value Added Material & Mark-Up Containers Packaging Total 7,500/yr $739.18 $823.14 $2.25 $5.43 $1570.00 10,000/yr $676.59 $823.14 $2.25 $5.43 $1507.41 12,500/yr $622.13 $823.14 $2.25 $5.43 $1452.95
3406E
Value Added Material & Mark-Up Containers Packaging Total 7,500/yr $662.95 $815.06 $2.25 $5.43 $1485.69 10,000/yr $611.84 $815.06 $2.25 $5.43 $1434.58 12,500/yr $555.90 $815.06 $2.25 $5.43 $1378.64
Any combination requirements of 3406C, 3406E or replacement part numbers as defined in note one below may be added together in order to achieve annualized volume prices. NOTES: 1. Products include the current part numbers and any new or replacement part numbers issued by the Buyer and agreed upon by Buyer and Seller. 2. Prices are based on specifications and engineering change levels as of the commencement date of this agreement. 3. Prices are firm except for changes resulting from volume pricing as noted above, material & mark-up price changes. Price Containment provisions of Section 9, and changes in Buyer's specifications. 4. Price adjustments will be made as of the first of each month based upon annualizing the coming month's forecasted volume as provided by Buyer. Partial weeks or months will be prorated as nearly as possible to the exact monthly amount. 6 EXHIBIT B Durable tooling, fixtures and/or gauging owned by the Buyer: At the completion of this project Seller will provide complete documentation for the durable tooling, fixtures and/or gauging purchased on the Buyer's behalf. Documentation will include a complete description of the durable tooling, fixtures and/or gauging purchased and the price paid by Seller. Seller further commits to label all durable tooling, fixtures and/or gauging so that it is easily identifiable as the property of Buyer and to provide a complete list of all durable tooling, fixture and/or gauging to Buyer. Exhibit B will then be revised to reflect the additional detail. 7 EX-10.5 9 EXHIBIT 10.5 Exhibt 10.5 PURCHASE AGREEMENT This Purchase Agreement ("Agreement"), dated as of the 7th day of February 2000, is made by and between DANA CORPORATION, SPICER HEAVY AXLE & BRAKE DIVISION, 6938 Elm Valley Drive, Kalamazoo, Michigan, 49009 (hereinafter called "DANA"), and NATIONWIDE PRECISION PRODUCTS CORPORATION, 200 Tech Park Drive, Rochester, New York 14623 (hereinafter called "NPP"). WHEREAS, DANA is engaged in the design, manufacture and sale of axles, brakes and other powertrain components for medium and heavy duty trucks; and WHEREAS, NPP is in the business of performing machining services; and WHEREAS, DANA desires to use NPP to perform machining services on purchased components which are incorporated into DANA's axle products; NOW, THEREFORE, in consideration of the obligations and premises set forth herein, NPP and DANA agree as follows: 1.0 SERVICES AND TERMS OF PURCHASE 1.1 During the term of this Agreement DANA agrees to purchase from NPP and NPP agrees to supply to DANA, machined parts (collectively referred to hereinafter as "Parts") to be incorporated into DANA's axle products. 1.2 The Parts that Nationwide will supply include all part numbers listed on the attached Exhibit A. Exhibit A may be revised from time to time to add or delete Parts as agreed to by both parties. 1.3 The purchased components (such as raw castings, forgings, bearings, hardware, etc.) which are to be machined shall be purchased by NPP from suppliers and at costs designated by DANA. 1.4 DANA shall issue a blanket purchase order or orders to NPP for the Parts based on the agreed prices. DANA shall order Parts from NPP by issuing releases against such purchase orders, designating the mix and volume of Parts, delivery date and agreed delivery location. 1.5 Except as otherwise provided in this Agreement, Dana's standard purchase order items and conditions ("Standard Terms") in effect on the date a release is issued shall apply to all purchases made by DANA. The current Standard Terms are set out in the attached Exhibit B. DANA may change these Standard Terms from time to time without prior notice to NPP. 1 2.0 PRICE 2.1 NPP's invoice price for each Part supplied to DANA will be the sum (a) the price paid by NPP for the purchased component, (b) a handling fee equal to 2% of NPP's price for the purchased component(s), (c) the price of the machining services performed on the component. 2.2 The prices for all machining services performed through December 31, 2001, will be those set out in Exhibit A. The prices for machining services will be reduced by 2% in the year 2000 from 2001 pricing. The 2002 prices will remain in effect for the remainder of the term of this Agreement. 2.3 The machining services prices are based on NPP's receiving aggregate annual revenue of $7,800,000 for performing the services, including the 2% handling fee, in 2001 and $7,650,000 including the 2% handling fee, thereafter during the term of this Agreement. These prices will be in effect as long as NPP received +/- 10% of this value added billing annually. If the value added billings are outside the +/- 10%, DANA and NPP agree to reevaluate the pricing structure. Parts over-and-above those listed in Exhibit A may be added to meet revenue targets. 2.4 Charges for inbound freight to NPP from designated DANA suppliers and any non-returnable containers will be billed to DANA at cost. 2.5 NPP will procure all special gages, special cutting tools and general gages required to perform the machining services, at the best available prices, and DANA will pay NPP $1,500,000 for the tooling, on or after January 1, 2001, upon receipt of NPP's itemized invoice for the tooling and subject to full Production Part Approval Process ("PPAP") approval of the machined Parts produced therefrom. The tooling will be "Special Tooling" under Section 11 of the Standard Terms. The tooling will belong solely to DANA upon payment therefor and NPP will cooperate with DANA in the filing of any UCC Form 1 or similar documents evidencing its title. NPP will also procure all necessary machine fixtures, at its own expense, and these fixtures will belong solely to NPP. 3.0 DELIVERY 3.1 Delivery and pricing of the Parts will be F.O.B NPP's Plant in Rochester, NY. 3.2 DANA will provide reusable outbound shipping containers for the Parts. 