10-K 1 FORM 10-K FOR 1994 1 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, 1994 Commission file number 1-7272 KERR GROUP, INC. ---------------- (Exact name of Registrant as specified in its charter) Delaware 95-0898810 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identi- incorporation or organization) fication Number) 1840 Century Park East, Los Angeles, California 90067 ----------------------------------------------- --------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (310) 556-2200 -------------- Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock New York Stock Exchange $1.70 Class B Cumulative Convertible Preferred Stock, Series D New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None -Continued- 2 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. [ ]. The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 7, 1995, was $28,645,000. The number of shares of the Registrant's Common Stock, $.50 par value, outstanding as of March 7, 1995, was 3,677,095. DOCUMENTS INCORPORATED BY REFERENCE
Part(s) Into Document Which Incorporated -------- ------------------ (1) Annual Report to Stockholders Part I; Part II; for the fiscal year ended Part IV December 31, 1994. With the exception of the pages of the Annual Report to Stockholders specifically incorporated by reference herein, the Annual Report to Stockholders is not deemed to be filed as a part of this Form 10-K. (2) Proxy Statement to be used in Part III connection with the Annual Meeting of Stockholders to be held on April 25, 1995. With the exception of the pages of the Proxy Statement specifically incorporated by reference herein, the Proxy Statement is not deemed to be filed as a part of this Form 10-K.
(ii) 3 KERR GROUP, INC. Form 10-K Annual Report For The Fiscal Year Ended December 31, 1994 PART I ITEM 1. BUSINESS 1. General Kerr Group, Inc. (the "Registrant"), a Delaware corporation which was founded in 1903, currently operates in two business segments: the Plastic Products segment and the Consumer Products segment. Operations in the Plastic Products segment include the manufacture and sale of a variety of plastic products, including child-resistant closures, tamper-evident closures, prescription packaging products, jars, other closures and containers and the sale of glass prescription products (the "Plastic Products Business"). Operations in the Consumer Products segment include the manufacture and sale of caps and lids and the sale of glass jars and a line of pickling spice and pectin products for home canning (the "Home Canning Supplies Business"), which together with the sale of other related products, including iced tea tumblers and beverage mugs, constitutes the "Consumer Products Business." The Plastic Products Business and the Consumer Products Business are referred to herein as "Continuing Businesses". a. Principal Products and Markets; Sales and Customers The Plastic Products segment accounted for approximately 77% of the Registrant's total net sales in 1994. Plastic closures are sold to customers in the pharmaceutical, food, distilled spirits, toiletries and cosmetics and household chemical industries. Plastic and glass prescription products are sold to drug wholesalers, drug chains and independent pharmacists. Plastic bottles and jars are sold to customers in the pharmaceutical and toiletries and cosmetics industries. Plastic products are sold nationally, principally by the Registrant's sales force. The Consumer Products Business accounted for approximately 23% of the Registrant's total net sales in 1994. 4 The Home Canning Supplies Business represents substantially all of the Consumer Products Business. The Consumer Products Business sells its products primarily through food brokers to grocery retailers, food wholesalers and mass merchandisers. No customer accounted for more than 10% of the Registrant's net sales in 1994, 1993 or 1992. b. Competition Competition in the markets in which the Plastic Products Business operates is highly fragmented and the Registrant has a number of large competitors with respect to its Plastic Products Business that compete for sales on the basis of price, service and quality of product. The Registrant believes that it is one of the three largest manufacturers of child-resistant plastic closures. The Registrant has one major competitor in the prescription products business, who has substantially larger market share than the Registrant. The Registrant also believes it is the largest manufacturer of plastic closures incorporating a tamper-evident feature for the liquor market and that it is one of the leading suppliers of single and double walled jars to the personal care and cosmetic markets. The Registrant's one major competitor in the Home Canning Supplies Business is Alltrista Corporation. The Registrant believes it has a significant share of the market for home canning caps, lids and jars. c. Backlog The Registrant does not believe that recorded sales backlog is a significant factor in its business. d. Raw Materials and Supplies; Fuel and Energy Matters The primary raw materials used by the Registrant's Plastic Products Business are resins. The Registrant has historically been able to obtain adequate supplies of these items from a number of sources. However, since resins are derived from petroleum or fossil fuel, shortages of petroleum or fossil fuel could affect the supply of resins. From time to time, the Registrant has experienced increases in the cost of resins. To the extent that the Registrant is unable to reflect such price -2- 5 increases in the price for products manufactured by it, increases in the cost of resins could have a significant impact on the results of the Registrant's operations. The Plastic Products Business, consistent with industry practice, is generally able to pass-through resin cost increases for all product lines except the prescription packaging product line. The Registrant purchases glass jars for its Home Canning Business from a single supplier under a multi-year contract. The Registrant believes that it could obtain adequate supplies of glass jars from alternate sources at reasonable prices if its current supply was interrupted. In addition to glass jars, the primary raw material used by the Registrant's Home Canning Supplies Business in the manufacture of its caps and lids is tinplate. During 1994, the Registrant was able to obtain adequate supplies of these items from a number of sources. e. Product Development, Engineering, Patents and Licensing The Registrant carries on a product development and engineering program with respect to its Plastic Products Business. Expenditures for such programs during the years ended December 31, 1994, 1993 and 1992 were approximately $3,600,000, $2,000,000 and $1,400,000, respectively. Although the Registrant owns a number of United States patents, including patents for its tamper-evident closures and certain of its child-resistant closures, it is of the opinion that no one or combination of these patents is of material importance to its business. The Registrant has granted licenses on some of its patents, although the income from these sources is not material. f. Environmental Matters; Legislation Several states have enacted recycling laws which require consumers to recycle certain items including containers, and which require product, container and resin manufacturers to promote recycling efforts. These mandatory recycling laws are not expected to have an adverse effect on the Registrant's business. The Registrant is subject to laws and regulations governing the protection of the environment,including, among others, laws and regulations governing disposal of waste, -3- 6 discharges into water and emissions into the atmosphere. The Registrant's expenditures for environmental control equipment in each of the last three years have not been material and the standards required by such regulations have not significantly affected the Registrant's operations. Registrant is a party or a potentially responsible party in several administrative proceedings and lawsuits involving liability for cleanup of certain offsite disposal facilities under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or Superfund") and similar state laws. See "Legal Proceedings". g. Employees As of December 31, 1994, the Registrant had approximately 1,100 employees, of which approximately 294 were office, supervisory and sales personnel. h. Seasonality The Registrant's sales and earnings are usually higher in the second and third calendar quarters and lower in the first and fourth calendar quarters. Most of the sales by the Home Canning Supplies Business occur in the second and third calendar quarters. In addition, substantially all returns of home canning supplies occur in the fourth calendar quarter of each year. The Registrant's Home Canning Supplies Business normally manufactures its inventory of caps and lids in anticipation of expected orders, and, consistent with practice followed in the industry, grants extended payment terms to home canning customers and accepts, subject to certain limitations, the return of unsold home canning merchandise in the fourth calendar quarter of each year. i. Working Capital In general, the working capital practices followed by the Registrant are typical of the businesses in which it operates. The seasonal nature of the Registrant's Home Canning Supplies Business requires periodic short-term borrowing by the Registrant. -4- 7 As of December 31, 1994, the Registrant had two unsecured $10,000,000 lines of credit with two banks to provide for the seasonal working capital needs of the Company. In January 1995, the Company entered into a two-year agreement with a bank to sell its trade accounts receivable on a nonrecourse basis. Under the facility, the maximum amount that can be advanced to the Company pursuant to the sale of trade accounts receivable at any time is $5,000,000 through April 30, 1995, and $10,000,000 thereafter. The Company retains collection and service responsibility, as agent for the purchaser, over any receivables sold. This facility reduced the committed amount of one of the lines of credit to $5,000,000 through April 30, 1995, at which time the line of credit terminates. In February 1995, the commitment of the other line of credit was extended to April 30, 1996. The lines of credit and accounts receivable facility, together with internally generated funds, provide the Registrant with the working capital which the Registrant believes will be sufficient to meet its anticipated needs. 2. The Discontinued Businesses a. The Metal Crown Business On December 11, 1992, the Registrant sold substantially all of its assets (the "Sale of the Metal Crown Assets") relating to the manufacture and sale of metal crowns for beer and beverage bottles (the "Metal Crown Business") to Crown Cork & Seal Company, Inc. ("Crown Cork") pursuant to the terms of an asset purchase agreement for approximately $7,200,000 in cash. Included among the assets of the Metal Crown Business sold to Crown Cork were essentially all of the assets of the Registrant's Arlington, Texas plant. The Sale of the Metal Crown Assets was more fully described in the Registrant's Current Report on Form 8-K dated December 11, 1992 filed with the Securities and Exchange Commission. As a result of the Sale of the Metal Crown Assets, the Registrant no longer operates its Metal Crown Business. b. The Commercial Glass Container Business On February 28, 1992, the Registrant consummated the sale of substantially all of its assets (the "Sale of the Glass -5- 8 Container Assets") relating to the manufacture and sale of glass containers (the "Commercial Glass Container Business") to Ball Corporation pursuant to the terms of an asset purchase agreement for approximately $68,000,000 in cash. The Sale of the Glass Container Assets was more fully described in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (the "1991 10-K"). As a result of the Sale of the Glass Container Assets, the Registrant no longer operates its Commercial Glass Container Business. 3. Segment Information The Registrant's 1994 Annual Report to Stockholders contains on pages 31 and 32 additional financial information regarding each of the Registrant's two industry segments for each of the last three fiscal years required by Item 1 and such information is incorporated herein by reference. The Registrant's 1994 Annual Report to Stockholders contains on pages 36 through 38 Management's Discussion and Analysis of Financial Condition and Results of Operations and such information is incorporated herein by reference. ITEM 2. PROPERTIES The Registrant's manufacturing activities with respect to its Continuing Businesses are conducted at the five facilities described in the following table.
Building Area Location Purpose of Facility (square feet) -------- ------------------- ------------- Lancaster, Pennsylvania Plastic Closure and 490,000 Container Plant; Warehouses Jackson, Tennessee Plastic Closure, Vial and 198,000 Bottle Plant; Warehouse Santa Fe Springs, Plastic Jar and Closure 170,000 California Plant; Warehouse Jackson, Tennessee Home Canning Cap and 160,000 Lid Plant; Warehouse
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Building Area Location Purpose of Facility (square feet) -------- ------------------- ------------- Ahoskie, North Carolina Plastic Closure Plant; 153,000 Warehouse
The Registrant has entered into a lease for a 168,000 square feet plastic closure manufacturing and warehouse facility in Bowling Green, Kentucky to be operational in 1995. The Lancaster, Pennsylvania and Ahoskie, North Carolina facilities are owned by the Registrant. The two Jackson, Tennessee and the Santa Fe Springs, California facilities are leased by the Registrant. The Registrant's principal executive offices are located at 1840 Century Park East, Los Angeles, California 90067, in approximately 23,000 square feet of leased space. In addition, the Registrant rents three area sales offices. In the opinion of the Registrant's management, its manufacturing facilities are suitable and adequate for the purposes for which they are being used. The Registrant owns land and buildings used in connection with a former glass container manufacturing plant that are being held for sale. In 1994, the Registrant's plastic products manufacturing facilities operated at approximately 74% of capacity. During August through December of 1994, the Company's cap and lid manufacturing facility located in Jackson, Tennessee operated at approximately 26% of capacity. This level of operations in the cap and lid manufacturing facility primarily resulted because the new plant was in its start-up phase. ITEM 3. LEGAL PROCEEDINGS As the Registrant reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, in February 1986, the Registrant was advised by the United States Environmental Protection Agency ("EPA") that Phoenix Closures, Inc. ("Phoenix") was one of several companies which disposed of wastes at the American Chemical Services ("ACS") site located near Griffith, -7- 10 Indiana. The EPA indicated that the wastes were disposed of by Phoenix's Chicago plant between 1955 and 1975. The Registrant has advised the EPA that it did not lease the Chicago plant during the period from 1955 to 1975. The Registrant has also advised Phoenix of its responsibilities with respect to environmental matters, including the environmental matters at the ACS site, under the lease relating to the Chicago plant. As the Registrant reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, in March 1986, the Registrant and other parties were designated by the EPA as potentially responsible parties ("PRPs") responsible for the cleanup of certain hazardous wastes that have been disposed of at the Wayne Waste Oil ("WWO") site located near Columbia City, Indiana. In October 1986, the Registrant and other PRPs entered into a Consent Order with the EPA which allowed the PRPs to complete a Remedial Investigation and Feasibility Study ("RI/FS") for the WWO site. In March 1990, the EPA issued a Record of Decision ("ROD") for the site. The ROD documents the EPA's cleanup plan for the site, which includes capping the former municipal landfill, groundwater extraction and treatment, and soil vapor extraction. On July 20, 1992, a Consent Decree between the EPA and the PRPs at the site was entered in the United States District Court for the Northern District of Indiana, captioned United States v. Active Products Corp., No. F91-00247. Based upon the Registrant's percentage share of the total amount of wastes disposed of at the WWO site, the Registrant estimates its share of the costs under the Consent Decree will be approximately $109,000. A reserve has been established for such costs. As the Registrant reported in its Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, on April 12, 1990, the State of New Jersey, Department of Environmental Protection and Energy ("NJDEPE"), filed a lawsuit in the United States District Court for the District of New Jersey against the Registrant, among others, entitled State of New Jersey, Department of Environmental Protection v. Gloucester Environmental Management Services, Inc., et al., No. 84-0152 (D.N.J.). The suit alleges that the Registrant was a "generator" of hazardous wastes and other hazardous substances which were disposed of at the Gloucester Environmental Management Services, Inc. ("GEMS") facility in the Township of Gloucester. The suit seeks cleanup costs, compensatory and treble damages, and a declaration that the Registrant and others are responsible for NJDEPE's past and future response costs at the GEMS site. On -8- 11 March 27, 1990, NJDEPE issued a Directive to the Registrant and other parties pursuant to the New Jersey Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 et seq. Pursuant to the Directive, the Registrant and other parties have been ordered to undertake the second phase of remedial action at the site, including the construction and operation of a groundwater treatment system and operation of the remedial action performed in the first phase, and to reimburse NJDEPE's alleged past and future response costs. The estimated cost of second phase remedial action related to the GEMS site is approximately $20 million. The amount that the NJDEPE is seeking as reimbursement for past costs and damages is approximately $10 million. Notwithstanding the issuance of the Directive by the NJDEPE, the Registrant believes that it has no material liability with respect to the GEMS site because the only reason it has been named as a defendant (there are over 550 named defendants) is that a transporter that was used by the Registrant is known to have disposed of waste at the site. However, there is no evidence that any waste disposed of at the site by such transporter was waste of the Registrant and the Registrant has a motion for summary judgment pending in which it seeks dismissal from the case on these grounds. If such motion is granted, the Registrant would have a good faith basis to not comply with the Directive. The Registrant does not believe that any of its waste was disposed of at the site. One of the Registrant's insurance carriers has agreed to defend the current lawsuit and has funded the Registrant's participation in settlement efforts, which may result in the Registrant's dismissal from the lawsuit for a payment of approximately $100,000. Participation in the settlement will not be considered an admission of liability for the disposal of waste at the site. A reserve has been established for such costs. On March 24, 1995, the Deputy Minister of National Revenue of Canada ("Revenue Canada") announced that Revenue Canada had commenced a dumping investigation into home canning supplies imported from the United States. The investigation follows a complaint filed by Bernardin of Canada, Ltd., which manufactures jar caps and lids, and Consumer Packaging Inc., which manufactures jars. The initiation of an investigation is the first step of the administrative process. First, Revenue Canada must determine whether dumping has taken place. If Revenue Canada makes a determination of dumping, the Canadian complainant (Bernardin or Consumers Packaging) must then prove that the alleged dumping has been causing it "material injury". Dumping duties, if any, would be imposed with respect to goods -9- 12 imported after the date on which the dumping determination is made by Revenue Canada, which is expected to occur within approximately 90 days. The Company expects that it will take approximately seven months for the Canadian authorities to finally resolve the matter. Kerr intends to vigorously contest the proceedings and does not expect this matter to have a material effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages, positions and offices held, and a brief account of the business experience during the past five years of each executive officer of the Registrant.
Positions Held With Registrant and Periods Name and Age During Which Held ------------------------- ----------------------------- Roger W. Norian (51) Chairman, since 1983; President and Chief Executive Officer, since 1980 Norman N. Broadhurst (48) Senior Vice President, President, Consumer Products Division, since 1992; Senior Vice President, General Manager, Consumer Products Division, since 1988 Robert S. Reeves (65) Senior Vice President, Sales and Marketing, Plastic Products Division, since 1992; Senior Vice President, General Manager, Commercial Glass Container Division, since 1985
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Positions Held With Registrant and Periods Name and Age During Which Held -------------------------- ------------------------------ D. Gordon Strickland (48) Senior Vice President, Finance and Chief Financial Officer, since 1986 J. Stephen Grassbaugh (41) Vice President, Controller, since 1988
Business Experience Roger W. Norian has served in an executive capacity with the Registrant for more than the past five years. Norman N. Broadhurst has served in an executive capacity with the Registrant for more than the past five years. Robert S. Reeves has served in an executive capacity with the Registrant for more than the past five years. D. Gordon Strickland has served in an executive capacity with the Registrant for more than the past five years. J. Stephen Grassbaugh has served in an executive capacity with the Registrant for more than the past five years. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Registrant's Annual Report to Stockholders for the year ended December 31, 1994, contains on page 12 the information required by Item 5 of Form 10-K and such information is incorporated herein by this reference. ITEM 6. SELECTED FINANCIAL DATA The Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1994, contains on pages 34 and 35 the information required by Item 6 of Form 10-K and such information is incorporated herein by this reference. -11- 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1994, contains on pages 36 through 38 the information required by Item 7 of Form 10-K and such information is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1994, contains on pages 12 through 33 the information required by Item 8 of Form 10-K and such information is incorporated herein by this reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required by Item 10 of Form 10-K is included in a separate item captioned "Executive Officers of the Registrant" in Part I of this Form 10-K. The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 25, 1995 contains on pages 2 through 6 the remaining information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 25, 1995 contains on pages 7 through 12 the information required by Item 11 of Form 10-K, and such information is incorporated herein by this reference. -12- 15 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 25, 1995 contains on pages 2 through 3 the information required by Item 12 of Form 10-K, and such information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 25, 1995 contains on page 16 the information required by Item 13 of Form 10-K, and such information is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. (i) Financial Statements The Financial Statements and related financial data contained in the Registrant's Annual Report to Stockholders for the year ended December 31, 1994, on pages 13 through 35 thereof and the Independent Auditors' Report on page 12 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1994, are incorporated herein by reference. With the exception of information specifically incorporated by reference, however, the Registrant's Annual Report to Stockholders for the year ended December 31, 1994 is not to be deemed filed as a part of this report. Consolidated Financial Statements: Consolidated Statements of Earnings (Loss) for the years ended December 31, 1994, 1993 and 1992. Consolidated Balance Sheets as of December 31, 1994 and 1993. Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. -13- 16 Consolidated Statements of Common Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992. Notes to Consolidated Financial Statements. In addition to such Consolidated Financial Statements and Independent Auditors' Report, the following are included herein: Independent Auditors' Report on Supporting Schedules, page 21. Schedules for the three years ended December 31, 1994: VIII - Valuation and Qualifying Accounts, page 22. All other Schedules have been omitted as inapplicable, or not required, or because the required information is included in the Consolidated Financial Statements or the notes thereto. (ii) Exhibits 3.1 Restated Certificate of Incorporation of the Registrant is incorporated by reference to Exhibit 3.1 to Form 10-K for the fiscal year ended December 31, 1980. 3.2 Certificate of Retirement of Capital Stock of the Registrant is incorporated by reference to Exhibit 3.2 to Form 10-K for the fiscal year ended December 31, 1989. 3.3 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant is incorporated by reference to Exhibit 3.3 to Form 10-K for the fiscal year ended December 31, 1989. 3.4 By-laws of the Registrant, as amended effective June 15, 1993, is incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended June 30, 1993. -14- 17 10.1 Amended and Restated Employment Agreement between the Registrant and Roger W. Norian dated as of December 1, 1994. 10.2 Employment Agreement between the Registrant and D. Gordon Strickland dated as of June 16, 1986 is incorporated by reference to Exhibit 10.5 to Form 10-K for the fiscal year ended December 31, 1986. 10.3 Employment Agreement between the Registrant and Robert S. Reeves dated as of February 17, 1983 is incorporated by reference to Exhibit 10.6 to Form 10-K for the fiscal year ended December 31, 1983. 10.4 Employment Agreement between the Registrant and Norman N. Broadhurst dated as of December 8, 1988 is incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal year ended December 31, 1988. 10.5 Employment Agreement between the Registrant and J. Stephen Grassbaugh dated as of February 24, 1989 is incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal year ended December 31, 1988. 10.6 1984 Stock Option Plan is incorporated by reference to Exhibit 4.7 to Registration Statement No. 2-92722. 10.7 1987 Stock Option Plan is incorporated by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1986. 10.8 Amended and Restated 1993 Employee Stock Option Plan. 10.9 1987 Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1987. -15- 18 10.10 1993 Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.4 to Form 10-Q for the fiscal quarter ended June 30, 1993. 10.11 Form of Stock Option Agreement used in connection with the 1984 Stock Option Plan is incorporated by reference to Exhibit 4.11 to Registration Statement No. 2-92722. 10.12 Form of Stock Option Agreement used in connection with the 1987 Stock Option Plan is incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1986. 10.13 Form of Stock Option Agreement used in connection with the 1993 Employee Stock Option Plan is incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year ended December 31, 1993. 10.14 Form of Stock Option Agreement used in connection with the 1987 Stock Option Plan for Non- Employee Directors is incorporated by reference to Exhibit 10.23 to Form 10-K for the fiscal year ended December 31, 1987. 10.15 Form of Stock Option Agreement used in connection with the 1993 Stock Option Plan for Non- Employee Directors is incorporated by reference to Exhibit 10.19 to Form 10-K for the fiscal year ended December 31, 1993. 10.16 1993 Common Stock Purchase Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.3 to Form 10-Q for the fiscal quarter ended June 30, 1993. 10.17 Directors' Retirement Consulting Plan is incorporated by reference to Exhibit 10.22 to Form 10- K for the fiscal year ended December 31, 1984. -16- 19 10.18 Key Executive Bonus Plan is incorporated by reference to Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30, 1993. 10.19 Pension Restoration Plan. 10.20 Asset Purchase Agreement dated as of November 25, 1991 by and between the Registrant and Ball Corporation is incorporated by reference to Exhibit 1 to Form 8-K dated November 24, 1991. 10.21 Asset Purchase Agreement, dated as of December 11, 1992, by and between Crown Cork & Seal Company, Inc. and Kerr Group, Inc. is incorporated by reference to Exhibit 1 to Form 8-K dated December 11, 1992. 10.22 Lease dated as of March 11, 1986 between Northrop Corporation and Registrant with respect to Registrant's principal executive offices, including related amendment to the Lease dated as of September 30, 1986 is incorporated by reference to Exhibit 10.24 to Registration Statement No. 33-08212. 10.23 Lease dated August 1, 1988 between KCB Development, as lessor, and SCP Corporation, as lessee. 10.24 Lease dated October 5, 1989 between Century 21 Associates, as lessor, and Santa Fe Plastic Corporation, as lessee, is incorporated by reference to Exhibit 10.3 to Form 10-Q for the fiscal quarter ended September 30, 1994. 10.25 Lease between the Industrial Development Board of the City of Jackson and Kerr Group, Inc., Dated as of May 14, 1993 is incorporated by reference to Exhibit 10.5 to Form 10-Q for the fiscal quarter ended June 30, 1993. -17- 20 10.26 Amended and restated lease dated as of May 16, 1994 between Phoenician Properties, as lessor, and Kerr Group, Inc., as lessee,is incorporated by reference to Exhibit 10.4 to Form 10-Q for the fiscal quarter ended September 30, 1994. 10.27 Amendment dated May 18, 1994 between Century 21 Associates and Kerr Group, Inc. related to lease dated October 5, 1989 is incorporated by reference to Exhibit 10.5 to Form 10-Q for the fiscal quarter ended September 30, 1994. 10.28 Lease agreement dated June 30, 1994 between Bowling Green-Warren County Industrial Authority IV, Inc. and Kerr Group, Inc. is incorporated by reference to Exhibit 10.6 to Form 10-Q for the fiscal quarter ended September 30, 1994. 10.29 Note Agreement dated as of September 15, 1993 between Kerr Group, Inc. and the Purchasers identified therein is incorporated by reference to Exhibit 2 to Form 8-K dated September 21, 1993. 10.30 Line of Credit between PNC Bank and Kerr Group, Inc. dated May 2, 1994 is incorporated by reference to Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30, 1994. 10.31 Receivables Purchase Agreement dated as of January 19, 1995 between Kerr Group, Inc., as the seller, and PNC Bank, N.A., as the purchaser. 10.32 Line of Credit between the Bank of Boston and Kerr Group, Inc. dated February 9, 1995. -18- 21 10.33 Amendment dated February 24, 1995 of the Receivables Purchase Agreement dated as of January 19, 1995 between Kerr Group, Inc., as the seller, and PNC Bank, N.A., as the purchaser. 11.1 Statement re: Computation of Per Common Share Earnings (Loss). 13.1 Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1994, pages 12 through 38. 21.1 Subsidiaries 23.1 Consent of Independent Certified Public Accountants. 99.1 Undertaking is incorporated by reference to Exhibit 28.1 to Form 10-K for the year ended December 31, 1982. The Registrant has no additional long-term debt instruments in which the total amount of securities authorized under any instrument exceeds 10% of total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such long-term debt instrument upon the request of the Securities and Exchange Commission. b. Reports on Form 8-K None -19- 22 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. KERR GROUP, INC. By: Roger W. Norian ------------------------------------- Roger W. Norian, Chairman President and Chief Executive Officer Dated: March 29, 1995 Los Angeles, California Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Gordon C. Hurlbert March 29, 1995 ----------------------------------- Gordon C. Hurlbert, Director Michael C. Jackson March 29, 1995 ----------------------------------- Michael C. Jackson, Director John D. Kyle March 29, 1995 ----------------------------------- John D. Kyle, Director James R. Mellor March 29, 1995 ----------------------------------- James R. Mellor, Director Roger W. Norian March 29, 1995 ----------------------------------- Roger W. Norian, Principal Executive Officer; Director Robert M. O'Hara March 29, 1995 ----------------------------------- Robert M. O'Hara, Director Harvey L. Sperry March 29, 1995 ----------------------------------- Harvey L. Sperry, Director D. Gordon Strickland March 29, 1995 ----------------------------------- D. Gordon Strickland Principal Financial Officer J. Stephen Grassbaugh March 29, 1995 ----------------------------------- J. Stephen Grassbaugh Principal Accounting Officer
-20- 23 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors of Kerr Group, Inc.: Under date of February 28, 1995, we reported on the consolidated balance sheets of Kerr Group, Inc. as of December 31, 1994 and 1993, and the related consolidated statements of earnings (loss), common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related supplementary financial statement schedule as listed in Item 14a(i). This supplementary financial statement schedule is the responsibility of the company's management. Our responsibility is to express an opinion on this supplementary financial statement schedule based on our audits. In our opinion, such supplementary 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. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions and income taxes in 1993. KPMG Peat Marwick LLP Los Angeles, California February 28, 1995 - 21 - 24 SCHEDULE VIII KERR GROUP, INC. Valuation and Qualifying Accounts Three years ended December 31, 1994 (in thousands)
Column A Column B Column C Column D Column E -------------------------------- ------------ ------------------------- -------- -------- Additions ------------------------- (1) (2) Balance Charged Charged Deductions Balance at Beginning (Credited) to Other From at End Description of Period to Earnings Account Reserves(a) of Period -------------------------------- ------------ ----------- -------- -------- ---------- Allowance for doubtful accounts, year ended: December 31, 1992 $360 $390 $ - $105 $645 ==== ==== ===== ==== ==== December 31, 1993 $645 ($ 42) $ - $ 25 $578 ==== ====== ===== ==== ==== December 31, 1994 $578 $ 39 $ - $447 $170 ==== ==== ===== ==== ====
Note: Allowance for doubtful accounts presented in the table above is related to continuing operations only. Allowance for doubtful accounts associated with the Commercial Glass Container Business and Metal Crown Business of the Registrant in 1992 has been reported as a component of net current assets related to discontinued operations in the Registrant's Consolidated Balance Sheets. (a) These deductions represent uncollectible amounts charged against the reserve. - 22 - 25 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 KERR GROUP, INC. FORM 10-K for year ended December 31, 1994 INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
Exhibit No. Document ----------- -------- 10.4 Amended and Restated Employment Agreement between the Registrant and Roger W. Norian dated as of December 1, 1994. 10.8 Amended and Restated 1993 Employee Stock Option Plan. 10.19 Pension Restoration Plan. 10.23 Lease dated August 1, 1988 between KCB Development, as lessor, and SCP Corporation, as lessee. 10.31 Receivables Purchase Agreement dated as of January 19, 1995 between Kerr Group, Inc., as the seller, and PNC Bank, N.A., as the purchaser. 10.32 Line of Credit between the Bank of Boston and Kerr Group, Inc. dated February 9, 1995. 10.33 Amendment dated February 24, 1995 of the Receivables Purchase Agreement dated as of January 19, 1995 between Kerr Group, Inc., as the seller, and PNC Bank, N.A., as the purchaser. 11.1 Statement re: Computation of Per Common Share Earnings (Loss). 13.1 Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1994, pages 12 through 38.
26 21.1 Subsidiaries 23.1 Consent of Independent Certified Public Accountants.
- 2 - EX-10.4 2 EXHIBIT 10.4 1 Exhibit 10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT, originally dated as of the tenth day of October, 1985, amended as of December 12, 1989 and further amended and restated as of December 1, 1994, between KERR GROUP, INC. a Delaware corporation ("Company"), and ROGER W. NORIAN (the "Employee"). 1. Employment. The Company hereby employs the Employee and the Employee hereby accepted employment upon the terms and conditions hereinafter set forth. 2. Term. (a) The term of this Agreement shall commence on October 10, 1985 and end on the date this Agreement is terminated by either the Company or the Employee as hereinafter provided in this paragraph 2. (b) The Company may at its election terminate the obligations of the Company under this Agreement as follows: (1) Upon 30 days' prior notice in the event the Employee has been so incapacitated that he has been unable to perform the services required of him hereunder for a period of 180 consecutive days and such inability is continuing at the time of such notice. From and after such termination, Employee shall receive from the Company, or from disability insurance purchased directly and owned by the Company, the sum of $150,000 per annum during the period of incapacity which remains after such termination but not after age 65. In addition, for the initial 24 months after such termination, Employee shall receive from the Company an amount per month equal to the difference between the monthly Salary set forth in subparagraph 3(a)(x) hereof and $12,500 per month. Furthermore, the Company shall continue to provide and keep in force during the period of incapacity which remains after such termination but not after age 65, at its sole cost and expense, life insurance in the amount described in subparagraph 3(b) hereof and health insurance for Employee and his dependents with coverage of the type provided by the group benefit plan of the Company for other executives of the Company. (2) For just cause upon notice of such termination to the Employee. Termination of the Employee's employment by the Company shall constitute a termination "for just cause" only if such termination is for one or more of the following reasons: (x) the failure of the Employee to render services 2 to the Company in accordance with his obligations under this Agreement which failure amounts to an extended and gross neglect of his duties to the Company; (y) the continued use of drugs by the Employee to an extent that he is unable to fulfill his duties under this Agreement; and (z) the commission by the Employee of an act of fraud or embezzlement against the Company or the Employee's having been convicted of a felony involving moral turpitude. (3) Without cause upon notice to the Employee provided that, immediately upon the effective date of such termination, the Company shall pay to the Employee the sum of $1,140,000, by bank or certified check. In addition, for a period of 24 months after such termination, the Company shall (i) provide for the Employee the same fringe benefits, consisting of medical, dental, life and disability insurance, which were provided to the Employee at the date of the notice of termination and (ii) pay to the Employee an amount each year equal to the amount described in subparagraph 3(a)(y) hereof. The payment required to be made to the Employee pursuant to the first sentence of this paragraph 2(b)(3) shall not be reduced by any amounts paid to the Employee for the performance of services by anyone other than the Company following the date of such termination. The Company shall not be obligated to provide any fringe benefit described in clause (i) of the second sentence of this paragraph 2(b)(3) after the Employee shall receive such fringe benefit at least as favorable to the Employee from another employer. If the Company may elect, in accordance with paragraph 2(b)(1) hereof, to terminate this Agreement then such election shall be deemed to have been made under paragraph 2(b)(1) and not in accordance with this paragraph 2(b)(3). The Company shall be deemed to have elected to terminate this Agreement in accordance with this paragraph 2(b)(3) from and after the date: (x) the Employee is assigned duties other than that of Chief Executive Officer of the Company, (y) the Employee is required to report other than to the Board of Directors of the Company or (z) the Employee is required to reside other than in the area of Los Angeles, California in order to perform his duties for the Company; provided that the Employee within 30 days after the occurrence of any such event shall notify the Company that the Company is so deemed to have elected to terminate this Agreement. (c) The Employee may terminate his obligations under paragraphs 4 and 5 hereof upon 90 days' notice thereof to the Company and from and after the delivery of such notice, the Company shall have no further obligations under this Agreement unless it shall elect, by notice to the Employee, to continue to pay the Employee as herein provided for the 90 day period commencing with the date of delivery of the notice and in such 2 3 event the Employee shall continue to perform his obligations under paragraphs 4 and 5 during such period. (d) The obligations of the Company under this Employment Agreement shall terminate simultaneously with the occurrence of any of the following events and upon such termination the Company shall pay to Employee the sum of $1,140,000 by certified or bank check: (i) 50% or more of the shares of the Company's Common Stock is acquired, directly or indirectly, by an individual, partnership, corporation, trust or unincorporated organization (collectively "Person") or by Persons acting with a common design, either formally or informally; (ii) The Company merges with or into another Person and is not the survivor of such merger or the Company sells all of its fixed assets to another Person or Persons; or (iii) The majority of the Board of Directors of the Company consists of directors who were not selected by or nominated with the approval of a majority of the directors of the Company in office on the date hereof (the "Present Directors") or who were not selected by or nominated with the approval of a majority selected or nominated by a majority of the Present Directors. The Employee shall have no further obligation under this Employment Agreement from and after such termination except as provided in paragraphs 6, 7 and 8 hereof. 3. Compensation. (a) The Company shall pay the Employee (x) a salary ("Salary") during each month of the term hereof at the rate of $47,500.00 per month from and after December 1, 1994 plus (y) an annual amount equal to the annual premium for a Supplemental Disability Policy to be owned by Employee, which amount shall be payable on or before July 8 of each year during the term hereof. "Supplemental Disability Policy" shall mean a disability insurance policy, owned by Employee, the benefits of which would pay to Employee $90,000 per annum during the initial 5 year period of disability following termination of the Employee under paragraph 2(b)(1) hereof and the sum of $800,000 at the end of such 5 year period, and which amounts would not be reduced by any amounts paid by the Company, or under a disability policy owned by the Company, pursuant to paragraph 2(b)(1) hereof. (b) The Company will provide to Employee life insurance which shall pay an amount equal to $2,000,000 in 3 4 addition to any amount received pursuant to travel and accident insurance provided by the Company and the amount of life insurance which Employee purchased under any benefit plan of the Company. (c) If the Company elects to terminate this Agreement in accordance with paragraph 2(b)(1) hereof and if the Supplemental Disability Policy is in effect, then "$60,000" shall be substituted for "$150,000" in such paragraph 2(b)(1). (d) In addition to the foregoing, the Employee shall be eligible for and participate in such fringe benefits as are generally available to executives of the Company and shall be entitled to receive such increases in Salary as the Company may from time to time deem appropriate, which increased Salary may not thereafter be reduced without the consent of Employee. 4. Duties. The Employee is engaged as the Chief Executive Officer of the Company and hereby promises to perform and discharge well and faithfully the duties which may be assigned to him from time to time by the Company in connection with the conduct of its business. The Company shall use its best efforts to elect the Employee to the Board of Directors of the Company during the term hereof. If the Employee is elected or appointed a director or officer of the Company or any subsidiary thereof during the term of this Agreement, the Employee will serve in such capacity without further compensation. 5. Extent of Services. The Employee shall devote his entire time, attention and energies to the businesses of the Company and shall not during the term of this Agreement be engaged in any other business activity whether or not such business activity is pursued for gain, profit or other pecuniary advantage; but this shall not be construed as preventing the Employee from investing his personal assets in businesses which do not compete with the Company in such form or manner as will not require any services on the part of the Employee in the operation of the affairs of the companies in which such investments are made and in which his participation is solely that of an investor and except that the Employee may purchase securities in any corporation whose securities are regularly traded provided that such purchases shall not result in his collectively owning beneficially at any time 1% or more of the equity securities of any corporation engaged in a business competitive to that of the Company. 6. Disclosure of Information. The Employee recognizes and acknowledges that the Company's and its subsidiaries' trade secrets and proprietary processes as they may exist from time to time are valuable, special and unique assets of the Company's and its subsidiaries' business, access to and knowledge of which are essential to the performance of the Employee's duties hereunder. 4 5 The Employee will not, during or after the term of his employment, in whole or in part, disclose such secrets or processes to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Employee make use of any such property for his own purposes or for the benefit of any person, firm, corporation or other entity (except the Company) under any circumstances during or after the term of his employment, provided that after the term of his employment these restrictions shall not apply to such secrets and processes which are then in the public domain (provided that he was not responsible, directly or indirectly, for such secrets or processes entering the public domain without the Company's consent). 7. Inventions. The Employee hereby sells, transfers and assigns to the Company or to any person or entity designated by the Company all of the entire right, title and interest of the Employee in and to all inventions, ideas, disclosures and improvements, whether patented or unpatented, and copyrightable material made or conceived by the Employee, solely or jointly during the Term hereof which relate to methods, apparatus, designs, products, processes or devices, sold, leased, used or under consideration or development by the Company, or which otherwise relate to or pertain to the business, functions or operations of the Company. The Employee agrees to communicate promptly and to disclose to the Company, in such form as the Employee may be required to do so, all information, details and data pertaining to the aforementioned inventions, ideas, disclosures and improvements and to execute and deliver to the Company such formal transfers and assignments and such other papers and documents as may be required of the Employee to permit the Company or any person or entity designated by the Company to file and prosecute the patent applications and, as to copyrightable material, to obtain copyright thereof. Any invention relating to the business of the Company and disclosed by the Employee within one (1) year following the termination of this Agreement shall be deemed to fall within the provisions of this paragraph unless proved to have been first conceived and made following such termination. 8. Injunctive Relief. If there is a breach or threatened breach of the provisions of paragraph 6 or 7 of this Agreement, the Company shall be entitled to an injunction restraining the Employee from such breach. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies for such breach or threatened breach. 9. Insurance. The Company may, at its election and for its benefit, insure the Employee against accidental loss or death and the Employee shall submit to such physical examination and supply such information as may be required in connection therewith. 5 6 10. No Right of Setoff. The Company may not set off against or otherwise reduce any payment or benefit due the Employee under this Agreement on account of any claim which the Company may purport to have against the Employee at the time such payment or benefit becomes due. 11. Attorney's Fees. The Company shall reimburse the Employee for legal fees and expenses incurred by the Employee in an action in a court of competent jurisdiction to enforce any of his rights under this Agreement if the court, in the form of an order for which no appeal can be taken, or with respect to which the time limit to appeal has expired, shall decide in favor of the Employee. Such reimbursement shall be made upon the submission by the Employee of invoices demonstrating that such fees and expenses were incurred. The Employee shall have no obligation to reimburse the Company for legal fees and expenses. 12. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence in the case of the Employee or to the Secretary of Kerr, Kerr Group, Inc., 1840 Century Park East, Los Angeles, California 90067, in the case of the Company. 13. Waiver of Breach. A waiver by the Company or the Employee of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the other party. 14. Entire Agreement. This instrument contains the entire agreement of the parties. It may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 6 7 IN WITNESS WHEREOF, the parties have executed this amended and restated Agreement as of December 1, 1994. KERR GLASS MANUFACTURING CORPORATION By /s/ D G Strickland -------------------------------------- Title: Senior Vice President, Finance /s/ Roger Norian -------------------------------------- Roger W. Norian 7 EX-10.8 3 EXHIBIT 10.8 1 EXHIBIT 10.8 KERR GROUP, INC. AMENDED AND RESTATED 1993 EMPLOYEE STOCK OPTION PLAN *** ARTICLE I PURPOSE The Kerr Group, Inc. ("Company") 1993 Employee Stock Option Plan (the "Old Plan") became effective on April 27, 1993 (the "Effective Date") when the Old Plan was approved by a majority of the Company's stockholders. On and effective February 28, 1995, the Board of Directors of the Company (the "Board") amended and restated (subject to shareholder approval as set forth in Article XIX) the Old Plan in the form of The Kerr Group, Inc. Amended and Restated 1993 Employee Stock Option Plan (the "Plan"). The purpose of the 1995 amendment and restatement is to (i) increase the number of shares of common stock of the Company, par value $.50 per share ("Common Stock") which may be purchased hereunder and (ii) add provisions ensuring that Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), does not limit tax 2 deductions otherwise available to the Company on account of the exercise of options granted hereunder. The Plan is intended as an incentive and to encourage stock ownership by key employees of the Company and of its subsidiaries in order to increase their proprietary interest in the Company's success and to encourage them to remain in the employ of the Company. The word "Company" when used in the Plan with reference to employment shall include any subsidiaries of the Company. ARTICLE II ADMINISTRATION The Plan shall be administered by a Stock Option and Compensation Committee (the "Committee") appointed by the Board from among its members and shall consist of not less than three members thereof, each of whom must be both a "disinterested person" within the meaning of Rule 16b-3(a)(2)(i) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") and an "outside director" within the meaning of Section 162(m) of the Code. -2- 3 Subject to the provisions of the Plan, the Committee shall have sole authority, in its absolute discretion: (a) to determine which of the eligible employees of the Company and its subsidiaries shall be granted options; (b) to determine whether the options granted shall be "incentive stock options" within the meaning of Section 422(b) of the Code, nonstatutory stock options or any combination thereof; (c) to determine the times when options shall be granted and the number of shares to be optioned; (d) to determine the purchase price for the shares underlying the options granted ("Option Shares"); (e) to determine the time or times when each option becomes exercisable and the duration of the exercise period; (f) to prescribe the form or forms of the option agreements under the Plan which forms shall be consistent with the Plan but need not be identical to it; (g) to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and (h) to construe and interpret the Plan, the rules and regulations and the option agreements under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, -3- 4 determinations and interpretations of the Committee shall be final and binding on all optionees. The Committee shall hold its meetings at such times and places as it may determine, with a majority of the Committee constituting a quorum. Any action which the Committee has the power to take at a meeting may be taken by the Committee without a meeting if all of the members of the Committee give their consent to such action in writing. ARTICLE III STOCK The Option Shares shall be shares of authorized but unissued Common Stock or previously issued shares of Common Stock reacquired by the Company. Under the Plan the total number of Option Shares which may be purchased pursuant to options granted hereunder shall not exceed in the aggregate 280,000 except as such number of shares shall be adjusted in accordance with the provisions of ARTICLE IX hereof. No person may be granted options under the Plan covering more than 200,000 Option Shares over the life of the Plan. -4- 5 In the event that any outstanding option under the Plan expires for any reason or is terminated prior to the end of the period during which options may be granted, the unexercised portion of such option may again be granted pursuant to the Plan. ARTICLE IV ELIGIBILITY OF PARTICIPANTS Officers and other key employees of the Company or of its subsidiaries (including employees who are also Directors of the Company or the Company's subsidiaries excluding persons who are members of the Committee) shall be eligible to participate in the Plan. -5- 6 ARTICLE V OPTION PRICE Options shall be exercisable at prices (the "Option Price") specified in the option agreements. ARTICLE VI EXERCISE AND TERM OF OPTIONS The exercise of options may be limited in whole or in part for any period or periods of time as specified in the option agreements. Except as may be so specified, any option may be exercised in whole at any time or in part from time to time during the option period. Notwithstanding the above, (i) no option granted hereunder to a person subject to the restrictions of Section 16(b) of the Exchange Act shall be exercisable before the date six months following the date of grant of such option and (ii) this Article VI is subject to the provisions of Article XIX. All stock options granted hereunder shall terminate concurrently with the termination of the optionee's employment if the Company terminates the employment for cause or if the optionee resigns. -6- 7 Any other provision of the Plan notwithstanding, no option shall be exercised after the date ten years from the date of grant of such option. ARTICLE VII PAYMENT OF SHARES Payment for Option Shares shall be made in full upon exercise of the option. ARTICLE VIII NON-TRANSFERABILITY OF OPTION No option shall be transferable except by will or the laws of descent and distribution. During the lifetime of the optionee, the option shall be exercisable only by the optionee. -7- 8 ARTICLE IX ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC. If there is any stock dividend, split-up or combination of shares of Common Stock or any other change in Common Stock, whether by way of exchange, offering of subscription rights, recapitalization or otherwise, an adjustment shall be made in the number of Option Shares in respect of which options may be granted hereunder, the number of Option Shares to which each outstanding option relates and the Option Price to be as the Committee, in its sole discretion, may deem equitable. Subject to any required action by the stockholders, if the Company shall be the surviving corporation in any merger or consolidation, the holder of the then unexercised portion of any option granted hereunder shall, upon exercise in accordance with the terms hereof, receive the property, whether Common Stock or other securities, into which the Option Shares otherwise issuable upon exercise of the option would have been converted had they been outstanding at the time of such event. -8- 9 The foregoing adjustments and the manner of application of the foregoing provisions shall be determined by the Committee in its sole discretion. