-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VvDckG69eWBoyInqXYePg4MouIhKn4bqxbpP0NimFtJYxHPuygHbgq14E7hw9HX7 uQ5mUNEM4LwFX+2EO6tpAA== 0000950152-99-006055.txt : 19990716 0000950152-99-006055.hdr.sgml : 19990716 ACCESSION NUMBER: 0000950152-99-006055 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONARCH MACHINE TOOL CO CENTRAL INDEX KEY: 0000067532 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 344307810 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-01997 FILM NUMBER: 99665062 BUSINESS ADDRESS: STREET 1: 2600 KETTERING TOWER STREET 2: PO BOX 668 CITY: DAYTON STATE: OH ZIP: 45423 BUSINESS PHONE: 5134924111 MAIL ADDRESS: STREET 1: 615 N OAK ST STREET 2: PO BOX 668 CITY: SIDNEY STATE: OH ZIP: 45365 8-K 1 THE MONARCH MACHINE TOOL COMPANY 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): June 30, 1999 The Monarch Machine Tool Company -------------------------------- (Exact name of Registrant as specified in its charter) Ohio 1-1997 34-4307810 ---- ------ ---------- (State or other jurisdiction of (Commission (IRS Employer incorporation or organization) File Number) Identification No.) 2600 Kettering Tower, Dayton, OH 45423 -------------------------------- ----- (Address of principal executive offices) (Zip code) 937-910-9300 ------------ (Registrant's telephone number including area code) Not applicable -------------- (Former name and former address, if changed since last report) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On May 13, 1999, The Monarch Machine Tool Company (the "Company") and the stockholders ("Sellers") of Precision Industrial Corporation ("Precision"), a Delaware corporation, which is the parent of Herr-Voss Industries, Inc. and its subsidiary Herr-Voss Corporation ("Herr-Voss"), entered into a Stock Purchase Agreement (the "Agreement"). A copy of the Agreement is Exhibit 2.1 to this Report. Pursuant to the Agreement, on June 30, 1999, the Company purchased all of the outstanding capital stock of Precision from Sellers. For the Precision stock, the Company paid the following: (i) $39,295,000 paid in cash to Sellers at the closing of the transaction on June 30, 1999 (the "Closing"); (ii) 500,000 common shares of Monarch were issued to Sellers at the Closing; and (iii) Monarch's 12% Junior Subordinated Note in the principal amount of $15,000,000 due in full on December 31, 2007 (the "12% Subordinated Note") and its 8% Special Junior Subordinated Note in the principal amount of $840,000 due June 30, 2002 (the "Special Subordinated Note") were issued to Sellers. The purchase price of the stock is also subject to a possible adjustment based on the final balance sheet of Precision at the close of business on June 30, 1999. As additional consideration to Sellers for accepting Monarch's 12% Subordinated Note, Monarch issued Sellers at the Closing warrants to purchase 100,000 common shares of Monarch at a warrant exercise price of $7.75 per share, subject to adjustment. The Warrants are not exercisable before June 30, 2000 and expire on June 30, 2009. In addition, Monarch agreed that if the 12% Subordinated Note is not paid off by June 30, 2000, it will issue to Sellers warrants to purchase an additional 150,000 Monarch common shares at the lower of $7.75 or the market price of such shares on June 30, 2000. Warrants to purchase an additional 50,000 shares will be issued on a similar basis on each of October 2, 2000, January 2, 2001, April 2, 2001, July 2, 2001, and October 1, 2001 if the 12% Subordinated Note continues to be outstanding as of those dates. If the 12% Subordinated Note is not paid off by September 28, 1999, Sellers have the option of nominating two persons to serve on Monarch's Board of Directors. Herr-Voss and its subsidiaries, with annual sales of $81 million for their fiscal year ended March 31, 1999, design and manufacture metal coil processing lines, leveling rolls and components, and also provide a full range of roll reconditioning services to the flat rolled metal industry. The Company intends to continue to operate this business. In connection with the purchase, the Company entered into the Credit Agreement, dated June 30, 1999 (the "Credit Agreement"), among the Company, the lenders which are parties to the Credit Agreement and ING (U.S.) Capital LLC, as administrative agent for the Lenders and as issuing lender. The Credit Agreement provides for a seven-year, $50,000,000 term loan, a seven and a half-year term loan of $20,000,000, and a seven-year revolving credit facility of $30,000,000. On the Closing date, Monarch used all of the proceeds of the term loans and $16,000,000 borrowed under the revolving credit facility as follows: $39,295,000 to fund the cash portion of the purchase price of the Precision stock; $25,450,000 to pay off all of Precision's and its subsidiaries indebtedness for borrowed money; and $18,200,000 to pay all of Monarch's then existing indebtedness for borrowed money; and $3,055,000 to pay for costs associated with the 1 3 purchase of Precision and obtaining the Credit Agreement. The Credit Agreement is filed as Exhibit 4.1 to this Report and reference is made to such amendment for additional information. There is no material relationship between the Sellers and the Company or any affiliate, director, or officer of the Company or any associate of any director or officer of the Company 2 4 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired. Following are the audited consolidated financial statements and related notes thereto of Precision for the years ended March 31, 1999 and 1998 and Salem Group, Inc. (the former name of Precision) for the three months ended March 31, 1997 and December 31, 1996. Precision Industrial Corporation and Subsidiaries ------------------------------------------------- (1) Report of Independent Public Accountants, dated May 20, 1999. (2) Consolidated Balance Sheets at March 31, 1999 and 1998. (3) Consolidated Statements of Income for the years ended March 31, 1999 and 1998. (4) Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999 and 1998. (5) Consolidated Statements of Cash Flows for the years ended March 31, 1999 and 1998. (6) Notes to the Consolidated Financial Statements. Salem Group, Inc. ----------------- (7) Report of Independent Public Accountants, dated June 27, 1997. (8) Consolidated Balance Sheets at March 31, 1997 and December 31, 1996. (9) Consolidated Statements of Income for the three months ended March 31, 1997 and December 31, 1996. (10) Consolidated Statements of Shareholders' Equity for the three months ended March 31, 1997 and December 31, 1996. (11) Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and December 31, 1996. (12) Notes to the Consolidated Financial Statements. (13) Report of Independent Public Accountants, dated July 13, 1999. 3 5 (b) Pro forma financial information (unaudited) The following pro forma financial information is prepared in connection with the acquisition of Precision Industrial Corporation and Subsidiaries ("Precision") by The Monarch Machine Tool Company ("Monarch") as of June 30, 1999. At December 31, 1998, Monarch acquired GFG Corporation ("GFG") (refer to Form 8-K filed by Monarch on January 14, 1999 and Form 8-K/A filed by Monarch on March 16, 1999). The Pro Forma Condensed Balance Sheet as of March 31, 1999 includes the unaudited accounts of Monarch and the audited accounts of Precision as of that date. The Pro Forma Condensed Consolidated Statement of Earnings for the three months ended March 31, 1999 includes the unaudited results for both Monarch and Precision for that three month period. The Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 1998 includes the reported results of Monarch, the unaudited results of GFG for the year ended December 31, 1998 and the audited results of Precision for the year ended March 31, 1999. (1) Pro Forma Condensed Consolidated Balance Sheet at March 31, 1999. (2) Pro Forma Condensed Consolidated Statement of Earnings for the three months ended March 31, 1999. (3) Notes to the Pro Forma Condensed Consolidated Financial Information as of and for the three months ended March 31, 1999. (4) Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 1998. (5) Notes to the Pro Forma Condensed Consolidated Financial Information for the year ended December 31, 1998. (c) Exhibits - See Index to Exhibits. 4 6 SIGNATURES Pursuant to the requirements 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. THE MONARCH MACHINE TOOL COMPANY Date: July 15, 1999 -------------- By: /s/ Karl A. Frydryk ------------------------------------------ Karl A. Frydryk Vice President and Chief Financial Officer 5 7 INDEX TO EXHIBITS ----------------- (1) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION: 2.1 Stock Purchase Agreement dated May 13, 1999 between The Monarch Machine Tool Company and the Stockholders of Precision Industrial Corporation. (2) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING DEBENTURES: 4.1 Credit Agreement among The Monarch Machine Tool Company and ING (U.S.) Capital LLC, dated as of June 30, 1999. 4.2 Agreement dated June 30, 1999 between The Monarch Machine Tool Company and the Stockholders of Precision Industrial Corporation identified in the Stock Purchase Agreement dated May 13, 1999 and listed on Exhibit 2.1, above. 4.2.1 $15,000,000 12% Special Junior Subordinated Note due December 31, 2007 of the Monarch Machine Tool Company. 4.2.2 Form of Warrant issued pursuant to the Agreement listed as Exhibit 4.2 above. 6 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Precision Industrial Corporation: We have audited the accompanying consolidated balance sheets of Precision Industrial Corporation (a Delaware corporation) and Subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Precision Industrial Corporation and Subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - ------------------------- Pittsburgh, Pennsylvania May 20, 1999 9 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 1999, and 1998 (Dollars in Thousands)
ASSETS 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 2,616 $ 1,742 Cash held in escrow 2,000 2,000 Receivables 10,252 10,044 Contracts-in-progress, net 4,117 5,244 Inventories 5,197 3,833 Income tax benefit 924 1,769 Income tax receivable 1,261 761 Prepaid expenses 2,433 2,178 -------- -------- Total current assets 28,800 27,571 PROPERTY PLANT AND EQUIPMENT, net 16,548 11,193 OTHER ASSETS: Investments in affiliated companies, at equity 1,514 1,314 Income tax benefit 1,566 2,921 Goodwill, net 8,879 6,678 Other assets 214 199 -------- -------- Total assets $ 57,521 $ 49,876 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 1,250 $ 2,420 Accounts payable (including outstanding checks of $291 and $1,233, respectively) 7,728 6,909 Advance billings on contracts, net 6,951 5,129 Accrued payroll and employee benefits 3,091 3,116 Other accrued liabilities 2,986 3,950 Reserves for warranty expense 1,014 1,974 -------- -------- Total current liabilities 23,020 23,498 -------- -------- LONG-TERM DEBT 23,750 20,705 OTHER NONCURRENT LIABILITIES 2,899 2,995 SHAREHOLDERS' EQUITY Redeemable preferred stock, par $.01; 90,000 shares authorized -- -- Common stock, $.01 par value; Voting 554,605 shares authorized, 551,818 shares outstanding 6 6 Nonvoting 1,465,395 shares authorized, 1,144,142 and 1,075,582 shares outstanding, respectively 11 10 Paid-in surplus 6,247 2,133 Retained earnings 4,677 1,982 Unearned deferred compensation (1,989) (260) Cumulative translation adjustment (1,100) (1,193) -------- -------- Total shareholders' equity 7,852 2,678 -------- -------- Total liabilities and shareholders' equity $ 57,521 $ 49,876 ======== ========