3.3 DANA and NPP will mutually develop a packaging specification satisfactory to both parties. 2 3.4 DANA will select the freight carriers for inbound shipments to NPP and outbound shipments from NPP to DANA, negotiate the corresponding freight rates, and reimburse NPP for all freight charges that NPP will invoice separately. 4.0 INVOICE AND PAYMENT TERMS 4.1 NPP will invoice DANA when the Parts are shipped. 4.2 The terms of payment for undisputed invoices are net thirty (30) days from the receipt of the invoice, with a 1/2% discount off the invoice price for payments made within ten (10) days. 5.0 TERM AND CANCELLATION 5.1 This Agreement will be in effect from the date first written above through December 31, 2006, unless cancelled sooner as provided herein or in the Standard Terms. If the parties wish to extend this Agreement beyond the initial term for one-year renewal terms, they will commence renewal negotiations by July 1, 2005. 5.2 Section 18 of the Standard Terms (or any equivalent provision in a subsequent version of the Standard Terms providing for the termination by DANA for convenience) will not apply to this Agreement and DANA will not exercise any of its cancellation rights as long as NPP meets all performance criteria outlined in this Agreement. 5.3 The notice and cure period provided in Section 19 of the Standard Terms (or any equivalent provision in a subsequent version of the Standard Terms) will be ninety (90) days. 5.4 In the event either NPP or DANA (1) ceases to function, (2) liquidates, dissolves, sells substantially all of its assets, (3) undergoes significant management realignment or change, (4) merges or consolidates and is not the surviving corporation, the other party shall have the right to cancel this Agreement immediately by giving written notice. 6.0 OBLIGATIONS OF NPP In performance of its obligations under this Agreement, NPP agrees that it will: 6.1 PPAP all Parts prior to November 30, 2000. The PPAP process will commence no later than July 1, 2000. NPP is not responsible for the PPAP approval of purchased components. 3 6.2 Maintain adequate facilities and personnel to meet its obligations hereunder, including, but not limited to, development of an inventory control system to assure proper storage of purchased components and finished Parts and prompt handling of inquiries, orders and shipments. 6.3 Perform the machining services according to DANA's Supplier Quality Manual (11/89 Rev. 2) and Spicer Heavy Axle & Brake Division's QSR- 109 (October 1999). 6.4 Provide evidence of conformance to DANA's quality assurance procedures as reasonably requested and permit DANA or its designee upon reasonable advance notice to audit NPP's quality assurance procedures and review pertinent inspection records. 6.5 Not make modifications to the purchased components except in accordance with DANA's Parts specifications and/or written instructions. 6.6 Notify DANA promptly of all problems relating to the machining services or NPP's other obligations to be performed under this Agreement if such problems will impact delivery or quality of the Parts to be shipped to DANA. 6.7 Maintain such records relating to machining services provided under this Agreement as DANA may reasonably require. 6.8 Deliver the Parts in accordance with DANA's releases, subject to the following provisions: a. NPP is committed to 100% on time delivery, but in no event will be less than 98% on time, based on DANA's providing NPP with a rolling 4 (four) week firm schedule and a 5 (five) month planning forecast. b. If DANA permanently cancels its orders for any Parts, it will reimburse NPP for the costs of components for those Parts which NPP purchased within the forecast period and which are not returnable. c. DANA will assure that quantities of outbound packaging are sufficient to meet delivery schedules. d. Lack of performance by the freight carrier or the purchased components supplier without fault of NPP will not be considered non performance by NPP. 6.9 Maintain high quality standards that include but are not limited to the following: a. Maintain quality systems compliant with QS-9000. b. Achieve a 200 parts per million ("PPM") maximum target. 4 6.10 Maintain an inventory bank of 5 (five) days for high volume Parts and 10 (ten) days for low volume Parts. These banks may vary +50%. The high - versus low volume designations will be mutually agreed upon prior to January 1, 2001. 6.11 Provide an inventory of the tooling that is owned by DANA under Section 2.5. 6.12 Cooperatively work with DANA on an exit program to transition this business to another supplier or DANA's internal operations on the expiration, termination or cancellation of this Agreement. 7.0 DANA'S OBLIGATIONS In the performing of its obligations under this Agreement, DANA agrees that it will: 7.1 Provide NPP with the most current print revisions (including all specifications) available for the Parts at the commencement of this Agreement and from time to time thereafter as changes are made. In addition, if there are any revisions to the Part prints or specifications, DANA agrees to purchase all obsolete components and finished Parts in inventory at NPP, not to exceed a reasonable quantity and mix consistent with DANA's firm schedules and NPP's customary lead times for purchased components, prior to changeover. 7.2 Own the tooling used by third parties to manufacture the components that are purchased by NPP hereunder for machining and be responsible for any and all design changes, repairs and replacements for such tooling. 7.3 Provide facility space at no cost to NPP for the inventory bank described in Section 6.10, should DANA and NPP mutually agree to have the bank located outside NPP's facilities. 7.4 Provide all returnable drainage and packaging necessary for outbound shipments of Parts from NPP to DANA. 7.5 Assist NPP in resolving any quality issues with the purchased component suppliers should NPP be unable to resolve them directly and promptly. 