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to an option. -9- 10 ARTICLE X RIGHTS UPON MERGER, SALE OF ASSETS, LIQUIDATION, ETC. If the Company shall be the surviving corporation in any merger or consolidation, or if the Company shall merge with or into a wholly-owned subsidiary and the Company is not the survivor, the holder of the then unexercised portion of any option granted hereunder shall, upon exercise in accordance with the terms hereof, receive the property, whether Common Stock or other securities, into which the Option Shares otherwise issuable upon exercise of such unexercised portion, would have been converted had they been outstanding at the time of such event; provided, however, that the optionee shall not have the right to exercise such unexercised portion as a result of such event if the Committee makes an appropriate adjustment in the securities covered by and/or the Option Price of such option as provided in Article IX hereof. If the Company is not the surviving corporation in any merger or consolidation and substitute options are not issued, or if the Company sells substantially all of its assets or liquidates, then during the ten (10) day period commencing on the date of such -10- 11 event, the holder of an option granted hereunder may exercise all or any unexercised part of the option, including any part thereof which would otherwise not then be exercisable, and receive upon such exercise the property into which the Option Shares otherwise issuable upon exercise of the option would have been converted had such shares been outstanding at the time of such event. The options shall terminate after such 10 day period. If a single stockholder or a group of stockholders who would be deemed to be a "person" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 acquires more than 50% of the shares of the Company's capital stock which are entitled to vote for the election of directors, then during the sixty (60) day period commencing after such event, the holder of an option granted hereunder may exercise the unexercised portion of such option as to all or any part of the Optioned Shares, including shares as to which such option would not then otherwise be exercisable. If such option is exercised in accordance with the provisions of the immediately preceding sentence as to less than all of the Optioned Shares, such option shall be deemed to have -11- 12 been so exercised in inverse chronological order with respect to the vesting thereof. Upon the expiration of such 60 day period, the unexercised portion of any such portion shall be exercisable only to the extent it was exercisable prior to the occurrence of such event. -12- 13 ARTICLE XI NO OBLIGATION TO EXERCISE OPTION The granting of an option shall impose no obligation on the recipient to exercise such option. ARTICLE XII USE OF PROCEEDS The proceeds received from the sale of Option Shares pursuant to the Plan shall be used for general corporate purposes. ARTICLE XIII RIGHTS AS A STOCKHOLDER An optionee or a transferee of an option shall have no rights as a stockholder with respect to any Option Share covered by his option until such person shall have become the holder of record of such share, and such person shall not be entitled to any dividends or distributions of other rights in respect of such share for which the record date is prior to the date on which such person shall have become the holder of record thereof. -13- 14 ARTICLE XIV REGULATORY MATTERS Every option under the Plan is granted upon the express conditions that (i) the inability of the Company to obtain, or any delay in obtaining, from each regulatory body having jurisdiction, all requisite authority to issue or transfer shares of stock necessary to satisfy such option or (ii) the inability of the Company to comply with, or any delay in complying with, any laws, rules or regulations governing the issuance of Option Shares necessary to satisfy such option (including but not limited to complying with the Securities Act of 1933 and all rules and regulations promulgated thereunder), the fulfillment of which conditions are deemed necessary by counsel for the Company to the lawful issuance or transfer of any such shares, shall relieve the Company of any liability for the non-issuance or non-transfer, or any delay in the issuance or transfer of, such shares. At the time of exercise of any option, the Company may, if it shall deem it necessary or desirable in order to comply with the Securities Act of 1933, as amended (the "Act"), require the -14- 15 holder of the option to represent in writing to the Company that it is then the holder's intention to acquire the Option Shares for the account of the holder, that the holder shall not sell, transfer or dispose of such shares except pursuant to an effective registration statement under the Act or an exemption therefrom, as determined by, or with approval of, counsel satisfactory to the Company, and that the holder acknowledges that such shares are unregistered under the Act and accordingly must be held indefinitely unless such shares are subsequently registered or an exemption from such registration is available. In such event a legend shall be placed on the stock certificate representing such shares to reflect the transfer restrictions, and stop transfer instructions shall be issued to the Company's transfer agent with respect to such shares. -15- 16 ARTICLE XV CANCELLATION OF OPTIONS The Committee in its discretion may, with the consent of any optionee, cancel any outstanding option hereunder. ARTICLE XVI EXPIRATION DATE OF PLAN No option shall be granted hereunder after 10 years following the Effective Date. ARTICLE XVII AMENDMENT OR DISCONTINUANCE OF PLAN The Board may, without the consent of optionees, at any time terminate the Plan entirely and at any time or from time to time amend or modify the Plan, provided that no such action shall adversely affect options theretofore granted hereunder, and provided further that no such action by the Board, without approval of the stockholders, may (a) increase the total number of Option Shares, except as contemplated in ARTICLE IX; (b) change the class of officers or employees eligible to receive options under the Plan; or (c) extend the term of the Plan. -16- 17 ARTICLE XVIII LIMITATION ON GRANTS OF INCENTIVE STOCK OPTIONS To the extent the aggregate fair market value (determined as of the date of grant of such options) of the shares of Common Stock with respect to which any incentive stock options may be exercisable for the first time by the optionee in any calendar year (under this Plan or any other stock option plan of the Company and any parent or subsidiary of the Company) exceeds $100,000, such options shall be treated as nonstatutory stock options. -17- 18 ARTICLE XIX SHAREHOLDER APPROVAL The amendment and restatement of the Plan by the Board is effective February 28, 1995. However, notwithstanding anything in the Plan or in an option agreement to the contrary, no option granted hereunder on or after February 28, 1995 may be exercised until approval of the Plan by the stockholders of the Company on or after such date in a manner which complies with Rule 16b-3 promulgated pursuant to the Exchange Act and Sections 162(m) and 422(b)(1) of the Code. -18- EX-10.19 4 EXHIBIT 10.19 1 Exhibit 10.19 KERR GROUP, INC. PENSION RESTORATION PLAN 1. Purpose of the Plan The purpose of this Pension Restoration Plan (the "Plan") of Kerr Group, Inc. (the "Company") is to provide to employees of the Company who participate in the Kerr Group, Inc. Retirement Income Plan (the "Qualified Plan") retirement benefits which are unavailable to such persons under the Qualified Plan on account of the benefit limitations imposed under Sections 415 and 401(a)(17) (the "Statutory Benefit Limitations") of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). 2. Administration of the Plan (a) General Powers. The committee administering the Qualified Plan (the "Committee") also shall administer the Plan. The Committee shall have full authority to determine all questions arising in connection with the Plan, including its interpretation, may adopt procedural rules, and may employ and rely on such legal counsel, actuaries, accountants and agents as it may deem advisable to assist in the administration of the Plan. Decisions of the Committee shall be conclusive and binding on all persons. (b) Specific Powers. Without limiting the generality of Section 2(a), the Administrator shall have the following powers and duties: i. To furnish to all "Participants" (as defined in Section 3), upon request, copies of the Plan, and to require any 2 person to furnish such information as it may request for the purpose of the proper administration of the Plan as a condition to receiving any benefits under the Plan; ii. To make and enforce such rules and regulations and prescribe the use of such forms as it shall deem necessary for the efficient administration of the Plan; iii. To interpret the Plan, and to resolve ambiguities, inconsistencies and omissions, which findings shall be binding, final and conclusive; iv. To decide on questions concerning the Plan in accordance with the provisions of the Plan; v. To determine the amount of benefits which shall be payable to any person in accordance with the provisions of the Plan; to instruct the Company, or the trustee of any trust which may be established in connection with the Plan in accordance with Section 5(d), as to payments to be made under the Plan and to provide a full and fair review to any Participant whose claim for benefits has been denied in whole or in part; and vi. To designate persons to carry out any duty or power which would otherwise be a responsibility of the Committee. (c) Hold Harmless. To the extent permitted by law, the Committee and any person to whom it may delegate any duty or power in connection with administering the Plan, the Company and the officers and directors of the Company, shall be entitled to rely conclusively upon, and shall be fully protected in any action taken 2 3 or not taken by them in good faith in the reliance upon, any actuary, counsel, accountant, other specialist or other person selected by the Committee, or in reliance upon any tables, valuations, certificates, opinions or reports which shall be furnished by any of them. Further, to the extent permitted by law, the Committee, the Company, and the officers and directors of the Company shall not be liable for any neglect, omission or wrongdoing of any other agent, officer or employee of the Company. Any person claiming benefits under the Plan shall look solely to the Company for redress. (d) Plan Expenses. All expenses incurred that shall arise in connection with the administration of the Plan, including, but not limited to administrative expenses, proper charges and disbursements, compensation and other expenses and charges of any actuary, counsel, accountant, specialist or other person who shall be employed by the Committee in connection with the Plan, shall be paid by the Company. (e) Claims Procedure. A claim for benefits under the Plan must be made to the Committee in writing. The Committee shall provide adequate notice in writing to any Participant, joint annuitant or beneficiary whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the claimant. If a claim is denied, the Participant, joint annuitant or beneficiary may request a review of the denial, but such a request must be in writing, and must be submitted to the Committee 3 4 within 60 days after the claimant's claim has been denied. A decision upon review shall be made by the Committee within 60 days of the receipt of the request for review, unless the Committee determines that special circumstances require additional time, in which case a decision shall be rendered not later than 120 days after receipt of the request for review. The decision on the review shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific reference to the pertinent Plan provisions on which the decision is based. (f) Indemnification. The Company shall indemnify and hold harmless the Committee, and the individual members thereof, against any and all claims, loss, damage, expense or liability (including reasonable attorney's fees) arising from any action or failure to act with respect to the Plan, except in the case of gross negligence or willful misconduct. 3. Application of the Plan Any individual employed by the Company, or by an affiliate of the Company which has adopted the Plan by action of its Board of Directors with the consent of the Board of Directors of the Company (the "Board"), whose benefits under the Qualified Plan are limited by the application of the Statutory Benefit Limitations shall participate in the Plan, and shall be referred to hereunder as a "Participant". The benefits provided hereunder in respect of any Participant shall be paid by the corporation which employed such 4 5 Participant. In the case of a Participant who is employed by more than one of the Company and any affiliated corporations, the Committee shall allocate the cost of such benefits among the Company and such corporations in such manner as it deems equitable. 4. Benefits Payable (a) Subject to Section 4(b) below, the Company shall pay to each Participant, his joint annuitant or beneficiary a benefit equal to the excess of: (i) The benefit that would have been paid to such person under the Qualified Plan (as it may be in effect from time to time), if the Qualified Plan was not subject to the Statutory Benefit Limitations, over (ii) the benefit actually paid to such person under the Qualified Plan, taking into account in each of (i) and (ii) above any decision made with respect to the Qualified Plan regarding early or deferred retirement, optional methods of benefit payment, pre-retirement death benefit coverage and any other factors which affect the amount, timing or form of the Participant's benefit thereunder. (b) The aggregate annual accrued benefit under the Plan and the Qualified Plan, when expressed as a single-life annuity on the life of the Participant in accordance with the terms of the Qualified Plan (and using the actuarial assumptions employed by the enrolled actuary for the Qualified Plan for the purpose of calculating benefits thereunder) shall be limited to $200,000. 5 6 (c) A Participant's joint annuitant and beneficiary hereunder shall be the same as his joint annuitant and beneficiary under the Qualified Plan. Benefits payable to any person hereunder shall be paid at the same time and in the same manner as benefits payable to such person under the Qualified Plan in accordance with all the terms and conditions applicable to such benefits under the Qualified Plan (other than benefit limitation provisions adopted to conform to the Statutory Benefit Limitations). In no event shall an amount be payable under the Plan in respect of any Participant which would cause the actuarial value of the aggregate employer-provided pension benefits provided under the Qualified Plan and the Plan payable in respect of such Participant as of any date to exceed the actuarial value of the employer-provided benefits that would have been payable in respect of such Participant under the Qualified Plan in the absence of such Statutory Benefit Limitations. 5. Miscellaneous (a) Amendment and Termination. The Plan may be terminated at any time by the Board, and may be amended at any time by the Board or the Committee, except that (i) any amendment which has a material impact on the cost to the Company of maintaining the Plan must be made by the Board, (ii) no such amendment or termination shall reduce the dollar amount of benefit accrued under the Plan by any Participant immediately before the effective date of the amendment or termination (although such dollar amount may be subsequently reduced through operation of the Plan to the extent 6 7 that the benefits accrued by the Participant under the Qualified Plan immediately before such effective date are subsequently increased solely due to an adjustment in the Statutory Benefit Limitations) and (iii) clause (ii) and this clause (iii) of Section 5(a) may not be amended under any circumstances without the written consent of all Participants. (b) Plan Not Funded. Benefits payable under the Plan shall not be funded and shall be paid only out of the general assets of the Copmpany or any corporation referred to in Section 3. The Plan constitutes only a mere promise by the Company (and any participating affiliated corporation) to make benefit payments in the future. Plan participants and their beneficiaries have only the status of unsecured creditors of the Company (or any participating affiliated corporation) with respect to the benefits payable under the Plan. (c) Legal Status of Plan. It is intended that the Plan be considered a "plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees" under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Plan is intended to be unfunded for tax purposes and for purposes of Title I of ERISA. (d) Use of Trust or Annuity Contracts. Notwithstanding the foregoing subsections (b) and (c), the Company may establish a trust from which payments to persons entitled to Plan benefits may be paid; provided, however, that such trust shall be a "grantor 7 8 trust" under Section 677 of the Code, and shall conform in substance to the model "rabbi trust" appearing in Revenue Procedure 92-64, 1992-33 I.R.B. 11. Also, at the request of a Participant, joint annuitant or beneficiary, or on its own accord, the Committee may, in lieu of causing the Company or any such trust to pay from its assets a benefit to which such person is entitled, cause the Company or such trust to purchase an annuity contract which will provide benefits in an amount equal to that which such person in entitled under the Plan. Any such annuity contract must be purchased from a commercial insurance company qualified to do business in the State of California, and whose rating from each of those of Standard & Poor, Moody's and Duff & Phelps which rates such insurance company is one of the two highest given by such organization. The ownership of any such annuity contract shall be retained by the Company or such trust, whichever purchased it. (e) No Assignment. No right to payment or any other interest under the Plan shall be assignable or subject to attachment, execution or levy of any kind, and any attempt to assign any such payment or interest or make it so subject shall be void. (f) No Effect On Employment Rights. The establishment of the Plan shall not be construed as conferring any legal rights upon any employee or other person for a continuation of employment, nor shall it interfere with the right of the Company (or any contributing corporation) to discharge any employee. 8 9 (g) Withholding. The Company shall have the right to deduct from each payment to be made under the Plan any required withholding taxes. (h) Governing Law. The Plan shall be construed, administered and enforced according to the laws of the State of California. (i) Invalidity of Certain Provisions. If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and the Plan shall be construed and enforced as if such provision had not been included. (j) Successor Organizations. The Company agrees that it will not merge or consolidate with any other corporation or organization, or permit its business activities to be taken over by any other organization, unless and until the succeeding or continuing organization or corporation assumes the rights and obligations under the Plan, or other provision for payment of benefits due under the Plan have been made. 6. Effective Date The effective date of the Plan is January 1, 1995. IN WITNESS WHEREOF, the Plan has been adopted by the Board on February 25, 1995, effective as described in Section 6. 9 EX-10.23 5 EXHIBIT 10.23 1 EXHIBIT 10.23 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. PARTIES. This Lease, dated for reference purposes only, August 1, 1988, is made by and between KCB Development, a California general partnership (herein called "Lessor") and SCP Corporation, a California corporation (herein called "Lessee"). 2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property situated in the County of Los Angeles, State of California commonly known as 9601 John Street, Santa Fe Springs, California 90670 and described as in Exhibit A attached hereto by legal description. Said real property including the land and all improvements therein, is herein called "the Premises". 3. TERM. 3.1. TERM. The term of this Lease shall be for 10 years (subject to adjustment under Paragraph 4 and extension terms under Paragraph 50) commencing on the first day of , 1988 and ending on the last day of , 1998 unless sooner terminated pursuant to any provision hereof (unless so adjusted or extended). 3.2. DELAY IN POSSESSION. Lessee is now in possession. 4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly payment of $40,750, in advance, on the 1st day of each month of the term hereof. Lessee shall pay Lessor upon the execution hereof the amount called for by Paragraph 48. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or at such other places as Lessor may designate in writing. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof None as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount herein above stated and Lessee's failure to do so shall be a material breach of this Lease. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall thereupon deposit with Lessor additional security deposit so that the amount of security deposit held by Lessor shall at all times bear the same proportion to current rent as the original security deposit bears to the original monthly rent set forth in paragraph 4 hereof. Lessor shall not be required to keep said deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for any lawful purpose (subject to Paragraph 54 with respect to hazardous substances and Paragraph 57 (vii) hereof with respect to 2 prospective usage by a proposed assignee or subLessee) or any other use which is reasonably comparable and for no other purpose. 6.2 COMPLIANCE WITH LAW. (b) Lessee shall at Lessee's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements in effect as of the date hereof and/or arising during the term or any part of the term hereof, regulating the Premises. Lessee shall not use nor permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant in the building containing the Premises, shall tend to disturb such other tenants. 6.3 CONDITION OF PREMISES. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any convenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition and repair the Premises and every part thereof, structural and non structural, (whether or not such portion of the Premises requiring repair, or the means of repairing the same are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises) including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air conditioning system maintenance contract) ventilating, electrical, lighting facilities and equipment within the Premises, fixtures, walls (interior and exterior), foundations, ceilings, roofs (interior and exterior), floors, windows, doors, plate glass and skylights located within the Premises, and all landscaping, driveways, parking lots, fences and signs located on the Premises and sidewalks and parkways adjacent to the Premises. 7.2. SURRENDER. On the last day of the term hereof, or any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the premises in good operating condition. 7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's obligations under this Paragraph 7, or under any other paragraph of this Lease, Lessor may at its option (but shall not be required to) enter upon the Premises after ten (10) days prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf and put the same in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall become due and payable as additional rental to Lessor together with Lessee's next rental installment. See Paragraph 59 (ii). 7.4. LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under Paragraph 6.2 (a) and 6.3 (a) (relating to Lessor's warranty), Paragraph 9 (relating to destruction of the Premises) and under Paragraph - 2 - 3 14 (relating to condemnation of the Premises), it is intended by the parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises nor the building located thereon nor the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit of any statue now or hereinafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the premises in good order, condition and repair. 7.5 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions or Utility Installations in, on or about the Premises, except for non structural alterations not exceeding $150,000 in cumulative costs during the term of this Lease in any event, whether or not in excess of $2,500 in cumulative cost. Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the building(s) on the Premises without Lessor's prior written consent. As used in this Paragraph 7.5 the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises to their prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor may require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in, or about the Premises that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. (d) Unless Lessor requires their removal, as set forth in Paragraph 7.5 (a), all alterations, improvements, additions and Utility installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall become the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of the Paragraph 7.5 (d). Lessee's machinery and equipment other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2. - 3 - 4 8. INSURANCE INDEMNITY. 8.1. INSURANCE PARTY. As used in this Paragraph 8, the term "insuring party" shall mean the party who has the obligation to obtain the Property Insurance required hereunder. The insuring party shall be designated in Paragraph 46 hereof Lessee shall, as additional rent for the Premises, pay the cost of all insurance required hereunder, except for that portion of the cost attributable to Lessor's liability insurance coverage in excess of $1,000,000 per occurrence. 8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and keep in force during the term of this Lease a policy of Combined Single Limit, Bodily Injury and Property Damage insurance insuring Lessor and Lessee against any liability arising out to the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be a combined single limit policy in an amount not less than $500,000 per occurrence. The policy shall insure performance by Lessee of the indemnity provisions of this Paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. 8.3 PROPERTY INSURANCE. See Paragraph 59 (iii) (a) The insuring party shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises, in the amount of the full replacement value thereof, as the same may exist from time to time, which replacement value is now as per existing policy, but in no event less than the total amount required by lenders having liens on the Premises, against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event same is required by a lender having a lien on the Premises), and special extended perils ("all risk" as such term is used in the insurance industry). Said insurance shall provide for payment of loss thereunder to Lessor or to the holders of mortgages or deeds of trust on the Premises. If the insuring party shall fail to procure and maintain said insurance the other party may, but shall not be required to, procure and maintain the same, but at the expense of Lessee. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount. (c) If the Lessor is the insuring party the Lessor will not insure Lessee's fixtures, equipment or tenant improvements unless the tenant improvements have become a part of the Premises under paragraph 7, hereof. But if Lessee is the insuring party the Lessee shall insure its fixtures, equipment and tenant improvements. 8.4 INSURANCE POLICIES. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least B plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide". The insuring party shall deliver to the other party copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with loss payable clauses as required by this paragraph 8. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Lessor. If Lessee is the insuring party Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor may order such insurance and charge the cost thereof to Lessee which amount shall be payable by Lessee upon demand. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in Paragraph 8.3. If Lessee does or permits to be done anything which shall increase the cost of the insurance policies referred to in Paragraph 8.3 then Lessee shall forthwith upon Lessor's demand reimburse Lessor for any additional premiums attributable to any maintained hereunder cover other improvements in addition to the Premises. Lessor shall deliver to Lessee written statement setting forth the amount of any such insurance cost increase and showing in reasonable detail the manner in which it has been computed. - 4 - 5 8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against under paragraph 8.3 which perils occur in, or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier that the foregoing mutual waiver of subrogation is contained in this Lease. 8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Premises, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any negligence of the Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claims or any action or proceeding brought thereon: and in case any action or proceeding be brought against Lessor by reason of any such claims Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. See Paragraph 59 (iv). 8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee. Lessee's employees, invitees, customers, or any other person in or about the Premises, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinkles, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee Lessor shall not be liable for any damages arising from any act or neglect of any other tenant, if any of the building in which the Premises are located. See Paragraph 59 (i). 9. DAMAGE OR DESTRUCTION. See Paragraph 56 10. REAL PROPERTY TAXES. 10.1 PAYMENTS OF TAXES. Lessee shall pay the real property tax, as defined in paragraph 10.2, applicable to the Premises during the term of this Lease. All such payments shall be made at least ten (10) days prior to the delinquency date of such payment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall be equitably prorated to cover only the period of time prior to or after the expiration of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year during which this Lease shall be in effect, and Lessor shall reimburse Lessee to the extent required. If Lessee shall fail to pay any such taxes, Lessor shall have the right to pay the same, in which case Lessee shall repay such amount to Lessor with Lessee's next rent installment together with interest at the maximum rate then allowable by law. See Paragraph 59 (v) 10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, - 5 - 6 commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Premises. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge herein above included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Premises or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. See Paragraph 59 (vi) 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. See Paragraph 59 (vii) 10.4 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the Premises, without the Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance, or subletting without such consent shall be void, and shall constitute a breach of this Lease. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, provided that said assignee assumes, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or - 6 - 7 subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no subletting or assignment shall release Lessee of Lessee's obligation or alter the primary liability of Lessee to pay the rent and to perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor form any other personal shall not be deemed to be a waiver by Lessor of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignment of subletting of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee or any successor of Lessee and without obtaining its or their consent thereto and such action shall not relieve Lessee liability under this Lease. 12.4 ATTORNEY'S FEES. 13. DEFAULTS; REMEDIES. 13.1 DEFAULTS. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Lessee: (a) The vacating or abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of 10 days after written notice thereof from Lessor in the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) The failure by Lessee to observe or perform any of the convenants: conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph (b) above, where such failure shall continue for a period of 30 days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than 30 days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said 30-day period and thereafter diligently prosecutes such cure to completion. (d) (i) The making by Lessee of any general arrangement or assignment for the benefit of creditor: (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. Paragraph 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days. Provided, however, in the event that any provision of this paragraph 13.1 (d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any of them, was materially false. 13.2 REMEDIES. In the event of any such material default or breach by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default or breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to - 7 - 8 Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises: expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided, that portion of the leasing commission paid by Lessor pursuant to Paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently prosecutes the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount not to exceed $500. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any other provision of this Lease to the contrary. 13.5 IMPOUNDS. In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of rent or any other monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to Lessor, if Lessor shall so request, in addition to any other payments required under this Lease, a monthly advance installment, payable at the same time as the monthly rent, as estimated by Lessor, for real property tax and insurance expenses on the Premises which are payable by Lessee under the terms of this Lease. Such fund shall be established to insure payment when due, before delinquency, of any or all such real property taxes and insurance premiums. If the amounts paid to Lessor by Lessee under the provisions of this paragraph are insufficient to discharge the obligations of Lessee to pay such real property taxes and insurance premiums as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums necessary to pay such obligations. All moneys paid to Lessor - 8 - 9 under this paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a default in the obligations of Lessee to perform under this Lease, then any balance remaining from funds paid to Lessor under the provisions of this paragraph may, at the option of Lessor, be applied to the payment of any monetary default of Lessee in lieu of being applied to the payment of real property tax and insurance premiums. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the building on the Premises, or more than 25% of the land area of the Premises which is not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent shall be reduced in the proportion that the floor area of the building taken bears to the total floor area of the building situated on the Premises. No reduction of rent shall occur if the only area taken is that which does not have a building located thereon. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property, in the event that this Lease is not terminated by reason of such condemnation. Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. Deliberately Omitted. 16. ESTOPPEL CERTIFICATE. (a) Lessee shall at any time upon not less than ten (10) days prior written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and to acknowledge that there are not to Lessee's knowledge any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. (b) At Lessor's option, Lessee's failure to deliver such statement within such time shall be a material breach of this Lease or shall be conclusive upon Lessee (i) that this Lease is in full force and effect, without modification except as may be presented by Lessor (ii) that there are no uncured defaults in Lessor's performance, and (iii) that not more than one month's rent has been paid in advance or such failure may be considered by Lessor as a default under this Lease. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three years financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be sued only for the purposes herein set forth. - 9 - 10 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners at the time in question of the fee title or a Lessee's interest in a ground lease of the Premises, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease, provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. See Paragraph 59 (ii) 20. TIME OF ESSENCE. Time is of the essence. 21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the terms shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. 23. NOTICE. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may be notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, but all options and rights of first refusal, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. - 10 - 11 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive by shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a convenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment by Lessee and subject to the provisions of Paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State wherein the Premises are located. 30. SUBORDINATION. (a) This Lease, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quite possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground Lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within 10 days after written demand shall constitute a material default by Lessee hereunder, or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessors as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30 (b). 31. ATTORNEY'S FEES. If either party or the broker named herein brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or Lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part as Lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs, all without rebate of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. - 11 - 12 34. SIGNS. See paragraph 57 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld. 37. GUARANTOR. In the event that here is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provision on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Premises. 39. Not Used. 40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a larger building or group of buildings then Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the building and grounds, the parking of vehicles and the preservation of good order therein as well as for the convenience of other occupants and tenants of the building. The violations of any such rules and regulations shall be deemed a material breach of this Lease by Lessee. 41. SECURITY MEASURES. Lessee hereby acknowledge that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of Lessee, its agents and invitees from acts of third parties. 42. EASEMENTS. Deliberately Omitted 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30 ) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. INSURING PARTY. The insuring party under this Lease shall be the Lessee. - 12 - 13 47. ADDENDUM. Attached hereto is an addendum or addenda containing paragraphs 48 through 59 which constitutes a part of this Lease and where applicable supersede the printed provisions and shall take precedence. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL, NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE ON THE DATES SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES. Executed at L.A., CA KCB Development, a California general partnership on 10/11/88 By: /s/ Garell ----------------------------- Address: _______________________ By: _____________________________ "LESSOR" (Corporate Seal) Executed at L.A., CA SCP Corporation, a California Corporation on 10/11/88 By: /s/ L.R. Knipple ------------------------------ Address: _________________________ By: ______________________________ "LESSEE" (Corporate Seal) -13- 14 ADDENDUM TO STANDARD INDUSTRIAL LEASE-NET This is an Addendum to that certain Standard Industrial Lease-Net dated August 1, 1988 (the "Lease"), by and between KGB Development, a California general partnership as "Lessor" and SCP Corporation a California corporation as "Lessee. The paragraphs below are a continuation of those in the printed form. 48. Term Commencement. The lease under which Lessee has previously occupied the Premises shall automatically terminate concurrently with the acquisition of fee title to the Premises by the Lessor herein and the commencement of this present Lease is conditional upon such acquisition of such fee title. If such fee title has not been acquired by October 30, 1988, this Lease shall be of no force and effect. If such acquisition of fee title be other than on the first day of a calendar month, then for purposes of all provisions hereof dating from the commencement of the term, such first day shall be deemed the commencement date (although rent and other obligations shall be appropriately prorated) if such acquisition be prior to the 16th of the month; and shall be deemed to be the first day of the next following calendar month if such acquisition be on or after the 16th day of the month. In such latter event, Lessee's occupancy of the Premises from the date of the acquisition of such fee title by Lessor until such first day of such next calendar month shall be pursuant to the provisions of this Lease and Lessee shall pay rent therefor at the original rental rate under the Lease, prorated for the portion of the month involved. In all events, the rent for any partial month commencing on such acquisition of fee title by Lessor shall be payable immediately following such Lessor's acquisition of such fee title. As provided in Paragraph 3.1 the initial term ("Initial Term") of this Lease is 10 years (subject to an additional period in the event that the Expansion Space as hereinafter defined is not completed by the expiration of the first year but construction thereof is later commenced within the first three years) and by reason of the provisions of this Paragraph 48, such 10 year period shall commence on the first day of the calendar month of such acquisition of fee title or on the first day of the first calendar month following such acquisition of fee title, as the case may be. By way of example only, if such fee title is acquired on October 22, 1988, the 10 year Initial Term shall commence on November 1, 1988 and rent for the portion of 15 October, 1988 governed by this Lease shall be $11,830.65 consisting of 9/31sts of the original monthly rent. Upon acquisition of such fee title by Lessor, this Lease shall be delivered and the following blanks completed: 1. Date fee title acquired: Oct. 12, 1988. 2. First day of the month the term commencement for time expiration purposes: First day of October, 1988. 49. Initial Term Length. As noted above, the Initial Term of this Lease shall be for 10 years; provided, however, that if the Expansion Space provided under Paragraph 51 hereof is not completed in time for the first incremental rent attributable thereto to be paid by the 13th month of this Lease and the Expansion Space is later completed pursuant to said Paragraph, then the Initial Term of this Lease shall be extended so as to expire after there shall have been 120 months (10 years) of increased rent attributable to such Expansion Space. As provided in said Paragraph 51, construction of such Expansion Space must commence no later than the third anniversary of the commencement of the term of this Lease and if not by then so commenced, there shall be no Expansion Space, no resulting extension of the term of this Lease for failure to have said incremental rent by the 13th month, and the Initial Term shall therefore be 10 years only. 50. Extension Options. Lessee may extend the term of this Lease for five additional years ("First Extension Term") after the Initial Term by giving an extension notice to Lessor not later than nine months prior to expiration of the Initial Term; and may thereafter (if the First Extension Term option shall have been exercised) extend the term of this Lease an additional five years ("Second Extension Term") by giving written notice to Lessor no later than nine months before expiration of the First Extension Term. A condition of the exercise of each Extension Option is that there then be no uncured default by Lessee. 51. Expansion Space. Lessee has heretofore delivered to Lessor schematic plans for proposed expansion space ("Expansion Space") to be added to the building comprising a part of the Premises and such - 2 - 16 schematic plans are identified as being those of Architect Oldham & Erickson dated April 22, 1988. In the event that Lessee wishes to proceed with the construction contemplated by such schematic plans, Lessee shall proceed to have preliminary plans prepared and thereafter shall proceed to have final plans prepared. In each case, the plans shall be subject to the reasonable review and approval of Lessor and in this process the Lessor shall respond promptly so that the entire review process of each set of plans may be completed within 30 days after the submission to the Lessor including the taking into account of such comments as Lessor may have, and the drafting of corrective revisions. If after obtaining approval of the final set of plans, Lessee still wishes to proceed, Lessee shall cause the Expansion Space to be constructed in accordance with such finally approved plans with due diligence (but subject to events of force majeure) and upon completion of such construction and when it is legally permissible to occupy the Expansion Space; Lessee shall do so, and with the next following calendar month, the monthly rent hereunder shall be increased to reflect the addition of such Expansion Space to the Premises and at the same time Lessor shall reimburse Lessee for the Cost of Construction (as herein defined) of such Expansion Space, all in accordance with the following terms and provisions applicable thereto: (i) When the Expansion Space is occupied there must be a temporary certificate of occupancy or other comparable approval from the City of Santa Fe Springs (if the permanent certificate of occupancy has not been obtained, Lessee shall nevertheless occupy but shall diligently pursue and obtain such final certificate of occupancy as expeditiously as possible). (ii) Unless the net worth of Lessee's parent corporation shall then be at least $30,000,000, upon the commencement of construction of the Expansion Space, the Lessee shall provide (or cause its contractor to so provide) to the Lessor a completion and payment bond with respect to the work being undertaken in form and substance reasonably acceptable to Lessor. - 3 - 17 (iii) Upon the completion of the work and prior to receipt of payment therefor from Lessor, Lessee shall provide to Lessor (a) an endorsement to Lessor's title policy (or equivalent protection under a new policy) insuring that there are no mechanics liens applicable to the Premises arising from the construction of the Expansion Space; and (b) a certificate from the Architect that the work has been done in accordance with the approved plans and specifications and all applicable governmental requirements. (iv) Upon the completion of the Expansion Space Lessee shall cause the architect to prepare a so-called "as built" set of plans and shall deliver a true copy thereof to Lessor. (v) Lessee shall cause accurate records of the cost of the Expansion Space to be kept and upon completion shall give a full and complete breakdown thereof to Lessor. Such Construction Costs shall consist of all costs of actual construction, all costs of the professionals involved, all expenses of construction casualty and liability insurance and other so-called "soft" costs; all governmental fees, costs of interest incurred during construction and prior to reimbursement by Lessor (with the same to be based upon the actual cost of money to Lessee's parent corporation) and the remodeling costs of certain office space areas in the existing Premises which are being transferred into the Expansion Space. Construction Costs will not include any developer's fee or the cost of any time for the personnel of Lessee or its parent corporation in connection with the project other than the time of a Project Supervisor to be charged at $50 per hour for an aggregate not in excess of $25,000. (vi) Upon construction and installation of the Expansion Space and each component thereof, the Expansion Space shall be deemed incorporated into the Premises and shall become and remain the property of Lessor (subject to Lessee's rights of occupancy and use pursuant to this Lease). Notwithstanding the automatic application of the foregoing, Lessee shall execute, acknowledge and deliver to Lessor, concurrently with the payment provided in (vii) below, such deeds and/or bills of sale as Lessor deems - 4 - 18 necessary or advisable to confirm its ownership of the Expansion Space. (vii) Concurrently with the commencement of additional rent for the Expansion Space, Lessor shall pay to Lessee the full Construction Costs as set forth on said full and complete breakdown thereof, but in no event more than $2,300,000. The additional monthly rent to be paid with respect to the Expansion Space shall be 1/12 of the product of 8-1/2% multiplied by the lesser of (i) $2,000,000 or (ii) the total Construction Costs for which such payment is made. To the extent that the Construction Costs to be reimbursed by Lessor exceed $2,000,000, the additional monthly rent to be paid with respect to the Expansion Space shall be further increased by 1/12 of the product of the Interest Rate (as defined below) multiplied by such excess costs, but in no event more than an excess of $300,000. The Interest Rate as used herein shall mean one-half of one percent per annum over the actual annual interest rate payable by Lessor on the permanent loan which it intends to obtain on the Premises. Lessee agrees to use reasonable efforts to obtain a reasonable interest rate on such loan and currently anticipates that such rate will be approximately ten and one-half percent per annum. Lessor may delay Construction Costs funding (and such funding shall not be deemed due and payable by Lessor) until Lessee has complied with items (i) exclusive of the parenthetical expression, (iii) (iv), (v) and the second sentence of (vi) immediately above (collectively, the "Funding Conditions"); provided, however, that if Lessor delays such funding pending meeting of any of the above conditions, the rental increase attributable to the Expansion Space shall not go into effect until such funding is made. If such funding and rental increase is not on the first day of a calendar month, the rent for such partial month shall be appropriately prorated. Lessee shall for the preceding three months keep Lessor informed as to the probable funding date. Lessee shall have satisfied all of the Funding Conditions and made demand for reimbursement of the Construction Costs within nine months after issuance of a certificate of occupancy (or its equivalent) for the Expansion Space; provided, however, that if - 5 - 19 Lessee has not satisfied one or more of the Funding Conditions within such nine months, Lessee shall have an additional three months to satisfy said Funding Conditions. If Lessee has not made demand for reimbursement of the Construction Costs and satisfied all of the Funding Conditions within the time set forth above, Lessor's obligation to so reimburse Lessee shall terminate and Lessee shall, within 10 days after written demand, reimburse Lessor for any actual loss suffered by Lessor because of Lessee's failure to request reimbursement of the Construction Costs; provided that Lessor may agree in writing, upon good cause shown, to extend the time period for Lessee to satisfy any of the unsatisfied Funding Conditions. Lessor agrees to extend such time period if such Funding Conditions have not been satisfied due to problems outside of Lessee's control. (viii) Lessee shall during construction of the Expansion Space carry customary course of construction casualty and liability coverage and shall cause Lessor to be named as an additional insured thereunder, and with respect to any uninsured claims or those within any deductible limit, Lessee shall indemnify and hold Lessor harmless. If the funding conditions have been fully and timely satisfied but Lessor does not pay the Lessee the Construction Costs of the Expansion Space when such payment is otherwise due and does not cure such default within 30 days after notice so to do, Lessee shall have the following three remedies, which shall be exclusive. Such three remedies are as follows (remedy (b) if pursued is exclusive; remedies (a) and (c) may each be pursued alone or together unless and until remedy (b) is elected): (a) Lessee may cease paying rent under this Lease until the rental obligation that it otherwise would have paid shall equal such Construction Costs plus interest on the declining balance thereof (just as if the rent payments not made were being used to amortize an "interest included" mortgage note) at the interest rate of prime plus 3% per annum with prime being that defined in Paragraph 59(ii) hereof (but in no event more than the highest - 6 - 20 rate then allowed by law). Accordingly, each rental payment not made shall be deemed to have been made and then at once returned to be used first to pay such interest theretofore accrued and then to reduce the unpaid Construction Costs balance. (b) In the alternative, Lessee may at any time while such default continues, prematurely exercise its option of purchase under Paragraph 53 hereof (with a closing 30 days after such exercised) even though such option has not otherwise matured, except that in the event of such exercise, the purchase price shall be S6,050,000 rather than any price set by appraisal. (c) Lessee may bring action to recover the money owed. If a bona fide dispute exists as to whether the Funding Conditions have been fully and timely satisfied, Lessee shall not have the right to exercise the remedies under subparagraphs (a) or (b) above until such dispute has been resolved. 52. Cost of Living Increases. Rent under the provisions of Paragraph 4 hereof shall be subject to increase (but never reduction) based upon changes in the Cost of Living as herein defined (subject to the maximum or minimum amounts herein provided), all in accordance with the provisions set forth below: (i) The percentage increase in the Cost of Living (as herein defined) over the previous one year period shall be determined on each anniversary of the commencement date of the term of this Lease. The "Effective Annual Rate" for each year shall be the percentage Cost of Living increase for such year, as determined above; provided, however, that if such percentage Cost of Living increase for any year is less than 3-1/2%, the Effective Annual Rate shall nevertheless be 3-1/2%, and if such percentage Cost of Living increase for any year is more than 7%, then the Effective Annual Rate shall nevertheless be 7% and no more. On the third anniversary of the Lease commencement date, and every three years thereafter, rent shall be increased by the sum of the Effective Annual Rates for the prior three years. These three year - 7 - 21 adjustments shall occur at three year intervals without regard to the timing of any commencement of the First Extension Term or the Second Extension Term. For example, if the First Extension Term commences after 13 years (meaning that the Expansion Space has been completed at the expiration of the first three years) and the option for the Second Extension Term is also exercised, then such three year reviews shall be after years 3, 6, 9, 12, 15. 