-----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, AF9jsOLgtBIgzv7V4yE+3jtSk7qmsqUqffITpToV0IrPKb6zm+Hle25gbdOXdy0B oOzrayN/8g3xK11CsIFnVw== 0000054681-99-000003.txt : 19990319 0000054681-99-000003.hdr.sgml : 19990319 ACCESSION NUMBER: 0000054681-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KATY INDUSTRIES INC CENTRAL INDEX KEY: 0000054681 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 751277589 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05558 FILM NUMBER: 99568119 BUSINESS ADDRESS: STREET 1: 6300 S SYRACUSE WAY STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80111-6723 BUSINESS PHONE: 3032909300 MAIL ADDRESS: STREET 1: 6300 S SYRACUSE WAY SUITE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1998 Commission file number 1-5558 Katy Industries, Inc. (Exact name of registrant as specified in its charter) Delaware 75-1277589 (State of Incorporation) (IRS Employer Identification Number) 6300 S. Syracuse #300, Englewood, Colorado 80111 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (303) 290-9300 Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Name of each exchange on which registered) Common Stock, $1.00 par value New York Stock Exchange Common Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 18, 1999, was $69,686,330. On that date 8,362,008 shares of Common Stock, $1.00 par value, were outstanding, the only class of the registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the definitive Proxy Statement of Katy Industries, Inc. (The "1999 Proxy Statement") with respect to the 1999 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K. Exhibit index appears on page 56. Report consists of 59 pages. PART I ------ Item 1. BUSINESS - ----------------- Katy Industries, Inc. ("Katy" or the "Company") was organized as a Delaware corporation in 1967. In accordance with Katy's Divestiture and Reorganization Plan (the "Plan"), announced during 1997, Katy carries on business through two principal operating groups: Electrical/Electronics and Maintenance Products. Under the Plan, Katy is in the process of disposing its entire previously reported Machinery Manufacturing Group and, accordingly that group has been reported as "Discontinued operations" in the Consolidated Statements of Operations. The other businesses being disposed comprise only a portion of Katy's previously reported Distribution and Service Group and one of Katy's equity investments. The operations of these businesses have been reported as "Equity in income (loss) of operations to be disposed of" in the 1998 and 1997 Consolidated Statements of Operations. During the fourth quarter of 1998, the Company decided to retain Hamilton Precision Metals, Inc., ("Hamilton"), due to its earnings recovery and growth potential. Accordingly, the results for Hamilton have been removed from the caption "Equity in income (loss) of operations to be disposed of" and consolidated in the financial statements with the continuing operations of the Electrical/Electronics segment for both 1998 and 1997. Katy also has an equity investment in one other company. Each Katy company operates within a framework of broad policies and corporate goals established by Katy's corporate management, which is responsible for overall planning, financial management, acquisitions, dispositions, and other related administrative and corporate matters. During 1998, the Company emphasized acquisitions and, as a result, completed five acquisitions including the Contico acquisition described below, which closed shortly after year-end. On January 8, 1999, the Company purchased all of the common membership interest in Contico International, L.L.C., a Delaware limited liability company ("Contico") and the successor to the business of Contico International Inc. Contico, based in St. Louis, Missouri, manufactures and distributes consumer storage, home and automotive products, as well as janitorial and food service equipment and supplies, with annual sales of approximately $220,000,000. See Note 17 to Consolidated Financial Statements. On December 31, 1998 the Company acquired the assets of the Bay State Gritcloth division of Tyrolit North America, Inc. The division manufactures an industrial product line of specialty abrasives and has annual sales of approximately $4,000,000. The estimated aggregate purchase price for this division was approximately $4,000,000. See Note 3 to Consolidated Financial Statements. On August 11, 1998, the Company purchased substantially all of the assets of The Wilen Companies, Incorporated. The Company operates the business through its Wilen Products, Inc. subsidiary ("Wilen"). Wilen is a premier manufacturer and distributor of a wide variety of professional cleaning products including mops, brooms and plastic cleaning products. The estimated aggregate purchase price for the Wilen business was approximately $50,000,000. See Note 3 to Consolidated Financial Statements. On May 21, 1998, the Company purchased substantially all of the assets of the Consumer Electrical Division of Noma Industries, Limited. The Company operates the business through its Woods Industries (Canada), Inc. subsidiary ("Woods Canada"). Woods Canada is a North American leader in the design, manufacturing and marketing of a wide variety of consumer corded products including low voltage garden lighting, extension cords, multiple outlet and surge strips, specialty cord products, automotive products and electronic timers. On May 11, 1998, the Company purchased substantially all of the assets of Disco, Inc. The Company operates the business through its Glit/Disco, Inc. subsidiary ("Disco"). Disco is a manufacturer and distributor of cleaning and specialty products sold to the restaurant/food service industry. The estimated aggregate purchase price for the Woods Canada and Disco businesses was approximately $17,100,000. See Note 3 to Consolidated Financial Statements. Management continuously reviews each of the businesses. As a result of these ongoing reviews management may determine to sell certain companies and intends to augment certain businesses with acquisitions. Under current financial conditions, any acquisitions would be funded through current cash balances, available lines of credit and/or new borrowings. Selected restated operating data for each operating group is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7. Information regarding foreign and domestic operations and export sales is incorporated herein by reference to Note 13 to Consolidated Financial Statements of Katy included in Part II, Item 8. Set forth below is information about Katy's operating groups and investments and about Katy's business in general: Electrical/Electronics Group - ---------------------------- The group's principal business is the manufacture, distribution, packaging and sale of consumer electric corded products, electrical and electronic accessories, electronic components and nonpowered hand tools and specialty metals. The group accounted for 67% of the Company's consolidated sales in 1998. Woods Industries, Inc. and Woods Canada are the only businesses in this group that experiences seasonal sales trends. The six business units comprising this group are described below: GC Electronics. GC Electronics is headquartered in Rockford, Illinois, and has a sourcing office in Taiwan. GC Electronics is a leading value-added distributor of electrical and electronic parts and accessories. In addition the company produces a full line of home entertainment component parts and service technician products. GC Thorsen. GC Thorsen is headquartered in Rockford, Illinois, and has a sourcing office in Taiwan. GC Thorsen is a leading value-added distributor of nonpowered hand tools. Hamilton Precision Metals, Inc. Hamilton, located in Lancaster, Pennsylvania, rerolls a wide range of precision metal strip and foil for the medical, electronics, aerospace and computer industries. The company's products are used in a wide range of high-tech applications. Waldom Electronics, Inc. Waldom, located in Chicago, Illinois, is a leading master distributor of high quality, brand name electrical and electronic components, and loudspeakers and their components. Waldom distributes primarily to the electronic, automotive and communication industries. Woods Industries (Canada), Inc. Woods Canada is headquartered in Toronto, Ontario, Canada. Woods Industries (Canada) designs, manufactures and markets a wide variety of consumer corded products including low voltage garden lighting, extension cords, multiple outlet and surge strips, specialty corded products, automotive products and electronic timers. Woods Industries, Inc. Woods is headquartered in Carmel, Indiana and has additional warehousing, distribution and manufacturing facilities in Jasonville, Loogootee, Mooresville and Worthington, Indiana, Sparks, Nevada, and London, Ontario, Canada. Woods manufactures and distributes consumer electric corded products, supplies and electrical/electronics accessories. These products are sold to retailers principally located in the United States and Canada. Maintenance Products Group - -------------------------- The group's principal business is the manufacture, distribution, packaging and sale of sanitary maintenance supplies, professional cleaning products, abrasives and stains. The group accounted for 33% of the Company's consolidated sales in 1998. Duckback Products, Inc. is the only business in this group that experiences seasonal sales trends. The six business units comprising this group are described below: Glit/Disco, Inc. Disco is located in McDonough, Georgia. Disco is a manufacturer and distributor of cleaning and specialty products sold to the restaurant/food service industry. Duckback Products, Inc. Duckback, located in Chico, California, is a manufacturer of high quality exterior transparent stains, coatings and water repellents. These products are sold under the trade names Superdeck, Supershade and Fightback. Glit/Microtron Abrasives. Glit/Microtron, is headquartered in Wrens, Georgia, and has additional manufacturing and sales facilities in Pineville, North Carolina, and Mississauga, Ontario, Canada. Glit/Microtron manufactures nonwoven floor maintenance pads, scouring pads and sponges, and specialty abrasive products for cleaning and finishing. Products are sold primarily to the sanitary maintenance, restaurant supply and consumer markets. In addition, Glit/Microtron manufactures a line of wood sanding products which are sold through retail stores across the United States and Canada. Consumer products are marketed under various brand names, including Kleenfast, through supermarkets and drug and variety stores. Glit/Gemtex Abrasives. Gemtex, is headquartered in Etobicoke, Ontario, Canada and has an additional distribution plant in Buffalo, New York. Gemtex is a manufacturer and distributor of fiber disks and coated abrasives for the automotive, industrial and consumer markets. Loren Products. Loren is headquartered in Lawrence, Massachusetts. Loren is a manufacturer and distributor of cleaning and abrasive products for the industrial markets and building products for the consumer markets. Loren markets its institutional products under the brand names of Brillo, and Boraxo, as well as some private label products. Wilen Products, Inc. Wilen is headquartered in Atlanta, Georgia. Wilen is a manufacturer and distributor of a wide variety of professional cleaning products, including mops, brooms and plastic cleaning accessories for both the industrial and consumer markets. Operations to be Disposed Of - ---------------------------- These business lines operate cold storage facilities, operate a waste-to- energy facility and harvest shrimp. Note the gross sales of these operations are excluded from the 1998 and 1997 Consolidated Statements of Operations, see Note 4 to Consolidated Financial Statements for further discussion. The companies in this group do not experience seasonal sales trends. All of these companies have a number of competitors, with the exception of Savannah Energy Systems Company, some of which are larger and have greater financial resources. The three businesses comprising the operations to be disposed of are described below: Bee Gee Holding Company, Inc. This company farms and harvests shrimp off the coast of South and Central America. Katy's investment in this company is an equity investment. See Note 6 to Consolidated Financial Statements. C.E.G.F. (USA), Inc. This company is headquartered in Plant City, Florida, and operates refrigeration and cold storage facilities in Plant City, Florida and in Houston, Texas. The facilities serve the needs of a variety of firms in the frozen food, grocery and seafood industries. On June 11, 1998, Katy completed the sale of C.E.G.F. (USA), Inc. See Note 3 to Consolidated Financial Statements. Savannah Energy Systems Company. Savannah Energy owns and operates a waste-to-energy facility in Savannah, Georgia. See Note 10 to Consolidated Financial Statements. Discontinued Operations - ----------------------- The group's business is the manufacture of machinery for the cookie sandwich, food processing and wood working industries. Other businesses in the group manufacture testing and recording devices for the transportation industry, and another produces gauging and control systems for the metalworking industry. Note that the group's sales are excluded from the Consolidated Statements of Operations for all periods presented therein; see Note 4 to Consolidated Financial Statements for further discussion. The companies in this group do not experience seasonal sales trends. All the companies in this group have a number of competitors, some of which are larger and have greater financial resources. The four business units comprising this group are described below: Airtronics. Airtronics, which is located in Elgin, Illinois, supplies the metalworking industry with engineered gauging and control systems. In addition, Airtronics rebuilds and resells centerless grinding machines. Bach-Simpson, Ltd. Bach Simpson is a manufacturer of transportation test and monitoring system equipment, speed indicators, fuel gauges and specialized diagnostic and testing products. Primary markets served are the railroad and general industrial markets. Bach Simpson is located in London, Ontario, Canada. The sale of Bach Simpson was completed in January of 1999. See Note 17 to Consolidated Financial Statements. Diehl Machines, Inc. Diehl, located in Wabash, Indiana, is a manufacturer of ripsaws, veneer splicers, automatic lathes and moulders. Primary customers are in the millwork industry and manufacturers of doors, windows, cabinets and furniture. Peters Machinery Company. Peters, which designs and manufactures proprietary machinery for producing cookie and cracker sandwiches, is located in Chicago, Illinois. Approximately 62% of Peters' sales are made outside the United States. Investments, at equity - ---------------------- Katy has an investment, at equity, in one other company. Schon & Cie, AG ("Schon"), located in Germany, manufactures a wide range of mechanical and programmable four post, web and flat bed die-cutting equipment and shoe manufacturing machines. Schon has a number of competitors, some of which are larger and have greater financial resources. For additional information related to investments, reference is made to Note 6 to Consolidated Financial Statements in this report, which information is included in Part II, Item 8. Customers - --------- Katy had one major customer in its Electrical/Electronics segment that accounted for approximately 14% of the Company's consolidated 1998 annual sales. On November 4, 1998, the Company announced that this major customer withdrew its commitment to purchase extension corded products from Woods at or about year-end. Katy is not dependent on any other single customer for a material portion of its overall business. Backlog - ------- Electrical/Electronics: The Company's aggregate backlog position for this segment was $14,300,000 and $17,700,000 as of December 31, 1998 and 1997, respectively. The 1998 orders are firm and are expected to be shipped during 1999. Maintenance Products: The Company's aggregate backlog position for this segment was $5,000,000 and $2,900,000 as of December 31, 1998 and 1997, respectively. The 1998 orders are firm and are expected to be shipped during 1999. Markets and Competition - ----------------------- Electrical/Electronics: The Company markets branded electrical and electronics products primarily in North America through a combination of direct salesman, manufacturers sales representatives and wholesale distributors. The Company's primary customer base is made up of major national retail chains that service the home improvement, hardware, mass merchant, discount and automotive markets, smaller regional concerns serving a similar customer base and a variety of electrical and electronic distributors. Electrical and electronic products sold by the Company are generally used by consumers and include such items as extension cords, work lights, surge suppressors, power taps and strips, computer connectivity devices, telephone accessories, outdoor lights and timers and a variety of electronic connectors and switches. Overall demand for the Company's products is highly correlated consumer demand, the performance of the general economy and to a lesser extent home construction and resale activity. The markets for the Company's electrical and electronic products are highly competitive. Competition is based primarily on price and the ability of the competitors to provide superior customer service in the form of complete on-time product delivery. Other competitive factors include brand recognition and product design, quality and performance. In the retail extension cord market, there are two major competitors who collectively, with the Company, account for the major share of the United States market. The markets in the Company's remaining product lines are significantly more fragmented and typically 5-8 primary competitors are competing for market share. The basis for competition in these product categories is similar to the extension cord market with brand identification representing a much greater factor. In general, the Company believes it is competitive with respect to each of the factors affecting each of the respective markets in which it competes. Maintenance Products: The Company markets branded sanitary maintenance supplies, professional cleaning products, abrasives and stains primarily in North America through a combination of direct salesman, manufacturers sales representatives and wholesale distributors. The Company's Maintenance Products Group services the industrial, consumer, sanitary maintenance, food supply and automotive markets. Maintenance products sold by the Company include such items as floor maintenance pads, scouring pads, sponges, specialty abrasive products for cleaning and finishing; brooms, mops and plastic cleaning products; high quality exterior transparent stains, coating and water repellents; cleaning and specialty products for the restaurant/food service industry. The markets for the Company's maintenance products are highly competitive. Competition is based primarily on price and the ability to provide superior customer service in the form of complete on-time product delivery. Other competitive factors include brand recognition and product design, quality and performance. The Company competes for market share with several competitors in this industry. The Company believes that it has established long standing relationships with its major customers based on high quality products and service, while continuing its position of being a low cost provider in this industry. Raw Materials - ------------- Katy's operations have not experienced significant difficulty in obtaining raw materials, fuels, parts or supplies for their activities during the most recent fiscal year, but no prediction can be made as to possible future supply problems or production disruptions resulting from possible shortages. Employees - --------- As of February 26, 1999, Katy employed 4,147 people, of which 3,862 related to the Company's continuing businesses. Approximately 940 employees of the Company were members of various unions. Katy's labor relations are generally satisfactory and there have been no strikes in recent years that have materially affected its operations. Regulatory and Environmental Matters - ------------------------------------ Katy does not anticipate that federal, state or local environmental laws or regulations will have a material adverse effect on its consolidated operations or financial position. Katy anticipates making additional expenditures for environmental control facilities during 1999, in accordance with terms agreed upon with the United States Environmental Protection Agency and various state environmental agencies. (See Part II, Item 7 - Environmental and Other Contingencies) Licenses, Patents and Trademarks - -------------------------------- The success of Katy's products has not depended on patent and license protection, but rather on the quality of Katy's products, proprietary technology, contract performance, customer service and the technical competence and creative ability of Katy's personnel to develop and introduce saleable products. Item 2. PROPERTIES - ------------------- As of December 31, 1998, Katy's total building floor area owned or leased was 2,851,000 square feet, of which 1,095,000 square feet were owned and 1,756,000 square feet were leased. The following table shows by industry segment a summary of the size (in square feet) and character of the various facilities included in the above totals together with the location of the principal facilities. Industry Segment Owned Leased Total - ---------------- ----- ------ ----- (in thousands of square feet) Electrical/Electronics - primarily plant and located in Rockford, Illinois; Taipei, Taiwan; Chicago, Illinois; and Carmel, Indianapolis, Jasonville, Loogootee, Mooresville, and Worthington, Indiana; Sparks, Nevada; Lancaster, Pennsylvania and Toronto, Ontario, Canada 564 658 1,222 Maintenance Products - primarily plant and office facilities with principal facilities located in Chico, California; Wrens, McDonough, and Atlanta, Georgia; Phoenix, Arizona; Pineville, North Carolina; Buffalo, New York; Lawrence, Massachusetts and Etobicoke and Mississauga, Ontario, Canada 230 732 1,311 Other Operations to be Disposed Of - primarily plant and office facilities with principal facilities located in Savannah, Georgia 63 0 63 Discontinued Operations - primarily plant and office facilities with principal facilities located in Elgin and Chicago, Illinois; Wabash and Elkhart, Indiana and London, Ontario, Canada 238 4 242 Corporate - office facilities in Englewood, Colorado 0 13 13 All properties used in operations are owned or leased and are suitable and adequate for Katy's operations. It is estimated that approximately 95% of these properties are being utilized. Item 3. LEGAL PROCEEDINGS - -------------------------- Except as set forth below, no cases or legal proceedings are pending against Katy, other than ordinary routine litigation incidental to Katy and its businesses and other non-material cases and proceedings. 1. Environmental Claims -------------------- (a) Administrative Order on Consent - W.J. Smith Wood Preserving Company and Katy Industries, Inc., U.S. EPA Docket No. RCRA-VI- 7003-93-02 and Texas Water Commission Administrative Enforcement Action. (b) Notice of Claim - Medford, Oregon. (c) Demand for Indemnification - Londonderry, New Hampshire. The "W. J. Smith" case, matter (a) above, originated in the 1980's when the United States and the State of Texas, through the Texas Water Commission ("TWC"), initiated environmental enforcement actions against W.J. Smith alleging that certain conditions on the W.J. Smith property (the "Property") violated environmental laws. Following such enforcement actions, W.J. Smith engaged in a series of cleanup activities on the W.J. Smith property and implemented a groundwater monitoring program. In 1993, TWC referred the entire matter to the United States Environmental Protection Agency ("USEPA"), which initiated a Unilateral Administrative Order Proceeding under Section 7003 of the Resource Conservation and Recovery Act ("RCRA") against W.J. Smith and Katy. The proceeding requires certain actions at the site and certain off-site areas, as well as development and implementation of additional cleanup activities to mitigate off-site releases. In December 1995, W.J. Smith, Katy and USEPA agreed to resolve the proceeding through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is currently implementing a cleanup to mitigate off-site releases. Since 1990, the Company has spent in excess of $5,850,000 in undertaking cleanup and compliance activities in connection with this matter and has established a reserve, in excess of $1,650,000 before taxes, for future such activities. The Company believes that the amount reserved will be adequate; however, total cleanup and compliance costs cannot be determined at this time. Concerning matter (b) above, by letter dated August 20, 1993, a claim was asserted by Balteau Standard, Inc. ("Balteau") against Katy concerning PCB contamination at the Medford, Oregon facility of the former Standard Transformer division of American Gage. Balteau demanded that Katy accept financial responsibility for investigation and cleanup costs incurred as a result of the PCB contamination. Katy and Balteau agreed to share such costs. Pursuant to such agreement, Katy paid 65% of the first $2,000,000 of such costs and agreed to pay 50% of such costs to the extent that they exceed $2,450,000. Since it executed the cost sharing agreement, Katy has paid approximately $1,400,000 in cleanup costs. Katy believes the cleanup plan has been successful and has requested that the Oregon Department of Environmental Quality inspect and approve the remediation work. Katy has received such approval with respect to a portion of the cleanup plan. Further monitoring of groundwater and testing and cleanup of adjacent property may be required before approval can be obtained with respect to the remainder of the plan. Pending such approval, the liability of Katy and its subsidiary cannot be determined at this time. Concerning matter (c) above, pursuant to an agreement executed in connection with the sale of assets of JEI Liquidating, Inc., a Katy subsidiary, Katy has agreed to defend and indemnify the buyer of such assets, Allard Industries, Inc. ("Allard"), in the case captioned United States v. Exxon, et al. in U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95-L; C-94-148-Lcas. The case concerns the disposal of hazardous substances at a landfill site in Londonderry, New Hampshire, at which JEI Liquidating, Inc. allegedly disposed of hazardous substances from its Manchester, New Hampshire facility. The case arises under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), under which generators and transporters of hazardous substances are generally held to be jointly and severally liable for the cleanup of those substances when released into the environment. The parties to the litigation have reached a settlement in principle, the specific terms of which are being negotiated in a Consent Decree. Under the expected Consent Decree, Allard/Katy will pay approximately $300,000 and perform no future work at the site, subject to limited re-openers. In exchange, Allard and Katy will receive a release and contribution protection. Honeywell Inc., a former owner and operator of JEI Liquidating, Inc.'s Manchester, New Hampshire facility, has agreed in principle to pay $40,000 of Allard/Katy's settlement under the Consent Decree. Pending entry of the Consent Decree and receipt of a release, Katy's liability cannot be determined at this time. In addition to the claims specifically identified above, the Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by USEPA, state environmental agencies and private parties as potentially responsible parties at a number of waste disposal sites under CERCLA or equivalent state laws, and, as such, may be liable for the costs of cleanup and other remedial activities at these sites. The costs involved in these matters are, by nature, difficult to estimate and subject to substantial change as litigation or negotiations with the United States, states and other parties proceed. While ultimate liability with respect to these matters is not easily determinable, the Company has recorded and accrued amounts that it deems reasonable for such prospective liabilities and the Company believes that any additional liability with respect to such matters will not be material. 2. Banco del Atlantico, S.A. v. Woods Industries, Inc., et al., ----------------------------------------------------------- Civil Action No. L-96-139 (U.S. District Court, Southern District of Texas). In December 1996, Banco del Atlantico, a bank located in Mexico, filed a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company, and against certain past and then present officers and directors and former owners of Woods, alleging that the defendants participated in a violation of the Racketeer Influenced and Corrupt Organizations Act involving allegedly fraudulently obtained loans from Mexican banks, including the plaintiff, and "money laundering" of the proceeds of the illegal enterprise. All of the foregoing is alleged to have occurred prior to the Company's purchase of Woods. The plaintiff also alleges that it made loans to an entity controlled by certain officers and directors based upon fraudulent representations. The plaintiff seeks to hold Woods liable for its alleged damage under principles of respondeat superior and successor liability. The plaintiff is claiming damages in excess of $24,000,000 and is requesting treble damages under the statutes. The defendants have filed a motion, which has not been ruled on, to dismiss this action on jurisdictional grounds. Because the litigation is in preliminary stages, it is not possible at this time for the Company to determine an outcome or reasonably estimate the range of potential exposure. The Company may have recourse against the former owner of Woods and others for, among other things, violations of covenants, representations and warranties under the purchase agreement through which the Company acquired Woods, and under state, federal and common law. In addition, the purchase price under the purchase agreement may be subject to adjustment as a result of the claims made by Banco del Atlantico. The extent or limit of any such recourse cannot be predicted at this time. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of 1998. PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Katy's common stock is traded on the New York Stock Exchange ("NYSE"). The following table sets forth high and low sales prices for the common stock in composite transactions as reported on the NYSE composite tape for the prior two years and dividends declared during such periods. Cash Dividends Period High Low Declared ------ ---- --- -------- 1998 First Quarter $20 1/4 $17 5/8 $.075 Second Quarter 19 15/16 17 7/8 .075 Third Quarter 18 13/16 13 7/8 .075 Fourth Quarter 21 15 1/16 .075 1997 First Quarter $16 $13 1/2 $.075 Second Quarter 17 1/4 14 1/2 .075 Third Quarter 18 14 15/16 .075 Fourth Quarter 20 3/8 17 3/8 .075 Dividends are paid at the discretion of the Board of Directors and are reviewed on a quarterly basis. As of March 18, 1999, there were 845 record holders of the Common Stock and there were 8,362,008 shares of Common Stock outstanding. Item 6. SELECTED FINANCIAL DATA - -------------------------------- Years Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Thousands of dollars, except per share data and ratios) Net sales $342,315 $286,023 $156,024 $136,093 $124,928 Net income (loss) Continuing segments - businesses to be retained $ 11,007 $ 9,435 $ 5,803 $ 6,046 $ 2,127 Unusual Items 0 387 6,685 22,520 (12,864) Operations to be disposed of 2,075 (179) 275 (2,139) 186 Discontinued operations [b] 0 1,959 953 2,144 1,708 ------ ------ ------ ------ ------ Net income (loss) $ 13,082 $ 11,602 $ 13,716 $ 28,571 $ (8,843) Earnings (loss) per share - Basic Continuing segments $ 1.33 $ 1.14 $ .70 $ .67 $ .23 Unusual Items .00 .05 .80 2.51 (1.42) Operations to be disposed of .25 (.03) .03 (.24) .02 Discontinued operations [b] .00 .24 .11 .24 .19 ---- ---- ---- ---- ---- Earnings (loss) per common share $ 1.58 $ 1.40 $ 1.64 $ 3.18 $ (0.98) ==== ==== ==== ==== ==== Earnings (loss) per share - Diluted Continuing segments $ 1.30 $ 1.12 $ .70 $ .67 $ .23 Unusual Items .00 .05 .80 2.51 (1.42) Operations to be disposed of .25 (.02) .03 (.24) .02 Discontinued operations [b] .00 .23 .11 .24 .19 ---- ---- ---- ---- ---- Earnings (loss) per common share $ 1.55 $ 1.38 $ 1.64 $ 3.18 $ (0.98) ==== ==== ==== ==== ==== Income (loss) from continuing operations $ 13,082 $ 9,643 $ 12,763 $ 26,427 $(10,551) Earnings (loss) per share from continuing operations - Basic $ 1.58 $ 1.16 $ 1.53 $ 2.94 $ (1.17) Earnings (loss) per share from continuing operations - Diluted $ 1.55 $ 1.15 $ 1.53 $ 2.94 $ (1.17) Total assets [a] $293,175 $237,160 $235,377 $225,412 $203,142 Total liabilities and minority interest 143,859 97,989 105,331 95,082 92,364 Stockholders' equity 149,316 139,171 130,046 130,330 110,778 Long-term debt, excluding current portion [a] 39,908 9,948 8,582 9,346 10,572 Depreciation and amortization [a] 7,162 4,568 5,505 5,949 6,049 Capital expenditures 15,921 10,699 5,319 9,163 4,105 Working capital [a] 100,971 103,252 107,571 96,425 50,041 Ratio of debt to capitalization 21.1% 7.1% 6.6% 15.8% 15.9% Stockholders' equity per share $ 17.91 $ 16.81 $ 15.78 $ 14.94 $ 12.21 Return on average stockholders' equity 9.1% 8.6% 10.5% 23.7% (5.0%) Weighted average common shares outstanding - Basic 8,289,915 8,272,836 8,339,189 8,984,513 9,031,541 Stockholders of record 845 907 1,351 1,410 1,471 Number of employees 2,472 1,907 2,049 1,109 1,285 Cash dividends declared per common share $.30 $.30 $.30 $.25 $14.1875 [a] Total assets includes $15,238 of net assets from discontinued operations and $16,724 of net assets from operations to be disposed of for 1998, $15,552 of net assets from discontinued operations and $26,543 of net assets from operations to be disposed of for 1997 and $18,395 of net assets from discontinued operations for 1996. Long-term debt includes $9,948 from operations to be disposed of for 1997. Depreciation and amortization includes $631, $681 and $747 from discontinued operations for 1998, 1997 and 1996, respectively. Depreciation and amortization includes $1,009 and $1,549 from other operations to be disposed of for 1998 and 1997 respectively. Working capital includes $10,959, $10,588 and $12,569 of net current assets from discontinued operations for 1998, 1997 and 1996, respectively. Working capital also includes $1,203 and $2,005 of net current assets of other operations to be disposed of for 1998 and 1997 respectively. See Note 4 to Consolidated Financial Statements. [b] Income from operations for discontinued operations for 1998 has been deferred pending final disposition of such operations. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS - --------------------- Results of Operations - --------------------- For purposes of this discussion and analysis section, reference is made to the table below and the Company's Consolidated Financial Statements (included in Part II, Item 8). Katy has two principal operating groups: Electrical/Electronics and Maintenance Products. Under the Plan, Katy is in the process of disposing its entire previously reported Machinery Manufacturing Group and, accordingly that group has been reported as "Discontinued operations" in the Consolidated Financial Statements. The other businesses being disposed comprise only a portion of Katy's previously reported Distribution and Service Group and one of Katy's equity investments. The operations of these businesses have been reported as "Equity in income (loss) of operations to be disposed of" in the 1998 and 1997 Consolidated Statement of Operations. During the fourth quarter of 1998, the Company decided to retain Hamilton, due to its earnings recovery and growth potential. Accordingly, the results for Hamilton have been removed from the caption "Equity in income (loss) of operations to be disposed of" and consolidated in the financial statements with the continuing operations of the Electrical/Electronics segment for both 1998 and 1997. For purposes of discussion and analysis, information for the discontinued operations and the other operations to be disposed of is presented below. Katy intends to seek additional acquisitions to grow its Electrical/Electronics and Maintenance Products segments. The table below and the narrative, which follows, summarize the key factors in the year-to-year changes in operating results. The information provided below has been retroactively restated to reflect Katy's realignment of its operating units. Years Ended December 31, 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Electrical/Electronics Group - ---------------------------- Net external sales $230,927 $218,237 $ 89,622 Net internal sales 32,103 175 180 Income from operations 14,839 13,191 7,250 Operating margin 6.4% 6.0% 8.1% Identifiable assets 126,362 112,156 108,775 Depreciation and amortization 1,652 398 1,475 Capital expenditures 7,348 5,138 2,503 Maintenance Products Group - -------------------------- Net external sales $111,388 $ 67,786 $ 56,391 Net internal sales 6,389 4,306 3,423 Income from operations 8,401 6,328 4,794 Operating margin 7.5% 9.3% 8.5% Identifiable assets 110,317 46,333 31,065 Depreciation and amortization 3,779 1,854 1,745 Capital expenditures 2,725 1,234 1,235 Operations to be Disposed Of - ---------------------------- Net external sales $ 6,297 $ 9,568 $ 10,011 Net internal sales - - - Income (loss) from operations (3,262) 122 1,566 Operating margin (7.3%) 1.3% 15.6% Identifiable assets 17,680 31,599 32,015 Equity Investments 7,034 6,500 6,382 Depreciation and amortization 1,009 1,549 1,384 Capital expenditures 5,126 3,034 515 Discontinued Operations - ----------------------- Net external sales $ 23,349 $ 31,537 $ 32,494 Net internal sales 146 - - Income from operations 1,663 [a] 3,046 1,566 Operating margin 7.1% 9.7% 4.8% Identifiable assets 16,975 18,486 22,843 Depreciation and amortization 631 681 747 Capital expenditures 547 1,252 884 Corporate - --------- Corporate expenses $ 7,965 $ 6,496 $ 5,640 Identifiable assets 24,535 43,818 44,811 Depreciation and amortization 91 86 154 Capital expenditures 175 41 182 Company - ------- Net external sales [a] $371,961 $327,128 $188,518 Net internal sales 38,638 4,481 3,603 Income from operations [a] 13,676 16,191 9,536 Operating margin [a] 4.4% 4.9% 5.1% Identifiable assets [a] 295,869 252,392 239,509 Depreciation and amortization [a] 7,162 4,568 5,505 Capital expenditures 15,921 10,699 5,319 [a] Company balances include amounts from both "Discontinued Operations" and "Operations to be Disposed of", whereas the Consolidated Financial Statements classify such amounts as "Discontinued Operations" and "Operations to be Disposed of" for 1998 and 1997 and "Discontinued Operations" for 1996. The "Income from operations" for "Discontinued Operations" was deferred pending final disposition of such operations. See Note 4 to Consolidated Financial Statements for further discussion. 