The accompanying notes are an integral part of these statements. 10 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended March 31, 1999 and 1998 (Dollars in Thousands)
1999 1998 -------- -------- CONTRACT REVENUES AND ROYALTIES $ 81,212 $ 84,128 COST OF REVENUES 57,792 63,751 -------- -------- Gross Margin 23,420 20,377 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,596 12,427 STOCK GRANT COMPENSATION EXPENSE 3,289 214 NON-RECURRING CHARGES 100 2,210 -------- -------- Operating income 7,435 5,526 OTHER INCOME (EXPENSE) Interest income 114 408 Interest expense (2,446) (2,610) Equity in net earnings (losses) of affiliates 120 (247) Other income, net 128 474 -------- -------- Total other expense (2,084) (1,975) -------- -------- Income from continuing operations before taxes 5,351 3,551 PROVISION FOR INCOME TAXES 2,773 1,512 -------- -------- Income from continuing operations 2,578 2,039 Extraordinary loss, net of taxes of $184 (264) -- Income from discontinued operations, net of taxes of $320 -- 451 Gain on disposal of discontinued operations, net of taxes of $214 and $1,348 in 1999 and 1998 381 416 -------- -------- NET INCOME $ 2,695 $ 2,906 ======== ========
The accompanying notes are an integral part of these statements. 11 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended March 31, 1999 and 1998 (Dollars in Thousands)
COMMON STOCK UNEARNED CUMULATIVE ---------------- PAID-IN RETAINED DEFERRED TRANSLATION VOTING NONVOTING SURPLUS EARNINGS COMPENSATION ADJUSTMENT TOTAL ------- ------- ------- ------- ------- ------- ------- Balance at March 31, 1997 $ 6 $ 10 $ 1,950 ($ 924) ($ 600) ($ 944) ($ 502) Comprehensive income Net Income -- -- -- 2,906 -- -- 2,906 Foreign currency adjustments -- -- -- -- -- (249) (249) Comprehensive income 2,657 Issuance of stock grants -- 1 592 -- -- -- 593 Repurchase of shares -- (1) (440) -- -- -- (441) Share price appreciation, net -- -- 31 -- (31) -- -- Amortization of unearned -- deferred compensation -- -- -- -- 371 -- 371 ------- ------- ------- ------- ------- ------- ------- Balance at March 31, 1998 $ 6 $ 10 $ 2,133 $ 1,982 ($ 260) ($1,193) $ 2,678 Comprehensive income Net Income -- -- -- 2,695 -- -- 2,695 Foreign currency adjustments -- -- -- -- -- 93 93 Comprehensive income 2,788 Issuance of stock grants -- 1 816 -- (601) -- 216 Repurchase of shares -- -- (963) -- 65 -- (898) Share price appreciation, net -- -- 4,261 -- (1,582) -- 2,679 Amortization of unearned deferred compensation -- -- -- -- 389 -- 389 ------- ------- ------- ------- ------- ------- ------- Balance at March 31, 1999 $ 6 $ 11 $ 6,247 $ 4,677 ($1,989) ($1,100) $ 7,852 ======= ======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these statements. 12 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 31, 1999 and 1998 (Dollars in Thousands)
1999 1998 ------- ------- CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 2,695 $ 2,906 Extraordinary loss, net of tax effect 264 -- Adjustments for noncash items: Depreciation and amortization 1,839 2,078 Deferred income taxes 2,169 (903) (Gain) on sale of property and equipment (14) (63) Equity in (earnings)/losses of affiliates, net (120) 247 Stock grant compensation expense 3,289 592 Gain on sale of subsidiaries, net of tax effect (381) (416) Income from discontinued operations, net of tax effect -- (451) Changes in balance sheet accounts (net of effect of acquisitions, discontinued operations and extraordinary items): Receivables 85 (223) Inventories 61 (1,964) Prepaid expenses and other assets (722) (960) Advance billings 1,842 (2,603) Accounts payable and other accrued liabilities (1,625) 1,628 ------- ------- Net cash flows provided by (used for) operating activities 9,382 (132) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (4,478) (2,967) Proceeds from sale of property, plant and equipment 101 481 Purchase of subsidiary, net of cash acquired (4,967) -- Proceeds from sale of subsidiaries, net of cash held in escrow -- 8,491 Change in other assets (114) 1,097 ------- ------- Net cash flows (used for) provided by investing activities (9,458) 7,102 CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit facility (2,300) (6,100) Proceeds from additional term loan borrowings 6,000 2,000 Principal payments under capital leases (24) (26) Term loan debt repayments (1,800) (1,200) Repurchase of common stock (903) (180) ------- ------- Net cash flows provided by (used for) financing activities 973 (5,506) EFFECT OF EXCHANGE RATE CHANGES ON CASH (23) (13) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 874 1,451 CASH AND CASH EQUIVALENTS, Beginning of year 1,742 291 ------- ------- CASH AND CASH EQUIVALENTS, End of year $ 2,616 $ 1,742 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 2,642 $ 2,486 ======= ======= Income taxes paid, net $ 1,908 $ 2,038 ------- -------
The accompanying notes are an integral part of these statements. 13 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 1. ORGANIZATION AND OPERATIONS: --------------------------- Precision Industrial Corporation (a Delaware corporation), is the parent company of Herr-Voss Industries, Inc., a Pennsylvania corporation. Herr-Voss Industries, Inc. is the parent company of Herr-Voss Corporation, H-V Mill Roll Services, Inc., H-V Roll Center, Inc., H-V Asset Management Corp., H-V Equipment Company, H-V Foreign Sales Corp., Herr-Voss Limited, Salem Engineering Company Limited and until July 24, 1997 Salem Furnace Co. Precision Industrial Corporation and its subsidiaries (the Company) are in the business of designing, engineering, manufacturing, and installing heavy industrial equipment primarily for the metals industry. The Company presently operates in one business segment: metal processing equipment. The revenues of the Company's business are derived primarily from long-term contracts, which are negotiated by sales engineers employed by the Company. For the year ended March 31, 1999, one customer accounted for more than 10% of revenues. For the year ended March 31, 1998, no single customer accounted for more than 10% of contract revenues. Export sales may bear additional credit risk beyond normal credit risks and are usually secured by letters of credit or other forms of credit insurance. As a multinational corporation, the Company manages its foreign currency risk through the purchase of forward contracts for the limited number of contracts denominated in foreign currencies. The Company manages its exposure to translation gains and losses by borrowing in local currencies, which reduces such exposure. The Company does not engage in the trading of, or speculation in, derivative instruments. As described in Note 13, the Company sold its Minerals Processing Group on April 4, 1997 for approximately $2.1 million. This transaction was accounted for as discontinued operations as of March 31, 1997. For tax purposes, this transaction was recognized in fiscal 1998. In addition, on June 11, 1997, the Company entered into a stock purchase agreement to sell all of the issued and outstanding capital stock of Salem Furnace Co. for $8.8 million. Also, on September 20, 1997, the Company sold Essex Insurance Co., Ltd. (Essex) for $10,000. The financial results of Salem Furnace Co. and Essex have been accounted for as discontinued operations under APB No. 30 in the accompanying financial statements. On July 24, 1998, H-V Roll Center, Inc., a newly formed subsidiary of Herr-Voss Industries, Inc., acquired certain assets and assumed certain liabilities of Roll Center, Inc. for $5.0 million, excluding cash acquired. The assets acquired consisted primarily of property, plant and equipment and accounts receivable. The fair value of property, plant and equipment acquired was estimated internally based on the Company's experience and knowledge of the industry. No independent appraisal was performed. In management's opinion, any difference between the estimated value of property, plant and equipment acquired and the fair value as of the acquisition date would not have a material impact on the financial statements. The excess of the purchase price over the estimated fair values of the net assets acquired was approximately $2.3 million. This amount is included with goodwill in the accompanying consolidated balance sheet and is being amortized over a period of 40 years. As described in Note 17, the shareholders of the Company have entered into a definitive agreement to sell the Company. 14 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------- The significant accounting policies applied in preparing the accompanying consolidated financial statements are summarized below: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Investments in other than wholly owned and majority owned subsidiaries include two 50%-owned subsidiaries in Japan, both of which are carried at equity. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS: Cash equivalents, which consist primarily of time deposits, are stated at cost, which approximates fair value. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. SHORT-TERM INVESTMENTS: Short-term, interest-bearing investments are those with maturities of one year or less but greater than three months when purchased. These investments are readily convertible to cash and are stated at cost, which approximates fair value. CONTRACT ACCOUNTING: The Company and its subsidiaries account for contracts on the percentage-of-completion method. Based upon the nature of the contract, the Company determines the stage of completion using the relationship of total costs incurred to total estimated costs at completion. Contract costs, as reflected in the consolidated statements of income, include all direct contract costs and overhead, including all related engineering costs. Changes in contract performance, estimated profitability and final contract settlements may result in revisions to costs and revenues which are recognized in the period in which the revisions are determined. If a loss is projected on any contract-in-progress, the entire estimated loss is recognized currently. Warranty reserves are provided during the course of contract performance for costs which may be incurred after completion based on a formula and specific identification basis. INVENTORIES: Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market and consist primarily of raw materials. OPERATING CYCLE: The operating cycles of contracts vary and in some cases are more than one year. In accordance with industry practices, all contract-related accounts are included in current assets and liabilities. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost. Major additions and betterments are capitalized, while maintenance and repairs, which do not significantly improve or extend the lives of the respective assets, are expensed in the year incurred. Property disposed of is removed from the asset and accumulated depreciation accounts, with the gain or loss credited or charged to current income. 