18 and 21. (ii) It is recognized that the information needed to apply the above formula may not be available for approximately two months after the time that it is first needed. In such event, rent shall be paid at the minimum increased amount until the information is available and there shall then be a retroactive adjustment between the parties. (iii) As noted in Paragraph 51, in the event that the Expansion Space is added there shall be an increase in the monthly rent. The rent attributable to this Expansion Space shall also be subject to the aforementioned Cost of Living adjustment at the time of the next regular annual review, but with respect to this initial review of such increased rent, the parties recognize that a full year period shall not have expired at the time of the review, and accordingly there shall be a separate formula applied to this adjustment of the increased rent attributable to the Expansion Space. In such special formula the Effective Annual Rate for the year during which such Expansion Space is added shall be calculated by determining the percentage increase in the Cost of Living from the first month for which rent is increased because of the Expansion Space until the end of such year, and comparing it with annual minimum and maximum percentages which have been reduced from 3.5% and 7%, respectively, by multiplying said amounts by a fraction the numerator of which is the number of months for which increased rent has been paid on the Expansion Space during the year just expiring and the denominator of which is 12. For example, if there have been 6 months of increased rent, 3.5% shall be reduced to 1.75% and 7% shall be reduced to 3.5%. The initial annual review after occupancy of the Expansion Space shall be the only review during which separate calculations - 8 - 22 shall be made with respect to the original rent and that for the Expansion Space. (iv) The Cost of Living shall be determined by reference to the Consumer Price Index for All Urban Consumers for the area within which the Premises are located as promulgated by the Department of Labor of the United States Government or, if at any time such Index is not available, by an index jointly and reasonably selected by Lessor and Lessee which shall reflect changes in the Cost of Living in a manner comparable to that of the above named Index; and when changing from one Index to another, appropriate conversion factors shall be used. 53. Purchase Option. If there then be no uncured default by Lessee, Lessee shall have an option (the "Purchase Option") to purchase the Premises for fair market value (as herein established) at the time of the expiration of the Initial Term of the Lease upon the following terms and conditions: (i) In the event that Lessee is considering exercising the Purchase Option if the purchase price be acceptable, Lessee must give notice (the "Notice") to that effect to Lessor on or before one year prior to the expiration of the Initial Term of this Lease, but not more than 15 months prior to such expiration. Within 5 days after the giving of the Notice, each of the parties shall designate an appraiser who has within the preceding three year period had experience appraising industrial properties in the Santa Fe Springs area, and such appraisers shall each (within 45 days after the Notice shall have been given) separately determine the probable fair market value of the Premises as of the end of the Initial Term and in doing so such value shall be calculated without reference to (1) the extension options set forth in Paragraph 50 of this Lease or (2) the presence of any hazardous materials, or (3) the need for any work to correct deferred maintenance, repairs and replacements. Such two appraisers, without consulting with each other, shall each submit to both Lessor and Lessee a copy of their appraisal. If the two appraisals are within 10% of the amount of the higher one, then - 9 - 23 the average of the two shall be the fair market value. If they are not within such 10%, both appraisers shall be so advised at once and then such two appraisers shall select a third and the third appraiser shall, without consulting with either of the first two, determine fair market value and submit his report to both Lessor and Lessee within 70 days after the aforementioned Notice. The value selected by the third appraiser shall be averaged with whichever of the first two appraisals is closest to that value and if they be equal distance, then the value of the third appraiser shall be used without any averaging. (ii) With the applicable fair market value of the property thus determined, Lessee shall advise Lessor on or before nine months prior to expiration of the Initial Term as to whether or not Lessee wishes to exercise Lessee's Purchase Option. If Lessee does not, then Lessee shall be responsible for the appraisal fees charged by all three appraisers. If the Purchase Option be exercised, then each party shall pay the appraiser selected by that party and they shall equally share the cost of any third appraiser. Each retainer agreement with an appraiser shall contractually obligate the appraiser to meet the time schedule provided herein. (iii) If such Purchase Option be exercised, then the parties shall promptly enter a purchase and sale escrow at First American Title Insurance Company which shall be timed to close on the expiration of the Initial Term. The purchase price shall be paid all cash at the closing and the Lessor shall deliver the Premises free and clear of any trust deed mortgages and other encumbrances other than taxes not then delinquent, and shall provide an owner's policy of title insurance with exceptions that are not materially different from those affecting the Premises at the time of its acquisition by Lessor in 1988, except for those matters, if any, created at the express request of Lessee or approved in writing by Lessee. As this Lease is a triple net lease there shall be no need for the prorations at such closing of items already being paid by Lessee pursuant to the terms of this Lease. Lessee shall have the right to name a nominee to - 10 - 24 accept title in its place and stead. In addition to providing the aforementioned title policy, Lessor shall pay the expense of any transfer taxes. Lessor and Lessee shall equally share the escrow holder's fee. Any other miscellaneous costs of closing shall be borne in accordance with the practice of the escrow holder. Escrow instructions shall be upon the customary form of the escrow holder, modified to conform to the provisions hereof. (iv) By reason of this Purchase Option and the First Extension Term option under Paragraph 50 hereof, it is contemplated that if Lessee has given the Notice above provided under Item (i) above, then on or before nine months prior to expiration of the Initial Term, Lessee shall do one of three things, to wit, exercise the Purchase Option under this Paragraph 53 (in which event the Lease Extension options shall become moot); exercise the First Lease Extension option; or do neither of the foregoing, in which event this Lease shall simply terminate upon expiration of its Initial Term. (v) Notwithstanding any of the foregoing, if the fair market value purchase price determined by appraisal as above provided be less than the total ("Minimum Value") of $6,050,000, plus 4% per annum (not compounded) on such sum from the date of Lessor's acquisition of the Premises until the date of the expiration of the Initial Term of the Lease, plus the Construction Costs paid by Lessor to Lessee in the event that the Expansion Space has been built, plus 4% per annum on such Construction Costs (not compounded) from the date Lessor pays Lessee the Construction Costs until expiration of the Initial Term of this Lease; then, unless Lessee is prepared to pay as its Purchase Price such Minimum Value in lieu of that determined by appraisal, the entire Purchase Option process shall at Lessor's request be delayed by two years and repeated again. The mechanics for this delay shall be as follows: (a) If the fair market value established by appraisals be less than the Minimum Value, then within 30 days after such establishment (i.e., 30 days after the supporting appraisals have - 11 - 25 been delivered to Lessor), Lessor shall give written notice to Lessee as to whether or not Lessor wishes to delay the Purchase Option process by two years. If Lessor does not elect such a delay, then the parties shall proceed without reference to these delay mechanics. (b) In the event that the Lessor indicates that it does wish a two year delay, Lessee shall, when the time comes when it normally would have exercised the Purchase Option (that is, nine months before expiration of the Initial Term) elect by notice to the Lesser either (i) to forego the Purchase Option altogether; or (2) exercise the Purchase Option but with the understanding that the Minimum Value rather than the fair market value shall prevail as the Purchase Price: or (3) go along with the two year delay in the Purchase Option process. In such third event the Lessee shall concurrently be required to exercise the First Extension Term option under Paragraph 50 hereof, but if such extension option is exercised under these circumstances and the Lessee ultimately does not exercise the Purchase Option under the delayed mechanics, Lessee may elect (by written notice given at least nine months prior to the second anniversary of the commencement of the First Extension Term) to terminate the First Extension Term upon expiration of the second anniversary of its commencement. (c) If, based on the foregoing, there is to be a two year delay in the Purchase Option process, then the Lessor shall pay for the full cost of the appraisers used in the initial appraisal process and the Lessee, if it is still considering exercising the Purchase Option, shall at the time of the first anniversary of the commencement of the First Extension Term so notify the Lessor and the appraisal process shall begin anew just as if the Initial Term were to expire in another year at the time of the second anniversary of the commencement of the First Extension Term (the "Hypothetical Expiration Date"). Accordingly, at least nine months prior to such Hypothetical Expiration Date, Lessee shall advise whether or not it is exercising its Purchase Option, in which case the parties shall proceed accordingly (and the Lessor - 12 - 26 may not again delay the process) and the purchase escrow shall then close on the Hypothetical Expiration Date and the purchase price shall be based upon the second set of appraisals. If Lessee does not elect to exercise the Purchase Option, the Lessee shall be responsible for all costs of the second appraisal process. Further, in such event then (as provided in Item (b) immediately above) the Lessee may exercise its right to terminate the First Extension Term at the expiration of the first two years thereof by giving notice to that effect at least nine months prior to such expiration. (vi) In the event that, prior to 21 months before the end of the Initial Term, there be an assignment of this Lease for which Lessor's consent be required under Paragraph 12.1, then within 150 days thereafter Lessor may notify the assignee in writing that Lessor has elected to accelerate the Purchase Option, in which event such assignee in its capacity as Lessee must within 180 days after the assignment give the "Notice" under Paragraph 53(i) above or lose the Purchase Option forever; and if the Notice be so given, then the probable fair market value referred to in Paragraph 53(i) shall be established as of the first anniversary of the assignment (rather than at the end of the Initial Term) and Lessee's advisement under Paragraph 53(ii) as to whether it wishes to exercise the Purchase Option or not shall be given within 30 days prior to such first anniversary and the close of escrow under Paragraph 53(iii) shall be upon such first anniversary. If Lessor does so accelerate the Purchase Option, Lessor shall have no "delay" rights under Paragraph 53(v). If the Purchase Option be so accelerated and exercised, Lessee's Lease Extension Options shall remain in full force and effect. 54. Hazardous Waste. Lessee shall not engage in any activities on the Premises, nor bring into or create in the Premises, any materials the possession, the doing, use or disposal of which requires a permit from any federal, state or local agency having jurisdiction over hazardous, toxic, or infectious materials without (i) giving Lessor at least thirty (30) days prior written notice of its intention to introduce any such materials into or upon the Premises, and (ii) - 13 - 27 obtaining such a permit and observing all conditions thereof. Lessee shall not engage in any activity on the Premises that violates any federal; state or local laws, rules or regulations pertaining to hazardous, toxic or infectious materials, and shall promptly, at Lessee's expense, take all investigatory and/or remedial action required or ordered for clean up of any contamination of the Premises or the elements surrounding same created or caused during the lease term or caused by Lessee during its prior occupancy of the Premises. Without limiting the foregoing, and whether or not required by law, if Lessee does not purchase the Premises (as provided elsewhere in this Lease), Lessee shall with respect to all matters caused during the lease term or caused by Lessee during its prior occupancy, at or prior to the expiration of the Lease term (as the same may have been extended), remove all hazardous, toxic or infectious materials from the Premises, perform any necessary or advisable clean-up work or other remedial action, and deliver the Premises to Lessor in a safe, clean and uncontaminated condition. Lessee shall indemnify and hold Lessor, its agents, employees, lenders, and the Premises, harmless from and against any and all costs, loss, claims, liability and expenses, including without limitation, penalties and attorneys fees and costs, arising out of any matter within the scope of this Paragraph, including, but not limited to (i) the investigation, remediation and/or abatement of any contamination to the Premises and/or the underlying real property created or caused during the lease term or caused by Lessee during prior occupancy of the Premises, and (ii) claims asserted by third parties for damages resulting from the presence of any such materials in, on or about the Premises and/or the underlying real property. The foregoing indemnification obligations shall be unconditional and absolute, and shall apply regardless of whether Lessee has complied with all applicable governmental regulations, and even though Lessee may have acted in good faith in performing or permitting the acts or events which resulted in the presence of hazardous materials in, on or about the Premises. However, aside from indemnity with respect to claims from Lessee's own employees, neither this provision nor any other provision of this lease (including paragraph 6) shall impose any duty on Lessee with respect to any matter that was neither (a) caused during the term, or (b) caused by Lessee during its occupancy prior to the term - 14 - 28 commencement. The obligations contained in this Paragraph shall survive the expiration or earlier termination of this Lease. If the premiums under lessors umbrella liability policy of not in excess of $5,000,000 is increased by reason of Lessee utilizing the Premises for any purposes other than those in which Lessee is engaged as of the date hereof, the Lessee shall on request reimburse Lessor for the amount of such increased amount each time Lessor pays it. 55. Earthquake Insurance. Earthquake insurance is not called for by Paragraph 8.3 hereof. Nevertheless, Lessee has obtained an earthquake coverage policy and submitted a copy thereof to Lessor and Lessor has expressly approved that coverage which calls for $4,000,000 of coverage with a $250,000 deductible. Lessee will continue that coverage or comparable coverage throughout the term, so long as the same can be obtained for an annual premium not in excess of 125% of that paid with respect to the initial year, provided, however, that once the Expansion Space is completed the amount so paid in the initial year shall for this purpose be deemed to be that which would have been paid had the coverage been increased to include in that year the Construction Costs of the Expansion Space. In the event that a greater premium is required then Lessee shall be entitled to curtail coverage by increasing deductibles or providing less insurance or both so as to keep the total premium obligation within such 125% limitation. Provided, however, that if such steps result in there being less than $1,500,000 ($1,500,000 plus 30% of said Expansion Space Construction Costs after completion of the Expansion Space) of coverage with respect to such earthquake risk on the Premises at the time of actual earthquake damage, then, if and to the extent that such insurance provides less than such $1,500,000 (or $1,500,000 plus said 30%, as the case may be) the shortfall (including any deductible amount) shall be paid by Lessee as if self-insured to that extent. Any additional risk of loss from earthquake in excess of $1,500,000 (or $1,500,000 plus 30%, as the case may be) shall be borne by Lessor and in addition Lessor shall bear the risk of loss from those other risks not generally covered by an extended coverage so-called "all risk" policy, such as atomic fission. The fact that Lessor "bears a risk of loss" does not mean that Lessor has a duty to repair, but only that Lessee has no such duty either and Lessee may terminate this Lease as - 15 - 29 provided in Paragraph 56(b) below unless Lessor elects to repair as therein provided. In the event Lessee's parent corporation's net worth becomes less than $15,000,000 then while such condition continues, the percentage "125%" in all of the foregoing provisions of this Paragraph shall be read as "250%". 56. Damage or Destruction. In the event of partial or total destruction of the Premises from fire or other casualty during the term of this Lease then: (a) If the risk is covered by insurance, the insurance proceeds shall be made available for rebuilding and the Lessor shall cause any encumbrance upon the Premises to expressly authorize such use. Such rebuilding shall be done by Lessee following procedures, mutatis mutandis, comparable to those set forth in Paragraph 51 with respect to the building of the Expansion Space, except as the contrary is provided in this Paragraph 56. (b) In the event the risk is not covered by insurance (or in the ease of earthquake, in the event the insurance proceeds plus any "self-insured" amount for which Lessee is liable under Paragraph 55 hereof, in total are inadequate to rebuild) then Lessee (i) may elect to cancel this Lease as of the date of such loss by giving notice within 30 days thereafter or, in the alternative, (ii) may elect, by giving a notice within the same time period, to rebuild just as in the ease of an insured loss under Item (a) above, in which event Lessee shall do such rebuilding with its own funds, or in the ease of earthquake, with its own funds to the extent that insurance proceeds do not prove adequate. If Lessee elects to proceed under Item (i) above of this provision, Lessor may by giving notice within 20 days thereafter elect to provide funds for repair and establish by evidence accompanying such notice Lessors ability so to do to Lessee's reasonable satisfaction, in which event Lessee shall repair as in the case of an insured loss with Lessor taking the place of the insurance company (or in the case of earthquake loss, providing funds needed in excess of S1,500,000). - 16 - 30 Notwithstanding any of the foregoing, if the destruction be within the last 12 months of the Initial Term or the then current Extension Term, then, unless Lessee is prepared to then exercise the next Extension Option (if any there be) within 30 days after the loss, this Lease shall terminate as of the date of such loss and Lessor shall be entitled to all insurance proceeds and Lessee need not rebuild. As used in this paragraph, references to insurance are to policies required to be carried pursuant to the provisions of this Lease. With the exception of earthquake insurance, such policies are to be for full replacement value and, accordingly, in those circumstances where Lessee is obligated to restore, any shortfall in the insurance proceeds (after all insurance proceeds have been made available to Lessee) shall be made up by Lessee with its own funds. Similarly, if the policies have deductible amounts, Lessee shall make up these amounts. Subject to the requirements of the respective insurance carriers, it is contemplated that insurance proceeds for rebuilding will be funded incrementally during the rebuilding process to pay for the costs of construction as they are incurred. Upon any termination of this Lease pursuant to this Paragraph, (i) there shall be a proration of the rent and other Lessee obligations under this Lease as of the date of such termination; and (ii} if the loss giving rise to the termination was covered by insurance and not due to earthquake, Lessee shall pay Lessor any deductible amount under the policy; in the case of earthquake shall pay the amount by which insurance proceeds fail to provide $1,500,000 due to policy limits, deductible amount or both. Lessor and Lessee waive any provisions of law relating to termination of leases when leased property is destroyed and agree that instead the same shall be governed by the terms of this Lease. 57. Signs. Subject to compliance with all governmental requirements and the coverage of liability with respect to signs under the liability policies called for by this Lease, Lessee may keep and maintain all signs on the Premises as of the date hereof and may remove any signs or place any additional signs on the Premises as Lessee may reasonably determine. When the term (and any extensions) expires, Lessor may require that Lessee take or leave sign fixtures then in place and if removed repair any damage caused by such removal, - 17 - 31 but in all events Lessee shall take those signs elements comprising the lettering. 58. Short Forms. Upon the request of Lessee, there shall be prepared, executed and recorded at Lessee's expense a short form of this Lease. Upon the request of Lessee, there shall be prepared, executed and recorded at Lessee's expense a short form of the Purchase Option set forth in this Lease. Lessee may elect, at its own cost and expense and if available, to obtain title insurance with respect to the leasehold estate hereunder or with respect to said Purchase Option or both Lessor shall reasonably cooperate in Lessee's efforts to obtain any such coverage. 59. Miscellaneous. These Addendum items qualify specific printed paragraphs as indicated: (i) Lessee is already in possession of the Premises and accordingly the provisions of Paragraphs 6.2(a) and 6.3(a) shall have no application and have been deleted. (ii) With respect to the provisions of this Lease in Paragraphs 7.3, 10.1 and 19 calling for payment of interest at the highest rate permitted by law, such rate shall not exceed the prime rate in effect from time to time plus three percentage points per annum. Such prime rate shall be that designated as such (the so-called "reference rate") from time to time during the term of this Lease by the Security Pacific National Bank. (iii) Paragraph 8.3 (a) is supplemented as follows: "Lessee may elect to carry for the benefit of Lessor rental value insurance (and must so elect as to any time when its parent corporation's net worth is less than $15,000,000), in which event rent and other Lessee obligations shall abate hereunder during the restoration of any destruction if and to the extent that insurance proceeds pay for such rent or other tenant obligations. In the event that Lessee elects not to carry such insurance, then, if this Lease continues without termination, there shall be no such abatement and such obligations shall continue, even - 18 - 32 though Lessee is deprived of the use of the Premises or a portion thereof during the restoration period. At such time as Lessee's parent corporation's net worth be at least $15,000,000 and Lessee has not subleased or assigned, the number 'S1000' appearing in the last line of 8.3(a) shall read '$100,000" (iv) None of the provisions of Sections 8.6 or 8.7 shall be construed as relieving Lessor for its own negligent acts or omissions. (v) Notwithstanding the provisions of Paragraph 10.1 hereof, in the event that there be an increase in real property taxes attributable to any transfer of the Premises (including any subsequent increases due to applying an annual "inflation" factor to the initial increase and such subsequent increases), then after Lessee pays such increased taxes, Lessor shall within 30 days after a request so to do, reimburse the Lessee for the amount thereof in excess of what such taxes would have been had there been no such transfer(s). This provisions shall only apply during the Initial Term and not during any Extension Term of the Lease. In addition, in the event that Lessee shall assign or sublease the Premises (other than to an affiliate under Paragraph 12.2), this provision shall not apply to any taxes accruing from and after the date of such event. (vi) The first sentence of Paragraph 10.2 is amended by adding, in the second line thereof, the words, "the current portion of" immediately preceding the words improvement bond or bonds and by adding, in the third line thereof, the words ", corporate income, franchise" immediately after the words Personal income. (vii) In determining reasonableness of Lessor's approval under Paragraph 12.1, Lessor may, without limitation, treat as a reasonable basis for disapproval: (i) any prospective use by an assignee or sublessee of substances for which a special handling governmental permit is required or substances the use of which increases fire or liability insurance rates over those generally applicable to light industrial use of property; or (ii) the fact - 19 - 33 that the net worth of the assignee or sublessee (when added to that of any guaranteeing parent company and officer(s), but not including that of any inactive investors that may guarantee) be less than S10,000,000 if such be the case. Any permitted assignment by Lessee shall include assignment of the Extension Options and Purchase Option under this Lease, subject however to the provisions of Paragraph 53(vi). If and when Lessee commences serious negotiations with a prospective sublessee or assignee of this Lease, Lessee shall notify Lessor in writing thereof and identify the prospect. - 20 - 34 GUARANTEE (Attached to Lease dated as of August 1, 1988 between KCB Development as Lessor and SCP Corporation as Lessee covering premises at 9601 John Street Santa Fe Springs, California) The undersigned ("Guarantor") is the parent corporation of Lessee under the above Lease, and as a material inducement to the Lessor to enter into said Lease, hereby unconditionally guarantees the full and timely payment of all sums and performance of all obligations required to be paid or performed by such subsidiary with the same force and effect as if Guarantor were jointly and severally liable thereunder as a principal with such subsidiary, and Guarantor hereby waives any laws with respect to guarantees which could lead to a contrary result to the fullest extent that the same may be lawfully waived. Without limiting the foregoing: 1. Guarantor waives the benefit of any statute of limitations affecting Guarantor's liability under this Guarantee. 2. The provisions of the Lease may be changed by agreement between Lessor and Lessee at any time, or by course of conduct, without the consent of or without notice to Guarantor. This Guarantee shall guarantee the performance of the Lease as changed. Assignment of the Lease (if and to the extent permitted by the Lease) shall not affect this Guarantee. 3. This Guarantee shall not be affected by Lessor's failure or delay to enforce any of its rights. 4. If Lessee defaults under the Lease, Lessor can demand performance of and can proceed immediately against Guarantor or Lessee, or both, and/or Lessor can enforce against Guarantor or Lessee, or both, any rights that it has under the Lease, or pursuant to applicable laws. If the Lease terminates and Lessor has any rights - 21 - 35 it can enforce against Lessee after termination, Lessor can enforce those rights against Guarantor without giving previous notice to Lessee or Guarantor, or without making any demand on either of them. 5. Guarantor hereby waives the right to require Lessor to (i) proceed against Lessee; (ii) proceed against or exhaust any security that Lessor holds from Lessee; (iii) pursue any other remedy in lessor's power. Guarantor waives any defense by reason of any disability of Lessee, and waives any other defense based on the termination of Lessee's liability from any cause. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protests, notices of dishonor, and notices of acceptance of this Guarantee, and waives all notices of the existence, creation or incurring of new or additional obligations. 6. If Lessor disposes of its interest in the Lease, "Lessor" as used in this Guarantee, shall mean Lessor's successors. 7. If Lessor is required to enforce Guarantor's obligations by legal proceedings, Guarantor shall pay to Lessor all costs incurred, including without limitation, all attorneys fees and costs as set by the court. 8. Guarantor's obligations under this Guarantee shall be binding on Guarantor's successors in interest and assigns. DATED: 10/11/88 KERR GLASS MANUFACTURING CORPORATION By: /s/ Louis Rambaud -------------------------------- Title: VP Corp. Development - 22 - 36 EXHIBIT A of a Standard Industrial Lease dated August 1, 1988 between KCB Development and SCP Corporation PARCEL 1: Lot 1, and the Southwesterly 161.22 feet of Lot 2, measured at right angles from the Southwesterly line of said Lot 2 of Tract No. 27623, in the city of Santa Fe Springs, as shown on a map recorded in Book 706 Pages 55 to 57 inclusive of Maps in the office of the country recorder of said county. EXCEPT from said Lot 1, that portion thereof described as follows: Beginning at a point in the Northwesterly line of said Lot 1, that is distant thereon North 39" 01' 38" East 267.04 feet from the most Westerly corner of said lot 1, thence along said Northwesterly line, South 39" 01' 35" West 267.04 feet to said most Westerly corner; thence along the southwesterly and Southerly lines of said Lot 1 as follows: South 50" 04' 20" East 378.84 feet and North 84" 28' 38" East 23.85 feet, thence along the Southeasterly line of said lot 1, North 39" 01' 35" East 250.04 feet, thence North 30" 04' 20" West 395.84 feet to said point of beginning. ALSO EXCEPT an undivided one-half of all oil, gas and minerals and of all oil, gas and mineral rights upon and under said land with no right of entry on the surface of said land for the purpose of extracting oil, gas and minerals thereon and thereunder, as reserved by Security First National Bank of Los Angeles, in deed recorded in Book 18259 Page 99, Official Records. ALSO EXCEPT an undivided 1/4th interest in and to all oil, gas or other hydrocarbon substances and all minerals of every kind and nature in or under or produced from below 500 feet from the surface of said land, as reserved by Justin J. Accarias, et al, in the deed recorded January 8, 1936 in Book 49964 Page 104, Official Records. All interests to enter in and upon the surface or within 500 feet of the surface of said land were quitclaimed to the record owners of the surface of said land by a deed recorded February 16, 1961 as Instrument No. 1895, in Book 01125 Page 70, Official Records. ALSO EXCEPT an undivided one-fourth interest in all oil, gas or other hydrocarbon substances and all minerals of every kind and nature, in or under or produced form below 500 feet from the surface of said land without the right of surface entry, as reserved in the deed from Ben Weingart, as Trustee for Trust 2 under the will of Stella 37 Weingart, deceased, et al., recorded February 16, 1961 as Instrument No. 1597 in Book D1125 Page 74, Official Records. PARCEL 1A: A non-exclusive easement for railroad and all incidental purposes, over that portion of Lot 3 of Tract No. 27623, in the city of Santa Fe Springs, as shown on a map recorded in Book 706 Pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, described as follows: Beginning at the Southwesterly corner of Lot 3 thence North 39" 01' 35", a distance of 851.76 feet to the Northwesterly corner of said Lot 3, thence South 78" 01' 51" East along the Northeasterly line of said Lot 3, a distance of 160.36 feet to a non-tangent curve concave Southeasterly and having a radius of 292.65 feet thence Southwesterly along said curve through a central angle of 48" 27' 11" and an arc distance of 247.48 feet to a point of tangency with a line which is parallel with and distant Southeasterly 44.25 feet, measured at right angles from the Northwesterly line of said Lot 3 thence South 39" 01' 35" West along said parallel line to the Northeasterly line of Sorensen Avenue, thence Northwesterly along last mentioned Northeasterly line to the point of beginning. EXCEPT the portion of such property within the easement created by the deed recorded March 4, 1947 in Book 24293, Official Records of said county. PARCEL 1B: A non-exclusive easement for railroad spur track and all incidental purposes, over that portion of Lot 2 of Tract No. 27623l in the city of Santa Fe Spring, as shown on a map recorded in Book 706 Pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, described as follows: Beginning at the intersection of the Southwesterly line of Sorensen Avenue and a line which is parallel with and distant Southeasterly 52.25 feet, measure at right angles from the Northwesterly line of Lot 2, thence south 39" 01' 38" West along said parallel line to a point in a line parallel with and distant 412.57 feet Northeasterly, measured at right angles from the Southwesterly line of said Lot 2, thence North 50" 56' 25" West along last mentioned parallel line 35.76 foot to the Southeasterly line of a 16.50 feet wide easement as described in a deed recorded in Book 24293 Page 246, Official Records of said county, thence North 39" 01' 35" East along said Southeasterly line to said Southwesterly line of Sorensen Avenue; thence Southeasterly along said Southwesterly line of Sorensen Avenue to the point of beginning. EXCEPT the portion of such property within the easement created by the deed recorded March 4, 1947 in Book 24293 Page 246, Official Records of said county. - 2 - 38 PARCEL 1C: A non-exclusive right of way to be used only for railroad transportation facilities and operations and uses incidental thereto, over that portion of Lot 2 of Tract No. 27623, in the city of Santa Fe Springs, as shown on a map recorded in Book 706 Pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, described as follows: Beginning at a point on the Northwesterly line of Lot 2, distant thereon North 39" 01' 35" East 161.22 feet from the most Westerly corner of said Lot 2, thence continuing North 39" 01' 35" East along the Northwesterly line of said Lot 2, a distance of 251.35 feet; thence at right angles south 50" 58' 25" East, a distance of 52.25 feet to a line parallel with said Northwesterly line; thence South 39" 01' 35" West along said parallel line; a distance of 251.35 feet to a line which is parallel with and distant Northeasterly 161.22 feet, measured at right angles from the Southwesterly line of said Lot 2' thence North 50" 58' 25" West, a distance of 52.25 feet to the point of beginning. EXCEPT the portion of such property within the easement created by the deed recorded March 4, 1947 in Book 24293 Page 246, Official Records of said county. PARCEL 1D: An easement to be used for a spur tract serving exclusively the land conveyed in fee to McMaster-Carr Supply Company, an Illinois Corporation, by deed recorded September 8, 1966, as Instrument No. 536, over that portion of Lot 2 of Tract No. 27623, in the city of Santa Fe Springs, as shown on a map recorded in Book 706 pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, described as follows: Beginning at a point on a line which is parallel with and distant Northeasterly 161.22 feet, measured at right angles from the Southwesterly line of said Lot 2, said point being 52.25 feet Southeasterly of the intersection of said parallel line with the Northwesterly line of said lot, thence South 50" 90' 25" East, a distance of 19.75 feet, thence North 39" 01' 35" East, a distance of 25.00 feet; thence North 30" 04' 21" East, a distance of 126.90 feet to the intersection with a line which is parallel with said Northwesterly line of Lot 2 and distant therefrom 82.25 feet, said point of intersection being 180.35 feet distant from the point of beginning thence South 39" 01' 35" feet distant from the point of beginning; thence South 39" 01' 35" West along said parallel line to EXCEPT the portion of such property within the easement created by the deed recorded March 4, 1947 in Book 24293 Page 246, official Records of said county. PARCEL 2: All that portion of Lot 2 of Tract no. 27623, in the city of Santa Fe Springs, as per map recorded in Book 706 Pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, lying Southwesterly of a line which is parallel with and distant Northeasterly 412.57 feet, measured at right angles from the Southwesterly line of said Lot 2. EXCEPT the Southwesterly 161.22 feet, measured at right angles of said Lot 2. - 3 - 39 ALSO EXCEPT an undivided one-half of all oil, gas and minerals and of all oil, gas and mineral rights upon and under said land, with no right of entry on the surface of said land for the purposes of extracting oil, gas and minerals thereon and thereunder, as reserved by Security-First national Bank of Los Angeles, in deed recorded in Book 18259 page 99, Official Records. ALSO EXCEPT an undivided 1/4th interest in and to all oil, gas or other hydrocarbon substances and all minerals of every kind and nature in or under or produced from below 500 feet from the surface of said land, as reserved by Justin J. Accarias, et al., in the deed recorded January 8, 1986 in Book 49964 Page 184, Official Records. ALSO EXCEPT an undivided one-fourth interest in all oil, gas or other hydrocarbon substances and all minerals of every kind and nature, in or under or produced from below 500 feet from the surface of said land without the right of surface entry, as reserved in the deed form Ben Weingart, as Trustee for Trust No. 2 under the will of Stella Weingart, deceased, et al., recorded February 16, 1961 as Instrument No. 1597, in Book 01128 Page 874, Official Records. PARCEL 2A: An easement over that portion of Lot 3 of Tract No. 27623, in the city of Santa Fe Springs, as shown on a map recorded in Book 706 Pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, described as follows: Beginning at the Southwesterly corner of Lot 3, thence North 39" 01' 35" East, a distance of 851.76 feet to the Northwesterly corner of said Lot 3, thence South 78" 01' 51" East along the Northeasterly line of said Lot, a distance of 160.36 feet to a non-tangent curve concave Southeasterly and having a radius of 292.65 feet; thence southwesterly along said curve through a central angle of 48" 27' 11" an arc distance of 247.48 feet to a point of tangency with a line which is parallel with and distant Southeasterly 44.25 feet; measured at right angles from the Northwesterly line of said Lot 3; thence South 39" 01' 35" West along said parallel line to the Northeasterly line of Sorensen Avenue; thence Northwesterly along last mentioned Northeasterly line to the point of beginning. EXCEPT from the foregoing Parcel 2 the portion of such property within the easement created by the deed recorded March 4, 1947 in Book 24293 Page 246 of Official Records of said county. PARCEL 2B: An easement over that portion of Lot 2 of Tract No. 27623, in the city of Santa Fe springs, as shown on a map recorded in Book 706 Pages 55 to 57 inclusive of Maps, in the office of the county recorder of said county, described as follows: - 4 - 40 Beginning at the intersection of the Southwesterly line of Sorensen Avenue and a line which is parallel with and distant Southeasterly 52.25 feet, measured at right angles form the Northwesterly line of Lot 2, thence South 39" 01' 35" West along said parallel line to a point in a line parallel with and distant 412.57 feet Northeasterly, measured at right angles from the Southwesterly line of said Lot 2; thence North 50" 58' 25" West along last mentioned parallel line 35.78 feet to the southeasterly line of a 16.50 fee wide easement as described in a deed recorded in Book 24293 Page 246, Official Records of said county; thence North 39" 01' 35" East along said Southeasterly line to said Southwesterly line of Sorensen Avenue; thence southeasterly along said Southwesterly line of Sorensen Avenue to the point of beginning. - 5 - EX-10.31 6 EXHIBIT 10.31 1 EXHIBIT 10.31 RECEIVABLES PURCHASE AGREEMENT Between KERR GROUP, INC. as the Seller and PNC BANK, NATIONAL ASSOCIATION as the Purchaser dated as of January 19, 1995 2 TABLE OF CONTENTS
Page ---- LIST OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi LIST OF SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi ARTICLE I DEFINITIONS AND CONVENTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2. Certain Definitional Conventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.3. Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE II SALE AND PURCHASE OF RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.1. Commitment to Purchase Eligible Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.2. Notice of Proposed Sale or Payment of Current Purchase Price Payments . . . . . . . . . . . . 23 2.3. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.4. Rights Assigned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.5. Consideration for Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (a) Description of Consideration Paid for Sold Receivables . . . . . . . . . . . . . . . . . . . . 24 (b) Determination of Maximum Current Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . 25 (c) Determination of Adjusted Deferred Purchase Price . . . . . . . . . . . . . . . . . . . . . . . 26 (d) Initial Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.6. Allocation of Collections; Semi-Monthly Settlements; and Designated Purchase Date Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (a) Initial Allocation Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (b) Segregation of Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (c) Payment of Amounts Set Aside . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (d) Semi-Monthly Settlement Statement and Delivery of Collections . . . . . . . . . . . . . . . . . 29 (e) Designated Purchase Date Settlement Statement and Delivery of Collections . . . . . . . . . . . 30 2.7. Monthly Settlement Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (a) Monthly Settlement Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (b) Maintenance of Reserve Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.8. Seller Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (a) Calculation of Seller Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (b) Excessive Seller Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (c) Noncomplying Sold Receivable Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (d) Dilution Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (e) Reconveyance of Certain Sold Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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Page ---- 2.9. Limited Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.10. No Assumption of Obligations Relating to Sold Receivables, Related Assets, or any Contract . . 35 2.11. True Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.12. Payments and Computations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.13. Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE III CONDITIONS OF PURCHASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.1. Conditions to Initial Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.2. Conditions to Subsequent Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3.3. Certification as to Representations and Warranties and Closing Condition . . . . . . . . . . 39 ARTICLE IV REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4.1. Organization, Standing, Qualification, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4.2. Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4.3. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.4. Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.5. Seller's Chief Executive Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.6. Enforceability of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.7. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.8. Events of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.9. Tax Returns and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.10. [Unused] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.11. Certain Legal Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.12. Bulk Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.13. Regulation G,T,U and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.14. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.15. No Disclosure Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.16. Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.17. Licenses for Computer Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.18. Solvency of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.19. Lockbox Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.20. Representations and Warranties Regarding Sold Receivables . . . . . . . . . . . . . . . . . . . 44 4.21. Representations and Warranties Regarding Sold Receivables Pool . . . . . . . . . . . . . . . . 47 ARTICLE V FEES, EARNED DISCOUNT, YIELD PROTECTION AND FUNDING LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.1. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (a) Structuring Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (b) Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (c) Administrative Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
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Page ---- 5.2. Earned Discount, Payments of Earned Discount and Certain Related Payments Pertaining to Purchaser's Net Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 (a) Agreement to Pay Earned Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 (b) Accrual of Earned Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 (c) Earned Discount Upon Occurrence of Termination Event . . . . . . . . . . . . . . . . . . . . . 49 5.3. Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.4. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.5. Earned Discount; Other Amounts Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.6. Investment Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE VI COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 6.1. Financial Statements and Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (a) Financial Reports; Notice of Material Adverse Change and Termination Events . . . . . . . . . . 51 (b) Notice of Change in Chief Executive Office . . . . . . . . . . . . . . . . . . . . . . . . . . 53 (c) Notice of Changes to Credit and Collection Policies . . . . . . . . . . . . . . . . . . . . . . 53 (d) Notice of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 (e) Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 6.2. Compliance with Laws, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.3. Further Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 6.4. Inspection Rights; Maintenance of Books and Records . . . . . . . . . . . . . . . . . . . . . . 54 6.5. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.6. [Unused] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.7. Sales, Liens, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.8. Negative Pledges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.9 Enforceability of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.10 Fulfillment of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 6.11 Statement for and Treatment of the Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.12 No Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.13. Location of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.14. Lockboxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 6.15. [Unused] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6.16. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6.17 Incorporation of Certain Covenants; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6.18 Use of Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE VII SERVICING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 7.1. Designation of Seller as Initial Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 7.2. Duties of Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (a) Appointment; Duties in General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (b) Allocation of Collections; Segregation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (c) Modification of Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
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Page ---- (d) Documents and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (e) Certain Duties to Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (f) Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 (g) Subcontracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 (h) Certain Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 (i) Allocation of Unspecified Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 7.3. Segregation of Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 7.4. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.5. Servicing Costs and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.6. Termination of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.7. Transfer of Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.8. Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 7.9. Servicer Deposit Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 ARTICLE VIII TERMINATION EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 8.1. Termination Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 (a) Cross Default to Agreements with Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 (b) Bankruptcy and Financial Distress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (c) Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (d) Default Under the Receivables Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 (e) Notice of Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (f) Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (g) Loss of Priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (h) Current Default Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (i) Changes in Credit Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 (j) Violation of Maximum Purchaser's Net Investment . . . . . . . . . . . . . . . . . . . . . . . 67 (k) Delinquency Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (l) Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 8.2. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (a) Optional Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (b) Automatic Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (c) Additional Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 (d) This Agreement a Financial Accommodation . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 ARTICLE IX SECURITY INTEREST; ACTIONS OF PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 9.1. Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 9.2. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 9.3. Remedies to Enforce Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 9.4. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 9.5. Rights of Purchaser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 ARTICLE X INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 10.1. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 10.2. Contest of Tax Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
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Page ---- 10.3. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 11.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 11.2. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 11.3. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 11.4. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 11.5. No Implied Waivers; Cumulative Remedies; Writing . . . . . . . . . . . . . . . . . . . . . . . 76 11.6. Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 11.7. Funding by Branch, Subsidiary or Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 77 (a) Notional Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 (b) Actual Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.8. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.9. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.10. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 11.11. FORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 11.12. Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 11.13. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 11.14. WAIVER BY JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 11.15. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 11.16. Waiver of Certain Setoff Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
-v- 7 LIST OF EXHIBITS Exhibit "A" - Form of Assignment of Tendered Receivables Exhibit "B" - Form of Notice of Proposed Sale Exhibit "C" - Form of Lockbox Letter Agreement Exhibit "D" - Form of Monthly Settlement Statement Exhibit "E" - Form of Reassignment of Sold Receivables Exhibit "F" - Form of Opinion of Counsel of Seller Exhibit "G" - Special Concentration Limits Exhibit "H" - Form of UCC-1 Exhibit "I" - Form of Servicer Deposit Account Agreement Exhibit "J" - Form of Amended and Restated Lockbox Service Agreement
LIST OF SCHEDULES Schedule 1.1a - Forms of Eligible Contracts Schedule 4.5 - Identification of Chief Executive Office Schedule 4.19 - List of Lockbox Banks and Lockbox Information