1998 Compared to 1997 - --------------------- The Electrical/Electronics Group external sales increased $12,690,000 or 6%. The increased sales were primarily a result of the Woods Canada acquisition in May of 1998. Excluding the Woods Canada acquisition, sales decreased $10,223,000 or 5% due to lower volumes in the electric corded products and the distribution of electronic and electrical components, parts and accessories. These decreases were a result of unfavorable line reviews from major customers pertaining to our electric corded products business and additional program pricing pressures in the Electrical/Electronics segment. Operating income for the group increased $1,648,000 or 12%. Excluding the increased volumes associated with the Woods Canada acquisition, operating income increased 5%. This increase was attributable to increased margins in the specialty metal business resulting from favorable product mix. These increases were partially offset by lower volumes associated with the line reviews discussed above and higher selling, general and administrative costs as a percentage of sales in the electric corded products and electrical components, parts and accessories businesses. Consolidation and intense pricing pressures by national distributors had a negative impact on both revenues and margins in the electrical components, parts and accessories businesses. Identifiable assets for the group increased during the year mainly as a result of the Woods Canada acquisition in May of 1998. Sales for the Maintenance Products Group increased $43,602,000 or 64%. The increase in sales was primarily due to the Disco acquisition in May of 1998, the Wilen acquisition in August of 1998, and a full year of sales from Loren, acquired in August of 1997. Excluding these acquisitions, sales increased approximately $3,600,000 due to general volume increases in the previously owned sanitary maintenance and stain businesses. Operating income for the group increased $2,073,000 or 33%. Excluding the Maintenance Products Group acquisitions discussed above, operating income increased $911,000 or 14% primarily as a result of the above mentioned volume improvements offset partially by slightly lower margins in the stain and sanitary maintenance businesses. Identifiable assets for the group increased during the year mainly as a result of the previously announced acquisitions of Disco and Wilen in 1998. Sales for operations to be disposed of decreased $3,271,000 or 34%. The decrease was a result of lower volumes associated with the disposition of the cold storage facility business in June of 1998. Excluding the disposition, sales remained relatively stable in 1998 compared to 1997. Operating income for operations to be disposed of decreased $3,384,000. The decrease was primarily a result of an impairment related to the waste-to-energy business combined with the disposition of the cold storage facility in June of 1998. Excluding the impairment and disposition, operating income decreased slightly due to lower margins in the waste-to-energy business. Identifiable assets for operations to be disposed of decreased during the year mainly as a result of the previously announced disposition of the Company's cold storage facility in June of 1998. Sales for discontinued operations decreased $8,188,000 or 26%. The decrease in sales was primarily a result of the disposition of Beehive effective July 1997, combined with lower volumes in the cookie sandwich machinery, wood processing machinery and gauging and control systems businesses. Operating income for the group decreased $1,383,000 or 45%. The decrease in operating income was primarily a result of lower volumes combined with diminished margins in the wood processing machinery and cookie sandwich machinery businesses. Corporate expenses increased $1,469,000 or 23%. This increase was mainly a result of banking fees, increased outside service fees and salary and compensation increases for 1998 as compared to 1997. Identifiable assets at Corporate decreased primarily as a result of lower cash levels at year-end. Although the results of these operating groups can be significantly affected by the strength of the general economy, the Company believes that it has positioned itself well in segments that can be expanded both externally through acquisitions particularly in the electrical/electronics and maintenance products areas, and internally through new products, operational improvements and increased market penetrations. Following is a discussion concerning other factors that affected the Company's net income. Gross profit from continuing operations increased $19,541,000 or 25% as gross margins increased slightly to 29% from 28% in 1997 while selling, general and administrative expenses increased $17,289,000 or 26% in 1998 compared to the prior year. The increase in gross profit and selling, general and administrative expenses is attributable to both the increased volumes and the acquisition activity previously mentioned. Interest expense increased $978,000 from 1997 primarily as a result of the borrowings associated with the acquisition of Wilen in August of 1998. Interest income decreased slightly due to the Company maintaining lower average cash and cash equivalent balances during 1998 compared to 1997. Other, net in 1998 was income of $1,523,000 versus income of $920,000 in 1997. The increase was a result of the Company receiving past due balances on previously written-off investments. Income before provision for income taxes increased to $19,821,000 in 1998 from $14,565,000 in 1997. The increase resulted primarily from the gain on sale of the Company's cold storage facility of $6,122,000, which was partially offset by the impairment loss resulting from the reduction in the fair value of the waste-to-energy facility of $2,800,000 being recorded in "Equity in income (loss) of operations to be disposed of" on the Consolidated Statement of Operations. Excluding these items, the income from continuing operations before income taxes increased $1,934,000 primarily as a result of increased operating income from both the Electrical/Electronics and the Maintenance Products Groups. Provision for income taxes in 1998 was $6,739,000 or an effective tax rate of 34% and $4,922,000 or an effective tax rate of 33.8% in 1997. 1997 Compared to 1996 - --------------------- The Electrical/Electronics Group sales increased $128,615,000 or 144%. The increased sales were primarily due to the acquisition of Woods effective December 1996. Excluding the acquisition, sales decreased $3,629,000 or 4% as a result of lower volumes in the distribution of electronic and electrical parts and accessories and diminished volumes from the specialty metal business. Operating income for the group increased $5,941,000 or 82%. Excluding the increased sales volume associated with the acquisition of Woods, operating income decreased $3,213,000 or 44% as a result of lower margins in the specialty metals, distribution of electronic parts, accessories, components and nonpowered hand tool businesses. Lower margins in the above areas were a result of competitive pressure on selling prices and higher than expected material costs. Increased margins in the electric corded products and supplies business as a result of lower copper prices further contributed to the increased operating income. Sales for the Maintenance Products Group increased $11,395,000 or 20%. The increase in sales was primarily associated with the acquisition of Loren Products, effective August 1997. Excluding the acquisition, sales increased $4,449,000 or 8% primarily due to increased volumes in the sanitary maintenance and stain businesses resulting from various sales promotions. Operating income for the group increased $1,534,000 or 32%. Excluding the acquisition of Loren, operating income increased $1,211,000 or 25%. The improvement was primarily due to increased sales and increased margins in the sanitary maintenance business complemented by lower selling, general and administrative costs as a percentage of sales within the stain business. Identifiable assets for the group increased during the year mainly as a result of the acquisition of Loren, effective August 1997. Sales for the other operations to be disposed of decreased $443,000 or 4%. The decrease was primarily a result of decreased volume in the waste energy business, balanced partially by increased volume in the cold storage facility business. Operating income for the group decreased $1,444,000 or 92%. The decrease was a result of lower sales volume in the previously mentioned business coupled with lower margins in the waste energy facility and cold storage facility businesses. These lower margins were a result of unfavorable product mix. Higher selling, general and administrative expenses as a percentage of sales in each of the above-mentioned areas also contributed to the decrease in operating income. Sales for Discontinued Operations decreased $957,000 or 3%. Excluding the disposition of Beehive, effective July 1997, sales increased $2,136,000 or 7%. The increase was primarily a result of volume improvements in both the cookie sandwich and gauging and control system businesses. Operating income for the group increased $1,480,000 or 95%. Excluding the disposition of Beehive, operating income increased $1,389,000 or 89% due to improved margins in wood processing machinery, cookie sandwich machinery, gauging and control systems, and testing and recording devices for the transportation industry. Increased margins were a result of successful cost saving measures and favorable product mix in the wood processing and gauging and control system businesses. Lower selling, general and administrative costs as a percentage of sales for the wood processing and cookie sandwich businesses further contributed to the increase in operating income. Identifiable assets decreased during the year mainly due to the disposition of Beehive in July of 1997. Corporate expenses increased $856,000 or 15%. This increase was mainly a result of greater insurance costs and salary and compensation increases for 1997 as compared to 1996. Identifiable assets at Corporate decreased slightly during the year mainly due to lower cash levels at year-end. Although the results of these operating groups can be significantly affected by the strength of the general economy, the Company believes that it has positioned itself well in segments that can be expanded both externally through acquisitions particularly in the electrical/electronics and maintenance products areas, and internally through new products, operational improvements and increased market penetrations. Following is a discussion concerning other factors that affected the Company's net income. Gross profit from continuing operations increased $31,457,000 as gross margins decreased to 28% from 30% in 1996 while selling, general and administrative expenses increased $26,404,000 in 1997 compared to the prior year. The increase in gross profit and slight decrease in gross margin is attributable to assuming a full year of operations from Woods, which essentially is a higher volume, lower margin business than the existing businesses of the Company. The increase in selling, general and administrative expenses is primarily due to the increase in sales volumes during 1997, offset partially by lower selling, general and administrative costs as a percentage of sales in the Maintenance Products Group. Interest expense decreased $833,000 from 1996 primarily as a result of reclassifying the operations of C.E.G.F. (USA), Inc., including interest expense, into the line item "Equity in income (loss) of other operations to be disposed of" in the 1997 Consolidated Statement of Operations. Interest income decreased $1,196,000 during 1997 due to the Company maintaining less average cash and cash equivalent balances during 1997 compared to 1996. Other, net in 1997 was income of $920,000 versus income of $1,074,000 in 1996. The decrease was a result of the Company receiving settlements from various insurance companies associated with environmental issues in the prior year. Income before provision for income taxes to $14,565,000 in 1997 from $20,966,000 in 1996. This decrease relates primarily to the gain on sale of Union Pacific stock recognized in 1996, offset partially by increased operating income from both the Electrical/Electronics and the Maintenance Products Groups. Provision for income taxes was $4,922,000 or an effective tax rate of 33.8% in 1997, and $7,639,000 or an effective rate of 36.4% in 1996. The effective tax rate in 1997 reflects the benefits obtained from the Woods acquisition effective December 1996. Equity in income of unconsolidated affiliates increased $636,000 in 1997 primarily due to Bee Gee Holding Company improving upon an unfavorable year in 1996. Note that the income from this equity investment has been included within the line item "Equity in income of other operations to be disposed of" on the Consolidated Statement of Operations for 1997. See Note 6 to Consolidated Financial Statements. Liquidity and Capital Resources - ------------------------------- Combined cash and cash equivalents decreased 42% to $12,898,000 on December 31, 1998, from $22,351,000 on December 31, 1997, mostly due to the acquisition activity during the current year. Excluding current year acquisitions, cash flow from operations was substantial enough to cover liquidity and capital resource requirements with the exception of the debt- financed acquisition of Contico International, L.L.C. in January of 1999, the Company believes that cash flow from operating activities should be able to cover its 1999 liquidity and capital resource requirements. Current ratios were 2.52 to 1.00 and 2.80 to 1.00 at December 31, 1998 and 1997, respectively. Working capital decreased 2% to $100,971,000 on December 31, 1998, from $103,252,000 on December 31, 1997. This decrease is primarily attributable to the previously mentioned cash and cash equivalents decrease in 1998, offset by the Company's emphasis on better management of working capital. Katy has authorized and expects to commit approximately $24,000,000 for capital projects in 1999, of which $22,500,000 will be expended by the Company's ongoing operations, exclusive of acquisitions, if any, and expects to meet these capital expenditure requirements through the use of available cash and internally generated funds. The Company continues to search for appropriate acquisition candidates, and may obtain all or a portion of the financing for future acquisitions through its unsecured $215 million credit agreement described below. On December 11, 1998, the Company amended and restated its revolving credit agreement agented by Bank of America with LaSalle National Bank acting as the managing agent. The amended and restated credit agreement is for an unsecured $215 million revolving loan which replaced an unsecured $80 million revolving loan facility. The Company had $39,000,000 outstanding under this agreement as of December 31, 1998. The borrowings under this agreement resulted from the Wilen purchase in August of 1998. On January 8, 1999, the Company completed the Contico acquisition, resulting in additional borrowings of $132,000,000 under this credit agreement. The Company had $162,000,000 outstanding under this agreement as of March 18, 1999. At December 31, 1998, Katy had short and long-term indebtedness of $39,980,000. Total debt was 21.1% of total capitalization at December 31, 1998. See Note 7 to Consolidated Financial Statements for further discussion. On May 19, 1998, Katy's Board of Directors authorized the Company to repurchase an additional 250,000 shares, bringing the total authorized shares to 1,150,000 since 1995. In connection therewith, Katy repurchased 12,000, 38,000 and 509,800 of its common shares during the years ended December 31, 1998, 1997 and 1996, at a total cost of $217,000, $566,000 and $6,367,000, respectively. During 1998, the repurchase activities were minimal due to restrictions resulting from acquisition activity. As of December 31, 1998, 238,000 common shares may still be purchased to complete the repurchase program. Management continuously reviews each of its businesses. As a result of these ongoing reviews, management may determine to sell certain companies and may augment its remaining businesses with acquisitions. When sales do occur, management anticipates that funds from these sales will be used for general corporate purposes or to fund acquisitions. Acquisitions may also be funded through cash balances, available lines of credit and future borrowings. See Notes 3 and 4 to Consolidated Financial Statements for further discussion. New Accounting Pronouncements - ----------------------------- In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that specified costs incurred in developing or obtaining internal-use software, as defined by SOP 98-1, be capitalized once certain criteria have been met and amortized in a systematic and rational manner over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998, and stipulates that costs incurred prior to initial application of the statement not be adjusted according to the statement's provisions. Adoption of SOP 98-1 is not expected to have a significant impact on the Company's financial position or results of operations. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that costs of start-up activities, as defined by SOP 98-5, be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, and stipulates that adoption would be reported as a cumulative change in accounting principle, meaning that any previously capitalized start-up costs would be written off. Adoption of SOP 98-5 is not expected to have a significant impact on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and requires that those assets and liabilities be measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and its resulting designation. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Since the Company is not actively engaged in hedging activities, adoption of this statement is not expected to have a significant impact on the Company's financial position or results of operations. Environmental and Other Contingencies - ------------------------------------- In December 1996, Banco del Atlantico, a bank located in Mexico, filed a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company, and against certain past and then present officers and directors and former owners of Woods, alleging that the defendants participated in a violation of the Racketeer Influenced and Corrupt Organizations Act involving allegedly fraudulently obtained loans from Mexican banks, including the plaintiff, and "money laundering" of the proceeds of the illegal enterprise. All of the foregoing is alleged to have occurred prior to the Company's purchase of Woods. The plaintiff also alleges that it made loans to an entity controlled by certain officers and directors based upon fraudulent representations. The plaintiff seeks to hold Woods liable for its alleged damage under principles of respondeat superior and successor liability. The plaintiff is claiming damages in excess of $24,000,000 and is requesting treble damages under the statutes. The defendants have filed a motion, which has not been ruled on, to dismiss this action on jurisdictional grounds. Because the litigation is in preliminary stages, it is not possible at this time for the Company to determine an outcome or reasonably estimate the range of potential exposure. The Company may have recourse against the former owner of Woods and others for, among other things, violations of covenants, representations and warranties under the purchase agreement through which the Company acquired Woods, and under state, federal and common law. In addition, the purchase price under the purchase agreement may be subject to adjustment as a result of the claims made by Banco del Atlantico. The extent or limit of any such recourse cannot be predicted at this time. Katy also has a number of product liability and workers' compensation claims pending against it and its subsidiaries. Many of these claims are proceeding through the litigation process and the final outcome will not be known until a settlement is reached with the claimant or the case is adjudicated. It can take up to 10 years from the date of the injury to reach a final outcome for such claims. With respect to the product liability and workers' compensation claims, Katy has provided for its share of expected losses beyond the applicable insurance coverage, including those incurred but not reported, which are developed using actuarial techniques. Such accruals are developed using currently available claim information, and represent management's best estimates. The ultimate cost of any individual claim can vary based upon, among other factors, the nature of the injury, the duration of the disability period, the length of the claim period, the jurisdiction of the claim and the nature of the final outcome. The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency, state environmental agencies and private parties as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") or equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Under the federal Superfund statute, parties could be held jointly and severally liable, thus subjecting them to potential individual liability for the entire cost of cleanup at the site. Based on its estimate of allocation of liability among PRPs, the probability that other PRPs, many of whom are large, solvent, public companies, will fully pay the costs apportioned to them, currently available information concerning the scope of contamination, estimated remediation costs, estimated legal fees and other factors, the Company has recorded and accrued for indicated environmental liabilities in the aggregate amount of approximately $5,000,000 at December 31, 1998. The ultimate cost will depend on a number of factors and the amount currently accrued represents management's best current estimate of the total cost to be incurred. The Company expects this amount to be substantially paid over the next one to four years. The most significant environmental matters in which the Company is currently involved are as follows: 1. In 1993, the United States Environmental Protection Agency ("USEPA") initiated a Unilateral Administrative Order Proceeding under Section 7003 of the Resource Conservation and Recovery Act ("RCRA") against W.J. Smith and Katy. The proceeding requires certain actions at the W.J. Smith site and certain off-site areas, as well as development and implementation of additional cleanup activities to mitigate off- site releases. In December 1995, W.J. Smith, Katy and USEPA agreed to resolve the proceeding through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is currently implementing a cleanup to mitigate off-site releases. 2. During 1995, the Company reached agreement with the Oregon Department of Environmental Quality ("ODEQ") as to a cleanup plan for PCB contamination at the Medford, Oregon facility of the former Standard Transformer division of American Gage. The agreement required the Company to pay $1,300,000 of the first $2,000,000 in clearing costs. Those funds were expended in 1998. The present occupant of the site, Balteau Standard, Inc. was responsible for the remaining $700,000 of the first $2,000,000 and the next $450,000 in cleanup costs above the $2,000,000. The parties are now sharing equally in cleanup costs. Katy believes the cleanup plan has been successful and has requested that the ODEQ inspect and approve the remediation work. Katy has received such approval with respect to a portion of the cleanup plan. Further monitoring of groundwater and testing and cleanup of adjacent property may be required before approval can be obtained with respect to the remainder of the plan. Pending such approval, the liability of Katy and its subsidiary cannot be determined at this time. 3. Pursuant to an agreement executed in connection with the sale of assets of JEI Liquidating, Inc., a Katy subsidiary, Katy has agreed to defend and indemnify the buyer of such assets, Allard Industries, Inc. ("Allard"), in the case captioned United States v. Exxon, et al. in U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95- L; C-94-148-Lcas. The case concerns the disposal of hazardous substances at a landfill site in Londonderry, New Hampshire, at which JEI Liquidating, Inc. allegedly disposed of hazardous substances from its Manchester, New Hampshire facility. The case arises under the Superfund law. The parties to the litigation have reached a settlement in principle, the specific terms of which are being negotiated in a Consent Decree. Under the expected Consent Decree, Allard/Katy will pay approximately $300,000 and perform no future work at the site, subject to limited re-openers. In exchange, Allard and Katy will receive a release and contribution protection. Honeywell Inc., a former owner and operator of JEI Liquidating, Inc.'s Manchester, New Hampshire facility, has agreed in principle to pay $40,000 of Allard/Katy's settlement under the Consent Decree. Pending entry of the Consent Decree and receipt of a release, Katy's liability cannot be determined at this time. Although management believes that these actions individually and in the aggregate are not likely to have a material adverse effect on the Company, further costs could be significant and will be recorded as a charge to operations when such costs become probable and reasonably estimable. Year 2000 - --------- The year 2000 issue is a problem that has a potentially material adverse impact on the Company as well as governments, businesses, and individuals throughout the world. The year 2000 issue affects computer programs and microchips that cannot properly recognize the first two digits of a year, beginning after December 31, 1999. The problem has the potential to disrupt the operation of products and services that rely on these computer programs or microchips. Based on assessment activities conducted by the Company beginning in 1997 regarding the year 2000 problem, Katy determined that the Company required modification or replacement of a moderate number of computer programs and microchips. The changes required are necessary for a wide variety of assets which include, but are not limited to, computer hardware and software, production machinery and phone systems. The Company believes that it has identified the major sources of potential internal year 2000 issues and implemented a company wide year 2000 remediation program (the "Y2K Program") during 1998 which includes the performance of due diligence procedures for all acquisitions made by the Company. The Company has significantly completed the Y2K Program as of December 31, 1998 and expects to fully complete the Y2K Program by July 31, 1999, however, testing of new systems will continue throughout the year. The Company believes that completion of the Y2K Program will substantially mitigate all known significant potential internal year 2000 problems by July 31, 1999. The Company will continue to investigate additional year 2000 risks as they come to the attention of the Company. The Company has contacted many of its critical suppliers, financial institutions, public utilities and other entities to determine the year 2000 readiness of its material business relationships. While the Company has not been informed of any material risks associated with these entities, there is no guarantee of the year 2000 readiness of those entities or the potential material adverse effect on the Company. The Company has expensed approximately $824,000 of costs incurred to date related to the Y2K Program. Approximately $549,000 has been expensed for fiscal year 1998. The total remaining costs of remediation are estimated to be $500,000. The costs of the Y2K Program to date and estimated future costs, as well as Y2K Program completion dates are based on management's best estimates. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty of the year 2000 readiness of third-party suppliers, customers and others, the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material impact on its results of operations, liquidity or financial condition. However, the Y2K Program is expected to significantly reduce Katy's level of uncertainty about the year 2000 problem. Other - ----- Katy's 1999 operating plan of the continuing segments indicates an improvement in results compared to those reported in 1998. The plan reflects slightly lower results in the first quarter of 1999 from continuing segments compared to the year earlier periods due mainly to acquisition accounting of inventory purchased at Contico International, L.L.C., as well as the loss of business at Woods Industries, Inc., previously announced on November 4, 1998. The plan for the second, third and fourth quarters of 1999 exceed the year earlier periods and projects an improved year to year result. Some of the statements in this Form 10-K, as well as statements by the Company in periodic press releases, oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company and conference calls following earning releases, constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- The Company's exposure to market risk associated with changes in interest rates relates primarily to its debt obligations and temporary cash investments. The Company does not use derivative financial instruments relating to either of these exposures. The Company's debt obligations are generally at short-term LIBOR rates, and its temporary cash investments earn rates of interest available on securities with maturities of three months or less. (In Thousands) Expected Maturity Dates ASSETS - ------ 1999 2000 2001 2002 2003 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Temporary cash investments Fixed rate $3,600 $ - $ - $ - $ - $ - $3,600 $3,600 Average interest rate 4.5% - - - - - 4.5% LONG-TERM DEBT - -------------- Fixed rate debt $ 72 $ 71 $ 71 $ 766 $ - $ - $ 980 $ 980 Average interest rate 7.14% 7.14% 7.14% 7.14% - - 7.14% Variable rate debt $ - $ - $39,000 $ - $ - $ - $39,000 $39,000 Average interest rate 7.33% 7.33% 7.33% 7.33% - - 7.33% Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- MANAGEMENT REPORT Katy Industries, Inc. management is responsible for the fair presentation and consistency of all financial data included in this Annual Report in accordance with generally accepted accounting principles. Where necessary, the data reflect management's best estimates and judgements. Management also is responsible for maintaining an internal control structure with the objective of providing reasonable assurance that Katy's assets are safeguarded against material loss from unauthorized use or disposition and that authorized transactions are properly recorded to permit the preparation of accurate financial data. Cost-benefit judgements are an important consideration in this regard. The effectiveness of internal controls is maintained by: (1) personnel selection and training; (2) division of responsibilities; (3) establishment and communication of policies; and (4) ongoing internal review programs and audits. Management believes that Katy's system of internal controls is effective and adequate to accomplish the above described objectives. /S/John R. Prann, Jr. - --------------------- John R. Prann, Jr. President and Chief Executive Officer /S/Stephen P. Nicholson - ----------------------- Stephen P. Nicholson Vice President, Finance and Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO KATY INDUSTRIES, INC.: We have audited the accompanying consolidated balance sheet of KATY INDUSTRIES, INC., (a Delaware corporation) and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Katy Industries, Inc. and subsidiaries as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, January 26, 1999. INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Katy Industries, Inc. We have audited the accompanying consolidated balance sheet of Katy Industries, Inc. and subsidiaries (the "Company") as of December 31, 1997, and the related statements of consolidated operations, stockholders' equity and cash flows for each of the two years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Katy Industries, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Denver, Colorado, January 27, 1998. KATY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (Thousands of Dollars) ASSETS ------ 1998 1997 CURRENT ASSETS: ---- ---- Cash and cash equivalents - Note 1 $ 12,898 $ 22,351 Accounts receivable, trade, net of allowance for doubtful accounts of $963 and $857 53,449 49,721 Notes and other receivables, net of allowance for doubtful notes of $198 and $410 3,246 2,263 Inventories - Note 1 69,394 57,113 Deferred income taxes - Note 11 13,268 13,233 Other current assets 3,158 3,252 Net current assets of operations to be disposed of - Note 4 1,203 2,005 Net current assets of discontinued operations - Note 4 10,959 10,588 ------- ------- Total current assets 167,575 160,526 ------- ------- OTHER ASSETS: Notes receivable, net of allowance for doubtful notes of $2,452 and $2,500 953 1,106 Cost in excess of net assets acquired - Notes 1 and 3 33,576 8,544 Other intangibles - Note 3 23,621 8,803 Miscellaneous - Note 8 2,551 1,272 Net noncurrent assets of operations to be disposed of - Note 4 15,521 24,538 Net noncurrent assets of discontinued operations - Note 4 4,279 4,964 ------- ------- Total other assets 80,501 49,227 ------- ------- PROPERTIES - Note 1: Land and improvements 1,435 1,214 Buildings and improvements 10,677 14,987 Machinery and equipment 60,340 34,710 ------- ------- 72,452 50,911 Accumulated depreciation (27,353) (23,504) ------- ------- Net properties 45,099 27,407 ------- ------- $293,175 $237,160 ======= ======= See Notes to Consolidated Financial Statements. KATY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (Thousands of Dollars) LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 CURRENT LIABILITIES: ---- ---- Accounts payable $28,017 $24,974 Accrued compensation 5,354 2,485 Accrued expenses - Note 1 31,626 28,946 Accrued interest and taxes 910 248 Current maturities, long-term debt - Note 7 72 - Dividends payable 625 621 ------- ------- Total current liabilities 66,604 57,274 ------- ------- LONG-TERM DEBT, less current maturities - Note 7 39,908 - ------- ------- OTHER LIABILITIES - Note 8 9,310 11,280 ------- ------- EXCESS OF ACQUIRED NET ASSETS OVER COST, Net - Notes 1 and 3 5,198 6,902 ------- ------- DEFERRED INCOME TAXES - Note 11 22,839 22,533 ------- ------- COMMITMENTS AND CONTINGENCIES - Notes 7, 12 and 14 STOCKHOLDERS' EQUITY - Note 9: Common stock, $1 par value; authorized 25,000,000 shares; issued 9,822,204 shares 9,822 9,822 Additional paid-in capital 51,243 51,127 Accumulated other comprehensive income (2,309) (1,462) Other adjustments (1,302) (814) Retained earnings 112,784 102,194 Treasury stock, at cost, 1,483,890 and 1,542,197 shares, respectively (20,922) (21,696) ------- ------- Total stockholders' equity 149,316 139,171 ------- ------- $293,175 $237,160 ======= ======= See Notes to Consolidated Financial Statements. KATY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (Thousands of Dollars, Except Per Share Amounts) 1998 1997 1996 ---- ---- ---- Net sales $342,315 $286,023 $156,024 Cost of goods sold 243,751 207,000 108,458 ------- ------- ------- Gross profit 98,564 79,023 47,566 Selling, general and administrative expenses (83,289) (66,000) (39,596) Equity in income (loss) of operations to be disposed of - Note 2, 3, 4 and 6 3,144 (325) - Interest expense (1,214) (236) (1,069) Interest income 1,093 1,183 2,379 Gain on sales of marketable securities - Notes 1 and 15 - - 10,612 Other, net 1,523 920 1,074 ------- ------- ------- Income before provision for income taxes and equity in loss of unconsolidated affiliates 19,821 14,565 20,966 Provision for income taxes - Note 11 (6,739) (4,922) (7,639) ------- ------- ------- Income from operations before equity in loss of unconsolidated affiliates 13,082 9,643 13,327 Equity in loss of unconsolidated affiliates (net of tax) - Note 6 - - (564) ------- ------- ------- Income from continuing operations 13,082 9,643 12,763 Discontinued operations - Note 4: Income from operations of discontinued businesses (net of tax) - 1,959 953 ------- ------- ------- Net income $ 13,082 $ 11,602 $ 13,716 ======= ======= ======= Earnings per share of common stock - Basic (Note 5): Income from continuing operations $ 1.58 $ 1.16 $ 1.53 Discontinued operations - .24 .11 ------- ------- ------- Net income $ 1.58 $ 1.40 $ 1.64 ======= ======= ======= Earnings per share of common stock - Diluted (Note 5): Income from continuing operations $ 1.55 $ 1.15 $ 1.53 Discontinued operations - .23 .11 ------- ------- ------- Net income $ 1.55 $ 1.38 $ 1.64 ======= ======= ======= Dividends paid per share of common stock $ .30 $ .30 $ .2875 ======= ======= ======= See Notes to Consolidated Financial Statements. KATY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Common Stock Additional Other Number Par Paid-in Comprehensive Other Retained Treasury Comprehensive of Shares Value Capital Income(Loss) Adjustments Earnings Stock Income(Loss) --------- ----- ------- ------------ ----------- -------- ----- ------------ (Thousands of dollars) Balance, January 1, 1996 9,821,329 $9,821 $51,111 $4,006 $(349) $81,925 $(16,184) Net income - - - - - 13,716 - $13,716 Foreign currency translation adjustments - - - 3 - - - 3 Unrealized holding gains adjustment - Note 1 - - - (5,297) - - - (5,297) ------ Comprehensive income $ 8,422 Common stock dividends - - - - - (2,499) - ====== Issuance of shares under Stock Purchase Plan - Note 9 875 1 6 - (141) (43) 337 Purchase of Treasury Shares - Note 9 - - - - - - (6,367) --------- ------ ------- ------ ----- ------- -------- Balance, December 31, 1996 9,822,204 9,822 51,117 (1,288) (490) 93,099 (22,214) Net income - - - - - 11,602 - $11,602 Foreign currency translation adjustments - - - (174) - - - (174) ------ Comprehensive income $11,428 Common stock dividends - - - - - (2,481) - ====== Issuance of shares under Stock Purchase Plan - Note 9 - - (31) - - (26) 295 Other issuance of shares - Note 9 - - 41 - (324) - 876 Purchase of Treasury Shares - Note 9 - - - - - - (653) --------- ------ ------- ------ ----- ------- -------- Balance, December 31, 1997 9,822,204 9,822 51,127 (1,462) (814) 102,194 (21,696) Net income - - - - - 13,082 - $13,082 Foreign currency translation adjustments - - - (847) - - - (847) ------ Comprehensive income $12,235 Common stock dividends - - - - - (2,492) - ====== Issuance of shares under Stock Option Plan - Note 9 - - (54) - - - 274 Other issuance of shares - Note 9 - - 170 - (488) - 717 Purchase of Treasury Shares - Note 9 - - - - - - (217) ---------- ------ ------- ------ ----- ------- -------- Balance, December 31, 1998 9,822,204 $9,822 $51,243 $(2,309) $(1,302) $112,784 $(20,922) ========== ====== ======= ====== ====== ======= ======== See Notes to Consolidated Financial Statements.