15 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) ------------------------------------------ DEPRECIATION AND AMORTIZATION: The Company provides for depreciation over the estimated useful lives of the plant and equipment, employing the straight-line method. License agreements and other purchased technology are amortized on the straight-line method over the remaining years expected to be benefited. GOODWILL: Goodwill (excess of cost over net assets acquired) is being amortized on a straight-line basis over a 40-year period. DEVELOPMENT COSTS: Development costs related to continuing operations are charged to operations as incurred and amounted to $289,000 and $407,000 for the year ended March 31, 1999 and 1998, respectively. INCOME TAXES: The Company, in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," computes deferred tax assets or liabilities based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expense or credit is based on the changes in the assets and liabilities from period to period. See Note 7 for further information concerning income taxes. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS: The financial statements of foreign subsidiaries are translated using the standards established by SFAS No. 52, "Foreign Currency Translation." Accordingly, all assets and liabilities of foreign subsidiaries are translated at year-end exchange rates; revenues and expense accounts are translated at the average exchange rates during the year. Net unrealized translation gains or losses are reflected in the cumulative translation adjustment and are not included in net income. 3. RECEIVABLES: ----------- Receivables at March 31, 1999 and 1998 are net of allowances for doubtful accounts of $102,000 and $83,000, respectively. In accordance with the provision of long-term contracts, certain percentages of billings or amounts are withheld by customers until completion and acceptance of the project. At March 31, 1999 and 1998, these contract retentions amounted to approximately $197,000 and $929,000, respectively. Retentions due are included in current receivables. Based upon prior experience with similar contracts, retentions are expected to be collected within one year. 4. INVESTMENTS IN AFFILIATED COMPANIES: ----------------------------------- NIPPON HERR CO., LTD. --------------------- The Company owns 48,000 shares of capital stock of Nippon Herr Co., Ltd., representing a 50% interest of Nippon Herr's outstanding common stock. Nippon Herr's principal business is the engineering and installation of metal can forming equipment. The Company's equity in net earnings of Nippon Herr was recorded through February 28, 1999 and 1998 based on financial statements at 16 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 4. INVESTMENTS IN AFFILIATED COMPANIES: (CONTINUED) ----------------------------------- that date. The Company accounts for its investment in Nippon Herr using the equity method. The Company recognized $80,000 and ($48,000) relating to its share of the net income (loss) of Nippon Herr for the years ended March 31, 1999 and 1998, respectively. Nippon Herr's total assets were $10.6 million and $7.5 million with stockholder's equity of $2.6 million and $2.3 million, respectively, at February 28, 1999 and 1998. DAIDO HERR ENGINEERING CO., LTD. -------------------------------- The Company owns 400 shares of capital stock of Daido Herr Engineering Co., Ltd., representing a 50% interest of Daido Herr's outstanding common stock. Daido Herr's principal business is the engineering and installation of metal strip processing equipment. The Company's equity in net earnings of Daido Herr was recorded through February 28, 1999 and 1998 based on financial statements at that date. The Company accounts for its investment in Daido Herr using the equity method. The Company recognized $40,000 and ($199,000) relating to its share of the net income (loss) of Daido Herr for the years ended March 31, 1999 and 1998, respectively. Daido Herr's total assets were $11.4 million and $4.7 million with stockholder's equity of $290,000 and $165,000, respectively, at February 28, 1999 and 1998. 5. CONTRACTS-IN-PROGRESS: --------------------- Amounts reflected in the balance sheets as contracts-in-progress consist of costs incurred on contracts-in-progress, plus estimated earnings thereon, less progress billings. Where progress billings exceed costs and earnings, that amount is reflected as advance billings on contracts. At March 31, 1999 and 1998 these amounts were as follows: (Dollars in Thousands) --------------------- 1999 1998 -------- -------- Costs incurred plus estimated earnings $ 45,513 $ 64,594 Less: Progress billings (48,347) (64,479) -------- -------- $ (2,834) $ 115 ======== ======== Presentation in balance sheet: Contracts-in-progress $ 4,117 $ 5,244 Advance billings on contracts (6,951) (5,129) -------- -------- $ (2,834) $ 115 ======== ======== 17 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 6. PROPERTY, PLANT AND EQUIPMENT: ----------------------------- Property, plant and equipment consists of the following at March 31, 1999 and 1998: (Dollars in Thousands) --------------------- 1999 1998 -------- -------- Land $ 301 $ 301 Buildings 7,208 5,216 Equipment, furniture and fixtures 18,405 13,849 -------- -------- 25,914 19,366 Less: Accumulated depreciation (9,366) (8,173) -------- -------- Property, plant and equipment, net $ 16,548 $ 11,193 ======== ======== Property, plant and equipment increased during 1999 primarily due to the acquisition of Roll Center, Inc. (see Note 1) and the construction of an addition to a building at one of the Company's facilities. 7. INCOME TAXES: ------------ The Company and all of its domestic subsidiaries file a consolidated federal income tax return. The parent company and its domestic subsidiaries each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return, and loss companies recognizing benefits to the extent their losses contribute to reduced consolidated taxes. Deferred income taxes are established and segregated for each member of the consolidated group. Similar procedures are followed by the United Kingdom subsidiaries, which file tax returns under available group relief provisions. Income from continuing operations before taxes as shown in the accompanying consolidated statements of income includes the following components: (Dollars in Thousands) 1999 1998 ------- ------- Domestic - United States $ 5,366 $ 3,575 Foreign - non U.S., primarily U.K (15) (24) ------- ------- Income from continuing operations before taxes $ 5,351 $ 3,551 ======= ======= 18 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 7. INCOME TAXES: (CONTINUED) ------------ A reconciliation of the United States federal statutory income tax rate to the effective income tax rate for continuing operations follows: 1999 1998 ------ ------ United States federal statutory rate 34.0% 34.0% State and foreign taxes, net of federal benefit 3.4 6.4 Amortization of goodwill and increases in stock grant compensation expense 19.6 6.2 Valuation allowance 0.2 (1.8) Benefit of Foreign Sales Corporation (1.0) (1.4) Effect of change in deferred tax rate and other, net (4.5) (0.8) ------ ------ Effective book income tax rate 51.7% 42.6% ====== ====== Taxes on income from continuing operations, as shown in the accompanying consolidated statements of income, includes the following components: (Dollars in Thousands) 1999 1998 ------- ------- Currrent provision: Federal $ 444 $ 2,061 State 160 450 Foreign -- (96) ------- ------- Total current tax provision 604 2,415 ------- ------- Deferred provision: Federal 1,993 (748) State 176 (155) ------- ------- Total deferred tax provision 2,169 (903) ------- ------- Provision for income taxes $ 2,773 $ 1,512 ======= ======= 19 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 7. INCOME TAXES: (CONTINUED) ------------ The components of the deferred tax assets and liabilities recorded in the accompanying balance sheets at March 31, 1999 and 1998 were as follows:
(Dollars in Thousands) --------------------------------- Deferred March 31, Expense/ March 31, 1999 (Credit) 1998 Deferred Tax Assets from Continuing Operations: Reserves recorded for: Accruals/reserves not currently deductible $ 3,393 $ 1,118 $ 4,511 Foreign tax credit and net operating / capital loss carryforwards 391 974 1,365 ------- ------- ------- Total deferred tax assets from continuing operations 3,784 2,092 5,876 ------- ------- ------- Deferred Tax Liabilities for Continuing Operations: Excess of book basis over tax basis of plant and equipment (874) 192 (682) ------- ------- ------- Other (189) (115) (304) ------- ------- ------- Total deferred tax liabilities from continuing operations (1,063) 77 (986) Net deferred tax assets from continuing operations 2,721 2,169 4,890 Net deferred tax asset from extraordinary loss 184 (184) -- Net deferred tax liability from discontinued operations (415) 215 (200) ------- ------- ------- Net deferred tax assets $ 2,490 $ 2,200 $ 4,690
The Company's federal income tax returns for the years 1996 through 1998, inclusive, are subject to examination by the Internal Revenue Service. Management believes that adequate tax accruals have been provided for these and subsequent years. Undistributed earnings of non-U.S. subsidiaries amounting to $2.1 million at March 31, 1999 and 1998 were considered by management to be permanent business requirements of these subsidiaries under present circumstances and no provision has been made for the additional U.S. income taxes which might result if these undistributed earnings were remitted to the parent company. Except for the effects of the reversal of net deductible temporary differences, the Company is not aware of any factors which would cause any significant differences between book and taxable income in future years. Although there can be no assurances that the Company will generate any earnings or specific level of continuing earnings in any jurisdiction, management believes that it is more likely than not that the net deductible differences will reverse during periods when the Company generates sufficient net taxable income, and that sufficient taxable income will be generated in foreign 20 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 7. INCOME TAXES: (CONTINUED) ------------ jurisdictions to permit utilization of related credit carryforwards to the extent recorded at March 31, 1999. The Company has $78,000 of foreign tax credit carryforwards which expire from 2000 to 2003. The Company has established a valuation allowance of $52,000 at March 31, 1999 for a portion of its foreign tax credit carryforwards available against U.S. income taxes. In addition, the Company has generated a tax benefit of $884,000 from net operating loss carryforwards as a result of operating losses incurred during the fiscal year ended March 31, 1998 and the three-month period ended March 31, 1997. Due to the Internal Revenue Service limitation on "short-period" losses, a net operating loss carryforward of $312,000, related to the three month period ended March 31, 1997, is reflected in deferred tax assets and is expected to be recognized in full over its remaining four year period. The remaining tax benefit of $572,000 related to the net operating loss carryforward for the fiscal year ended March 31, 1998 was recognized in full in the current year. 8. CREDIT AND BORROWING ARRANGEMENTS: --------------------------------- Long-term debt consists of the following at March 31, 1999 and 1998:
(Dollars in Thousands) ---------------------- 1999 1998 ------- ------- Term loan (with maturity dates from November 1999 through May 2005) $15,000 $10,800 Subordinated notes (with maturity dates through September 29, 2005 and fixed interest rate of 12%) 10,000 10,000 Revolving credit facility (with a maturity date of June 29, 2003 and a variable rate of 7.75% and 8.50% at March 31, 1999 and 1998) -- 2,300 Capital lease obligations -- 25 ------- ------- 25,000 23,125 Less current maturities 1,250 2,420 ------- ------- Long-term debt $23,750 $20,705 ======= =======