-vi- 8 RECEIVABLES PURCHASE AGREEMENT This Receivables Purchase Agreement is entered into as of January 19, 1995, between KERR GROUP, INC. (as more fully defined hereinafter, the "Seller") and PNC BANK, NATIONAL ASSOCIATION (as more fully defined hereinafter, the "Purchaser"). WITNESSETH WHEREAS, Seller has, and expects to have, Eligible Receivables (as hereinafter defined) which Seller desires to sell; and Seller has requested Purchaser, and Purchaser has agreed, subject to the terms and conditions contained in this Agreement (as hereinafter defined), to purchase Tendered Receivables (as hereinafter defined), from Seller from time to time during the term of this Agreement. NOW, THEREFORE, the parties hereto, in consideration of the premises (each of which is incorporated herein by reference) and mutual covenants herein set forth of the parties hereto and intending to be legally bound hereby, agree as follows: ARTICLE I DEFINITIONS AND CONVENTIONS 1.1. Definitions. The following terms have the meanings indicated for purposes of this Agreement: "Adjusted Base Rate" means the Base Rate plus twenty-five (25) basis points (1/4 of 1%) per annum. "Adjusted Deferred Purchase Price" shall have the meaning ascribed to it in Section 2.5(c). "Administrative Fee" means the fee described in Section 5.1(c). "Adverse Claim" means, with respect to any Sold Receivable, any Lien of, or claim of ownership interest by, any Person, other than Purchaser, on such Sold Receivable. "Affected Party" means each of Purchaser, any assignee or participant of Purchaser, any corporation controlling Purchaser or any assignee or participant of Purchaser and any successor to any of the foregoing. 9 "Affiliate" means, with respect to any Person, any other Person (i) which owns beneficially, directly or indirectly, 20% or more of the outstanding shares of such Person, or which is otherwise in control of such Person, (ii) of which 20% or more of the outstanding voting securities are owned beneficially, directly or indirectly, by any entity described in clause (i) above, or (iii) which is otherwise controlled by any entity described in clause (i) above; provided that for purposes of this definition the terms "control" and "controlled by" shall have the meanings assigned to them in Rule 405 under the Securities Act of 1933, as amended. "Affiliated Obligor" in relation to any Obligor means an Obligor which Servicer knows, or has reason to believe, to be an Affiliate of such Obligor. "Agreement" means this Receivables Purchase Agreement, as the same may from time to time be amended, supplemented or otherwise modified together with all exhibits and schedules hereto. "Allocation Minimum" means the greater of (i) 20%, or (ii) the Minimum Deferred Purchase Price Percentage. "Amended and Restated Lockbox Service Agreement" means an agreement, substantially in the form of Exhibit "J", between Seller and Purchaser. "Approved Obligor" means any Obligor specified in Exhibit "G", which Exhibit "G" may be modified by Purchaser in writing at its option from time to time. "Assignment" means individually, an Assignment of Tendered Receivables, substantially in the form of Exhibit "A" attached hereto; and the term "Assignments" means collectively all such assignments. "Base Rate" means, on any date, a fluctuating rate of interest per annum equal to the higher of: (a) the rate of interest most recently announced by PNC Bank, National Association, in Pittsburgh, Pennsylvania, as its "prime rate"; and (b) the Federal Funds Rate (as defined below) most recently determined by PNC Bank, National Association plus fifty (50) basis points (1/2 of 1%) per annum. -2- 10 The Base Rate is not necessarily intended to be the lowest rate of interest determined by PNC Bank, National Association, in connection with extensions of credit. "Books and Records" means all books and records (including but not limited to credit files, billing tapes, whether processed or unprocessed, data, computer programs, printouts, and other computer materials and records) of the Seller evidencing or otherwise relating to the Pool Receivables, the Related Security and Collections. "Business Day" means a day on which commercial banks in Los Angeles, California or Pittsburgh, Pennsylvania are not authorized or required to be closed for business. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of capital stock of a corporation. "Chief Executive Office" means the place where Seller is located, within the meaning of Section 9-103(c)(2) of the UCC or any analogous provision of any successor statute or any analogous provision of the UCC in effect in the jurisdiction whose Law governs the perfection of Purchaser's ownership interest in any Sold Receivables. "Collections" means, with respect to any Receivable, all funds which either (a) are received by Seller or Servicer from or on behalf of the related Obligors in payment of any amounts owed (including, without limitation, purchase prices, finance charges, interest and all other charges) in respect of such Receivable, or applied to such amounts owed by such Obligors (including, without limitation, insurance payments that Seller or Servicer applies in the ordinary course of its business to amounts owed in respect of such Receivable and net proceeds of sale or other disposition of repossessed goods or other collateral or property of the Obligor or any other party directly or indirectly liable for payment of such Receivable and available to be applied thereon), or (b) are deemed pursuant to Section 2.8 to have been received by Seller or any other Person as a Collection; provided that, prior to such time as Seller shall cease to be Servicer, late payment charges, collection fees and extension fees shall not be deemed to be Collections. "Commitment Fee" means the fee described in Section 5.1(b). "Concentration Limit" means, at any time, in relation to the aggregate Unpaid Balance of Sold Receivables owed by any single Obligor and its Affiliated Obligors (if any): -3- 11 (a) in the case of any Group I Obligor, an amount equal to the greater of 5% of the Net Pool Balance at such time or $100,000; and (b) in the case of any Group II Obligor, an amount equal to the greater of 2% of the Net Pool Balance at such time or $50,000; (c) in the case of an Approved Obligor, any Special Concentration Limit as listed for such Approved Obligor in Exhibit "G" attached hereto, as designated by Purchaser from time to time (i) for Obligors whose long- term debt securities are rated BBB+ or better by S&P, or Baa1 or better by Moody's, or (ii) for Obligors rated 4A1, 5A1 or 5A2 by D&B; and (d) in the case of the United States of America or any agency thereof, an amount equal to 2% of the Net Pool Balance at such time. provided, that, for purposes of any calculation of the percentage of the Net Pool Balance represented by the Unpaid Balance of Sold Receivables of an Obligor in the Sold Receivables Pool pursuant to this definition, the full amount of the newly Tendered Receivables of such Obligor are assumed to be Eligible Receivables. "Contract" means a billing statement, a purchase order, an invoice or other similar written instrument between Seller and any Person pursuant to or under which such Person shall be obligated to make payments to Seller with respect to the sale or lease of goods or services from time to time. A "related" Contract with respect to a Receivable means the Contract under which such Receivable in the Receivables Pool arose or which is relevant to the collection or enforcement of such Receivable. "Credit and Collection Policy" means those credit and collection policies and practices of Seller relating to the Contracts described in the materials delivered to Purchaser prior to the Initial Purchase Date, as may be modified in accordance with Section 6.1(c) and 6.12 without violating the terms of this Agreement. "Current Default Ratio" means the ratio (expressed as a percentage) computed as of a Month End Date by dividing (x) the aggregate Unpaid Balance of all Pool Receivables that became Defaulted Receivables during the Monthly Accounting Period ending on such Month End Date, by (y) the aggregate Unpaid Balance of Pool Receivables on such Month End Date. -4- 12 "Current Purchase Price Payment" means the Dollar amount of each payment requested by Seller in the Notice of Proposed Sale submitted by Seller to Purchaser with respect to a Purchase Date and paid by Purchaser to Seller on such Purchase Date with respect to the Unpaid Balance of the Sold Receivables in the Sold Receivables Pool after giving effect to the assignment, if any, of any Tendered Receivables sold to Purchaser on such Purchase Date. "Current Purchase Price Percentage" shall have the meaning ascribed to it in Section 2.5(b). "D&B" means Dun and Bradstreet, Inc., its successors and assigns. "Dated Terms" means terms of payment under a Contract which permits payment by the related Obligor within 240 days of the invoice date of such Contract provided that the Receivable arising from such Contract is related to goods sold by the Consumer Products Division of Seller. "Defaulted Receivable" means a Pool Receivable: (a) as to which any payment, or part thereof, remains unpaid for 90 days from the original due date for such payment, (b) as to which an Event of Bankruptcy has occurred and remains continuing with respect to the Obligor thereof, (c) as to which payments have been extended, or the terms of payment thereof rewritten, other than as permitted by Section 7.2(c) of the Agreement, or (d) which has been, or, consistent with the Credit and Collection Policy, would be written off Seller's books as uncollectible. "Delinquency Ratio" means the ratio (expressed as a percentage) computed as of a Month End Date by dividing (x) the aggregate Unpaid Balance of Pool Receivables that are classified as Delinquent Receivables during the Monthly Accounting Period ending on such Month End Date by (y) the aggregate Unpaid Balance of all Pool Receivables on such Month End Date. "Delinquent Receivable" means a Pool Receivable that is not a Defaulted Receivable but as to which any payment, or part thereof, remains unpaid for sixty (60) days or more from the original due date for such payment. "Designated Purchase Date" means any Business Day during a Monthly Accounting Period, which is not a Semi-Monthly Reporting Date, a Semi-Monthly Settlement Date, a Monthly Reporting Date, a Monthly Settlement Date or the Business Day following a Semi-Monthly Reporting Date or a Monthly Reporting Date, and which is designated by Seller on at least two (2) Business Days prior written notice to Purchaser as a date on -5- 13 which Seller desires to sell Eligible Receivables to Purchaser; provided that Seller may designate no more than four (4) such dates during a Monthly Accounting Period. "Designated Purchase Date Settlement Statement" means a settlement statement as of the close of business on the last Business Day preceding the Designated Purchase Notice Date in question prepared by Servicer substantially in the form of part I of Exhibit "D" attached hereto, or in such other form as may be agreed on among the Seller, Servicer and Purchaser. "Designated Purchase Notice Date" shall have the meaning ascribed to it in Section 2.6(e). "Dilution" means the amount of any reduction or cancellation of the Unpaid Balance of a Pool Receivable as described in Section 2.8. "Dilution Adjustment" shall have the meaning ascribed to it in Section 2.8(d). "Dollar", "Dollars" and the symbol "$" shall mean the lawful money of the United States of America. "Earned Discount" means a fee payable by Seller to Purchaser in consideration for Purchaser's Net Investment in the Sold Receivables and which shall accrue as set forth in Section 5.2(b) hereof; provided, however, that no provision of this Agreement shall require the payment of or permit the collection of Earned Discount in excess of the maximum permitted by applicable law; and provided further, that Earned Discount accrued with respect to the Purchaser's Net Investment shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason. "Eligible Contract" means a Contract which conforms in all material respects to one of the forms set forth in Schedule 1.1a or otherwise approved by Purchaser. "Eligible Obligor" means an Obligor (a) which is a Person domiciled in the United States of America, or any of its possessions or territories, and if such Person is not an individual, is also organized under the laws of the United States of America, a state of the United States of America, the District of Columbia, or a possession or territory of the United States of America; or (b) which is a Person organized under the laws of the Commonwealth of Canada or a province thereof; except any Obligor (i) which is an Affiliate of Seller or any Subsidiary of Seller, (ii) which is not a Governmental Person other than the United -6- 14 States of America or an agency thereof, or (iii) as to which in the judgment of Purchaser, there has been a material adverse change in its financial condition, operations, business or business prospects and as to which Purchaser has, at least three Business Days prior to the date of determination, given notice to Seller that such Obligor shall not be considered an Eligible Obligor. "Eligible Receivable" means, at any time, a Receivable: (a) which is a Receivable arising out of the sale of goods or the performance of services by Seller, in the ordinary course of its business, free and clear of any Lien or other claim or right of any Person (and, without limiting the foregoing, not out of a sale on consignment); (b) as to which the perfection of Purchaser's ownership interest therein is governed by the laws of a jurisdiction where the Uniform Commercial Code -- Secured Transactions is in force, and which constitutes an "account" as defined in the Uniform Commercial Code as in effect in such jurisdiction; (c) the Obligor of which is an Eligible Obligor; (d) which is not a Defaulted Receivable; (e) with regard to which the warranty of Seller in Section 4.20(b) is true and correct; (f) the sale of such Receivable does not contravene or conflict with any law; (g) which is denominated and payable only in Dollars in the United States; (h) which arises under an Eligible Contract that has been duly authorized and that, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Receivable enforceable against such Obligor in accordance with its terms and is not subject to any dispute, offset, counterclaim or defense whatsoever relating to the goods or services covered thereby; (i) which, together with the Contract related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and -7- 15 regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to the Contract related thereto is in violation of any such law, rule or regulation in any material respect if such violation would impair the collectibility of such Receivable; (j) which satisfies all applicable requirements of the Credit and Collection Policy; (k) which, according to the Contract related thereto, is due and payable (i) within thirty (30) days from the invoice date of such Receivable and (ii) in a single installment and not in multiple installments; provided that, if the Receivable arises from a sale of goods through the Seller's prescription packaging line of business, such Receivable may be due and payable within forty-six (46) days from the invoice date of such Receivable; and provided further that, if the Receivable arises from a sale of goods through the Seller's Consumer Products Division the related Contract may contain Dated Terms; (l) the terms of the related Contract have not been modified or extended except as permitted by Section 7.2(c) of the Agreement; (m) the Unpaid Balance of which if sold to Purchaser, together with the Unpaid Balances of all Eligible Receivables owed by the same Obligor or an Affiliate of such Obligor which are Sold Receivables would not exceed the applicable Concentration Limit for such Obligor. (n) which has been fully earned by performance on the part of Seller and is not subject to any contingency to be satisfied by Seller; (o) the Obligor of which (i) is not the Obligor on Delinquent Receivables having an aggregate Unpaid Balance equal to 25% or more of the aggregate Unpaid Balance of Receivables owed by such Obligor to Seller or (ii) has failed to pay for more than 90 days from the original due date for payment Pool Receivables having an aggregate Unpaid Balance equal to the lesser of (x) $30,000, or (y) 15% or more of the aggregate Unpaid Balance of Pool Receivables owed by such Obligor to Seller; and -8- 16 (p) which does not cause the Unpaid Balance of Sold Receivables with Dated Terms to exceed $4,000,000; provided, however, solely for purposes of determining if a Pool Receivable is an Eligible Receivable, if the payment of a Pool Receivable is guaranteed by a Person such Pool Receivable need only fulfill the eligibility requirements set forth in the definition of an "Eligible Receivable" for either the primary account party or the guarantor but not both. "Engagement Letter" means that certain letter dated November 10, 1994 of Purchaser to Seller and agreed to and executed by Seller as of November 28, 1994. "ERISA" means the Employee Retirement Income Security Act of 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, in each case as in effect from time to time. References to sections of ERISA shall be construed also to refer to any successor sections. "Event of Bankruptcy" shall be deemed to have occurred with respect to a Person if either: (a) a case or other proceeding shall be commenced, without the application or consent of such Person, in any court, seeking the liquidation, reorganization, debt arrangement, dissolution, winding up, or composition or readjustment of debts of such Person, the appointment of a trustee, receiver, custodian, liquidator, assignee, sequestrator or the like for such Person or all or substantially all of its assets, or any similar action with respect to such Person under any law relating to bankruptcy, insolvency, reorganization, winding up or composition of adjustment of debts (including without limitation an action commenced under the Federal Bankruptcy Code), and such case or proceeding shall continue undismissed, or unstayed and in effect, for a period of 30 consecutive days; or such Person shall consent to the commencement of such involuntary case under the federal bankruptcy laws or other similar laws now or hereafter in effect; or an order for relief in respect of such Person shall be entered in an involuntary case under the federal bankruptcy laws or other similar laws now or hereafter in effect; or (b) such Person shall commence a voluntary case or other proceeding under any applicable bankruptcy, -9- 17 insolvency, reorganization, debt arrangement, dissolution or other similar law now or hereafter in effect (including without limitation an action commenced under the Federal Bankruptcy Code), or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for, such Person or for any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall be adjudicated insolvent, or admit in writing its inability to, pay its debts generally as they become due, or, if a corporation or similar entity, its board of directors shall vote to implement any of the foregoing. "Exchange Act" means the federal Securities Exchange Act of 1934, as amended from time to time, together with the regulations and rules promulgated thereunder or pursuant thereto, as amended from time to time. "Federal Bankruptcy Code" means the bankruptcy code of the United States of America codified in Title 11 of the United States Code, as from time to time amended or supplemented. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal (for each day during such period) to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Purchaser from three federal funds brokers of recognized standing selected by Purchaser. "Federal Reserve Board" shall mean the Board of Governors of the United States Federal Reserve System as constituted from time to time. "Fees" shall mean collectively the Structuring Fee, the Commitment Fee and the Administrative Fee; and the term "Fee" shall mean any of the Fees. -10- 18 "Final Payout Date" means the date following the Termination Date which is the earlier of (i) the date on which Purchaser has recovered in full Purchaser's Net Investment plus accrued and unpaid Earned Discount and all other amounts payable by Seller under this Agreement (excluding contingent obligations under indemnities and the like as to which no present payment exists) shall have been paid in full, or (ii) the date on which the Sold Receivables have been paid in full or written off in accordance with the Credit and Collection Policy and all other amounts payable by Seller under this Agreement (excluding contingent obligations under indemnities and the like as to which no present payment exists) shall have been paid in full. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be recognized by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Governmental Person" means any national, federal, state, local or other government or political subdivision, or any agency, authority, bureau, central bank, commission, regulatory body, department or instrumentality of any government or political subdivision, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Group I Obligor" means (i) an Obligor (other than the United States of America or an agency thereof), the long-term debt securities of which are rated at least BBB- by S&P or Baa3 by Moody's, or (ii) an Obligor rated 4A1, 4A2, 5A1 or 5A2 by D&B, or (iii) at the sole discretion of Purchaser, an Obligor with an equivalent rating from another source. "Group II Obligor" means an Obligor other than a Group I Obligor. "Indemnified Losses" shall have the meaning ascribed to it in Section 10.1. "Indemnified Party" shall have the meaning ascribed to it in Section 10.1. "Indemnity Payments" shall mean any sum due and payable to Purchaser pursuant to Sections 5.3, 5.4, 10.1, 10.3 and 11.6 hereof. -11- 19 "Initial Purchase Date" means the Purchase Date designated in the first Assignment to be delivered hereunder, after the satisfaction of all conditions precedent set forth in Article III hereof. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and any successor thereto, and the regulations promulgated and rulings issued thereunder. "Law" means any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Person. "Lien" shall mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease intended as security or any title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the UCC or comparable Law of any jurisdiction). "Liquidation Period" means the period (i) commencing on the Termination Date and ending on the Final Payout Date or (ii) commencing on the date of the occurrence of a Potential Termination Event or a Termination Event and continuing until the earlier of (A) any cure or waiver of such Potential Termination Event or Termination Event or (B) the Final Payout Date. "Lockbox" shall mean a post office box or other mailing location identified on Schedule 4.19 hereto maintained by a Lockbox Bank pursuant to the Lockbox Servicing Instructions for the purpose of receiving payments made by the Obligors for subsequent deposit into a related Lockbox Account, or such other post office box or mailing location as Purchaser and the Seller may agree upon from time to time. "Lockbox Account" shall mean the lockbox account identified on Schedule 4.19 hereto maintained with a Lockbox Bank pursuant to the Lockbox Servicing Instructions for the purpose of processing the payments made by the Obligors or such other account as the Seller and Purchaser may agree upon from time to time. "Lockbox Agreement" means an agreement in form and substance satisfactory to Purchaser between Seller and a Lockbox -12- 20 Bank concerning Collections of the Pool Receivables, including the Sold Receivables. "Lockbox Bank" shall mean a bank identified on Schedule 4.19 hereto or such other bank as the Seller and Purchaser may agree upon from time to time. "Lockbox Letter Agreement" means a letter agreement, in substantially the form of Exhibit "C", between Seller and any Lockbox Bank other than Purchaser if Purchaser is a Lockbox Bank. "Lockbox Servicing Instructions" shall mean the instructions relating to lockbox services in connection with a Lockbox and the related Lockbox Account which are in compliance with Section 6.14 hereof and otherwise in form and substance satisfactory to Purchaser, which have been executed and delivered by the Seller to a Lockbox Bank. "Material Adverse Effect" with respect to any event or circumstance, a material adverse effect on: (i) the business, assets, financial condition or operations of Seller; (ii) the ability of Seller or, if Seller or an Affiliate of Seller is acting as Servicer, Servicer to perform its respective obligations under this Agreement or an Assignment; (iii) the validity or enforceability of this Agreement, an Assignment, the Sold Receivables or the related Contract; (iv) the collectibility of a substantial portion of the Sold Receivables Pool; or (v) the status, existence, perfection, priority or enforceability of Purchaser's ownership interest in the Sold Receivables. "Maximum Current Purchase Price" shall have the meaning ascribed to it in Section 2.5(b) hereof. "Maximum Purchaser's Net Investment" means Ten Million Dollars ($10,000,000). "Minimum Deferred Purchase Price Percentage" means, as of any date of determination, a number, expressed as a percentage, equal to the difference determined by subtracting the -13- 21 Current Purchase Price Percentage, as of the date of determination, from one (1.00). "Month End Date" means the last day of each calendar month during the term hereof. "Monthly Accounting Period" means each calendar month during the term of this Agreement. "Monthly Reporting Date" with respect to any Monthly Accounting Period means the fourth (4th) Business Day after the Month End Date for such Monthly Accounting Period. "Monthly Settlement Date" means, with respect to any Monthly Accounting Period, the second (2nd) Business Day following the Monthly Reporting Date for such Monthly Settlement Period. "Monthly Settlement Statement" means a settlement statement as of the close of business on the last Business Day of a Monthly Accounting Period just completed prepared by Servicer substantially in the form of parts I, II and III of Exhibit "D" attached hereto, or in such other form as may be agreed on among the Seller, Servicer and Purchaser and delivered to Purchaser and Seller on the Monthly Reporting Date for such Monthly Period. "Moody's" means Moody's Investors Service, Inc., a Delaware corporation, its successors and assigns. "Net Charge-Off Ratio" at any time during a Monthly Accounting Period means the percentage equivalent of a fraction (a) the numerator of which is the average of the Net Charge-Offs for the three Monthly Accounting Periods concluding on the Relevant Month End Date and (b) the denominator of which is the average aggregate Unpaid Balance of all Pool Receivables as of the Month End Dates for such three Monthly Accounting Periods. "Net Charge-Offs" for any Monthly Accounting Period means the excess, if any, of (a) the aggregate Unpaid Balance of Pool Receivables which during such Monthly Accounting Period have been, or, consistent with the Credit and Collection Policy, should be, written off Seller's books as uncollectible, over (b) the aggregate amount, if any, of Collections received by Seller or Servicer (and not required to be returned to the Obligor or any Person on its behalf) in respect of Pool Receivables after such Pool Receivables were written off (or should have been written off as described in clause (a) of this definition). -14- 22 "Net Pool Balance" at any time means an amount equal to the aggregate Unpaid Balance of the Notional Amount of the Eligible Receivables in the Sold Receivables Pool at such time. "Noncomplying Sold Receivables Adjustment" shall have the meaning ascribed to it in Section 2.8(c). "Noncomplying Sold Receivables" shall have the meaning ascribed to it in Section 2.8(c). "Note Agreement" shall mean and refer to any of those certain Note Agreements made by Kerr Group, Inc. as of September 15, 1993, with those Persons executing such Note Agreements as purchasers, and all exhibits and schedules thereto, in such form as such Note Agreements are in force on the date hereof, and shall not include any amendments, modifications or supplements thereto or thereof made after the date of this Agreement, unless such amendment, modification or supplement is consented to in writing by the Purchaser. "Notice of Proposed Sale" means notice substantially in the form of Exhibit "B" attached to the Agreement. "Notional Amount" means, with respect to a Pool Receivable, the original face amount of such Pool Receivable at the time such Pool Receivable is booked by Seller, less all discounts and allowances to which the related Obligor would be entitled if such Obligor paid such Pool Receivable on the most expeditious basis. "Obligor" means a Person obligated to make payments with respect to a Contract giving rise to a Pool Receivable, including any guarantor thereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" or "person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, government or any agency or political subdivision thereof or any other entity. "PNC Note" means that certain promissory note issued by Seller and payable to the order of Purchaser in the face principal amount of $10,000,000 dated May 2, 1994 and due and payable on April 30, 1995. "Pool Receivable" means a Receivable in the Receivables Pool, including without limitation the Sold Receivables. -15- 23 "Potential Termination Event" means any event which, with the giving of notice or lapse of time, or both, would become a Termination Event. "Principal Office of Purchaser" means the principal corporate banking offices of Purchaser as designated by Purchaser to Seller. "Purchase" shall have the meaning ascribed to it in Section 2.3 hereof. "Purchase Commitment" shall have the meaning ascribed to it in Section 2.1. "Purchase Date" means (i) any Semi-Monthly Settlement Date during the term of this Agreement on which Seller delivers an executed Assignment selling, assigning and transferring to Purchaser the Tendered Receivables described in the Schedule 1 attached to such Assignment, and (ii) any Designated Purchase Date. "Purchase Price" shall have the meaning set forth in Section 2.5(a). "Purchaser" means PNC Bank, National Association and its successors and assigns. "Purchaser's Net Investment" means at any time with respect to the Sold Receivables, an amount equal to (a) the aggregate incremental Current Purchase Price Payments theretofore paid to Seller against the Maximum Current Purchase Price for the Sold Receivables Pool pursuant to Section 2.5(a), less (b) the aggregate amount theretofore received by Purchaser in reduction of such Purchaser's Net Investment, as applied to the reduction of Purchaser's Net Investment, each in accordance with Section 2.6, Section 2.7 or Section 2.8, as applicable. "Purchase Termination Date" means that day on which a Termination Event has occurred and is continuing, and (a) Purchaser declares a Purchase Termination Date in a notice to Seller in accordance with Section 8.2(a); or (b) in accordance with Section 8.2(b) becomes the Purchase Termination Date automatically. "Reassignment of Sold Receivable" means the assignment in the form of Exhibit "E" attached hereto. -16- 24 "Receivable" means all accounts, contract rights, chattel paper, general intangibles and all other rights to payments due and to become due to Seller pursuant to the terms of a Contract and all other rights, powers and privileges of Seller arising thereunder or related thereto (including but not limited to all guarantees, collateral security, surety bonds, rights under letters of credit, insurance or other direct or indirect security), assertible against any Person whatever and all rebates, refunds, adjustments and returned, rejected, or repossessed goods relating thereto and all proceeds of any of the foregoing. "Receivables Documents" shall mean this Agreement, the Assignments, the Amended and Restated Lockbox Service Agreement, the Lockbox Agreements, the Lockbox Letter Agreements, the Servicer Deposit Account Agreement, financing statements and any other instruments, certificates or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may be supplemented or amended from time to time in accordance herewith or therewith, and "Receivables Document" shall mean any of the Receivables Documents. "Receivables Pool" means at any time all then outstanding Receivables, including any Sold Receivables, which have not been charged off by Seller or Servicer, as the case may be, as uncollectible, but shall not include any Receivables owned by any Subsidiary of Seller. "Regulation D" means Regulation D of the Federal Reserve Board, or any other regulation of the Federal Reserve Board that prescribes reserve requirements applicable to nonpersonal time deposits or "Eurocurrency Liabilities" as presently defined in Regulation D, as in effect from time to time. "Regulatory Change" means, relative to any affected party (a) any change in (or the adoption, implementation, change in phase-in or commencement of effectiveness of) any (i) United States federal or state law or foreign law applicable to such affected party; (ii) regulation, interpretation, directive, requirement or request (whether or not having the force of law) applicable to such affected party of (A) any court, government authority charged with -17- 25 the interpretation or administration of any law referred to in clause (a)(i) of this definition or of (B) any fiscal, monetary or other authority having jurisdiction over such affected party; or (iii) generally accepted accounting principles or regulatory accounting principles applicable to such affected party and affecting the application to such affected party of any law, regulation, interpretation, directive, requirement or request referred to in clause (a)(i) or (a)(ii) above of this definition; or (b) any change in the application to such affected party of any existing law, regulation, interpretation, directive, requirement, request or accounting principles referred to in clause (a)(i), (a)(ii) or (a)(iii) above of this definition. "Related Assets" shall have the meaning ascribed to it Section 2.4 hereof. "Related Security" means, with respect to any Pool Receivable: (a) all of Seller's right, title and interest in and to all Contracts that relate to such Pool Receivable; (b) all of Seller's interest in the merchandise (including returned merchandise), if any, relating to the sale which gave rise to such Pool Receivable; (c) all other security interests or liens and property subject thereto from time to time purporting to secure payment of such Pool Receivable, whether pursuant to the Contract related to such Pool Receivable or otherwise; (d) the assignment to Purchaser and any assignee, of all UCC financing statements covering any collateral securing payment of such Pool Receivable (but such assignment is made only to the extent of the interest of Purchaser in the respective Pool Receivable); and (e) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Pool Receivable whether pursuant to the Contract related to such Pool Receivable or otherwise. "Releases" means documents that are filed with the appropriate filing offices in the relevant states of the United States for the purpose of releasing any security interests or ownership interests in the Sold Receivables that have been filed or perfected through the filing of one or more financing statements. "Relevant Month End Date" means the Month End Date for which the most recent Monthly Settlement Statement has been delivered to Purchaser. -18- 26 "Reporting Dates" means collectively the Semi-Monthly Reporting Dates and the Monthly Reporting Dates; and the term "Reporting Date" means individually any of the Reporting Dates. "Reserve Asset Percentage" means the number, expressed as a percentage and determined as of each Business Day, which is equal to the difference determined by subtracting a fraction, the numerator of which is equal to the Purchaser's Net Investment, as of the date of such determination, and the denominator of which is equal to the Net Pool Balance as of the date of such determination, from one (1.00). "Responsible Officer" for Seller shall mean the president, any vice president, the treasurer, the secretary or any other officer designated by Seller in writing to Purchaser upon execution of this Agreement. "S&P" means Standard & Poor's Rating Group, a division of McGraw-Hill, Inc., its successors and assigns. "Seller" means Kerr Group Inc., a Delaware corporation, and its successors and permitted assigns. "Seller Adjustments" shall have the meaning ascribed to it in Section 2.8(a). "Semi-Monthly Period" means (i) a period of days commencing on the first day of a month and ending on the fifteenth day of such month; and (ii) a period of days commencing on the sixteenth day of each month and ending on the Month End Date of such month. "Semi-Monthly Reporting Date" means (i) with respect to any Semi-Monthly Period commencing on the first day of a month, the third (3rd) Business Day of the next Semi-Monthly Period in question, and (ii) with respect to any Semi-Monthly Period commencing on the sixteenth day of each month, the fourth (4th) Business Day of the next Semi-Monthly Period in question. "Semi-Monthly Settlement Date" means, with respect to any Semi-Monthly Period, the second (2nd) Business Day following the Semi-Monthly Reporting Date for such Semi-Monthly Period in question. "Semi-Monthly Settlement Statement" means a settlement statement as of the close of business on the last Business Day of the Semi-Monthly Period just completed prepared by Servicer substantially in the form of parts I and II of Exhibit "D" attached hereto, or in such other form as may be agreed on among the Seller, Servicer and Purchaser and delivered to Purchaser and -19- 27 Seller on the Semi-Monthly Reporting Date for such Semi-Monthly Period. "Servicer" means initially Seller, or such other Person that is appointed by Purchaser in accordance with Section 7.6 of this Agreement, to act on Purchaser's behalf in the administration, servicing and collection of the Sold Receivables. "Servicer Deposit Account" has the meaning set forth in Section 7.9. "Servicer Deposit Account Agreement" means that certain Servicer Deposit Account Agreement, substantially in the form of Exhibit "I", between Servicer and Purchaser, as the same may from time to time be amended, supplemented or otherwise modified together with all exhibits and schedules hereto. "Servicer's Fee" means, for any day that Seller, or an Affiliate of Seller, shall no longer be Servicer, an amount specified by Purchaser not exceeding 110% of Servicer's reasonable cost and expenses of performing its obligations under the Agreement during the Semi-Monthly Period on such day. "Servicer Reports" means collectively, the Semi-Monthly Settlement Statement and the Monthly Settlement Statement; and the term "Servicer Report" means individually any of the Servicer Reports. "Sold Receivable(s)" shall have the meaning ascribed to it in Section 2.4 hereof. "Sold Receivables Pool" means at any time all then outstanding Sold Receivables which have not been charged off by Servicer in conformity with the Credit and Collection Policy. "Solvent" shall mean, when used with respect to any Person, that: (a) the fair value and present fair saleable value of such Person's assets is in excess of the total amount of such Person's stated liabilities including identified contingent liabilities; (b) the present fair saleable value of such Person's assets is in excess of the amount that will be required to pay such Person's probable liability on such Person's debts as they become absolute and mature; (c) such Person does not have unreasonably small capital to carry on the business in which such Person is -20- 28 engaged and all businesses in which such Person is about to engage; and (d) such Person has not incurred debts beyond such Person's ability to pay such debts as they mature. "Special Concentration Limit" means, with respect to an Approved Obligor, a limit, not to exceed $1,000,000, specified next to the Approved Obligor's name in Exhibit "G" attached hereto, as designated by the Purchaser from time to time. "Structuring Fee" means the fee described in Section 5.1(a). "Subsidiary" means, of any person at any time, (i) any corporation or trust of which 50% or more (by number of shares or number of votes) of the outstanding Capital Stock or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such person or one or more of such person's Subsidiaries, or any partnership of which such person is a general partner or of which 50% or more of the partnership interests is at the time directly or indirectly owned by such person or one or more of such person's Subsidiaries, and (ii) any corporation, trust, partnership or other entity which is controlled or capable of being controlled by such person or one or more of such person's Subsidiaries. "Tendered Receivables" means the Pool Receivables described in a Schedule 1 attached to an Assignment executed and delivered by Seller to Purchaser on a Purchase Date; and the term "Tendered Receivable" means any of the Tendered Receivables. "Termination Date" means the earlier of (a) the Purchase Termination Date; or (b) the earlier of (i) January 18, 1997 or (ii) such date established by thirty (30) days written notice of Seller to Purchaser. "Termination Event" shall have the meaning set forth in Section 8.1. "Uniform Commercial Code" or "UCC" means the Pennsylvania Uniform Commercial Code and, if applicable, the Uniform Commercial Code in effect in the state in which the place of business of Seller is located, or, if Seller has more than one -21- 29 place of business, the state in which Seller has its Chief Executive Office. "Unpaid Balance" of any Receivable means at any time the sum of the unpaid amount thereof, but excluding all late payment charges, delinquency charges, and extension or collection fees. 1.2. Certain Definitional Conventions. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP consistently applied. That certain terms or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. All other undefined terms contained in this Agreement shall, unless the context indicates otherwise, have the meanings provided for by the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania to the extent the same are used or defined therein. 1.3. Gender and Number. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. ARTICLE II SALE AND PURCHASE OF RECEIVABLES 2.1. Commitment to Purchase Eligible Receivables. Subject to the terms and conditions hereof and relying upon the representations and warranties set forth herein, the Seller may, at its option, offer to sell to the Purchaser, and the Purchaser agrees to purchase from the Seller (such agreement being referred to herein as the "Purchase Commitment"), from time to time on the Initial Purchase Date and on each Purchase Date thereafter to but not including the Termination Date, all of Seller's right, title and interest in and to the Tendered Receivables specified by the Seller in the Notice of Proposed Sale delivered by the Seller to the Purchaser pursuant to the terms of Section 2.2 hereof. No Purchase shall be made of a Tendered Receivable, the payment due date of which would be forty-six (46) days or more after the Termination Date determined by clause (b) of the definition of the term "Termination Date". The Purchaser shall have no obligation to purchase any Tendered Receivable on any Purchase Date to the extent that after giving effect thereto the -22- 30 Purchaser's Net Investment at such time would exceed the Maximum Purchaser's Net Investment at such time. The Purchaser shall have no obligation to purchase any Tendered Receivable on any Purchase Date to the extent that such Tendered Receivable fails to qualify as an Eligible Receivable. The Purchaser shall have no obligation to purchase Tendered Receivables hereunder on or after the Termination Date. 2.2. Notice of Proposed Sale or Payment of Current Purchase Price Payments. Seller shall make each offer to assign Eligible Receivables to Purchaser and/or each request for the receipt by Seller of a Current Purchase Price Payment for the Sold Receivables Pool by delivering to the Purchaser and the Servicer, not less than two (2) Business Days prior to the proposed Purchase Date, and with respect to the Initial Purchase Date not less than five (5) days prior to the Initial Purchase Date, a Notice of Proposed Sale in the form of Exhibit "B" hereto (i) describing the Tendered Receivables that Seller proposes to sell and the Purchase Date on which Seller proposes that such sale occur and/or (ii) setting forth the Dollar amount of the Current Purchase Price Payment with respect to the Sold Receivables Pool requested by Seller. Each Purchase shall be made at 2:00 p.m. on a Purchase Date, and shall take place at the office of the Purchaser at Fifth Avenue and Wood Street, Pittsburgh, PA 15265, or such other place as may be mutually agreed upon by Seller and Purchaser. Any Current Purchase Price Payment which Seller has requested to be paid by Purchaser on any Purchase Date with respect to the Sold Receivables Pool shall be in an amount set forth by Seller in the Notice of Proposed Sale submitted by Seller to Purchaser with respect to such Purchase Date provided that such amount together with the Purchaser's Net Investment then outstanding does not exceed either (i) the Maximum Current Purchase Price, or (ii) the Maximum Purchaser's Net Investment. On each such Purchase Date, Purchaser shall, upon satisfaction of the applicable conditions set forth in Articles II and III make available to Seller the applicable Current Purchase Price Payment in same day funds at the Principal Office of Purchaser by deposit into a demand deposit account of Seller established with Purchaser. 2.3. Assignment. On each Purchase Date, Seller shall deliver to Purchaser an Assignment, executed by Seller, dated such Purchase Date, assigning and transferring to the Purchaser all right, title and interest of Seller, in and to the Seller's Tendered Receivables and Related Assets offered for assignment to the Purchaser on such Purchase Date, free and clear of all Adverse Claims. Each Assignment shall have attached to it a schedule describing, to the satisfaction of the Purchaser, the Tendered Receivables sold and assigned on such Purchase Date. Each delivery of an Assignment concerning Tendered Receivables -23- 31 and Related Assets by Purchaser on a Purchase Date is herein called a "Purchase". 2.4. Rights Assigned. The Seller hereby grants, conveys, sells, assigns, transfers and sets over to Purchaser the following property, whether now or hereafter owned, existing or arising: (a) all of Seller's right, title and interest in, to and under the Tendered Receivables; (b) all rights to payments under, but not the obligations under, (i) the Tendered Receivables, (ii) all related Contracts with respect to the Tendered Receivables and (iii) all Related Security with respect to such Tendered Receivables; (c) all Books and Records evidencing or otherwise relating to such Tendered Receivables and the obligations owing by the Obligors thereunder to Seller together with a non-exclusive license to use the same in the administration and collection of the Tendered Receivables; and (d) all Collections in respect of, and other proceeds of, any of the foregoing. The items listed above in clauses (b), (c) and (d) are herein collectively called the "Related Assets". Upon the delivery of the applicable Assignment, the Tendered Receivables and the Related Assets described in clauses (a), (b), (c) and (d) above are herein sometimes collectively called the "Sold Receivables"; and the term "Sold Receivable" means any of the Sold Receivables. 2.5. Consideration for Purchases. (a) Description of Consideration Paid for Sold Receivables. (i) A Tendered Receivable shall be sold to Purchaser for a gross contractual purchase price equal to the Notional Amount of such Tendered Receivable which shall be adjusted for the allocable Earned Discount which accrues with respect to the Purchaser's Net Investment and which shall be further adjusted for its allocable share of the Adjusted Deferred Purchase Price payable to Seller in accordance with Section 2.6(c)(iv); provided, that, the purchase price for a Tendered Receivable may be paid in two or more installments with a deferred purchase price portion determined and paid with respect to the collection performance of the Sold Receivables Pool; and -24- 32 provided, further that, the actual sums paid by Purchaser with respect to a Tendered Receivable shall not exceed such Tendered Receivable's allocable share of the Purchaser's Net Investment outstanding during the time such Tendered Receivable is part of the Sold Receivables Pool plus the Collections actually received with respect to such Tendered Receivables and distributed to Seller pursuant to Section 2.6(c) hereof. (ii) At any time of determination, the aggregate purchase price for the Pool Receivables in the Sold Receivables Pool shall equal the sum of the incremental Current Purchase Price Payments paid to Seller plus the Adjusted Deferred Purchase Price paid with respect to such Sold Receivables Pool in accordance with the procedures contained in Section 2.6(c). The initial Current Purchase Price Payment or any incremental Current Purchase Price Payments shall be paid to Seller by Purchaser as set forth in Section 2.2; and the Adjusted Deferred Purchase Price shall be payable solely from the proceeds of the Collections of the Sold Receivables in the Sold Receivables Pool allocated to Seller pursuant to Section 2.6(c)(iv) after deduction of any accrued and unpaid Earned Discount and Servicer's Fees then due and payable by Seller to Purchaser, or Servicer, hereunder and the recovery by Purchaser from Collections of Sold Receivables of the Purchaser's Net Investment. Any portion of the Adjusted Deferred Purchase Price allocated to Seller pursuant to Section 2.6(c)(iv) shall be paid to Seller at the Principal Office of the Purchaser on the Semi-Monthly Settlement Date following the Servicer's receipt in good and collected funds of the proceeds of the Collections of such Sold Receivables. Notwithstanding the foregoing, Purchaser shall have no obligation to make any Current Purchase Price Payment for the Sold Receivables Pool to Seller on any Purchase Date if (1) the sum of any such Current Purchase Price Payment plus the Purchaser's Net Investment then outstanding shall exceed the Maximum Purchaser's Net Investment or (2) the sum of any such Current Purchase Price Payment plus the Purchaser's Net Investment then outstanding shall exceed the Maximum Current Purchase Price. (b) Determination of Maximum Current Purchase Price. The "Maximum Current Purchase Price" which may be paid to Seller by Purchaser and outstanding on any Purchase Date (as represented by the calculation of Purchaser's Net Investment after giving effect to the payment of any Current Purchase Price Payment on such date) with respect to the Sold Receivables Pool shall be in an amount as determined in accordance with the following formula: -25- 33 MCPP = NPB x CPPP where: MCPP = Maximum Current Purchase Price which may be outstanding on the applicable Purchase Date. NPB = The Net Pool Balance on such Purchase Date after adding to the Sold Receivables Pool the Notional Amount of the Tendered Receivables to be assigned to Purchaser on such Purchase Date. CPPP = Current Purchase Price Percentage as determined for such Purchase Date. where: "Current Purchase Price Percentage" equals the lesser of (i) 80%, or (ii) 1.00 - (12 x NCR) and: NCR = Net Charge-Off Ratio for Seller as determined for such Purchase Date. (c) Determination of Adjusted Deferred Purchase Price. The "Adjusted Deferred Purchase Price" for the Pool Receivables in the Sold Receivables Pool shall be the amount distributed to Seller pursuant to Section 2.6(c)(iv). (d) Initial Calculations. Concurrently with the Initial Purchase Date, Seller shall furnish to Purchaser an initial Monthly Settlement Statement (which may contain such changes in the standard form of Monthly Settlement Statement as may be satisfactory to Purchaser), containing the required information for the three Monthly Accounting Periods before the Initial Purchase Date. To the extent that the provisions of Section 2.5 require information pertaining to such Monthly Accounting Periods, the information set forth in such initial report, prepared in accordance with the provisions hereof, shall be used. Furthermore, to the extent the provisions of Section 2.5 require information pertaining to such Monthly Accounting Periods for the calculation of the Net Charge-Off Ratio, for the purposes of determining the "Net Charge-Offs" the Seller may decrease by half the amount of the aggregate Unpaid Balance of Pool Receivables which were written off Seller's books as uncollectible during the month of December, 1994 as a result of the revision to the Seller's Credit and Collection Policy during -26- 34 December, 1994 concerning the timing of the writing-off of bad debts. 