7.6 Consider NPP as a preferred source for machining services and afford NPP the opportunity to quote any new or replacement business. 5 8.0 CONFIDENTIALITY 8.1 The confidentiality provisions of the Standard Terms attached hereto as Exhibit B will apply mutually to both parties during the term of this Agreement and will not be superseded by any subsequent version of the Standard Terms without both parties' written consent. 8.2 All materials, including without limitation documents, drawings, models, apparatus, sketches, designs and lists, furnished to NPP by DANA shall remain the property of DANA and shall be returned to DANA, erased and/or destroyed promptly at DANA's request, as well as all copies made thereof. 9.0 MISCELLANEOUS 9.1 NOTICES. All notices, requests, consents and other communications hereunder shall be deemed to have been duly given hereunder if in writing and, upon receipt when delivered by hand or sent by courier, facsimile transmission or telex, or three (3) calendar days after being mailed by first class mail, postage prepaid, in each case addressed as follows: To DANA: To NPP: Dana Corporation Nationwide Precision Products Spicer Heavy Axle & Brake Div. 200 Tech Park Drive 6938 Elm Valley Drive Rochester, New York 14623 Kalamazoo, Michigan 49009 Attn: Purchasing Manager Attn: Vice President - Sales or such address as the addressee party may have previously designated in writing by notice to the other party, and such notice or communication shall be deemed to have been given as of the date so delivered or mailed. 9.2 SUCCESSORS AND ASSIGNS; OTHER PARTIES. This Agreement and the parties' respective rights and obligations hereunder are not assignable by NPP or DANA without the prior written consent of the other party. 9.3. ENTIRE AGREEMENT. This Agreement, together with the Exhibits attached hereto, constitutes the entire agreement between the parties about the subject matter hereof and supersedes all prior agreements, representations, warranties, statements, promises, information, arrangements and understandings, whether oral or written, expressed or implied with respect to this subject. No modification or waiver of this Agreement shall be binding upon any party unless in writing and signed by or on behalf of the party against which the modification or waiver is asserted. 6 9.4 SEVERABILITY. Any term or provision of this Agreement which is held to be invalid or unenforceable shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of' this Agreement. 9.5 WAIVER. Neither the failure nor any delay on the part of NPP or DANA to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege available to NPP or DANA at law or in equity. 9.6 GOVERNING LAW. This Agreement shall in all respects be interpreted, construed and governed by and in accordance with the laws of the State of Ohio, without recourse to the conflicts of laws provisions thereof, and any action relating to this Agreement shall be brought exclusively in a state or federal court in the State of Ohio. IN WITNESS WHEREOF, NPP and DANA have caused this Agreement to be duly executed as of the date first above written. NATIONWIDE PRECISION DANA CORPORATION, PRODUCTS CORPORATION SPICER HEAVY AXLE & BRAKE DIVISION By: /S/ RONALD S. RICOTTA By: /S/ NORM BOISVERT -------------------------------- --------------------------------- Ronald S. Ricotta Norm Boisvert President & CEO VP & General Manager Date: 02/08/00 Date: 02/09/00 -------------------------------- --------------------------------- 7 EXHIBIT A NATIONWIDE PRECISION PRODUCTS
- ------------------------------------------------------------------------------ 2001 PART MACHINING FORECAST NUMBER DESCRIPTION PRICE NOTES - ------------------------------------------------------------------------------ 10524 ADJUSTER 1.23 31,734 21637 ADJUSTER 1.23 171 27842 ADJUSTER 1.23 6,612 31562 ADJUSTER 0.98 15,401 39448 ADJUSTER 1.23 10,232 82451 ADJUSTER 1.23 13,572 110243 ADJUSTER 0.98 217 111022 ADJUSTER 1.23 7,461 113884 ADJUSTER 1.23 8,037 113885 ADJUSTER 1.23 118776 ADJUSTER 1.23 304 119683 ADJUSTER 1.23 7,142 128616 ADJUSTER 0.79 128965 ADJUSTER 1.23 239,050 129128 ADJUSTER 0.79 231,473 129130 ADJUSTER 0.79 3,114 210108 ADJUSTER 1.23 4,216 210179 ADJUSTER 1.23 5,738 210286 ADJUSTER 1.23 3,087 210389 ADJUSTER 1.23 37744 BEARING CAP 3.69 12,350 39914 BEARING CAP 2.95 5,700 67809 BEARING CAP 1.97 5,016 67810 BEARING CAP 1.97 475 68841 BEARING CAP 2.95 26,125 08642 BEARING CAP 1.97 11,662 78928 BEARING CAP 1.97 5,073 113818 BEARING CAP 2.46 4,081 113819 BEARING CAP 2.46 1,500 126807 BEARING CAP 8.09 40,608 127471 BEARING CAP 1.62 51,151 127473 BEARING CAP 1.62 7,125 128603 BEARING CAP 2.21 210030 BEARING CAP 1.97 901 210311 BEARING CAP 2.21 210382 BEARING CAP 1.97 19 210459 BEARING CAP 1.97 1,520 210460 BEARING CAP 2.21 4,256 210502 BEARING CAP 2.21 4,013 210503 BEARING CAP 1.97 211027 BEARING CAP 1.97 190 79898 BRG ADJ & CUP 9.83 204 106694 BRG ADJ & CUP 9.83 380 119685 BRG ADJ & CUP 9.83 380 75108 CAGE & CUP ASSY 7.87
Page 1 EXHIBIT A NATIONWIDE PRECISION PRODUCTS
- ------------------------------------------------------------------------------ 2001 PART MACHINING FORECAST NUMBER DESCRIPTION PRICE NOTES - ------------------------------------------------------------------------------ 75967 CAGE & CUP ASSY 9.83 198 76689 CAGE & CUP ASSY 8.85 479 76897 CAGE & CUP ASSY 8.85 13,780 78914 CAGE & CUP ASSY 9.83 684 79246 CAGE & CUP ASSY 11.80 86812 CAGE & CUP ASSY 10.82 190 98381 CAGE & CUP ASSY 11.80 103534 CAGE & CUP ASSY 10.82 76 104471 CAGE & CUP ASSY 10.82 107322 CAGE & CUP ASSY 8.85 152 107324 CAGE & CUP ASSY 9.83 1,847 107496 CAGE & CUP ASSY 8.85 1.642 110731 CAGE & CUP ASSY 7.87 1,915 110733 CAGE & CUP ASSY 6.88 12,312 111692 CAGE & CUP ASSY 8.85 3,694 119820 CAGE & CUP ASSY 9.83 119827 CAGE & CUP ASSY 8.85 119840 CAGE & CUP ASSY 10.82 6,479 126290 CAGE & CUP ASSY 11.80 126694 CAGE & CUP ASSY 11.80 410 126825 CAGE & CUP ASSY 10.82 127039 CAGE & CUP ASSY 11.80 117,012 127600 CAGE & CUP ASSY 5.90 Service with AL PDU 85,287 127601 CAGE & CUP ASSY 5.90 Now 129575 1,907 127602 CAGE & CUP ASSY 4.96 5,035 127843 CAGE & CUP ASSY 8.85 1,667 128372 CAGE & CUP ASSY 7.87 2,052 128373 CAGE & CUP ASSY 7.87 11,799 128976 CAGE & CUP ASSY 9.83 205 129172 CAGE & CUP ASSY 11.80 129174 CAGE & CUP ASSY 8.85 570 129364 CAGE & CUP ASSY 8.85 95,152 129575 CAGE & CUP ASSY 5.58 1,597 129767 CAGE & CUP ASSY 6.99 1,554 129768 CAGE & CUP ASSY 6.99 171 210011 CAGE & CUP ASSY 7.87 616 210189 CAGE & CUP ASSY 8.85 1,231 210340 CAGE & CUP ASSY 8.85 210511 CAGE & CUP ASSY 10.82 3,591 210592 CAGE & CUP ASSY 9.83 210720 CAGE & CUP ASSY 11.80 8,550 127214 CARRIER & CAP ASSY 31.47 3,000 127221 CARRIER & CAP ASSY 31.47 3,116 45481 CARRIER COVER 16.72 536 102606 CARRIER COVER 16.72 13,437 103526 CARRIER COVER 16.72