Maturities of long-term debt during the five years ending March 31, 2004 and the years thereafter are as follows: 2000 - $1,250,000; 2001 - $2,500,000; 2002 - $2,500,000; 2003 - $2,500,000; 2004 - $2,500,000; and thereafter $13,750,000. The Company and its subsidiaries entered into a credit agreement on September 27, 1996 with a U.S. bank wherein such bank provided a term loan of $15.0 million and a revolving credit facility of $15.0 million for borrowing and the issuance of letters of credit and under which the Company and its subsidiaries were subject to certain restrictions and covenants including, among other provisions, financial requirements related to fixed charge coverage, debt to cash flow coverage and net worth. On October 9, 1998, the Company amended and restated this credit agreement with the amount available under the agreement being increased to $20.0 million in term loans and $20.0 million in a revolving credit facility for borrowing and the issuance of letters of credit. The Company has pledged the capital stock of substantially all of its subsidiaries as collateral against the revolving credit facility and term 21 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 8. CREDIT AND BORROWING ARRANGEMENTS: (CONTINUED) --------------------------------- loan. Interest on the term loan and revolver is variable based on prime and/or LIBOR rates plus add on margin rates, as defined. The Company is required to pay a commitment fee of 0.25% quarterly on the unused portion of the revolving credit facility. Of the term loan outstanding at March 31, 1999, $2.5 million was subject to interest based on a then current prime rate of 7.75% with $8.5 million subject to interest based on a 3-month LIBOR rate of 6.75% and $4.0 million was subject to a 1-month LIBOR rate of 6.69%. The March 31, 1998 term loan balance was subject to interest at the then current prime rate of 8.50%. As of March 31, 1999, the Company had borrowed $15.0 million of its term loan facility while its full revolving credit facility of $20.0 million was available. As of March 31, 1998, the Company had fully utilized its $15.0 million term loan facility and had borrowed $2.3 million under its revolving credit facility. As of March 31, 1999 and 1998, The Company had outstanding letters of credit of $1.8 million and $1.7 million, leaving $18.2 million and $11.0 million of its revolving credit facility available on such dates. In June 1997, the Company refinanced its related party subordinated debt with subordinated debt from another financial institution. The subordinated debt now bears interest at 12% per annum, interest payments are due monthly, with the principal due on September 29, 2005. In connection with this debt agreement, a portion of the Company's stock has been pledged as collateral for the amount outstanding. The Company, in connection with its October 1998 amendment and restatement of its credit agreement, refinanced its existing bank debt and wrote off $264,000 of deferred financing costs (net of taxes of $184,000) which is reflected as an extraordinary loss in the accompanying consolidated statements of income. At March 31, 1999 and 1998, the Company's United Kingdom subsidiaries had outstanding bank guarantees of $105,000 and $138,000 issued by a major bank. All of the amounts utilized have been for guarantees issued to customers of the Company for assuring contract performance related to the operations of its United Kingdom subsidiaries and which are collateralized by standby letters of credit issued by the Company's U.S. bank. 9. COMMITMENTS AND CONTINGENCIES: ----------------------------- The Company, through one U.S. bank, has provided letters of credit totaling $1.8 million at March 31, 1999, all of which are provided under the Company's revolving credit facility, as described in Note 8. The standby letters of credit represent collateral for the following at March 31, 1999: performance and advances on long-term contracts - $750,000; documentary letters of credit - $300,000; and commercial insurance policies - $750,000. The Company purchases surety bonds on an as needed basis. At March 31, 1999, there were $58,000 of such surety bonds outstanding. In accordance with an Agreement and Plan of Merger (the "Agreement") dated June 28, 1996, the Company purchased all outstanding shares of common stock of Salem Corporation. As of March 31, 1999 and 1998, 16,628 and 19,409 shares were still outstanding and have not been tendered by shareholders. The liability for these shares is approximately $416,000 and $485,000, and has been recorded in the Company's consolidated balance sheets. 22 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 9. COMMITMENTS AND CONTINGENCIES: (CONTINUED) ----------------------------- The Company is engaged in ordinary litigation incidental to its business. The Company does not believe that this litigation will have a material adverse effect on its consolidated financial position or results of operations. 10. EMPLOYEE RETIREMENT BENEFITS: ---------------------------- The Company maintains a retirement savings plan, qualified under Section 401(k) of the Internal Revenue Code, for its salaried employees. The Company and its subsidiaries make mandatory contributions to this plan of 3% of base compensation for eligible employees. One of the Company's U.S. subsidiaries has two noncontributory defined benefit pension plans covering certain of their collective bargaining employees. Pension benefits are determined by a fixed benefit formula and number of years of service. Company contributions are computed using the projected unit credit method of funding. The funded status for the fiscal years ended March 31, 1999 and 1998 was as follows: (Dollars in Thousands) 1999 1998 ------- ------- Benefit obligation $ 3,453 $ 3,262 Fair value of plan assets 3,524 3,367 ------- ------- Funded status $ 71 $ 105 ======= ======= (Accrued) benefit cost recognized in the consolidated balance sheets $ (264) $ (188) ======= ======= The following table sets forth weighted-average assumptions as of March 31, 1999 and 1998: 1999 1998 ------ ------ Weighted-average assumptions Discount rate 7.00% 7.00% Expected return on plan assets 7.75% 7.75% 23 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 10. EMPLOYEE RETIREMENT BENEFITS: (CONTINUED) ---------------------------- The following table summarizes the plan activity: (Dollars in Thousands) 1999 1998 -------- -------- Benefit cost $ 76 $ 77 Employer contributions -- 316 Plan participants' contributions -- -- Benefits paid 168 118 Plan assets were invested primarily in common stocks (45%), bonds and mortgages (25%), investment funds (25%) and real estate (5%). The Company's United Kingdom subsidiaries have a contributory defined benefit retirement plan covering substantially all salaried employees. Pension benefits are based primarily on years of service and the employee's average compensation during the three highest consecutive years in the last ten years preceding the date of normal retirement. In addition, employees contribute either 3.0% or 5.0% of their salary, depending upon their position in the Company. The Company contributions are computed using the projected unit credit method of funding, taking into account future salary increases. Plan assets are invested in a pooled collective investment fund comprised of publicly traded stocks and bonds. Based upon the latest actuarial valuation, management estimates that the net periodic pension cost and accrued pension liability are not significant. 11. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: ---------------------------------------------------- The Company provides certain retiree health care benefits covering substantially all domestic salaried employees and certain retiree life insurance covering a portion of its collective bargaining employees. Employees are generally eligible for benefits upon retirement with the Company and completion of ten years of service. The Company does not currently pre-fund these benefits and retains the right to modify or terminate certain of these benefits in the future. 24 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 11. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED) ---------------------------------------------------- The following table illustrates the Company's postretirement benefit funded status as of March 31, 1999 and 1998: (Dollars in Thousands) 1999 1998 ------- ------- Benefit obligation $ 1,359 $ 1,257 Fair value of plan assets -- -- ------- ------- Funded status $(1,359) $(1,257) ======= ======= (Accrued) benefit cost recognized in the consolidated balance sheets $(1,382) $(1,289) ======= ======= Benefit cost $ 126 $ 170 ======= ======= Future benefit costs were estimated assuming medical costs would increase at 7.8% per year, decreasing by 0.56% over each of the next five years and remaining at 5.0% per year thereafter. A 1.0% increase in this annual trend rate would have increased the accumulated postretirement benefit obligation at March 31, 1999 by approximately $94,000 and increased the postretirement benefit expense for the year then ended by approximately $17,000. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation at March 31, 1999 and 1998 was 7.0%. The Company continues to evaluate ways in which it can better manage these benefits and control costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and annual expense. 12. NON-RECURRING CHARGES: --------------------- During the fiscal year ended March 31, 1999, the Company recorded $100,000 of non-recurring charges primarily related to executive search fees and relocation costs net of a reversal of a prior year accrual for non-recurring charges. During the fiscal year ended March 31, 1998, the Company recorded severance charges of $1.1 million. In addition, non-recurring charges amounting to $1.1 million were recognized during the year ended March 31, 1998, which primarily related to expenses incurred for the disposal and liquidation of various subsidiaries. 13. DISCONTINUED OPERATIONS: ----------------------- On April 4, 1997, the Company sold its stock in the Minerals Processing Group to a group of management employees of such group for $2.1 million. The loss on disposal of $2.4 million (net of taxes of $1.8 million) was accounted for as a discontinued operation in the year ended March 31, 1997. 25 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 13. DISCONTINUED OPERATIONS: (CONTINUED) ----------------------- On July 29, 1997, the Company sold its stock in Salem Furnace Co. for $8.8 million, of which $2.0 million is maintained in escrow as of March 31, 1999 in accordance with the stock purchase agreement. In April, 1999 an agreement as to the final distribution of the escrowed funds was reached. The Company, in May 1999, received $2.2 million, including interest on such funds, which resulted in a gain in fiscal 1999 of $381,000 (net of taxes of $214,000) on the disposal of discontinued operations. The July 1997 sale resulted in a gain in fiscal year 1998 of $570,000 (net of taxes of $2.1 million), which includes a $3.0 million allocation of goodwill, that is non-deductible for tax purposes. The goodwill, which resulted from the Agreement and Plan of Merger of Salem Corporation on September 27, 1996, was allocated one-third to Salem Furnace Co. based on their historical pro-rata portion of consolidated earnings before income taxes. Salem Furnace Co. had total assets and liabilities of $15.4 million and $11.5 million, respectively, at March 31, 1997. Revenues and net income for the period April 1 to July 31, 1997 amounted to $12.0 million and $661,000, respectively. In September 1997, Essex was sold at a loss of $313,000 (net of taxes of $729,000). At March 31, 1997, Essex had total assets and liabilities of $4.7 million and $3.2 million, respectively. Based upon management's estimates, certain reserves were recorded in fiscal 1998 related to the transactions described above. Such reserves were reduced in fiscal 1999 to $350,000 to reflect a settlement agreement reached with a party to one of the above transactions. 