2.6. Allocation of Collections; Semi-Monthly Settlements; and Designated Purchase Date Settlements. (a) Initial Allocation Procedures. At the opening of business on each Business Day (except that solely for the purpose of this Section 2.6(a) Good Friday and the day immediately preceding or following any of the following holidays: Thanksgiving, Christmas, New Year's Day or the Fourth of July, shall not be a Business Day if such day is declared a holiday for the Chief Executive Office of Seller) during the period from the date hereof to and including the Final Payout Date, Servicer will, out of all Collections received from and including the preceding Business Day to and including the day immediately preceding the Business Day in question (a "Collection Period") from the Receivables Pool: (i) determine the portion of such Collections attributable for any Collection Period to the Sold Receivables; (ii) out of the portion of such Collections allocated to the Sold Receivables pursuant to clause (i), set aside and hold in trust for Purchaser an amount equal to the sum of (1) the accrued and unpaid Earned Discount in respect of the Purchaser's Net Investment and (2) the accrued and unpaid Servicer's Fee due to Servicer hereunder (in each case set forth in items (1) and (2), accrued through such day and without duplication) to be applied on the next Semi-Monthly Settlement Date in accordance the provisions of Section 2.6(c); (iii) set aside and hold in trust for Purchaser, from the remaining portion of such Collections allocated to Sold Receivables pursuant to clause (i) of this Section 2.6 but not set aside and held in trust for Purchaser pursuant to clause (ii) of this Section 2.6 an amount, which together with the other amounts set aside during the Semi-Monthly Period in question pursuant to this clause (iii) of Section 2.6, is not in excess of the Purchaser's Net Investment to be applied on the next Semi-Monthly Settlement Date in accordance with the provisions of Section 2.6(c) or on the next Designated Purchase Date in accordance with Section 2.6(e), as the case may be; and (iv) set aside and hold in trust for Seller in payment of the Adjusted Deferred Purchase Price, the remaining portion of such Collections allocated to the Sold -27- 35 Receivables pursuant to clause (i) above but not set aside and held in trust for Purchaser pursuant to clause (ii) or (iii) above, to be applied on the next Semi-Monthly Settlement Date (subject to Sections 2.6(d), 2.7 and 2.8 hereof) in accordance with the provisions of Section 2.6(c). (b) Segregation of Collections. Servicer shall set aside, and hold in trust for the benefit of Purchaser, and for Seller to the extent of the Adjusted Deferred Purchase Price due to the Seller on the next Semi-Monthly Settlement Date, all Collections described in clauses (ii), (iii) and (iv) of Section 2.6(a). On the Business Day of the allocation of all funds described in clauses (ii), (iii) and (iv) of Section 2.6(a), all such funds shall be deposited in the Servicer Deposit Account. Any sums described in clauses (ii) and (iii) of Section 2.6(a) above shall be placed in a separate sub-account segregated from the sums described in clause (iv) of Section 2.6(a) above. (c) Payment of Amounts Set Aside. (i) Servicer shall pay to Purchaser from the amounts set aside pursuant to Section 2.6(a)(ii)(1) during a Semi-Monthly Period, which are good and collected funds, the accrued and unpaid Earned Discount on the Purchaser's Net Investment during such Semi-Monthly Period on the relevant Semi-Monthly Settlement Date. (ii) Servicer shall pay to Servicer, if Servicer is a Person other than Seller or an Affiliate of Seller, from the amounts set aside pursuant to Section 2.6(a)(ii)(2) during a Semi-Monthly Period, which are good and collected funds, the accrued and unpaid Servicer's Fees due to Servicer hereunder for such Semi-Monthly Period on the relevant Semi-Monthly Settlement Date. (iii) Subject to Section 2.6(e) hereof, Servicer shall pay all amounts set-aside pursuant to Section 2.6(a)(iii) (which amounts have not been previously applied by Purchaser to pay a Current Purchase Price Payment due on a Designated Purchase Date in accordance with Section 2.6(e)), which are good and collected funds, to Purchaser in repayment of the Purchaser's Net Investment on each Semi-Monthly Settlement Date; provided that the Purchaser may direct the Servicer to apply any such repayments to the payment of any portion of the Current Purchase Price due from Purchaser to Seller in respect to the Sold Receivables in this Sold Receivables Pool on such Semi-Monthly Settlement Date. (iv) In accordance with Section 2.6(d)(iv), Servicer shall pay any amounts set aside pursuant to Section 2.6(a)(iv), which are good and collected funds, to Seller as payment of the Adjusted Deferred Purchase Price during a Semi- -28- 36 Monthly Period on the relevant Semi- Monthly Settlement Date; provided, however, Purchaser may direct Servicer to pay to Purchaser from the sums otherwise payable to Seller pursuant to this Section 2.6(c)(iv) the amount of any accrued and unpaid Seller Adjustments, Fees and Indemnity Payments due to Purchaser from Seller. (v) Notwithstanding the foregoing provisions of this Section 2.6(c), during any Liquidation Period, Servicer shall pay to Purchaser all amounts set aside pursuant to Section 2.6(a)(ii) and Section 2.6(a)(iii) on the Business Day such amounts represent good and collected funds until such time as the Purchaser's Net Investment is repaid in full. (d) Semi-Monthly Settlement Statement and Delivery of Collections. (i) On each Semi-Monthly Reporting Date for a Semi-Monthly Period, Servicer shall prepare and forward to Purchaser, and if Seller is not Servicer to Seller, a Semi-Monthly Settlement Statement, setting forth, and showing the calculation of, the aggregate Unpaid Balance of the Sold Receivables Pool as of the close of business on the last Business Day of the Semi-Monthly Period just completed, the Notional Amount of Sold Receivables assigned to Purchaser on Designated Purchase Dates occurring since the close of business on the last Business Day of the Semi-Monthly Period just completed, the Notional Amount of the Tendered Receivables to be assigned to Purchaser on the Semi-Monthly Settlement Date for the Semi-Monthly Period just completed, the Maximum Current Purchase Price for the Sold Receivables Pool taking into account the addition to the Sold Receivables Pool of the Sold Receivables assigned to Purchaser on Designated Purchase Dates occurring since the close of business on the last Business Day of the Semi-Monthly Period just completed and the Notional Amount of Tendered Receivables to be assigned on such Semi-Monthly Settlement Date and the other information listed in the Semi-Monthly Settlement Statement, on the basis of the most recent information available to Servicer. (ii) Upon delivery of such report, Seller shall recompute, and Purchaser shall confirm, the Allocation Minimum and Reserve Asset Percentage on the basis of (1) the aggregate Unpaid Balance of Sold Receivables Pool shown in such report (including the Notional Amount of the Tendered Receivables to be presented to the Purchaser for Purchase on the Semi-Monthly Settlement Date for such Semi-Monthly Period), (2) the information contained in the most recent Monthly Settlement Statement as to the aggregate Unpaid Balance of Sold Receivables Pool not constituting Eligible Receivables, and the amounts and percentages used to determine the Net Charge-Off Ratio, all as of the most recent Monthly Settlement Statement, and (3) the Purchaser's Net Investment (adding the amount of the Current -29- 37 Purchase Price Payment due to Seller on such Semi-Monthly Settlement Date and subtracting the sum set aside by Servicer pursuant to Section 2.6(a)(iii), but not previously applied pursuant to Section 2.6(e) to the payment of a Current Purchase Price Payment on a Designated Purchase Date occurring during such Semi-Monthly Period, to reduce the Purchaser's Net Investment on the Semi-Monthly Settlement Date for the Semi-Monthly Period just completed). (iii) If, on the basis of such calculation, the Allocation Minimum would exceed the Reserve Asset Percentage or the Purchaser's Net Investment would exceed the Maximum Purchaser's Net Investment, then either, at Seller's election, (1) the Servicer may set-aside funds in an amount equal to such excess, out of the portion of Collections described in Section 2.6(a)(iv) and pay such amount immediately to Purchaser to reduce the Purchaer's Net Investment, or (2) Seller may reduce its request for a Current Purchase Price Payment on such Semi-Monthly Settlement Date such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment, or (3) Seller may execute and deliver an Assignment on such Semi-Monthly Settlement Date concerning additional Eligible Receivables with sufficient Notional Amount such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage and the Allocation Minimum, or (4) Seller may cause the occurrence of a combination of the events described in clauses (1), (2) and (3) of this Section 2.6(d)(iii) such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment; provided that the failure of Seller to cause compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment shall create immediately a Potential Termination Event, and with the passage of time a Termination Event, and upon the existence of such Termination Event, Purchaser may declare a Purchase Termination Date and pursue its remedies set forth in Section 8.2 hereof. (iv) Provided that the Seller has complied, or caused the compliance, with the provisions of this Section 2.6(d) hereof on the applicable Semi-Monthly Settlement Date, Servicer shall pay to Seller the amount described in Section 2.6(c)(iv) hereof. (e) Designated Purchase Date Settlement Statement and Delivery of Collections. (i) On each day that a Notice of Proposed Sale is delivered to Purchaser in connection with any Designated Purchase Date (such day, the "Designated Purchase Notice Date"), Servicer shall prepare and forward to Purchaser, -30- 38 and if Seller is not Servicer to Seller, a Designated Purchase Date Settlement Statement, setting forth, and showing the calculation of, the aggregate Unpaid Balance of Sold Receivables Pool as of the close of business on the last Business Day prior to such Designated Purchase Notice Date, the Notional Amount of the Tendered Receivables to be assigned to Purchaser on such Designated Purchase Date, the Current Purchase Price Payment requested by Seller on such Designated Purchase Date, the Maximum Current Purchase Price for the Sold Receivables Pool and the other information listed in the Designated Purchase Date Settlement Statement, on the basis of the most recent information available to Servicer. (ii) Upon delivery of such report, Seller shall recompute, and Purchaser shall confirm, the Allocation Minimum and Reserve Asset Percentage on the basis of (1) the aggregate Unpaid Balance of Sold Receivables Pool shown in such report (including the Notional Amount of the Tendered Receivables to be presented to the Purchaser for Purchase on the applicable Designated Purchase Date), (2) the information contained in the most recent Monthly Settlement Statement as to the aggregate Unpaid Balance of Sold Receivables Pool not constituting Eligible Receivables, and the amounts and percentages used to determine the Net Charge-Off Ratio, all as of the most recent Monthly Settlement Statement, and (3) the Purchaser's Net Investment (adding the amount of the Current Purchase Price Payment due to Seller on such Designated Purchase Date and subtracting the sum set aside by Servicer pursuant to Section 2.6(a)(iii), and to be applied to the payment of all or a portion of such Current Purchase Price Payment payable on such Designated Purchase Date pursuant to Section 2.6(e)(iv), to reduce the Purchaser's Net Investment). (iii) If, on the basis of such calculation, the Allocation Minimum would exceed the Reserve Asset Percentage or the Purchaser's Net Investment would exceed the Maximum Purchaser's Net Investment, then either, at Seller's election, (1) the Servicer may set-aside funds in an amount equal to such excess, out of the portion of Collections described in Section 2.6(a)(iii) or Section 2.6(a)(iv) and pay such amount immediately to Purchaser to reduce the Purchaser's Net Investment, or (2) Seller may reduce its request for a Current Purchase Price Payment on such Designated Purchase Date such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment, or (3) Seller may cause the occurrence of a combination of the events described in clauses (1) and (2) of this Section 2.6(e)(iii) such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum -31- 39 Purchaser's Net Investment; provided that the failure of Seller to cause compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment shall create immediately a Potential Termination Event, and with the passage of time a Termination Event, and upon the existence of such Termination Event, Purchaser may declare a Purchase Termination Date and pursue its remedies set forth in Section 8.2 hereof. (iv) If Purchaser shall so direct, Servicer shall pay to Seller from amounts set-aside pursuant to Section 2.6(a)(iii), which are good and collected funds, all or any portion of the Current Purchase Price Payment, as directed by Purchaser, due from Purchaser to Seller in respect to the Sold Receivables in the Sold Receivables Pool on such Designated Purchase Date Settlement Date; and upon withdrawal of such amount from the Servicer Deposit Account the Purchaser's Net Investment shall be reduced by the sum of such withdrawal and the Purchaser's Net Investment shall be increased by the amount of the Current Purchase Price Payment paid to Seller on such Designated Purchase Date. 2.7. Monthly Settlement Procedures. The parties hereto will take the following actions with respect to each Monthly Accounting Period: (a) Monthly Settlement Statement. On the Monthly Reporting Date for each Monthly Accounting Period, Servicer shall deliver to the Purchaser, and if Seller is not the Servicer to Seller, a diskette and a hard copy of the information therein contained containing the Monthly Settlement Statement for such Monthly Accounting Period. (b) Maintenance of Reserve Covenants. (i) On the first (1st) Business Day after such Monthly Reporting Date for each Monthly Accounting Period, Seller shall recompute, and Purchaser shall confirm, as of the Relevant Month End Date and based upon the assumptions in the next sentence, (A) the Reserve Asset Percentage, (B) Allocation Minimum, (C) the amount of the reduction or increase (if any) in the Purchaser's Net Investment since the next preceding Month End Date, (D) the excess (if any) of the Allocation Minimum over the Reserve Asset Percentage, and (E) the excess (if any) of the Purchaser's Net Investment over the Maximum Purchaser's Net Investment. Such calculation shall be based upon the assumptions that the information in the Monthly Settlement Statement is correct. (ii) If according to the computations made pursuant to clause (i) above, the Allocation Minimum exceeds the Reserve Asset Percentage or the Purchaser's Net Investment -32- 40 exceeds the Maximum Purchaser's Net Investment, then Purchaser shall immediately notify Servicer, and on the relevant Monthly Settlement Date, Servicer shall pay to Purchaser the amount necessary to reduce the sum of the Purchaser's Net Investment to the Maximum Purchaser's Net Investment or to increase the Reserve Asset Percentage to the Allocation Minimum. Such payment shall be made out of amounts set-aside pursuant to Section 2.6(a)(iii) or (iv) and, to the extent such amounts are insufficient to reduce the sum of the Purchaser's Net Investment to the Maximum Purchaser's Net Investment or increase the Reserve Asset Percentage to the Allocation Minimum, then either, at Seller's election, (1) the Seller may reduce the amount of its request for a Current Purchase Price Payment on the applicable Semi-Monthly Settlement Date such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment, (2) the Seller may execute and deliver an Assignment on such Semi-Monthly Settlement Date concerning additional Eligible Receivables with sufficient Notional Amount such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage and the Allocation Minimum, or (3) Seller may cause the occurrence of a combination of the events described in clauses (1) and (2) of this Section 2.7(b)(ii) such that the Seller will be in compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment; provided that the failure of Seller to cause compliance with the limitations imposed by the Reserve Asset Percentage, the Allocation Minimum and the Maximum Purchaser's Net Investment shall create immediately a Potential Termination Event, and with the passage of time a Termination Event, and upon the existence of such Termination Event, Purchaser may declare a Purchase Termination Date and pursue its remedies set forth in Section 8.2 hereof. 2.8. Seller Adjustments. (a) Calculation of Seller Adjustments. On each Purchase Date, Purchaser shall reduce the requested Current Purchase Price Payment payable to Seller on such Purchase Date by an amount (the "Seller Adjustments") equal to the difference between (i) the sum of (A) the accumulated Dilution Adjustment (as defined in Section 2.8(d)), if any, for the Semi-Monthly Period just completed, plus (B) the aggregate Noncomplying Sold Receivables Adjustment (as defined in Section 2.8(c), if any, for the Semi-Monthly Period just completed, minus (ii) the aggregate amount of any payments that Servicer shall have received during such Semi-Monthly Period on account of Collections due with respect to Noncomplying Sold Receivables that have been included in any Seller Adjustment previously deducted or paid in accordance with this Section 2.8. -33- 41 (b) Excessive Seller Adjustments. If Seller Adjustments on any Purchase Date exceed the Current Purchase Price Payments payable by Purchaser to Seller on such Purchase Date, then Seller shall pay to Purchaser in cash the amount of such excess Seller Adjustments together with the accrued and unpaid Earned Discount on the Dollar amount of such excess Seller Adjustments on the next succeeding Business Day. The payment of such excess Seller Adjustment shall be applied to reduce Purchaser's Net Investment, but in no event shall such excess Seller Adjustment exceed the Purchaser's Net Investment then outstanding. (c) Noncomplying Sold Receivable Adjustment. If, with respect to any Sold Receivables that Purchaser purchases hereunder, (i) any of the representations or warranties set forth in Section 4.20 is not true with respect to any Tendered Receivable added to the Sold Receivables Pool as of its Purchase Date or, (ii) as a result of any action or inaction of Seller or any of its Affiliates, on any day any of the representations or warranties as set forth in Section 4.20 is no longer true with respect to such Sold Receivable, then, on such day, Seller shall be deemed to have received on such day a Collection of the applicable Sold Receivable (a "Noncomplying Sold Receivable") in an amount equal to the Unpaid Balance of such Receivable (herein the sum of all such amounts for all Noncomplying Receivables on any day being collectively called the "Noncomplying Sold Receivables Adjustment"), and Seller shall pay the amount of the Noncomplying Sold Receivables Adjustment to Purchaser in the manner provided for in this Section 2.8. (d) Dilution Adjustment. If on any day any Sold Receivable is (i) reduced as a result of any defective, rejected or returned services or products, any cash discount not reflected in the concept of the Notional Amount of such Sold Receivable, or any other adjustment by Seller, (ii) subject to reduction on account of any offsetting account payable of Seller to the applicable Obligor or is reduced or canceled as a result of a set-off in respect of any claim by, or defense or credit of, such Obligor against Seller or any Affiliate of Seller (whether such claim, defense or credit arises out of the same or a related or an unrelated transaction), (iii) reduced on account of the obligation of Seller to pay to such Obligor any rebate or refund or (iv) reduced as a result of any incorrect billings, disputed billings, allowances, chargebacks, credits or any other reductions or cancellations that are unrelated to the ability of such Obligor to pay such Sold Receivable and are not reflected in the concept of the Notional Amount of such Sold Receivable or (v) becomes subject to any claim made by any Person alleging a violation of the related Contract, with respect to any Sold Receivable, against Seller, Purchaser or any assignee of -34- 42 Purchaser (each of the reductions and cancellations described above in clauses (i) through (v) being herein called a "Dilution Adjustment"), then Seller shall be deemed to have received on such day a Collection of such Sold Receivable in the amount of such Dilution Adjustment and Seller shall pay such amount to Purchaser in the manner provided in this Section 2.8. (e) Reconveyance of Certain Sold Receivables . Upon the payment of any Seller Adjustment pursuant to this Section 2.8 where a portion of such Seller Adjustment relates to either a Noncomplying Sold Receivable Adjustment or a Dilution Adjustment where the amount of such Dilution Adjustment relating to any Sold Receivable is equal to the full face amount of such Sold Receivable, Purchaser shall execute and deliver to Seller a duly completed Reassignment of Sold Receivable concerning the applicable Sold Receivables the subject of such Seller Adjustment. 2.9. Limited Recourse. The purchase and sale of the Sold Receivables under this Agreement shall be without recourse to Seller; provided, however, that Seller shall be liable to Purchaser for all representations, warranties, covenants and indemnities made by it pursuant to the terms of this Agreement, including without limitation the obligation to pay to Purchaser any accrued and unpaid Earned Discount, Servicer's Fees, Fees, Seller Adjustments and Indemnity Payments in accordance with the terms of this Agreement; provided, however, that in no event shall Seller be liable to Purchaser hereunder for any losses on a Sold Receivable arising from or due to a credit-related failure to pay by an Obligor (including due to the bankruptcy or insolvency of such Obligor) where the circumstances of such credit-related failure arise after the assignment of such Sold Receivable to Purchaser. 2.10. No Assumption of Obligations Relating to Sold Receivables, Related Assets, or any Contract. Neither Servicer, if Servicer is a Person other than Seller, nor Purchaser shall have any obligation or liability with respect to any Sold Receivable, any Related Asset or any other agreement related to any Sold Receivable, nor shall Servicer, if Servicer is a Person other than Seller, or Purchaser have any obligation or liability to any Obligor or other customer or client of Seller (including any obligation to perform any of the obligations of Seller under any such Sold Receivable, any Related Asset or any other related agreement). No such obligation or liability is intended to be assumed by Servicer, if Servicer is a Person other than Seller, or Purchaser and any such assumption is expressly disclaimed. 2.11. True Sales. Seller and Purchaser intend the transactions hereunder to constitute true sales of the Sold -35- 43 Receivables by Seller to Purchaser providing Purchaser with the full benefits of ownership of the Sold Receivables. 2.12. Payments and Computations, Etc. All amounts to be paid by Seller or Servicer to Purchaser hereunder shall be paid in accordance with the terms hereof no later than 2:00 p.m. (Pittsburgh, Pennsylvania time) on the day when due in Dollars in immediately available funds to such account as Purchaser may from time to time specify in writing. Payments received by Purchaser after such time on any Business Day shall be deemed to have been received on the next Business Day. In the event that any payment becomes due on a day which is not a Business Day, then such payment shall be made on the next succeeding Business Day. Seller shall, to the extent permitted by Law, pay to Purchaser, on demand, interest on all amounts not paid when due hereunder (whether owing by Seller or by Servicer) at 1.75% per annum above the Adjusted Base Rate in effect on the date such payment was due until such payment is made in full; provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by applicable Law and the amount of interest payable under this Section 2.12 shall be without duplication of the increased amount of Earned Discount accruing with respect to the Purchaser's Net Investment on an after the occurrence of a Termination Event. To the extent that any amount of interest is paid in excess of the maximum permissible amount, such amount shall be applied to the repayment of the amount due on which such interest is accruing. All computations of interest payable under this Section 2.12 shall be made on the basis of a calendar year of 365/366 days, as the case may be, for the actual number of days (including the first but excluding the last day) elapsed. 2.13. Negative Pledge. Until the Final Payout Date, Seller covenants and agrees not to grant to any Person (other than Purchaser) any Lien on any of the Receivables and Related Assets, whether now existing or hereafter arising. ARTICLE III CONDITIONS OF PURCHASE 3.1. Conditions to Initial Purchase. The obligation of Purchaser to purchase any Tendered Receivables on the Initial Purchase Date and to make the initial Current Purchase Price Payment for the Sold Receivables Pool on the Initial Purchase Date is subject to the condition that (i) on such date no Termination Event or Potential Termination Event shall have occurred and be continuing, (ii) no event or circumstance shall have occurred since September 30, 1994 that would have a Material Adverse Effect on or with respect to Seller, and (iii) there -36- 44 shall have been delivered to Purchaser, in form and substance satisfactory to Purchaser: (a) A Notice of Proposed Sale duly completed and executed by an authorized representative of Seller and dated and delivered at least five (5) days prior to the Initial Purchase Date; (b) An Assignment duly completed and executed by an authorized representative of Seller and dated the Initial Purchase Date; (c) A duly executed, counterpart original of this Agreement; (d) A duly executed, counterpart original of the Servicer Deposit Account Agreement substantially in the form of Exhibit "I" hereto; (e) A duly executed, counterpart original of each Lockbox Letter Agreement concerning each Lockbox Bank other than the Purchaser together with a copy of the related Lockbox Agreement; (f) A copy of a resolution passed by the Board of Directors of Seller, certified by the Secretary of Seller as being in full force and effect on the Initial Purchase Date providing authorization for the execution, delivery and performance of this Agreement, the Assignments and any other instrument or agreement required hereunder; (g) A certificate, signed by the Secretary of Seller and dated the Initial Purchase Date, as to the incumbency, and containing a specimen signature or signatures, of the person or persons authorized to execute and deliver this Agreement, the Assignments and any other instrument or agreement required hereunder on behalf of Seller; (h) A certificate signed by a responsible officer of Seller and dated the Initial Purchase Date, stating that the representations and warranties contained in Article IV and in any instrument, agreement or certificate executed and delivered in connection herewith are then true and accurate in all material respects as though made on and as of the Initial Purchase Date; (i) Evidence satisfactory to Purchaser that Seller is duly organized and validly existing and in good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation and in good standing in the State of California and -37- 45 the Commonwealth of Pennsylvania, and has paid all California corporate taxes which are due and payable; (j) Confirmation of submission for filing in the appropriate offices of all proper financing statements (which financing statements shall be substantially in the form of Exhibit "H" hereto or such other form as may be requested by Purchaser) naming Seller, as the "seller", with respect to the Sold Receivables, and Purchaser, as "purchaser", or other similar instruments or documents as may be necessary or, in the opinion of Purchaser, desirable under the UCC of all appropriate jurisdictions or any comparable law to perfect Purchaser's interest in the Sold Receivables (taking into consideration that the sale of accounts and chattel paper is subject to Article 9 of the UCC); (k) Executed copies of releases of all financing statements, in favor of any Person (other than Purchaser) filed with respect to the Tendered Receivables sold or to be sold to Purchaser hereunder or otherwise subject hereto; (l) A certified copy of each search report, certified by the appropriate filing officer (or a similar certificate of counsel admitted to practice in the appropriate jurisdiction), listing the financing statements filed with respect to the Receivables, and showing that no financing statements or similar statements have been filed with respect to, and then presently cover, any Receivables (except those filed pursuant to this Agreement in favor of Purchaser and those (if any) as may be otherwise approved by Purchaser, in writing); (m) Original executed copies of one or more favorable written opinions of counsel to Seller, substantially in the form of Exhibit "F" hereto, upon which Purchaser may rely satisfactory to Purchaser and its counsel, dated as of the Initial Purchase Date; (n) The payment in full of the Structuring Fee; (o) The payment of the reasonable fees and expenses of counsel to the Purchaser, including without limitation the cost of any UCC lien and tax lien searches concerning the Seller; (p) A payoff letter from Purchaser to Seller, and acknowledged and accepted in writing by Seller, with respect to the payment in full of the PNC Note and termination of the related line of credit, together with irrevocable directions from Seller to Purchaser to pay the PNC Note in full with the proceeds of the sale of Tendered Receivables on the Initial Purchase Date; -38- 46 (q) A duly executed, counterpart original of the Amended and Restated Lockbox Service Agreement substantially in the form of Exhibit "J" hereto; and (r) Such other evidence as Purchaser may reasonably request to establish the consummation of the transactions contemplated hereby, the taking of all proceedings in connection herewith and compliance with the conditions set forth in this Agreement. 3.2. Conditions to Subsequent Purchases. After the Initial Purchase Date, the obligation of Purchaser to make any Current Purchase Price Payment for the Sold Receivables Pool pursuant to Section 2.5 hereof on the related Purchase Date shall be subject to the satisfaction of the following conditions: (a) A Notice of Proposed Sale duly completed and executed by an authorized representative of Seller and dated and delivered at least two (2) Business Days prior to the proposed Purchase Date; (b) An Assignment duly completed and executed by an authorized representative of Seller and dated the proposed Purchase Date concerning the Tendered Receivables and Related Assets to be added to the Sold Receivables Pool on such Purchase Date; (c) All representations and warranties of Seller contained herein shall be true and correct in all respects on the related Purchase Date; (d) All filings (including, without limitation, UCC filings), recordings and registrations shall have been made, and there shall have been taken all action as may be necessary or, to the extent requested by Purchaser, advisable, in order to establish, perfect, protect and preserve the right, title and interest, remedies, powers and privileges of Purchaser in the Sold Receivables and Purchaser shall have received evidence satisfactory to it of the foregoing on or prior to such Purchase Date; and (e) No Termination Event or Potential Termination Event shall have occurred and be continuing on such Purchase Date. 3.3. Certification as to Representations and Warranties and Closing Condition. (a) Seller, by accepting the initial Current Purchase Price Payment or any additional Current Purchase Price Payment for the Sold Receivables Pool, shall be deemed to have certified that (i) its representations and warranties contained -39- 47 in Article IV are true and correct on and as of such day, with the same effect as though made on and as of such day, (ii) all the conditions precedent to Purchaser's purchase of such Sold Receivables set forth in Sections 3.1 and 3.2, as applicable, and/or the payment of the Current Purchase Price for the Sold Receivables Pool, have been performed as of such Purchase Date, (iii) no event has occurred and is continuing, or would result from such Purchase or the payment of the Current Purchase Price Payment then due, that constitutes a Termination Event or Potential Termination Event, (iv) the Unpaid Balance of the Tendered Receivables sold to Purchaser on such Purchase Date equals or exceeds the Notional Amount of such Tendered Receivables as shown on the Schedule 1 of the related Assignment, (v) the master computer files of Seller have been marked with the code "P" or "Sold" concerning each Tendered Receivable sold to Purchaser on such Purchase Date which such code designates such Tendered Receivables as Sold Receivables, and (vi) the Termination Date has not occurred. (b) Seller, by accepting any Adjusted Deferred Purchase Price paid for any Sold Receivable, shall be deemed to have certified that (i) no event has occurred and is continuing, or would result from such payment, that constitutes a Termination Event or Potential Termination Event, (ii) the Purchaser's Net Investment does not exceed the Maximum Purchaser's Net Investment and the Allocation Minimum does not exceed the Reserve Asset Percentage, and (iii) a Liquidation Period has not occurred, and is not continuing. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce Purchaser to purchase any Tendered Receivables and Related Assets, Seller hereby represents and warrants to Purchaser as follows. 4.1. Organization, Standing, Qualification, etc. Seller is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Agreement, the Assignments and the other Receivables Documents, to sell and service any and all Tendered Receivables and to carry out the terms of this Agreement and the other Receivables Documents. Seller is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction (other than the jurisdiction of its incorporation) in which the nature of its activities or the -40- 48 character of the properties it owns or leases makes such qualification necessary, except those in which the failure so to qualify would not reasonably be likely to have a materially adverse effect on Seller. 4.2. Authorization of Agreement. The execution, delivery and performance of this Agreement, each Assignment and the other Receivables Documents, and the consummation of the transactions herein and therein contemplated, including without limitation the sale and assignment of the Sold Receivables on the terms and conditions herein provided, (i) are within Seller's power, authority and legal right, (ii) have been duly authorized by all necessary corporate action, (iii) are not in conflict with (A) the terms of any articles or certificate of incorporation, charter, bylaw or other organization papers of Seller, or (B) the terms of any indenture, loan agreement, credit agreement, lease, contract, instrument or other agreement to which Seller is a party or by which Seller is bound or affected, (iv) do not constitute (with or without notice or lapse of time or both) a default under the terms of any indenture, loan agreement, credit agreement, lease, contract, instrument or other agreement to which Seller is a party or by which Seller is bound or affected and (v) do not result in or require the creation of any Lien upon or with respect to any of its properties, except in favor of Purchaser pursuant to the terms hereof. 4.3. Compliance with Laws. Seller is not in violation of any term of any applicable law, ordinance, rule or regulation of any Governmental Person or any term of any applicable order, judgment or decree of any court, arbitrator or Governmental Person (including without limitation Environmental Laws, as such term is defined in the Note Agreements), the consequences of which violation are reasonably likely to have a materially adverse effect on the business, operations, affairs, condition (financial or otherwise), properties or assets of Seller; and the execution, delivery and performance of this Agreement, the Assignments and the other Receivables Documents will not result in any violation of or be in conflict with or constitute a default under any such term. 4.4. Approvals. Except for the filing of financing statements in state and county filing offices in favor of Purchaser in the jurisdiction of Seller's Chief Executive Office, no authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Governmental Person (other than normal reporting filings with the Securities and Exchange Commission) is or will be necessary in connection with the execution and delivery of this Agreement, any Assignment or the other Receivables Documents, the consummation of the transactions -41- 49 herein or therein contemplated, or the performance of or compliance with the terms and conditions hereof or thereof, or to ensure the legality, validity or enforceability hereof or thereof, or to ensure that Purchaser will have an ownership interest in and to the Sold Receivables which is prior and perfected to all other Liens (including competing ownership interests), or to ensure that no creditor of or purchaser from Seller or any other Person (other than Purchaser, its successors and assigns) has or will have a claim against the Sold Receivables. 4.5. Seller's Chief Executive Office. As of the date hereof, Seller's Chief Executive Office is located at the address stated in Section 11.1 hereof, and the offices where Seller keeps all its books, records and documents evidencing Pool Receivables (including any Sold Receivables), the related Contracts and all purchase orders and other agreements related to such Pool Receivables are located at the addresses specified in Schedule 4.5 (or at such other locations, as to which Purchaser has been notified in accordance with Section 6.1(b), in jurisdictions where all action required by Section 6.3 has been taken and completed). Since September 30, 1994, Seller has not changed its name, merged or consolidated with any other corporation. Seller has never been the subject of any proceeding under the Federal Bankruptcy Code. 4.6. Enforceability of Agreement. This Agreement is a legal, valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency or other Laws or equitable principles pertaining to creditors' rights, and each Assignment and any other Receivables Documents, when executed and delivered, will be similarly legal, valid, binding and enforceable, subject to the foregoing exception pertaining to Laws affecting creditors' rights. 4.7. Litigation. There are no injunctions, decrees or other decisions issued or made by any Governmental Person that would prevent the consummation of the transactions contemplated hereby or Seller from conducting a material part of its business operations; and there are no proceedings or investigations pending or, to Seller's knowledge (after due inquiry and investigation) threatened, before any Governmental Person (i) asserting the invalidity of this Agreement, any Assignment or any other Receivables Documents, (ii) seeking to prevent the sale and assignment of any of the Sold Receivables under, or the consummation of any of the other transactions contemplated by, this Agreement or any other Receivables Document, (iii) seeking any determination or ruling that would have a Material Adverse -42- 50 Effect or (iv) seeking to adversely affect the federal income tax attributes of the Purchases hereunder. 4.8. Events of Termination. No event has occurred or would result from the incurring of obligations by Seller under this Agreement, any Assignment or the other Receivables Documents which is, or upon the lapse of time or notice or both would become, a Termination Event. 4.9. Tax Returns and Payments. Seller has filed all tax returns required by law to be filed by it and has paid all taxes levied upon Seller or any of its properties, assets, income or franchises which are due and payable, other than those presently payable without penalty or interest and those presently being contested in good faith by appropriate proceedings diligently conducted for which such reserves or other appropriate provision, if any, as are required by GAAP have been made. The Federal income tax liabilities of Seller has been finally determined by the Internal Revenue Service and satisfied, or the time for audit has expired, for all fiscal periods through December 31, 1990. The charges, accruals and reserves on the books of Seller in respect of Federal, state and foreign income taxes for all fiscal periods are adequate in the opinion of Seller and Seller knows of no unpaid assessment for additional Federal, state or foreign income taxes for any period or any basis for any such assessment. 4.10. [Unused]. 4.11. Certain Legal Restrictions. Seller is not (i) an "investment company" or a Person directly or indirectly "controlled" by or acting on behalf of an "investment company" within the meaning of the Investment Company Act of 1940 as amended from time to time and the rules and regulations promulgated thereunder, as amended from time to time, (ii) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of either a "holding company" or a "subsidiary company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to any other Law of any Governmental Person (in each case whether United States federal, state or local, or other) having jurisdiction over Seller, which purports to restrict or regulate its ability to sell the Sold Receivables, borrow money, or extend or obtain credit. 4.12. Bulk Sales. No transaction contemplated hereby requires compliance with any bulk sales act or similar Law. 4.13. Regulation G,T,U and X. The use of all funds obtained by Seller under this Agreement or any other Receivables Document will not conflict with or contravene any of Regulations G, T, U -43- 51 or X promulgated by the Board of Governors of the Federal Reserve System. 4.14. Financial Statements. Seller has heretofore furnished to Purchaser its annual audited consolidated balance sheets as of December 31, 1991, December 31, 1992 and December 31, 1993, together with their respective related consolidated statements of income, cash flow and retained earnings for the fiscal year, ending on such date. Such financial statements (including the notes thereto) present fairly the consolidated financial condition of Seller and its Subsidiaries, as of such dates and the consolidated results of their respective operations and their respective cash flows for the fiscal periods then ended, all in accordance with GAAP consistently applied. Since the later of (x) December 31, 1993 or (y) the date of the most recent financial statements delivered by Seller pursuant to Section 6.1(a)(v) hereof, no event has occurred which would have a Material Adverse Effect. 4.15. No Disclosure Required. No information furnished by Seller to Purchaser pursuant to or in connection with this Agreement or the other Receivables Documents or any transaction contemplated hereby or thereby is false or misleading in any material respect as of the date as of which such information was stated or certified (including by omission of material information necessary to make such information not misleading). There is no fact known to Seller which would have a Material Adverse Effect. 4.16. Financing Statements. Excepting UCC financing statements and filings thereof in favor of Purchaser, (i) no UCC financing statement applicable to any of the Receivables, the Collections, the Books and Records or Related Security is currently on file in any applicable UCC filing office in jurisdiction of the Chief Executive Office of Seller, and (ii) Seller has not executed as debtor any UCC financing statement applicable to any of the Receivables, the Collections, the Books and Records or the Related Security. 4.17. Licenses for Computer Programs. No material license or approval is required for Seller's use of any computer program or software used by Seller in the servicing of the Sold Receivables other than those which have been obtained and are in full force and effect. 4.18. Solvency of Seller. On the date hereof, and as of the date of each Purchase, as the case may be, and after giving effect to such Purchase, Seller is, and will be, Solvent. -44- 52 4.19. Lockbox Accounts. The names and addresses of all the Lockbox Banks, together with the account numbers of the Lockbox Accounts of Seller at such Lockbox Banks, are specified in Schedule 4.19 (or have been notified to Purchaser in accordance with Section 6.14). 4.20. Representations and Warranties Regarding Sold Receivables. Seller by its sale or transfer to Purchaser of any Sold Receivables pursuant to a Purchase shall be deemed to reaffirm its representations and warranties contained in Sections 4.1 through and including 4.19 as of the related Purchase Date, as if such representations and warranties were made on and as of the related Purchase Date, and shall also be deemed to represent and warrant to Purchaser by offering such Sold Receivable to Purchaser, with respect to each such Sold Receivable as of the related Purchase Date, as follows: (a) each Sold Receivable that is transferred on the Initial Purchase Date, and each Sold Receivable that is added to the Sold Receivables Pool since the last Purchase Date and that is transferred to Purchaser on the applicable Purchase Date, is a valid and binding obligation of the parties thereto, enforceable in accordance with its terms except as enforceability may be limited by bankruptcy, insolvency, reorganization, or similar laws from time to time in effect affecting the enforcement of creditors' rights; and each such Sold Receivable which is transferred to Purchaser represents a Receivable and such Related Assets generated by Seller in the ordinary course of business or financial affairs of Seller; and each Sold Receivable which is transferred to Purchaser represents a true and correct statement of a bona fide indebtedness incurred by an Obligor in the Dollar amount set forth in the applicable Notice of Proposed Sale or Semi-Monthly Settlement Statement for goods sold to, or services performed for, such Obligor; (b) (i) each Tendered Receivable, together with the related Contracts, any Related Security, if any, and all purchase orders and other agreements related to such Tendered Receivable, upon creation and prior to the sale to Purchaser hereunder is owned by Seller free and clear of any Adverse Claim; (ii) when Purchaser makes a Purchase, it shall have acquired and shall at all times thereafter continuously maintain a valid and perfected ownership interest in each such Sold Receivable, each related Contract, the related Books and Records, the Related Security and Collections with respect thereto, free and clear of any Adverse Claim (other than any Lien arising as the result of any action taken by Purchaser or any assignee thereof); and (iii) no financing statement or other instrument similar in effect covering any Receivable, any interest therein, any Contract, any Books and Records, the Related Security or Collections with -45- 53 respect thereto is on file in any recording office except such as may be filed (1) in favor of Seller or Purchaser in accordance with the Contract, (2) in favor of Purchaser in connection with this Agreement, or (3) in connection with any Lien arising solely as the result of any Lien granted or other action taken by Purchaser (or any assignee thereof); (c) this Agreement and each Assignment (i) transfers to Purchaser all of the right, title and interest in and to the Tendered Receivables and Related Assets described in the applicable Assignment, free and clear of any Adverse Claim, and (ii) constitutes a valid sale and assignment of such Tendered Receivables and Related Assets enforceable against all creditors of and purchasers from Seller; (d) Seller has not amended or waived any of its rights with respect to each Tendered Receivable which is transferred to Purchaser on a Purchase Date or taken or omitted to take any action on or before such Purchase Date which action or omission may reduce or impair the rights that Purchaser would otherwise have with respect to such Tendered Receivable upon the sale and assignment thereof to Purchaser pursuant to this Agreement; (e) all filings and recordings required to evidence and perfect the title of Purchaser to such Sold Receivables have been made and are in full force and effect, including, without limitation, all financing statements required under the provisions of the UCC of any applicable jurisdiction to be filed or recorded against Seller, as debtor or assignor; (f) [unused]; (g) each Sold Receivable has been originated and computed pursuant to and in accordance with the Credit and Collection Policy; (h) The information set forth (i) in the Contracts related to the Sold Receivables on the Initial Purchase Date, (ii) in the Contracts related to the Sold Receivables added to the Receivables Pool since the last Purchase Date, (iii) in the Notice of Proposed Sale related to a Purchase, and (iv) in the Semi-Monthly Settlement Statement related to a Purchase is true, correct and complete in all respects; (i) each Contract giving rise to a Sold Receivable provides for one payment that will fully amortize such Sold Receivable, and Seller has not extended or amended, modified or waived the terms of any Sold Receivable or any Contract relating to any Sold Receivable; -46- 54 (j) Seller's right to receive payment of any Sold Receivables is absolute and not contingent upon the fulfillment of any condition whatever; there is no dispute or disagreement of any nature between an Obligor and Seller with respect to such Sold Receivable concerning the payment of such Sold Receivable; and no such Sold Receivable by its terms is subject to any right of rescission, setoff, counterclaim or defense other than a payment term discount which has been excluded from the Notional Amount of the Sold Receivables and other than a setoff arising from promotional allowances and discounts offered by Seller to its account debtors in its ordinary course of business; (k) Seller has recorded in its computer files that such Sold Receivables have been purchased by Purchaser and each such Sold Receivable is marked on Seller's master computer files with the code "P" or "Sold"; and (l) each Tendered Receivable is an Eligible Receivable on the applicable Purchase Date. 4.21. Representations and Warranties Regarding Sold Receivables Pool. Seller by its sale or transfer to Purchaser of any Sold Receivables pursuant to a Purchase shall be deemed to represent and warrant to Purchaser, as of the related Purchase Date, that after giving effect to the Purchase of Tendered Receivables on such Purchase Date, the ratio of the Unpaid Balance of all Sold Receivables, the Obligor of which is a Group I Obligor, to the Unpaid Balance of the Sold Receivables Pool equals or exceeds 75%. ARTICLE V FEES, EARNED DISCOUNT, YIELD PROTECTION AND FUNDING LOSSES 5.1. Fees. (a) Structuring Fee. In consideration for the establishment of the receivables purchase facility herein set forth, Seller shall pay to Purchaser a structuring fee (the "Structuring Fee") on the date of the execution and delivery by Seller to Purchaser of this Agreement equal to the amount specified in the Engagement Letter as the fee payable by Seller to Purchaser upon execution of this Agreement in consideration for the structuring of this receivables purchase facility. (b) Commitment Fee. In consideration for the liquidity available to Seller under the receivables purchase facility herein set forth, Seller agrees to pay to Purchaser on -47- 55 March 31, 1995 and quarterly thereafter on the last day of each June, September, December and March to and including the Termination Date, a fee (the "Commitment Fee") calculated at the rate of one-half of one percent (1/2%) per annum (computed upon the basis of an assumed year of 360 days and the actual number of days elapsed) on the daily (computed at the opening of business) unused amount of the Maximum Purchaser's Net Investment for the most recent quarter ending March 31, June 30, September 30, or December 31, as the case may be; provided, however, that the first payment of the Commitment Fee shall be for the actual number of days elapsed between the date of the Initial Purchase Date and March 31, 1995. (c) Administrative Fee. In consideration for the maintenance and administration of the receivables purchase facility herein set forth, Seller shall pay to Purchaser an annual administrative fee (the "Administrative Fee") equal to $10,000 payable in arrears on the anniversary of the execution and delivery by Seller to Purchase of this Agreement. 5.2. Earned Discount, Payments of Earned Discount and Certain Related Payments Pertaining to Purchaser's Net Investment. (a) Agreement to Pay Earned Discount. In consideration of each Purchase of the Sold Receivables, Seller shall pay to Purchaser the Earned Discount accruing daily with respect to Purchaser's Net Investment from time to time outstanding, from the date of the Initial Purchase Date until repayment in full of Purchaser's Net Investment. Seller shall pay the accrued Earned Discount on Purchaser's Net Investment in arrears (A) on the Semi-Monthly Settlement Date for each Semi-Monthly Period during the term of this Agreement prior to the declaration of a Termination Event and (B) after the declaration of a Termination Event, on demand until paid in full. If on any day that the Earned Discount is due and payable to Purchaser under the terms of this Agreement, there shall be insufficient Collections held by Servicer available to pay, or if Collections are being delivered directly to Purchaser, insufficient funds have been delivered to Purchaser in good and collected funds for the payment in full of, the Earned Discount to be paid on such day on Purchaser's Net Investment, then Seller shall be personally obligated to pay, and hereby agrees that it shall pay, to Purchaser on such day the amount of such insufficiency; provided, however, that Seller shall have no obligation under this sentence with respect to any Earned Discount accruing after the earlier of (i) two hundred forty-first (241st) day after the Termination Date, or (ii) the Final Payout Date. -48- 56 (b) Accrual of Earned Discount. Purchaser's Net Investment shall accrue an investment fee payable by Seller to Purchaser in consideration for Purchaser's Net Investment (the "Earned Discount" as more fully defined in Section 1.1 hereof), for each day until Purchaser's Net Investment is repaid in full, at rate per annum (computed upon the basis of a calendar year of 365/366 days, as the case may be, and the actual number of days elapsed) equal to the Base Rate plus twenty-five (25) basis points (1/4 of 1%)(the "Adjusted Base Rate"); provided, however, that such Earned Discount shall not at any time exceed the maximum rate permitted by applicable Law. To the extent that any amount of Earned Discount is paid in excess of the maximum permissible amount, such amount shall be applied to the repayment of the Purchaser's Net Investment. The Adjusted Base Rate shall be adjusted automatically from time to time upon each change in the Base Rate and in accordance with the provisions of Section 5.2(c). (c) Earned Discount Upon Occurrence of Termination Event. Upon the occurrence of a Termination Event and during any period in which a Termination Event exists (i) the Purchaser's Net Investment shall accrue Earned Discount at a rate per annum which shall be one hundred seventy-five basis points (1.75%) per annum above the rate otherwise in effect under the Adjusted Base Rate, such rate to change automatically from time to time, effective as of the effective date of each change in the Base Rate. 5.3. Yield Protection. If, after the date hereof, any Law, guideline or interpretation or any change in any Law, guideline or interpretation of application thereof by any Governmental Person charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of law) of any central bank or other Governmental Person: (i) subjects Purchaser to any tax or changes the basis of taxation with respect to this Agreement, or the Purchaser's Net Investment or payments by Seller of Earned Discount, or other amounts due from Seller hereunder (except for income taxes, branch profits taxes, franchise taxes or similar taxes imposed on, or measured by, the income or profits of Purchaser), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions -49- 57 of funds by, Purchaser (in any capacity hereunder), or (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, other credits or commitments to extend credit extended by, Purchaser (in any capacity hereunder), or (B) otherwise applicable to the obligations of Purchaser under this Agreement, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon Purchaser with respect to this Agreement or the acquisition, maintenance or funding of any part of the Purchaser's Net Investment (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on Purchaser's capital, taking into consideration Purchaser's customary policies with respect to capital adequacy) by an amount which Purchaser shall from time to time notify Seller as determined in good faith (using any averaging and attribution methods employed in good faith) by Purchaser (which determination shall be conclusive absent manifest error) to be necessary to compensate Purchaser for such increase in cost, reduction of income or additional expense, then such amount shall be due and payable by Seller to Purchaser ten (10) Business Days after such notice is given. Such notice shall set forth in reasonable detail the basis for such determination. Notwithstanding anything to the contrary in this Section 5.3, Seller shall be responsible to Purchaser only for costs hereunder which accrued as the result of an event described in this Section 5.3 within 180 calendar days prior to the date upon which Seller is notified of the same hereunder. 5.4. Taxes. Seller agrees that all payments with respect to the Sold Receivables, any Earned Discount, any Seller Adjustments, any Indemnity Payment and any other fee, cost or expense payable under this Agreement shall be free and clear of any deduction for any present or future taxes and agrees to pay any present or future taxes or charges with respect to such payments which may be imposed by any jurisdiction, except income taxes, branch profits taxes, franchise taxes or similar taxes imposed on, or measured by, the income or profits of Purchaser. At Purchaser's request, Seller shall confirm that all taxes have been paid by delivery of official tax receipts or notarized copies thereof to Purchaser within thirty (30) days after the due date for each tax payment. 5.5. Earned Discount; Other Amounts Due. On the Business Day preceding each Semi-Monthly Settlement Date, Purchaser shall notify Servicer of (i) the amount of Earned Discount accrued -50- 58 during such Semi-Monthly Period, and (ii) all Fees and Indemnity Payments accrued during such Semi-Monthly Period and payable by Seller under this Agreement. Servicer shall pay to Purchaser the amount of such Earned Discount (not previously paid to Purchaser pursuant to Section 2.6) on the Semi-Monthly Settlement Date for such Semi-Monthly Period; and shall pay to Purchaser, or at the direction of Purchaser shall retain, the Servicing Fee, if any, (not previously paid pursuant to Section 2.6) on the Semi-Monthly Settlement Date for such Semi-Monthly Period. Such payment shall be made (A) out of amounts set aside pursuant to items (1) and (2) of Section 2.6(a)(ii) for such payment, (B) in the case of amounts other than Earned Discount to the extent that amounts were not set aside pursuant to item (2) of Section 2.6(a)(ii) for such payment, out of funds paid by Seller to Servicer (which amounts Seller hereby agrees to pay to Servicer), and (C) in the case of Earned Discount, to the extent that funds were not set aside pursuant to clause (1) of Section 2.6(a)(ii) for such payment, out of funds paid by Seller to Servicer (which amounts Seller hereby agrees to pay to Servicer). 5.6. Investment Account. Purchaser shall open and maintain on its books an investment account with respect to the Purchases made, the Sold Receivables acquired, the repayments of Purchaser's Net Investment, the computation and payment of Earned Discount, the Seller Adjustments, the Servicer's Fees, the Fees, the Indemnity Payments and other amounts due and sums paid to Purchaser hereunder. Such investment account shall be conclusive and binding on Seller as to the amount at any time due to Purchaser from Seller or in repayment of Purchaser's Net Investment, except in the case of manifest error in computation. ARTICLE VI COVENANTS Until the Final Payout Date, Seller shall perform, or cause the performance of, the covenants and agreements set forth below. 