Page 2 EXHIBIT A NATIONWIDE PRECISION PRODUCTS
- --------------------------------------------------------------------------------------------- 2001 PART MACHINING FORECAST NUMBER DESCRIPTION PRICE NOTES - --------------------------------------------------------------------------------------------- 1.279 127605 CARRIER COVER 11.36 Now 129572 179 129459 CARRIER COVER 15.98 129489 CARRIER COVER 12.41 1.368 129490 CARRIER COVER 12.41 129572 CARRIER COVER 12.95 100% OF VOLUME 73.967 129572 CARRIER COVER 15.00 70% OF VOLUME 570 86776 CASE FH 23.40 3.768 86786 CASE FH 23.40 6.270 88501 CASE FH 23.40 456 88677 CASE FH 23.45 10.260 103865 CASE FH 23.40 9 104519 CASE FH 23.40 1.140 113851 CASE FH 23.40 1.140 113862 CASE FH 23.40 3.420 113863 CASE FH 23.40 95 118736 CASE FH 23.40 62 118775 CASE FH 23.40 51 120091 CASE FH 23.40 304 120092 CASE FH 23.40 752 126035 CASE FH 23.40 1.619 126036 CASE FH 23.40 364 126037 CASE FH 23.40 126191 CASE FH 23.40 215 128192 CASE FH 23.40 8.550 126234 CASE FH 23.40 285 127823 CASE FH 23.40 79 210390 CASE FH 23.40 276 210391 CASE FH 23.40 228 210392 CASE FH 23.40 448 210504 CASE FH 23.40 2.480 210505 CASE FH 23.40 1.469 210506 CASE FH 23.40 210677 CASE FH 23.40 210678 CASE FH 23.40 26.657 86777 CASE PH 15.74 95 104518 CASE PH 15.74 6.270 113864 CASE PH 15.74 118735 CASE PH 15.74 118774 CASE PH 15.74 72 119870 CASE PH 15.74 357 119871 CASE PH 15.74 137 126014 CASE PH 14.75 2.145 126996 CASE PH 15.74 85.500 127498 CASE PH 7.98 MINIMUM OF 50% 6.521 210017 CASE PH 14.75 3,848 210507 CASE PH 15.74
Page 3 EXHIBIT A NATIONWIDE PRECISION PRODUCTS
- --------------------------------------------------------------------------------------------- 2001 PART MACHINING FORECAST NUMBER DESCRIPTION PRICE NOTES - --------------------------------------------------------------------------------------------- 210676 CASE PH 14.75 1,003 110807 COVER & CUP ASSY 7.87 3,010 110825 COVER & CUP ASSY 6.88 1,708 129766 COVER & CUP ASSY 6.67 126303 DIFF CASE 4 LEG 24.35 108140 DIFF CASE PH 2 SPD 14.80 2,453 103190 GEAR SUPPORT CS 14.27 174 111029 GEAR SUPPORT CS 37.71 77751 HSG COVER 18.29 171 78923 HSG COVER 16.39 80269 HSG COVER 16.39 80277 HSG COVER 16.62 82693 HSG COVER 16.39 342 84546 HSG COVER 16.39 570 98276 HSG COVER 16.39 126997 HSG COVER 16.39 127487 HSG COVER 12.29 684 127781 HSG COVER 16.37 127873 HSG COVER 16.39 128285 HSG COVER 16.39 114 128266 HSG COVER 16.39 11,548 128287 HSG COVER 16.39 246 88029 IAD 5.20 179 102621 IAD 5.20 1,140 104513 IAD 5.15 24,919 126151 IAD 5.10 16,422 127784 IAD 5.10 221 32326 SHIFT FORK 6.30 3,990 32613 SHIFT FORK 5.57 319 32679 SHIFT FORK 6.22 43242 SHIFT FORK 6.50 12,546 84508 SHIFT FORK 6.22
Page 4 EXHIBIT B PURCHASE ORDER FOR MATERIALS AND COMPONENTS TERMS AND CONDITIONS 1. CONTRACT, ACCEPTANCE. This Order and the documents incorporated or referred to herein constitute the entire contract between the parties for the Goods ordered and supersede any prior written or oral agreements between the parties therefor. Seller's written acknowledgment of this Order or Seller's delivery of any Goods hereunder will constitute Seller's acceptance of these terms and conditions. Any reference herein to Seller's quotation is for informational purposes only and does not constitute Buyer's acceptance of any terms and conditions contrary or supplemental to those set out herein. 2. SELLER'S STATUS, ASSIGNMENT. Seller is an independent contractor and not an employee or agent of Buyer. Seller may not assign or subcontract this Order or any of its rights or obligations hereunder without Buyer's prior written consent. 3. CHANGES TO ORDER. Buyer may change this Order in any respect at any time on written notice to Seller. If any change made by Buyer materially affects Seller's costs of producing the Goods, the purchase price of the affected Goods will be equitably adjusted and this Order amended accordingly. 4. PACKING AND SHIPMENT. Seller will pack and ship the Goods in accordance with Buyer's instructions, without charge for packaging or handling unless otherwise specified. All Goods will be packed to comply with applicable common carrier requirements and so as to secure the best available freight rates. All U.S. shipments will be accompanied by a fully completed bill of lading in the form prescribed by the National Motor Freight Classification and by a packing list showing the number and description of items contained therein. Buyer's name and Order number will be plainly marked on all Terms and Conditions packages, bills of lading, packing slips, and other shipping documents and on Seller's invoices. Buyer's count or weight will be final and conclusive for all shipments. 5. DELIVERIES. Seller will deliver all Goods in accordance with Buyer's instructions. Buyer may reject any or all Goods shipped in excess of quantities ordered or in advance of schedule and may either return the same to Seller at Seller's expense or retain the same and invoice Seller for Buyer's incidental costs of handling and/or storage. Buyer will not process invoices for Goods shipped in advance of the schedule until the scheduled delivery date. Buyer may change scheduled deliveries at any time and will reimburse Seller for Seller's reasonable, documented incremental costs due to such changes. 