KATY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (Thousands of Dollars) 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income $13,082 $11,602 $13,716 Depreciation and amortization 7,162 4,568 5,505 (Gain) loss on sale of assets (2,864) (653) 160 Gain on marketable security transactions - - (10,612) Equity in (income) loss of unconsolidated affiliates (534) - 564 Deferred income taxes 1,117 1,287 6,239 Changes in assets and liabilities, net of acquisition/disposition of subsidiaries: Receivables 7,890 (5,528) 9,547 Inventories 463 2,996 (1,983) Other current assets (636) (553) (373) Accounts payable and accrued liabilities (2,051) 682 (44) Other, net (1,096) 21 (195) ------ ------ ------ Net cash flows provided by operating activities 22,533 14,422 22,524 ------ ------ ------ Cash flows from investing activities: Proceeds from sale of assets 482 1,487 1,205 Collections of notes receivable and receivable from sale of business 710 451 13,211 Proceeds from sales of marketable securities - - 18,681 Proceeds from sale of subsidiary 12,237 5,493 - Payments for purchase of subsidiaries, net of cash acquired (71,091) (12,788) (42,648) Capital expenditures (11,314) (8,654) (5,319) ------ ------ ------ Net cash flows used in investing activities (68,976) (14,011) (14,870) ------ ------ ------ Cash flows from financing activities: Notes payable activity, net - - (14,193) Proceeds from issuance of long-term debt 44,012 - - Principal payments on long-term debt (5,277) (657) (1,019) Payments of dividends (2,492) (2,481) (2,452) Purchase of treasury shares (217) (653) (6,367) Other - 359 - ------ ------ ------ Net cash flows provided by (used in) financing activities 36,026 (3,432) (24,031) ------ ------ ------ Effect of exchange rate changes on cash - - (3) ------ ------ ------ Net decrease in cash and cash equivalents (10,417) (3,021) (16,380) Cash and cash equivalents at beginning of year 24,300 27,321 43,701 ------ ------ ------ Cash and cash equivalents at end of year 13,883 24,300 27,321 Cash of discontinued operations and operations to be disposed of 985 1,949 982 ------ ------ ------ Cash and cash equivalents of continuing operations $12,898 $22,351 $26,339 ====== ====== ====== See Notes to Consolidated Financial Statements. KATY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. SIGNIFICANT ACCOUNTING POLICIES Consolidation Policy - The consolidated financial statements include the accounts of Katy Industries, Inc. and subsidiaries in which it has a greater than 50% interest, collectively "Katy" or the "Company". All significant intercompany accounts, profits and transactions have been eliminated in consolidation. Investments in affiliates that are not majority owned and where the Company does not exercise significant influence are reported using the equity method. As part of the continuous evaluation of its operations, Katy has acquired and disposed of a number of its operating units in recent years. Those which affected the Consolidated Financial Statements for the years ended December 31, 1998, 1997, and 1996 are described in Note 3. There are no restrictions on the payment of dividends by consolidated subsidiaries to Katy. Katy's consolidated retained earnings as of December 31, 1998 include $6,256,000 of undistributed earnings of 50% or less owned investments accounted for by the equity method. No dividends have been paid by any of these unconsolidated affiliates to Katy. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash equivalents consist of highly liquid investments with original maturities of three months or less and total $12,898,000 and $22,351,000, as of December 31, 1998 and 1997, respectively, which approximates their fair value. The Company places its temporary cash investments in quality financial institutions. As such, the Company believes no significant concentration of credit risk exists with respect to these investments. Supplemental Cash Flow Information - Noncash investing and financing activities are disclosed in Notes 1, 3, 6 and 9. Cash paid during the year for interest and income taxes is as follows: 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Interest $1,064 $1,076 $1,143 ===== ===== ===== Income taxes $6,910 $3,694 $3,445 ===== ===== ===== Marketable Securities - During 1996, the Company sold its remaining investment in Union Pacific common stock and Union Pacific Resources common stock for total proceeds of $18,681,000 resulting in a pre-tax gain of $10,612,000. During 1996, unrealized holding gains, net of income taxes, included in stockholders' equity decreased $5,297,000. Research and Development Costs - Research and development costs are expensed as incurred. Inventories - Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. The components of inventories are: December 31, 1998 1997 ---- ---- (Thousands of dollars) Raw materials $26,155 $ 8,314 Work in process 6,073 3,110 Finished goods 37,166 45,689 ------ ------ $69,394 $57,113 ====== ====== Cost in Excess of Net Assets Acquired - In connection with certain acquisitions, the Company recorded an intangible asset for the cost of the acquisition in excess of the fair value of the net assets acquired. This intangible asset is being amortized using the straight-line method over periods ranging from 10 to 20 years. Excess of Acquired Net Assets Over Cost - In connection with the acquisition of Woods Industries, Inc., the Company recorded negative goodwill for the excess of the fair value of the net assets acquired over the cost of the acquisition. Negative goodwill is being amortized using the straight-line method over a period of 5 years. Properties - Properties are stated at cost and depreciated over their estimated useful lives: buildings (10-40 years) generally using the straight- line method; machinery and equipment (3-20 years) and leased machines (lease period) using straight-line, accelerated or composite methods; and leasehold improvements using the straight-line method over the remaining lease period. During 1998, the Company incurred additional debt of $1,018,000 relating to capital equipment. The Company also incurred $3,589,000 of debt for capital equipment relating to CEGF that the Company disposed of during 1998. During 1997, the Company incurred additional debt of $2,045,000 relating to capital equipment. These are classified as non-cash investing and financing for purposes of the Consolidated Statement of Cash Flows. Impairment of Assets - Long-lived assets are reviewed for impairment if events or circumstances indicate the carrying amount of these assets may not be recoverable. If this review indicates that the carrying value of these assets will not be recoverable, based on future net cash flows from the use or disposition of the asset, the carrying value is reduced to fair value. See Note 2 for 1998 asset impairment discussion. Accrued Expenses - The components of accrued expenses are: December 31, 1998 1997 ---- ---- (Thousands of dollars) Accrued insurance $ 6,509 $ 6,538 Accrued environmental costs 4,931 4,355 Other accrued expenses 20,186 18,053 ------ ------ $31,626 $28,946 ====== ====== Fair Value of Financial Instruments - Where the fair values of Katy's financial instrument assets and liabilities differ from their carrying value or Katy is unable to establish the fair value without incurring excessive costs, appropriate disclosures have been given in the Notes to Consolidated Financial Statements. All other financial instrument assets and liabilities not specifically addressed are believed to be carried at their fair value in the accompanying Consolidated Balance Sheets. New Accounting Pronouncements - In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". This statement revises employers' disclosures about pension and other postretirement benefit plans and standardizes the disclosure requirements to the extent practicable. This statement is effective for the Company's financial statements for the year ending December 31, 1998. The Company has adopted this statement and the application of this pronouncement is included in Note 8. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for the Company's financial statements for the year ending December 31, 1998. The Company has adopted this statement and the application of this pronouncement is included in Note 13. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income in financial statements. Under this statement, all components of comprehensive income shall be reported in the financial statements for the period in which they are recognized. This statement divides comprehensive income into net income and other comprehensive income. Other comprehensive income shall be classified separately into foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The accumulated balance of other comprehensive income shall be reported in the equity section of the balance sheet separately from retained earnings and additional paid-in-capital. The Company has adopted this statement and the application of this pronouncement is included in the Consolidated Financial Statements. Revenue Recognition - Sales are recognized upon shipment of products to customers or when services are performed. Reclassifications - Certain amounts from prior years have been reclassified to conform to the 1998 financial statement presentation. Note 2. ASSET IMPAIRMENT During 1998, Katy evaluated the carrying value of Savannah Energy Systems Company ("SESCO"). Continued operating and cash flow losses combined with the efforts to dispose of SESCO led to the Company's review of SESCO's carrying value. Accordingly, during the fourth quarter of 1998, Katy adjusted the carrying value of SESCO's long-lived assets to their estimated fair value, resulting in a pre-tax impairment of $2,800,0000. The estimated fair value was based upon comparable asset values and anticipated future cash flows discounted at a rate commensurate with the risk involved. SESCO is one of the "Operations to be Disposed Of" included in the previously reported Divestiture and Reorganization Plan announced on January 5, 1998. SESCO's historical operating results have been segregated as "Equity in income (loss) of operations to be disposed of" on the accompanying Consolidated Statements of Operations for the years ended December 31, 1998 and 1997. The related net assets have been separately identified on the Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of operations to be disposed of". After recording the above impairment, the net assets held for sale for SESCO are as follows: Current assets $1,414 Current liabilities $ 211 ----- Net current assets $1,203 ===== Noncurrent assets $8,487 Noncurrent liabilities $ - ----- Net noncurrent assets $8,487 ----- Note 3. ACQUISITIONS AND DISPOSITIONS Acquisitions - ------------ On December 31, 1998, the Company acquired the assets of the Bay State Gritcloth division of Tyrolit North America, Inc. The division manufactures an industrial product line of specialty abrasives and has annual sales of approximately $4,000,000. The acquisition has been accounted for under the purchase method and, accordingly, the purchase price is preliminary and adjustments may be recorded through December 1999. The accounts of this acquisition have been included in the Company's Consolidated Financial Statements from the acquisition date. The estimated aggregate purchase price for this division was approximately $4,000,000. The estimated cost in excess of net assets acquired of approximately $1,950,000, subject to additional purchase accounting adjustments, has been recorded as "Cost in excess of net assets acquired" in the Consolidated Balance Sheets and is being amortized on a straight line basis over twenty years. On August 11, 1998, the Company purchased substantially all of the assets of The Wilen Companies, Incorporated. The Company operates the business through its Wilen Products, Inc. subsidiary ("Wilen"). Wilen is a premier manufacturer and distributor of a wide variety of professional cleaning products including mops, brooms and plastic cleaning products. The acquisition has been accounted for under the purchase method and, accordingly, the purchase price is preliminary and adjustments may be recorded through August 1999. The accounts of this acquisition have been included in the Company's Consolidated Financial Statements from the acquisition date. The estimated aggregate purchase price for the Wilen business was approximately $50,000,000. The estimated cost in excess of net assets acquired of approximately $24,000,000, subject to additional purchase accounting adjustments, has been recorded as "Cost in excess of net assets acquired" in the Consolidated Balance Sheets and is being amortized on a straight line basis over twenty years. In addition, Katy has recorded intangible assets of approximately $14,900,000, consisting of customer lists, trademarks and tradenames, and accumulated work force. These intangible assets are being amortized over periods ranging from 7 1/2 to 20 years. The following unaudited pro forma information reflects the pro forma results of operations for the Company giving effect to the Wilen acquisition as if the Wilen acquisition occurred on January 1, 1997. The unaudited pro forma results include the unaudited historical operating results of Wilen for the seven months ended July 31, 1998 and the twelve months ended December 31, 1997. The Company's historical information presented below excludes net income of $2,075,000 or $0.25 per share (basic) from discontinued operations and other operations to be disposed of for December 31, 1998. The Company's historical information presented below excludes net income of $1,780,000 or $0.21 per share (basic) from discontinued operations and other operations to be disposed of and $387,000 or $.05 per share for the sale of property for December 31, 1997. Disclosure results may not be indicative of future results. Year Ended Year Ended December 31, 1998 December 31 ,1997 ----------------- ----------------- (In Thousands, Except Per Share Data) Katy Pro Katy Pro Historical Forma Historical Forma Net Sales $342,315 $365,628 $286,023 $324,017 Income from Operations $ 15,275 $ 17,054 $ 13,023 $ 15,928 Net Income $ 11,007 $ 11,006 $ 9,435 $ 9,363 Earnings per share - Basic $ 1.33 $ 1.33 $ 1.14 $ 1.13 Earnings per share - Diluted $ 1.30 $ 1.30 $ 1.12 $ 1.11 On May 21, 1998, the Company purchased substantially all of the assets of the Consumer Electrical Division of Noma Industries, Limited. The Company operates the business through its Woods Industries (Canada), Inc. subsidiary ("Woods Canada"). Woods Canada is a North American leader in the design, manufacturing and marketing of a wide variety of consumer corded products including low voltage garden lighting, extension cords, multiple outlet and surge strips, specialty cord products, automotive products and electronic timers. On May 11, 1998, the Company purchased substantially all of the assets of Disco, Inc. The Company operates the business through its Glit/Disco, Inc. subsidiary ("Disco"). Disco is a manufacturer and distributor of cleaning and specialty products sold to the restaurant/food service industry. Both acquisitions have been accounted for under the purchase method and accordingly the purchase price is preliminary and adjustments may be recorded through May 1999. The accounts of these acquisitions have been included in the Company's Consolidated Financial Statements from the acquisition date. The estimated aggregate purchase price for the Woods Canada and Disco businesses was approximately $17,100,000. The estimated costs in excess of the net assets acquired of approximately $400,000, subject to additional purchase accounting adjustments, has been recorded as "Cost in excess of net assets acquired" in the Consolidated Balance Sheets and is being amortized on a straight line basis over twenty years. On August 6, 1997, the Company purchased Loren Products ("Loren"). Loren is a manufacturer and distributor of cleaning and abrasive products for the industrial markets and building products for the consumer markets. The estimated purchase price, including acquisition costs was $12,788,000. The acquisition has been accounted for under the purchase method, and accordingly, the estimated cost in excess of the net assets acquired of approximately $2,650,000 has been recorded as cost in excess of net assets of business acquired in the Consolidated Balance Sheets and is being amortized over twenty years. In addition, Katy has recorded intangible assets of approximately $4,790,000, consisting of customer lists, trademarks and tradenames, and accumulated work force. These intangible assets are being amortized over periods ranging from 7 1/2 to 20 years. The accounts of Loren have been included in the Company's Consolidated Financial Statements from the acquisition date. On December 2, 1996, the Company purchased all of the outstanding shares of common stock of Woods Industries, Inc., ("Woods"). Woods is a manufacturer and distributor of electrical corded products as well as electrical and electronic passive components. The estimated purchase price, including acquisition costs, was $45,100,000. The purchase price was paid in cash, of which $3,250,000 was funded through a borrowing against the Company's unsecured line of credit at The Northern Trust Company. The acquisition has been accounted for under the purchase method, and accordingly, the estimated excess of acquired net assets over cost of approximately $8,605,000 has been recorded as "Excess of acquired net assets over cost" in the Consolidated Balance Sheets and is being amortized over five years. The accounts of Woods have been included in the Company's Consolidated Financial Statements from the acquisition date. The following unaudited pro forma information has been prepared assuming the acquisition of Woods had occurred at the beginning of 1996. The pro forma information includes adjustments for (1) the elimination of Woods' depreciation due to the write-down of plant and equipment pursuant to purchase accounting, (2) the elimination of Woods' amortization due to the write-down of cost in excess of businesses acquired pursuant to purchase accounting, (3) the amortization of the estimated excess of acquired net assets over cost recorded pursuant to purchase accounting, (4) elimination of Woods' interest expense as all debt is repaid on date of purchase pursuant to the purchase agreement, (5) decrease in interest income due to use of cash for the purchase price, and (6) the estimated related income tax effects. The pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations as they would have been had the transaction been effected on the assumed dates nor is it necessarily indicative of the results of operations which may occur in the future. Year ended December 31, 1996 ---- (In Thousands, Except Per Share) Net sales $301,863 Income from operations $ 17,736 Net income $ 18,538 Earnings per share - Basic and Diluted $ 2.22 Dispositions - ------------ On June 11, 1998, the Company completed its divestiture of C.E.G.F. (USA), Inc., ("CEGF") for approximately $12,237,000. The net pre-tax book gain of $6,122,000 had been recorded and included as "Equity in income (loss) of operations to be disposed of" on the accompanying Consolidated Statement of Operations for the year ended December 31, 1998. See Note 4 for further discussion. On July 14, 1997, the Company completed its divestiture of the Beehive division of Hamilton Precision Metals, Inc., ("Hamilton") for net proceeds of approximately $5,493,000 and the assumption of certain liabilities of Beehive. Beehive is one of the businesses that comprise the discontinued operations. See Note 4 for further discussion. Accordingly, the gain on disposal has been deferred pending the disposal of all of the discontinued operations. On April 4, 1996, the Company sold substantially all of the assets of its Walsh Press subsidiary for net proceeds of $1,125,000 which included net cash of $721,000 and a note receivable of $404,000, resulting in a nominal loss. The note receivable portion of the consideration is a noncash investing transaction. The Consolidated Financial Statements include Walsh Press' results of operations through that date. Note 4. DISCONTINUED OPERATIONS AND OPERATIONS TO BE DISPOSED OF On December 31, 1997, the Board of Directors approved a plan to dispose of the Company's previously reported Machinery Manufacturing segment. The businesses included as "Discontinued operations" are Airtronics, Inc., Beehive, Bach-Simpson, Ltd., Diehl Machines, Inc., and Peters Machinery Company. The divestiture of Beehive was completed in July of 1997 and the sale of Bach Simpson, Ltd. closed on January 25, 1999. The Company believes that the remaining businesses will be fully divested and the plan completed during the year ending December 31, 1999. On October 20, 1998, the Company announced that the proposed sale of the five companies announced on April 15, 1998, was terminated. All of the remaining discontinued operations were included in this proposed sale to Publicker Industries, Inc., thus, undergoing due diligence from the period April 15, 1998 through September 30, 1998. The Company believes that the remaining businesses will be fully divested and the plan completed during the year ending December 31, 1999. The expected manner of disposition for these businesses is to sell the net assets of each of these operations. See Notes 3 and 17 for further discussion. The historical operating results have been segregated as "Discontinued operations" on the accompanying Consolidated Statements of Operations for all periods presented. The related assets and liabilities have been separately identified on the Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of discontinued operations". Discontinued operations have not been segregated on the Consolidated Statements of Cash Flows. The net income from these operations during 1998 has been deferred and will not be recognized until the total of the gains and losses from the sales of these companies can be determined with certainty to be a net gain. Selected financial data for the discontinued operations is summarized as follows: For the Year Ended December 31, 1998 1997 1996 ---- ---- ---- (In Thousands, Except Per Share Data) Net sales $23,349 $31,537 $32,494 Income before income taxes $ - $ 3,110 $ 1,513 Income taxes - 1,151 560 ------ ------ ------ Net income $ - $ 1,959 $ 953 ====== ====== ====== Net income per share - Basic $ - $ .24 $ .11 ====== ====== ====== Net income per share - Diluted $ - $ .23 $ .11 ====== ====== ====== In connection with the previously mentioned divestiture plan, the Board of Directors also approved the disposal of a portion of the Company's previously reported Distribution and Service segment and one of the Company's equity investments. These businesses are reported as "Operations to be disposed of" and include CEGF, SESCO and the Company's equity investment in Bee Gee Holding Company, Inc. ("Bee Gee"). Katy has decided to retain Hamilton, due to its earnings recovery and growth potential. Accordingly, Hamilton has been removed from the caption "Equity in income (loss) of operations to be disposed of" and consolidated in the financial statements with the continuing operations of the Electrical/Electronics segment for both 1998 and 1997. The sale of CEGF was closed on June 11, 1998 and the Company continues to explore its options with respect to SESCO. The Company believes that Bee Gee will be fully divested during the year ending December 31, 1999. The historical operating results of "Operations to be disposed of" have been segregated as "Equity in income (loss) of operations to be disposed of" on the accompanying Consolidated Statements of Operations for 1998 and 1997. The related assets and liabilities have been separately identified on the Consolidated Balance Sheets as "Net current assets or Net noncurrent assets of operations to be disposed of". The operating financial data for the year ended December 31, 1998 includes a net pre-tax gain of $6,122,000 offset partially by a pre-tax impairment of $2,800,000 relating to the reduction in the book value of SESCO. See Notes 2 and 15 for further discussion. Selected financial data for operations to be disposed of, is summarized as follows: For the Year Ended December 31, 1998 1997 1996 ---- ---- ---- (In Thousands, Except Per Share Data) Net sales $ 6,297 $ 9,568 $10,011 Income (loss) before income taxes $ 3,144 $ (325) $ 432 Income taxes (benefit) 1,069 (146) 157 ------ ------ ------ Net income (loss) $ 2,075 $ (179) $ 275 ====== ====== ====== Net income (loss) per share - Basic $ .25 $ (.03) $ .03 ====== ======= ====== Net income (loss) per share - Diluted $ .25 $ (.02) $ .03 ====== ======= ====== Net assets held for sale for "discontinued operations" are carried at cost, which does not exceed estimated net realizable value, as follows: December 31, 1998 1997 ---- ---- (In Thousands) Discontinued Operations ----------------------- Current assets $13,431 $14,202 Current liabilities (2,472) (3,614) ------ ------ Net current assets of discontinued operations $10,959 $10,588 ====== ====== Noncurrent assets $ 4,288 $ 5,027 Noncurrent liabilities (9) (63) ------ ------ Net noncurrent assets of discontinued operations $ 4,279 $ 4,964 ====== ====== Net assets held for sale for "operations to be disposed of" are valued in accordance with SFAS No. 121, lower of cost or estimated proceeds less cost to sell, as follows: December 31, 1998 1997 ---- ---- (In Thousands) Operations to be Disposed Of ---------------------------- Current assets $ 1,414 $ 3,379 Current liabilities (211) (1,374) ------ ------ Net current assets of operations to be disposed of $ 1,203 $ 2,005 ====== ====== Noncurrent assets $15,521 $34,719 Noncurrent liabilities - (10,181) ------ ------ Net noncurrent assets of operations to be disposed of $15,521 $24,538 ====== ====== Note 5. EARNINGS PER SHARE The Company's diluted earnings per share were calculated using the Treasury Stock method in accordance with the SFAS No. 128. The basic and diluted earnings per share calculations are as follows: For the Year Ended December 31, 1998 1997 1996 ---- ---- ---- (In Thousands, Except Per Share Data) Basic EPS: Income from continuing operations $13,082 $ 9,643 $12,763 Income from discontinued operations - 1,959 953 ------ ------ ------ Net income $13,082 $11,602 $13,716 ====== ====== ====== Shares - Basic 8,290 8,273 8,339 Per-share amount: Continuing operations $ 1.58 $ 1.16 $ 1.53 Discontinued operations - .24 .11 ------ ------ ------ Total $ 1.58 $ 1.40 $ 1.64 ====== ====== ====== Effect of potentially dilutive securities: Options 152 132 46 Diluted EPS: Income from continuing operations $13,082 $ 9,643 $12,763 Income from discontinued operations - 1,959 953 ------ ------ ------ Net income $13,082 $11,602 $13,716 ====== ====== ====== Shares - Diluted 8,442 8,405 8,385 Per-share amount: Continuing operations $ 1.55 $ 1.15 $ 1.53 Discontinued operations - .23 .11 ------ ------ ------ Total $ 1.55 $ 1.38 $ 1.64 ====== ====== ====== Rights to purchase one common share of stock for $35 for each common share of stock held were not included in the computation of diluted EPS because the rights' exercise price was greater than the average price of the common shares. See Note 9 for further discussion. Note 6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES The Company's investments in unconsolidated affiliates are comprised of the following: 1998 1997 ---- ---- (Thousands of dollars) Schon & Cie, AG $ - $ - Bee Gee Holding Company, Inc. 7,034 6,500 ----- ----- 7,034 6,500 Less amounts classified with net noncurrent assets of operations to be disposed of (7,034) (6,500) ----- ----- $ - $ - ===== ===== Bee Gee Holding Company, Inc. - ----------------------------- At December 31, 1998, the Company owns 30,000 shares of common stock, a 43% interest, of Bee Gee, which consists of several subsidiaries engaged in the business of farming and harvesting shrimp off the coast of South and Central America and, during 1996, processed shrimp and other sea foods for domestic and foreign markets. In January 1997, Bee Gee sold its processing operations to a major competitor in the same geographical area. Goodwill related to the Bee Gee investment was amortized over ten years and was completed in 1997. Financial Information - --------------------- The condensed financial information that follows reflects the Company's proportionate share in the financial position and results of operations of Bee Gee: 1998 1997 ---- ---- (Thousands of dollars) Current assets $ 3,619 $ 4,353 Current liabilities (2,063) (2,107) ------ ------ Working capital 1,556 2,246 ====== ====== Properties, net 9,034 7,423 Other assets 417 411 Long-term debt (2,444) (3,044) Other liabilities (1,529) (536) ------ ------ Stockholders' equity $ 7,034 $ 6,500 ====== ====== Investments, at equity, in unconsolidated affiliates $ 7,034 $ 6,500 ====== ====== 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Sales $ 7,597 $11,648 $26,890 Costs and expenses (7,063) (11,129) (27,414) ------ ------ ------ Net income (loss), from continuing operations 534 519 (524) Amortization of excess of cost over net assets acquired - 401 421 Income taxes (benefit) 208 46 (381) ------ ------ ------ Equity in net income (loss) of continuing unconsolidated affiliates $ 326 $ 72 $ (564) ====== ====== ====== Schon & Cie, AG ("Schon") - ------------------------ At December 31, 1998, the Company maintains an equity interest in Schon. Schon consists of three operating companies engaged in the business of manufacturing a wide range of mechanical and programmable four post, web and flat bed die-cutting equipment and shoe manufacturing machinery. Schon's investment was written down to zero at December 31, 1995 due to the continuous losses. During the second quarter, 1996, Schon acquired J. Sandt AG, a major competitor in the same geographical area. This transaction reduced Katy's interest in Schon from 37.5% to 27.6%. The transaction had no effect on Katy's results for the period. In January 1998, the Company, in agreement with Schon's other major stockholders, surrendered some of its stock ownership in lieu of contributing additional funds. As a result of this transaction, Katy's interest in Schon was reduced. This transaction had no effect on Katy's results for the period. Note 7. INDEBTEDNESS On December 11, 1998, the Company amended and restated its unsecured revolving credit agreement agented by Bank of America, with LaSalle National Bank acting as the managing agent. The Credit Agreement provides for borrowings of up to $215 million. The Company had $39 million outstanding under the Credit Agreement as of December 31, 1998. Under the credit agreement, the Company must meet certain net worth and other financial covenants. At December 31, 1998, the Company is in compliance with all such covenants. Letters of credit totaling $6,640,000 were outstanding at December 31, 1998. Long-term debt at December 31 includes: 1998 1997 ---- ---- (Thousands of dollars) Revolving loans payable, interest at various LIBOR Rates (7.31% - 7.65%), due through 2001, unsecured $39,000 $ - Real estate and chattel mortgages, with interest at fixed rates (7.14%), due through 2002 980 10,628 Less current maturities (72) (680) ------ ------ 39,908 9,948 Less amount classified with net noncurrent assets of other operations to be disposed of - (9,948) ------ ------ $39,908 $ - ====== ====== Aggregate scheduled maturities of long-term debt are as follows: (Thousands of dollars) 1999 $ 72 2000 71 2001 39,071 2002 766 ------ Total $39,980 ====== Other - ----- As of December 31, 1998, the Company is contingently liable for $8,000,000 (original face value) of 8-1/8% Subordinated Industrial Development Bonds issued by Bee Gee. As of December 31, 1998, the outstanding balance on these bonds is $5,510,000. Note 8. RETIREMENT BENEFIT PLANS Pension and Other Postretirement Plans - -------------------------------------- Several domestic and foreign subsidiaries have pension plans covering substantially all of their employees. These plans are noncontributory, defined benefit pension plans. The benefits to be paid under these plans are generally based on employees' retirement age and years of service. The companies' funding policies, subject to the minimum funding requirements of the applicable U.S. or foreign employee benefit and tax laws, are to contribute such amounts as are determined on an actuarial basis to provide the plans with assets sufficient to meet the benefit obligations. Plan assets consist primarily of fixed income investments, corporate equities and government securities. The Company also provides certain health care and life insurance benefits for some of its retired employees. Pension Benefits Other Benefits 1998 1997 1998 1997 ---- ---- ---- ---- (Thousands of dollars) Change in benefit obligation: Benefit obligation at beginning of year $3,614 $3,307 $2,105 $2,142 Service cost 232 226 20 20 Interest cost 257 253 139 143 Actuarial (gain)/loss (35) 220 - - Benefits paid (538) (392) (200) (200) ----- ----- ----- ----- Benefit obligation at end of year 3,530 3,614 2,064 2,105 Change in plan assets: Fair value of plan assets at beginning of year 4,111 3,670 - - Actuarial return on plan assets 303 649 - - Employer contribution 173 184 200 200 Benefits paid (538) (392) (200) (200) ----- ----- ----- ----- Fair value of plan asset at end of year 4,049 4,111 - - Reconciliation of prepaid(accrued) benefit cost: Funded status 519 497 (2,064) (2,105) Unrecognized net actuarial (gain)/loss 328 323 (493) (538) Unrecognized prior service cost 70 76 29 33 Unrecognized net transition asset/(obligation) (328) (366) - - ----- ----- ----- ----- Prepaid/(Accrued) benefit cost 589 530 (2,528) (2,610) Components of net periodic benefit cost: Service cost 232 226 20 20 Interest cost 257 253 139 143 Expected return on plan assets (313) (339) - - Amortization of net transition asset (38) (38) - - Amortization of prior service cost (6) (3) 5 5 Amortization of net gain/(loss) 29 76 (45) (45) ----- ----- ----- ----- Net periodic benefit cost $ 161 $ 175 $ 119 $ 123 ===== ===== ===== ===== Assumptions as of December 31: Discount rates 7-7.5% 7-7.5% 7% 7% Expected return on plan assets 7.5-8% 7.5-8% Assumed rates of compensation increases 0-5% 0-5% Impact of one-percent increase in health care trend rate: Increase in accumulated postretirement benefit obligation $213 $212 Increase in service cost and interest cost $ 4 $ 19 Impact of one-percent decrease in health care trend rate: Increase in accumulated postretirement benefit obligation $171 $170 Increase in service cost and interest cost $ 3 $ 15 The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1998 was 10% for 1998 decreasing linearly each successive year until it reaches 4.5% in 2001, after which it remains constant. In addition to the plans described above, in 1993 the Company's Board of Directors approved a retirement compensation program for certain officers and employees of the Company and a retirement compensation arrangement for the Company's then Chairman and Chief Executive Officer. The Board approved a total of $3,500,000 to fund such plans. This amount represents the best estimate of the obligation that vested immediately upon Board approval and is to be paid for services rendered to date. 401(k) Plans - ------------ The Company offers its employees the opportunity to voluntarily participate in one of six 401(k) plans administered by the Company or one of its subsidiaries. The Company makes matching and other contributions in accordance with the provisions of the plans and, under certain provisions, at the discretion of the Company. The Company made annual matching and other contributions of $632,000, $623,000 and $474,000 in 1998, 1997 and 1996, respectively. Note 9. STOCKHOLDERS' EQUITY Share Repurchase - ---------------- On May 19, 1998, Katy's Board of Directors authorized the Company to repurchase an additional 250,000 common shares, bringing the total authorized shares to 1,150,000 since 1995. In connection therewith, Katy repurchased 12,000, 38,000 and 509,800 of its common shares during the years ended December 31, 1998, 1997 and 1996, at a total cost of $217,000, $566,000 and $6,367,000, respectively. As of December 31, 1998, 238,000 common shares may still be purchased pursuant to the repurchase program. During 1997, the Company initiated an "Odd Lot Buyback" program to repurchase common shares held by stockholders owning fewer than 100 shares. During the year ended December 31, 1997, Katy repurchased 4,695 of its common shares at a cost of $87,000. Stockholder Rights Plan - ----------------------- In January 1995, the Board of Directors adopted a Stockholder Rights Plan and distributed one right for each outstanding share of the Company's common stock. Each right entitles the stockholder to acquire one share of the Company's common stock at an exercise price of $35, subject to adjustment. The rights are not and will not become exercisable unless certain changes of control events occur. As of December 31, 1998, there are 8,338,314 rights outstanding, of which none are exercisable. Stock Purchase Plan for Key Employees and Directors - --------------------------------------------------- In 1994, the Board of Directors approved the Stock Purchase Plan for Key Employees and Directors ("Stock Purchase Plan"). Under the Stock Purchase Plan, shares of the Company's common stock, held in the treasury, were reserved for issuance at a purchase price equal to 65% (50% in certain cases) of the market value of the shares as determined based upon the offering period established by the Compensation Committee of the Board of Directors. During 1996, 24,000 shares were issued at prices ranging from $6.17 to $8.02 per share. As of December 31, 1998, 83,000 common shares have been issued at prices ranging from $6.17 to $8.02 per share. The issuance of these shares, in 1996, for total notes receivable of $141,000, was a noncash financing transaction. Proceeds from the sale of these shares consisted of cash or notes receivable due on demand but no later than sixty months from date of purchase with an interest rate equal to the Federal Short-Term Funds Rate. The Company is holding the shares as collateral for all notes receivable. Further, these shares cannot be sold until twenty-four months from the date of purchase provided the notes have been repaid. Notes receivable from plan participants are included in the Consolidated Balance Sheets under the caption "Foreign currency translation and other adjustments". The excess of the cost of the treasury shares over the market value of the shares at the date of purchase of $43,000 was charged to retained earnings in 1996. The excess of the market value of the shares over the purchase price of $113,000 was charged to compensation expense in 1996. Restricted Stock Grant - ---------------------- During 1998 and 1997, the Company issued restricted stock grants in the amount of 37,800 and 44,250 shares, respectively, to certain key employees of the Company. These stock grants vest over a four-year period, of which 25% vested immediately upon distribution. As a result of this transaction, the Company has recognized compensation expense for 1998 and 1997 in the amount of $162,000 and $324,000, respectively. Director Stock Grant - -------------------- During 1998 and 1997, the Company granted all non-employed Directors 500 shares of Company common stock. The total grant to the Directors for the years ended December 31, 1998 and 1997 was 4,000 and 4,500 shares, respectively. Stock Option Plans - ------------------ At the 1998 Annual Meeting, the Company's stockholders approved a Long-Term Incentive Plan (the "Incentive Plan"), authorizing the issuance of up to 875,000 shares of Company Common Stock pursuant to the grant or exercise of stock options, including incentive stock options, nonqualified stock options, stock appreciation rights ("SARs"), restricted stock, performance units or shares and other incentive awards. The Board of Directors administers the Incentive Plan and determines to whom awards may be granted, the type of award as well as the number of shares of Company Common Stock to be covered by each award, and the terms and conditions of such awards. The exercise price of stock options granted under the Incentive Plan cannot be less than 100 percent of the fair market of such stock on the date of grant. Related to the Incentive Plan, the Company granted SARs as follows: SARs (204,473) become exercisable at any time after the earliest that (a) up to and including July 22, 2001, the Company's average closing stock price over a 45 calendar day period has equaled or exceeded $39.125 per share; or (b) up to and including January 22, 2005, the Company's average closing stock price over a 45 calendar day period has equaled or exceeded $53.80 per share. In addition, in the event that goal (a) above is met, only 50% of the SARs thus vested will be immediately exercisable, with, 25% exercisable upon the first anniversary of the performance vesting date, and 25% exercisable upon the second anniversary of the performance vesting date. In addition, SARs (163,579) become exercisable at such time up to and including January 22, 2005, the Company's average closing stock price over a 45 calendar day period has equaled or exceeded $53.80 per share. All SARs which have met the performance goals above, as the case may be, will expire December 9, 2007. During 1995, the Company established stock option plans providing for the grant of options to purchase common shares to outside directors, executives and certain key employees. The Compensation Committee of the Board of Directors administers the plans and approves stock option grants. Stock options granted under the plans are exercisable at a price equal to the market value of the stock at the date of grant. The options, in the case of nonemployee directors, are immediately exercisable, and in the case of executives and key employees, become exercisable from one to four years from the date of grant, and generally expire 10 years from the date of grant. The following table summarizes option activity under the plan: Weighted Average Weighted Remaining Average Contractual Exercise Options Exercise Price Life Price ------- -------------- ---- ----- Outstanding at December 31, 1995 197,000 $ 8.50 - 9.25 9.8 years $ 8.96 Granted 304,750 $12.69 - 13.57 $13.21 Canceled (12,000) $ 8.50 - 9.25 $ 9.00 ------- Outstanding at December 31, 1996 489,750 $ 8.50 - 13.57 9.5 years $11.60 Granted 33,000 $16.13 - 19.56 $17.87 Exercised (21,850) $ 8.50 - 13.19 $11.25 Canceled (17,500) $ 8.50 - 9.25 $12.69 ------- Outstanding at December 31, 1997 483,400 $ 8.50 - 19.56 8.5 years $11.99 ======= Granted 16,000 $ 18.13 $18.13 Exercised (19,436) $ 8.50 - 13.19 $11.31 Canceled (8,864) $ 8.50 - 19.56 $12.74 ------- Outstanding at December 31, 1998 471,100 $ 8.50 - 19.56 7.6 years $12.21 ======= Vested and exercisable at December 31, 1998 305,787 $11.92 ======= The Company applies Accounting Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized. SFAS No. 123, "Accounting for Stock-Based Compensation" was issued and, if fully adopted by the Company, would change the method for recognition of cost. Under SFAS No. 123, cost is based upon the fair value of each option at the date of grant using an option-pricing model that takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the expected term of the option. Had compensation cost been determined based on the fair value method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. The weighted average fair values of options granted in 1998, 1997 and 1996 were $5.67, $7.02 and $4.80, respectively. The fair value of each option grant is estimated on the date of grant using the binomial option-pricing model with the following assumptions used for grants on June 8, 1995, December 29, 1995, May 20, 1996, July 30, 1996, December 9, 1996, May 19, 1997 and December 9, 1997, May 19, 1998, respectively: dividend yield of 1.65%, 1.82% and 2.35% for the periods 1998, 1997 and 1996, respectively; expected volatility ranging from 17.8% to 35.5% for all grants, risk free interest rates ranging from of 4.66% to 6.44% for all grants; and expected lives of 5 years for all grants. 