6.1. Financial Statements and Other Reports. Seller shall maintain a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Seller will deliver to Purchaser reports and information as follows: (a) Financial Reports; Notice of Material Adverse Change and Termination Events. Seller shall deliver, or cause to be delivered: -51- 59 (i) on the Semi-Monthly Reporting Date for the Semi-Monthly Period most recently completed, a duly completed Semi-Monthly Settlement Statement for the relevant Semi-Monthly Period; (ii) on the Monthly Reporting Date for the Monthly Accounting Period most recently completed, a duly completed Monthly Settlement Statement for the relevant Monthly Accounting Period; (iii) within five Business Days after Seller becomes aware thereof, notice of any event or circumstance which has any Material Adverse Effect on or with respect to Seller, Servicer or this Agreement; (iv) as soon as possible after the occurrence of (and in any event within three Business Days after having received actual knowledge of) any Termination Event or any Potential Termination Event, the statement of the chief financial officer or chief accounting officer of Seller setting forth details of such Termination Event or Potential Termination Event and what action Seller has taken or proposes to take with respect thereto; (v) The covenants and agreements of Seller set forth in section 7 (individually, an "Incorporated Reporting Requirements"; and collectively, the "Incorporated Reporting Requirements") of the Note Agreement, shall be incorporated herein mutatis mutandis by this reference thereto, and shall be deemed to have been made by Seller in favor of, and for the benefit of, Purchaser; and for all purposes herein references to the terms "holder of any Notes" and "you" shall be deemed to be references to the Purchaser and references to the term "Company" shall be deemed to be references to the Seller; and for all purposes herein the second sentence of such section 7 is amended such that the words beginning with "The Company ... of Notes:" at the beginning of the second sentence is deleted and there is substituted therefor the phrase "Seller will deliver (in duplicate) to Purchaser, so long as Purchase Commitment shall remain in effect and so long as the Purchaser's Net Investment remains outstanding:"; and notwithstanding the foregoing, (a) all capitalized terms set forth in the Incorporated Reporting Requirements and defined in the Note Agreement, as well as other capitalized terms set forth in any such definitions therein, shall also be deemed to be incorporated herein mutatis mutandis and shall have the meanings given to such terms in the Note Agreement for the purposes hereof, and (b) to the extent any of the Incorporated Reporting Requirements, or any incorporated -52- 60 definition contains any cross-reference to, or incorporates by reference any terms of, any provision, section, schedule or exhibit of the Note Agreement, such cross-reference or incorporation shall be incorporated herein mutatis mutandis for the purposes hereof; and furthermore, for the purposes of this Section 6.1(a)(v), in the event that any amendment, modification or supplement to the Note Agreement is consented to in writing by the Purchaser, then any affected Incorporated Reporting Requirement shall, upon such consent becoming effective, be deemed to be revised for the purposes of this Section 6.1(a)(v) ; and the Purchaser shall have the right in its sole but reasonable discretion (a) to make a determination of any failure of Seller to deliver any information or report in compliance with an Incorporated Reporting Requirement and (b) to exercise any remedies for such violation as provided hereunder, in each case without regard to any interpretation, waiver, action or inaction with respect to the Note Agreement in connection therewith; and the incorporation of the Incorporated Reporting Requirements herein in favor of the Purchaser shall not be affected in any way by the termination or expiration of the Note Agreement; and in the event of a conflict between the express terms of this Agreement and any Incorporated Reporting Requirement, the express terms of this Agreement shall control; and (vi) such other reports and information as the Purchaser may from time to time reasonably request including without limitation, reports in the format of the Monthly Settlement Statement, but for such shorter interim accounting periods as the Purchaser may reasonably request (to the extent necessary to make the information contained therein meaningful, the defined terms used to create the information contained therein shall be automatically modified to account for the shorter accounting periods required by such interim reports in such manner as required by the Purchaser consistent with the shorter accounting period). (b) Notice of Change in Chief Executive Office. Seller shall deliver notice as soon as Seller plans to change its name or any name under which it does business, or plans to relocate its Chief Executive Offices, or plans to relocate the books, records and other documentation evidencing Purchaser's interest in the Receivables, Contracts, Collections or Related Security, but in no such event shall such notice be delivered less than sixty (60) days prior to such change or relocation. (c) Notice of Changes to Credit and Collection Policies. If Seller plans to implement any material change in -53- 61 any of Seller's Credit and Collection Policy, Seller shall deliver to Purchaser a written description of such proposed change at least sixty (60) days in advance of such change. (d) Notice of Litigation. As soon as possible, and in any event within ten (10) Business Days of the Seller's knowledge thereof, the Seller shall give Purchaser notice of (i) any litigation, investigation or proceeding against the Seller which may exist at any time which, in the reasonable judgment of the Seller, could have a material adverse effect on the financial condition or results of operations of the Seller or impair the ability of the Seller or the applicable Servicer to perform their respective obligations under this Agreement and (ii) any material adverse development in any such previously disclosed litigation. (e) Other Information. Seller shall deliver, with reasonable promptness, such other information, reports or documents concerning the Receivables, the Related Security, the Books and Records and the Collections and Seller's collection policies, practices and procedures as Purchaser may from time to time reasonably request, including without limitation, a copy of any Contract and such records and invoices pertaining thereto and evidence thereof as Purchaser may deem necessary to enable it to enforce its rights thereunder; provided that the Seller shall not be required to furnish any portion of a Contract that, pursuant to confidentiality provisions contained in such Contract, would prohibit the delivery or disclosure of such portion of such Contract to Purchaser. 6.2. Compliance with Laws, etc. Seller shall comply with the requirements of all applicable Laws of any Governmental Person, the noncompliance with which would have a Material Adverse Effect. 6.3. Further Cooperation. (a) Seller shall perform, at Seller's expense, from time to time, or at the request of Purchaser, such acts as may be necessary or advisable to carry out the intent of this Agreement. Without limiting the generality of the preceding sentence, Seller shall take all steps reasonably necessary or, in the reasonable opinion of Purchaser, advisable to validate or protect the ownership interest of Purchaser in, or to defeat the assertion by any third party of any Adverse Claim with respect to, any Sold Receivables. Without limiting the generality of the foregoing, from time to time, or at the request of Purchaser, Seller will execute and file such financing statements, continuation statements, amendments thereto and assignments thereof, and such other instruments and notices, to perfect, protect or more fully evidence the Purchases hereunder and the resulting sale of the Sold Receivables, or to enable Purchaser or its designee to exercise or enforce any of -54- 62 their respective rights hereunder or under any Receivable Documents. (b) Seller hereby authorizes Purchaser or any of its designees to file one or more financing statements, continuation statements, amendments thereto and/or assignments thereof, relative to all or any of the Sold Receivables, in each case whether now existing or hereafter generated. If Seller fails to perform any of its agreements or obligations under this Agreement, Purchaser or its designee may (but shall not be required to) itself perform, or cause performance of, such agreement or obligation, and the reasonable expenses of Purchaser or its designee or assignee incurred in connection therewith shall be payable by Seller as provided in Section 11.6. 6.4. Inspection Rights; Maintenance of Books and Records. (a) Seller shall permit Purchaser, at any reasonable time and from time to time during normal business hours, (i) to inspect, audit, check and make abstracts from any Person's books, accounts, documents, papers or other records (including, without limitation, computer tapes and disks) in the possession or under the control of Seller pertaining to the Pool Receivables, the Related Securities and the Collections, (ii) to visit the offices and properties of Seller for the purpose of examining such materials described in clause (i) next above, and to discuss matters relating to Pool Receivables, the Related Securities and the Collections or Seller's performance hereunder with any of the officers of Seller having knowledge of such matters and, upon notice to a Responsible Officer of Seller, with employees of Seller having knowledge of such matters; (ii) to meet with the independent auditors of the Seller, to review such auditors' work papers (including, without limitation, work papers relating to any audit report or audit opinion), and otherwise to review with such auditors the books and records of the Seller with respect to the Pool Receivables, the Related Securities and the Collections; and (iii) without limiting the provisions of clause (i) next above, at any time when a Termination Event or a Potential Termination Event shall have occurred and be continuing on request of Purchaser, permit certified public accountants or other auditors acceptable to Purchaser to conduct, at Seller's expense, a review of Seller's books and records with respect to the Pool Receivables, the Related Securities and the Collections. (b) Seller shall (i) identify and hold as agent for Purchaser at the offices of Seller at 1840 Century Park East, Los Angeles, California, and 508 New Holland Avenue, Lancaster, Pennsylvania, all books, records and documents evidencing or relating to the Sold Receivables, including the Contracts and the Related Security, and maintain a current record of the Sold Receivables, in such reasonable detail and in form and substance -55- 63 satisfactory to Purchaser; (ii) make such notations on such books, records and documents, including any computer records, as may be requested by Purchaser to evidence Purchaser's interest in the Sold Receivables and, if so requested, to store the same in separate filing cabinets so marked, or deliver the same to Purchaser; and/or (iii) maintain and implement administrative and operating procedures (including without limitation an ability to recreate records evidencing Purchaser's ownership interests in Sold Receivables in the event of the destruction of the original records), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of the Sold Receivables (including, without limitation, records adequate to permit the daily identification of outstanding unpaid balances by Obligor and related debit and credit details of the Sold Receivables). (c) Seller (i) shall mark a legend on Seller's books, records and other documentation (whether maintained by Seller or Seller's agent) concerning the existence of the Pool Receivables that identifies the Pool Receivables which are Sold Receivables and that such Sold Receivables are owned by Purchaser, as purchaser, under a Receivables Purchase Agreement dated as of January 19, 1995, and (ii) shall mark, or cause to be marked, on the master computer files concerning the Pool Receivables the code "P" or "Sold" for each Sold Receivable. 6.5. Amendments. Seller shall not extend, amend or otherwise modify, or permit the extension, amendment or modification of, the terms of any Sold Receivable, or amend, modify or waive any right with respect to any Contract related thereto except as permitted by Section 7.2(c) hereof. 6.6. [Unused] 6.7. Sales, Liens, Etc. Seller shall not cause any of the Pool Receivables originated by the Seller or any related Contracts, or any inventory or goods the sale of which may give rise to any such Pool Receivables, or any Lockbox or Lockbox Account or any right to receive any payments received therein or deposited thereto, to be sold, pledged, assigned or transferred or to be subject to any Adverse Claim, other than the sale and assignment of the Sold Receivables to Purchaser and the Liens created in connection with the transactions contemplated by this Agreement. 6.8. Negative Pledges. Seller shall not enter into or assume any agreement (other than this Agreement) prohibiting the creation or assumption of any Lien upon any Pool Receivables, any Related Security or the Collections, whether now owned or hereafter created or acquired, as contemplated by this Agreement, -56- 64 or otherwise prohibiting or restricting any transaction contemplated hereby. 6.9 Enforceability of Obligations. The Seller shall take such actions as are reasonable and within its power to ensure that the obligation of any related Obligor to pay the unpaid balance of any Sold Receivable in accordance with the terms of the related Contract remains legal, valid, binding and enforceable against such Obligor except as otherwise permitted by Section 7.2(c) hereof. 6.10 Fulfillment of Obligations. The Seller will duly observe and perform, or cause to be observed or performed, all material obligations and undertakings on its part to be observed and performed under or in connection with the Sold Receivables, including its obligations as initial Servicer, will duly observe and perform all material provisions, covenants and other promises required to be observed by it under the Contracts related to the Sold Receivables, will do nothing to impair the rights, title and interest of Purchaser in and to the Sold Receivables and will pay when due any taxes, including without limitation any sales tax, excise tax or other similar tax or charge, payable in connection with such Sold Receivables and their creation and satisfaction. 6.11 Statement for and Treatment of the Sales. Seller shall not prepare any financial statements for financial accounting or external reporting purposes which shall account for the transactions contemplated hereby in any manner other than as a sale of the Sold Receivables to Purchaser. 6.12 No Changes. Seller shall not (i) make any change in the character of its business or in the Seller's Credit and Collection Policy, which change would, in either case, impair the collectibility of any material amount of the Sold Receivables originated by the Seller, or otherwise adversely affect the interests or remedies of Purchaser under this Agreement or any other Receivables Document, (ii) make any material change in, or fail to comply with, the Seller's Credit and Collection Policy without the prior written notification to Purchaser as required by Section 6.1(c) hereof, or (iii) change its name, identity or corporate structure in any manner which would make any financing statement or continuation statement filed in connection with this Agreement or the transactions contemplated hereby seriously misleading within the meaning of Section 9-402(7) of the UCC of any applicable jurisdiction or other applicable Laws unless it shall have given Purchaser prior written notice thereof as required by Section 6.1(b) hereof, and unless prior thereto it shall have caused such financing statement or continuation statement to be amended or a new financing statement to be filed -57- 65 such that such financing statement or continuation statement would not be seriously misleading as required by Section 6.3. 6.13. Location of Records. Seller will keep its Chief Executive Office, and the offices where it keeps its records concerning the Pool Receivables (including the Sold Receivables), all related Contracts and all purchase orders and other agreements related to such Pool Receivables (including the Sold Receivables) (and all original documents relating thereto), at the address(es) of Seller referred to in Section 6.4(b) or, upon sixty (60) days' prior written notice to Purchaser, at such other locations in jurisdictions where all action required by Section 6.3 shall have been taken and completed. 6.14. Lockboxes. (a) Seller hereby agrees (i) to instruct all Obligors to cause all Collections on account of Pool Receivables (including Sold Receivables) to be mailed directly to a Lockbox; (ii) not to suffer or permit any funds other than such Collections to be mailed to Lockboxes or deposited into related Lockbox Accounts; (iii) to make or cause the Servicer to make the necessary bookkeeping entries to reflect such Collections on the Books and Records pertaining to such Pool Receivables; (iv) to apply or cause the applicable Servicer to apply all such Collections as provided in this Agreement; (v) not to amend or modify any term of any Lockbox Servicing Instructions without the prior written consent of Purchaser to such amendment or modification; (vi) not to amend or modify any term, with respect to the disposition of such Collections or any other amounts received by Seller or the Servicer (if the Servicer is a person other than the Seller) or any Lockbox Bank, of this Agreement or any other agreement (other than Lockbox Servicing Instructions) without the prior written consent of Purchaser to such amendment or modification, (vii) add or terminate any Person as a Lockbox Bank from those Persons listed on Schedule 4.19 hereto, or (viii) make any change in the instructions to its Obligors regarding payments to be made to the Seller or payments to be made to any Lockbox. (b) The Seller further represents and warrants and covenants and agrees as follows: (i) each Lockbox Account shall be maintained with a Lockbox Bank; (ii) each Lockbox Account shall be a segregated account and the funds deposited in such Lockbox Account from time to time shall not be commingled with any other funds of the Seller or the Servicer (if the Servicer is a person other than the Seller); (iii) each Lockbox Account shall be in the name of Seller or Servicer in trust for the benefit of Purchaser and Seller as their interests arise; (iv) the location of each Lockbox and each related Lockbox Account may not be changed without the written consent of Purchaser; (v) funds deposited in each Lockbox Account shall be transferred to the -58- 66 Servicer (if the Servicer is a Person other than the Seller) not later than the next Business Day after such funds are deposited in each such Lockbox Account; (vi) each Lockbox Account shall be insured by the Federal Deposit Insurance Corporation to the full extent permitted by law; (vii) Purchaser shall have the right to obtain control over each Lockbox and each related Lockbox Account, or appoint a successor servicer, and, in either case, direct the Lockbox Bank not to transfer funds in such Lockbox Account to the Seller or the Servicer, and direct the Lockbox Bank to transfer the funds in such Lockbox Account to an account designated by Purchaser, if an event or circumstance arises which would constitute a Termination Event under this Agreement by dating and delivering the Lockbox Letter Agreement with respect to such Lockbox, and the Seller hereby irrevocably authorizes Purchaser to date and deliver a Lockbox Letter Agreement to each Lockbox Bank; (viii) the Seller has not given and shall not give any instructions to any Lockbox Bank inconsistent with the Lockbox Letter Agreement; and (ix) the Seller shall cooperate fully with Purchaser in effecting any such transfer of control. (c) The Seller shall not enter into any Lockbox Servicing Instructions or other lockbox servicing agreement which does not contain the foregoing provisions and terms, unless such deviation is consented to by Purchaser. 6.15. [Unused]. 6.16. Fiscal Year. Neither Seller nor any Subsidiary of Seller shall change its fiscal year from the calendar year basis utilized as of the date hereof with the 1995 fiscal year beginning January 1, 1995 and ending December 31, 1995 without giving sixty (60) days written notice to Purchaser. Seller further agrees to review the definitions of Semi-Monthly Period and Monthly Accounting Period with Purchaser and make such adjustment to these definitions and any related definitions to conform with the new fiscal year selected by Seller. 6.17 Incorporation of Certain Covenants; etc. The covenants and agreements of Seller set forth in Sections 10.1 through 10.14 and Section 10.16 (individually, an "Incorporated Covenant"; and collectively, the "Incorporated Covenants") of the Note Agreement, shall be incorporated herein mutatis mutandis by this reference thereto, and shall be deemed to have been made by Seller in favor of, and for the benefit of, Purchaser, and for all purposes herein references to the terms "holder of any Notes" and "you" shall be deemed to be references to the Purchaser and references to the term "Company" shall be deemed to be references to the Seller; provided, however, that in the case of Section 10.5 of the Note Agreement, the sale of Sold Receivables by Seller to Purchaser pursuant to this Agreement is excepted -59- 67 therefrom. Notwithstanding the foregoing, (a) all capitalized terms set forth in the Incorporated Covenants and defined in the Note Agreement, as well as other capitalized terms set forth in any such definitions therein, shall also be deemed to be incorporated herein mutatis mutandis and shall have the meanings given to such terms in the Note Agreement for the purposes hereof, and (b) to the extent any of the Incorporated Covenants, or any incorporated definition contains any cross-reference to, or incorporates by reference any terms of, any provision, section, schedule or exhibit of the Note Agreement, such cross-reference or incorporation shall be incorporated herein mutatis mutandis for the purposes hereof. Furthermore, for the purposes of this Section 6.17, in the event that any amendment, modification or supplement to the Note Agreement is consented to in writing by the Purchaser, then any affected Incorporated Covenant shall, upon such consent becoming effective, be deemed to be revised for the purposes of this Section 6.17. The Purchaser shall have the right in its sole but reasonable discretion (a) to make a determination of the existence of any violation of an Incorporated Covenant and (b) to exercise any remedies for such violation as provided hereunder, in each case without regard to any interpretation, waiver, action or inaction with respect to the Note Agreement in connection therewith. The incorporation of the Incorporated Covenants herein in favor of the Purchaser shall not be affected in any way by the termination or expiration of the Note Agreement. In the event of a conflict between the express terms of this Agreement and any Incorporated Covenant, the express terms of this Agreement shall control. 6.18 Use of Software. In the event that Seller is replaced as the Servicer of the Sold Receivables, Seller agrees to use its best efforts to obtain all necessary approvals, at the cost and expense of Seller, for Purchaser's use, or a successor Servicer's use, of the computer software licensed by Seller to service the Sold Receivables. If such approval is not obtained, Seller will pay all reasonable charges to convert detailed accounting records related to the Sold Receivables for use on Purchaser's software. ARTICLE VII SERVICING 7.1. Designation of Seller as Initial Servicer. Seller hereby grants to Purchaser an irrevocable power of attorney (coupled with an interest) to designate a Person for the purpose of servicing, administering and collecting the Sold Receivables. Purchaser hereby designates and appoints Seller as the agent of Purchaser and Seller (Seller in such capacity herein referred to -60- 68 as the "Servicer") as the initial Servicer for the purpose of servicing, administering and collecting the Sold Receivables. 7.2. Duties of Servicer. (a) Appointment; Duties in General. Each of Seller and Purchaser hereby appoints as its agent the Servicer, as from time to time designated pursuant to Section 7.1 or Section 7.6, to enforce its respective rights and interests in and under the Sold Receivables. Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Sold Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. (b) Allocation of Collections; Segregation. Servicer shall set aside for the account of Seller and Purchaser their respective allocable shares of the Collections of Pool Receivables in accordance with Section 2.6(a). Servicer shall segregate and deposit in the Servicer Deposit Account, and the appropriate subaccount, the Collections of Sold Receivables on the first Business Day following receipt by Servicer of such Collections in immediately available funds. In the event Servicer has advanced to the Servicer Deposit Account in immediately available funds the dollar amount of Collections for a day processed through a Lockbox Account established at a Lockbox Bank other than Purchaser and such Lockbox Bank debits the Lockbox Account for the amount of a returned item at a later date, the Servicer may net the amount of such returned item against the dollar amount of Collections due to be transferred to the Servicer Deposit Account on such later date. (c) Modification of Receivables. So long as no Potential Termination Event or Termination Event of the type described in Subsection (b) of Section 8.1 shall have occurred and be continuing, Seller, while it is Servicer, may, in accordance with the Credit and Collection Policy, (i) adjust the original maturity of any Sold Receivable, not more than once, to reflect the actual terms of the Contract under which such Sold Receivable arose, (ii) extend the maturity or adjust the Unpaid Balance of any Defaulted Receivable which is a Sold Receivable as Seller may determine to be appropriate to maximize Collections thereof, and (iii) adjust the Unpaid Balance of any Sold Receivable to reflect the reductions or cancellations described in Section 2.8. (d) Documents and Records. Seller shall deliver to Servicer, and Servicer shall hold in trust for Seller and Purchaser in accordance with their respective interests, all -61- 69 documents, instruments and records (including, without limitation, computer tapes or disks) that evidence or relate to Sold Receivables. Seller and Servicer shall maintain and keep proper books of record and account, including without limitation computer files, which (i) identify and segregate the Sold Receivables from other accounts receivable and other rights to the payment of money due Seller, and (ii) enable Servicer and/or Purchaser or its designee to calculate Purchaser's Net Investment, the Net Pool Balance, the Receivables Pool, the Sold Receivables Pool and otherwise monitor the performance of the Pool Receivables. (e) Certain Duties to Seller. Servicer shall in no event later than one (1) Business Day following the applicable Semi-Monthly Settlement Date turn over to Seller that portion of Collections of Sold Receivables representing the Adjusted Deferred Purchase Price payable to Seller in accordance with Section 2.6(c), less, in the event that neither Seller nor any Affiliate of Seller is Servicer, all reasonable and appropriate out-of-pocket costs and expenses of Servicer of servicing, collecting and administering the Sold Receivables to the extent not covered by the Servicer's Fee received by it. As soon as practicable following receipt, Servicer shall turn over to Seller the Collections of any Pool Receivable which is not a Sold Receivable. Servicer, if other than Seller or any Affiliate thereof, shall, as soon as practicable upon demand, deliver to Seller all documents, instruments and records in possession of Servicer that evidence or relate to Pool Receivables of Seller other than Sold Receivables. (f) Termination. Servicer's authorization under this Agreement shall terminate upon the Final Payout Date. (g) Subcontracts. Servicer may, with the prior written consent of Purchaser, subcontract with any other person for servicing, administering or collecting the Sold Receivables, provided that Servicer shall remain liable for the performance of the duties and obligations of Servicer pursuant to the terms hereof. (h) Certain Reports. In addition to the other reports and information required by Sections 2.6(d) and 2.7(a), Servicer shall prepare and deliver to Purchaser concurrently with the delivery of each Monthly Settlement Statement (and to the extent not included in the Monthly Settlement Statement) a list of the Obligors any Sold Receivables of which are included in the Net Pool Balance under clause (a), (b), (c) or (d) of the definition of "Concentration Limit", setting forth where applicable the ratings currently assigned to the long-term debt of such Obligors by Moody's, S&P or D&B. -62- 70 (i) Allocation of Unspecified Collections. If Servicer receives from an Obligor any Collections with respect to Pool Receivables and such Obligor is the Obligor with respect to both Pool Receivables which are Sold Receivables and Pool Receivables which are not Sold Receivables, the Servicer shall apply all Collections to the Pool Receivable specifically identified by the Obligor with such payment and if no specification is made by the Obligor such Collections shall be applied to the oldest outstanding Pool Receivable. 7.3. Segregation of Collections. Servicer shall be able to determine, and at the request of Purchaser will determine, the amount of Collections received on any Business Day from Sold Receivables. In accordance with the provisions of Section 2.6, Servicer shall segregate all collections and proceeds of any Sold Receivable so that each is capable of identification and, if, following an Event of Termination, deemed reasonably necessary or appropriate by Purchaser, shall notify the Obligors to make payments on the Sold Receivables directly to Purchaser. 7.4. Payments. On any day that payments of Collections of Sold Receivables are to be made to Purchaser pursuant to Section 2.6 hereof, Servicer shall withdraw such payment from the funds on deposit in Servicer Deposit Account which are good and collected funds as of the opening of business on such day and shall forward such payment by wire transfer to Purchaser on or before 2:00 P.M. Eastern time on such day. If on any day that a payment of the Earned Discount, Servicer's Fees, Fees, Seller Adjustments or Indemnity Payments due hereunder is to be paid by Seller and Servicer receives on or before 2:00 P.M. Eastern time such payment, Servicer shall forward such payment by wire transfer to Purchaser on or before 4:00 P.M. Eastern time on the same day. Any such payment described in the preceding sentence received by Servicer after 2:00 P.M. Eastern time shall be paid to Purchaser by noon Eastern time the next Business Day. 7.5. Servicing Costs and Fees. At any time Seller is Servicer under this Agreement, Seller shall pay and be responsible for all costs, expenses and attorneys' fees incurred by Servicer in connection with the performance of its obligations under this Article VII. So long as Seller is Servicer, Seller hereby acknowledges that the purchase of the Sold Receivables and the incurrence by Purchaser of the risk of collection with respect to the Sold Receivables together with any investment earnings on the Servicer Deposit Account payable under the terms of Section 7.9 hereof to Servicer constitutes adequate consideration for the services of Servicer hereunder. So long as Seller is Servicer, Servicer shall not be entitled to any fees for the performance of its obligations under this Article VII. Any successor Servicer, which is not an Affiliate of Seller, -63- 71 shall be entitled to such reasonable compensation consistent with the definition of the term "Servicer's Fee" as Purchaser shall consent to. 7.6. Termination of Agency. Purchaser may discharge Servicer from its duties under this Article VII upon a Termination Event. Seller may not resign as Servicer hereunder without the prior written consent of Purchaser. 7.7. Transfer of Servicing. (a) Upon the resignation or termination of Seller as Servicer pursuant to Section 7.6, all rights and powers of Seller, as Servicer under this Agreement (and the rights and powers with respect to the Sold Receivables specified in such notice) shall vest in Purchaser or its designee. Notwithstanding the foregoing, Purchaser may, if it is unwilling so to act, or shall, if it is unable so to act, take such actions as are necessary to cause the appointment of a successor Servicer. Purchaser is hereby authorized and empowered, on behalf of Seller, as attorney-in-fact or otherwise, to execute and deliver all documents and instruments and to do all other acts and things as are necessary or appropriate to transfer the rights and obligations of Seller, as Servicer to Purchaser or its designee as successor Servicer. (b) Upon the resignation or termination of Seller as Servicer pursuant to Section 7.6, Seller shall: (i) deliver to Purchaser or upon the direction of Purchaser to such other Person (A) the books, documentation, records and computer files and software with respect to the Sold Receivables, and (B) all other documentation, books, records and other data necessary for the servicing of the Sold Receivables; and (ii) provide Purchaser (and any successor Servicer) with access to, and copies of, all books, documentation, records and computer files and software relating to the Sold Receivables. (c) Any successor Servicer appointed pursuant hereto shall expressly assume and agree to be bound by the provisions of this Agreement. 7.8. Power of Attorney. Seller hereby grants to each of Purchaser and Servicer (if a Person other than Seller is Servicer) an irrevocable power of attorney, with full power of substitution and coupled with an interest, to take in the name of Seller or in the name of Purchaser or Servicer (if a Person other than Seller is Servicer) or both, as the case may be, all steps necessary or advisable (i) to endorse, negotiate or otherwise realize on any check, draft, writing or other right of any kind held or owned by Seller or transmitted to or received by Purchaser or Servicer (if a Person other than Seller is Servicer) as payment on account or otherwise in respect of any Sold -64- 72 Receivable and (ii) if any sale arising hereunder is found to be a financing, to collect any Sold Receivables if not paid to Purchaser when due, and (iii) if the rights, titles and interest of Seller under any Contract are not assignable, in whole or in part, to Purchaser, to enforce all rights, titles and interests thereunder of Seller if any Sold Receivable related thereto is not paid to Purchaser when due, or (iv) if Seller fails to do so on request, to execute and deliver, in Seller's name and on Seller's behalf, such instruments and documents (including bills of sale and assignments) reasonably necessary or desirable to evidence or protect Purchaser's ownership interest in the Sold Receivables and to execute and file, in Seller's name, financing statements (including amendments and continuation statements) under the UCC (or similar Law where the UCC is not enacted) in all jurisdictions where it may be necessary or, in the opinion of Purchaser, advisable to validate or protect the ownership interest of the Purchaser in the Sold Receivables. 7.9. Servicer Deposit Account. On the date hereof Servicer shall cause to be established, and at all times prior to the Final Payout Date, Servicer shall cause to be maintained, one or more segregated trust accounts at Purchaser in the name of Servicer, as trustee for Purchaser (collectively, the "Servicer Deposit Account"). The Servicer Deposit Account shall be used for the deposit of funds set aside pursuant to clauses (ii), (iii) and (iv) of Section 2.6(a) and no other funds. No deposit of funds in the Servicer Deposit Account shall be deemed to reduce the Purchaser's Net Investment, unless and until such funds are actually paid to Purchaser in accordance with Section 2.6 or 2.7. Except during any Liquidation Period, funds on deposit in the Servicer Deposit Account shall be invested in overnight deposits, selected by Seller but acceptable to Purchaser, and the income from such investments shall be added to the balance in such account. During any Liquidation Period, any moneys credited to the Servicer Deposit Account will remain uninvested. Except upon the commencement of, and during the continuance of, any Liquidation Period, all income on the overnight investments of the funds on deposit in the Servicer Deposit Account shall be paid to Servicer, if Seller or an Affiliate of Seller is the Servicer, on the Semi-Monthly Settlement Date following any credit of such income to the Servicer Deposit Account as consideration for servicing the Sold Receivables. Upon the commencement of any Liquidation Period, all accrued and unpaid income on the overnight investments of the funds on deposit in the Servicer Deposit Account shall be paid to Purchaser on the Semi-Monthly Settlement Date following any credit of such accrued income to the Servicer Deposit Account and shall be applied to reduce the Purchaser's Net Investment. Any losses on the investment of sums deposited in the Servicer Deposit Account shall be for the account of Seller. On the Final -65- 73 Payout Date, after payment of all sums due and owing to Purchaser any remaining balance in the Servicer Deposit Account shall be released to Seller. ARTICLE VIII TERMINATION EVENTS 8.1. Termination Events. The following events shall be "Termination Events" hereunder: (a) Cross Default to Agreements with Seller. (i) Any breach or default occurs under any other agreement involving the borrowing of money, the extension of credit or any capitalized or operating lease by and between Seller or any Affiliate thereof, and Purchaser or any Affiliate of Purchaser, under which Seller may be obligated as a borrower, installment purchaser, lessee or guarantor, if such breach or default consists of the failure to pay any indebtedness or rental payments in excess of $100,000 when due or if such breach or default permits or causes (with or without the passage of time or the giving of notice or both) the acceleration of any indebtedness or rental payments in excess of $100,000 due or the termination of any commitment to lend; or (ii) a default shall have occurred and be continuing under the Note Agreement, which default if unremedied, uncured, or unwaived (with or without the passage of time or the giving of notice or both) would permit acceleration of the maturity of such indebtedness or any notice of default required to permit acceleration shall have been given; or (iii) a default shall have occurred and be continuing under any other instrument or agreement evidencing, securing or providing for the issuance of indebtedness for borrowed money in excess of $1,000,000 of, or guaranteed by, Seller, which default if unremedied, uncured, or unwaived (with or without the passage of time or the giving of notice or both) would permit acceleration of the maturity of such indebtedness or any notice of default required to permit acceleration shall have been given; or (b) Bankruptcy and Financial Distress. (i) an Event of Bankruptcy shall occur with respect to Seller, or (ii) Seller shall voluntarily suspend the transaction of usual business, or (iii) a writ or warrant of attachment or any similar process shall be issued against a substantial part of the property of Seller, or (iv) an order shall be entered enjoining or preventing Seller from conducting all or any part of its business as it is usually conducted, or (v) garnishment proceedings shall be instituted by attachment, -66- 74 levy or otherwise, against any Lockbox Account or the Servicer Deposit Account; (c) Payment Default. Seller fails to pay to Purchaser any sum due by Seller, whether in its capacity as Servicer or as the Seller hereunder, to Purchaser hereunder, including without limitation any Earned Discount, Seller Adjustment, Servicer's Fees, Fees or Indemnity Payment due hereunder by Seller to Purchaser; (d) Default Under the Receivables Documents. (i) The existence of a violation of any covenant set forth in Sections 6.5 or 6.7 hereof or any of the following Incorporated Covenants under Section 6.17: Sections 10.1, 10.4, 10.5, 10.7, 10.8, 10.9, 10.11 and 10.16 of the Note Agreement, or (ii) Seller, whether in its capacity as Seller or Servicer hereunder, breaches, or defaults under, any other term, condition, representation, warranty, provision or covenant contained in this Agreement or in any of the other Receivables Documents other than a covenant set forth in Sections 6.5 or 6.7 hereof or any of the following Incorporated Covenants under Section 6.17: Sections 10.1, 10.4, 10.5, 10.7, 10.8, 10.9, 10.11 and 10.16 of the Note Agreement, which breach continues uncured for three (3) Business Days after Seller's receipt of written notice of the breach; (e) Notice of Lien. A notice of Lien, levy or assessment in excess of $50,000 is filed of record against Seller with respect to all or any part of Pool Receivables, including any Sold Receivables, by the United States, or any department, agency or instrumentality thereof (including, without limitation, the PBGC) and such notice, levy or assessment shall not have been released within five Business Days of such filing; (f) Change of Control. Any person or group of persons (within the meaning of Sections 13(a) or 14(a) of the Exchange Act), other than the current officers or directors of Seller and any person who as of the date hereof holds 20% or more of the voting capital stock of Seller, shall have acquired beneficial ownership of (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Exchange Act) 20% or more of the voting capital stock of Seller; or (g) Loss of Priority. This Agreement and the Assignments shall for any reason cease to vest in Purchaser a valid and perfected first priority interest under Article 9 -67- 75 of the Uniform Commercial Code in the Sold Receivables (subject to Section 9-306 of the Uniform Commercial Code). (h) Current Default Ratio and Net Charge-Off Ratio. The Current Default Ratio as of any Relevant Month End Date exceeds 10.0%; (ii) the average of the Current Default Ratios as of any three consecutive Month End Dates exceeds 8.0%; or (iii) the Net Charge-Off Ratio exceeds 2.25%; or (i) Changes in Credit Policies. Seller or Servicer (if Seller or Affiliate thereof is Servicer) shall make any material change in the policies as to origination of Receivables or in the Credit and Collection Policy without the prior written consent of Purchaser; or (j) Violation of Maximum Purchaser's Net Investment or Allocation Minimum. The Allocation Minimum is in excess of the Reserve Asset Percentage or the Purchaser's Net Investment exceeds the Maximum Purchaser's Net Investment and such event continues uncured more than two Business Days following written notice thereof to Seller from Purchaser or Servicer; or (k) Delinquency Ratio. Either (A) the Delinquency Ratio at any Relevant Month End Date is greater than 4.5%; or (B) the average of the Delinquency Ratios at any three consecutive Month End Dates is greater than 3.0%; (l) Material Adverse Change. There shall exist any event or occurrence that has caused a Material Adverse Effect; or (m) Cumulative Dilution. As of any Month End Date, the aggregate dollar amount of Dilutions accruing in the twelve-month period ending on such Month End Date equals or exceeds $22,000,000. 8.2. Remedies. (a) Optional Liquidation. Upon the occurrence of a Termination Event (other than a Termination Event described in subsection (b) or (c) of Section 8.1), Purchaser, by notice to Seller, shall have the option to reduce the Maximum Purchaser's Net Investment to zero (0), to terminate the Purchase Commitment and to declare the Purchase Termination Date to have occurred and the Liquidation Period to have commenced. (b) Automatic Liquidation. Upon the occurrence of a Termination Event described in subsection (b) or (c) of Section 8.1, the Maximum Purchaser's Net Investment shall automatically reduce to zero (0), the Purchase Commitment shall terminate, the -68- 76 Purchase Termination Date shall occur and the Liquidation Period shall commence automatically. (c) Additional Remedies. Upon any Purchase Termination Date pursuant to this Section 8.2, no Purchases thereafter will be made. Purchaser shall have (i) the right to notify the Obligors of the Sold Receivables, or any of them, of the interest of Purchaser in the Sold Receivables, (ii) the right to direct Obligors of the Sold Receivables, or any of them, to make payment directly to Purchaser, and (iii) the right to deliver the Lockbox Letter Agreements to the Lockbox Banks. Purchaser shall also have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC of each applicable jurisdiction and other applicable laws, which rights shall be cumulative. (d) This Agreement a Financial Accommodation. The parties hereto acknowledge that this Agreement is, and is intended to be, a contract to extend financial accommodations to the Sellers within the meaning of Section 365(e)(2)(B) of the Federal Bankruptcy Code. ARTICLE IX SECURITY INTEREST; ACTIONS OF PURCHASER 9.1. Grant of Security Interest. The Seller hereby grants and assigns to Purchaser a "security interest" (as defined in the UCC) in all of Seller's right, title and interest (including specifically any right of Seller to receive the payment of any Adjusted Deferred Purchase Price hereunder) now or hereafter existing in, to and under (i) all the Sold Receivables (including specifically any right of the Seller to receive the payment of any Adjusted Deferred Purchase Price hereunder), and (ii) all proceeds of any of the foregoing, and the parties hereby agree that this Agreement shall constitute a security agreement under the UCC, to secure all of the obligations of Seller, including any obligations of Seller as Servicer hereunder, arising in connection with this Agreement and each other Receivables Document, whether now or hereafter existing, due or to become due, direct or indirect, or absolute or contingent, including, without limitation, the payment to Purchaser of the sum of Purchaser's Net Investment, the payment to Purchaser of the aggregate unpaid Earned Discount calculated hereunder, the payment to Purchaser of any Servicer's Fees, Seller Adjustments or Indemnity Payment due hereunder and the payment of any other Fees, expenses and costs due and payable to Purchaser hereunder. -69- 77 9.2. Further Assurances. The provisions of Section 6.3 shall apply to the security interest granted under Section 9.1 as well as to the Purchases of the Sold Receivables hereunder. 9.3. Remedies to Enforce Security Interests. Upon the occurrence of a Termination Event, Purchaser shall have, with respect to the collateral granted pursuant to Section 9.1, and in addition to all other rights and remedies available to Purchaser under this Agreement and the other Receivables Documents and under other applicable law, all the rights and remedies of a secured party upon default under the UCC, which remedies shall be cumulative. 9.4. Disclosure. Purchaser may at any time disclose Purchaser's interest in the Sold Receivables to Purchaser's officers, directors, employees, attorneys, accountants and other advisers who need to know such information in connection with the administration and enforcement of this Agreement or as requested by any regulatory authority or as otherwise required by Law or by subpoena or other legal process. Except for the filing of UCC financing statements or to enforce its rights hereunder after demand has been made upon Seller, Purchaser shall not, however, at any time, disclose to an Obligor its interest in the Sold Receivables unless in connection with the collection of a Sold Receivable or required to do so by Law or by subpoena or other legal process or as otherwise permitted by the terms of this Agreement and the other Receivables Documents. 9.5. Rights of Purchaser. (a) Seller hereby authorizes Purchaser, Servicer and/or their respective designees to take any and all steps, in Seller's name and on behalf of Seller, that Purchaser, Servicer and/or their respective designees determine are necessary or desirable to collect all amounts due under any and all Sold Receivables, including, without limitation, endorsing the name of Seller on checks and other instruments representing collections and enforcing all Sold Receivables. (b) Purchaser shall have no obligation to account for, to replace, to substitute or to return any Sold Receivable to Seller. (c) Purchaser shall have the unrestricted right to further assign, transfer, deliver, hypothecate, subdivide or otherwise deal with the Sold Receivables, and all of Purchaser's right, title and interest in, to and under this Agreement, on whatever terms Purchaser shall determine. (d) Purchaser shall have the sole right to retain any gains or profits created by buying, selling or holding the Sold -70- 78 Receivables and shall have the sole risk of and responsibility for losses or damages created by such buying, selling or holding. ARTICLE X INDEMNIFICATION 10.1. Indemnification. (a) Seller shall hold Purchaser harmless from and indemnify Purchaser against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever (including attorneys' fees and allocated costs for in-house legal services) which arise out of or are incurred in connection with Purchaser's enforcement of this Agreement and any instrument or agreement required hereunder. (b) Without limiting any other rights which any Indemnified Party (as defined below) may have hereunder or under applicable Law, Seller hereby agrees to indemnify Purchaser, each of its successors, permitted transferees and assigns, and all officers, directors, shareholders, controlling Persons, employees and agents of any of the foregoing (each of the foregoing Persons being individually called an "Indemnified Party"), forthwith on demand, from and against any and all damages, losses, claims (whether on account of settlements or otherwise, and whether or not the relevant Indemnified Party is a party to any action or proceeding that gives rise to any Indemnified Losses (as defined below)), judgments, liabilities and related costs and expenses (including reasonable attorneys' fees and disbursements) awarded against or incurred by any of them arising out of or as a result of any of the following (all of the foregoing being collectively called "Indemnified Losses"): (i) any transfer by Seller of any interest in any Sold Receivable other than the transfer of the Sold Receivables by Seller to Purchaser pursuant to this Agreement; (ii) any representation or warranty made or deemed made by Seller (or any of its officers) under or in connection with this Agreement, any Assignment or any Servicer Report, or any other information or report delivered by or on behalf of Seller pursuant hereto or thereto, shall have been false, incorrect or misleading in any material respect when made or deemed made or delivered, as the case may be; -71- 79 (iii) the failure by Seller to comply with any applicable Law with respect to any Sold Receivable, or the nonconformity of any Sold Receivable with any such applicable Law. (iv) the failure to vest in Purchaser an ownership interest equal to the Sold Receivables free and clear of all Adverse Claims, other than a Lien arising solely as a result of any action of Purchaser or any assignee of any thereof, whether existing at the time of any purchase or at any time thereafter; (v) the failure to maintain the appropriate filings of financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable Laws with respect to any Sold Receivables, whether at the time of any purchase or at any time thereafter, to establish Purchaser's first priority interest in any Sold Receivable; (vi) any dispute, claim, offset, other non-cash reduction or defense (other than discharge in bankruptcy or other credit-related issue) of an Obligor to the payment of any Sold Receivable (including, without limitation, any defense that such Sold Receivable or the related Contract is not a legal, valid and binding obligation of the applicable Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or services related to such Sold Receivable or the related Contract or the furnishing or failure to furnish such merchandise or services; (vii) any failure of Seller, as Servicer or otherwise, to perform any of its duties or obligations in accordance with the provisions of Article VI or Article VII; (viii) any liability claim (including, but not limited to product liability or tort claims) arising out of or in connection with the Contract; (ix) any breach of the Contract by Seller; (x) any tax or governmental fee or charge (but not including income taxes, branch profit taxes, franchise taxes or similar taxes imposed on, or measured by, the income or profits of Purchaser), all interest and penalties thereon or with respect thereto, and all -72- 80 out-of-pocket costs and expenses, including the reasonable fees and expenses of counsel in defending against the same, which may arise by reason of the purchase or ownership of any Sold Receivable; (xi) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of a Sold Receivable, except to the extent any such investigation, litigation or proceeding relates to a possible matter involving an Indemnified Party for which neither Seller nor any of its Affiliates is at fault; (xii) any claim with respect to the Sold Receivables based upon or relating to any Laws relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy or any other claim relating to collection activities except to the extent such claim arises out of an act or an omission of a Servicer other than Seller or an affiliate of Seller; (xiii) any commingling of collections of Sold Receivables at any time with any other funds, unless such commingling was caused solely by a Servicer other than Seller or an affiliate of Seller; (xiv) the replacement of Seller as Servicer, including, without limitation, any servicing fees payable to such replacement servicer; or (xv) any loss incurred by Purchaser in the event (1) that any transfer of Sold Receivables to Purchaser is voided, or such transfer is reconveyed to Seller by Purchaser, in compliance with an order of a court having jurisdiction over any bankruptcy, insolvency or conservancy proceedings relating to Seller, or (2) that any repayments of Purchaser's Net Investment to Purchaser, or the payment to Purchaser of any Earned Discount, Servicer's Fees, Seller Adjustments, Fees or Indemnity Payments made by, or on behalf of Seller, is at any time repaid by Purchaser to Seller in compliance with an order of a court having jurisdiction over any bankruptcy, insolvency or conservancy proceedings relating to Seller. Notwithstanding the foregoing (and with respect to clause (B) below, without prejudice to the rights that Purchaser may have pursuant to the other provisions of this Agreement), in no event shall any Indemnified Party be indemnified for any Indemnified -73- 81 Losses (A) resulting from gross negligence or willful misconduct on the part of such Indemnified Party, or any Person of which such Indemnified Party is an officer, director, shareholder, controlling Person, employee or agent, or (B) to the extent the same includes losses in respect of Sold Receivables and reimbursement therefor that would constitute credit recourse to Seller or Servicer for the amount of any Sold Receivable not paid by the applicable Obligor. (c) Any claim by Purchaser or any other Indemnified Party for indemnification pursuant to this Section 10.1 shall be set forth in writing and such notice shall set forth in reasonable detail the basis for such determination; provided, however, if the Indemnified Loss qualifies as a Seller Adjustment such loss shall be governed by the provisions of Section 2.8, including without limitation the timing of the payment of such Seller Adjustment to Purchaser. Such amount shall be due and payable by Seller to Purchaser or such other Indemnified Party ten (10) Business Days after such notice is given. In the event that the nature of the Indemnified Loss gives rise to an Indemnity Payment that includes a repayment of the Current Purchase Price Payment allocable to a Sold Receivable such Indemnified Loss shall also include the payment by Seller of the accrued and unpaid Earned Discount through the day of such payment. Upon the payment of any Indemnity Payment described in the preceding sentence Purchaser shall execute and deliver to Seller a duly completed Reassignment of Sold Receivable concerning the applicable Sold Receivables. 10.2. Contest of Tax Claim. If any Indemnified Party shall have notice of any attempt to impose or collect any tax or governmental fee or charge for which indemnification will be sought from Seller under Section 10.1(b)(x), such Indemnified Party shall give prompt and timely notice of such attempt to Seller and Seller shall have the right, at its expense, to participate in any proceedings related to such attempt for the purpose of resisting or objecting to the imposition or collection of any such tax, governmental fee or charge. 10.3. Contribution. If for any reason the indemnification provided in Section 10.1 (and subject to the exceptions set forth therein) is unavailable (other than by reason of a final adjudication by a court of competent jurisdiction that a claim is not within the scope of such indemnification) to an Indemnified Party or is insufficient to hold an Indemnified Party harmless, then Seller shall contribute to the maximum amount payable or paid to such Indemnified Party under Section 10.1 as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Party on the one hand and Seller on the other -74- 82 hand, but also the relative fault of such Indemnified Party (if any) and Seller and any other relevant equitable considerations. ARTICLE XI MISCELLANEOUS 11.1. Notices. Any communications between the parties hereto to be given in writing shall be given by mailing the same, postage prepaid, or by facsimile or personal delivery to each party at its address set forth below, or to such other addresses as either party may in writing hereafter indicate. Any communications between the parties hereto to be given by telephone shall be confirmed immediately in writing by the party initiating the telephone call. Address for notices to Seller: Address for notices to Purchaser: Kerr Group, Inc. PNC Bank, National Association 1840 Century Park East 300 Sixth Avenue PNC Plaza Los Angelas, CA 90067 9th Floor Pittsburgh, PA 15226 Attn: Geoffrey A. Whynot, Attn: Secured Credit Treasurer Administration Telecopier No. (310) 201-5934 Telecopier No. (412) 762-4069 Telephone No. (310) 556-2200 Telephone No. (412) 762-4924 with copy to: PNC Bank, National Association 55 South Lake Avenue Suite 650 Pasadena, CA 91101 Attn: Anthony Trunzo, Vice President Telecopier No. (818) 568-0653 Telephone No. (818) 568-9423 -75- 83 Deposit instructions for Wire instructions for Payments to Seller: payment to Purchaser: Bank of America, N.A. PNC Bank, National Association (ABA 121000358) (ABA 043000096) San Francisco, California One PNC Plaza Pittsburgh, PA 15265 Further credit to: Attn: Loan & Collateral Account #1257600128 Reference Customer No. _______ Reference: Kerr Group, Inc. 11.2. Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however that Seller shall not assign this Agreement or any of the rights of Seller hereunder without the prior written consent of Purchaser. 11.3. Transfers. Purchaser may at any time, without the prior written consent of Seller, sell, assign, grant participations in, or otherwise transfer any of the Sold Receivables to any other person. 11.4. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Seller therefrom shall in any event be effective unless the same shall be in writing and signed by (a) Seller and Purchaser, and Servicer if Seller is not Servicer, (with respect to an amendment), or (b) Purchaser (with respect to a waiver or consent) or Seller (with respect to a waiver or consent by it), as the case may be, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 11.5. No Implied Waivers; Cumulative Remedies; Writing. No delay or omission by Purchaser to exercise any right under this Agreement shall impair any such right, nor shall it be construed to be a waiver thereof. No waiver of any single breach or default under this Agreement shall be deemed a waiver of any other breach or default. Any waiver, consent or approval under this Agreement must be in writing to be effective. No course of dealing and no delay or failure of Purchaser in exercising any right, power, remedy or privilege under this Agreement or any other Receivables Document shall affect any other or future exercise thereof or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of Purchaser under this Agreement and any other Receivables Documents, or by Law or otherwise, are cumulative and not -76- 84 exclusive of any rights or remedies which it would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of Purchaser of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing and executed by Purchaser. 11.6. Costs, Expenses and Taxes. In addition to its obligations under Article X hereof, Seller agrees to pay on demand: (a) all reasonable costs and expenses incurred by Purchaser in connection with the negotiation, preparation, execution and delivery of this Agreement, the Assignments and the other Receivables Documents, any amendment of or consent or waiver under any of this Agreement or of the Assignments which is requested or proposed by Seller (whether or not consummated), the administration (including periodic auditing) or the enforcement of, or any actual or claim breach of, this Agreement and, including, without limitation (i) the reasonable fees and expenses of counsel to any of such Persons incurred in connection with any of the foregoing or in advising such Persons as to their respective rights and remedies under this Agreement or the Assignments in connection with any of the foregoing, and (ii) all reasonable out-of-pocket expenses (including reasonable fees and expenses of independent accountants), incurred in connection with any review of Seller's books, records and other documentation either prior to the execution and delivery hereof or pursuant to Section 6.4 hereof; provided, however, that Seller shall not be obligated to pay any costs or expenses incurred by Purchaser in connection with more than two audits of Seller's books, records and other documentation during any twelve (12) month period so long as no Termination Event or Potential Termination Event shall have occurred and be continuing; and (b) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, of any Assignment or of any other Receivables Documents, and agrees to indemnify each Indemnified Party against any liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. (c) Seller agrees to reimburse Purchaser for the cost of two (2) tax lien searches per calendar year during the term of this Agreement conducted by Purchaser to verify the existence or non-existence of Liens against Receivables of Seller for non-payment of federal or state taxes in such jurisdictions as Purchaser in the reasonable exercise of its discretion may -77- 85 request; provided that upon the occurrence of a Termination Event Seller shall reimburse Purchaser for the cost of all tax lien searches conducted by Purchaser to verify the existence or non-existence of Liens against Receivables of Seller for non-payment of federal or state taxes in such jurisdictions as Purchaser in the reasonable exercise of its discretion may request. 11.7. Funding by Branch, Subsidiary or Affiliate. (a) Notional Funding. Purchaser shall have the right from time to time, without notice to the Seller, to deem any branch, subsidiary or affiliate (which for the purposes of this Section 11.7 shall mean any corporation or association which is directly or indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls Purchaser) of Purchaser to have made, maintained or funded the Purchaser's Net Investment, provided that immediately following (on the assumption that a payment were then due from the Seller to such other office) and as a result of such change the Seller would not be under any greater financial obligation pursuant to Section 5.3 or 5.4 hereof than it would have been in the absence of such change. Notional funding offices may be selected by Purchaser without regard to Purchaser's actual methods of making, maintaining or funding the Purchaser's Net Investment or any sources of funding actually used by or available to Purchaser. (b) Actual Funding. Purchaser shall have the right from time to time to make or maintain the Purchaser's Net Investment by arranging for a branch, subsidiary or affiliate of Purchaser to make or maintain the Purchaser's Net Investment subject to the last sentence of this Section 11.7. If Purchaser causes a branch, subsidiary or affiliate to make or maintain any part of the Purchaser's Net Investment hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Purchaser's Net Investment to the same extent as if the Purchaser's Net Investment were made or maintained by Purchaser but in no event shall Purchaser's use of such a branch, subsidiary or affiliate to make or maintain any part of the Purchaser's Net Investment hereunder cause Purchaser or such branch, subsidiary or affiliate to incur any cost or expenses payable by the Seller hereunder or require the Seller to pay any other compensation to any (including, without limitation, any expenses incurred or payable pursuant to Section 5.3 or 5.4) which would otherwise not be incurred. 11.8. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or -78- 86 enforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 11.9. Survival. All representations, warranties, covenants and agreements of Seller contained herein or in the other Receivables Documents or made in writing in connection herewith shall survive the Initial Purchase Date and shall continue in full force and effect so long as Seller may sell and assign any Sold Receivables hereunder and so long thereafter until the repayment in full of the Purchaser's Net Investment and the payment of the other sums due to Purchaser hereunder. The obligations of the Seller under Sections 2.8, 5.3, 5.4 and 11.6 and Article X shall survive the termination of this Agreement and the discharge of the other obligations of Seller hereunder, and any other Receivables Documents, and shall also survive the payment in full of the Purchaser's Net Investment and the reduction of the Maximum Purchaser's Net Investment to zero (0) in accordance with the provisions of this Agreement. 11.10. GOVERNING LAW. THIS AGREEMENT AND THE OTHER RECEIVABLES DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA (INCLUDING WITHOUT LIMITATION, AS TO THE STATUTE OF LIMITATIONS), WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICT OF LAWS, EXCEPTING APPLICABLE FEDERAL LAW AND EXCEPT ONLY TO THE EXTENT PRECLUDED BY THE MANDATORY APPLICATION OF THE LAW OF ANOTHER JURISDICTION. 11.11. FORUM. THE PARTIES HERETO AGREE THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER RECEIVABLES DOCUMENTS TO WHICH THE SELLER IS A PARTY MAY BE COMMENCED IN THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE WESTERN DISTRICT OF PENNSYLVANIA, AND THE PARTIES HERETO AGREE THAT A SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN EITHER OF SUCH COURTS SHALL BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED PERSONALLY OR BY CERTIFIED MAIL TO THE PARTIES AT THEIR RESPECTIVE ADDRESSES SET FORTH IN SECTION 11.1, OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. FURTHER, SELLER HEREBY SPECIFICALLY CONSENTS TO THE PERSONAL JURISDICTION OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA AND THE DISTRICT COURT OF THE UNITED STATES FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND WAIVES AND HEREBY ACKNOWLEDGES THAT IT IS ESTOPPED FROM RAISING ANY OBJECTION BASED ON FORUM NON CONVENIENS, ANY CLAIM THAT EITHER SUCH COURT LACKS PROPER VENUE OR ANY OBJECTION THAT EITHER SUCH COURT LACKS PERSONAL JURISDICTION OVER SELLER SO AS TO PROHIBIT EITHER SUCH COURT FROM ADJUDICATING ANY ISSUES RAISED IN A COMPLAINT FILED WITH EITHER -79- 87 SUCH COURT AGAINST SELLER BY PURCHASER CONCERNING THIS AGREEMENT OR THE OTHER RECEIVABLES DOCUMENTS OR PAYMENT TO PURCHASER. SELLER HEREBY ACKNOWLEDGES AND AGREES THAT THE CHOICE OF FORUM CONTAINED IN THIS SECTION 11.11 SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN ANY FORUM OR THE TAKING OF ANY ACTION UNDER THE RECEIVABLES DOCUMENTS TO ENFORCE THE SAME IN ANY APPROPRIATE JURISDICTION. 11.12. Integration. This Agreement and the other Receivables Documents constitute the entire agreement between the parties relating to this financing transaction and they supersede all prior understandings and agreements, whether written or oral, between the parties hereto relating to the transactions provided for herein. 11.13. Headings. Article, Section and other headings used in this Agreement are intended for convenience only and shall not affect the meaning or construction of this Agreement. 11.14. WAIVER BY JURY TRIAL. IN ORDER TO EXPEDITE THE RESOLUTION OF ANY DISPUTES WHICH MAY ARISE UNDER THIS AGREEMENT OR UNDER ANY OTHER RECEIVABLES DOCUMENT TO WHICH SELLER IS A PARTY, AND IN LIGHT OF THE COMPLEXITY OF THE TRANSACTIONS CONTEMPLATED UNDER THIS AGREEMENT, THE PARTIES HERETO WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT TO WHICH THEY MAY BOTH BE PARTIES, WHETHER ARISING OUT OF, UNDER, OR BY REASON OF THIS AGREEMENT OR ANY OF THE OTHER RECEIVABLES DOCUMENTS OR ANY ASSIGNMENT OR OTHER TRANSACTION THEREUNDER OR BY REASON OF ANY CAUSE OR DISPUTE WHATSOEVER BETWEEN THEM OF ANY KIND OR NATURE. THE PARTIES HERETO ACKNOWLEDGE THAT THIS WAIVER OF JURY TRIAL HAS BEEN SPECIFICALLY NEGOTIATED AS A PART OF THIS AGREEMENT. -80- 88 11.15. Counterparts. This Agreement may be executed in as many counterparts as shall be convenient and by the different parties hereto on separate counterparts, each of which when executed by Purchaser, Seller and Servicer shall be regarded as an original. 11.16. Waiver of Certain Setoff Rights. Without affecting or diminishing any rights of Purchaser with respect to any checks, drafts, or other orders for the payment of money, any deposit funds or any electronic funds transfer which represent Collections or the proceeds of Collections of Sold Receivables, or the right of Purchaser to recover the Purchaser's Net Investment plus Earned Discount and Servicer's Fees from Collections of Sold Receivables, Purchaser shall not have the right to set off any of the funds of Seller on deposit in any account with Purchaser against any debts or other obligations of Seller to the Purchaser. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -81- 89 IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers as of the day and year first above written. ATTEST: (Seal) SELLER: KERR GROUP, INC. By: /s/ L.R. Knipple By: /s/ Geoffrey A. Whynot -------------------------- -------------------------- Name: Larry R. Knipple Name: Geoffrey A. Whynot Title: V.P., Secretary Title: Treasurer Purchaser: PNC BANK, NATIONAL ASSOCIATION By: /s/ Anthony L. Trunzo -------------------------- Name: Anthony L. Trunzo Title: Vice President -82- EX-10.32 7 EXHIBIT 10.32 1 EXHIBIT 10.32 February 9, 1995 Mr. Geoffrey A. Whynot Treasurer Kerr Group, Inc. 1840 Century Park East Los Angeles, CA 90067 Dear Geoff: This letter will confirm that we hold available for Kerr Group, Inc. a $10,000,000 line of credit with a $2MM sublimit for standby letters of credit, to extend through April 30, 1996. Borrowings shall be evidenced by a promissory note in the form attached hereto. Interest on any borrowings under this facility will be at our Base Rate, which is the higher of our announced Base Rate or overnight Federal Funds rate plus 1/2%, and shall be payable in accordance with the terms of the promissory note. Letters of credit will be 2% per annum, invoiced quarterly in arrears with a minimum flat fee of $250.00. You will execute the banks customary documents with respect to letters of credit, as well as pay all standard fees and other charges as is customary with respect to the issuance and maintenance of each letter of credit. Letters of credit shall have such maturity as the bank and company mutually agree upon. A fee equal to 3/4% per annum, on the total amount of the line will be invoiced quarterly. The availability of borrowings and standby letters of credit under this facility is subject to our usual reservation that we continue to be satisfied with the affairs of Kerr Group, Inc. and to any changes in government regulations or monetary policy. As well, that no event of default shall have occurred with respect to any term or condition of this line or to the $50MM senior note agreement between Kerr Group, Inc. and its holders dated September 15, 1993. If the foregoing satisfactorily sets forth the terms and conditions of this line of credit, please execute and return the enclosed copy of this letter. If you have any questions concerning this letter, please do not hesitate to call. Accepted: Sincerely yours, Kerr Group, Inc. /s/ S. Karen Langstaff -------------------------- By: /s/ Geoffrey A. Whynot S. Karen Langstaff ---------------------------- Director Title: Date: 2/9/95 cc: Mr. D. Gordon Strickland 2 COMMERCIAL PROMISSORY NOTE $10,000,000.00 Boston, Massachusetts February 1, 1995 FOR VALUE RECEIVED, the undersigned promises to pay to the order of THE FIRST NATIONAL BANK OF BOSTON (together with any successors or assigns, the "Bank"), a national banking association with its Head Office at 100 Federal Street, Boston, Massachusetts 02110, the principal amount of ten million Dollars ($10,000,000.00), on April 30, 1996 or, if less, the aggregate principal amount advanced to the undersigned by the Bank under this Note and unpaid on such date, with interest thereon at a floating rate equal to the Base Rate plus 0%. As used herein, "Base Rate" means the rate per annum equal to the greater of (i) the rate of interest announced from time to time by the Bank at its Head Office as its Base Rate, and (ii) the rate equal to the weighted average of the published rates on overnight Federal Funds transactions with members of the Federal Reserve System plus 1/2%. The rate shall change as and when the Base Rate changes and changes in the Base Rate shall take effect on the day announced, unless otherwise specified in the announcement. Interest shall be payable in arrears on July 31, 1994 and on the end of each quarter thereafter. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed including holidays and days on which the Bank is not open for the conduct of banking business. SECTION 1. PAYMENT TERMS. 1.1 PAYMENTS; PREPAYMENTS. All payments hereunder shall be made by the undersigned to the Bank in United States currency at the Bank's address specified above (or at such other address as the Bank may specify), in immediately available funds, on or before 2:00 p.m. (Boston, Massachusetts time) on the due date thereof. Payments received by the Bank prior to the occurrence of an Event of Default (as defined in Section 2) will be applied first to fees, expenses and other amounts due hereunder (excluding principal and interest); second, to accrued interest; and third to outstanding principal; after the occurrence and during the continuance of an Event of Default, payments will be applied to the Obligations under this Note as the Bank determines in its sole discretion. Subject to Section 1.2, the undersigned may pay all or a portion of the amount owed earlier than it is due without premium or other charge. 1.2 DEFAULT RATE. To the extent permitted by applicable law, upon and after the occurrence and during the continuance of an Event of Default (whether or not the Bank has accelerated payment of this Note), interest on principal and overdue interest shall, at the option of the Bank, be payable on demand at a rate per annum equal to 2% above the greater of the rate of interest otherwise payable hereunder or the Base Rate. 1.3 LATE PAYMENT CHARGE. If a payment of principal or interest hereunder is not made within five business days of its due date, the undersigned will pay on demand a late payment charge equal to the Base Rate plus 2% of the amount of such payment. Nothing in the preceding sentence shall affect the Bank's right to accelerate the maturity of this Note in the event of any default in the payment of this Note. SECTION 2. DEFAULTS AND REMEDIES. 2.1 DEFAULT. The occurrence of any of the following events or conditions shall constitute an "EVENT OF DEFAULT" hereunder: (a) (i) default in the payment when due of the principal of or interest on this Note or (ii) any other default in the payment or performance of this Note or of any other Obligation or (iii) default in the payment or performance of any obligation of any Obligor to others for borrowed money or in respect of any extension of credit or accommodation or under any lease greater than $1,000,000.00 dollars; including, without limitation, the occurrence of any event of default under a senior note agreement dated September 15, 1993 by and between the undersigned and the holders of its, 9.45% series A senior note and 8.99% Series B senior note, collectively the "Senior Debt," holders. 3 (b) failure of any representation or warranty herein or in any agreement, instrument, document or financial statement delivered to the Bank in connection herewith to be true and correct in any material respect; (c) default or breach of any condition under any mortgage, security agreement, assignment of lease, or other agreement securing, constituting or otherwise relating to any collateral for the Obligations; (d) failure to furnish the Bank promptly on request with financial information about, or to permit inspection by the Bank of any books, records and properties of, any Obligor; (e) merger, consolidation, sale of all or substantially all of the assets or change in control of any Obligor; or (f) any Obligor generally not paying its debts as they become due; the death, dissolution, termination of existence or insolvency of any Obligor; the appointment of a trustee, receiver, custodian, liquidator or other similar official for such Obligor or any substantial part of its property or the assignment for the benefit of creditors by any Obligor; or the commencement of any proceedings under any bankruptcy or insolvency laws by or against any Obligor. (g) the failure of the undersigned to comply with any of the terms, conditions and covenants set forth in the instruments, documents and agreements evidenced by the Senior Debt, as if each of such terms, conditions and covenants were set forth herein at length. For purposes of this paragraph, the terms, conditions and covenants in effect as of the date hereof shall be applicable to the within Note, notwithstanding any future amendment, modification or termination of the Senior Debt. As used herein, "OBLIGATION" means any obligation hereunder or otherwise of any Obligor to the Bank or to any of its affiliates, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising; and "OBLIGOR" means the undersigned, any guarantor or any other person primarily or secondarily liable hereunder or in respect hereof, including any person or entity who has pledged or granted to the Bank a security interest in, or other lien on, property on behalf of the undersigned as collateral for the Obligations. 2.2 REMEDIES. Upon an Event of Default described in Section 2.1(f) immediately and automatically, and upon or after the occurrence of any other Event of Default at the option of the Bank, all Obligations of the undersigned shall become immediately due and payable without notice or demand. All rights and remedies of the Bank are cumulative and are exclusive of any rights or remedies provided by law or in equity or any other agreement, and may be exercised separately or concurrently. 4 SECTION 3. MISCELLANEOUS. 3.1 WAIVER; AMENDMENT. No delay or omission on the part of the Bank in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. No waiver of any right or any amendment hereto shall be effective unless in writing and signed by the Bank, nor shall a waiver on one occasion bar or waive the exercise of any such right on any future occasion. Without limiting the generality of the foregoing, the acceptance by the Bank of any late payment shall not be deemed to be a waiver of the Event of Default arising as a consequence thereof. Each Obligor waives presentment, demand, notice, protest, and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note or of any collateral for the Obligations, and assents to any extensions or postponements of the time of payment and to any other indulgences under this Note or with respect to any such collateral, to any substitutions, exchanges or releases of any such collateral, and to any additions or releases of any other parties or persons primarily or secondarily liable hereunder, that from time to time may be granted by the Bank in connection herewith. 3.2 SECURITY; SET-OFF. The undersigned grants to the Bank, as security for the full and punctual payment and performance of the Obligations, a continuing lien on and security interest in all securities or other property belonging to the undersigned now or hereafter held by the Bank and in all deposits (general or special, time or demand, provisional or final) and other sums credited by or due from the Bank to the undersigned or subject to withdrawal by the undersigned; and regardless of the adequacy of any collateral or other means of obtaining repayment of the Obligations, the Bank is hereby authorized at any time and from time to time, without notice to the undersigned (any such notice being expressly waived by the undersigned) and to the fullest extent permitted by law, to set off and apply such deposits and other sums against the Obligations of the undersigned, although such Obligations may be contingent or unmatured; provided however that the bank by accepting this Note waives any security interest in and right of set off against the deposits of the undersigned, with respect to funding A/C #54170704, any controlled disbursement account or any master trust account established in connection with the defined contribution plan of the undersigned. 3.3 TAXES. The undersigned agrees to indemnify the Bank and hold it harmless from and against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution, delivery, and performance of this Note or any collateral for the Obligations. 3.4 EXPENSES. The undersigned will pay on demand all expenses of the Bank in connection with the preparation, administration, default, collection, waiver or amendment of the Obligations or in connection with the Bank's exercise, preservation or enforcement of any of its rights, remedies or options thereunder, including, without limitation, fees of outside legal counsel or the allocation costs of in-house legal counsel, accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with any travel or other costs relating to any appraisals or examinations conducted in connection with the Obligations and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal hereunder (including any default rate) and be an Obligation secured by any such collateral. 3.5 BANK RECORDS. The entries on the records of the Bank (including any appearing on this Note) shall be prima facie evidence of the aggregate principal amount outstanding under this Note and interest accrued thereon. 3.6 INFORMATION. The undersigned shall furnish the Bank from time to time with such financial statements and other information relating to any Obligor or any collateral securing this Note as the Bank may require. All such information shall be true and correct and fairly represent the financial condition and the operating results of such Obligor as of the date and for the periods for which the same are furnished. The undersigned shall permit representatives of the Bank to inspect its properties and its books and records, and to make copies or abstracts thereof. Each Obligor authorizes the Bank to release and disclose to its affiliates, agents and contractors any financial statements and other information relating to said Obligor provided to or prepared by or for the Bank in connection with any Obligation. The undersigned will notify the Bank promptly of the existence or upon the occurrence of any Event of Default or event which, with the giving of notice or the passage of time or both, would become an Event of Default. 5 3.7 GOVERNING LAW; CONSENT TO JURISDICTION. This Note is intended to take effect as a sealed instrument and shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts, without regard to its conflicts of law rules. The undersigned agrees that any suit for the enforcement of this Note may be brought in the courts of such state or any Federal Court sitting in such state and consents to the non-exclusive jurisdiction of each such court and to service of process in any such suit being made upon the undersigned by mail at the address specified below. The undersigned hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit was brought in an inconvenient court. 3.8 SEVERABILITY; AUTHORIZATION TO COMPLETE; PARAGRAPH HEADINGS. If any provision of this Note shall be invalid, illegal or unenforceable, such provisions shall be severable from the remainder of this Note and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Bank is hereby authorized, without further notice, to fill in any blank spaces on this Note, and to date this Note as of the date funds are first advanced hereunder. Paragraph headings are for the convenience of reference only and are not a part of this Note and shall not affect its interpretation. 3.9 JURY WAIVER. THE BANK (BY ITS ACCEPTANCE OF THIS NOTE) AND THE UNDERSIGNED AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS NOTE, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE UNDERSIGNED HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. Address: 1840 Century Park East Kerr Group, Inc. ------------------------------------ By: /s/ Geoffrey A. Whynot (Type Name) Geoffrey A. Whynot Los Angeles, CA 90067 Title: Vice President, Treasurer ------------------------------------ --------------------------------------- EX-10.33 8 EXHIBIT 10.33 1 EXHIBIT 10.33 February 24, 1995 Mr. Geoffrey A. Whynot Treasurer Kerr Group, Inc. 1840 Century Park East Los Angeles, CA 90067 Re: Amendment of certain provisions of the Receivables Purchase Agreement dated as of January 19, 1995, by and between Kerr Group, Inc. and PNC Bank, National Association. Dear Mr. Whynot: Reference is hereby made to that certain Receivables Purchase Agreement dated as of January 19, 1995 (the "Purchase Agreement") by and between Kerr Group, Inc. (the "Seller") and PNC Bank, National Association (the "Purchaser"). All capitalized terms used herein but not defined herein shall have the meanings ascribed thereto in the Purchase Agreement. The Seller has requested that Purchaser agree to amend certain provisions of the Purchase Agreement to, among other things, modify the conditions precedent to the initial purchase thereunder, as more particularly set forth below. Subject to the terms and conditions of this letter agreement (the "Letter Agreement"), the Purchaser is willing to amend the Purchase Agreement as set forth below. I. Amendment. Subject to the conditions set forth herein, the Purchase Agreement is hereby amended as follows: A. Section 1.1 of the Purchase Agreement is hereby amended to amend and restate the definition of the term "Maximum Purchaser's Net Investment" to read as follows: "Maximum Purchaser's Net Investment" means: (i) for the period from January 19, 1995 up to and including April 2 Mr. Geoffrey A. Whynot Treasurer February 24, 1995 Page 2 30, 1995, Five Million Dollars ($5,000,000); and (ii) thereafter, Ten Million Dollars ($10,000,000). B. Section 3.1 of the Purchase Agreement is hereby amended to delete clause (p) thereof and to substitute therefore the following: (p) A letter from Seller to Purchaser, and acknowledged and accepted in writing by Purchaser, permanently reducing the line of credit under the PNC Note, together with (i) a repayment by Seller of the principal amount of the PNC Note such that the principal balance outstanding under PNC Note is equal to or less than $5,000,000, or (ii) irrevocable directions from Seller to Purchaser to pay the PNC Note in an amount necessary to reduce the outstanding amounts thereunder to Five Million Dollars ($5,000,000), out of the proceeds of the sale of Tendered Receivables on the Initial Purchase Date, or (iii) a combination of the events set forth in clauses (i) or (ii) above so long as the principal balance outstanding under the PNC Note is reduced to an amount equal to or less than $5,000,000; C. Section 8.1 of the Purchase Agreement is hereby amended to add a new clause (n) thereto which reads as follows: (n) The Purchaser shall not have received on or before May 1, 1995, each of the following: (i) a payoff letter from the Purchaser to Seller, and acknowledged and accepted in writing by Seller, with respect to the payment in full of the PNC Note and termination of the related line of credit, and (ii) evidence of the payment in full of the PNC Note. II. Miscellaneous. The amendments and modifications to the Purchase Agreement set forth in this Letter Agreement above do not and shall not, now or in the future, either implicitly or explicitly (a) alter, waive or amend, except as expressly provided in this Letter Agreement, any provision of the Purchase Agreement, or (b) impair any right or remedy of the Purchaser under the Purchase 3 Mr. Geoffrey A. Whynot Treasurer February 24, 1995 Page 3 Agreement with respect to any violation of any provision of the Purchase Agreement. The provisions hereof do not waive, now or in the future, compliance with any covenant, term or condition to be performed or complied with nor do they impair any rights or remedies of the Purchaser under the Purchase Agreement, as amended hereby, with respect to any such violation. As an inducement to the Purchaser to enter into this Letter Agreement, the Seller hereby incorporates herein by reference and repeat herein for the benefit of the Purchaser, each of the representations and warranties made by the Seller in Article IV of the Purchase Agreement, except that for purposes hereof such representations and warranties shall be deemed to extend to and cover this Letter Agreement. This Letter Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, without regard or giving effect to principles of conflict of laws. This Letter Agreement may be executed in any number of counterparts which, when taken together, shall be one and the same instrument. The delivery of an executed counterpart signature page to this Letter Agreement by telecopier shall be as effective as a delivery of an executed original counterpart hereto. This Letter Agreement shall be construed in connection with and as part of the Purchase Agreement, and the Purchase Agreement is hereby amended, modified and supplemented to include this Letter Agreement. Except as expressly amended hereby, the Purchase Agreement and each and every representation, warranty, agreement, covenant, term and condition contained therein or in any other Receivables Document is specifically ratified and confirmed. The Seller hereby ratifies and confirms in all respects any grant of a security interest in property of the Seller pursuant to the Receivables Documents, and further acknowledges that any such grant of a security interest shall secure the obligations of the Seller under the Purchase Agreement, as amended hereby. Nothing in this Letter Agreement shall be deemed or construed to be a waiver or release of, or a limitation upon, Purchaser's exercise of any of its rights and remedies under the Purchase Agreement and the other Receivables Documents, whether arising as a consequence of any Termination Event which may now exist or otherwise, and all such rights and remedies are hereby expressly reserved. 4 Mr. Geoffrey A. Whynot Treasurer February 24, 1995 Page 4 All notices, communications, agreements, certificates, documents or other instruments executed and delivered after the execution and delivery of this Letter Agreement may refer to the Purchase Agreement without making specific reference to this Letter Agreement, but nevertheless all such references shall include this Letter Agreement unless the context requires otherwise. From and after the execution of this Letter Agreement by the Purchaser, all references in the Purchase Agreement and each of the other Receivables Documents to the Purchase Agreement shall be deemed to be references to the Purchase Agreement as amended hereby. This Letter Agreement shall be binding upon the Seller and the Purchaser and their respective successors and assigns, and shall inure to the benefit of the Seller and the Purchaser and their respective successors and assigns (except that Seller shall have no right to assign, voluntarily or by operation of law, any of their rights hereunder without the prior written consent, of the Purchaser and provided further that nothing herein is intended by any party hereto to confer any rights upon any third party as a beneficiary hereof). Seller shall pay any costs and expenses of Purchaser incurred in connection with this Letter Agreement and any other documents or agreements executed in connection therewith, including attorney's fees and costs. This Letter Agreement shall become effective on the date on which (i) the Seller and Purchaser have each executed and delivered to the other party hereto a counterpart of this letter agreement; and (ii) Purchaser shall have received the following: (a) a certification from the Seller that its articles or certificates of incorporation, as certified by the Secretary of State of the State of Delaware, its by-laws, and its corporate resolutions relative to the Purchase Agreement, the Other Receivables Documents and the transactions contemplated thereby, delivered to the Purchaser on or about January 19, 1995, continue to remain complete and correct and in full force and effect and have not been amended, supplemented or otherwise modified rescinded on or after such date, (b) certificates of the 5 Mr. Geoffrey A. Whynot Treasurer February 24, 1995 Page 5 secretaries or assistant secretaries of the Seller certifying the names of the Persons authorized to sign this Letter Agreement and all other documents, instruments and certificates delivered hereunder, together with the true signatures of such Persons; and (c) such other instruments and documents as the Lender shall reasonably require, all of which shall be satisfactory in form and content to the Lender and its counsel, Tucker Arensberg, P.C., and (iii) The following statements are true and correct and the Purchaser shall have received certificates signed by an authorized officer of the Seller, dated the date hereof, stating that: (a) no petition by or against the Seller or any Subsidiary has been filed under the United States Bankruptcy Code or under any similar act; (b) no material adverse change in the properties, business, operations, financial condition or prospects of the Seller has occurred which has not been disclosed to the Purchaser; (c) the Seller has in all material respects performed all agreements, covenants and conditions required to be performed on or prior to the date hereof under the Purchaser Agreement and the other Receivables Documents; and (d) no Potential Termination Event or Termination Event has occurred and is continuing or exists under the terms of the Purchase Agreement. If you agree to the terms and conditions set forth herein, please sign each of the enclosed letters and return one original to PNC Bank, National Association, c/o Anthony Trunzo, Vice President, 55 South Lake Avenue, Suite 650, Pasadena, CA 91101. Very truly yours, PNC BANK, NATIONAL ASSOCIATION By: /s/ Anthony L. Trunzo ------------------------------ Name: Anthony Trunzo Title: Vice President Agreed to and accepted this 24th day of February, 1995, with the intent to be legally bound hereby. 6 Mr. Geoffrey A. Whynot Treasurer February 24, 1995 Page 6 KERR GROUP, INC. By: /s/ Geoffrey A. Whynot --------------------------- Name: Geoffrey Whynot Title: Treasurer EX-11.1 9 EXHIBIT 11.1 1 EXHIBIT 11.1 KERR GROUP, INC. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1994 1993 1992 1991 1990 ------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------ PRIMARY NET EARNINGS (LOSS) PER ------------------------------- COMMON SHARE ------------ NET EARNINGS (LOSS) $3,404 ($1,633) ($2,697) ($2,579) ($1,252) LESS PREFERRED STOCK DIVIDENDS (829) (829) (829) (829) (829) ------- -------- -------- -------- -------- NET EARNINGS (LOSS) APPLICABLE TO PRIMARY EARNINGS (LOSS) PER COMMON SHARE $2,575 ($2,462) ($3,526) ($3,408) ($2,081) ======= ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,674 3,669 3,675 3,675 3,675 ======= ======== ======== ======== ======== PRIMARY NET EARNINGS (LOSS) PER COMMON SHARE $0.70 ($0.67) ($0.96) ($0.93) ($0.57) ======= ======== ======== ======== ======== FULLY DILUTED NET EARNINGS (LOSS) PER ------------------------------------- COMMON SHARE ------------ NET EARNINGS (LOSS) APPLICABLE TO PRIMARY EARNINGS (LOSS) PER COMMON SHARE $2,575 ($2,462) ($3,526) ($3,408) ($2,081) ADD PREFERRED STOCK DIVIDENDS 829 829 829 829 829 ------- -------- -------- -------- -------- NET EARNINGS (LOSS) APPLICABLE TO FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE $3,404 ($1,633) ($2,697) ($2,579) ($1,252) ======= ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 3,674 3,669 3,675 3,675 3,675 COMMON SHARES ISSUABLE FROM ASSUMED CONVERSION OF PREFERRED STOCK 709 709 709 709 709 INCREMENTAL COMMON SHARES ISSUABLE UPON ASSUMED EXERCISE OF OUTSTANDING STOCK OPTIONS 22 6 3 - 1 ------- -------- -------- -------- -------- ADJUSTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,405 4,384 4,387 4,384 4,385 ======= ======== ======== ======== ======== FULLY DILUTED NET EARNINGS (LOSS) COMMON SHARE: AS COMPUTED $0.77 ($0.37) ($0.61) ($0.59) ($0.29) ======= ======== ======== ======== ======== AS REPORTED (A) $0.70 ($0.67) ($0.96) ($0.93) ($0.57) ======= ======== ======== ======== ========
(a) Fully diluted net earnings (loss) per common share are anti-dilutive for all years. EX-13.1 10 EXHIBIT 13.1 1 EXHIBIT 13.1 PRICE RANGE AND DIVIDENDS OF COMMON STOCK AND PREFERRED STOCK The Company's Common Stock and Preferred Stock are both listed on the New York Stock Exchange. As of February 21, 1995, there were approximately 1,139 and 173 holders of record of the Company's Common Stock and Preferred Stock, respectively. The following table summarizes the prices of the Common Stock and Preferred Stock on the New York Stock Exchange Composite Tape and quarterly cash dividends:
------------------------------------------------------------------------------------------------------------------------ Common Stock Preferred Stock ------------------------------------------------------------------------------------------------------------------------ Cash Cash Calendar Year High Low Dividends High Low Dividends ------------------------------------------------------------------------------------------------------------------------ 1994 First Quarter $10 $8 1/8 $-- $21 $19 1/4 $.425 Second Quarter 10 5/8 8 -- 22 19 3/4 .425 Third Quarter 9 1/2 8 1/8 -- 20 3/4 19 7/8 .425 Forth Quarter 9 1/2 8 1/8 -- 20 1/2 19 1/8 .425 -------------------------------------------------------------------------- 1993 First Quarter $ 8 7/8 $6 1/2 $-- $21 1/4 $18 3/4 $.425 Second Quarter 9 1/4 6 3/4 -- 21 1/2 19 7/8 .425 Third Quarter 8 3/4 6 3/8 -- 22 3/8 20 .425 Fourth Quarter 9 1/4 7 7/8 -- 22 3/8 20 1/4 .425 ==========================================================================
The annual cumulative Preferred Stock dividend requirement as of December 31, 1994, was $829,000. The payment of Common Stock dividends is restricted by the Company's Senior Note agreement. Under the most restrictive covenant of such agreement, $500,000 was available for the payment of dividends on Common Stock as of December 31, 1994. INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Kerr Group, Inc.: We have audited the accompanying consolidated balance sheets of Kerr Group, Inc. (Kerr) as of December 31, 1994 and 1993, and the related consolidated statements of earnings (loss), common stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kerr at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions and income taxes in 1993. [SIG] Los Angeles, California February 28, 1995 12 2 FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Net sales $ 139,156 $ 127,372 $ 126,610 Cost of sales 96,356 88,922 88,730 --------------------------------------- Gross profit 42,800 38,450 37,880 Selling, warehouse, general and administrative expenses 32,435 30,095 28,945 Loss on plant relocation -- 4,500 -- Interest expense 4,985 5,680 5,815 Interest and other income (369) (858) (1,293) --------------------------------------- Earnings (loss) from continuing operations before income taxes 5,749 (967) 4,413 Provision (benefit) for income taxes 2,345 (634) 1,826 --------------------------------------- Earnings (loss) from continuing operations 3,404 (333) 2,587 Loss from discontinued operations, after applicable income tax benefit of $2,104 -- -- (5,284) Extraordinary loss on retirement of debt, after applicable income tax benefit of $632 -- (1,300) -- --------------------------------------- Net earnings (loss) 3,404 (1,633) (2,697) Preferred stock dividends 829 829 829 --------------------------------------- Net earnings (loss) applicable to common stockholders $ 2,575 $ (2,462) $ (3,526) ======================================= Earnings (loss) per common share: Earnings (loss) per common share from continuing operations $ 0.70 $ (0.32) $ 0.48 Loss per common share from discontinued operations -- -- (1.44) Extraordinary loss per common share on retirement of debt -- (0.35) -- --------------------------------------- Net earnings (loss) per common share $ 0.70 $ (0.67) $ (0.96) =======================================
See accompanying notes to consolidated financial statements. 13 3 CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 -------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Current assets Cash and cash equivalents $ 2,261 $ 11,329 Receivables - primarily trade accounts, less allowance for doubtful accounts of $170 in 1994 and $578 in 1993 16,312 13,533 Inventories Raw materials and work in process 11,156 8,906 Finished goods 23,134 19,126 ------------------------- Total inventories 34,290 28,032 Prepaid expenses and other current assets 4,526 4,409 ------------------------- Total current assets 57,389 57,303 ------------------------- Property, plant and equipment, at cost Land 427 427 Buildings and improvements 12,577 12,476 Machinery and equipment 84,462 74,748 Furniture and office equipment 5,381 3,001 ------------------------- 102,847 90,652 Accumulated depreciation and amortization (54,506) (50,228) ------------------------- Net property, plant and equipment 48,341 40,424 Deferred income taxes 2,192 4,747 Goodwill and other intangibles, net of amortization of $1,812 in 1994 and $2,122 in 1993 6,622 6,645 Other assets 9,156 8,230 ------------------------- $ 123,700 $117,349 =========================
See accompanying notes to consolidated financial statements. 14 4 CONSOLIDATED BALANCE SHEETS (continued)
-------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 -------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term debt $ 5,500 $ -- Accounts payable 13,445 9,573 Accrued expenses 3,862 9,089 ------------------------- Total current liabilities 22,807 18,662 ------------------------- Pension liability 15,230 18,321 Other long-term liabilities 2,610 2,302 Senior long-term debt 50,000 50,000 Stockholders' equity Preferred Stock, 487 shares authorized and issued, at liquidation value of $20 per share 9,748 9,748 Common Stock, $.50 par value per share, 20,000 shares authorized, 4,220 shares issued in 1994 and 4,210 shares issued in 1993 2,110 2,105 Additional paid-in capital 27,210 27,145 Retained earnings 11,995 9,420 Treasury Stock, at cost, 543 shares (12,803) (12,803) Excess of additional pension liability over unrecognized prior service cost, net of tax benefits (5,207) (6,835) Notes receivable from ESOP Trusts -- (716) ------------------------- Total stockholders' equity 33,053 28,064 ------------------------- $ 123,700 $117,349 =========================
See accompanying notes to consolidated financial statements. 15 5 CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------- (in thousands) CASH FLOW PROVIDED (USED) BY OPERATIONS Continuing operations: Earnings (loss) from continuing operations $ 3,404 $ (333) $ 2,587 Add (deduct) noncash items included in earnings (loss) from continuing operations Depreciation and amortization 7,731 7,364 6,651 Reserve for loss on plant relocation, net of tax -- 2,754 -- Change in deferred income taxes 1,705 159 (225) Reduction in accrued long-term pension liability, net (266) (1,116) (2,413) Other, net 62 (624) (355) Changes in other operating working capital Receivables (2,779) (2,186) (555) Inventories (6,258) (5,712) 1,422 Prepaid expenses (133) (885) (1,279) Accounts payable 3,872 729 1,384 Accrued expenses (913) (541) (508) ------------------------------------------ Cash flow provided (used) by continuing operations 6,425 (391) 6,709 Cash flow used by discontinued operations -- -- (3,121) ------------------------------------------ Total cash flow provided (used) by operations 6,425 (391) 3,588 ------------------------------------------ CASH FLOW PROVIDED (USED) BY INVESTING ACTIVITIES Continuing operations: Capital expenditures (15,648) (11,256) (8,359) Payments associated with relocation of home canning cap and lid operations (3,005) -- -- Proceeds from liquidation of long-term certificate of deposits 1,000 -- 5,000 Other, net (699) (1,338) 256 Discontinued operations: Proceeds from the sale of the Commercial Glass Container Business -- -- 67,719 Proceeds from the sale of the Metal Crown Business -- -- 7,208 Collection of accounts receivable, and payment of accounts payable and accrued and other expenses (2,598) (2,500) (7,974) Capital expenditures and other -- -- (2,553) ------------------------------------------ Cash flow provided (used) by investing activities (20,950) (15,094) 61,297 ------------------------------------------ CASH FLOW PROVIDED (USED) BY FINANCING ACTIVITIES Net borrowings under lines of credit 5,500 -- -- Issuance of senior debt -- 50,000 -- Extinguishment of subordinated debt -- (41,131) -- Borrowings (repayments) under Bank Credit Agreements, net -- -- (53,000) Other long-term debt retirements -- (1,000) (3,207) Dividends paid (829) (829) (829) Other, net 786 523 843 ------------------------------------------ Cash flow provided (used) by financing activities 5,457 7,563 (56,193) ------------------------------------------ CASH AND CASH EQUIVALENTS Increase (decrease) during the year (9,068) (7,922) 8,692 Balance at beginning of the year 11,329 19,251 10,559 ------------------------------------------ Balance at end of the year $ 2,261 $ 11,329 $ 19,251 ==========================================
See accompanying notes to consolidated financial statements. 16 6 CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994, 1993 and 1992 ------------------------------------------------------------------------------------------------------------------------------- Number Of Excess Of Shares Of Additional Pension Notes Common Additional Liability Over Receivable Stock Common Paid-In Retained Treasury Unrecognized From ESOP Outstanding Stock Capital Earnings Stock Prior Service Cost Trusts ------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance, December 31, 1991 3,675 $ 2,105 $ 27,021 $ 15,408 $ (12,737) $ -- $(3,207) Net loss -- -- -- (2,697) -- -- -- Dividends on Preferred Stock -- -- -- (829) -- -- -- Repayments on ESOP Trusts notes receivable -- -- -- -- -- -- 1,560 Restricted Stock Plan -- -- 92 -- -- -- -- -------------------------------------------------------------------------------------- Balance, December 31, 1992 3,675 2,105 27,113 11,882 (12,737) -- (1,647) -------------------------------------------------------------------------------------- Net loss -- -- -- (1,633) -- -- -- Dividends on Preferred Stock -- -- -- (829) -- -- -- Pension adjustment -- -- -- -- -- (6,835) -- Repayments on ESOP Trusts notes receivable -- -- -- -- -- -- 931 Purchase of common stock (8) -- -- -- (66) -- -- Restricted Stock Plan -- -- 32 -- -- -- -- -------------------------------------------------------------------------------------- Balance, December 31, 1993 3,667 2,105 27,145 9,420 (12,803) (6,835) (716) -------------------------------------------------------------------------------------- Net earnings -- -- -- 3,404 -- -- -- Dividends on Preferred Stock -- -- -- (829) -- -- -- Pension adjustment -- -- -- -- -- 1,628 -- Repayments on ESOP Trusts notes receivable -- -- -- -- -- -- 716 Issuance of Common Stock under stock option plans 10 5 65 -- -- -- -- -------------------------------------------------------------------------------------- Balance, December 31, 1994 3,677 $ 2,110 $ 27,210 $ 11,995 $ (12,803) $(5,207) $ -- ======================================================================================
See accompanying notes to consolidated financial statements. 17 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis Of Presentation The consolidated financial statements include the accounts of Kerr Group, Inc., formerly Kerr Glass Manufacturing Corporation, and its wholly owned subsidiary, collectively referred to as the Company. All material intercompany balances and transactions are eliminated in consolidation. Cash Equivalents Cash equivalents consist only of investments that have an original maturity of three months or less, are readily convertible to known amounts of cash and have insignificant risk of changes in value because of changes in interest rates. Inventories Inventories are valued at the lower of cost or market, determined by the use of the first-in, first-out method. Depreciation, Maintenance And Repairs Depreciation of property, plant and equipment is provided by the use of the straight-line method over the estimated useful lives of the assets. The principal estimated useful lives used in computing the depreciation provisions are as follows: Buildings and improvements 5 to 30 years Machinery and equipment 3 to 15 years Furniture and equipment 5 to 10 years
The policy of the Company is to charge amounts expended for maintenance and repairs to expense and to capitalize expenditures for major replacements and betterments. Goodwill And Other Intangibles The excess of cost over net tangible assets of the business acquired during 1987 is amortized on a straight-line basis over 40 years. Other intangible assets are being amortized by the use of the straight-line method over their respective initial estimated lives ranging from 5 to 17 years. The Company periodically evaluates goodwill to assess recoverability based upon expectations of future nondiscounted operating earnings related to the acquired business. Based upon the most recent analysis, the Company believes that no impairment of goodwill exists at December 31, 1994. Revenue Recognition The Company recognizes revenue as product is shipped. A reserve is provided for estimated end-of-season returns of home canning supplies as sales are recorded. Pensions And Other Postretirement Benefits Financial Accounting Standards Board Statement No. 87 (FASB No. 87) requires that a company record an additional minimum pension liability to the extent that a company's accumulated pension benefit obligation exceeds the fair value of pension plan assets and accrued pension liabilities. This additional minimum pension liability is offset by an intangible asset, not to exceed prior service costs of the pension plan. Amounts in excess of prior service costs are reflected as a reduction in stockholders' equity, net of related tax benefits. Prior to 1993, the Company accounted for retiree health care and life insurance benefits on a pay-as-you-go basis. Effective January 1, 1993, the Company adopted Financial Accounting Standards Board Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (FASB No. 106). As more fully described in Note 5, the Company has elected to amortize the impact of FASB No. 106 ratably over 20 years. Income Taxes In February 1992, the Financial Accounting Standards Board issued Statement No. 109, Accounting for Income Taxes (FASB No. 109). Under the asset and liability method of FASB No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) recovered or settled. Under FASB No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, the Company adopted FASB No. 109. The cumulative and pro forma effect of the change in accounting was not material. The Company previously used the asset and liability method for accounting for income taxes under FASB No. 96. 18 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings (Loss) Per Common Share Primary net earnings (loss) per common share are based on the weighted average number of common shares outstanding and are after Preferred Stock dividends. Fully diluted net earnings (loss) per common share reflect when dilutive 1) the incremental common shares issuable upon the assumed exercise of outstanding stock options and 2) the assumed conversion of the Preferred Stock and the elimination of the related Preferred Stock dividends. Antidilution occurred in 1994, 1993 and 1992. Financial Statement Reclassification And Presentation Certain reclassifications have been made to prior years' financial statements to conform to the 1994 presentation. NOTE 2 - LOSS ON PLANT RELOCATION During the fourth quarter of 1993, the Company recorded a pre-tax loss of approximately $4,500,000 ($2,754,000 after-tax or $0.75 per common share) associated with the relocation of its home canning cap and lid manufacturing operations from Chicago, Illinois to a new manufacturing facility in Jackson, Tennessee. The pre-tax loss consisted primarily of accruals for i) the early recognition of retiree health care and pension expense, severance, workers' compensation costs and insurance continuation costs of approximately $2,500,000, ii) asset retirement and related facility closing costs of approximately $1,000,000, and iii) moving and relocation costs of approximately $700,000. In 1994, the Company made cash payments related to such accruals for i) the early recognition of retiree health care and pension expense, severance, workers' compensation costs and insurance continuation costs of approximately $1,500,000, ii) asset retirement and related facility closing costs of approximately $600,000, iii) moving and relocation costs of approximately $600,000 and iv) other costs of approximately $300,000. In addition, during 1994, approximately $300,000 was charged against such accruals related to the book value of fixed assets retired. The remaining accruals primarily relate to retiree health costs and pensions which will be paid over a number of years. NOTE 3 - INCOME TAXES As discussed in Note 1, the Company adopted FASB No. 109, Accounting for Income Taxes, effective January 1, 1993. The cumulative effect of such change in the method of accounting for income taxes was not material. Total income tax provision (benefit) for the years ended December 31, 1994 and 1993 was allocated as follows:
----------------------------------------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------------------------------------- (in thousands) Earnings (loss) from continuing operations $ 2,345 $ (634) Extraordinary item -- (632) Stockholders' equity, related to excess of pension liability over unrecognized prior service costs 878 (4,340) ----------------------- $ 3,223 $(5,606) =======================
19 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - INCOME TAXES (continued) The provision (benefit) for income taxes related to continuing operations for the years ended December 31, 1994, 1993 and 1992 consists of the following:
----------------------------------------------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- (in thousands) Current U.S. Federal $ 81 $ 119 $ 1,426 State -- -- 493 --------------------------------------- Total current 81 119 1,919 --------------------------------------- Deferred U.S. Federal 1,814 (637) 88 State 450 (116) (181) --------------------------------------- Total deferred 2,264 (753) (93) --------------------------------------- Total provision (benefit) for income taxes $ 2,345 $ (634) $ 1,826 =======================================
The significant components of deferred income taxes (benefits) related to continuing operations for the years ended December 31, 1994, 1993 and 1992 are as follows:
----------------------------------------------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- (in thousands) Reinstatement (reduction) of deferred income taxes attributable to recognition of alternative minimum tax credits and tax net operating loss carryforwards $ (541) $ 52 $ 3,653 Timing differences associated with the sales of discontinued operations 1,531 1,051 (3,483) Timing differences associated with the loss on plant relocation 1,429 (1,368) -- Additional costs inventoried for tax purposes 64 (245) (175) Excess (deficit) of pension contributions paid over pension expense 46 448 (312) Excess (deficit) of tax over book depreciation, including assets retired or sold (19) (327) 228 Other, net (246) (364) (4) ------------------------------------ Total $ 2,264 $ (753) $ (93) ====================================
Total provision (benefit) for income taxes related to continuing operations for the years ended December 31, 1994, 1993 and 1992 differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to earnings (loss) from continuing operations before income taxes as a result of the following:
----------------------------------------------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- (in thousands) Computed "expected" tax provision (benefit) $ 1,954 $ (329) $ 1,500 Increase (reduction) in provision resulting from: State income tax provision (benefit), net of Federal income tax effect 231 (47) 213 Change in the valuation allowance for deferred income tax assets -- (369) -- Other, net 160 111 113 --------------------------------------- Actual tax provision (benefit) $ 2,345 $ (634) $ 1,826 =======================================
20 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - INCOME TAXES (continued) The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 1994 and 1993 are as follows:
------------------------------------------------------------------------------------------------------------- 1994 1993 ------------------------------------------------------------------------------------------------------------- (in thousands) Deferred income tax assets: Pension liabilities -- Excess of additional pension liability over unrecognized prior service cost $ 3,462 $ 4,340 Accrued pension liability 1,490 1,495 Accrued retiree health liability 630 436 Accrued reserves associated with discontinued operations 350 1,830 Accrued reserves associated with plant relocation -- 1,368 Inventory 722 595 Accrued vacation pay 383 444 Tax credit carryforwards 1,830 1,975 Net operating loss carryforwards 1,962 978 Other 1,120 502 ------------------------ Total gross deferred income tax assets 11,949 13,963 Less valuation allowance -- -- ------------------------ Deferred income tax assets, net of valuation allowance 11,949 13,963 Deferred income tax liabilities: Property, plant and equipment, principally due to differences in depreciation (5,146) (5,110) Excess of book basis over tax basis of land and buildings formerly used as a glass container manufacturing plant (1,795) (1,746) Other (962) (478) ------------------------ Total gross deferred income tax liabilities (7,903) (7,334) ------------------------ Net deferred income tax assets $ 4,046 $ 6,629 ========================
The valuation allowance for deferred income tax assets as of January 1, 1993, was $369,000. The net change in the valuation allowance during the year ended December 31, 1993, was a reduction of $369,000, or $0.10 per common share. In order to fully realize the deferred income tax asset, the Company will need to generate future taxable income of at least $24,000,000 prior to expiration of net operating loss carryforwards which will begin to expire in 2006. Based upon the Company's recent pre-tax earnings, adjusted for significant nonrecurring items, and projections of future taxable income over the period in which the deferred income tax assets are deductible, management believes it is more likely than not that the Company will realize the benefit of the deferred income tax asset. There can be no assurance, however, that the Company will generate any specific level of continuing earnings. At December 31, 1994, the Company had net operating loss carryforwards for Federal income tax purposes of $4,524,000 which are available to offset future Federal taxable income, expiring in the years 2006 through 2009. The Company also has an alternative minimum tax credit carryforward of $1,522,000 and other tax credit carryforwards (primarily investment tax credits) of $308,000, expiring in the years 1999 through 2009, which are available to reduce future Federal income taxes, if any. The total net cash payments related to income taxes, which primarily represent Federal alternative minimum taxes and state taxes, were $761,000, $470,000 and $347,000 for 1994, 1993 and 1992, respectively. 21 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4 - ACCRUED EXPENSES At December 31, 1994 and 1993, accrued expenses from continuing operations were as follows:
------------------------------------------------------------------------------------------------------- 1994 1993 ------------------------------------------------------------------------------------------------------- (in thousands) Accrued wages and vacation pay $ 1,879 $1,951 Accrued expenses associated with plant relocation 215 3,523 Accrued expenses associated with the sales of discontinued operations -- 990 Other accrued expenses 1,768 2,625 ----------------------- Total accrued expenses $ 3,862 $9,089 =======================
NOTE 5 - RETIREMENT BENEFITS Pensions The Company has a defined benefit pension plan and defined contribution pension plan, which cover substantially all employees. The defined benefit plan generally provides benefits based on years of service and average final pay. The defined contribution plan provides benefits based on a fixed percent of pay for each year of service. The Company's policy is to fund amounts sufficient to satisfy the funding requirements of the Employee Retirement Income Security Act of 1974. During 1994 and 1993, the Company funded $800,000 more than the accrued pension expense for the 1993 plan year. During 1993 and 1992, the Company funded $1,721,000 more than the accrued pension expense for the 1992 plan year. Net pension expense related to continuing operations for the years ended December 31, 1994, 1993 and 1992 included the following components:
----------------------------------------------------------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- (in thousands) Defined Benefit Plan: Service cost (benefit earned during period) $ 564 $ 472 $ 471 Interest cost on projected benefit obligation 7,018 6,941 6,884 Actual loss (return) on assets 597 (7,843) (5,383) Net amortization and deferral (6,552) 1,619 (427) --------------------------------------- Defined Benefit Plan expense $ 1,627 $ 1,189 $ 1,545 ======================================= Defined Contribution Plan expense $ 17 $ 21 $ 30 =======================================
22 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5 - RETIREMENT BENEFITS (continued) The funded status of the defined benefit plans at December 31, 1994 and 1993 was as follows:
----------------------------------------------------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------------------------------------------------- (in thousands) Actuarial present value Vested benefit obligation $ 81,605 $89,848 Nonvested benefit obligation 2,445 2,985 ------------------------ Accumulated benefit obligation 84,050 92,833 Effect of future salary increases 1,842 3,171 ------------------------ Projected benefit obligation 85,892 96,004 Plan assets at fair value (a) 68,750 74,492 ------------------------ Projected benefit obligation in excess of plan assets 17,142 21,512 Unrecognized net transition obligation (553) (632) Unrecognized prior service costs (663) (903) Unrecognized net loss (10,511) (14,346) ------------------------ Accrued pension liability before adjustment 5,415 5,631 Adjustment required to recognize additional minimum pension liability 9,885 12,710 ------------------------ Accrued pension liability related to the defined benefit plan $ 15,300 $18,341 ------------------------ Accrued pension liability related to the defined contribution plan $ 17 $ 26 ========================
(a)Plan assets include 118,200 shares of Company Common Stock at a value of $990,000 at December 31, 1994 and 1993. In connection with recording the additional minimum pension liability pursuant to the provisions of FASB No. 87, the Company recorded a reduction in stockholders' equity of $5,207,000 at December 31, 1994, and $6,835,000 at December 31, 1993, and an intangible pension asset of $1,216,000 at December 31, 1994, and $1,535,000 at December 31, 1993. The majority of all pension plan assets are held by a master trust created for the collective investment of the plan's funds, as well as in private placement insurance contracts. At December 31, 1994, assets held by the master trust consisted primarily of cash, U.S. government obligations, corporate bonds and common stocks. The defined benefit plan assumptions as of December 31, 1994, 1993 and 1992 were as follows:
------------------------------------------------------------------------------ 1994 1993 1992 ------------------------------------------------------------------------------ Discount rate 8.75% 7.5% 9% Increase in compensation rate 5% 5% 5% Long-term rate of return on assets 9.5% 9.5% 9.5% =============================
The Company retained the pension benefit obligations for service prior to the date of the sale and the pension assets related to both the Metal Crown Business and the Commercial Glass Container Business. In connection with the sale of the two businesses, the Company's pension plans had a combined curtailment loss of $4,664,000 pursuant to FASB Statement No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. During 1993, the Company recorded a curtailment loss of $232,000 related to the relocation of the Company's home canning cap and lid manufacturing operations. Such curtailment losses are included as a component of the respective losses on the sale of the businesses and plant relocation. 23 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5 - RETIREMENT BENEFITS (continued) Retiree Health Care And Life Insurance The Company provides certain health care and life insurance benefits for retired employees and their spouses. The costs of such benefits are shared by retirees through one or more of the following: a) deductibles, b) copayments and c) retiree contributions. Salaried employees hired prior to September 1, 1992, and certain hourly employees may become eligible for those benefits if they reach retirement age while working for the Company. The Company will not provide retiree health care and life insurance benefits for salaried employees hired after September 1, 1992. Health care and life insurance benefits provided by the Company are not funded in advance, but rather are paid by the Company as the costs are actually incurred by the retirees. As discussed in Note 1, effective January 1, 1993, the Company adopted FASB No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. FASB No. 106 requires a company to use an accrual method for recording retiree health care and life insurance benefits instead of the previously used pay-as-you-go method. The effect of this accounting change on 1993 results of operations was to increase retiree health care and life insurance expense by $640,000 from the amount that would have been recorded in 1993 under the previously used pay-as-you-go method. The adoption of FASB No. 106 at January 1, 1993, created a previously unrecognized accumulated postretirement benefit obligation of $13,195,000. As permitted under FASB No. 106, the Company has elected to amortize the $13,195,000 accumulated postretirement benefit obligation ratably over 20 years. Prior to 1993, the Company recognized the expense for the cost of retiree health care and life insurance benefits as paid. During 1992, the cost of retiree health care and life insurance benefits with respect to both i) the retirees of continuing operations and ii) the retirees of discontinued operations, liability for which was retained by the Company, totalled $1,230,000. All such retiree costs were charged against continuing operations. Retiree health care and life insurance expense related to continuing operations for the years ended December 31, 1994 and 1993 included the following components:
----------------------------------------------------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------------------------------------------------- (in thousands) Retiree health care and life insurance plans: Service cost (benefit earned during period) $ 54 $ 83 Interest cost on accumulated benefit obligation 1,082 1,187 Actual return on assets -- -- Net amortization and deferral 624 660 ------------------------- Retiree health care and life insurance expense $ 1,760 $ 1,930 =========================
The funded status of the retiree health care and life insurance plans at December 31, 1994 and 1993 was as follows:
----------------------------------------------------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------------------------------------------------- (in thousands) Actuarial present value of accumulated postretirement benefit obligation: Retirees $ 9,083 $11,400 Fully eligible active participants 1,428 1,400 Other active participants 739 700 ------------------------- Accumulated benefit obligation 11,250 13,500 Plan assets at fair value -- -- ------------------------- Accumulated benefit obligation in excess of plan assets 11,250 13,500 Unrecognized net transition obligation (11,237) (11,790) Unrecognized prior service costs -- -- Unrecognized net gain (loss) 1,563 (325) ------------------------- Accrued postretirement benefit liability $ 1,576 $ 1,385 =========================
24 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5 - RETIREMENT BENEFITS (continued) The retiree health care and life insurance plans assumptions are as follows:
-------------------------------------------------------------------------------------------------------------- December 31, December 31, January 1, 1994 1993 1993 -------------------------------------------------------------------------------------------------------------- Discount rate 8.75% 7.5% 9.0% Health care cost trend rates-- Indemnity plans 8.75% trending down to 6% 9% trending down to 6% 15% trending down to 7% Managed care plans 6.75% trending down to 4% 7% trending down to 4% 13% trending down to 5% =============================================================================
The effect of a one percentage point annual increase in these assumed cost trend rates at December 31, 1994, would increase the postretirement benefit obligation by approximately $450,000 and would increase the service and interest cost components of the annual expense by approximately $40,000. NOTE 6 - DEBT At December 31, 1994 and 1993, the Company's long-term debt consisted of $50,000,000 principal amount of Senior Notes payable to a group of insurance companies consisting of John Hancock Mutual Life Insurance Company, New York Life Insurance Company and Massachusetts Mutual Life Insurance Company. The Senior Notes were issued on September 21, 1993, and consist of $41,000,000 of 10-year notes with an interest rate of 9.45% and $9,000,000 of 6-year notes with an interest rate of 8.99%. Sinking fund payments begin under the 10-year notes in 1998 and under the 6-year notes in 1997. The Senior Notes are unsecured. The Senior Notes contain various covenants including covenants relating to coverage of fixed charges, minimum level of tangible net worth, limitation on leverage and limitation on restricted payments, for which payments are defined to include Common Stock dividends. Under these covenants, at December 31, 1994, $500,000 was available for the payment of Common Stock dividends. A portion of the proceeds from the sale of the Senior Notes was used to redeem all of the $40,000,000 principal amount of 13% Subordinated Notes on December 15, 1993, at par. During the third quarter of 1993, the Company incurred an after-tax loss of $1,300,000, or $0.35 per common share, in connection with the refinancing on September 21, 1993, of its 13% Subordinated Notes and the termination of its revolving credit facility. The extraordinary loss included interest expense on the 13% Subordinated Notes from September 21, 1993 through December 15, 1993 (the date on which the Subordinated Notes were redeemed at par) and the write-off of unamortized debt fees and related costs. The mandatory principal payments for the next five years on the outstanding long-term debt at December 31, 1994, are as follows:
--------------------------------------------------------------------------- Years Ended December 31, --------------------------------------------------------------------------- (in thousands) 1995 $ -- 1996 -- 1997 3,000 1998 9,833 1999 9,833 2000 and thereafter 27,334 =======
25 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6 - DEBT (continued) At December 31, 1994, the Company had two unsecured $10,000,000 short-term lines of credit to provide for the seasonal working capital needs of the Company. Both $10,000,000 lines of credit are committed through April 30, 1995. One of the $10,000,000 lines of credit provides for borrowings to bear interest at either the prime rate of the lender or, alternatively, the Eurodollar rate plus 1.5% and charges a facility fee of 0.5% per annum on the commitment (the Eurodollar Line of Credit). The other $10,000,000 line of credit provides for borrowings to bear interest at the prime rate of the lender and charges a facility fee of 0.75% per annum on the commitment (the Prime Line of Credit). The lines of credit contain covenants identical to the Senior Notes. During 1994, the Company had maximum borrowings outstanding under its lines of credit of $5,500,000. During 1994, the weighted average interest rate under its lines of credit was 7.3% and the weighted average borrowings outstanding under its lines of credit was $1,544,000. During 1993, the Company had no borrowings under either its lines of credit or its revolving credit facility which was terminated on September 21, 1993. In January 1995, the Company entered into a two-year agreement with a bank to sell its trade accounts receivable on a nonrecourse basis. Under the facility, the maximum amount that can be advanced to the Company pursuant to the sale of trade accounts receivable at any time is $5,000,000 through April 30, 1995, and $10,000,000 thereafter. The Company retains collection and service responsibility, as agent for the purchaser, over any receivables sold. This facility reduced the committed amount of the Eurodollar Line of Credit to $5,000,000 through April 30, 1995, at which time the line of credit is terminated. In February 1995, the commitment of the Prime Line of Credit was extended to April 30, 1996. Total cash payments of interest (including duplicative interest related to the refinancing of the Subordinated Notes and interest allocated to discontinued operations) during 1994, 1993 and 1992 were $4,743,000, $6,501,000 and $6,358,000, respectively. NOTE 7 - PREFERRED STOCK Class B Preferred Stock At December 31, 1994 and 1993, the Company was authorized to issue 1,302,300 shares of Class B Preferred Stock, par value $.50 per share, which may be issued in series from time to time at the discretion of the Board of Directors. Holders of all series of Class B Preferred Stock share ratably as to rights to payment of dividends and to amounts payable in event of liquidation, dissolution or winding up of the Company. No dividends or payments in liquidation may be made with respect to Common Stock or any other stock ranking junior as to dividends or assets to the Class B Preferred Stock unless all accumulated dividends and sinking fund payments on the Class B Preferred Stock have been paid in full and, in the event of liquidation, unless the accumulated dividends and the liquidation preference of the Class B Preferred Stock have been paid. Series D At December 31, 1994 and 1993, the Company had 487,400 shares of Class B Cumulative Convertible Preferred Stock, Series D (Preferred Stock), issued and outstanding. Holders of the Preferred Stock are entitled to a cumulative dividend, payable quarterly, at the annual rate of 8.5% ($1.70 per share). The Preferred Stock is redeemable at the option of the Company at any time, in whole or in part, at a price of $20.00 per share. No purchases or redemptions of or dividends on Common Stock may occur unless all accumulated dividends have been paid on the Preferred Stock. 26 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7 - PREFERRED STOCK (continued) Each share of Preferred Stock has a liquidating value of $20.00 per share and is convertible into Common Stock at the rate of 1.4545 shares of Common Stock for each share of Preferred Stock (equivalent to a conversion price of $13.75 per common share), subject to adjustment under certain conditions. At December 31, 1994, a total of 708,923 shares of Common Stock was reserved for issuance upon conversion of the Preferred Stock. If six quarterly dividends on the Preferred Stock are unpaid, the holders of Preferred Stock shall have the right, voting as a class, to elect two additional persons to the Board of Directors of the Company until all such dividends have been paid. NOTE 8 - COMMON STOCK Employee Stock Ownership Plans The Company has two employee stock ownership plans, the Kerr Group, Inc. Employee Incentive Stock Ownership Plan Trust formed in 1985 (ESOP I) and the Kerr Group, Inc. 1987 Employee Incentive Stock Ownership Plan Trust formed in 1987 (ESOP II). Both plans are for the benefit of employees of the Company. The Company borrowed funds from a group of banks, which in turn were loaned to the plans for the purpose of purchasing shares of the Company's Common Stock. The bank loans were repaid on February 28, 1992. The related Company loan to ESOP I was repaid during 1993 and the loan to ESOP II was repaid during 1994. ESOP I and ESOP II obtained the funds to repay loans primarily through the receipt of tax deductible contributions made by the Company. The Company funded such contributions primarily through the reduction of compensation and benefits, and deferral of salary increases which it would otherwise have provided to its employees. Total contribution expense for these plans related to continuing operations was $472,000, $633,000 and $955,000 in 1994, 1993 and 1992, respectively. For financial statement purposes, the bank loans were reflected as a liability and the Company's loans to ESOP I and ESOP II were reflected as a reduction in stockholders' equity. Stock Options Under the Company's Stock Option Plans for employees, options may be granted at a price determined by the Stock Option Committee of the Board of Directors, which may be less than market value. Options may be exercised during periods established by such Committee; however, in no event may any option be exercised more than ten years after the date of grant. All of the Company's currently outstanding options generally vest in cumulative installments of 20% per year commencing on the date of grant. Such options become exercisable in full upon the occurrence of certain enumerated events, including certain changes in control of the Company. The options granted beginning in 1992 provide that the Company's stock price must equal or exceed a triggering price per Common Share, which is higher than the exercise price of the option, for ten consecutive trading days for the options to be exercisable. The options granted during 1994 had triggering prices ranging from $14.16 to $15.56 per Common Share and the options granted during 1993 had triggering prices of $12.50 per Common Share. The options granted during 1992 had triggering prices of $10 per Common Share, which requirement was met during 1994, and the options issued during 1992 are now exercisable. 27 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8 - COMMON STOCK (continued) The following tabulation summarizes changes under the Company's Stock Option Plans for employees during the years ended December 31, 1994, 1993 and 1992.
----------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 ------------------------------------------------------------------------------------------ Number Of Number Of Number Of Options Price Range Options Price Range Options Price Range ------------------------------------------------------------------------------------------ Options Outstanding: Beginning of year 274,000 $5 3/8 - 8 5/16 198,850 $5 3/8 - 11 7/16 127,750 $ 7 1/8 - 11 7/16 Granted 6,500 9 7/16 - 10 3/8 157,500 8 - 8 5/16 90,000 5 3/8 Exercised (10,400) 5 3/8 - 7 1/8 -- -- Cancelled (18,000) 5 3/8 - 8 5/16 (36,000) 5 3/8 - 10 3/4 (8,900) 5 3/8 - 11 7/16 Expired -- (46,350) 5 3/8 - 11 7/16 (10,000) 10 1/16 ------------------------------------------------------------------------------------------ End of year 252,100 5 3/8 - 10 3/8 274,000 5 3/8 - 8 5/16 198,850 5 3/8 - 11 7/16 ------------------------------------------------------------------------------------------ Exercisable at end of year: Currently exercisable 70,900 56,200 95,451 Exercisable if Common Stock trades at triggering prices of between $12.50 and $15.56, or above 57,501 31,500 -- ------------------------------------------------------------------------------------------ Total 128,401 87,700 95,451 ------------------------------------------------------------------------------------------ Available for grant at end of year 22,497 20,100 13,250 ==========================================================================================
In addition, the 1988 Stock Option Plan for Non-Employee Directors (the 1988 Plan), consisting of 80,000 shares, and 1993 Stock Option Plan for Non-Employee Directors (the 1993 Plan), consisting of 60,000 shares, provide for the grant of options to purchase Common Stock to members of the Board of Directors of the Company who are not employees of the Company or any of its subsidiaries or affiliates. The option price of each option granted under these plans is the fair market value of Common Stock on the date of grant. Options under the 1988 Plan are immediately exercisable upon grant and will expire five years from the date of grant. Future grants of options under the 1988 Plan can only be made to Directors other than the Company's current Directors. Options under the 1993 Plan are exercisable six months after date of grant, provided that the Company's stock price equals or exceeds $12.50 per Common Share for ten consecutive trading days. Options under the 1993 Plan expire ten years from the date of grant. 28 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8 - COMMON STOCK (continued) The following tabulation summarizes changes under the Company's Stock Option Plans for Non-Employee Directors during the years ended December 31, 1994, 1993 and 1992.
------------------------------------------------------------------------------------------------------------- 1994 1993 1992 -------------------------------------------------------------------------------- Number Of Number Of Number Of Options Price Range Options Price Range Options Price Range -------------------------------------------------------------------------------- Options Outstanding: Beginning of year 60,000 $8 3/16 60,000 $11 5/16 60,000 $11 5/16 Granted -- 60,000 8 3/16 -- Exercised -- -- -- Expired -- (60,000) 11 5/16 -- -------------------------------------------------------------------------------- End of year 60,000 8 3/16 60,000 8 3/16 60,000 11 5/16 -------------------------------------------------------------------------------- Exercisable at end of year: Currently exercisable -- -- 60,000 Exercisable if Common Stock trades at $12.50 per share or above 60,000 60,000 -- -------------------------------------------------------------------------------- Total 60,000 60,000 60,000 -------------------------------------------------------------------------------- Available for grant at end of year 80,000 80,000 20,000 ================================================================================
The aggregate option price for all outstanding options at December 31, 1994, 1993 and 1992 was $2,359,000, $2,508,000 and $2,129,000, respectively. At the time options are exercised, the common stock account is credited with the par value of the shares issued and additional paid-in capital is credited with the cash proceeds in excess of par value. The Company's Stock Option Plans permit the grant of both incentive stock options and nonstatutory stock options. Restricted Stock Plan In 1985 and 1984, the Company sold 65,000 shares and 75,000 shares, respectively, of Treasury Stock to an officer of the Company at a price of $1.00 per share. The shares were sold subject to forfeiture and restrictions on disposition under conditions as defined in the Restricted Stock Purchase Agreements between the Company and the officer. As of December 31, 1994, the restrictions on all 140,000 shares have been released. Compensation expense was recorded in the periods benefitted as the difference between the fair market value on the date of sale and the sale price. During 1993 and 1992, total shares of 15,000 and 16,000, respectively, were released from restriction. 29 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9 - DISCONTINUED OPERATIONS On December 11, 1992, the Company sold its Metal Crown Business for a cash payment of approximately $7,200,000. The sale of the Metal Crown Business resulted in a pre-tax loss in 1992 of $3,000,000 ($2,600,000 after-tax or $0.71 per common share). On February 28, 1992, the Company sold its Commercial Glass Container Business for a cash payment of approximately $68,000,000. The sale of the Commercial Glass Container Business resulted in a pre-tax loss in 1991 of $4,859,000 ($2,982,000 after-tax or $0.81 per common share). The results of the discontinued operations have been reported separately in the Consolidated Statements of Earnings (Loss). Summarized results of the discontinued operations for the year ended December 31, 1992, are as follows:
---------------------------------------------------------------------- 1992 ---------------------------------------------------------------------- (in thousands) Net sales $ 37,690 Costs and expenses 41,352 Allocated interest expense 726 -------- Loss before income taxes (4,388) Benefit for income taxes (1,704) -------- Loss from discontinued operations (2,684) Loss on sale of Metal Crown Business (2,600) -------- Total loss related to discontinued operations $ (5,284) ========
Interest expense was allocated to the Commercial Glass Container Business based upon the ratio of the Commercial Glass Container Business net assets to total Company net assets. NOTE 10 - RENTAL EXPENSE AND LEASE COMMITMENTS The Company occupies certain manufacturing facilities, warehouse facilities and office space and uses certain automobiles, machinery and equipment under noncancelable lease arrangements. Rent expense related to continuing operations under these agreements was $3,085,000, $3,008,000 and $2,864,000 in 1994, 1993 and 1992, respectively. 30 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - RENTAL EXPENSE AND LEASE COMMITMENTS (continued) At December 31, 1994, the Company was obligated under various noncancelable leases. Calendar year minimum rental commitments under the Company's leases are as follows:
---------------------------------------------------------------------------- Total Real Personal Years Ended December 31, Commitment Property Property ---------------------------------------------------------------------------- (in thousands) 1995 $ 3,363 $ 2,682 $681 1996 3,409 3,082 327 1997 3,276 3,082 194 1998 3,175 3,062 113 1999 3,142 3,077 65 2000 through 2008 22,866 22,866 --
Real estate taxes, insurance and maintenance expenses are obligations of the Company. Generally, in the normal course of business, leases that expire will be renewed or replaced by leases on other properties. NOTE 11 - COMMITMENTS AND CONTINGENCIES In connection with the Company's Workers' Compensation insurance programs, the Company has pledged a certificate of deposit in the amount of $900,000 to secure surety bonds. The Company's estimate of its ultimate liability relating to these programs has been reflected on the Company's consolidated balance sheet as a liability. The Company has been designated by the Environmental Protection Agency as a potentially responsible party to share in the remediation costs of several waste disposal sites. Pursuant to the sale of the Metal Crown Business, the Company has indemnified the buyer for certain environmental remediation costs. In addition, pursuant to the sale of the Commercial Glass Container Business, the Company has indemnified the buyer for certain environmental remediation costs and has retained ownership of certain real property used in the Commercial Glass Container Business which may require environmental remediation. During 1994, the Company made cash payments related to environmental remediation of $974,000. As of December 31, 1994, the Company has accrued a reserve of approximately $1,100,000 for the expected remaining costs associated with environmental remediation described above and in connection with its current manufacturing plants. The amount of the reserve was based in part on an environmental study performed by an independent environmental engineering firm. The Company believes that this reserve is adequate. NOTE 12 - INDUSTRY SEGMENT INFORMATION The Company operates in two industry segments, Plastic Products and Consumer Products. Operations in the Plastic Products segment involve: 1) the manufacture and sale of a variety of plastic products including child-resistant closures, tamper-evident closures, prescription packaging products, jars and other plastic closures and containers; and 2) the sale of glass prescription products. Operations in the Consumer Products segment involve: 1) the manufacture and sale of caps and lids for home canning, and 2) the sale of glass jars and a line of pickling spice and pectin products for home canning, iced tea tumblers and beverage mugs. Intersegment sales are not material. No customer accounted for more than 10% of net sales from continuing operations in 1994, 1993 or 1992. Segment earnings is income from continuing operations before general corporate expenses, interest expense, interest and other income and provision (benefit) for income taxes. Identifiable assets by industry segment are those assets that are used in the Company's operations in each industry segment. Corporate assets are principally cash and cash equivalents, the deferred income tax asset, land and buildings formerly used as a glass container manufacturing plant that is being held for sale, certificates of deposit and certain intangible assets. 31 21 NOTE 12 - INDUSTRY SEGMENT INFORMATION (continued) A summary of the Company's operations by industry segment follows:
----------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- (in thousands) Net sales: Plastic Products $ 106,792 $ 98,533 $ 92,557 Consumer Products 32,364 28,839 34,053 ----------------------------------------- Total $ 139,156 $127,372 $126,610 ========================================= Segment earnings (loss): Plastic Products $ 12,055 $ 11,428 $ 9,165 Consumer Products (a) 3,213 (2,707) 4,982 ----------------------------------------- Total 15,268 8,721 14,147 General corporate expenses 4,903 4,866 5,212 ----------------------------------------- Earnings from continuing operations before interest and income taxes 10,365 3,855 8,935 Interest expense 4,985 5,680 5,815 Interest and other income (369) (858) (1,293) ----------------------------------------- Earnings (loss) from continuing operations before income taxes $ 5,749 $ (967) $ 4,413 =========================================
(a)The 1993 segment loss for Consumer Products includes a $4,500,000 pre-tax loss associated with the relocation of the Company's home canning cap and lid manufacturing operations. See Note 2 of notes to consolidated financial statements for further information. Identifiable assets, depreciation and amortization and capital expenditures for each segment are as follows:
----------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- (in thousands) Identifiable Assets: Plastic Products $ 84,283 $ 69,834 $ 64,306 Consumer Products 22,782 20,403 12,370 Corporate 16,635 27,112 28,556 ----------------------------------------- Total $ 123,700 $117,349 $105,232 ========================================= Depreciation and amortization: Plastic Products $ 6,946 $ 6,600 $ 5,839 Consumer Products 236 197 204 Corporate 549 567 608 ----------------------------------------- Total $ 7,731 $ 7,364 $ 6,651 ========================================= Capital expenditures: Plastic Products $ 13,906 $ 8,587 $ 6,853 Consumer Products 1,472 1,920 601 Corporate 270 749 905 ----------------------------------------- Total $ 15,648 $ 11,256 $ 8,359 =========================================
32 22 NOTE 13 - CONDENSED QUARTERLY DATA FOR 1994 AND 1993 (UNAUDITED)
----------------------------------------------------------------------------------------------------------- Three Months Ended March 31 June 30 Sept. 30 Dec. 31 ----------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1994 Net sales $29,380 $41,004 $40,624 $28,148 Gross profit 9,961 12,291 12,007 8,541 Net earnings 263 1,599 1,310 232 Preferred stock dividends 207 207 207 208 ------------------------------------------------------- Net earnings applicable to common stockholders $ 56 $ 1,392 $ 1,103 $ 24 ======================================================= Net earnings per common share: Primary $ 0.02 $ 0.38 $ 0.30 $ 0.01 Fully diluted $ 0.02 $ 0.36 $ 0.30 $ 0.01 ======================================================= 1993 Net sales $26,674 $38,113 $34,448 $28,137 Gross profit 8,358 11,371 9,832 8,889 Earnings (loss) from continuing operations (a) (295) 1,398 552 (1,988) Extraordinary loss on retirement of debt (b) -- -- (1,300) -- ------------------------------------------------------- Net earnings (loss) (295) 1,398 (748) (1,988) Preferred stock dividends 207 207 207 208 ------------------------------------------------------- Net earnings (loss) applicable to common stockholders $ (502) $ 1,191 $ (955) $(2,196) ======================================================= Earnings (loss) per common share: Earnings (loss) per common share from continuing operations (a) $ (0.14) $ 0.32 $ 0.09 $ (0.60) Extraordinary loss per common share on retirement of debt (b) -- -- (0.35) -- ------------------------------------------------------- Net earnings (loss) per common share $ (0.14) $ 0.32 $ (0.26) $ (0.60) =======================================================
(a)The loss from continuing operations for the fourth quarter of 1993 includes a $4,500,000 pre-tax loss ($2,754,000 after-tax or $0.75 per common share) associated with the relocation of the Company's home canning cap and lid manufacturing operations and a tax benefit of $369,000 ($0.10 per common share) related to a reduction in the income tax valuation reserve. See Notes 2 and 3 of notes to consolidated financial statements for further information. (b)See Note 6 of notes to consolidated financial statements for information regarding the extraordinary loss on retirement of debt. 33 23
-------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) Net sales $ 139,156 $ 127,372 $ 126,610 $ 125,598 $122,168 ========================================================================== Segment earnings (loss): Plastic Products $ 12,055 $ 11,428 $ 9,165 $ 9,077 $ 8,121 Consumer Products (a) 3,213 (2,707) 4,982 1,804 (294) -------------------------------------------------------------------------- Total 15,268 8,721 14,147 10,881 7,827 General corporate expenses 4,903 4,866 5,212 5,568 6,484 -------------------------------------------------------------------------- Earnings from continuing operations before interest and income taxes $ 10,365 $ 3,855 $ 8,935 $ 5,313 $ 1,343 ========================================================================== Earnings (loss) from continuing operations before income taxes (a) $ 5,749 $ (967) $ 4,413 $ 1,094 $ (2,873) Provision (benefit) for income taxes (b) 2,345 (634) 1,826 700 (1,132) -------------------------------------------------------------------------- Earnings (loss) from continuing operations 3,404 (333) 2,587 394 (1,741) Earnings (loss) from discontinued operations (c) -- -- (5,284) (2,973) 489 Extraordinary loss on retirement of debt (d) -- (1,300) -- -- -- -------------------------------------------------------------------------- Net earnings (loss) 3,404 (1,633) (2,697) (2,579) (1,252) Preferred stock dividends 829 829 829 829 829 Net earnings (loss) applicable to common stockholders $ 2,575 $ (2,462) $ (3,526) $ (3,408) $ (2,081) ========================================================================== Earnings (loss) per common share: Earnings (loss) per common share from continuing operations (a) (b) $ 0.70 $ (0.32) $ 0.48 $ (0.12) $ (0.70) Earnings (loss) per common share from discontinued operations (c) -- -- (1.44) (0.81) 0.13 Extraordinary loss per common share on retirement of debt (d) -- (0.35) -- -- -- -------------------------------------------------------------------------- Net earnings (loss) per common share $ 0.70 $ (0.67) $ (0.96) $ (0.93) $ (0.57) ========================================================================== Cash dividends per common share $ -- $ -- $ -- $ -- $ .33 ==========================================================================
(a)The 1993 segment loss for Consumer Products includes a $4,500,000 pre-tax loss ($2,754,000 after-tax or $0.75 per common share) associated with the relocation of the Company's home canning cap and lid manufacturing operations. See Note 2 of notes to consolidated financial statements for further information. (b)The benefit for income taxes for 1993 includes a tax benefit of $369,000 ($0.10 per common share) related to a reduction in the income tax valuation reserve. See Note 3 of notes to consolidated financial statements for further information. (c)See Note 9 of notes to consolidated financial statements for information regarding discontinued operations. (d)See Note 6 of notes to consolidated financial statements for information regarding the extraordinary loss on retirement of debt. 34 24
-------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------- (in thousands) Net property, plant and equipment $ 48,341 $ 40,424 $ 36,383 $ 34,395 $ 36,240 Depreciation and amortization 7,731 7,364 6,651 6,209 6,208 Capital expenditures (e) 15,648 11,256 8,359 4,391 6,980 Total assets 123,700 117,349 105,232 165,883 165,614 Senior long-term debt 50,000 50,000 -- 55,647 52,607 Subordinated long-term debt -- -- 40,000 40,000 40,000 ========================================================================= Stockholders' equity before pension adjustment $ 38,260 $ 34,899 $ 36,464 $ 38,338 $ 40,091 Excess of additional pension liability over unrecognized prior service cost, net of tax benefits (5,207) (6,835) -- -- -- ------------------------------------------------------------------------- Stockholders' equity $ 33,053 $ 28,064 $ 36,464 $ 38,338 $ 40,091 ========================================================================= Weighted average number of common shares outstanding 3,674 3,669 3,675 3,675 3,675 =========================================================================
(e)During 1991 and 1990, in addition to the capital expenditures shown above, the Company entered into long-term operating leases for manufacturing equipment costing $1,623,000 and $1,331,000, respectively. 35 25 RESULTS OF OPERATIONS -- 1994 COMPARED TO 1993 Net sales of the Company increased to $139,156,000 in 1994 from $127,372,000 in 1993. Net sales of the Plastic Products Business increased 8.4% to $106,792,000 in 1994 from 1993. The Company's plastic products manufacturing facilities operated at approximately 74% of capacity during 1994. The Plastic Products Business manufactures a variety of plastic closures, prescription packaging products, bottles and jars. Although unit sales of these products have generally increased in recent years, sales and profitability of these products could be affected in the future by the availability and pricing of resin. During 1994, the average cost per pound of polypropylene, the primary resin used by the Plastic Products Business, increased 31%. The impact of this increase was largely mitigated by the ability of the Plastic Products Business, consistent with industry practice, to pass-through resin cost increases for all product lines except the prescription packaging product line. The higher resin costs did reduce 1994 results in the prescription packaging product line. Net sales of the Consumer Products Business increased 12.2% to $32,364,000 in 1994 compared to 1993 due primarily to higher unit sales as a result of favorable growing conditions as compared to the adverse growing conditions experienced during 1993. During August 1994, the Company completed the relocation of its home canning cap and lid manufacturing operations to Jackson, Tennessee from Chicago, Illinois. The new facility is expected to result in improved efficiencies and cost reductions of approximately $3,000,000 pre-tax per year ($1,836,000 after-tax, or 50 cents per common share per year). In anticipation of the relocation, the Company produced home canning caps and lids in excess of normal requirements. As a result, the Company will not realize significant earnings improvement from the relocation until 1996, when inventories and production volume approach normal levels. During August through December of 1994, the Company's cap and lid manufacturing facility located in Jackson, Tennessee operated at approximately 26% of capacity. This level of operations primarily resulted because the new plant was in its start-up phase. Home canning supplies sales of the Consumer Products Business are dependent upon favorable growing conditions. In addition, the Company believes that the demand for home canning supplies has declined in recent years. If this decline were to increase materially, it could have an adverse effect on the Company. Cost of sales of the Company increased to $96,356,000 in 1994 compared to $88,922,000 in 1993 primarily due to higher unit sales and higher resin costs. Gross profit as a percent of net sales increased to 30.8% for 1994 as compared to 30.2% for 1993. Selling, warehouse, general and administrative expenses increased $2,340,000 or 7.8% during 1994, as compared to 1993, primarily due to higher selling expenses, additional employees and salary and wage increases. The Company recorded a pre-tax reserve of $4,500,000 in 1993 for the expected costs associated with the relocation of the home canning cap and lid manufacturing operations. The pre-tax loss consisted primarily of accruals for i) the early recognition of retiree health care and pension expense, severance, workers' compensation costs and insurance continuation costs of approximately $2,500,000, ii) asset retirement and related facility closing costs of approximately $1,000,000 and iii) moving and relocation costs of approximately $700,000. In 1994, the Company made cash payments related to such accruals for i) the early recognition of retiree health care and pension expense, severance, workers' compensation costs and insurance continuation costs of approximately $1,500,000, ii) asset retirement and related facility closing costs of approximately $600,000, iii) moving and relocation costs of approximately $600,000 and iv) other costs of approximately $300,000. In addition, during 1994, approximately $300,000 was charged against such accruals related to the book value of fixed assets retired. The remaining accruals primarily relate to retiree health costs and pensions which will be paid over a number of years. Segment earnings of the Plastic Products Business, the larger of the Company's two businesses, increased $627,000 to $12,055,000 in 1994 compared to $11,428,000 in 1993 primarily due to higher sales. Segment earnings of the Consumer Products Business increased to $3,213,000 in 1994 compared to $1,793,000 in 1993, excluding the loss on plant relocation in 1993, due primarily to higher sales as a result of favorable growing conditions. 36 26 Earnings before interest and income taxes increased $2,010,000 to $10,365,000 in 1994 compared to $8,355,000 in 1993, excluding the loss on plant relocation in 1993, due primarily to higher earnings in both the Consumer Products and Plastic Products Businesses. Net interest expense decreased $206,000 during 1994, as compared to 1993, as a result of a refinancing in 1993. The increase in the income tax provision in 1994 compared to 1993 is due to higher pre-tax earnings and the recognition in 1993 of an income tax benefit of $369,000 related to a reduction in the income tax valuation reserve. During 1993, the Company incurred an after-tax loss of $1,300,000 in connection with the refinancing on September 21, 1993 of its 13% Subordinated Notes and the termination of its revolving credit facility. The extraordinary loss included interest expense on the 13% Subordinated Notes from September 21, 1993 through December 15, 1993 (the date on which the Subordinated Notes were redeemed at par) and the write-off of unamortized debt fees and related costs. Due to competitive pressures, there are occasions when the Company is unable to pass-through to customers the full extent of cost increases. Other than the inability on all occasions to pass on cost increases, inflation and changes in prices did not have a material effect on the Company's results of operations. RESULTS OF CONTINUING OPERATIONS -- 1993 COMPARED TO 1992 Net sales of the Company increased to $127,372,000 in 1993 from $126,610,000 in 1992. Net sales of the Plastic Products Business increased 6.5% to $98,533,000 in 1993 from 1992. The Company's plastic products manufacturing facilities operated at approximately 83% of capacity during 1993. Net sales of the Consumer Products Business decreased 15.3% to $28,839,000 in 1993 compared to 1992 due primarily to lower unit sales as a result of adverse growing conditions in many areas of the country where the Company markets home canning supplies. The cap and lid manufacturing facility of the Consumer Products Business operated at approximately 76% of capacity in 1993. Cost of sales of the Company increased slightly to $88,922,000 in 1993 compared to $88,730,000 in 1992. Selling, warehouse, general and administrative expenses increased 4.0% to $30,095,000 in 1993 compared to $28,945,000 in 1992. Earnings from continuing operations before interest, income taxes and the loss on plant relocation decreased $580,000 to $8,355,000 in 1993 from $8,935,000 in 1992, due primarily to lower earnings in the Consumer Products Business. Segment earnings of the Plastic Products Business, the larger of the Company's two businesses, increased 25% to $11,428,000 in 1993, compared to $9,165,000 in 1992, primarily due to higher sales. Segment earnings of the Consumer Products Business, excluding the loss on plant relocation, declined to $1,793,000 in 1993, compared to $4,982,000 in 1992, due primarily to lower sales as a result of adverse growing conditions. The decrease in the income tax provision in 1993 compared to 1992 is due to lower pre-tax earnings and the recognition of an income tax benefit of $369,000 related to a reduction in the income tax valuation reserve. LIQUIDITY AND CAPITAL RESOURCES During 1994, the principal use of cash flow was to fund investing activities, primarily capital expenditures of $15,649,000, payments associated with the relocation of the home canning operations of $3,005,000 and other payments related to discontinued operations of $2,598,000. Cash flow was provided through the reduction of the Company's cash balances of $9,068,000, cash from operations of $6,425,000 and cash from financing activities of $5,457,000. During 1993, the principal use of cash flow was to fund investing activities, primarily capital expenditures of $11,256,000 and payments associated with discontinued operations of $2,500,000. Cash flow was provided through the reduction of the Company's cash balances of $7,922,000 and cash from financing activities of $7,563,000. During 1993, the Company sold $50,000,000 principal amount of unsecured Senior Notes to a group of insurance companies and used a portion of the proceeds from that sale to redeem all of the $40,000,000 principal amount of 13% Subordinated Notes. 37 27 During 1992, the Company used primarily all of the $67,719,000 received from the sale of its Commercial Glass Container Business to repay all amounts outstanding under the Company's then-existing bank credit agreements and ESOP bank loan agreements, and such agreements were terminated. Other sources of cash flow during 1992 were $7,208,000 from the sale of the Metal Crown Business, $6,709,000 from the Company's continuing operations and $5,000,000 from the liquidation of a long-term certificate of deposit which had been used as collateral under a letter of credit. Other uses of cash flow during 1992 were $13,648,000 related to the Company's discontinued operations and $8,359,000 to fund capital expenditures for its continuing operations. During 1994 and 1993, inventories increased by $6,258,000 and $5,712,000, respectively, due primarily to a) increases in inventories of home canning caps and lids in anticipation of the relocation of the home canning cap and lid plant and as a result of low sales levels in 1993, and b) increases in inventories of the Plastic Products Business due to higher quantities and costs of resin, and higher quantities of finished goods. It is anticipated that total inventories will decline in 1995. Capital expenditures of approximately $16,000,000 are planned for 1995. Since the third quarter of 1990, the Company has not declared any dividends on its Common Stock. The Company's Senior Note Agreement limits the payment of dividends on Common Stock. Under the most restrictive covenant of such agreement, $500,000 was available for the payment of dividends on Common Stock as of December 31, 1994. At December 31, 1994, the Company had two unsecured $10,000,000 short-term lines of credit to provide for the seasonal working capital needs of the Company. At December 31, 1994, the Company had $5,500,000 borrowed under the lines of credit. The Company had no borrowings outstanding under its working capital credit facilities as of December 31, 1993 or 1992. In January 1995, the Company entered into a two-year agreement with a bank to sell its trade accounts receivable on a nonrecourse basis. Under the facility, the maximum amount that can be advanced to the Company pursuant to the sale of trade accounts receivable at any time is $5,000,000 through April 30, 1995, and $10,000,000 thereafter. The Company retains collection and service responsibility, as agent for the purchaser, over any receivables sold. This facility reduced the committed amount of one of the lines of credit to $5,000,000 through April 30, 1995, at which time the line of credit is terminated. In February 1995, the commitment of the other line of credit was extended to April 30, 1996. The ratio of current assets to current liabilities at December 31, 1994 and 1993 was 2.5 and 3.1, respectively. The decline in the ratio of current assets to current liabilities at December 31, 1994, compared to December 31, 1993, is due to the $5,500,000 of short-term borrowings outstanding at December 31, 1994. At December 31, 1994 and 1993, the ratio of total debt to total capitalization was 62.7% and 64.1%, respectively. The Company has recorded deferred income tax assets of $4,046,000 on its Consolidated Balance Sheet as of December 31, 1994. In order to fully realize this deferred income tax asset, the Company will need to generate future taxable income of at least $24,000,000 prior to expiration of net operating loss carryforwards which will begin to expire in 2006. Based upon the Company's recent pre-tax earnings, adjusted for significant nonrecurring items, and projections of future taxable income over the period in which the deferred income tax assets are deductible, management believes it is more likely than not that the Company will realize the benefit of the deferred income tax asset. There can be no assurance, however, that the Company will generate any specific level of continuing earnings. At December 31, 1994, the Company had unused sources of liquidity consisting of cash and cash equivalents of $2,261,000, unused committed credit under the bank lines of credit of $14,500,000 of which $10,404,000 could be borrowed under the terms of the Company's Senior Note Agreement, a tax net operating loss carryforward of $4,524,000, a minimum tax credit carryforward of $1,522,000 and other tax credit carryforwards of $308,000. The Company believes that its financial resources, including internally generated funds and amounts available under its receivables facility and line of credit, are adequate to meet its foreseeable needs. 38 EX-21.1 11 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES
NAME STATE OF INCORPORATION ---- ---------------------- SANTA FE PLASTIC CORPORATION CALIFORNIA
EX-23.1 12 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Kerr Group, Inc.: We consent to the incorporation by reference in the Registration Statement No. 2-92721 on Form S-3, Registration Statement No. 33- 3517 on Form S-3, Registration Statement No. 33-18463 on Form S-8 and Registration Statement No. 33-31347 on Forms S-3 and S-8 of Kerr Group, Inc. (Kerr) of our report dated February 28, 1995 relating to the consolidated balance sheets of Kerr and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of earnings (loss), common stockholders' equity and cash flow and related schedule for each of the years in the three-year period ended December 31, 1994, which is incorporated by reference in the December 31, 1994 annual report on Form 10-K of Kerr. Our report refers to a change in Kerr's method of accounting for postretirement benefits other than pensions and income taxes in 1993. KPMG Peat Marwick LLP Los Angeles, California March 29, 1995 EX-27 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 2,261 0 16,482 170 34,290 57,389 102,847 54,506 123,700 22,807 50,000 2,110 0 9,748 21,195 123,700 139,156 139,525 96,356 96,356 32,435 0 4,985 5,749 2,345 3,404 0 0 0 3,404 0.70 0.70