6. INSPECTIONS, DEFECTS AND NONCONFORMITIES. Buyer may inspect and/or test the Goods at reasonable times and places and in reasonable quantities, at its own expense; provided that Seller will, at no charge, make its premises available for such purposes and will provide all necessary assistance to make such inspections and/or tests safe and convenient. No inspections and/or tests by Buyer hereunder will relieve Seller of its obligation to make full and adequate inspections and/or tests of the Goods. If any Goods are found to be defective or not in conformity with Buyer's specifications or requirements, Buyer may reject them, in whole or in part, or require Seller to repair or 1 replace them at Seller's sole expense. If Buyer returns any rejected Goods, Seller will reimburse Buyer for the purchase price and all freight, handling, insurance and other incidental costs incurred by Buyer. If Seller fails to promptly repair or replace any defective or nonconforming Goods as requested by Buyer, Buyer may repair or replace the same and invoice Seller for Buyers costs of repair or replacement and any incidental costs. 7. QUALITY. In performing this Order, Seller will comply with the quality compliance and quality assurance standards and procedures set out in the Quality System Manual and the OS-9000 standards published by the International Organization for Standardization. 8. CONFIDENTIAL INFORMATION. Except as required by law, as reasonably necessary to perform this Order, or with Buyer's prior written consent. Seller will keep confidential, at all times, all information, drawings, specifications and data furnished by Buyer and/or derived or developed by Seller in connection with the performance of this Order. Seller will not divulge such confidential information or use it (directly or indirectly) for its own benefit or for the benefit or any other party or make copies of such confidential information or permit copies to be made. The foregoing confidentiality obligations do not apply to information known by Seller at the time it is disclosed by Buyer, to information lawfully obtained by Seller from a third party entitled to disclose it, and to information which is or later becomes public knowledge other than through disclosure by Seller. 9. INTELLECTUAL PROPERTY RIGHTS, PATENT WARRANTY. If Buyer furnishes the design for the Goods or reimburses Seller for the cost of designing the Goods, Buyer will own all intellectual property rights relating to that design. Conversely, if Seller furnishes the design for the Goods or bears the sole cost of designing the Goods, Seller will own all intellectual property rights relating to the design. In either case, the owner of the intellectual property rights warrants to the other party that the design of the Goods will not infringe upon or contribute to the infringement of any U.S. or foreign patent or patent right. 10. PRODUCT WARRANTY. Seller warrants to Buyer, its customers and end users, that Seller has good title to the Goods, free and clear of all liens; that the Goods are free from defects in material and workmanship; that the Goods are merchantable; conform fully with all specifications, drawings and/or samples furnished by Buyer (or furnished by Seller and accepted by Buyer); that the Goods are fit and sufficient for their intended uses; and that the Goods conform to all applicable Federal Motor Vehicle Safety Standards issued under the National Traffic and Motor Vehicle Safety Act of 1966, as amended. 11. SPECIAL TOOLING. "Special Tooling" means all special dies, jigs, fixtures, drawings, molds, patterns, templates and gages acquired or manufactured by Seller under this Order for use in manufacturing or assembling Goods which are proprietary to Buyer, excluding any standard or perishable tooling or gages. Special tooling separately itemized in this Order will be Buyer's property upon Buyer's full payment of the purchase price for same; provided, however, that Buyer will have no payment obligation until it has accepted such tooling or the first run of Goods manufactured or assembled therewith. Seller will furnish Buyer with an itemized list of such tooling and will maintain adequate cost records for the same, which records will be available for review or audit 2 by Buyer. If Seller fails to maintain such cost records, Buyer will be obligated to pay Seller solely the fair market value of the special tooling, regardless of the purchase price stated herein. Seller will be responsible for all loss or damage to such tooling and for all taxes, assessments, and similar charges levied with respect to or upon such tooling while in Seller's possession. Seller will mark and number such tooling with Buyer's name and the number of the part made therewith to permit accurate identification of same at all times and will segregate the same from other tooling in its possession to the extent feasible. Seller will repair, maintain and keep such tooling in good working condition and replace the same at its own expense as necessary. Seller will use such tooling exclusively for the production of Goods for Buyer and for no other use. Upon completion, cancellation, or termination of this Order, Seller will hold such tooling and any operation sheets or process data necessary to show the use thereof, at no charge, pending Buyer's instructions with respect to removal or disposition at Buyer's expense. 12. LEGAL COMPLIANCE. Seller warrants that it will comply with all applicable federal, state and local laws, regulations, ordinances, and executive, judicial or administrative orders in the performance of this order. Seller will furnish Buyer with certificates of compliance in such form as Buyer may request, from time to time, and will promptly furnish to the proper person or entity any reports which are properly required of Seller by law, regulation, ordinance, or order. 13. HAZARDOUS MATERIALS. Seller will property classify, describe, package, mark, label and provide Material Safety Data Sheets (MSDS) for all Goods to be shipped hereunder. Seller will prepare all such Goods for transportation in accordance with any applicable state or federal laws or regulations. Seller will indemnify and hold harmless Buyer from any claims penalties or damages incurred by Buyer as a result of any Goods received from Seller not in accordance therewith. 