1998 1997 1996 ---- ---- ---- (In Thousands, Except Per Share Data) Net income as reported $13,082 $11,602 $13,716 ====== ====== ====== Net income - pro forma $12,762 $11,334 $13,628 ====== ====== ====== Earnings per share as reported - Basic $1.58 $1.40 $1.64 ==== ==== ==== Earnings per share - pro forma - Basic $1.54 $1.37 $1.63 ==== ==== ==== Earnings per share as reported - Diluted $1.55 $1.38 $1.64 ==== ==== ==== Earnings per share - pro forma - Diluted $1.52 $1.35 $1.63 ==== ==== ==== The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. Note 10. WASTE-TO-ENERGY FACILITY SESCO owns a waste-to-energy facility in Savannah, Georgia. SESCO is under contract with the Resource Recovery Development Authority ("Authority") of the City of Savannah (the "City") to receive and dispose of the City's solid waste through 2007. The contract provides for minimum levels of SESCO's disposal fee income to be used to retire the $50,700,000 of industrial revenue bonds issued by an Authority of the City to finance construction of the plant. In substance, the City desired a solid waste disposal and resource recovery facility, issued bonds to finance construction of the facility, and contracted SESCO to construct, operate and maintain the facility. In return for its services, it was intended that the Company would receive a reasonable profit and the facility upon the termination of the various agreements. SESCO is obligated to perform under the various agreements. SESCO is therefore merely the operator of the facility and has not recorded the cost of the facility or the obligations related to its construction in its Consolidated Financial Statements. Under terms of the contract, SESCO made contributions to the Authority totaling $9,200,000. In consideration for these contributions, the waste-to- energy facility will revert to the Company, subject to collateral agreements under the bond indentures, when the service agreement expires. The Company is not required to make any additional payments to the Authority. SESCO has made capital expenditures to improve the operating facility, and these expenditures have been accounted for as deferred expenses and prior to the impairment loss, were being amortized through 2007. See Note 2 and 4 for further discussion. Note 11. INCOME TAXES The domestic and foreign components of income (loss) before income taxes, exclusive of equity in income of unconsolidated affiliates, are: 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Domestic Continuing $19,179 $14,148 $21,469 Discontinued - 3,159 1,361 ------ ------ ------ Total domestic $19,179 $17,307 $22,830 ====== ====== ====== Foreign Continuing $ 642 $ 417 (503) Discontinued - (49) 152 ------ ------ ------ Total foreign $ 642 $ 368 $ (351) ====== ====== ====== Total worldwide $19,821 $17,675 $22,479 ====== ====== ====== The components of the net provision (benefit) for income taxes are: 1998 1997 1996 ---- ---- ---- Continuing operations: (Thousands of dollars) Current: Federal $ 4,240 $ 2,786 $ 1,385 State 590 340 243 Foreign 285 47 - ------ ------ ------ Total 5,115 3,173 1,628 ------ ------ ------ Deferred: Federal 1,585 1,315 5,729 State 171 269 87 Foreign (132) 165 (186) ------ ------ ------ Total 1,624 1,749 5,630 ------ ------ ------ Total continuing operations $ 6,739 $ 4,922 $ 7,258 ====== ====== ====== Discontinued operations: Federal $ - $ 1,065 $ 674 State - 104 52 Foreign - (18) (166) ------ ------ ------ Total - 1,151 560 ------ ------ ------ Net provision for income taxes $ 6,739 $ 6,073 $ 7,818 ====== ====== ====== The total income tax provision for continuing operations differed from the amount computed by applying the statutory federal income tax rate to pretax income from continuing operations. The computed amount and the differences for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Provision for income taxes at statutory rate $ 6,937 $ 5,098 $ 7,338 State income taxes, net of federal benefit 476 492 403 Foreign tax rate differential 10 20 - Amortization of negative goodwill (596) (596) - Benefit of net operating loss carryforwards (66) (49) (22) Other, net (22) (43) (80) ------ ------ ------ Provision for income taxes from continuing consolidated operations 6,739 4,922 7,639 Undistributed loss of equity investees - - (381) ------ ------ ------ Net provision for income taxes $ 6,739 $ 4,922 $ 7,258 ====== ====== ====== The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 1998 and 1997 are as follows: 1998 1997 ---- ---- (Thousands of dollars) Deferred tax liabilities: Difference between book and tax basis of property $ 449 $ 149 Waste-to-energy facility 18,763 17,581 Undistributed earnings of equity investees 10,372 10,616 ------ ------ 29,584 28,346 ------ ------ Deferred tax assets: Allowance for doubtful receivables 2,156 1,837 Inventory costs 3,470 2,698 Accrued expenses and other items 11,708 11,806 Operating loss carryforwards - domestic 2,574 3,097 Operating loss carryforwards - foreign 555 361 Tax credit carryforwards - 46 ------ ------ 20,463 19,845 Less valuation allowance (450) (799) ------ ------ 20,013 19,046 ------ ------ Net deferred income tax liability $ 9,571 $ 9,300 ====== ====== The valuation allowance primarily relates to domestic net operating loss carryforwards and foreign tax credit carryforwards that may not be realized due to uncertainties as to certain subsidiaries realization of future income and to past losses from foreign operations. The valuation allowance decreased $349,000 during the year ended December 31, 1998, due to partial utilization of available net operating losses, the disposition of CEGF and the utilization of foreign tax credit carryovers. The domestic net operating loss carryforwards primarily relate to SESCO and CEGF and can only be used to offset income from those operations. One of the Company's foreign subsidiaries has net operating loss carryforwards of approximately $1,542,000 at December 31, 1998 that expire in the years 2002 through 2005. SESCO has state net operating loss carryforwards of $51,481,000 at December 31, 1998 that expire in the years 2003 through 2013. Note 12. LEASE OBLIGATIONS: The Company has entered into noncancelable leases for manufacturing and data processing equipment and real property with lease terms of up to ten years. Future minimum lease payments as of December 31, 1998 are as follows: (Thousands of dollars) 1999 $ 5,314 2000 3,569 2001 2,860 2002 1,991 2003 1,677 Later years 2,587 ------ Total minimum payments $17,998 ====== Rental expense for 1998, 1997 and 1996 for operating leases was $5,138,000, $3,928,000 and $1,456,000, respectively. Note 13. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION: The Company is a manufacturer and distributor of a variety of industrial and consumer products, including sanitary maintenance supplies, coated abrasives, stains, electrical and electronic components, and nonpowered hand tools. Principal markets are in the United States and Canada, and include the sanitary maintenance, restaurant supply, retail, electronic, automotive, and computer markets. These activities are grouped into two industry segments: Electrical/Electronics and Maintenance Products. Katy had one major customer in the Electrical/Electronics segment that accounted for approximately $46,796,000 or 14% of the Company's consolidated sales in 1998. On November 4, 1998, the Company announced that this major customer withdrew its commitment to purchase extension corded products from Woods at or about year-end. Katy is not dependent on any other single customer for a material portion of its overall business. The Company is not reliant upon any one significant vendor or material. The table below and the narrative, which follows, summarize the key factors in the year-to-year changes in operating results. The information provided below has been retroactively restated to reflect Katy's realignment of its operating units. Years Ended December 31, 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Electrical/Electronics Group - ---------------------------- Net external sales $230,927 $218,237 $ 89,622 Net internal sales 32,103 175 180 Income from operations 14,839 13,191 7,250 Operating margin 6.4% 6.0% 8.1% Identifiable assets 126,362 112,156 108,775 Depreciation and amortization 1,652 398 1,475 Capital expenditures 7,348 5,138 2,503 Maintenance Products Group - -------------------------- Net external sales $111,388 $ 67,786 $ 56,391 Net internal sales 6,389 4,306 3,423 Income from operations 8,401 6,328 4,794 Operating margin 7.5% 9.3% 8.5% Identifiable assets 110,317 46,333 31,065 Depreciation and amortization 3,779 1,854 1,745 Capital expenditures 2,725 1,234 1,235 Operations to be Disposed Of - ---------------------------- Net external sales $ 6,297 $ 9,568 $ 10,011 Net internal sales - - - Income (loss) from operations (3,262) 122 1,566 Operating margin (7.3%) 1.3% 15.6% Identifiable assets 17,680 31,599 32,015 Equity Investments 7,034 6,500 6,382 Depreciation and amortization 1,009 1,549 1,384 Capital expenditures 5,126 3,034 515 Discontinued Operations - ----------------------- Net external sales $ 23,349 $ 31,537 $ 32,494 Net internal sales 146 - - Income from operations 1,663 [a] 3,046 1,566 Operating margin 7.1% 9.7% 4.8% Identifiable assets 16,975 18,486 22,843 Depreciation and amortization 631 681 747 Capital expenditures 547 1,252 884 Corporate - --------- Corporate expenses $ 7,965 $ 6,496 $ 5,640 Identifiable assets 24,535 43,818 44,811 Depreciation and amortization 91 86 154 Capital expenditures 175 41 182 Company - ------- Net external sales [a] $371,961 $327,128 $188,518 Net internal sales 38,638 4,481 3,603 Income from operations [a] 13,676 16,191 9,536 Operating margin [a] 4.4% 4.9% 5.1% Identifiable assets [a] 295,869 252,392 239,509 Depreciation and amortization [a] 7,162 4,568 5,505 Capital expenditures 15,921 10,699 5,319 [a] Company balances include amounts from both "Discontinued Operations" and "Operations to be Disposed of", whereas the Consolidated Financial Statements classify such amounts as "Discontinued Operations" and "Operations to be Disposed of" for 1998 and 1997 and "Discontinued Operations" for 1996. The "Income from operations" for "Discontinued Operations" was deferred pending final disposition of such operations. See Note 4 to Consolidated Financial Statements for further discussion. The following tables reconcile the Company's total revenues, operating income and assets to the Company's Consolidated Statements of Operations and Consolidated Balance Sheets. 1998 1997 1996 ---- ---- ---- (Thousands of dollars) Revenues Total revenues for reportable segments $410,599 $331,609 $192,121 Elimination of inter-company revenues (38,638) (4,481) (3,603) Revenues included in Equity in income (loss) of operations to be disposed of (6,297) (9,568) - Revenues included in Discontinued operations (23,349) (31,537) (32,494) ------- ------- ------- Total consolidated revenues $342,315 $286,023 $156,024 ======= ======= ======= Operating Income Total operating income for reportable segments $13,676 $16,191 $ 9,536 Operating income included in Equity in income (loss) of operations to be disposed of 462 (122) - Loss from impairment of assets 2,800 - - Operating income included in Discontinued operations (1,663) (3,046) (1,566) ------ ------ ------ Total consolidated operating income $15,275 $13,023 $ 7,970 ====== ====== ====== Total Assets Total assets for reportable segments $295,869 $252,392 Liabilities included in Net current and Net noncurrent assets of operations to be disposed of (956) (11,555) Liabilities included in Net current and Net noncurrent assets of discontinued operations (1,738) (3,677) ------- ------- Total consolidated assets $293,175 $237,160 ======= ======= Export sales of products, primarily to Canada, Mexico, Europe, and the Far East, were $19,641,000, $15,197,000, and $5,960,000 in 1998, 1997 and 1996, respectively. The Company operates businesses in the United States and foreign countries. The operations for 1998, 1997 and 1996 of businesses within major geographic areas are summarized as follows: United Canada/ States Mexico Europe Other Consolidated ------ ------ ------ ----- ------------ (Thousands of dollars) 1998: Sales to unaffiliated customers $298,572 $35,876 $ 5,246 $ 2,621 $342,315 ======= ====== ====== ====== ======= Operating income $ 12,539 $ 1,852 $ 626 $ 258 $ 15,275 ======= ====== ====== ====== ======= Identifiable assets [a] $261,309 $31,866 $ - $ - $293,175 ======= ====== ====== ====== ======= 1997: Sales to unaffiliated customers $266,403 $13,526 $ 3,541 $ 2,553 $286,023 ======= ====== ====== ====== ======= Operating income $ 11,551 $ 958 $ 299 $ 215 $ 13,023 ======= ====== ====== ====== ======= Identifiable assets [a] $222,300 $14,860 $ - $ - $237,160 ======= ====== ====== ====== ======= 1996: Sales to unaffiliated customers $145,184 $ 4,907 $ 3,747 $ 2,186 $156,024 ======= ====== ====== ====== ======= Operating income $ 7,004 $ 342 $ 418 $ 206 $ 7,970 ======= ====== ====== ====== ======= Identifiable assets [a] $220,796 $14,581 $ - $ - $235,377 ======= ====== ====== ====== ======= Net sales for each geographic area include sales of products produced in that area and sold to unaffiliated customers, as reported in the Consolidated Statements of Operations. [a] Amounts represent total identifiable assets, net of liabilities of $2,693,000, $15,232,000 and $4,131,000 for 1998, 1997 and 1996, respectively. The $2,693,000 and $15,232,000 represent the total liabilities of both Discontinued Operations and Other Operations to be Disposed Of, whereas, the $4,131,000 represents the total liabilities of Discontinued Operations. Note 14. CONTINGENT LIABILITIES In December 1996, Banco del Atlantico, a bank located in Mexico, filed a lawsuit against Woods Industries, Inc. ("Woods"), a subsidiary of the Company, and against certain past and then present officers and directors and former owners of Woods, alleging that the defendants participated in a violation of the Racketeer Influenced and Corrupt Organizations Act involving allegedly fraudulently obtained loans from Mexican banks, including the plaintiff, and "money laundering" of the proceeds of the illegal enterprise. All of the foregoing is alleged to have occurred prior to the Company's purchase of Woods. The plaintiff also alleges that it made loans to an entity controlled by certain officers and directors based upon fraudulent representations. The plaintiff seeks to hold Woods liable for its alleged damage under principles of respondeat superior and successor liability. The plaintiff is claiming damages in excess of $24,000,000 and is requesting treble damages under the statutes. The defendants have filed a motion, which has not been ruled on, to dismiss this action on jurisdictional grounds. Because the litigation is in preliminary stages, it is not possible at this time for the Company to determine an outcome or reasonably estimate the range of potential exposure. The Company may have recourse against the former owner of Woods and others for, among other things, violations of covenants, representations and warranties under the purchase agreement through which the Company acquired Woods, and under state, federal and common law. In addition, the purchase price under the purchase agreement may be subject to adjustment as a result of the claims made by Banco del Atlantico. The extent or limit of any such recourse cannot be predicted at this time. Katy also has a number of product liability and workers' compensation claims pending against it and its subsidiaries. Many of these claims are proceeding through the litigation process and the final outcome will not be known until a settlement is reached with the claimant or the case is adjudicated. It can take up to 10 years from the date of the injury to reach a final outcome for such claims. With respect to the product liability and workers' compensation claims, Katy has provided for its share of expected losses beyond the applicable insurance coverage, including those incurred but not reported, which are developed using actuarial techniques. Such accruals are developed using currently available claim information, and represent management's best estimates. The ultimate cost of any individual claim can vary based upon, among other factors, the nature of the injury, the duration of the disability period, the length of the claim period, the jurisdiction of the claim and the nature of the final outcome. The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency, state environmental agencies and private parties as potentially responsible parties ("PRPs") at a number of hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") or equivalent state laws and, as such, may be liable for the cost of cleanup and other remedial activities at these sites. Responsibility for cleanup and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Under the federal Superfund statute, parties could be held jointly and severally liable, thus subjecting them to potential individual liability for the entire cost of cleanup at the site. Based on its estimate of allocation of liability among PRPs, the probability that other PRPs, many of whom are large, solvent, public companies, will fully pay the costs apportioned to them, currently available information concerning the scope of contamination, estimated remediation costs, estimated legal fees and other factors, the Company has recorded and accrued for indicated environmental liabilities in the aggregate amount of approximately $5,000,000 at December 31, 1998. The ultimate cost will depend on a number of factors and the amount currently accrued represents management's best current estimate of the total cost to be incurred. The Company expects this amount to be substantially paid over the next one to four years. The most significant environmental matters in which the Company is currently involved are as follows: 1. In 1993, the United States Environmental Protection Agency ("USEPA") initiated a Unilateral Administrative Order Proceeding under Section 7003 of the Resource Conservation and Recovery Act ("RCRA") against W.J. Smith and Katy. The proceeding requires certain actions at the W.J. Smith site and certain off-site areas, as well as development and implementation of additional cleanup activities to mitigate off- site releases. In December 1995, W.J. Smith, Katy and USEPA agreed to resolve the proceeding through an Administrative Order on Consent under Section 7003 of RCRA. Pursuant to the Order, W.J. Smith is currently implementing a cleanup to mitigate off-site releases. 2. During 1995, the Company reached agreement with the Oregon Department of Environmental Quality ("ODEQ") as to a cleanup plan for PCB contamination at the Medford, Oregon facility of the former Standard Transformer division of American Gage. The agreement required the Company to pay $1,300,000 of the first $2,000,000 in clearing costs. Those funds were expended in 1998. The present occupant of the site, Balteau Standard, Inc. was responsible for the remaining $700,000 of the first $2,000,000 and the next $450,000 in cleanup costs above the $2,000,000. The parties are now sharing equally in cleanup costs. Katy believes the cleanup plan has been successful and has requested that the ODEQ inspect and approve the remediation work. Katy has received such approval with respect to a portion of the cleanup plan. Further monitoring of groundwater and testing and cleanup of adjacent property may be required before approval can be obtained with respect to the remainder of the plan. Pending such approval, the liability of Katy and its subsidiary cannot be determined at this time. 3. Pursuant to an agreement executed in connection with the sale of assets of JEI Liquidating, Inc., a Katy subsidiary, Katy has agreed to defend and indemnify the buyer of such assets, Allard Industries, Inc. ("Allard"), in the case captioned United States v. Exxon, et al. in U.S. District Court, D.N.H., consolidated nos. C-92-486; C-93-95- L; C-94-148-Lcas. The case concerns the disposal of hazardous substances at a landfill site in Londonderry, New Hampshire, at which JEI Liquidating, Inc. allegedly disposed of hazardous substances from its Manchester, New Hampshire facility. The case arises under the Superfund law. The parties to the litigation have reached a settlement in principle, the specific terms of which are being negotiated in a Consent Decree. Under the expected Consent Decree, Allard/Katy will pay approximately $300,000 and perform no future work at the site, subject to limited re-openers. In exchange, Allard and Katy will receive a release and contribution protection. Honeywell Inc., a former owner and operator of JEI Liquidating, Inc.'s Manchester, New Hampshire facility, has agreed in principle to pay $40,000 of Allard/Katy's settlement under the Consent Decree. Pending entry of the Consent Decree and receipt of a release, Katy's liability cannot be determined at this time. Although management believes that these actions individually and in the aggregate are not likely to have a material adverse effect on the Company, further costs could be significant and will be recorded as a charge to operations when such costs become probable and reasonably estimable. Note 15. UNUSUAL ITEMS: During 1998, 1997 and 1996, various charges and credits, as follows, were recorded in the Company's Consolidated Statements of Operations: 1998 - ---- During 1998, the Company recorded a pre-tax gain of $6,122,000 from the sale of CEGF. In addition, Katy recorded a pre-tax impairment loss of $2,800,000 reducing SESCO's book value. 1997 - ---- During 1997, the Company recorded a pre-tax gain of $585,000 on the sale of property. 1996 - ---- During 1996, the Company sold its remaining investment in Union Pacific common stock and Union Pacific Resources common stock for total proceeds of $18,681,000 resulting in a pre-tax gain of $10,612,000. Note 16: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): Quarterly results of operations have been affected by unusual or infrequently occurring items as discussed in Notes 6 and 15. 1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr - ---- ------- ------- ------- ------- (Thousands of Dollars, Except Per Share Data) Net sales $68,856 $71,626 $94,814 $107,019 ====== ====== ====== ======= Gross profit $19,171 $22,344 $28,182 $ 28,867 ====== ====== ====== ======= Income from continuing operations $ 1,873 $ 2,785 $ 3,800 $ 4,624 Discontinued operations - - - - ------ ------ ------ ------- Net income $ 1,873 $ 2,785 $ 3,800 $ 4,624 ====== ====== ====== ======= Earnings per share - Basic Continuing operations $ .23 $ .34 $ .46 $ .56 Discontinued operations - - - - ------ ------ ------ ------- Net income $ .23 $ .34 $ .46 $ .56 ====== ====== ====== ======= Earnings per share - Diluted Continuing operations $ .22 $ .33 $ .45 $ .55 Discontinued operations - - - - ------- ------ ------ ------- Net income $ .22 $ .33 $ .45 $ .55 ======= ====== ====== ======= 1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr - ---- ------- ------- ------- ------- (Thousands of Dollars, Except Per Share Data) Net sales $65,424 $63,657 $75,132 $81,810 ====== ====== ====== ====== Gross profit $19,539 $18,699 $20,405 $20,380 ====== ====== ====== ====== Income from continuing operations $ 1,987 $ 1,959 $ 2,321 $ 3,376 Discontinued operations 503 600 289 567 ------ ------ ------ ------ Net income $ 2,490 $ 2,559 $ 2,610 $ 3,943 ====== ====== ====== ====== Earnings per share - Basic Continuing operations $ .24 $ .24 $ .28 $ .41 Discontinued operations .06 .07 .04 .07 ------ ------ ------ ------ Net income $ .30 $ .31 $ .32 $ .48 ====== ====== ====== ====== Earnings per share - Diluted Continuing operations $ .24 $ .23 $ .28 $ .40 Discontinued operations .06 .07 .03 .07 ------ ------ ------ ------ Net income $ .30 $ .30 $ .31 $ .47 ====== ====== ====== ====== Note 17: SUBSEQUENT EVENTS: On January 8, 1999, the Company purchased all of the common membership interest (the "Common Interest") in Contico International, L.L.C., (the "LLC"), the successor to the janitorial, consumer products and industrial packaging businesses of Contico International, Inc. ("Contico"). Contico had previously contributed substantially all of the assets and certain of the liabilities of the business to the LLC and entered into leases with the LLC for certain real property used in the business and retained by Contico. The purchase price for the Common Interest was approximately $132,100,000. The payment of the purchase price was financed under the Credit Agreement. Contico has retained a preferred membership interest in the LLC (the "Preferred Interest"), having a stated value of $32,900,000, which yields an 8% annual return on its stated value while outstanding. At certain times beginning on January 8, 2001, or upon the occurrence of certain events, all or a portion of the Preferred Interest is exchangeable for shares of Katy common stock at a rate of $21 per share (for an aggregate of 1,567,000 shares). The LLC, based in St. Louis, Missouri, manufactures and distributes consumer storage, home and automotive products, as well as janitorial and food service equipment and supplies. On January 25, 1999, the Company completed the divestiture of Bach Simpson, Ltd. for approximately $1,200,000. The Company will retain ownership of Bach Simpson, Ltd.'s building and will lease it to the buyer. The net loss from this sale did not exceed the deferred gains realized from the sale of companies reported as "Discontinued Operations." As such, neither will be recognized until the total of the gains and losses from the sales of these companies can be determined with certainty to be a net gain. Item 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING - ----------------------------------------------------------------------------- AND FINANCIAL DISCLOSURE - ------------------------ On March 30, 1998, the Company dismissed Deloitte & Touche LLP as Independent Public Accountants. The decision was approved by the Audit Committee of the Company's Board of Directors. Deloitte & Touche LLP's reports on the consolidated financial statements for the Company's fiscal years ended December 31, 1997 and December 31, 1996 did not contain an adverse opinion or a disclaimer of opinion, and were not modified as to uncertainty, audit scope or accounting principles. Deloitte & Touche LLP has advised the Company that a disagreement occurred between the Company's management and Deloitte & Touche LLP in connection with the 1997 audit. The disagreement concerned the accounting for an presentation of the results of operations for those subsidiaries and divisions of Katy that are a part of the reorganization plan that was approved by the Company's Board of Directors on December 31, 1997 and announced on January 5, 1998. The disagreement was resolved to the satisfaction of Deloitte & Touche LLP during the December 31, 1997 audit of the consolidated financial statements. The Audit Committee of the Board of Directors discussed the disagreement and the subject matter of the disagreement with Deloitte & Touche LLP. The Company has authorized Deloitte & Touche LLP to respond fully to any inquiries concerning the disagreement and the subject matter of the disagreement by the successor public accountant. On May 19, 1998, Arthur Andersen LLP was engaged as the Company's Independent Public Accountants. Part III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Information regarding the directors of Katy is incorporated herein by reference to the information set forth under the section entitled "Election of Directors" in the 1999 Proxy Statement. Information regarding executive officers of the Company is incorporated herein by reference to the information set forth under the section "Information Concerning Directors and Executive Officers" in the 1999 Proxy Statement. Item 11. EXECUTIVE COMPENSATION - -------------------------------- Information regarding compensation of executive officers is incorporated by reference to the materials under the caption "Executive Compensation" in the 1999 Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ Information regarding beneficial ownership of stock by certain beneficial owners and by management of Katy is incorporated herein by reference to the information set forth under the section "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the 1999 Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Information regarding certain relationships and related transactions with management is incorporated herein by reference to the information set forth under the section "Certain Relationships and Related Transactions" in the 1999 Proxy Statement. Part IV ------- Item 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------- (a) 1. Financial Statement Schedules The financial statement schedule filed with this report is listed on the "Index to Financial Statement Schedules." 2. Exhibits The exhibits filed with this report are listed on the "Exhibit Index." (b) Reports on Form 8-K On October 21, 1998, the Company filed a current report on Form 8-K/A providing information in response to Item 7 to Form 8-K/A with respect to the pro forma financial statements related to the acquisition of Wilen Companies, Incorporated. On November 6, 1998, the Company filed a current report on Form 8-K providing information in response to Item 57 to Form 8-K with respect to the loss of business at Woods Industries, Inc. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 18, 1999 KATY INDUSTRIES, INC. Registrant /S/ John R. Prann, Jr. ---------------------- John R. Prann, Jr. President and Chief Executive Officer POWER OF ATTORNEY Each person signing below appoints John R. Prann, Jr. and Stephen P. Nicholson, or either of them, his attorneys-in-fact for him in any and all capacities, with power of substitution, to sign any amendments to this report, and to file the same with any exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of this 18th day of March, 1999. Signature Title - --------- ----- /S/ Jacob Saliba Chairman of the Board and Director - ---------------- Jacob Saliba /S/ John R. Prann, Jr. President, Chief Executive Officer and - ---------------------- Director (Principal Executive Officer) John R. Prann, Jr. /S/ Stephen P. Nicholson Vice President, Finance and Chief Financial - ------------------------ Officer (Principal Financial and Stephen P. Nicholson Accounting Officer) /S/ Glenn W. Turcotte Executive Vice President, Chief Operating - --------------------- Officer and Director Glenn W. Turcotte /S/ Arthur R. Miller Executive Vice President, Corporate - -------------------- Development, General Counsel and Director Arthur R. Miller /S/ William F. Andrews Director - ---------------------- William F. Andrews /S/ Amelia M. Carroll Director - --------------------- Amelia M. Carroll /S/ Daniel B. Carroll Director - --------------------- Daniel B. Carroll /S/ Wallace E. Carroll, Jr. Director - --------------------------- Wallace E. Carroll, Jr. /S/ Lester I. Miller Director - -------------------- Lester I. Miller /S/ William H. Murphy Director - --------------------- William H. Murphy /S/ Lutz Raettig Director - ---------------- Lutz Raettig /S/ Charles W. Sahlman Director - ---------------------- Charles W. Sahlman INDEX TO FINANCIAL STATEMENT SCHEDULES Page ---- Independent Accountants' Reports 54 Independent Auditors' Consent 59 Schedule II - Valuation and Qualifying Accounts 55 All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements of Katy or the Notes thereto. INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULE TO KATY INDUSTRIES, INC.: We have audited the consolidated financial statements of Katy Industries, Inc. and subsidiaries (the "Company") as of December 31, 1998, and for the period ended December 31, 1998, and have issued our report thereon dated January 26, 1999; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of Katy Industries, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ARTHUR ANDERSEN LLP Denver, Colorado January 26, 1999 INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULE To the Board of Directors and Stockholders of Katy Industries, Inc. We have audited the consolidated financial statements of Katy Industries, Inc. and subsidiaries (the "Company") as of December 31, 1997, and for each of the two years in the period ended December 31, 1997, and have issued our report thereon dated January 27, 1998; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of Katy Industries, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Denver, Colorado January 27, 1998 KATY INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Thousands of dollars) Balance at Additions Balance Beginning Charged to Write-offs Other at End Description of Year Expense to the Reserve Adjustments of Year - ----------- ------- ------- -------------- ----------- ------- Year ended December 31, 1998: Reserve for doubtful accounts: Trade receivables $857 $382 $(106) $(170)[a] $963 Current notes and other accounts receivable 410 - - 48 [b] 198 (260)[a] Long-term notes receivable 2,500 - - (48)[b] 2,452 ----- ---- ---- ---- ----- $3,767 $382 $(106) $(430) $3,613 ===== ==== ==== ==== ===== Year ended December 31, 1997: [c] Reserve for doubtful accounts: Trade receivables $1,041 $526 $(430) $(155)[a] $857 (94)[d] (31)[e] Current notes and other accounts receivable 329 - - 94 [d] 410 (13)[a] Long-term notes receivable 2,500 - - - 2,500 ----- ---- ---- ---- ----- $3,870 $526 $(430) $(199) $3,767 ===== ==== ==== ==== ===== Year ended December 31, 1996: Reserve for doubtful accounts: Trade receivables $886 $455 $(174) $42 [f]$1,181 (28)[a] Current notes and other accounts receivable 966 146 (667) - 445 Long-term notes receivable 2,500 - - - 2,500 ----- ---- ---- ---- ----- $4,352 $601 $(841) $14 $4,126 ===== ==== ==== ==== ===== [a] Doubtful accounts and credit memos written-off against the reserve. [b] Amount reclassed from "Long-term notes receivable" to "Current notes and other accounts receivable". [c] In accordance with the divestiture plan, beginning balances for 1997 reflect the exclusion of the reserves for discontinued operations. [d] Amount reclassed from the "Trade receivables" to "Current notes and other accounts receivable". [e] Amount included in "Net current assets of other operations to be disposed of" line item in the current year and in the "Accounts receivable, trade" line item in the prior year. [f] Adjustment due to acquisition of subsidiary. KATY INDUSTRIES, INC. INDEX OF EXHIBITS DECEMBER 31, 1998 Exhibit Number Exhibit Title Page - ------ ------------- ---- 3.1 Certificate of Incorporation (incorporated by reference to * Katy's Form 10-K for year ended December 31, 1987, filed March 29, 1988). 3.2 By-Laws (incorporated by reference to Katy's Form 8-K filed * February 15, 1996). 4.1 Rights Agreement dated as of January 13, 1995 between Katy * and Harris Trust and Savings Bank as Rights Agent (incorporated by reference to Katy's Form 8-K filed January 24, 1995). 4.1a Amendment dated as of October 31, 1996 to the Rights * Agreement dated as of January 13, 1995 between Katy and Harris Trust and Savings Bank as Rights Agent (incorporated by reference to Katy's Form 8-K filed November 8, 1996). 4.1b Amendment dated as of January 8, 1999 to the Rights 60 Agreement dated as of January 13, 1995 between Katy and LaSalle National Bank as Rights Agent (incorporated by reference to Katy's Form 8-K filed January 15, 1999). 10.1 Katy's Industries, Inc. 1994 Key Employee and Director Stock * Purchase Plan (incorporated by reference to Katy's Registration Statement on Form S-8 filed September 28, 1994, Reg. No. 33-55647). 10.2 Katy Industries, Inc. Long-Term Incentive Plan (incorporated * by reference to Katy's Registration Statement on Form S-8 filed June 21, 1995, Reg. No. 33-60443). 10.3 Katy Industries, Inc. Non-Employee Director Stock Option Plan * (incorporated by reference to Katy's Registration Statement on Form S-8 filed June 21, 1995, Reg. No. 33-60449). 10.4 Katy Industries, Inc. Supplemental Retirement and Deferral * Plan effective as of June 1, 1995. 10.5 Katy Industries, Inc. Directors' Deferred Compensation Plan * effective as of June 1, 1995. 10.6 Katy Industries, Inc. Form of Compensation and Benefits * Assurance Agreement (covering Tier I employees: John R. Prann, Jr., Glenn W. Turcotte, Arthur R. Miller and Robert M. Baratta). 10.7 Katy Industries, Inc. Form of Compensation and Benefits * Assurance Agreement (covering Tier II employees: Michael G. Gordono, Peter S. More and Stephen P. Nicholson). 4 Credit Agreement 63 21 Subsidiaries of registrant 58 23 Independent Auditors' Consent 59 23.1a Independent Auditors' Consent 59 27 Financial Data Schedule * Indicates incorporated by reference. Exhibit 21 ---------- SUBSIDIARIES OF REGISTRANT The following list sets forth subsidiaries of Katy Industries, Inc. as of March 18, 1999, with successive indentation indicating parent/subsidiary relationships of such subsidiaries. The percentage (unless 100%) of outstanding equity securities owned by the immediate parent and the state of jurisdiction or incorporation of each such subsidiary is stated in parentheses. Omitted subsidiaries do not, in the aggregate, constitute a "significant subsidiary". American Gage & Machine Company (Illinois) Bach-Simpson, Ltd. (Ontario, Canada) Glit/Gemtex, Ltd. (Ontario, Canada) (June 1, 1997 and forward) Woods Industries (Canada), Inc. (Ontario, Canada) Bee Gee Holding Company, Inc. (Florida) (43%) Bush Universal, Inc. (New York) Hamilton Precision Metals, Inc. (Delaware) Waldom Electronics, Inc. (Delaware) Waldom Electronics, Inc. (Illinois) Contico International, L.L.C. (Delaware) Glit/Disco, Inc. (Delaware) Duckback Products, Inc. (Delaware) Hallmark Holdings, Inc. (Delaware) Diehl Machines, Inc. GC Thorsen, Inc. Glit/Gemtex, Inc. Loren Products Katy Oil Company of Indonesia (Delaware) Katy-Teweh Petroleum Company (Delaware) Katy-Seghers, Inc. (Delaware) Savannah Energy Systems Company (Delaware) Peters Machinery Company (Delaware) Schon & Cie, AG (Germany) (3%) American Shoe Machinery Corporation, Inc. (Delaware) Societe de Fabrication Europeenne des Machines, S.A.R.L. (France) Schoen Machinery U.S.A., Inc. (Illinois) Schon Engineering KFT (Hungary) Schon-Kaev-Eger KFT (Hungary) W.J. Smith, Wood Preserving Company (Texas) Wilen Products, Inc. (Delaware) Woods Industries, Inc. (Delaware) Exhibit 23 ---------- INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-55647, Registration Statement No. 33-60443 and Registration Statement No. 33-60449 of Katy Industries, Inc. on Forms S-8 of our reports dated January 27, 1998, appearing in this Annual Report on Form 10-K of Katy Industries, Inc. for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Denver, Colorado March 17, 1999 Exhibit 23.1a ------------- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement No. 33-55647, Registration Statement No. 33-60443 and Registration Statement No. 33-60449. ARTHUR ANDERSEN LLP Denver, Colorado, March 17, 1999. EX-27 2
5 YEAR DEC-31-1998 DEC-31-1998 12,898,000 0 57,856,000 1,161,000 69,394,000 167,575,000 72,452,000 27,353,000 293,175,000 66,604,000 39,980,000 0 0 9,822,000 139,494,000 293,175,000 342,315,000 342,315,000 243,751,000 327,040,000 (5,760,000) 0 1,214,000 19,821,000 6,739,000 13,082,000 0 0 0 13,082,000 1.58 1.55 includes equity in income of other operations to be disposed of, $ 3,144,000.