14. SHAREHOLDERS' EQUITY: -------------------- In accordance with an Agreement and Plan of Merger (the "Agreement") dated June 28, 1996, the Company purchased all outstanding shares of common stock of Salem Corporation and issued 551,818 shares of Class A Voting Common Stock, 948,182 shares of Class B Nonvoting Common Stock and 90,000 shares of Redeemable Preferred Stock. All shares of the Company's stock have a par value of $0.01 per share. In December 1996, in connection with an Employee Stockholder Agreement dated September 27, 1996, the Company issued a total of 99,800 additional shares of Class B Nonvoting Common Stock to various executives, management employees and other key employees. Associated with the acquisition, certain executives entered into employment agreements with the Company which outlined the terms and conditions of employment. Additionally, the Company entered into employee stockholder agreements which provide for participation in the Company's stock plan by certain executives, management employees and other key employees for the issuance of up to 400,000 of additional future shares of Class B - Nonvoting Common Stock of the Company. The additional 400,000 shares were expected to be granted in accordance with the related agreements as follows: a. First 100,000 shares - 42,000 granted in five equal amounts and 58,000 granted upon management recommendation and Board of Directors' approval over the five year period from 1998 to 2001. During fiscal 1998, 42,000 shares were granted. As a result, the Company recognized compensation expense based upon the fair market value at the date of grant. 26 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 14. SHAREHOLDERS' EQUITY: (CONTINUED) -------------------- b. Second 100,000 shares -- 100,000 shares granted based upon management's recommendation and Board of Directors' approval over the five year period from 1997 to 2001. c. Third 200,000 shares -- 200,000 shares granted based on determination by the Board of Directors. The executives who have entered into employment agreements with the Company have also entered into put option agreements which provide the right and option to require the Company to purchase any or all of the securities held by the optionee during the designated put period commencing on September 27, 1999 and ending on December 31, 1999. Certain other rights including call rights and provisions related to the discontinuance of employment are also in place. The stock grants made to employees of 99,800 shares and the 400,000 additional grants, also include certain provisions related to, among others, put rights by the employees, call rights by the Company, provisions upon discontinuance of employment and certain other rights. The put rights generally become exercisable one year after the stock award is granted and vested shares may be exercised at a rate of 20% per year over a five-year period. The initial stock grant of 99,800 shares was recorded based on an estimated fair value of $900,000 as unearned deferred compensation as of December 31, 1996. The unearned deferred compensation was to be amortized as expense over the five-year period between issuance and the private rights exercise period. To the extent that the future fair value of such stock increases above the initial value (as set forth below), additional unearned deferred compensation expense will be recorded for such excess and amortized to expense over the remaining number of years until the put rights become exercisable. However, in connection with the sale of the Minerals Processing Group on April 4, 1997 and Salem Furnace Co. on July 29, 1997, the stock grants held by the employees of such groups immediately vested. Accordingly, the related unamortized deferred compensation of approximately $427,000 was recognized immediately and included in the gain or loss on disposal of discontinued operations. Unearned compensation expense will be amortized to expense over the remaining number of years until the put rights become exercisable. In addition, upon the issuance of additional shares, such shares will be recorded as unearned deferred compensation, based on their estimated fair value at the time of issuance, and amortized to expense over the period beginning one year after issuance and the effective date of the related put right including the five year vesting period during which the shares become exercisable (at 20% per year). These shares may also result in additional future deferred compensation expense to the extent that the future fair value of the stock increases above the initial value at the time of issuance. The value used to establish the price for any shares that the Company is obligated to repurchase under put rights obligations contained in existing stockholder agreements is based on a formula of a multiple of five times earnings before interest, taxes and amortization plus cash minus the total of the average debt (including capitalized leases) and preferred stock (including accrued dividends) at the end of each of the preceding twelve months. However, if other information, such as the pending sale of the Company as described in Note 17, supports a different value then such information will be used by the Board of Directors to determine the value to be used 27 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 14. SHAREHOLDERS' EQUITY: (CONTINUED) -------------------- On January 9, 1998, the Company entered into an employment agreement with a new member of management that provides such person with the option to purchase 50,000 shares of common stock if certain performance criteria, as defined, are met. Upon exercise, the Company will record compensation expense based on the difference between the exercise price and the fair market value. In addition, the agreement provides for the granting of 100,000 shares of common stock to such person, of which 25,000 shares were fully vested upon grant and for which the Company recognized compensation expense of $192,000 based upon the then current fair value. The remaining 75,000 shares granted to such person will vest if certain share values, as defined, are reached by the Company from December 31, 1998 through December 31, 2002. Compensation expense will be recognized in the future based upon the share values, if such defined values have been achieved. All shares issued in connection with the above are subject to an Employee Stockholder Agreement dated February 20, 1998. On August 10, 1998, the Company entered into an employment arrangement with a new member of management that provides such person with the option to purchase 50,000 shares of common stock if certain performance criteria, as defined, are met. Upon exercise, the Company will record compensation expense based on the difference between the exercise price and the fair market value. Upon exercise, these shares are subject to an Employee Stockholder Agreement. In February 1999, several retiring employee shareholders exercised their put rights with respect to 39,050 shares of Class B Nonvoting Common Stock of which 510 shares were repurchased by existing employee shareholders with the remaining 38,540 shares having been redeemed for $963,500 and cancelled by the Company. As more fully described in Note 17, the shareholders of Precision Industrial Corporation have entered into an agreement to sell the Company to Monarch Machine Tool Company. In connection with such sale, any unvested shares held by employees will fully vest resulting in the recognition of compensation expense by the Company of its balance of unearned deferred compensation of $2.0 million, adjusted by any amounts required to recognize the final per share selling price in accordance with the Stock Purchase Agreement between Monarch Machine Tool Company and the Company. The Company also issued 90,000 shares of redeemable Preferred Stock (par value of $0.01 per share) for a total of $9.0 million. Such shares have a liquidation value of $100.00 per share. The Preferred Stock has its own specific rights as set forth in the related legal documents. On March 31, 1997, the Company redeemed the entire $9.0 million of its Preferred Stock and paid the accrued dividend on such shares. The funds for such redemption were provided by additional borrowings of approximately $9.4 million under the Company's existing credit facility. 15. STOCK PLAN: ---------- Effective April 1, 1998, the Board of Directors approved the Precision Industrial Corporation Stock Plan (the "Stock Plan") which provides for restricted stock awards, incentive stock options and non-statutory stock options of up to a total of 150,000 shares of Class B Nonvoting common stock. Specifically, the stock plan provides restricted stock grants for those employees who have been designated to receive 300 shares or less. These grants will vest over 5 years (20% each year) beginning April 1, 1998. For those employees who have been designated to receive an award of more than 300 shares, alternatives will be provided to receive such award as either a restricted stock grant or 28 PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS March 31, 1999 and 1998 ---------- 15. STOCK PLAN: (CONTINUED) ---------- a non-statutory stock option. The non-statutory stock option will vest in the same manner as the restricted stock grant. The option exercise price is the estimated fair market value and will expire after 5 years, but is subject to the conditions and restrictions contained in the Employee Stockholder Agreement dated September 27, 1996 and the Stock Plan. The Board of Directors, on May 18, 1998, awarded 22,500 shares under the stock plan. All employees elected to receive the award as a restricted stock grant. The Company recorded $126,000 in compensation expense related to this stock grant during the year ended March 31, 1999. In addition, on May 15, 1998, certain outside Directors purchased 90,000 shares of Class B Nonvoting common stock at a purchase price of $0.67 per share under the terms associated with such purchases. The purchased shares were 20% vested on the date of purchase with the remaining shares vesting ratably over the next four years on each December 31, subject to continued service and attendance of at least 80% of the Board meetings each year. The Company will record compensation expense for the difference, if any, between the purchase price and the fair market value of the shares over the vesting period. All stock purchased is subject to the terms and conditions of an Employee Stockholder Agreement dated May 15, 1998. 