14. COUNTRY OF ORIGIN INFORMATION. Upon request, Seller agrees to provide Buyer with documentation that establishes the country of origin of the Goods, including where applicable, affidavits of manufacture, NAFTA certificates of origin or other documentation that Buyer may reasonably require. 15. INDEMNIFICATION. Seller will defend and indemnity Buyer and its customers and end users from and against all claims, suits, damages, losses and expenses arising from (a) any personal injury, death or property loss or damage caused by Seller's negligent or willful acts or omissions in performing this Order, (b) Seller's breach of any warranty contained herein, or (c) Seller's breach of or default under this Order. 16. INSURANCE. While performing this Order, Seller will maintain insurance coverage at its own cost in amounts and with insurers satisfactory to Buyer for workers' compensation (unless self-insured), public liability (including contractual liability and products liability) and automobile liability. At buyer's request, Seller will furnish certificates of insurance evidencing such coverage (which certificates will name Buyer as an additional insured and provide that the coverage will not be cancelable or subject to limit reductions without 15 day's written notice to Buyer) and/or evidence of self- 3 insurance for workers' compensation. Seller's compliance with these insurance requirements will not relieve Seller of its defense and indemnification obligations under Paragraph 15. 17. ALLOCATION. In the event of a partial failure of Seller's ability to supply the entire quantity of Goods purchased hereunder, Seller will first meet all of Buyer's requirements hereunder prior to any allocation among customers under 12-615 of the Uniform Commercial Code. 18. TERMINATION FOR CONVENIENCE. Buyer may terminate this Order for convenience at any time on written notice to Seller. Upon termination, Buyer will be liable to Seller solely for (a) unpaid invoices for Goods shipped, and (b) Seller's reasonable, documented costs for raw materials, work-in-process and finished Goods (subject to the volumes specified in this Order or any firm releases hereunder) that cannot be canceled without penalty or sold in the general trade; provided that Seller has delivered the same to Buyer. 19. CANCELLATION FOR CAUSE. To the extent permitted by law, Buyer may cancel this Order without liability to Seller at any time on written notice to Seller in the event of Seller's insolvency, Seller's filing of a voluntary petition in bankruptcy, the appointment of a receiver or trustee for Seller, Seller's execution of an assignment for the benefit of creditors, or other comparable event. In addition, Buyer may cancel this Order without liability to Seller at any time on 30 days' written notice to Seller if Seller breaches any provision of this Order (or Buyer anticipates such breach); provided, that the cancellation will be void if Seller cures the breach (or provides adequate assurances of performance) within the 30-day notice period. 20. BINDING EFFECT. The obligations of the parties hereunder will be binding on their respective directors, officers, employees, agents, subcontractors, and duly authorized successors and assigns (if any). 21. CUMULATIVE REMEDIES, WAIVER. Buyer's remedies herein are cumulative and in addition to any other or further remedies available at law or equity. Buyer's waiver of any right herein will not constitute a subsequent waiver of the same right or any other right provided herein. 22. GOVERNING LAW. This Order will be interpreted and enforced under the laws of the state of Ohio (including, without limitation, the provisions of the Uniform Commercial Code as adopted by the State of Ohio), without recourse to the conflicts of laws provisions thereof. In no event will the provisions of the U.N. Convention on the Sale of Goods apply to this order. 23. DISPUTE RESOLUTION. Any dispute arising connection with the interpretation, performance or non-performance, or enforceability of this Order will be resolved by prompt good faith negotiation between the parties. If the parties are unable to resolve any such dispute, either party may request that it be resolved through binding arbitration conducted under the Commercial Rules of the American Arbitration Association in Toledo, Ohio, U.S.A. or elsewhere as the parties may mutually agree; provided, that neither party may institute an arbitration proceeding hereunder unless it has given written notice 30 days prior thereto to the other party, stating its intent to do so and specifying the basis therefor in reasonable detail. Any award, order or judgment made or issued pursuant to arbitration hereunder will be deemed final and may be entered and enforced in any court of competent jurisdiction. The parties hereby agree to submit to the jurisdiction of such 4 court for purposes of enforcement of such award, order or judgment. In any arbitration proceeding hereunder, the arbitrator(s) are authorized (but not obligated) to award reasonable attorneys' fees and other arbitration-related costs to the prevailing party. Any arbitration proceeding hereunder will be conducted on a confidential basis. Except by mutual written agreement, no arbitration arising out of or related to this Order will include by consolidation, joinder, or any other means, any person or entity not a party hereto. 