EX-4 3 Exhibit 4.1b ------------ SECOND AMENDMENT TO RIGHTS AGREEMENT ------------------------------------ This Second Amendment to Rights Agreement (this "Amendment") is made and entered into this 8th day of January, 1999, by and between Katy Industries, Inc., a Delaware corporation (the "Company"), and La Salle National Bank, a national banking association (the "Rights Agent"). WHEREAS, the Company and the Rights Agent, as successor rights agent, are parties to that certain Rights Agreement dated as of January 13, 1995, as amended (the "Agreement"), governing, inter alia, the issuance and exercise of Rights, as defined in the Agreement; and WHEREAS, on December 11, 1998, the Board of Directors of the Company approved an amendment to the Agreement on the terms set forth in this Amendment; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: 1. Section 1(j) of the Agreement is hereby amended by: (a) deleting the word Aand@ at the end of subparagraph (iii); (b) adding, immediately following subparagraph (iii), a new subparagraph (iv), to read as follows: "(iv) any member of the Miller Group; provided, however, that all of the Miller Group shall immediately and thereafter cease to be an Exempt Person if either (x) the Miller Group at any time shall acquire additional shares resulting in an increase in its aggregate beneficial ownership of the Company Common Stock from time to time outstanding by more than 1% above its holdings as of the close of business on the Closing Date under that certain Unit Purchase Agreement dated as of December 31, 1998 by and among the Company, Contico International, Inc. and Lester Miller or (y) the Miller Group at any time shall cease to be a Beneficial Owner of an aggregate of 10% or more of the Company Common Stock; and" and (c) renumbering subparagraph (iv) to become subparagraph (v). 2. Section 1(m) of the Agreement is hereby amended by deleting such section in its entirety and inserting in lieu thereof the following: (m) "Miller Group" shall mean (i) Lester Miller; (ii) the spouse, lineal descendants and spouse of the lineal descendants of Lester Miller; (iii) the estate or legal representative of each Person identified in clause (i) or (ii) above; (iv) each trust, custodianship or otherfiduciary arrangement in respect of which one or more of the Persons described in clause (i) or (ii) above is a beneficiary; (v) each corporation 100% (by number of votes) of the voting stock of which is owned by or held for the benefit of one or more of the Persons described in clause (i), (ii), (iii) or (iv) hereof; and (vi) each partnership, limited liability company or other association 100% of the capital of which is owned by or held for the benefit of one or more of the Persons described in clause (i), (ii), (iii) or (iv) above and such Person or Persons shall have control of such partnership. The term "control" as used in clause (vi) of the immediately preceding sentence means the possession of the power to direct or cause the direction of management and policies of such partnership, whether through the ownership of an equity interest, by contract or otherwise. For purposes of this definition, lineal descendants shall include adopted Persons who are twelve years of age or under at the time of adoption. 3. The Agreement is hereby amended by substituting for each reference to "the Independent Directors" the words "the directors of the Company." 4. Section 3(c) of the Agreement is hereby amended by substituting "La Salle National Bank" in lieu of the "Harris Trust and Savings Bank." 5. Section 25 of the Agreement is hereby amended by deleting the information regarding Harris Trust and Savings Bank and inserting in lieu thereof the following: La Salle National Bank 135 South La Salle Street Chicago, Illinois 60603 Attention: Mr. Gregory Malatia Fax: (312) 904-2236 6. The form of Rights Certificate attached as Exhibit A to the Agreement is hereby amended by substituting "La Salle National Bank" in lieu of "Harris Trust and Savings Bank" each place it appears. 7. Except as expressly amended hereby, all of the terms and provisions of the Agreement shall continue and remain in full force and effect, and each party confirms, ratifies and approves each and every of its obligations under the Agreement, as amended by this Amendment. 8. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed entirely in such state. 9. This Amendment may be executed (including by facsimile) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which, when executed, shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, all as of the date first above written. KATY INDUSTRIES, INC. Attest: By: /S/ Stephen P. Nicholson By: /S/ John R. Prann, Jr. -------------------------- --------------------------- Its: Chief Financial Officer Its: President and Chief -------------------------- Executive Officer --------------------------- LA SALLE NATIONAL BANK Attest: By: /S/ Mark Rimkus By: /S/ Greg Malatia -------------------------- --------------------------- Its: Trust Officer Its: Vice President -------------------------- --------------------------- The undersigned, being a duly elected, qualified and acting officer of the Company, hereby certifies to the Rights Agent that the foregoing Amendment is in compliance with the terms of Section 26 of the Agreement. IN WITNESS WHEREOF, the undersigned has executed this certification as of January 8, 1999. KATY INDUSTRIES, INC. By: /S/ John R. Prann, Jr. --------------------------- Its: President and Chief Executive Officer --------------------------- EX-4 4 Exhibit 4 --------- AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 11, 1998 among KATY INDUSTRIES, INC., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent and Issuing Bank, LA SALLE NATIONAL BANK, as Managing Agent, and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO NATIONSBANC MONTGOMERY SECURITIES LLC, as Lead Arranger and Syndication Agent TABLE OF CONTENTS ARTICLE I. DEFINITIONS 1 1.1 Certain Defined Terms. 1 1.2 Other Interpretive Provisions. 24 1.3 Accounting Principles. 25 ARTICLE II. THE CREDITS 25 2.1 Amounts and Terms of Commitments. 26 2.2 Loan Accounts. 26 2.3 Procedure for Borrowing. 27 2.4 Conversion and Continuation Elections. 28 2.5 Voluntary Termination or Reduction of Commitments. 29 2.6 Optional Prepayments. 30 2.7 Mandatory Prepayments of Loans; Mandatory Commitment Reductions. 30 2.8 Repayment. 30 2.9 Interest. 30 2.10 Fees. 31 2.11 Computation of Fees and Interest. 32 2.12 Payments by the Company. 32 2.13 Payments by the Banks to the Agent. 33 2.14 Sharing of Payments, Etc. 33 2.15 Quarterly Adjustments. 34 2.16 Extension of Facility A Revolving Termination Date. 34 ARTICLE III. THE LETTERS OF CREDIT 35 3.1 The Letter of Credit Subfacilities. 35 3.2 Issuance, Amendment and Renewal of Letters of Credit. 36 3.3 Risk Participations, Drawings and Reimbursements. 38 3.4 Repayment of Participations. 40 3.5 Role of the Issuing Bank. 41 3.6 Obligations Absolute 41 3.7 Cash Collateral Pledge. 42 3.8 Letter of Credit Fees. 43 3.9 Uniform Customs and Practice. 43 3.10 Subsidiaries as Account Parties. 43 3.11 Issuing Affiliate. 46 ARTICLE IV. TAXES, YIELD PROTECTION AND ILLEGALITY 46 4.1 Taxes. 46 4.2 Illegality. 47 4.3 Increased Costs and Reduction of Return. 48 4.4 Funding Losses. 49 4.5 Inability to Determine Rates. 49 4.6 Certificates of Banks. 50 4.7 Substitution of Banks. 50 4.8 Survival. 50 ARTICLE V. CONDITIONS PRECEDENT 50 5.1 Conditions of Initial Credit Extensions. 50 5.2 Conditions of Initial Acquisition Loans. 53 5.3 Conditions to All Credit Extensions. 55 ARTICLE VI. REPRESENTATIONS AND WARRANTIES 55 6.1 Corporate Existence and Power. 56 6.2 Corporate Authorization; No Contravention. 56 6.3 Governmental Authorization. 56 6.4 Binding Effect. 56 6.5 Litigation. 57 6.6 No Default. 57 6.7 ERISA Compliance. 57 6.8 Use of Proceeds; Margin Regulations. 58 6.9 Title to Properties. 58 6.10 Taxes. 58 6.11 Financial Condition. 59 6.12 Environmental Matters. 59 6.13 Regulated Entities. 59 6.14 No Burdensome Restrictions. 59 6.15 Copyrights, Patents, Trademarks and Licenses, etc. 60 6.16 Subsidiaries. 60 6.17 Insurance. 60 6.18 Swap Obligations. 60 6.19 Full Disclosure. 61 6.20 Y2K. 61 ARTICLE VII. AFFIRMATIVE COVENANTS 61 7.1 Financial Statements. 61 7.2 Certificates; Other Information. 62 7.3 Notices. 63 7.4 Preservation of Corporate Existence, Etc. 65 7.5 Maintenance of Property. 65 7.6 Insurance. 65 7.7 Y2K. 65 7.8 Compliance with Laws. 66 7.9 Compliance with ERISA. 66 7.10 Inspection of Property and Books and Records. 66 7.11 Environmental Laws. 66 7.12 Use of Proceeds. 66 7.13 New Subsidiaries. 67 7.14 Purchase Agreement. 67 ARTICLE VIII. NEGATIVE COVENANTS 67 8.1 Limitation on Liens. 67 8.2 Disposition of Assets. 69 8.3 Consolidations and Mergers. 70 8.4 Loans and Investments. 71 8.5 Limitation on Indebtedness. 72 8.6 Transactions with Affiliates. 73 8.7 Use of Proceeds. 73 8.8 Contingent Obligations. 73 8.9 Joint Ventures. 74 8.10 Lease Obligations. 74 8.11 Restricted Payments. 74 8.12 ERISA. 75 8.13 Change in Business. 75 8.14 Accounting Changes. 75 8.15 Amendment to Purchase Documents. 75 8.16 Limitation on Negative Pledge Clauses. 75 8.17 Limitation on Restrictions on Subsidiary Dividends and Other Distributions. 76 8.18 Minimum Net Worth. 76 8.19 Maximum Leverage Ratio. 76 8.20 Minimum Fixed Charge Coverage Ratio. 77 8.21 Quarterly Losses. 77 ARTICLE IX. EVENTS OF DEFAULT 77 9.1 Event of Default. 77 9.2 Remedies. 80 9.3 Rights Not Exclusive. 81 9.4 Certain Financial Covenant Defaults. 81 ARTICLE X. THE AGENT 81 10.1 Appointment and Authorization; "Agent". 81 10.2 Delegation of Duties. 82 10.3 Liability of Agent. 82 10.4 Reliance by Agent. 83 10.5 Notice of Default. 83 10.6 Credit Decision. 83 10.7 Indemnification of Agent. 84 10.8 Agent in Individual Capacity. 84 10.9 Successor Agent. 85 10.10 Withholding Tax. 85 10.11 Managing Agent, etc. 87 10.12 Release of Guaranty. 87 ARTICLE XI. MISCELLANEOUS 87 11.1 Amendments and Waivers. 87 11.2 Notices. 88 11.3 No Waiver; Cumulative Remedies. 89 11.4 Costs and Expenses. 89 11.5 Company Indemnification. 90 11.6 Payments Set Aside. 90 11.7 Successors and Assigns. 90 11.8 Assignments, Participations, etc. 91 11.9 Confidentiality. 92 11.10 Set-off. 93 11.11 Automatic Debits of Fees. 93 11.12 Notification of Addresses, Lending Offices, Etc. 94 11.13 Counterparts. 94 11.14 Severability. 94 11.15 No Third Parties Benefited. 94 11.16 Governing Law and Jurisdiction. 94 11.17 Waiver of Jury Trial. 95 11.18 Entire Agreement. 95 SCHEDULES Schedule 1.1A Existing Letters of Credit Schedule 1.1B Operations Planned for Divestiture Schedule 2.1 Commitments Schedule 6.5 Litigation Schedule 6.7 ERISA Schedule 6.11 Permitted Liabilities Schedule 6.12 Environmental Matters Schedule 6.16 Subsidiaries and Minority Interests Schedule 6.17 Insurance Matters Schedule 8.1 Permitted Liens Schedule 8.2 Permitted Disposition of Investments Schedule 8.4 Permitted Investments Schedule 8.5 Permitted Indebtedness Schedule 8.8 Contingent Obligations Schedule 11.2 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Notice of Borrowing Exhibit B Notice of Conversion/Continuation Exhibit C Compliance Certificate Exhibit D Legal Opinion of Company's Counsel Exhibit E Assignment and Acceptance Agreement Exhibit F Promissory Note Exhibit G Guaranty Agreement CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of December 11, 1998, among Katy Industries, Inc., a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), La Salle National Bank, as managing agent, and Bank of America National Trust and Savings Association, as letter of credit issuing bank and as administrative agent for the Banks. WHEREAS, the Company, Bank of America National Trust and Savings Association, La Salle National Bank and certain other financial institutions entered into a Credit Agreement dated as of December 12, 1997, as amended by the First Amendment to Credit Agreement dated as of September 11, 1998 (the "Existing Credit Agreement"); WHEREAS, the Banks have agreed to make available to the Company revolving credit facilities with letter of credit subfacilities upon the terms and conditions set forth in this Agreement; WHEREAS, to give effect to the foregoing, the Company, the Banks, and the Agent desire to amend and restate the Existing Credit Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties hereby amend and restate the Existing Credit Agreement in its entirety as follows: ARTICLE I. DEFINITIONS 1.1 Certain Defined Terms. The following terms have the following meanings: "Acquired Company" means CII Acquisition, L.L.C., a Delaware limited liability company. "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Restricted Subsidiary) provided that the Company or the Restricted Subsidiary is the surviving entity. "Acquisition Loan" means any Facility B Loan that causes the Effective Amount of all Facility B Loans to exceed of $30,000,000.00. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means Bank of America in its capacity as administrative agent for the Banks hereunder, and any successor administrative agent arising under Section 10.9. "Agent-Related Persons" means Bank of America and any successor administrative agent arising under Section 10.9 and any successor letter of credit issuing bank hereunder, together with their respective Affiliates (including, in the case of Bank of America, Montgomery), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on Schedule 11.2 or such other address as the Agent may from time to time specify. "Agreement" means this Amended and Restated Credit Agreement. "Applicable Margin" means with respect to any Base Rate Loan or Offshore Rate Loan under the Facility A Commitment or the Facility B Commitment the per annum rates set forth below opposite the Pricing Level calculated for the periods described below. Pricing Pricing Ratio Facility A Facility B Level at End of Fiscal Quarter Applicable Margin Applicable Margin - ------- -------------- ------------------ ------------------- Offshore Base Rate Offshore Base Rate Rate Loans Loans Rate Loans Loans I Less Than 1.00 to 1.00 0.775% 0.000% 0.750% 0.000% II Greater than or equal to 1.00 to 1.00 but less than 1.75 to 1.00 0.975% 0.000% 0.950% 0.000% III Greater than or equal to 1.75 to 1.00 but less than 2.25 to 1.00 1.150% 0.000% 1.125% 0.000% IV. Greater than or equal to 2.25 to 1.00 but less than 2.75 to 1.00 1.350% 0.000% 1.325% 0.000% V. Greater than or equal to 2.75 to 1.00 but less than 3.25 to 1.00 1.575% 0.375% 1.550% 0.375% VI. Greater than or equal to 3.25 to 1.00 1.900% 0.750% 1.875% 0.750% Where, "Pricing Level" means, for each Pricing Period, the pricing level set forth opposite the Pricing Ratio set forth in the Compliance Certificate most recently delivered to the Agent pursuant to Section 7.2. "Pricing Level Change Date" means the date three Business Days after the delivery to the Agent of the financial reports and Compliance Certificate delivered pursuant to Sections 7.1 and 7.2 for the fiscal quarter ending March 31, 1999, and three days after delivery to the Agent of such financial reports and Compliance Certificate for each fiscal quarter thereafter. "Pricing Period" means each period commencing on each Pricing Level Change Date and ending the day prior to the next Pricing Level Change Date. From the Closing Date until the first Pricing Level Change Date, the Applicable Margin for any Offshore Rate Loan or Base Rate Loan shall correspond to the rates per annum set forth above opposite Pricing Level V, unless the Company's Pricing Ratio, as reflected in the Compliance Certificate delivered pursuant to Section 7.2 for the fiscal year ending December 31, 1998, dictates that Pricing Level VI should apply, in which case Pricing Level VI shall apply from the date three Business Days after such delivery until the first Pricing Level Change Date; provided, however, if the Contico Acquisition has not occurred on or before February 26, 1999, then the Applicable Margin from such date until the first Pricing Level Change Date shall be based upon the Pricing Ratio reflected in the most recent Compliance Certificate delivered pursuant to Section 7.2 or pursuant to Section 7.2 of the Existing Credit Agreement (any change therein taking effect 3 Business Days after delivery of a more recent Compliance Certificate). The Applicable Margin shall be adjusted automatically as to all Loans then outstanding (without regard to the timing of Interest Periods) on each Pricing Level Change Date to correspond with the applicable Pricing Level. If the Company fails to deliver such financial reports and certificates to the Agent for any fiscal quarter by the date required hereunder, then the Applicable Margin for all Loans beginning three Business Days after such date shall, until three Business Days after delivery of such financial reports and certificates, be the next higher Applicable Margin as set forth in the chart above immediately below the previously effective Applicable Margin; thus, if the Applicable Margin with respect to Facility B had previously been 0.750% for Offshore Rate Loans, a failure to deliver quarterly financials on a timely basis would cause the Applicable Margin with respect to Facility B to be .950% until three Business Days after such delivery. "Assignee" has the meaning specified in subsection 11.8(a). "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel, the allocated cost of nonduplicative internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. References to the "Banks" shall include Bank of America, including in its capacity as Issuing Bank; for purposes of clarification only, to the extent that Bank of America may have any rights or obligations in addition to those of the Banks due to its status as Issuing Bank, its status as such will be specifically referenced. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. 101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate, and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America in San Francisco, California, as its "reference rate," or, if Bank of America no longer announces a "reference rate," its "prime rate" or other successor rate as Bank of America may notify the Company. (The "reference rate" or such successor rate is a rate set by Bank of America based upon various factors including Bank of America'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 Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Revolving Loan, or an L/C Advance, that bears interest based on the Base Rate. "Bank of America" means Bank of America National Trust and Savings Association., a national banking association, and its successors. "Borrowing" means a borrowing hereunder consisting of Revolving Loans of the same Type made to the Company on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.3. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, Dallas, Texas, or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Lease" means any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease. "Cash Collateralize" means to pledge and deposit with or deliver to the Agent, for the benefit of the Agent, the Issuing Bank and the Banks, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Agent and the Issuing Bank (which documents are hereby consented to by the Banks). Derivatives of such term shall have corresponding meaning. The Company hereby grants the Agent, for the benefit of the Agent, the Issuing Bank and the Banks, a security interest in all such cash and deposit account balances. Cash collateral shall be maintained in blocked, interest bearing deposit accounts at Bank of America. "Change of Control" means, with respect to the Company, an event or circumstance that results in any Person or group of related Persons other than the Permitted Owners (as defined below) having beneficial ownership of, or the right to control, by proxy or otherwise, (i) more than 50% of the shares of common stock of the Company, or (ii) capital stock of the Company having voting power to vote for and elect a majority of the members of the board of directors of the Company. "Permitted Owners" shall mean any of the following: Wallace E. Carroll, Jr., his wife, Amelia M. Carroll, their immediate family members, descendants and beneficiaries under the following trusts and subtrusts: (i) The Wallace E. Carroll Trust U/A Date 7/1/57 F/B/O Wallace E. Carroll, Jr. and his descendants, (ii) The Wallace E. and Lelia H. Carroll Trust U/A Dated 5/1/58 F/B/O Wallace E. Carroll, Jr., and his descendants, (iii) the Wallace E. Carroll Trust U/A Dated 1/20/61 F/B/O Wallace E. Carroll, Jr., (iv) the Lelia H. Carroll Trust U/A Dated 7/12/62 F/B/O Wallace E. Carroll, Jr., (v) the subtrusts under the Wallace E. Carroll Trust U/A Dated 12/15/78 F/B/O the descendants of Wallace E. Carroll, Jr., (vi) the subtrusts under the Wallace E. Carroll, Jr., Trust #1 U/A Dated 12/30/76 F/B/O the descendants of Wallace E. Carroll, Jr. and (vii) the subtrusts under the Wallace E. Carroll, Jr. Trust #2 U/A Dated 12/30/76 F/B/O the descendants of Wallace E. Carroll, Jr. In addition, CRL, Inc. and its wholly owned subsidiaries shall be Permitted Owners as long as all capital stock of CRL, Inc. is wholly-owned by other Permitted Owners. "Closing Date" means the date on which all conditions precedent set forth in Section 5.1 are satisfied or waived by all Banks (or, in the case of subsection 5.1(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commercial L/C Commitment" means the commitment of the Issuing Bank to Issue, and the commitment of the Banks severally to participate in, Commercial Letters of Credit from time to time Issued or outstanding under Article III, in an aggregate amount not to exceed on any date the amount of $30,000,000, as the same shall be reduced as a result of a reduction in the Commercial L/C Commitment pursuant to Section 2.5; provided that the Commercial L/C Commitment is a part of the combined Facility A Commitments, rather than a separate, independent commitment. "Commercial Letter of Credit" means a Letter of Credit supporting the obligation to pay the purchase price of goods sold to the Company or a Restricted Subsidiary. "Commitment", as to each Bank, means either the Facility A Commitment or the Facility B Commitment, as applicable. "Commitments" , as to each Bank, means the sum of the Facility A Commitment and the Facility B Commitment. "Company" means Katy Industries, Inc., a Delaware corporation. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Consolidated Interest Expense" means, for any period, for the Company and its Restricted Subsidiaries on a consolidated basis and determined in accordance with GAAP, (a) gross interest expense for the period (including that portion of Capital Leases attributable to interest), plus (b) any payments made under interest rate Swap Contracts to the extent not included in gross interest expense, less (c) the sum of any payments received under interest rate Swap Contracts. "Contico" means Contico International, Inc., a Missouri corporation. "Contico Acquisition" means the contribution of the Contico Assets to the Acquired Company and the acquisition by the Company of 100% of the common units of the Acquired Company as contemplated by the Purchase Agreement. "Contico Assets" means substantially all of the assets and business constituting the janitorial, consumer products, and industrial packaging businesses of Contico as conducted before the Contico Acquisition that are being contributed to the Acquired Company pursuant to the Contribution Agreement as defined in the Purchase Agreement. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition 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 holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation");(b) with respect to any Surety Instrument (other) than any Letter of Credit) issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations other than in respect of Swap Contracts, shall be equal to the maximum reasonably anticipated liability in respect thereof and, in the case of Contingent Obligations in respect of Swap Contracts, shall be equal to the Swap Termination Value. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.4, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Credit Extension" means and includes (a) the making of any Revolving Loans hereunder, and (b) the Issuance of any Letters of Credit hereunder. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollars", "dollars" and "$" each mean lawful money of the United States. "EBITDA" means, as measured quarterly on the last day of each fiscal quarter for the four trailing quarters then ending, and determined on a consolidated basis for the Company and its Restricted Subsidiaries in accordance with GAAP, an amount equal to, without duplication, the sum of (a) consolidated net income (or net loss) for such period, plus (b) all amounts treated as expenses for depreciation, Consolidated Interest Expense, and the amortization of intangibles and other assets (including non-cash finance fees and warrants and write-off of goodwill and organizational costs and expenses) of any kind to the extent included in the determination of such consolidated net income (or loss), plus (c) all accrued taxes on or measured by income to the extent included in the determination of such consolidated net income (or loss), plus (d) amortization of the inventory write-up associated with purchase accounting related to the Contico Acquisition pursuant to APB 16; provided, however, that consolidated net income (or loss) shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains or to any gains or losses associated with the sale or write-down of assets outside the ordinary course of business and without giving effect to net income or loss attributable to those operations of the Company and its Subsidiaries planned for divestiture as set forth in Schedule 1.1B, as the same may be modified by the Company from time to time by notice to the Agent if accompanied by the corresponding changes to the accounting treatment of the operations described therein or removed therefrom for all fiscal periods ending thereafter. Notwithstanding the foregoing, if, for any four trailing quarters, EBITDA attributable to Non-Guarantor Subsidiaries represents 15% or more of EBITDA for the Company and its Restricted Subsidiaries on a consolidated basis, the EBITDA attributable to Non-Guarantor Subsidiaries shall be excluded to the extent of such excess. For any Permitted Acquisition after the Closing Date, (x) EBITDA and Consolidated Interest Expense for the Person to be acquired shall be based upon such Person rather than by reference to the Company and its Restricted Subsidiaries, and (y) except for purposes of calculating the Fixed Charge Coverage Ratio, EBITDA of the Company and its Restricted Subsidiaries shall include the EBITDA of the Person to be acquired for such prior periods as reflected in the financial statements for such Person as long as (1) such financial statements are accompanied by a Compliance Certificate signed by a Responsible Officer of the Company certifying that the EBITDA reflected in such financial statements represents no more than the minimum prospective EBITDA that such Person would contribute to the consolidated EBITDA of the Company and its Restricted Subsidiaries after giving pro forma effect to the acquisition of such Person and (2) the Company has demonstrated the validity of such certification to the Agent's reasonable satisfaction. "EBITDAR" means, as measured quarterly on the last day of each fiscal quarter for the four trailing quarters then ending, and determined on a consolidated basis for the Company and its Restricted Subsidiaries in accordance with GAAP, an amount equal to, without duplication, the sum of (a) EBITDA for such period plus (b) all lease payments under Operating Leases for such period. Notwithstanding the foregoing, if, for any four trailing quarters, EBITDAR attributable to Non-Guarantor Subsidiaries represents 15% or more of EBITDAR for the Company and its Restricted Subsidiaries on a consolidated basis, the EBITDAR attributable to Non- Guarantor Subsidiaries shall be excluded to the extent of such excess. "Effective Amount" means (a) with respect to any Loan on any date, the aggregate outstanding principal amount thereof after giving effect to any Borrowings and prepayments or repayments of Loans occurring on such date, and (b) with respect to any outstanding L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any Issuances of Letters of Credit occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letters of Credit or any reductions in the maximum amount available for drawing under Letters of Credit taking effect on such date. "Electrical/Electronic Group" means lines of business operated at the Closing Date by the following Subsidiaries and assets associated therewith: (i) GC Thorsen, Inc. and its subsidiaries GC Thorsen/HMO, Inc. and GC Thorsen International Ltd., (ii) Waldom Electronics, Inc., (iii) Wood Industries, Inc., and (iv) Woods Industries (Canada), Inc. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States, and (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 9.1. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "Existing Credit Agreement" has the meaning specified in the recitals hereto. "Existing Letter of Credit" means any of the letters of credit issued to the Company or a Restricted Subsidiary by Bank of America pursuant to the Existing Credit Agreement as listed on Schedule 1.1A. "Facility" means either Facility A or Facility B. "Facility A Commitment" has the meaning specified in subsection 2.1(a). "Facility A Revolving Termination Date" means the earlier to occur of: (a) December 10, 1999, or such later date to which the Facility A Revolving Termination Date is extended in accordance with Section 2.16; and (b) the date on which the Facility A Commitment terminates in accordance with the provisions of this Agreement "Facility A Revolving Loan" has the meaning specified in subsection 2.1(a). "Facility B Commitment" has the meaning specified in subsection 2.1(b). "Facility B Revolving Termination Date" means the earlier to occur of: (a) December 11, 2001; and (b) the date on which the Facility B Commitment terminates in accordance with the provisions of this Agreement. "Facility B Revolving Loan" has the meaning specified in subsection 2.1(b). "Facility Fee" has the meaning specified in Section 2.10(b). "Facility Fee Percentage" means with respect to the Facility A Commitment or the Facility B Commitment, the per annum rates set forth below opposite the Pricing Level calculated for periods described below. The terms "Pricing Level" and "Pricing Level Change Date" shall have the meanings specified in the definition of "Applicable Margin." Pricing Pricing Ratio Facility A Facility B Level at End fo Fiscal Quarter Facility Fee Facility Fee I Less Than 1.00 to 1.00 0.225% 0.250% II Greater than or equal to 1.00 to 1.00 but less than 1.75 to 1.00 0.275% 0.300% III Greater than or equal to 1.75 to 1.00 but less than 2.25 to 1.00 0.350% 0.375% IV. Greater than or equal to 2.25 to 1.00 but less than 2.75 to 1.00 0.400% 0.425% V. Greater than or equal to 2.75 to 1.00 but less than 3.25 to 1.00 0.425% 0.450% VI. Greater than or equal to 3.25 to 1.00 0.475% 0.50% From the Closing Date until the first Pricing Level Change Date, the Facility Fee Percentage shall correspond to the rates per annum set forth above opposite Pricing Level V, unless the Company's Pricing Ratio, as reflected in the Compliance Certificate delivered pursuant to Section 7.2 for the fiscal year ending December 31, 1998, prior to that time dictates that Pricing Level VI should apply, in which case Pricing Level VI shall apply from the date three Business Days after such delivery until the first Pricing Level Change Date; provided, however, if the Contico Acquisition has not occurred on or before February 26, 1999, then the Facility Fee Percentage from such date until the first Pricing Level Change Date shall be based upon the Pricing Ratio reflected in the most recent Compliance Certificate delivered pursuant to Section 7.2 or pursuant to Section 7.2 of the Existing Credit Agreement (any change therein taking effect 3 Business Days after delivery of a more recent Compliance Certificate). The Facility Fee Percentage shall be adjusted automatically on each Pricing Level Change Date to correspond with the applicable Pricing Level. If the Company fails to deliver such financial reports and certificates to the Agent for any fiscal quarter by the date required hereunder, then the Facility Fee Percentage beginning three Business Days after such date shall, until three Business Days after delivery of such financial reports and certificates, be the next higher Facility Fee Percentage as set forth in the chart above immediately below the previously effective Facility Fee Percentage; thus, if the Facility Fee Percentage with respect to Facility B had previously been 0.250%, a failure to deliver quarterly financials on a timely basis would cause the Facility Fee Percentage with respect to Facility B to be 0.300% until three Business Days after such delivery. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.10(a). "Fixed Charge Coverage Ratio" means, as measured quarterly on the last day of each fiscal quarter for the four trailing quarters then ending, and determined on a consolidated basis for the Company and its Restricted Subsidiaries, the ratio of (a) the sum of EBITDAR minus capital expenditures minus cash taxes to (b) the sum of interest expense (excluding amortization of up-front financing costs) plus lease payments under Operating Leases plus scheduled repayments of principal on account of Funded Debt plus cash dividends paid to Persons other than the Company and its Wholly Owned Subsidiaries that are Restricted Subsidiaries. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Funded Debt" means, at any time, the sum of the following, computed on a consolidated basis for the Company and its Restricted Subsidiaries in accordance with GAAP (a) all Indebtedness for borrowed money, plus (b) Indebtedness on account of drawn but unreimbursed letters of credit, plus (c) the undrawn face amount of issued and outstanding standby letters of credit, plus (d) the principal portion of Indebtedness under Capital Leases, plus (e) Guaranty Obligations with respect to Indebtedness described in clauses (a) through (d) above; provided, however, that solely for purposes of calculating Funded Debt, Guaranty Obligations shall not include the Company's December 31, 1997 guarantee of the 8-1/8% Subordinated Industrial Development Bonds issued by Bee Gee. "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 4.1. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantor" means each Material Subsidiary other than the Non- Guarantor Subsidiaries. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." "Guaranty" means a Guaranty substantially in the form of Exhibit G and each "Guaranty" as defined in the Existing Credit Agreement as reaffirmed in the Reaffirmation of Guaranty executed by each Guarantor as of the Closing Date. "Honor Date" has the meaning specified in subsection 3.3(b). "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness; and (h) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture or limited liability company in which such Person is a general partner or a joint venturer or a member. "Indemnified Liabilities" has the meaning specified in Section 11.5. "Indemnified Person" has the meaning specified in Section 11.5. "Independent Auditor" has the meaning specified in subsection 7.1(a). "Intercompany Advance" means loans made by the Company to any Restricted Subsidiaries, which loans shall (a) be maintained in book entry form and not, unless requested by the Agent, evidenced by a promissory note or other negotiable instrument, and (b) be subordinated to repayment of the Obligations as provided in the Guaranties. "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter, provided, however, that if any Interest Period for a Offshore Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter (and any other period that is 12 months or less and is consented to by all Banks in the given instance) as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation provided that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (b) any Interest Period pertaining to an Offshore Rate Loan 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 the calendar month at the end of such Interest Period; (c) no Interest Period for any Facility A Revolving Loan shall extend beyond the Facility A Maturity Date; and (d) no Interest Period for any Facility B Revolving Loan shall extend beyond the Facility B Maturity Date. "Investment" has the meaning specified in Section 8.4. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Issuance Date" has the meaning specified in subsection 3.1(a). "Issue" means, with respect to any Letter of Credit to issue or to extend the expiration of, or to renew or increase the amount of, such Letter of Credit; and the terms "Issued," "Issuing" and "Issuance", whether or not capitalized, have corresponding meanings. "Issuing Affiliate" shall have the meaning specified in Section 3.11. "Issuing Bank" means Bank of America in its capacity as issuer of one or more Letters of Credit hereunder, together with any replacement letter of credit issuer arising under subsection 10.1(b) or Section 10.9. "Joint Venture" means a partnership, limited liability company, joint venture or other similar legal arrangement (whether created by contract or conducted through a separate legal entity) now or hereafter formed by the Company or any of its Subsidiaries with another Person in order to conduct a common venture or enterprise with such Person. "L/C Advance" means each Bank's participation in any L/C Borrowing in accordance with its Pro Rata Share. "L/C Amendment Application" means an application form for amendment of outstanding standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. "L/C Application" means an application form for issuances of standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Bank, as the Issuing Bank shall request. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made nor converted into a Borrowing of Revolving Loans under subsection 3.3(c). "L/C Fee Percentage" means at any time, the Applicable Margin then applicable to Facility A Offshore Rate Loans. "L/C Obligations" means at any time the sum of (a) the aggregate undrawn amount of all Letters of Credit then outstanding, plus (b) the amount of all unreimbursed drawings under all Letters of Credit, including all outstanding L/C Borrowings. "L/C-Related Documents" means the Letters of Credit, the L/C Applications, the L/C Amendment Applications and any other document relating to any Letter of Credit, including any of the Issuing Bank's standard form documents for letter of credit issuances. "L/C Subsidiary" shall have the meaning specified in subsection 3.10(a). "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 11.2, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Letters of Credit" means (a) any letters of credit (whether Standby Letters of Credit or Commercial Letters of Credit) Issued by the Issuing Bank pursuant to Article III, and (b) the Existing Letters of Credit. "Leverage Ratio" means, as measured quarterly on the last day of each fiscal quarter for the four trailing quarters then ending, and determined on a consolidated basis for the Company and its Restricted Subsidiaries, the ratio of Funded Debt to EBITDA. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an Operating Lease. "Loan" means an extension of credit by a Bank to the Company under Article II or Article III in the form of a Revolving Loan or L/C Advance. "Loan Documents" means this Agreement, any Notes, the Fee Letter, the Participation Fee Letters, the L/C-Related Documents, the Specified Swap Contracts, and all other documents delivered to the Agent or any Bank in connection herewith. "Machinery Manufacturing Group" means lines of business operated at the Closing Date by the following Subsidiaries and divisions and assets associated therewith: (i) the Airtronics division of American Gage & Machine, (ii) Bach-Simpson, Inc., (iii) Bach-Simpson Limited, (iv) Diehl Machines, Inc., and (v) Peters Machinery Company. "Maintenance Group" means lines of business operated at the Closing Date by the following Subsidiaries or divisions and assets associated therewith: (i) Duckback Products, Inc. (ii) Glit/Gemtex Limited, (iii) Glit/Gemtex, Inc. (iv) Glit/Microtron Canada, (v) the Glit, Microtron and Loren divisions of Hallmark Holdings, Inc., (vi) Glit DISCO, Inc., and (vii) Wilen Products, Inc. "Margin Stock" means "margin stock" as such term is used in Regulation T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company or the Company and its Restricted Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and to avoid any Event of Default or of the ability of the Company and its Restricted Subsidiaries taken as a whole to perform under the Loan Documents and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or any Restricted Subsidiary of any Loan Document. "Material Subsidiary" means each Restricted Subsidiary other than any Restricted Subsidiary that does not have material operations and in any event for the most recent four fiscal quarters has generated revenue from operations of less than $100,000, and that has a net worth, determined in accordance with GAAP on a consolidated basis for such Subsidiary and its Subsidiaries, of less than $100,000; provided, however, that if all Restricted Subsidiaries that are not Material Subsidiaries at any time have such a net worth on an aggregate basis in excess of $1,000,000 (subject to such exclusion of subordinated Indebtedness), all Restricted Subsidiaries shall constitute Material Subsidiaries. "Montgomery" means NationsBanc Montgomery Securities LLC, a Delaware limited liability company. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Net Worth" means, as of any date of determination as determined on a consolidated basis for the Company and its Restricted Subsidiaries in accordance with GAAP, total stockholders' equity plus the book value of the Preferred Units, in each case as of the end of the most recent fiscal quarter for which financial statements have been delivered pursuant to Section 7.1. "Non-Guarantor Subsidiary" means a Restricted Subsidiary that is not organized in the United States unless the Company has entered into pledge documentation reasonably satisfactory to the Agent and the Required Banks and taken other action reasonably requested by the Agent to establish and perfect in favor of the Agent and the Banks a first priority perfected security interest in and pledge of 66% of the shares of capital stock of such Restricted Subsidiary. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to subsection 2.2(b), in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: LIBOR Offshore Rate = ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where "Eurodollar Reserve Percentage" means for any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and "LIBOR" means the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of the relevant Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "LIBOR" shall mean, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of the relevant Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Operating Lease" means, as applied to any Person, a lease of property which is not a Capital Lease. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation and for any partnership, its partnership agreement and certificate of partnership. "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Participant" has the meaning specified in subsection 11.8(d). "Participation Fee Letters" has the meaning specified in subsection 2.10(a). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Acquisition" means an Acquisition complying with subsection 8.4(f). "Permitted Liens" has the meaning specified in Section 8.1. "Permitted Stock Repurchase" is defined in subsection 8.11(c). "Permitted Swap Obligations" means all obligations (contingent or otherwise) of the Company or any Restricted Subsidiary existing or arising under Swap Contracts, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments or assets held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person in conjunction with a securities repurchase program not otherwise prohibited hereunder, and not for purposes of speculation or taking a "market view;" (b) such Swap Contracts do not contain any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions and includes any Pension Plan. "Preferential Payment" shall have the meaning specified in subsection 3.10(c). "Preferred Units" means the preferred units in the Acquired Company to be issued to Contico as described in the Purchase Agreement. "Pricing Ratio" means, as measured quarterly on the last day of each fiscal quarter for the four trailing quarters then ending, and determined on a consolidated basis for the Company and its Restricted Subsidiaries, the ratio of (a) Funded Debt minus the undrawn face amount of issued and outstanding standby letters of credit, to (b) EBITDA. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the aggregate Commitments. "Purchase Agreement" means the Unit Purchase Agreement as intended to be entered into by and among the Company and Contico pursuant to the letter of intent dated September 8, 1998. "Replacement Bank" has the meaning specified in Section 4.7. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Required Banks" means at any time Banks then holding at least 66-2/3% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having at least 66- 2/3% of the Commitments. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer or the president of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility. "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary. "Revolving Loan" means any of the Facility A Revolving Loans or the Facility B Revolving Loans, which may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Revolving Loan), and any reference to Revolving Loans also applies to both the Facility A Revolving Loans and the Facility B Revolving Loans. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "SESCO" means Savannah Energy Systems Company, a Georgia limited partnership. "SESCO Service Agreement" means the Service Agreement dated as of December 1, 1994, by and between Resource Recovery Development Authority for the City of Savannah and SESCO. "Specified Swap Contract" means any Swap Contract made or entered into at any time, or in effect at any time (whether heretofore or hereafter), whether directly or indirectly, and whether as a result of assignment or transfer or otherwise, between the Company or any Restricted Subsidiary of the Company and any Swap Provider which Swap Contract is or was intended by the Company to have been entered into, in part or entirely, for purposes of mitigating interest rate or currency exchange risk relating to any Loan (which intent shall conclusively be deemed to exist if the Company so represents to the Swap Provider in writing), and as to which the final scheduled payment by the Company or its Subsidiary is not later than the Facility B Revolving Termination Date. "Standby Letter of Credit" means a Letter of Credit other than a Commercial Letter of Credit. "Standby L/C Commitment" means the commitment of the Issuing Bank to Issue, and the commitment of the Banks severally to participate in, Standby Letters of Credit from time to time Issued or outstanding under Article III, in an aggregate amount not to exceed on any date the amount of $10,000,000, as the same shall be reduced as a result of a reduction in the Standby L/C Commitment pursuant to Section 2.6; provided that the Standby L/C Commitment is a part of the combined Facility A Commitments, rather than a separate, independent commitment. "Subsidiary" of a Person means any corporation , association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership or other equity interests with voting power (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Swap Contract" means any agreement, whether or not in writing, relating to any transaction that is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap or option, bond, note or bill option, interest rate option, forward foreign exchange transaction, cap, collar or floor transaction, currency swap, cross-currency rate swap, swaption, currency option or any other, similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, and, unless the context otherwise clearly requires, any master agreement relating to or governing any or all of the foregoing. "Swap Provider" means any Bank, or any Affiliate of any Bank, that is at the time of determination party to a Swap Contract with the Company or any Restricted Subsidiary. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include any Bank). "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Type" has the meaning specified in the definition of "Revolving Loan." "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Unrestricted Subsidiary" means any Subsidiary designated by the Company, upon the prior written consent of the Required Banks, as an Unrestricted Subsidiary. "Wholly Owned Subsidiary" means any Subsidiary in which (other than directors' qualifying shares required by law) 100% of the equity interests of each class having ordinary voting power, and 100% of the equity interests of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one of the other Wholly Owned Subsidiaries, or both. Notwithstanding the foregoing, the ownership by Contico or any other Person of the Preferred Units shall not cause the Acquired Company to not constitute a Wholly Owned Subsidiary of the Company after the Acquisition. "Woods Industries" means Woods Industries, Inc., a Subsidiary of the Company. "Year 2000 Compliant" shall have the meaning specified in Section 6.20. "Year 2000 Problem" shall have the meaning specified in Section 6.20. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of the Agent or the Banks by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.3 Accounting Principles. (a) Except as otherwise expressly provided in this Agreement, all accounting terms used in this Agreement shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Agent and the Banks under this Agreement shall (unless otherwise disclosed to the Agent in writing at the time of delivery) be prepared, in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Agent and the Banks under this Agreement. All calculations made for purposes of determining compliance with this Agreement shall (except as otherwise expressly provided for in this Agreement) be made by application of GAAP applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Agent and the Banks pursuant to Section 7.1 unless (i) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Agent on behalf of the Required Banks shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. ARTICLE II. THE CREDITS 2.1 Amounts and Terms of Commitments. (a) The Facility A Revolving Credit. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company (each such loan, a "Facility A Revolving Loan") from time to time on any Business Day during the period from the Closing Date to the Facility A Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Bank's name on Schedule 2.1 (such amount as the same may be reduced under Section 2.5 or as a result of one or more assignments under Section 11.8, the Bank's "Facility A Commitment"); provided, however, that, after giving effect to any Borrowing of Facility A Revolving Loans, (i) the Effective Amount of all outstanding Facility A Revolving Loans and the Effective Amount of all L/C Obligations shall not at any time exceed the combined Facility A Commitments, and (ii) the Effective Amount of the Facility A Revolving Loans of any Bank plus the participation of such Bank in the Effective Amount of all L/C Obligations shall not at any time exceed such Bank's Facility A Commitment. Within the limits of each Bank's Facility A Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this subsection 2.1(a), prepay under Section 2.6 and reborrow under this subsection 2.1(a). (b) The Facility B Revolving Credit. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company (each such loan, a "Facility B Revolving Loan") from time to time on any Business Day during the period from the Closing Date to the Facility B Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Bank's name on Schedule 2.1 (such amount as the same may be reduced by the last sentence of this subsection, by Section 2.5, or as a result of one or more assignments under Section 11.8, the Bank's "Facility B Commitment"); provided, however, that, after giving effect to any Borrowing of Facility B Revolving Loans, (i) the Effective Amount of all outstanding Facility B Revolving Loans shall not at any time exceed the combined Facility B Commitments, and (ii) the Effective Amount of the Facility B Revolving Loans of any Bank shall not at any time exceed such Bank's Facility B Commitment. Within the limits of each Bank's Facility B Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this subsection 2.1(b), prepay under Section 2.6 and reborrow under this subsection 2.1(b). Notwithstanding anything contained in this subsection 2.1(b), (a) the Effective Amount of Facility B Revolving Loans shall not exceed $30,000,000.00 unless and until all conditions precedent in Section 5.2 are satisfied, and (b) if the Contico Acquisition does not occur on or before February 26, 1999, as of February 26, 1999 the Facility B Revolving Credit shall be permanently reduced to $30,000,000.00. 2.2 Loan Accounts. (a) The Loans made by each Bank and the Letters of Credit Issued by the Issuing Bank shall be evidenced by one or more accounts or records maintained by such Bank or Issuing Bank, as the case may be, in the ordinary course of business. The accounts or records maintained by the Agent, the Issuing Bank and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the Letters of Credit Issued for the account of the Company, and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans or any Letter of Credit. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.3 Procedure for Borrowing. (a) Each Borrowing of Revolving Loans shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San Francisco time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans, and (ii) on the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $2,000,000 or any multiple of $1,000,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be one month; (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of Bank of America with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent or, if requested by the Company, by wire transfer of such fund in accordance with written instructions provided to the Agent by the Company, less the Agent's customary fees for such wire transfer; provided, however, that (i) the initial Facility A Loans and Facility B Loans shall be applied directly by the Agent to the repayment of the "Facility A Loans" and "Facility B Loans" under the Existing Credit Agreement to the extent thereof, and (ii) the proceeds of the Revolving Loans used to finance the Contico Acquisition will be made available pursuant to such escrow or other arrangements as may be mutually satisfactory to the Agent and the Company. (d) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than ten (10) different Interest Periods in effect. 2.4 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.4(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Offshore Rate Loans, to convert any such Loans (or any part thereof in an amount not less than $2,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect as of the last day of the applicable Interest Period, to continue any Revolving Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $2,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $2,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco time) at least (i) three Business Days in advance of the Conversion/ Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans; and (ii) on the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Required Banks otherwise consent, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than ten (10) different Interest Periods in effect. 2.5 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Facility A Commitments or the Facility B Commitments, or permanently reduce the Facility A Commitments or Facility B Commitments by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, (a) the Effective Amount of all Facility A Revolving Loans and L/C Obligations together would exceed the amount of the Facility A Commitments then in effect, (b) the Effective Amount of all Commercial L/C Obligations then outstanding would exceed the Commercial L/C Commitment, (c) the Effective Amount of all Standby L/C Obligations would exceed the Standby L/C Commitment, or (d) the Effective Amount of all Facility B Revolving Loans then outstanding would exceed the Facility B Commitment. Once reduced in accordance with this Section, neither the Facility A Commitments, Facility B Commitments, Commercial L/C Commitments, nor the Standby L/C Commitments may be increased. Any reduction of the Commitments shall be applied to each Bank according to its respective Pro Rata Share. Any reduction in the Facility A Commitments will correspondingly reduce the Commercial L/C Commitment, and any reduction in the Facility A Commitments below $10,000,000 will correspondingly reduce the Standby L/C Commitment. All accrued Facility Fees to, but not including, the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.6 Optional Prepayments. Subject to Section 4.4, the Company may, at any time or from time to time, upon not less than (i) one Business Day's irrevocable notice to the Agent, in the case of Base Rate Loans, or (ii) three Business Days' irrevocable notice to the Agent, in the case of Offshore Rate Loans, ratably prepay Loans in whole or in part, in minimum amounts of $2,000,000 or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest of Offshore Rate Loans to each such date on the amount of Offshore Rate Loans prepaid and any amounts required pursuant to Section 4.4. 2.7 Mandatory Prepayments of Loans; Mandatory Commitment Reductions. If on any date the Effective Amount of Commercial L/C Obligations exceeds the Commercial L/C Commitment, the Company shall Cash Collateralize on such date the outstanding Commercial Letters of Credit in an amount equal to such excess. If on any date the Effective Amount of Standby L/C Obligations exceeds the Standby L/C Commitment, the Company shall Cash Collateralize on such date the outstanding Standby Letters of Credit in an amount equal to such excess. Subject to Section 4.4, if on any date after giving effect to any Cash Collateralization made on such date pursuant to the two preceding sentences, the Effective Amount of all Facility A Revolving Loans then outstanding plus the Effective Amount of all L/C Obligations exceeds the combined Facility A Commitments, the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Facility A Revolving Loans and L/C Advances by an amount equal to such excess. If on any date the Effective Amount of all Facility B Revolving Loans then outstanding exceeds the combined Facility B Commitments, the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Facility B Revolving Loans by an amount equal to such excess. If on any date the Effective Amount of all Loans and all L/C Obligations exceeds the combined Commitments, the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Loans by an amount equal to such excess. 2.8 Repayment. The Company shall repay to the Banks on the Facility A Revolving Termination Date the aggregate principal amount of Facility A Revolving Loans outstanding on such date. The Company shall repay to the Banks on the Facility B Revolving Termination Date the aggregate principal amount of Facility B Revolving Loans outstanding on such date. 2.9 Interest. (a) Each Revolving Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.4), plus the Applicable Margin. (b) Interest on each Revolving Loan shall be paid in arrears on each Interest Payment Date. Interest on Offshore Rate Loans shall also be paid on the date of any prepayment of Offshore Rate Loans under Section 2.6 or 2.7 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Banks. (c) Notwithstanding subsection (a) of this Section, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Obligations, at a rate per annum which is determined by adding 2% per annum to the Applicable Margin then in effect for such Loans and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 2%; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin then in effect for Base Rate Loans plus 2%. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.10 Fees. In addition to certain fees described in Section 3.8: (a) Certain Fees. The Company shall pay such fees to Montgomery and Bank of America for Montgomery's and Bank of America's own account, and shall pay such fees to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") among the Company, Montgomery and the Agent, dated October 14, 1998. In addition, the Company shall pay to the Agent on the Closing Date for the account of each Bank a one-time fee in the amounts specified in letter agreements, dated as of the date hereof, between the Company and each Bank (the "Participation Fee Letters"). (b) Facility Fees. The Company shall pay to the Agent for the account of each Bank a facility fee ("Facility Fee") for each day from the Closing Date to the termination of the Commitments in an amount equal to the product of (i) such Bank's Commitments in effect on such date multiplied by (ii) 1/360th of the Facility Fee Percentage in effect on such day. Such Facility Fee shall be due and payable quarterly in arrears on December 31, 1998 and thereafter on the last Business Day of each calendar quarter through the Facility B Revolving Termination Date, with the final payment to be made on the Facility B Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.5 or Section 2.7, the accrued Facility Fee for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The Facility Fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article V are not met. 2.11 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by Bank of America's "reference rate" or any successor rate shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.12 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 11:00 a.m. (San Francisco time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 11:00 a.m. (San Francisco time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.13 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.14 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 11.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. 2.15 Quarterly Adjustments. If the Company shall have failed to deliver the financial reports pursuant to Section 7.1 and the certificates pursuant to Section 7.2 on a timely basis and if, when delivered with respect to any fiscal quarter, such financial reports and certificates indicate that the Applicable Margin or the Facility Fee Percentage for any period after such failure should have been higher than the Applicable Margin or the Facility Fee Percentage assumed after such period pursuant to the definitions of such terms by virtue of such failure, and the interest or fee that would have been collected hereunder based upon the actual Applicable Margin or the Facility Fee Percentage had such failure not occurred exceeds the interest or fee actually collected hereunder, then the Company shall pay an amount equal to such excess on the next Interest Payment Date. 2.16 Extension of Facility A Revolving Termination Date. At least 45 and no earlier than 90 days before the Facility A Revolving Termination Date then in effect, the Company may request, through the Agent, that each Bank extend the Facility A Revolving Termination Date, effective upon the day following the Facility A Revolving Termination Date then in effect, to a date that is 364 days following the Facility A Revolving Termination Date then in effect. Each Bank that elects to extend the Facility A Revolving Termination Date will so indicate by notifying the Agent and the Company in writing during the period between 45 and 30 days before the Facility A Revolving Termination Date then in effect. If less than all of the Banks elect to extend the Termination Date during the aforesaid period, the Company may (but shall not be obligated to) invoke the provisions of Section 4.7 to substitute, effective following the Facility A Revolving Termination Date then in effect, for the Commitments and Loans of any Bank that has not elected to extend the Facility A Revolving Termination Date. Unless a Default or Event of Default exists, the Facility A Revolving Termination Date will be extended as aforesaid if, on or before the Facility A Revolving Termination Date then in effect, after taking into account any substitution in accordance with Section 4.7, Banks with aggregate Commitments equal to 66-2/3% of the aggregate Facility A Commitments have agreed to the extension of the Facility A Revolving Termination Date as aforesaid. If the Facility A Revolving Termination Date shall be so extended, any Bank not electing to extend shall cease to be a party to this Agreement effective upon its replacement under Section 4.7, and, if such Bank's Loans have been assigned to a Replacement Bank in accordance with Section 4.7, such Bank shall have no continuing rights or obligations hereunder except under those sections that are expressly to survive termination of the Commitments and repayment of the Loans. If such Bank's Loans have not been so assigned, such Loans, together with interest thereon and Facility Fees owing to such Bank on account of its Facility A Commitment, shall be due and payable in full on the previously effective Facility A Revolving Termination Date with no further action by any party hereto. Notwithstanding anything in this Section 2.16, the Facility A Revolving Termination Date shall not be extended more than two (2) times. ARTICLE III. THE LETTERS OF CREDIT 3.1 The Letter of Credit Subfacilities. (a) On the terms and conditions set forth herein (i) the Issuing Bank agrees, (A) from time to time on any Business Day during the period from the Closing Date to the Facility A Revolving Termination Date to issue Letters of Credit for the account of the Company, and to amend or renew Letters of Credit previously issued by it, in accordance with subsections 3.2(c) and 3.2(d), and (B) to honor drafts under the Letters of Credit; and (ii) the Banks severally agree to participate in Letters of Credit Issued for the account of the Company; provided, that the Issuing Bank shall not be obligated to Issue, and no Bank shall be obligated to participate in, any Letter of Credit if as of the date of Issuance of such Letter of Credit (the "Issuance Date") (1) the Effective Amount of all L/C Obligations plus the Effective Amount of all Facility A Revolving Loans exceeds the combined Facility A Commitments, (2) the participation of any Bank in the Effective Amount of all L/C Obligations plus the Effective Amount of the Facility A Revolving Loans of such Bank exceeds such Bank's Facility A Commitment, (3) the Effective Amount of Commercial Letters of Credit exceeds the Commercial L/C Commitment, or (4) the Effective Amount of Standby Letters of Credit exceeds the Standby L/C Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company's ability to obtain Letters of Credit shall be fully revolving, and, accordingly, the Company may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. (b) The Issuing Bank is under no obligation to Issue any Letter of Credit if: (i) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Bank from Issuing such Letter of Credit, or any Requirement of Law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the Issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Bank in good faith deems material to it; (ii) the Issuing Bank has received written notice from any Bank, the Agent or the Company, on or prior to the Business Day prior to the requested date of Issuance of such Letter of Credit, that one or more of the applicable conditions contained in Article V is not then satisfied; (iii) the expiration date of any requested Letter of Credit is (A) (i) more than six months after the date of Issuance, in the case of Commercial Letters of Credit, or (ii) more than one year after the date of Issuance, in the case of Standby Letters of Credit, unless the Required Banks have approved such expiration date in writing, or (B) after the Facility B Revolving Termination Date, unless all of the Banks have approved such expiration date in writing; (iv) the expiration date of any requested Standby Letter of Credit is prior to the maturity date of any financial obligation to be supported by the requested Standby Letter of Credit; (v) any requested Letter of Credit does not provide for drafts, or is not otherwise in form and substance acceptable to the Issuing Bank, or the Issuance of a Letter of Credit shall violate any applicable policies of the Issuing Bank; (vi) any Standby Letter of Credit is for the purpose of supporting the issuance of any letter of credit by any other Person; or (vii) such Letter of Credit is in a face amount less than $50,000 if a Standby Letter of Credit or is denominated in a currency other than Dollars; 3.2 Issuance, Amendment and Renewal of Letters of Credit. (a) Each Standby Letter of Credit shall be issued upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least four days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of issuance. Each such request for issuance of a Standby Letter of Credit shall be by facsimile, confirmed immediately in an original writing, in the form of an L/C Application, and shall specify in form and detail reasonably satisfactory to the Issuing Bank: (i) the proposed date of issuance of the Standby Letter of Credit (which shall be a Business Day); (ii) the face amount of the Standby Letter of Credit; (iii) the expiration date of the Standby Letter of Credit; (iv) the name and address of the beneficiary thereof; (v) the documents to be presented by the beneficiary of the Standby Letter of Credit in case of any drawing thereunder; (vi) the full text of any certificate to be presented by the beneficiary in case of any drawing thereunder; and (vii) such other matters as the Issuing Bank may reasonably require. (b) Each Commercial Letter of Credit shall be issued in accordance with the Issuing Bank's usual and customary business and documentation practices, as mutually agreed by the Company and the Issuing Bank. (c) At least two Business Days prior to the Issuance of any Standby Letter of Credit, the Issuing Bank will confirm with the Agent (by telephone or in writing) that the Agent has received a copy of the L/C Application or L/C Amendment Application from the Company and, if not, the Issuing Bank will provide the Agent with a copy thereof. Unless the Issuing Bank has received notice on or before the Business Day immediately preceding the date the Issuing Bank is to issue a requested Standby Letter of Credit from the Agent (A) directing the Issuing Bank not to issue such Standby Letter of Credit because such issuance is not then permitted under subsection 3.1(a) as a result of the limitations set forth in clauses (1) through (3) thereof or subsection 3.1(b)(ii); or (B) that one or more conditions specified in Article V are not then satisfied; then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, issue a Standby Letter of Credit for the account of the Company in accordance with the Issuing Bank's usual and customary business practices. (d) From time to time while a Standby Letter of Credit is outstanding and prior to the Facility A Revolving Termination Date, the Issuing Bank will, upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least five days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of amendment, amend any Standby Letter of Credit issued by it. Each such request for amendment of a Standby Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Standby Letter of Credit to be amended; (ii) the proposed date of amendment of the Standby Letter of Credit (which shall be a Business Day); (iii) the nature of the proposed amendment; and (iv) such other matters as the Issuing Bank may reasonably require. The Issuing Bank shall be under no obligation to amend any Standby Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue such Standby Letter of Credit in its amended form under the terms of this Agreement; or (B) the beneficiary of any such Standby Letter of Credit does not accept the proposed amendment to the Standby Letter of Credit. The Agent will promptly notify the Banks of the receipt by it of any L/C Application or L/C Amendment Application. (e) The Issuing Bank and the Banks agree that, while a Standby Letter of Credit is outstanding and prior to the Facility A Revolving Termination Date, at the option of the Company and upon the written request of the Company received by the Issuing Bank (with a copy sent by the Company to the Agent) at least five days (or such shorter time as the Issuing Bank may agree in a particular instance in its sole discretion) prior to the proposed date of notification of renewal, the Issuing Bank shall be entitled to take or omit to take such action as would allow the renewal of any Standby Letter of Credit issued by it. Each such request for renewal of a Standby Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the Issuing Bank: (i) the Standby Letter of Credit to be renewed; (ii) the proposed date of notification of renewal of the Standby Letter of Credit (which shall be a Business Day); (iii) the revised expiration date of the Standby Letter of Credit; and (iv) such other matters as the Issuing Bank may reasonably require. The Issuing Bank shall be under no obligation so to renew any Standby Letter of Credit if: (A) the Issuing Bank would have no obligation at such time to issue or amend such Standby Letter of Credit in its renewed form under the terms of this Agreement; or (B) the beneficiary of any such Standby Letter of Credit does not accept the proposed renewal of the Standby Letter of Credit. If any outstanding Standby Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the Issuing Bank that such Standby Letter of Credit shall not be renewed, and if at the time of renewal the Issuing Bank would be entitled to authorize the automatic renewal of such Standby Letter of Credit in accordance with this subsection 3.2(e) upon the request of the Company but the Issuing Bank shall not have received any L/C Amendment Application from the Company with respect to such renewal or other written direction by the Company with respect thereto, the Issuing Bank shall nonetheless be permitted to allow such Standby Letter of Credit to renew, and the Company and the Banks hereby authorize such renewal, and, accordingly, the Issuing Bank shall be deemed to have received an L/C Amendment Application from the Company requesting such renewal. (f) The Issuing Bank may, at its election (or as required by the Agent at the direction of the Required Banks), deliver any notices of termination or other communications to any Letter of Credit beneficiary or transferee, and take any other action as necessary or appropriate, at any time and from time to time, in order to cause the expiration date of such Letter of Credit to be a date not later than the Facility B Revolving Termination Date. (g) This Agreement shall control in the event of any conflict with any L/C-Related Document (other than any Letter of Credit). (h) The Issuing Bank will also deliver to the Agent, concurrently or promptly following its delivery of a Letter of Credit, or amendment to or renewal of a Letter of Credit, to an advising bank or a beneficiary, a true and complete copy of each such Letter of Credit or amendment to or renewal of a Letter of Credit. 3.3 Risk Participations, Drawings and Reimbursements. (a) Immediately upon the Issuance of each Letter of Credit in addition to those described in subsection 3.3(a), each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) the Pro Rata Share of such Bank, times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. For purposes of subsection 2.1(a), each Issuance of a Letter of Credit shall be deemed to utilize the Standby L/C Commitment or Commercial L/C Commitment, as applicable, of each Bank by an amount equal to the amount of such participation. (b) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Issuing Bank will promptly notify the Company. In the case of Commercial Letters of Credit, such notice will be provided at least one Business Day before the date that any amount is paid by the Issuing Bank under any Letter of Credit (each such date, an "Honor Date"); in the case of Standby Letters of Credit, the Issuing Bank will endeavor to notify the Company at least one Business Day before the Honor Date but its failure to provide such notice shall neither give rise to liability against it nor be any defense to the reimbursement obligations of the Company as described in the next sentence. The Company shall reimburse the Issuing Bank prior to 10:00 a.m. (San Francisco time) on each Honor Date in an amount equal to the amount so paid by the Issuing Bank. In the event the Company fails to reimburse the Issuing Bank for the full amount of any drawing under any Letter of Credit by 10:00 a.m. (San Francisco time) on the Honor Date, the Issuing Bank will promptly notify the Agent and the Agent will promptly notify each Bank thereof, and the Company shall be deemed to have requested that Base Rate Loans be made by the Banks to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the Facility A Revolving Commitment and subject to the conditions set forth in Section 5.3. Any notice given by the Issuing Bank or the Agent pursuant to this subsection 3.3(b) may be oral if immediately confirmed in writing (including by facsimile); provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (c) Each Bank shall upon any notice pursuant to subsection 3.3(b) make available to the Agent for the account of the relevant Issuing Bank an amount in Dollars and in immediately available funds equal to its Pro Rata Share of the amount of the drawing, whereupon the participating Banks shall (subject to subsection 3.3(e)) each be deemed to have made a Facility A Revolving Loan consisting of a Base Rate Loan to the Company in that amount. If any Bank so notified fails to make available to the Agent for the account of the Issuing Bank the amount of such Bank's Pro Rata Share of the amount of the drawing by no later than 12:00 noon (San Francisco time) on the Honor Date, then interest shall accrue on such Bank's obligation to make such payment, from the Honor Date to the date such Bank makes such payment, at a rate per annum equal to the Federal Funds Rate in effect from time to time during such period. The Agent will promptly give notice of the occurrence of the Honor Date, but failure of the Agent to give any such notice on the Honor Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligations under this Section 3.3. (d) With respect to any unreimbursed drawing that is not converted into Facility A Revolving Loans consisting of Base Rate Loans to the Company in whole or in part, because of the Company's failure to satisfy the conditions set forth in Section 5.3 or for any other reason, the Company shall be deemed to have incurred from the Issuing Bank an L/C Borrowing in the amount of such drawing, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at a rate per annum equal to the Base Rate plus 2% per annum, and each Bank's payment to the Issuing Bank pursuant to this subsection 3.3(d) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Bank in satisfaction of its participation obligation under this Section 3.3. (e) Each Bank's obligation in accordance with this Agreement to make the Facility A Revolving Loans or L/C Advances, as contemplated by this Section 3.3, as a result of a drawing under a Letter of Credit, shall be absolute and unconditional and without recourse to the Issuing Bank and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Bank, the Company or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default, an Event of Default or a Material Adverse Effect; or (iii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided, however, that each Bank's obligation to make Facility A Revolving Loans under this Section 3.3 is subject to the conditions set forth in Section 5.3. 3.4 Repayment of Participations. (a) Upon (and only upon) receipt by the Agent for the account of the Issuing Bank of immediately available funds from the Company (i) in reimbursement of any payment made by the Issuing Bank under the Letter of Credit with respect to which any Bank has paid the Agent for the account of the Issuing Bank for such Bank's participation in the Letter of Credit pursuant to Section 3.3 or (ii) in payment of interest thereon, the Agent will pay to each Bank, in the same funds as those received by the Agent for the account of the Issuing Bank, the amount of such Bank's Pro Rata Share of such funds, and the Issuing Bank shall receive the amount of the Pro Rata Share of such funds of any Bank that did not so pay the Agent for the account of the Issuing Bank. (b) If the Agent or the Issuing Bank is required at any time to return to the Company, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by the Company to the Agent for the account of the Issuing Bank pursuant to subsection 3.4(a) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent or the Issuing Bank the amount of its Pro Rata Share of any amounts so returned by the Agent or the Issuing Bank plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent or the Issuing Bank, at a rate per annum equal to the Federal Funds Rate in effect from time to time. 3.5 Role of the Issuing Bank. (a) Each Bank and the Company agree that, in paying any drawing under a Letter of Credit, the Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft and certificates expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. (b) No Agent-Related Person nor any of the respective correspondents, participants or assignees of the Issuing Bank shall be liable to any Bank for: (i) any action taken or omitted in connection herewith at the request or with the approval of the Banks (including the Required Banks, as applicable); (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any L/C-Related Document. (c) The Company hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Company's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Agent-Related Person, nor any of the respective correspondents, participants or assignees of the Issuing Bank, shall be liable or responsible for any of the matters described in clauses (i) through (vii) of Section 3.6; provided, however, anything in such clauses to the contrary notwithstanding, that the Company may have a claim against the Issuing Bank, and the Issuing Bank may be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Company which the Company proves were caused by the Issuing Bank's willful misconduct or gross negligence or the Issuing Bank's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing: (i) the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; and (ii) the Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. 