16. MANAGEMENT INCENTIVE PLAN: ------------------------- Precision Industrial Corporation maintains a Management Incentive Plan for its executive officers. The Company expensed $228,000 for this Plan during the fiscal year ended March 31, 1999. Herr-Voss Industries, Inc. maintains a Management Incentive Plan for its executive officers. Amounts previously expensed and unawarded of approximately $167,000 were reversed in the fiscal year ended March 31, 1999. There were no amounts expensed for this Plan for the fiscal year ended March 31, 1998. 17. SUBSEQUENT EVENTS: ----------------- In April, 1999, as a result of the pending sale of the Company, a severance and release agreement was executed between the Company and its President and Chief Executive Officer (also a Director of the Company) whereby the Company agreed to provide such individual with severance pay and benefits through September, 2000. The total cost of such payments is expected to be approximately $1.1 million. Additionally, as part of the severance agreement, the Company vested 15,000 of the 75,000 performance vesting shares, which are more fully described in Note 14. The Company will recognize $375,000 of stock grant compensation expense with respect to these 15,000 shares. The remaining 60,000 performance vesting shares were repurchased by the Company for $1 and were then cancelled. On May 13, 1999, the Company's owners entered into a definitive agreement to sell the company to the Monarch Machine Tool Company for approximately $55.0 million in cash, 500,000 Monarch common shares, and the assumption of approximately $19.0 million of the Company's indebtedness. The Company expects the acquisition to be completed by late June, 1999. 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Salem Group, Inc.: We have audited the accompanying consolidated balance sheets of Salem Group, Inc. (a Delaware corporation) and Subsidiaries as of March 31, 1997, and December 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three-month periods then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statement based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Salem Group, Inc. and Subsidiaries as of March 31, 1997 and December 31, 1996, and the results of their operations and their cash flows for each of the three-month periods then ended, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - ------------------------- Pittsburgh, Pennsylvania June 27, 1997 30 SALEM GROUP, INC. AND SUBSIDIARIES ---------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (DOLLARS IN THOUSANDS) ----------------------
MARCH 31, DECEMBER 31, A S S E T S 1997 1996 ----------- -------- -------- CURRENT ASSETS: Cash and cash equivalents (including restricted cash of $5,872 and $6,034, respectively) $ 7,904 $ 9,853 Restricted short-term investments 750 920 Receivables 16,037 18,677 Contracts-in-progress, net 3,016 6,499 Inventories 4,662 5,007 Income tax benefit 3,184 1,466 Income tax receivable 2,036 1,008 Prepaid expenses 1,476 2,377 Net current assets of discontinued operations 2,074 7,639 -------- -------- Total current assets 41,139 53,446 -------- -------- PROPERTY, PLANT AND EQUIPMENT, at cost 20,484 20,336 Less-Accumulated depreciation 10,310 10,635 -------- -------- Net property, plant and equipment 10,174 9,701 -------- -------- OTHER ASSETS: Investments in affiliated companies, at equity 1,654 1,820 Income tax benefit 2,452 2,195 Goodwill, net 9,858 9,918 Other assets 471 324 -------- -------- Total assets $ 65,748 $ 77,404 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 1,300 $ 1,431 Accounts payable (including outstanding checks of $2,335 and $2,451, respectively) 10,680 13,213 Advance billings on contracts, net 14,677 14,463 Accrued payroll and employee benefits 2,735 3,895 Accrued insurance reserves 1,829 1,759 Other accrued liabilities 2,546 2,695 Reserves for warranty expense 1,614 1,829 -------- -------- Total current liabilities 35,381 39,285 -------- -------- LONG-TERM DEBT 27,275 22,899 OTHER NONCURRENT LIABILITIES 3,074 3,517 MINORITY INTEREST 520 565 SHAREHOLDERS' EQUITY: Redeemable preferred stock, par $.01; 90,000 shares authorized and outstanding -- 9,000 Common stock, $.01 par value; Voting 554,605 shares authorized, 551,818 shares outstanding 6 6 Nonvoting 1,465,395 shares authorized, 1,047,982 and 948,182 shares outstanding, respectively 10 10 Paid-in surplus 1,950 1,950 Retained earnings (924) 1,887 Unearned deferred compensation (600) (900) Cumulative translation adjustment (944) (815) -------- -------- Total shareholders' equity (502) 11,138 -------- -------- Total liabilities and shareholders' equity $ 65,748 $ 77,404 ======== ========
The accompanying notes are an integral part of these statements. 31 SALEM GROUP, INC. AND SUBSIDIARIES ---------------------------------- CONSOLIDATED STATEMENT OF INCOME -------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1996 --------------------------------------------------------------- (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 1997 1996 -------- -------- CONTRACT REVENUES $ 21,772 $ 26,619 COST OF REVENUES 16,836 19,899 -------- -------- Gross income 4,936 6,720 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,620 3,530 -------- -------- Operating income 1,316 3,190 OTHER INCOME (EXPENSE): Interest income 112 174 Interest expense (482) (588) Equity in net earnings of affiliates (68) 39 Other income, net 61 323 -------- -------- Total other expense (377) (52) -------- -------- Income from continuing operations before taxes and minority interest 939 3,138 PROVISION FOR INCOME TAXES (412) (1,012) MINORITY INTEREST, NET 45 (55) -------- -------- Income from continuing operations 572 2,071 (Loss)/income from discontinued operations, net of tax (745) 19 Loss on disposal of discontinued operations, net of tax (2,426) -- -------- -------- NET INCOME $ (2,599) $ 2,090 ======== ========
- -------------- The accompanying notes are an integral part of these statements. 32 SALEM GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
REDEEMABLE UNEARNED CUMULATIVE PREFERRED COMMON STOCK PAID-IN RETAINED DEFERRED TRANSLATION STOCK VOTING NONVOTING SURPLUS EARNINGS COMPENSATION ADJUSTMENT ----- ------ --------- ------- -------- ------------ ---------- BALANCE, September 30, 1996 $ 9,000 $ 6 $ 9 $ 985 $ -- $ -- $ -- Net income -- -- -- -- 2,090 -- -- Dividends declared ($2.25 per preferred share) -- -- -- -- (203) -- -- Aggregate translation adjustment -- -- -- -- -- -- (814) Issuance of stock grants -- -- 1 965 -- (900) -- ------- ------- ------- ------- ------- ------- ------- BALANCE, December 31, 1996 $ 9,000 $ 6 $ 10 $ 1,950 $ 1,887 $ (900) $ (814) ======= ======= ======= ======= ======= ======= ======= Net loss -- -- -- -- (2,599) -- -- Aggregate translation adjustment -- -- -- -- -- -- (130) Redemption of preferred stock $(9,000) -- -- -- -- -- -- Dividends declared (212) -- -- Amortization of unearned deferred compensation -- -- 300 -- ------- ------- ------- ------- ------- ------- ------- BALANCE, March 31, 1997 $ -0- $ 6 $ 10 $ 1,950 $ (924) $ (600) $ (944) ======= ======= ======= ======= ======= ======= =======
- ----------------- The accompanying notes are an integral part of these statements. 33 SALEM GROUP, INC. AND SUBSIDIARIES ---------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1996 --------------------------------------------------------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ------------------------------------------------ (DOLLARS IN THOUSANDS)
March 31, December 31, 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ (2,599) $ 2,090 Adjustments for noncash items - Depreciation and amortization 257 264 Deferred income taxes (246) 1,152 Reserves for warranty expense (215) 27 Earnings of affiliates, net 68 (39) Minority interest (45) 55 Stock grant compensation expense 40 -- Loss on sale of subsidiaries 2,426 -- Changes in balance sheet accounts - Receivables 2,500 (3,311) Contracts-in-progress, net 3,658 2,602 Inventories 345 540 Prepaid expenses 893 426 Income tax receivable (1,028) (1,008) Accounts payable (2,441) (287) Accrued income taxes -- (666) Accrued liabilities (1,228) 1,015 Other noncurrent liabilities (443) 219 Accrued dividends -- (203) Cumulative translation adjustments 155 106 -------- -------- Net cash flows provided by operating activities 2,097 2,770 CASH FLOWS FROM INVESTING ACTIVITIES: Short-term investments 170 783 Investment in affiliates 388 47 Purchases of property, plant and equipment (835) (1,615) Change in net assets of discontinued operations 1,515 106 -------- -------- Net cash flows provided by investing activities 1,238 (679) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (414) -- Redemption of preferred stock (9,000) -- Proceeds from long term debt 11,400 -- Principal payments under capital leases (125) (56) Debt repayments (7,024) (7,855) -------- -------- Net cash flows used by financing activities (5,163) (7,911) EFFECT OF EXCHANGE RATE CHANGES ON CASH (121) (830) NET DECREASE IN CASH AND CASH EQUIVALENTS (1,949) (6,650) CASH AND CASH EQUIVALENTS, Beginning of year 9,853 16,503 -------- -------- CASH AND CASH EQUIVALENTS, End of year $ 7,904 $ 9,853 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid 244 589 Income taxes paid, net 442 1,668
- ---------------- The accompanying notes are an integral part of these statements. 34 SALEM GROUP, INC. AND SUBSIDIARIES ---------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- MARCH 31, 1997 -------------- 1. ORGANIZATION AND OPERATIONS: Salem Group, Inc. (the "Company"), a Delaware corporation, and its wholly-owned subsidiary, SC Acquisition Corporation, a Pennsylvania corporation, were formed in 1996 for the purpose of effecting a merger with Salem Corporation in accordance with the Agreement and Plan of Merger (the "Agreement") dated June 28, 1996. The Agreement resulted in the merger of SC Acquisition Corporation with and into Salem Corporation on September 27, 1996 and resulted in Salem Corporation becoming a wholly-owned subsidiary of the Company. During 1997, the Company changed its fiscal yearend from December 31 to March 31. The accounting principles for a purchase business transaction, as set forth in Accounting Principles Board Opinion No. 16 (APB No. 16), were used to account for the merger. The Company's tangible purchased assets and assumed liabilities were not adjusted as a result of the acquisition, as management believes that the carrying values approximate fair market values. As a result, the purchase price, including merger costs, in excess of the net assets acquired, was assigned to goodwill. The dispositions of certain subsidiary operations, as described later, have been included as a component of purchase accounting. The Company and its subsidiaries are in the business of designing, engineering and installing heavy industrial equipment primarily for the metals, coal and other minerals industries. The Company presently operates in two business segments; metal processing equipment and industrial furnaces. The revenues of the Company's business are derived primarily from long-term contracts which are negotiated by sales engineers employed by the Company. For the three months ended March 31, 1997 and December 31, 1996, no single customer accounted for more than 10% of consolidated contract revenues. For additional information with respect to customers see Note 15. Export sales may bear additional credit risks beyond normal credit risks and are usually secured by letters of credit or other forms of credit insurance. As a multinational corporation, the Company manages its foreign currency risk through the purchase of forward contracts in the limited number of contracts denominated in foreign currencies. The Company manages its exposure to translation gains and losses by borrowing in local currencies, which reduces such exposure. The Company does not engage in the trading of, or speculation in, derivative instruments. As described in Note 11, the Company sold the Minerals Processing Group on April 4, 1997, and has accounted for the group's financial results as a discontinued operation in the accompanying financial statements. In addition, on June 11, 1997, the Company entered into a stock purchase agreement to sell all of the issued and outstanding capital stock of Salem Furnace Company for $8.8 million. The sale will result in an estimated pre-tax gain of $5.2 which will be recognized in fiscal 1998. Refer to Note 15 for financial results of Salem Furnace Company. 