24. YEAR 2000 COMPLIANCE. Seller warrants that all software and hardware furnished under this Agreement (including all enhancements, upgrades, customizations, modifications and maintenance) will be Year 2000 compliant. Seller agrees to defend and indemnify Dana from and against all claims, losses, damages, and costs arising from Seller's Breach of this warranty, regardless of any limitations of remedies contained elsewhere in this agreement or in any other agreement between the parties. EXEMPTION CERTIFICATION (PURCHASE FOR FURTHER MANUFACTURE UNDER THE INTERNAL REVENUE CODE) Dana Corporation hereby certifies that it is a manufacturer or producer of entries taxable under the Internal Revenue Code and holds certificate of Registry #34-43-8104-0 issued by the District Director of Internal Revenue at Cleveland, Ohio, and that the article or articles specified in the accompanying order will be used by him as materials in the manufacture of production of, or as a component part of, an article or articles enumerated in the code, to be manufactured or produced by him. It is understood that for all the purposes of such taxes, the Buyer will be considered the manufacturer or producer of the articles purchased hereunder, and (except as specifically provided by law) must pay tax on resale or use, otherwise than as specified above, of the articles purchased hereunder. It is further understood that the fraudulent use of this Certificate no secure exemption will subject the Buyer and all guilty parties to revocation of the privilege of purchasing tax free and to a fine of not more than $10,000 or to Imprisonment for not more than five years or both together with costs of prosecution. February 1, 2000 5 EX-23.1 10 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports noted below included in Amendment No. 1 to the Registration Statement (Form S-4) and related Prospectus of Precision Partners, Inc. for the registration of $100,000,000 of Senior Subordinated Notes due 2009:
Company Period Date of Report ------- ------ -------------- Precision Partners, Inc. Year Ended December 31, March 27, 2000 1999 and the Period from September 9, 1998 (Inception) to December 31, 1998 Mid State Machine Nine month period ended January 19, 1999 Products September 30, 1998 General Automation, Inc. Period from January 1, 1999 March 10, 2000 to March 19, 1999 and Years Ended December 31, 1998 and 1997 Certified Fabricators, Inc. Period from November 1, March 10, 2000 and Calbrit Design, Inc. 1998 to March 19, 1999 and the Years Ended October 31, 1998 and 1997 Nationwide Precision Period from June 1, 1998 to February 25, 2000 Products Corp. March 19, 1999 Gillette Machine & Tool Period from March 1, 1999 March 10, 2000 Co., Inc. to August 31, 1999
/s/ Ernst & Young LLP May 2, 2000 Dallas, Texas EX-23.2 11 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 2, 1998, with respect to the audited consolidated statements of operations, stockholders' equity and cash flows of Mid State Machine Products, Inc. for the year ended December 31, 1997, included in the Amendment No. 1 to the Registration Statement (No. 333-33438) filed on Form S-4 and the related Prospectus of Precision Partners, Inc. for the registration of $100,000,000 of 12% Senior Subordinated Notes. /s/ Baker Newman & Noyes Limited Liability Company Portland, Maine May 5, 2000 EX-23.3 12 EXHIBIT 23.3 Exhibit 23.3 CONSENT OF INDEPENDENT AUDITORS May 5, 2000 Board of Directors Precision Partners, Inc. We consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 29, 1998 relating to the audited financial statements of Nationwide Precision Products Corporation in the Registration Statement (Form S-4) and related Prospectus of Precision Partners, Inc. /s/ Insero, Kasperski, Ciaccia & Co., P.C. Rochester, New York May 5, 2000 EX-23.4 13 EXHIBIT 23.4 Exhibit 23.4 CONSENT OF INDEPENDENT AUDITORS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement (Registration Statement File No. 333-33438). /s/ BONADIO & CO., LLP Rochester, New York May 3, 2000 EX-24.1 14 EXHIBIT 24.1 EXHIBIT 24.1 POWERS OF ATTORNEY By signing below, I hereby constitute and appoint Ronald M. Miller, Dr. James E. Ashton and Christopher M. Kelly, Esq. my true and lawful attorney and agent to do any and all acts and things and to execute any and all instruments in my name and behalf in my capacities as director and/or officer of Precision Partners, Inc., a Delaware corporation, Mid State Machine Products, a Maine corporation, Galaxy Industries Corporation, a Michigan corporation, Certified Fabricators, Inc., a California corporation, Nationwide Precision Products Corp., a New York corporation, General Automation, an Illinois corporation, and Gillette Machine and Tool Co., Inc., a New York corporation (collectively, the "Companies" and each a "Company"), which said attorney and agent may deem necessary or advisable or which may be required to enable the applicable Company to comply with the Securities Act of 1933, as amended (the "Securities Act"), and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof, in connection with a Registration Statement on Form S-4 (or any other appropriate form) for the purpose of registering pursuant to the Securities Act $100,000,000 of Precision Partners, Inc.'s 12% Senior Subordinated Notes due 2009, including specifically, and the other Companies' guarantees thereof, but without limiting the generality of the foregoing, the power and authority to sign for me, in my name and behalf in my capacities as director and/or officer of the applicable Company (individually or on behalf of such Company), such Registration Statement and any such abbreviated registration statement, and any and all amendments and supplements thereto, and to file the same, with all exhibits thereto and other instruments or documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and confirm all that said attorneys and agents, or any of them, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have executed this Power of Attorney as of March 28, 2000. /s/ DR. JAMES E. ASHTON /s/ RICHARD DETWEILER - ------------------------------------------- ------------------------------------------- Dr. James E. Ashton Richard Detweiler /s/ MELVIN D. JOHNSON /s/ DAVID W. M. HARVEY - ------------------------------------------- ------------------------------------------- Melvin D. Johnson David W. M. Harvey /s/ WILLIAM J. GUMINA /s/ RICHARD FAGAN - ------------------------------------------- ------------------------------------------- William J. Gumina Richard Fagan /s/ JOHN F. MEGRUE /s/ BYRDELL C. GOLDSMITH - ------------------------------------------- ------------------------------------------- John F. Megrue Byrdell C. Goldsmith /s/ S. DOUGLAS SUKEFORTH /s/ RONALD S. RICOTTA - ------------------------------------------- ------------------------------------------- S. Douglas Sukeforth Ronald S. Ricotta /s/ EDWARD R. GAJEWSKI /s/ DARREN J. GILLETTE - ------------------------------------------- ------------------------------------------- Edward R. Gajewski Darren J. Gillette