3.6 Obligations Absolute The obligations of the Company under this Agreement and any L/C- Related Document to reimburse the Issuing Bank for a drawing under a Letter of Credit, and to repay any L/C Borrowing and any drawing under a Letter of Credit converted into Facility A Revolving Loans, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and each such other L/C-Related Document under all circumstances, including the following: (i) any lack of validity or enforceability of this Agreement or any L/C-Related Document; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Company in respect of any Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C-Related Documents; (iii) the existence of any claim, set-off, defense or other right that the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C-Related Documents or any unrelated transaction; (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (v) any payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of any Letter of Credit; or any payment made by the Issuing Bank under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any Insolvency Proceeding; (vi) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the obligations of the Company in respect of any Letter of Credit; or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Company or a guarantor. 3.7 Cash Collateral Pledge. Upon (i) the request of the Agent, (A) if the Issuing Bank has honored any full or partial drawing request on any Letter of Credit and such drawing has resulted in an L/C Borrowing hereunder, or (B) if, as of the Facility B Revolving Termination Date, any Letters of Credit may for any reason remain outstanding and partially or wholly undrawn, or (ii) the occurrence of the circumstances described in Section 2.7 requiring the Company to Cash Collateralize Letters of Credit, then, the Company shall immediately Cash Collateralize the L/C Obligations in an amount equal to such L/C Obligations. 3.8 Letter of Credit Fees. (a) The Company shall pay to the Agent for the account of each of the Banks a letter of credit fee with respect to Standby Letters of Credit equal to the L/C Fee Percentage of the average daily maximum amount available to be drawn of the outstanding Standby Letters of Credit, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon Standby Letters of Credit outstanding for that quarter as calculated by the Agent. Such letter of credit fees shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter during which Letters of Credit are outstanding, commencing on the first such quarterly date to occur after the Closing Date, through the Facility A Revolving Termination Date (or such later date upon which the outstanding Standby Letters of Credit shall expire), with the final payment to be made on the Facility A Revolving Termination Date (or such later expiration date). (b) The Company shall pay to the Issuing Bank for its own account a letter of credit fronting fee for each Standby Letter of Credit Issued by the Issuing Bank, computed for the period between the date of Issuance of such Standby Letter of Credit to the expiration date thereof, in an amount equal to 0.125% per annum of the face amount of such Standby Letter of Credit. Such Standby Letter of Credit fronting fee shall be due and payable on each date of Issuance of a Standby Letter of Credit, and shall be fully earned upon the submission of a request for a Letter of Credit, regardless of whether such request is later revoked or withdrawn. (c) With respect to Standby Letters of Credit, the Company shall pay to the Issuing Bank from time to time on demand the normal issuance, presentation, amendment and other processing fees, and other standard costs and charges of the Issuing Bank relating to standby letters of credit as from time to time in effect. With respect to Commercial Letters of Credit, the Company shall pay to the Issuing Bank from time to time on demand such presentation, amendment and other processing fees, and other standard costs and charges of the Issuing Bank relating to commercial letters of credit as the Company and the Issuing Bank may from time to time agree. 3.9 Uniform Customs and Practice. The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in the Letters of Credit) apply to the Letters of Credit. 3.10 Subsidiaries as Account Parties. (a) As agreed from time to time between the Company and the Issuing Bank, the L/C-Related Documents for any Letter of Credit, and other communications required of the Company with respect thereto under this Article III, may be executed by a Subsidiary of the Company (an "L/C Subsidiary") rather than the Company. The parties hereto acknowledge and agree that a letter of credit issued pursuant to such L/C-Related Documents shall be a Letter of Credit for all purposes hereunder, and the Company, the Issuing Bank, and the Banks shall be obligated with respect thereto hereunder, and the Company shall be obligated under the related L/C-Related Documents, as though the Company were the signatory to such L/C Related Documents. Without limiting the foregoing, the Company hereby guarantees the payment when due, upon maturity, acceleration or otherwise, of any and all indebtedness of any L/C Subsidiary to the Issuing Bank, the Agent, or any Bank arising under any L/C-Related Document. If any or all of such indebtedness becomes due and payable , the Company unconditionally promise to pay such indebtedness to Bank, or order, on demand, in lawful money of the United States. The word "indebtedness" as used in this Section 3.10 shall mean any and all advances, debts, obligations and liabilities of an L/C Subsidiary, or any one or more of them, heretofore, now, or hereafter made, incurred or created, under any L/C-Related Document, and any and all renewals, extensions or modifications thereof, whether or not recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, and whether or not such indebtedness may be or hereafter become otherwise unenforceable. (b) The Company guarantees the payment of any and all indebtedness of each L/C Subsidiary whether or not due or payable by such L/C Subsidiary upon (a) the death, dissolution, insolvency or business failure of, or any assignment for benefit of creditors by, or commencement of any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceedings by or against, such L/C Subsidiary or the Company, or (b) the appointment of a receiver for, or the attachment, restraint of or making or levying of any order of court or legal process affecting, the property of such L/C Subsidiary or the Company, and unconditionally promises to pay such indebtedness to the Agent, on demand, in lawful money of the United States. (c) The liability of the Company under this Section 3.10 is exclusive and independent of any security for or other guaranty of the indebtedness of any L/C Subsidiary, whether executed by the Company or by any other party, and the liability of the Company hereunder is not affected or impaired by (a) any direction of application of payment by any L/C Subsidiary or by any other party, or (b) any other guaranty or undertaking of the Company or of any other party as to the indebtedness of any L/C Subsidiary, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel of any L/C Subsidiary or the Company. To the extent any L/C Subsidiary or the Company make any payment to the Issuing Bank or the Agent in connection with the indebtedness, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid or paid over to a trustee, receiver or any other entity, whether in connection with an Insolvency Proceeding or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then this guaranty shall continue to be effective or shall be reinstated, as the case may be, and, to the extent of such payment or repayment, the indebtedness or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. (d) The obligations of the Company under this Section 3.10 are independent of the obligations of the L/C Subsidiaries, and a separate action or actions may be brought and prosecuted against the Company whether or not action is brought against any L/C Subsidiary and whether or not any L/C Subsidiary be joined in any such action or actions. (e) The Company authorizes the Issuing Bank, without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing their liability hereunder, from time to time to (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the indebtedness or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of the indebtedness and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as Issuing Bank in its discretion may determine; and (d) release or substitute any one or more endorsers, guarantors, L/C Subsidiaries or other obligors. (f) It is not necessary for the Issuing Bank to inquire into the capacity or powers of any L/C Subsidiary or the officers, directors, partners or agents acting or purporting to act on their behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder, and if any L/C Subsidiary is a partnership, the word "L/C Subsidiary" and "indebtedness" as used herein include all successor partnerships and liabilities thereof to Issuing Bank, the Agent, and the Banks. (g) Absent a waiver of such right, the Company may have the right to assert a defense to an action to enforce this guaranty if (a) the Issuing Bank, the Agent, or the Banks do not proceed against any L/C Subsidiary, or any security for the indebtedness of any L/C Subsidiary, or pursue any other remedy in their power that the Company cannot pursue, before enforcing this guaranty, (b) the Issuing Bank, the Agent, or the Banks takes any action, without the Company's consent, of the type specified in subsection 3.10(c), or any other action by which the indebtedness of any L/C Subsidiary is altered in any respect, or the remedies or rights of the Company against any L/C Subsidiary or any other person or any security are impaired, suspended or extinguished, (c) any L/C Subsidiary is under a legal disability or any L/C Subsidiary has any other defense to payment of the indebtedness, (d) there is no liability on the part of any L/C Subsidiary or such liability is limited or ceases for any reason other than payment of the indebtedness in full, (e) Issuing Bank, the Agent, or any Bank fails to notify the Company of information known to them as to any L/C Subsidiary's financial condition, assets or other circumstances bearing on repayment of the indebtedness or the nature, scope and extent of the risks that the Company assumes and incurs hereunder (and the Company agree that neither the Issuing Bank, the Agent, nor any Bank shall have any duty to advise the Company of any such information), (f) the statute of limitations applicable to an action to enforce this guaranty has run (and the Company agrees that any payment by any L/C Subsidiary or other circumstance that operates to toll any statute of limitations as to any L/C Subsidiary shall operate to toll the statute of limitations as to the Company), (g) the Issuing Bank, the Agent, or any Bank fails to make or provide any presentment, demand for performance, or notice of nonperformance, dishonor, the acceptance of this guaranty, or other notice, or (h) any election of remedies by the Issuing Bank, the Agent, or any Bank , including any election to proceed by nonjudicial foreclosure on any security, or any act or omission of the Issuing Bank, the Agent, or any Bank relating to such foreclosure, operates to impair, suspend or extinguish any right of contribution, subrogation or reimbursement that the Company would otherwise have against any L/C Subsidiary. THE COMPANY HEREBY EXPRESSLY WAIVES THE RIGHT TO ASSERT ANY DEFENSE DESCRIBED IN THIS SUBSECTION 3.10(G). 3.11 Issuing Affiliate. The Issuing Bank may perform any or all of its obligations under this Agreement with respect to commercial Letters of Credit through one or more of its Affiliates (each, an "Issuing Affiliate") and, if it exercises such option, each reference to "Issuing Bank" in this Agreement shall be deemed a reference to the Issuing Bank or its Issuing Affiliate, as appropriate; provided, however, that any Letter of Credit issued by the Issuing Affiliate will, upon the request of the Company, be confirmed by Bank of America. ARTICLE IV. TAXES, YIELD PROTECTION AND ILLEGALITY 4.1 Taxes. (a) Except as otherwise required by law, any and all payments by the Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of (i) Taxes, (ii) Other Taxes, and (iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If the Company is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. 4.2 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 4.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent, that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 4.3 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate or in respect of the assessment rate payable by any Bank to the FDIC for insuring U.S. deposits) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans or participating in Letters of Credit, or, in the case of the Issuing Bank, any increase in the cost to the Issuing Bank of agreeing to issue, issuing or maintaining any Letter of Credit or of agreeing to make or making, funding or maintaining any unpaid drawing under any Letter of Credit, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 4.4 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.6; (d) the prepayment (including pursuant to Section 2.7) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.4 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under subsection 4.3(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 4.5 Inability to Determine Rates. If the Required Banks determine that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection 2.9(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to such Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Required Banks revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 4.6 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article IV shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and the calculations with respect thereto and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 4.7 Substitution of Banks. Upon (a) the receipt by the Company from any Bank of a claim for compensation under Section 4.3, or (b) a Bank's failure to elect to extend the Facility A Revolving Termination Date on or before the 30th day before such date (a Bank described in clauses (a) or (b) being referred to as an "Affected Bank"), then the Company may: (i) in the case of clause (a) above only, request the Affected Bank to use its best efforts to obtain a replacement bank or financial institution (which in any event, shall be an Eligible Assignee) satisfactory to the Company to acquire and assume all or a ratable part of all of such Affected Bank's Loans and Commitment (a "Replacement Bank") in accordance with the assignment provisions contained in Section 11.8; (ii) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitment in accordance with the assignment provisions contained in Section 11.8; or (iii) designate a Replacement Bank. Any such designation of a Replacement Bank under clause (i) or (iii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld) and shall be effected in accordance with the assignment provisions contained in Section 11.8. The Company shall be liable for the payment upon demand of all costs and other amounts arising under Section 4.4 that result from any Replacement Bank's acquisition of an Affected Bank's Loan and/or Commitment (or, in either case, any portion thereof) on a date other than the last day of the applicable Interest Period with respect to any Loans then outstanding. 4.8 Survival. The agreements and obligations of the Company in this Article IV shall survive the payment of all other Obligations. ARTICLE V.CONDITIONS PRECEDENT 5.1 Conditions of Initial Credit Extensions. The obligation of each Bank to make its initial Credit Extension hereunder is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Loan Documents. This Agreement, the Notes (for each Lender that has requested a Note at least three Business Days before the Closing Date), and a Reaffirmation of Guaranty executed by each Guarantor in form satisfactory to the Agent, each executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of directors of the Company and each Guarantor authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Person; and (ii) A certificate of the Secretary or Assistant Secretary of the Company, and each Guarantor certifying the names and true signatures of the officers of the Company or such Guarantor authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws, or partnership agreement, as applicable, of the Company and each Guarantor as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company or such Guarantor, or the general partner of such Guarantor, as of the Closing Date; and (ii) a good standing and tax good standing certificate for the Company and each Guarantor, except for those Guarantors listed on Schedule 5.1 as to which the Company agrees to take all action necessary to obtain such certificates promptly after the Closing Date, issued by the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation or organization and each state where the Company is qualified to do business as a foreign corporation or partnership as of a date within five days of the Closing Date in the case of the certificates for the Company issued by its state of incorporation, within fifteen days of the Closing Date in the case of the certificates for the Guarantors issued by their respective states of incorporation or organization, and within 30 days of the Closing Date in all other cases; (d) Legal Opinions. (i) an opinion of Schiff Hardin & Waite, counsel to the Company and the Guarantors and addressed to the Agent and the Banks, substantially in the form of Exhibit D; and (ii) a favorable opinion of Morrison & Foerster LLP, special counsel to the Agent; (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with reasonable Attorney Costs of Bank of America to the extent invoiced prior to or on the Closing Date, plus such additional amounts of reasonable Attorney Costs as shall constitute Bank of America's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and Bank of America); including any such costs, fees and expenses arising under or referenced in Sections 2.10 and 11.4; (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article VI are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the Credit Extension; and (iii) there has occurred since September 30, 1998, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; (g) Financial Statements. Copies of (i) the consolidated financial statements including audited balance sheets and income and cash flow statements prepared in conformity with GAAP of the Company and its Subsidiaries for the fiscal years ending December 31, 1995, December 31, 1996 and December 31, 1997, (ii) the consolidated financial statements including audited balance sheets and income and cash flow statements prepared in conformity with GAAP of Contico and its Subsidiaries for the fiscal years ending May 31, 1996, May 31, 1997 and May 31, 1998; (h) Consent from Departing Banks. Each "Bank" signatory to the Existing Credit Agreement that is not a Bank hereunder shall have consented to the Agreement in a form satisfactory to the Agent; (i) Existing Credit Agreement. All fees, expenses, principal, and accrued interest under the Existing Credit Agreement shall have been paid in full through the Closing Date or arrangements made to pay such amounts from the proceeds of the initial Revolving Loans; and (j) Other Documents. Such other approvals, opinions, documents or materials as the Agent or the Required Banks may reasonably request. 5.2 Conditions of Initial Acquisition Loans. The obligation of each Bank to make its initial Acquisition Loan hereunder is subject to the condition that the Agent shall have received prior to the Acquisition Loan Borrowing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank, and all of the following conditions shall have been satisfied: (a) Supplements to Schedules. Receipt of supplements to the Schedules attached hereto in form and substance acceptable to the Agent and the Company; (b) Purchase Agreement. A copy of the executed Purchase Agreement and all other documents in connection therewith certified as being true, correct and complete by the Company (evidencing an acquisition price in compliance with subsection 8.4(h)); (c) Contico Acquisition. Evidence that the transactions contemplated by the Purchase Agreement shall have been consummated or will be consummated simultaneously with the funding of the initial Acquisition Loans in accordance with the terms of the Purchase Agreement and in compliance with applicable law and with all necessary regulatory approvals; (d) Capital Structure. The corporate capital and ownership structure (including articles of agreements among members) of the Acquired Company shall be satisfactory to the Agent; (e) Organization Documents; Good Standing. Each of the following documents: (i) the operating agreement of the Acquired Company as in effect as of the date of the initial Acquisition Loan Borrowing Date, certified by the managing member (or Person with comparable authority) of the Acquired Company as of the date thereof, together with certification, in a form reasonably acceptable to the Agent, of the due authorization of the Acquired Company to enter into the transactions contemplated hereby, and the names and the true signatures of the individuals authorized to execute, deliver and perform, as appropriate the Guaranty and all other Loan Documents to be delivered by it hereunder; and (ii) a good standing and tax good standing certificate for the Acquired Company issued by the Secretary of State (or similar, applicable Governmental Authority) of its state of organization and each state where the Acquired Company is qualified to do business as a foreign corporation or partnership as of a date within five days of the initial Acquisition Loan Borrowing Date in the case of the certificates for the Acquired Company issued by its state of organization, and within 30 days of the initial Acquisition Loan Borrowing Date in all other cases; (f) Legal Opinion. An opinion of counsel to the Acquired Company and its Subsidiaries and addressed to the Agent and the Banks, in a form reasonably acceptable to the Agent together with reliance letters with respect to the opinions delivered at the closing of the Contico Acquisition; (g) Financial Statements. The Agent shall have received and, in the case of clause (ii), approved in its reasonable discretion: (i) unaudited interim financial statements for Contico through November 30, 1998; and (ii) an estimated pro forma balance sheet of the Company and its Subsidiaries as of December 31, 1998, giving effect to the Contico Acquisition and the transactions contemplated by this Agreement; (h) Certificate. A certificate signed by a Responsible Officer, dated as of the Borrowing Date of the initial Acquisition Loans, stating that, after giving effect to the Contico Acquisition: (i) the representations and warranties contained in Article VI are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the making of the Acquisition Loans; and (iii) there has occurred since May 31, 1998, (a) no material adverse change in, or a material adverse effect upon, the operations, financial condition or prospects of the Acquired Company or the businesses represented by the Contico Assets taken as a whole; (b) a material impairment of the ability of the Acquired Company to perform under any Loan Document to which it is a party or of the ability of the Acquired Company and its Subsidiaries taken as a whole to perform under the Loan Documents to which they are a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Acquired Company or the Acquired Company and its Subsidiaries of any Loan Document to which any of them are a party; and (i) Approvals and Consents. (i) Receipt by the Agent of all governmental, shareholder, and third party consents (including Hart-Scott Rodino clearance) and approvals necessary to consummate the Contico Acquisition; (ii) expiration of the all applicable waiting periods (if any) imposed by law that could restrain, prevent or impose any material adverse conditions on the consummation of the Contico Acquisition; and (j) Other Documents. Such other approvals, opinions, documents or materials as the Agent or the Required Banks may reasonably request, including information relating to Contico, the Contico Assets, or the Acquired Company or evidence that the Acquired Company has developed and implemented procedures necessary to address the Year 2000 Problem. 5.3 Conditions to All Credit Extensions. The obligation of each Bank to make any Revolving Loan to be made by it (including its initial Revolving Loan and its initial Acquisition Loan) or to continue any Offshore Loan or convert any Base Rate Loan into an Offshore Rate Loan under Section 2.4 and the obligation of the Issuing Bank to Issue any Letter of Credit (including the initial Letter of Credit) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date, Conversion/Continuation Date or Issuance Date: (a) Notice, Application. The Agent shall have received (with, in the case of the initial Revolving Loans only, a copy for each Bank) a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable or in the case of any Issuance of any Letter of Credit, the Issuing Bank and the Agent shall have received an L/C Application or L/C Amendment Application, as required under Section 3.2; (b) Continuation of Representations and Warranties. The representations and warranties in Article VI shall be true and correct on and as of such Borrowing Date or Conversion/Continuation Date or Issuance Date with the same effect as if made on and as of such Borrowing Date or Conversion/Continuation Date or Issuance Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date) and, in the case of the initial Acquisition Loans, such representations shall be true and correct after giving effect to the Contico Acquisition; and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or continuation or conversion or Issuance. Each Notice of Borrowing, Notice of Conversion/Continuation and L/C Application or L/C Amendment Application submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date, Conversion/Continuation Date, or Issuance Date, as applicable, that the conditions in this Section 5.3 are satisfied. ARTICLE VI. REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 6.1 Corporate Existence and Power. The Company and each of its Restricted Subsidiaries: (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation, partnership, or limited liability company and is licensed 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 or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in clause (c) or clause (d), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 6.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company or any of the Guarantors of this Agreement and each other Loan Document to which such Person is party, have been duly authorized by all necessary corporate, partnership, or limited liability company action, and do not and will not: (a) contravene the terms of any of that Person's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its property is subject; or (c) violate any Requirement of Law. 6.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company or any of the Guarantors of the Agreement or any other Loan Document. 6.4 Binding Effect. This Agreement and each other Loan Document to which the Company or any Guarantor is a party constitute the legal, valid and binding obligations of the Company and any of the Guarantors to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 6.5 Litigation. There are no actions, suits, proceedings, claims or disputes pending, or to the knowledge of the Company after due investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) except as specifically disclosed in Schedule 6.5, would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 6.6 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under subsection 9.1(e). 6.7 ERISA Compliance. Except as specifically disclosed in Schedule 6.7: (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and to the best knowledge of the Company, nothing has occurred which would cause the loss of such qualification. The Company and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the knowledge of Company after due investigation, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur that would reasonably be expected to result in a Material Adverse Effect; (ii) no Pension Plan has any Unfunded Pension Liability in an aggregate amount for the Company and its ERISA Affiliates in excess of $3,000,000; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 6.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 7.12 and Section 8.7. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. 6.9 Title to Properties. The Company and each Restricted Subsidiary have good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of their respective businesses, except for such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. As of the Closing Date, the property of the Company and its Restricted Subsidiaries is subject to no Liens, other than Permitted Liens. 6.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Company or any Subsidiary that would, if made, have a Material Adverse Effect. 6.11 Financial Condition. (a) The audited consolidated financial statements of the Company and its Subsidiaries dated December 31, 1997, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date, and the unaudited quarterly financial statements of the Company and its Subsidiaries dated June 30, 1998, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal quarter ended on that date: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, subject, in the case of quarterly financial statements, to ordinary, good faith year end audit adjustments; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 6.11, show all material indebtedness and other liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) Since December 31, 1997, there has been no Material Adverse Effect. 6.12 Environmental Matters. The Company from time to time reviews the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof the Company has reasonably concluded that, except as specifically disclosed in Schedule 6.12, neither such Environmental Claims nor, to the knowledge of the Company after due inquiry, compliance with such Environmental Laws could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.13 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 6.14 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 6.15 Copyrights, Patents, Trademarks and Licenses, etc. The Company or its Restricted Subsidiaries own or are licensed or otherwise have the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person. To the knowledge of the Company after due investigation, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company or any Subsidiary infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 6.5, no claim or litigation regarding any of the foregoing is pending or, to the knowledge of the Company after due investigation, threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Company after due investigation, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect. 6.16 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in part (a) of Schedule 6.16 hereto and has no equity investments in any other corporation or entity other than those specifically disclosed in part (b) of Schedule 6.16. Each Restricted Subsidiary that is a Material Subsidiary (other than the Non-Guarantor Subsidiaries, except as provided in the last sentence of Section 7.13) has fully complied with Section 7.13. Part (c) of Schedule 6.16 lists all Guarantors as of the Closing Date. 6.17 Insurance. Except as specifically disclosed in Schedule 6.17, the properties of the Company and its Restricted Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Restricted Subsidiary operates. 6.18 Swap Obligations. Neither the Company nor any of its Restricted Subsidiaries has incurred any outstanding obligations under any Swap Contracts, other than Permitted Swap Obligations. The Company has undertaken its own independent assessment of its consolidated assets, liabilities and commitments and has considered appropriate means of mitigating and managing risks associated with such matters and has not relied on any swap counterparty or any Affiliate of any swap counterparty in determining whether to enter into any Swap Contract. 6.19 Full Disclosure. None of the representations or warranties made by the Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Company to the Banks prior to the Closing Date including, to the Company's knowledge after due inquiry, information regarding Contico, the Contico Assets, or the Acquired Company or its Subsidiaries), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. All financial projections prepared by the Company and provided to the Agent or to any Bank hereunder or in connection with such offering and disclosure materials have been prepared in good faith and were believed by the Company to be reasonable based on information possessed by the Company at the time furnished. 6.20 Y2K. The Company has (i) initiated a review and assessment of all areas within its and each of its Restricted Subsidiaries' business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Company or any of its Restricted Subsidiaries or its suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) as of the Closing Date, implemented that plan in accordance with that timetable. The Company reasonably believes that all computer applications (including those of its suppliers and vendors) that are material to its or any of its Restricted Subsidiaries' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. ARTICLE VII. AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, unless the Required Banks waive compliance in writing: 7.1 Financial Statements. The Company shall deliver to the Agent and each Bank, in form and detail satisfactory to the Agent and the Required Banks: (a) as soon as available, but not later than 90 days after the end of each fiscal year (commencing with the fiscal year ended December 31, 1998), a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Deloitte & Touche or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records; (b) as soon as available, but not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended March 31, 1999), a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and its Subsidiaries; (c) as soon as available, but not later than 90 days after the end of each fiscal year (commencing with the fiscal year ended December 31, 1998), a copy of an unaudited consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidating statement of income and shareholders' equity for such year, certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 7.1(a); and (d) as soon as available, but not later than 90 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended March 31, 1999), a copy of the unaudited consolidating balance sheets of the Company and its Subsidiaries, and the related consolidating statements of income, shareholders' equity and cash flows for such quarter, all certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 7.1(b). 7.2 Certificates; Other Information. The Company shall furnish to the Agent and each Bank: (a) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and (b), a Compliance Certificate executed by a Responsible Officer, accompanied by calculations in reasonable detail evidencing the elimination of items attributable to Unrestricted Subsidiaries from the financial statements delivered pursuant to Section 7.1; (b) promptly, copies of all audit reports and management audit letters delivered by the Independent Auditor to the Company; (c) promptly, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Restricted Subsidiary may make to, or file with, the SEC; (d) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary (including information regarding financial position, projections or business prospects of the Company and the Restricted Subsidiaries) as the Agent, at the request of any Bank, may from time to time reasonably request; and (e) promptly upon receipt thereof, copies of all notices or other written information (including financial statements) received under the Purchase Agreement by the Company or the Acquired Company before the closing of the Contico Acquisition and simultaneously with the giving thereof, copies of each notice given by the Company or the Acquired Company thereunder before the closing of the Contico Acquisition. 7.3 Notices. The Company shall promptly notify the Agent and each Bank: (a) of the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that foreseeably will become a Default or Event of Default; (b) of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Restricted Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Restricted Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Restricted Subsidiary; including pursuant to any applicable Environmental Laws; (c) of the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 30 days after such event), and deliver to the Agent and each Bank a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event: (i) an ERISA Event (except with respect to an ERISA Event concerning a Mutiemployer Plan, in which event the Company shall provide such notice as soon as practicable, but in any event within 10 days, after receiving notice of the such ERISA Event); (ii) a material increase in the Unfunded Pension Liability of any Pension Plan; (iii) the adoption of, or the commencement of material contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability. (d) of any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries; (e) upon the request from time to time of the Agent, the Swap Termination Values, together with a description of the method by which such values were determined, relating to any then-outstanding Swap Contracts to which the Company or any of its Restricted Subsidiaries is party; and (f) until the closing of the Acquisition Loans and in each case if known by a Responsible Officer of the Company, of (a) any material adverse change in, or a material adverse effect upon, the operations, financial condition or prospects of the Acquired Company or the businesses represented by the Contico Assets taken as a whole; (b) any material impairment of the ability of the Acquired Company to perform under any Loan Document to which it will be a party or of the ability of the Acquired Company and its Subsidiaries taken as a whole to perform under the Loan Documents to which it or they will be a party; and (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Acquired Company or the Acquired Company and its Subsidiaries of any Loan Document to which it or they will be a party. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 7.3(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been (or foreseeably will be) breached or violated. 7.4 Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Restricted Subsidiary to: (a) preserve and maintain in full force and effect its existence and good standing under the laws of its state or jurisdiction of incorporation or organization; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect; in each case except in connection with transactions permitted by Section 8.3 and dispositions of assets permitted by Section 8.2. 7.5 Maintenance of Property. The Company shall maintain, and shall cause each Restricted Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect and except as permitted by Section 8.2. The Company and each Restricted Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. 7.6 Insurance. The Company shall maintain, and shall cause each Restricted Subsidiary to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons. 7.7 Y2K. The Company will promptly notify the Agent in the event the Company discovers or determines that any computer application (including those of its suppliers and vendors) that is material to its or any of its Restricted Subsidiaries business and operations will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. 7.8 Compliance with Laws. The Company shall comply, and shall cause each Subsidiary to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. 7.9 Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code; provided, however, that any such Plan may be voluntarily terminated in accordance with ERISA and the Code so long as such termination could not reasonably be expected to give rise to aggregate liability of the Company and its Subsidiaries in excess of $3,000,000 or otherwise have a Material Adverse Effect. 7.10 Inspection of Property and Books and Records. The Company shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall permit, and shall cause each Subsidiary to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the expense of the Company and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided, however, when an Event of Default exists the Agent or any Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice. 7.11 Environmental Laws. The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in material compliance with all Environmental Laws. 7.12 Use of Proceeds. The Company shall use the proceeds of the Loans (a) to refinance amounts outstanding under the Existing Credit Agreement, (b) to pay the cash portion of the purchase price of the Contico Acquisition and fees and expenses incurred in connection therewith, and (c) for working capital, capital expenditures, and other general corporate purposes, including for purposes of undertaking other Permitted Acquisitions, not in contravention of any Requirement of Law or of any Loan Document. 