EX-25.1 15 EXHIBIT 25.1 ================================================================================ FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) |__| --------------------------- THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) One Wall Street, New York, N.Y. 10286 (Address of principal executive offices) (Zip code) --------------------------- PRECISION PARTNERS, INC. (Exact name of obligor as specified in its charter) Delaware 22-3639336 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Table of Additional Registrants ------------------------------- Mid State Machine Products Maine 01-0280525 Galaxy Industries Corporation Michigan 38-1881019 Certified Fabricators, Inc. California 95-3316654 General Automation, Inc. Illinois 75-2808932 Nationwide Precision Products Corp. New York 22-3639335 Gillette Machine & Tool Co., Inc. New York 16-0786135 5605 N. MacArthur Boulevard Suite 760 Irving, Texas 75038 (Address of principal executive offices) (Zip code) --------------------------- 12% Senior Subordinated Notes due 2009 (Title of the indenture securities) ================================================================================ 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. - -------------------------------------------------------------------------------- Name Address - -------------------------------------------------------------------------------- Superintendent of Banks of the State 2 Rector Street, New York, N.Y. of New York 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005 (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. None. 16. LIST OF EXHIBITS. EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R. 229.10(D). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) -2- 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -3- SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 10th day of April, 2000. THE BANK OF NEW YORK By: /s/ Mary Beth A. Lewicki ------------------------------------ Name: Mary Beth A. Lewicki Title: Vice Presdient -4- - -------------------------------------------------------------------------------- Consolidated Report of Condition of THE BANK OF NEW YORK of One Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business December 31, 1999, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts -------------- ASSETS In Thousands Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin....................... $ 3,247,576 Interest-bearing balances................................................ 6,207,543 Securities: Held-to-maturity securities.............................................. 827,248 Available-for-sale securities............................................ 5,092,464 Federal funds sold and Securities purchased under agreements to resell...... 5,306,926 Loans and lease financing receivables: Loans and leases, net of unearned income......................................................37,734,000 LESS: Allowance for loan and lease losses...................................................575,224 LESS: Allocated transfer risk reserve.........................................................13,278 Loans and leases, net of unearned income, allowance, and reserve......... 37,145,498 Trading Assets.............................................................. 8,573,870 Premises and fixed assets (including capitalized leases).................... 723,214 Other real estate owned..................................................... 10,962 Investments in unconsolidated subsidiaries and associated companies......... 215,006 Customers' liability to this bank on acceptances outstanding................ 682,590 Intangible assets........................................................... 1,219,736 Other assets................................................................ 2,542,157 Total assets................................................................ $71,794,790 LIABILITIES Deposits: In domestic offices...................................................... $27,551,017 Noninterest-bearing............................................11,354,172 Interest-bearing...............................................16,196,845 In foreign offices, Edge and Agreement subsidiaries, and IBFs............ 27,950,004 Noninterest-bearing...............................................639,410 Interest-bearing...............................................27,310,594 Federal funds purchased and Securities sold under agreements to repurchase.. 1,349,708 Demand notes issued to the U.S.Treasury..................................... 300,000 Trading liabilities......................................................... 2,339,554 Other borrowed money: With remaining maturity of one year or less.............................. 638,106 With remaining maturity of more than one year through three years........ 449 With remaining maturity of more than three years......................... 31,080 Bank's liability on acceptances executed and outstanding.................... 684,185 Subordinated notes and debentures........................................... 1,552,000 Other liabilities........................................................... 3,704,252 Total liabilities........................................................... 66,100,355 EQUITY CAPITAL Common stock................................................................ 1,135,284 Surplus..................................................................... 866,947 Undivided profits and capital reserves...................................... 3,765,900 Net unrealized holding gains (losses) on available-for-sale securities...... (44,599) Cumulative foreign currency translation adjustments......................... (29,097) Total equity capital........................................................ 5,694,435 Total liabilities and equity capital........................................ $71,794,790 -----------
I, Thomas J. Mastro, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. -5- Thomas J. Mastro We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. Thomas A. Renyi Alan R. Griffith Directors Gerald L. Hassell -6- -----END PRIVACY-ENHANCED MESSAGE-----