7.13 New Subsidiaries. If the Company or any of its Subsidiaries at any time after the date hereof acquires, forms or establishes any Restricted Subsidiary that is a Material Subsidiary (other than a Subsidiary that is not organized in the United States), or if any Restricted Subsidiary that has not executed a Guaranty becomes a Material Subsidiary (other than a Subsidiary that is not organized in the United States), the Company shall cause any such Restricted Subsidiary to promptly execute a Guaranty substantially in the form of Exhibit G and to provide the Agent and each Bank with such evidence of due authorization, execution, and delivery of such Guaranty as the Agent or the Required Banks may reasonably require. 7.14 Purchase Agreement. The Company shall perform in all material respects its obligations under the Purchase Agreement. ARTICLE VIII. NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, unless the Required Banks waive compliance in writing: 8.1 Limitation on Liens. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien existing on property of the Company or any Restricted Subsidiary on the Closing Date and set forth in Schedule 8.1 securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, provided that no notice of lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens on the property of the Company or any of its Restricted Subsidiaries securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business, provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect; (g) Liens consisting of judgment or judicial attachment liens, provided that the enforcement of such Liens is effectively stayed and all such liens in the aggregate at any time outstanding for the Company and its Restricted Subsidiaries do not exceed $2,000,000; (h) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and its Restricted Subsidiaries; (i) Liens on assets of other Persons that become Restricted Subsidiaries after the date of this Agreement so long as the Liens described in this subsection 8.1(i) existed at the time the respective corporations became Restricted Subsidiaries, were not created in anticipation thereof, and do not secure aggregate Indebtedness outstanding at any one time in excess of $5,000,000; (j) purchase money security interests on any property acquired or held by the Company or its Restricted Subsidiaries securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property; provided that (i) any such Lien attaches to such property concurrently with or within 120 days after the acquisition thereof, (ii) such Lien attaches solely to the property so acquired in such transaction, (iii) the principal amount of the debt secured thereby does not exceed 100% of the cost of such property, and (iv) the principal amount of the Indebtedness secured by any and all such purchase money security interests shall not at any time exceed $7,000,000, (iv) no Default or Event of Default shall exist at the time the Indebtedness secured by such purchase money security interests was incurred or would arise as a result thereof; (k) Liens securing obligations in respect of Capital Leases on assets subject to such leases, provided that such Capital Leases are otherwise permitted hereunder and no Default or Event of Default shall exist at the time the obligations in respect of such Capital Leases arose or would arise as a result thereof; (l) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Company or any Restricted Subsidiary to provide collateral to the depository institution; (m) Liens consisting of pledges of cash collateral or government securities to secure on a mark-to-market basis Permitted Swap Obligations only, provided that (i) the counterparty to any Swap Contract relating to such Permitted Swap Obligation is under a similar requirement to deliver similar collateral from time to time to the Company or the Restricted Subsidiary party thereto on a mark-to-market basis; and (ii) the aggregate value of such collateral so pledged by the Company and its Restricted Subsidiaries together in favor of all counterparties does not at any time exceed $5,000,000; (n) Liens on the property comprising the Woods Industries manufacturing facility to secure Indebtedness permitted by subsection 8.5(h); and (o) Liens not otherwise permitted hereunder securing obligations in an aggregate amount not to exceed $3,000,000. 8.2 Disposition of Assets. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) dispositions of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business; (b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; (c) dispositions of inventory or equipment by the Company or any Restricted Subsidiary to the Company or any Restricted Subsidiary pursuant to reasonable business requirements; and (d) dispositions not otherwise permitted hereunder which are made for fair market value; provided, that (i) such dispositions are of assets of Subsidiaries in the Machinery Manufacturing Group or assets associated with lines of business operated at the Closing Date by Hamilton Precision Metals, Inc., Savannah Energy Construction Company, Inc., Savannah Energy Systems Company, Inc., or assets owned at the time of disposition by any Unrestricted Subsidiary, or of Investments in Unrestricted Subsidiaries or of Investments listed in Schedule 8.2, or, (ii) if such dispositions are of assets other than those in the preceding subsection 8.2(d)(i), (1) at the time of such disposition, no Event of Default shall exist or shall result from such disposition, (2) the aggregate sales price from such disposition shall be paid in cash, (3) the aggregate value of all assets so sold by the Company and its Restricted Subsidiaries, together, shall not exceed in any fiscal year 15% of the book value of the consolidated assets of the Company and its Restricted Subsidiaries, and (4) prior to becoming contractually committed to make any such disposition, the Company shall have delivered to the Banks pro forma consolidated financial statements for the Company and its Restricted Subsidiaries accompanied by a Compliance Certificate signed by a Responsible Officer certifying that at the end of the last fiscal quarter for which such financial statements and Compliance Certificate have been delivered pursuant to Sections 7.1 and 7.2, (A) the Company and its Restricted Subsidiaries would have been in compliance with the conditions in preceding clauses (1)-(3) with respect to the proposed disposition, and (B) after giving pro forma effect for four trailing quarters to such disposition by excluding EBITDA with respect to the assets so sold, the Company and its Restricted Subsidiaries would have been in compliance with the financial covenants set forth in Sections 8.18, 8.19, 8.20 and 8.21. 8.3 Consolidations and Mergers. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary may merge with the Company, provided that the Company shall be the continuing or surviving corporation, or with any one or more Restricted Subsidiaries, provided that if any transaction shall be between an Unrestricted Subsidiary and a Restricted Subsidiary, the Restricted Subsidiary shall be the continuing or surviving corporation, and if between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary shall be the continuing or surviving corporation; (b) any Restricted Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Wholly Owned Subsidiary that is a Restricted Subsidiary; and (c) the Company or any Restricted Subsidiary may merge with a Person that is not a Subsidiary of the Company in order to consummate an Acquisition not prohibited herein, and any Restricted Subsidiary may merge with a Person that is not a Subsidiary of the Company in order to consummate a sale of assets not prohibited herein, provided that in any merger involving the Company, the Company shall be the continuing or surviving corporation and in any merger intended to consummate an Acquisition, the resulting Person shall be a Wholly Owned Subsidiary and a Restricted Subsidiary. 8.4 Loans and Investments. The Company shall not purchase or acquire, or suffer or permit any Restricted Subsidiary to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person, or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, any Person including any Affiliate of the Company (together, "Investments"), except for: (a) Investments held by the Company or any Restricted Subsidiary in the form of cash equivalents or short term marketable securities; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) Investments existing on the date hereof as set forth on Schedule 8.4; (d) Investments (including Intercompany Advances) in Unrestricted Subsidiaries, Non-Guarantor Subsidiaries and SESCO (calculated on the initial investment amount but adjusted to take into account any proceeds received by the Company or any Restricted Subsidiary that is a Wholly Owned Subsidiary on a liquidation or repayment of any such Investments) as long as (i) such Investments made after the Closing Date do not exceed at any time, together with Investments made after the Closing Date to consummate Acquisitions of Unrestricted Subsidiaries or Non- Guarantor Subsidiaries pursuant to subsection 8.4(f), 10% of the Net Worth, and (ii) at the time any such Investment is made, no Default or Event of Default exists or would result from such Investment; (e) Intercompany Advances by the Company to any Restricted Subsidiary that is a Wholly Owned Subsidiary other than SESCO or any Non- Guarantor Subsidiary or by any of its Restricted Subsidiaries to another Restricted Subsidiary that is a Wholly Owned Subsidiary other than SESCO or any Non-Guarantor Subsidiary; (f) Investments incurred in order to consummate Acquisitions, if and only if with respect to such Acquisitions (i) Persons acquired are engaged in substantially the same lines of business as the Electrical/Electronic Group or the Maintenance Group, (ii) unless prior approval is granted by the Required Banks, (1) the cash purchase price (including assumed Indebtedness) of any single Acquisition shall not exceed $25,000,000, (2) the aggregate cash purchase price (including assumed Indebtedness) of all Acquisitions in any 12 month period shall not exceed $50,000,000 (it being agreed for purposes of clauses (1) and (2) that stock issued in conjunction with any Acquisition shall not be considered as a part of the "cash purchase price"), (3) any Person to be acquired must have positive EBITDA for the four fiscal quarters preceding the Acquisition date, and (4) prior to becoming contractually committed to make any Acquisition, the Company shall have delivered to the Banks pro forma consolidated financial statements for the Company and its Restricted Subsidiaries accompanied by a Compliance Certificate signed by a Responsible Officer certifying that (A) at the time any such Acquisition is consummated, the Company and its Restricted Subsidiaries will be in compliance with the conditions in preceding clauses (1)-(3), and (B) after giving pro forma effect to any such Acquisition, the Company and its Restricted Subsidiaries will remain in compliance with the financial covenants set forth in Sections 8.18, 8.19, 8.20 and 8.21 (giving effect to the EBITDA of the acquired Person as and to the extent provided in the definition of EBITDA), (iii) such Acquisitions are undertaken in accordance with all applicable Requirements of Law; (iv) no Default or Event of Default exists or would result from any such Acquisition, and (v) the prior, effective consent or approval of such Acquisition has been given by the board of directors or equivalent governing body of the Person acquired; (g) Investments constituting Permitted Swap Obligations or payments or advances under Swap Contracts relating to Permitted Swap Obligations; (h) the Contico Acquisition for a total cash consideration (including deferred purchase price) not to exceed $140,000,000.00 and for total consideration not to exceed $175,000,000.00; and (i) commitments to make Acquisitions not otherwise permitted hereunder as long as such commitments are conditioned upon the consent of the Required Banks. 8.5 Limitation on Indebtedness. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement; (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 8.8; (c) Indebtedness existing on the Closing Date and set forth in Schedule 8.5; (d) Indebtedness secured by Liens permitted by subsections 8.1(i) or (j) in an aggregate amount outstanding not to exceed $12,000,000; (e) Indebtedness secured by Liens permitted by subsection 8.1(m) in an aggregate amount outstanding not to exceed $5,000,000; (f) Intercompany Advances permitted by Section 8.4(e); (g) Indebtedness incurred in connection with leases permitted pursuant to Section 8.10; (h) Non-recourse Indebtedness of Woods Industries in an aggregate principal amount not to exceed $1,200,000; and (i) Indebtedness not otherwise permitted hereunder in an aggregate principal amount not to exceed $5,000,000. 8.6 Transactions with Affiliates. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, enter into any transaction with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Restricted Subsidiary. 8.7 Use of Proceeds. (a) The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, use any portion of the Loan proceeds or any Letter of Credit, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. (b) The Company shall not, directly or indirectly, use any portion of the Loan proceeds or any Letter of Credit (i) knowingly to purchase Ineligible Securities from Montgomery during any period in which Montgomery makes a market in such Ineligible Securities, (ii) knowingly to purchase during the underwriting or placement period Ineligible Securities being underwritten or privately placed by Montgomery, or (iii) to make payments of principal or interest on Ineligible Securities underwritten or privately placed by Montgomery and issued by or for the benefit of the Company or any Affiliate of the Company. The Montgomery is a registered broker-dealer and permitted to underwrite and deal in certain Ineligible Securities; and "Ineligible Securities" means securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. 24, Seventh), as amended. 8.8 Contingent Obligations. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the ordinary course of business; (b) Permitted Swap Obligations (excluding any Guaranty Obligation in respect thereof); (c) Contingent Obligations of the Company and its Restricted Subsidiaries existing as of the Closing Date and listed in Schedule 8.8; (d) Contingent Obligations with respect to Surety Instruments incurred in the ordinary course of business and not exceeding at any time $3,000,000 in the aggregate in respect of the Company and its Restricted Subsidiaries together; (e) Contingent Obligations under the Loan Documents, including L/C Obligations; and (f) Contingent Obligations not otherwise permitted hereunder in an aggregate amount not to exceed $1,000,000. 8.9 Joint Ventures. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to enter into any Joint Venture, other than in businesses related to those carried on by the Company and its Restricted Subsidiaries on the Closing Date or those related to the Contico Assets. 8.10 Lease Obligations. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, create or suffer to exist any obligations for the payment of rent for any property under any Capital Lease, except for Capital Leases entered into by the Company or any Restricted Subsidiary to finance the acquisition of equipment; provided that the aggregate annual rental payments for all such Capital Leases shall not exceed in any fiscal year $3,000,000. 8.11 Restricted Payments. The Company shall not, and shall not suffer or permit any Subsidiary to, declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding; except that the Company and any Restricted Subsidiary may: (a) declare and make dividend payments or other distributions payable solely in its common stock; (b) purchase, redeem or otherwise acquire shares of its common stock or warrants or options to acquire any such shares with the proceeds received from the substantially concurrent issue of new shares of its common stock; provided that, immediately after giving effect to such proposed action, no Default or Event of Default would exist; (c) repurchase shares of its capital stock in an aggregate amount not to exceed either (i) $5,000,000 in any 12 month period or (ii) $10,000,000 since the Closing Date ("Permitted Stock Repurchases"); provided, that, immediately after giving effect to such proposed action, no Default or Event of Default would exist; and (d) declare or pay cash dividends to the holders of its equity interests, including on account of the Preferred Units, provided, that, immediately after giving effect to such proposed action, no Default or Event of Default would exist. 8.12 ERISA. The Company shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Company in an aggregate amount in excess of $3,000,000; or (b) engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 8.13 Change in Business. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, engage in any material line of business substantially different from those lines of business carried on by the Company and its Subsidiaries on the date hereof. 8.14 Accounting Changes. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change the fiscal year of the Company or of any Subsidiary. 8.15 Amendment to Purchase Documents. The Company shall not take any action or make any agreement with any party to the Purchase Agreement which will modify, change, alter or amend any of the terms or conditions thereof in any respect that would impair the rights of the Banks under the Loan Documents without the express written consent of the Required Banks. 8.16 Limitation on Negative Pledge Clauses. The Company shall not, and shall not suffer or permit any Restricted Subsidiary to, enter into any agreement with any Person other than the Agent and the Banks pursuant to this Agreement or any of the other Loan Documents which prohibits or limits the ability of the Company or any Restricted Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired; provided, that the Company may enter into such an agreement in connection with any Permitted Liens described in subsections 8.1 (j) and (k) when such prohibition or limitation is by its terms effective only against the assets subject to such Permitted Lien. 8.17 Limitation on Restrictions on Subsidiary Dividends and Other Distributions. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer 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 its Capital Stock or any other interest or participation in its profits owned by the Company or any Restricted Subsidiary, or pay any Indebtedness owed to the Company or a Restricted Subsidiary, (b) make loans or advances to the Company, or (c) transfer any of its properties or assets to the Company, except for such encumbrances or restrictions existing under or by reasons of (i) applicable law, (ii) this Agreement, and (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of the Company or a Restricted Subsidiary. 8.18 Minimum Net Worth. The Company shall not permit Net Worth, measured as of the end of each fiscal quarter, to be less than the sum of (a) $164,477,100 if the Contico Acquisition occurred before the end of such fiscal quarter or $130,877,100 if the Contico Acquisition has not so occurred, plus (b) 50% of quarterly net income (with no deduction for losses) for the fiscal quarter ending December 31, 1998 and each fiscal quarter thereafter, plus (c) 75% of the net proceeds to the Company of new capital stock or other equity interests issued by the Company or any Restricted Subsidiary after the Closing Date, minus (d) the actual amount of Permitted Stock Repurchases after the Closing Date. 8.19 Maximum Leverage Ratio. The Company shall not permit its Leverage Ratio to be greater than (i) as of the end of any fiscal quarter ending before the Contico Acquisition, 2.50 to 1.00, and (ii) as of the end of any fiscal quarter ending on or after the Contico Acquisition, the ratio set forth below: Quarters Ending Maximum Leverage Ratio Through September 30, 1999 3.50 to 1.00 December 31, 1999 through March 31, 2000 3.25 to 1.00 June 30, 2000 through Facility B Revolving Termination Date 3.00 to 1.00 8.20 Minimum Fixed Charge Coverage Ratio. The Company shall not permit its Fixed Charge Coverage Ratio, as of the end of any fiscal quarter to be less than the ratio set forth below: Quarters Ending Minimum Fixed Charge Coverage Ratio Through September 30, 2000 1.10 to 1.00 December 31, 2000 through Facility B Revolving Termination Date 1.25 to 1.00 8.21 Quarterly Losses. The Company shall not have a pre-tax loss in any two consecutive fiscal quarters. ARTICLE IX. EVENTS OF DEFAULT 9.1 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan or of any L/C Obligation, or (ii) within 3 days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company or any Guarantor made or deemed made herein, in any other Loan Document or in the Existing Credit Agreement, or which is contained in any certificate, document or financial or other statement by the Company, any Guarantor, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document or the Existing Credit Agreement, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. (i) The Company or any Guarantor fails to perform or observe any term, covenant or agreement contained in either of Sections 7.1 or 7.2 and such failure continues for 30 days, or (ii) the Company or any Guarantor fails to perform or observe any term, covenant or agreement contained in either of Sections 7.3 or 7.9 or in Article VIII; or (d) Other Defaults. The Company or any Guarantor fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer knew of such failure or (ii) the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. (i) The Company or any Guarantor (A) fails to make any payment in respect of any Indebtedness or Contingent Obligation (other than in respect of Swap Contracts), having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $5,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (B) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (1) any event of default under such Swap Contract as to which the Company or any Guarantor Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (2) any Termination Event (as so defined) as to which the Company or any Guarantor Subsidiary is an Affected Party (as so defined), and, in either event, the Swap Termination Value owed by the Company or such Guarantor as a result thereof is greater than $5,000,000; or (f) Insolvency; Voluntary Proceedings. The Company or any Guarantor (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Guarantor, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Guarantor properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Guarantor admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Guarantor acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $3,000,000; the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $3,000,000; or (iii) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $3,000,000; or (i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $5,000,000 or more; or (j) Unstayed or Unvacated Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $1,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 10 days after the entry thereof; or (k) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (l) Change of Control. There occurs any Change of Control; or (m) Adverse Change. There occurs a Material Adverse Effect; or (n) Guarantor Defaults. Any Guarantor fails in any material respect to perform or observe any term, covenant or agreement in the Guaranty; or any Guaranty is for any reason partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise ceases to be in full force and effect, or any Guarantor or any other Person contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder; or (o) SESCO. The occurrence and continuance of an "Event of Default" as defined in the SESCO Service Agreement by SESCO or the Company that would entitle (upon the granting of any necessary consents) the Resource Recovery Development Authority for the City of Savannah or the Trustee (as defined in the SESCO Service Agreement) to terminate the SESCO Service Agreement; or (p) Purchase Agreement. Contico fails to make any indemnity payments to or on behalf of the Company pursuant to the terms of the Purchase Agreement, in an aggregate amount of more than $1,000,000 when due and such failure continues after the applicable grace or notice period, if any, specified in the Purchase Agreement. 9.2 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Required Banks, (a) declare the commitment of each Bank to make Loans and any obligation of the Issuing Bank to Issue Letters of Credit to be terminated, whereupon such commitments and obligation shall be terminated; (b) declare an amount equal to the maximum aggregate amount that is or at any time thereafter may become available for drawing under any outstanding Letters of Credit (whether or not any beneficiary shall have presented, or shall be entitled at such time to present, the drafts or other documents required to draw under such Letters of Credit) to be immediately due and payable, and declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 9.1 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans and any obligation of the Issuing Bank to Issue Letters of Credit shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent, the Issuing Bank or any Bank. 9.3 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. 9.4 Certain Financial Covenant Defaults. In the event that, after taking into account any extraordinary charge to earnings taken or to be taken as of the end of any fiscal period of the Company (a "Charge"), and if solely by virtue of such Charge, there would exist an Event of Default due to the breach of any of Sections 8.18, 8.19, 8.20 or 8.21, as of such fiscal period end date, such Event of Default shall be deemed to arise upon the earlier of (a) the date after such fiscal period end date on which the Company announces publicly it will take, is taking or has taken such Charge (including an announcement in the form of a statement in a report filed with the SEC) or, if such announcement is made prior to such fiscal period end date, the date that is such fiscal period end date, and (b) the date the Company delivers to the Agent its audited annual or unaudited quarterly financial statements in respect of such fiscal period reflecting such Charge as taken. ARTICLE X. THE AGENT 10.1 Appointment and Authorization; "Agent". (a) Each Bank hereby irrevocably (subject to Section 10.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) The Issuing Bank shall act on behalf of the Banks with respect to any Letters of Credit Issued by it and the documents associated therewith until such time and except for so long as the Agent may agree at the request of the Required Banks to act for such Issuing Bank with respect thereto; provided, however, that the Issuing Bank shall have all of the benefits and immunities (i) provided to the Agent in this Article X with respect to any acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit Issued by it or proposed to be Issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Agent", as used in this Article X, included the Issuing Bank with respect to such acts or omissions, and (ii) as additionally provided in this Agreement with respect to the Issuing Bank. 10.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 10.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action 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 for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 10.4 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The 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 Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Sections 5.1 and 5.2, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 10.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Banks in accordance with Article IX; provided, however, that unless and until the Agent has received any such request, the 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 or in the best interest of the Banks. 10.6 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent- Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, 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 Company and its Subsidiaries hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 10.7 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 10.8 Agent in Individual Capacity. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though Bank of America were not the Agent or the Issuing Bank hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, Bank of America or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, Bank of America shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent or the Issuing Bank. 10.9 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor administrative agent for the Banks which successor administrative agent shall be approved by the Company unless an Event of Default exists. If no successor administrative agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor administrative agent from among the Banks. Upon the acceptance of its appointment as successor administrative agent hereunder, such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor administrative agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article X and Sections 11.4 and 11.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor administrative agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor administrative agent as provided for above. Notwithstanding the foregoing, however, Bank of America may not be removed as the Agent at the request of the Required Banks unless Bank of America shall also simultaneously be replaced as "Issuing Bank" hereunder pursuant to documentation in form and substance reasonably satisfactory to Bank of America. 10.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code, such Bank agrees with and in favor of the Agent and the Company, to deliver to the Agent and the Company: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent and the Company of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent and the Company of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent and the Company will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent or the Company may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent or the Company, then the Agent or the Company may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent or the Company did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent or the Company of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent and the Company fully for all amounts paid, directly or indirectly, by the Agent or the Company as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent or the Company under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. (f) For any period in which a Bank has failed to provide the Agent and the Company with the appropriate form in accordance with subsection 10.10(a), such Bank shall not be entitled to any payment, payment increase, or indemnification under Section 4.1 with respect to Taxes imposed by the United States; provided, however, that should a Bank that is otherwise exempt from or subject to a reduced rate of withholding become subject to Taxes because of its failure to deliver a form required hereunder, the Company and the Agent shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. 10.11 Managing Agent, etc. None of the Banks identified on the facing page or signature pages of this Agreement as a "managing agent," "syndication agent" or "lead arranger" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as a "managing agent," "syndication agent" or "lead arranger" shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking such action hereunder. 10.12 Release of Guaranty. The Banks hereby authorize the Agent to release from time to time any Subsidiary from its obligations under its Guaranty and to release the stock of any Subsidiary held as collateral hereunder in connection with the disposition of such Subsidiary in a transaction not prohibited hereunder. ARTICLE XI. MISCELLANEOUS 11.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any applicable Restricted Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any such Commitment terminated pursuant to Section 9.2); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document, including prepayments specified in Section 2.7, or reduce the amount due to the Banks (or any of them) on any such date; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (iii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.14, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Bank in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Issuing Bank under this Agreement or any L/C-Related Document relating to any Letter of Credit Issued or to be Issued by it, (ii) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (iii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 11.2 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 11.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 11.2; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Articles II, III or X to the Agent shall not be effective until actually received by the Agent, and notices pursuant to Article III to the Issuing Bank shall not be effective until actually received by the Issuing Bank at the address specified for the "Issuing Bank" on the applicable signature page hereof. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans and L/C Obligations shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 11.4 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse Bank of America (including in its capacity as Agent and Issuing Bank) within five Business Days after demand (subject to subsection 5.1(e)) for all costs and expenses incurred by Bank of America (including in its capacity as Agent and Issuing Bank) in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by Bank of America (including in its capacity as Agent and Issuing Bank) and any Bank with respect thereto; and (b) pay or reimburse the Agent, Montgomery and each Bank within five Business Days after demand (subject to subsection 5.1(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). 11.5 Company Indemnification. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans, the termination of the Letters of Credit and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement, the Existing Credit Agreement, or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement, the Existing Credit Agreement, or the Loans or Letters of Credit or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. 11.6 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 11.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 11.8 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Company at all times other than during the existence of an Event of Default and the Agent and the Issuing Bank, which consent of the Company shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company, the Agent or the Issuing Bank shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments, the L/C Obligations and the other rights and obligations of such Bank hereunder, in a minimum amount of the Minimum Assignment Amount (as defined below); provided, however, that (1) such assignment shall be null and void if not undertaken on a pro rata basis between Facility A Loans and Commitments and Facility B Loans and Commitments, and (2) the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $3,500. The phrase "Minimum Assignment Amount" shall mean, the lesser of (x) $10,000,000, unless the Acquisition Loans are not funded by on or before February 26, 1999, in which case, $5,000,000, and (y) the assigning Bank's remaining combined Commitments hereunder. (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above- referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Promptly after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with subsection 11.8(a)), the Company shall execute and deliver to the Agent, if Notes have been made, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) such participation shall be null and void if not undertaken on a pro rata basis between Facility A Loans and Commitments and Facility B Loans and Commitments, (ii) the originating Bank's obligations under this Agreement shall remain unchanged, (iii) the originating Bank shall remain solely responsible for the performance of such obligations, (iv) the Company, the Issuing Bank and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (v) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 11.1. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 4.1, 4.3 and 11.5 as though it were also a Bank hereunder, and not have any rights under this Agreement, or any of the other Loan Documents, and all amounts payable by the Company hereunder shall be determined as if such Bank had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off 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 Bank under this Agreement. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it, if any, in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 11.9 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non- confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. 11.10 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 11.11 Automatic Debits of Fees. With respect to any facility fee, arrangement fee, letter of credit fee or other fee, or any other cost or expense (including Attorney Costs) due and payable to the Agent, the Issuing Bank, Bank of America or Montgomery under the Loan Documents, the Company hereby irrevocably authorizes Bank of America to debit any deposit account of the Company with Bank of America in an amount such that the aggregate amount debited from all such deposit accounts does not exceed such fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount of the fee or other cost or expense then due, such debits will be reversed (in whole or in part, in Bank of America's sole discretion) and such amount not debited shall be deemed to be unpaid. No such debit under this Section shall be deemed a set-off. 11.12 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 11.13 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 11.14 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 11.15 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 11.16 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND ANY NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. 11.17 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 11.18 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof, except that the representations and warranties (as of the dates made and deemed made) and the indemnities of the Company set forth in the Existing Credit Agreement and the "Loan Documents" as defined therein shall, in each case, survive the execution and delivery of this Agreement. 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. KATY INDUSTRIES, INC. By: /S/ Stephen P. Nicholson --------------------------------- Name: Stephen P. Nicholson Title: Vice President of Finance and Chief Financial Officer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent, Issuing Bank, and a Bank By: /S/ Dan Killian --------------------------------- Name: Dan Killian Title: Vice President LASALLE NATIONAL BANK, as Managing Agent and a Bank By: /S/ Robert Kastenholz --------------------------------- Name: Robert Kastenholz Title: Group - Senior Vice President KEYBANK NATIONAL ASSOCIATION, as a Bank By: /S/ Mary K. Young --------------------------------- Name: Mary K. Young Title: Assistant Vice President MERCANTILE BANK NATIONAL ASSOCIATION, as a Bank By: /S/ David F. Higbee --------------------------------- Name: David F. Higbee Title: Vice President THE NORTHERN TRUST COMPANY, as a Bank By: /S/ Raheela Gill Anwar --------------------------------- Name: Raheela Gill Anwar Title: Vice President NORWEST BANK COLORADO NATIONAL ASSOCIATION, as a Bank By: /S/ Darlene A. Evans --------------------------------- Name: Darlene A. Evans Title: Vice President SOCIETE GENERALE, as a Bank By: /S/ Richard A. Erbert --------------------------------- Name: Richard A. Erbert Title: Vice President UNION BANK OF CALIFORNIA, N.A., as a Bank By: /S/ David W. Kinkela --------------------------------- Name: David W. Kinkela Title: Assistant Vice President UNION PLANTERS BANK, N.A., as a Bank By: /S/ Stephen R. Callow --------------------------------- Name: Stephen R. Callow Title: Vice President U.S. BANK NATIONAL ASSOCIATION, as a Bank By: /S/ William J. Sullivan --------------------------------- Name: William J. Sullivan Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----