35 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Investments in other than wholly-owned and majority-owned subsidiaries include two 50%-owned subsidiaries in Japan and a 40%-owned subsidiary in India, all of which are carried at equity. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results may differ from those estimates. CASH EQUIVALENTS. Cash equivalents, which consist primarily of time deposits, are stated at cost, which approximates market. For purposes of the consolidated statement of cash flows, the Company considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. SHORT-TERM INVESTMENTS. Short-term, interest-bearing investments are those with maturities of one year or less but greater than three months when purchased. These investments are readily convertible to cash and are stated at cost, which approximates fair value. CONTRACT ACCOUNTING. The Company and its subsidiaries account for contracts on the percentage-of-completion method. Based upon the nature of the contract, the Company determines the stage of completion using the relationship of total costs incurred to total estimated costs at completion. Contract costs, as reflected in the consolidated statements of income, include all direct contract costs and overhead, including all related engineering costs. Changes in contract performance, estimated profitability and final contract settlements may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. If a loss is projected on any contract-in-progress, provision is made currently for the entire projected loss. Warranty reserves are provided during the course of contract performance for costs which may be incurred after completion. For contracts where the Company is also licensing the technology, royalty income is recognized in accordance with the terms of the contract. INVENTORIES. Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market and consist primarily of raw materials. OPERATING CYCLE. The operating cycles of contracts vary and in some cases are more than one year. In accordance with industry practices, all contract-related accounts are included in current assets and liabilities. 36 PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at cost. Major additions and betterments are capitalized, while maintenance and repairs which do not significantly improve or extend the lives of the respective assets are expensed in the year incurred. Property disposed of is removed from the asset and accumulated depreciation accounts, with the gain or loss credited or charged to current income. DEPRECIATION AND AMORTIZATION. The Company provides for depreciation over the estimated useful lives of the plant and equipment, employing both straight-line and accelerated methods. License agreements and other purchased technology are amortized on the straight-line method over the remaining years expected to be benefitted. GOODWILL. Goodwill (excess of cost over net assets acquired) is being amortized on a straight line basis over a 40 year period. DEVELOPMENT COSTS. Development costs related to continuing operations are charged to operations as incurred and amounted to $110,000 and $98,000 for the three months ended March 31, 1997 and December 31, 1996. INCOME TAXES. The Company, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" computes deferred tax assets or liabilities based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expense or credit is based on the changes in the assets and liabilities from period to period. See Note 6 for further information concerning income taxes. TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS. The financial statements of foreign subsidiaries are translated using the standards established by the Financial Accounting Standards Board ("FAS No. 52"). Accordingly, all assets and liabilities of foreign subsidiaries are translated at year-end exchange rates; revenue and expense accounts are translated at the average exchange rates during the year. Net unrealized translation gains or losses are reflected in the cumulative translation adjustment and are not included in net income. NEW ACCOUNTING PRONOUNCEMENTS. In 1996, the Company adopted SFAS No. 121 - -"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that the carrying value of long-lived operating assets, when determined to be impaired, be adjusted so as not to exceed the estimated undiscounted cash flows provided by such assets. Statement of Financial Accounting Standards No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of in future periods. The Company also adopted in 1996, SFAS No. 123 "Accounting for Stock Based Compensation" - which recommends, but does not require, that companies change their method of accounting for stock-based compensation plans to one that attributes compensation costs equal to the fair value of a stock-based compensation arrangement over the period service is rendered that qualifies an employee to receive such compensation. Companies not electing to change their method of accounting are required, among other things, to provide additional disclosures which in effect restate a company's results for comparative periods as if the new method of accounting had been adopted. The adoption of these new accounting pronouncements did not have a material effect on the Company's financial condition or results of its operations. 37 In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. The Company has adopted the provisions of this statement effective March 31, 1997 with no impact on the Company's operating or financial position. In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure." The disclosure requirements will have to be adopted by the Company for fiscal year ending March 31, 1998. In June 1997, The FASB issued SFAS No. 130, "Reporting Comprehensive Income." The statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The Company is required to adopt the new standards for fiscal year ending March 31, 1999. 3. RECEIVABLES: Receivables at March 31, 1997 and December 31, 1996 are net of allowances for doubtful accounts of $91,000 and $140,000, respectively. In accordance with the provisions of long-term contracts, certain percentages of billings or amounts are withheld by customers until completion and acceptance of the project. At March 31, 1997 and December 31, 1996, these contract retentions amounted to approximately $1.3 million and $986,000, respectively. Retentions due are included in current receivables. Based upon prior experience with similar contracts, retentions are expected to be collected within one year. 4. INVESTMENTS IN AFFILIATED COMPANIES: NIPPON HERR CO., LTD. The Company owns 48,000 shares of capital stock of Nippon Herr Co., Ltd., representing a 50% interest of Nippon Herr's outstanding common stock at March 31, 1997 and December 31, 1996. Nippon Herr's principal business is the engineering and installation of metal can forming equipment. The Company's equity in net earnings of Nippon Herr was recorded through February 28, 1997 based on financial statements at that date. The Company accounts for its investment in Nippon Herr using the equity method. Equity (loss) income of ($32,000) and $40,000 was recognized in the three months ended March 31, 1997 and December 31, 1996, respectively. Nippon Herr's total assets and stockholder's equity were $8.5 million and $2.4 million, respectively, at February 28, 1997. OTHER Other affiliates consist of Daido Herr Engineering Co., Ltd. and Wesalem Company Pvt. Ltd. The Company uses the equity method to account for these investments. These investments and related operations are not material to the Company. 38 5. CONTRACTS-IN-PROGRESS: Amounts reflected in the balance sheets as contracts-in-progress consist of costs incurred on contracts-in-progress plus estimated earnings thereon less progress billings. Where progress billings exceed costs and earnings, that amount is reflected as advance billings on contracts. At March 31, 1997 and December 31, 1996 these amounts were as follows:
(DOLLARS IN THOUSANDS) ---------------------------- MARCH 31, DECEMBER 31, 1997 1996 --------- --------- Costs incurred plus estimated earnings $ 73,831 $ 80,722 Less-Progress billings (85,492) (88,686) --------- --------- $ (11,661) $ (7,964) ========= ========= Presentation in balance sheets: Contracts-in-progress $ 3,016 $ 6,499 Advance billings on contracts 14,677 14,463 --------- --------- $ (11,661) $ (7,964) ========= =========
6. INCOME TAXES: The Company and all of its domestic subsidiaries file a consolidated federal income tax return. The parent company and its domestic subsidiaries each report current income tax expense as allocated under a consolidated tax allocation agreement. Generally, this allocation results in profitable companies recognizing a tax provision as if the individual company filed a separate return, and loss companies recognizing benefits to the extent their losses contribute to reduced consolidated taxes. Deferred income taxes are established and segregated for each member of the consolidated group. Similar procedures are followed by the Company's United Kingdom subsidiaries, which file tax returns under available group relief provisions. Income for continuing operations before taxes and minority interest as shown in the accompanying consolidated statement of income include the following components:
(DOLLARS IN THOUSANDS) ------------------------ MARCH 31, DECEMBER 31, 1997 1996 ----- ------- Domestic $ (8) $(3,139) Foreign 947 6,277 ----- ------- Income from continuing operations before taxes and minority interest $ 939 $ 3,138 ===== =======
The above amounts include certain intercompany transactions that are or will be reflected in separate U.S. and Non-U.S. tax returns. These intercompany transactions are not taxable in the United Kingdom due to current United Kingdom tax laws and net operating loss carryforwards. However, the effect of these transactions are eliminated in the consolidated financial statements. 39 A reconciliation of the United States federal statutory income tax rate to the effective income tax rate for continuing operations follows:
(DOLLARS IN THOUSANDS) -------------------------- MARCH 31, DECEMBER 31, 1997 1996 ---- ---- United States federal statutory rate 34.0% 34.0% State and foreign taxes, net of federal tax 6.2 2.3 Valuation allowance - (1.0) Loss/(Income) of Bermuda subsidiary upon which no taxes are imposed 4.6 (1.0) Benefit of foreign sales corporation (1.8) (1.5) Other, net (0.8) (0.6) ----- ---- Effective book income tax rate 43.8% 32.2% ===== ====
Taxes on income from continuing operations, as shown in the accompanying consolidated statement of income, include the following components:
(DOLLARS IN THOUSANDS) ------------------------ MARCH 31, DECEMBER 31, 1997 1996 ------ ------- Current provision Federal $ 198 $ (898) State 90 115 Foreign 370 1,052 ------ ------- Total current tax provision 658 269 ------ ------- Deferred provision: Federal (209) 1,561 State ( 37) 275 Foreign - (1,093) ------ ------- Total deferred tax provision (246) 743 ------ ------- Provision for income taxes $ 412 $(1,012) ====== =======
40 The components of the deferred tax assets and liabilities recorded in the accompanying balance sheets at March 31, 1997 and December 31, 1996 and the change in such accounts for the three month period ended March 31, 1997 and December 31, 1996 were as follows:
($ IN THOUSANDS) ------------------------------------------- DEFERRED MARCH 31, EXPENSE/ DECEMBER 31, 1997 (CREDIT) 1996 ------- ------ ------ Deferred Tax Assets: Reserves recorded for- Warranty $ 177 $ - $ 177 Cost after shipment 466 71 537 Compensation 387 (152) 235 Liability claims 224 (89) 135 Vacation pay 297 - 297 Investments 408 - 408 Inventory 192 (10) 182 Self-insurance claims 398 25 423 Postemployment benefits 569 28 597 Business insurance 312 4 316 Foreign tax credit and net operating loss carryforwards 218 - 218 Other 668 (112) 556 Capitalizable merger costs 552 9 561 Valuation allowance (143) - (143) ------- ------ ------ Total deferred tax assets 4,725 (226) 4,499 ------- ------ ------ Deferred Tax Liabilities: Excess of book basis over tax basis of plant and equipment (670) (12) (682) Other (148) (8) (156) ------ ------ ------ Total deferred tax liabilities (818) (20) (838) ------ ------ ------ Net deferred taxes $3,907 $(246) $3,661 ====== ====== ======
Salem Corporation has signed consents to extend the time for the Internal Revenue Service ("IRS") to complete the review of the 1987 through 1992 tax years. Such consents extend the period during which the IRS may assess tax for its federal income tax returns until December 31, 1997. Salem Corporation's federal income tax returns for the years 1987 through 1992, inclusive, are currently being examined by the IRS. Management believes that adequate tax accruals have been provided for these and subsequent years. Undistributed earnings of non-U.S. subsidiaries amounting to $2.3 and $2.1 million at March 31, 1997 and December 31, 1996 were considered by management to be permanent business requirements of these subsidiaries under present circumstances and no provision has been made for the additional U.S. income taxes which might result if these undistributed earnings were remitted to the parent company. However, any decision to remit such earnings in the future in the form of dividends is not expected in the aggregate to result in significant additional income taxes. 41 The Company has generated book pretax income from continuing operations of $939,000 and $3.1 million, for the three month period ended March 31, 1997 and December 31, 1996. Except for the effects of the reversal of net deductible temporary differences, the Company is not aware of any factors which would cause any significant differences between book and taxable income in future years. Although there can be no assurances that the Company will generate any earnings or specific level of continuing earnings in any jurisdiction, management believes that it is more likely than not that the net deductible differences will reverse during periods when the Company generates sufficient net taxable income, and that sufficient taxable income will be generated in foreign jurisdictions to permit utilization of related credit carryforwards to the extent recorded at March 31, 1997 and December 31, 1996. The Company has $218,000 of foreign tax credit carryforwards which expire from 1998 to 2001. The Company has established a valuation allowance of $143,000 at March 31, 1997 and December 31, 1996 for a portion of its foreign tax credit carryforwards available against U.S. income taxes. 7. CREDIT AND BORROWING ARRANGEMENTS: Long-term debt for March 31, 1997 and December 31, 1996 is as follows:
SCHEDULED INTEREST ($ IN THOUSANDS) MATURITY RATE MARCH 31, DECEMBER 31, -------------------------------- ------------------------ 1997 1996 Term Loans 1997-2003 7.5%-9.75% $10,000 $10,716 Related party subordinated notes 2003 10.0% 10,000 10,000 Revolving credit facility 2001 7.093%-8.25% 8,400 3,225 Other debt 1997 5.75%-12.5% - 114 Capital lease obligations 175 275 ------- ------- 28,575 24,330 Less current maturities 1,300 1,431 ------- ------- Long-term debt $27,275 $22,899 ======= =======
Maturities of long-term debt during the five years ending December 31, 2001 and the years thereafter are as follows: 1998 - $1,300,000; 1999 - $1,275,000; 2000 - - $1,200,000; 2001 - $1,200,000; 2002 - $9,600,000; and years thereafter - $14,000,000. In connection with the merger, the Company and its subsidiaries entered into a credit agreement on September 27, 1996 with a U.S. Bank wherein such bank provides a term loan of $15.0 million and a revolving credit facility of $15.0 million for borrowing and the issuance of letters of credit and under which the Company and its subsidiaries are subject to certain restrictions and covenants including, among other provisions, financial requirements related to fixed charge coverage, debt to cash flow coverage and net worth. The Company has pledged the capital stock of substantially all of its subsidiaries as collateral against the revolving credit facility and term loan. Interest on the term loan and revolver is variable based on prime and/or LIBOR rates plus add on margin rates as defined. The Company is required to pay a commitment fee of 0.375% quarterly on the unused portion of the revolving credit facility. As of March 31, 1997, the Company had borrowed $8.4 million under its revolving credit facility and had outstanding letters of credit of $5.4 million, leaving $1.2 million available. At December 31, 1996, the Company, under its revolving credit facility, had borrowed $3.2 million and had outstanding letters of credit of $5.4 million, leaving $6.4 million available. Also, at March 31, 1997 and December 31, 1996 the Company had $5.0 million of its term loan 42 available. At March 31, 1997 and December 31, 1996, the prime rate was 8.25%, which the Company uses as its base rate. As part of the merger, the Company borrowed $10.0 million in the form of two subordinated promissory notes from two major shareholders in order to fund the acquisition at September 27, 1996. These notes bear interest at 10% per annum, payable quarterly beginning December 31, 1996, with the principal due in full on December 31, 2003. The Company has subsequently refinanced this debt with another financial institution. The new debt bears interest at 12% per annum, due monthly, with the principal due in two equal payments on June 29, 2001 and 2002. The Company's United Kingdom subsidiaries have two separate credit facilities totalling $2.0 million at one major bank consisting of a facility for the issuance of bank guarantees and an overdraft and loan facility. Interest on borrowings is charged at 1.25% over the bank's base rate, which was 6% at March 31, 1997 and December 31, 1996. Of the $574,000 facility for the issuance of bank guarantees, approximately $334,000 is currently utilized. All of the amounts utilized have been for guarantees issued by the bank to customers of the Company for assuring contract performance related to the operations of its United Kingdom subsidiaries. Of the $1.4 million facility for overdrafts and loans, $354,000 was utilized at March 31, 1997. The agreement for such combined credit facility requires that a stand-by letter of credit be issued on behalf of Salem Corporation equal to the total of such facility. This credit line is subject to periodic review by the bank. 8. COMMITMENTS AND CONTINGENCIES: The Company is engaged in ordinary litigation incidental to its business. The Company does not believe that this litigation will have a material adverse effect on its consolidated financial position or results of operations. The Company, through two U.S. banks, has provided standby letters of credit totaling $5.4 million and $5.8 million at March 31, 1997 and December 31, 1996, respectively. Of this total, $5.1 million was provided under the Company's revolving credit facility as described in Note 7; the remaining $317,000 was issued by another U.S. bank.
REQUIRED STANDBY LETTERS AMOUNT OF CREDIT AS FACILITY UTILIZED COLLATERAL -------- -------- ---------- Surety facility $10,000 $ 168 $ 500 Surety facility 1,400 1,400 2,000 Performance and advances on long-term contracts N/A N/A 2,900
See also Note 12 for additional commitments of the Company. 43 9. EMPLOYEE RETIREMENT BENEFITS: The Company maintains a retirement savings plan, qualified under Section 401(k) of the Internal Revenue Code, for its salaried employees. The Company and its subsidiaries make mandatory contributions of 3% of base compensation for eligible employees to this plan. Two of the Company's U.S. subsidiaries have noncontributory defined benefit pension plans covering certain of their collective bargaining employees. Pension benefits are determined by a fixed benefit formula and number of years of service. Company contributions are computed using the projected unit credit method of funding. Net periodic pension cost for the Company's collective bargaining plans for the three months ended March 31, 1997 was as follows:
($ IN THOUSANDS) ---------------- Current service cost $26 Interest cost on projected benefit obligation 53 Return on assets (55) --- Net periodic pension cost $24 ===
The following table sets forth the funded status of these plans as of November 1, 1996 (date of latest actuarial valuation):
($ IN THOUSANDS) ---------------- Actuarial present value of benefit obligations: Vested benefit obligation $2,815 ====== Accumulated benefit obligation 3,121 ====== Projected benefit obligation 3,121 Plan assets at fair value 2,735 ------ Projected benefit obligation in excess of plan assets 386 ====== Net periodic pension expense recognized from November 1, 1996 through March 31, 1997 40 ------ Accrued pension liability in the consolidated balance sheet $ 426 ====== Actuarial assumptions used in developing this data were: Discount rate 7.00% Long-term rate of return on assets 7.75%
Plan assets were invested primarily in common stocks, bonds, mortgages and government securities. 44 The Company's United Kingdom subsidiaries have a contributory defined benefit retirement plan covering substantially all salaried employees. Pension benefits are based primarily on years of service and the employee's average compensation during the three highest consecutive years in the last ten years preceding the date of normal retirement. In addition, employees contribute either 3.0% or 5.0% of their salary, depending upon their position in the Company. The Company contributions are computed using the projected unit credit method of funding, taking into account future salary increases at 5.5% per year. Net periodic pension cost for these plans for the three months ended March 31, 1997 was as follows:
($ IN THOUSANDS) ---------------- Current service cost $17 Interest cost on projected benefit obligation 23 Return on assets (26) --- Net periodic pension cost $14 ===
The following table sets forth the funded status of these plans as of October 28, 1996 (date of the latest actuarial valuation):
($ IN THOUSANDS) ---------------- Actuarial present value of benefit obligations: Vested benefit obligation $1,034 ====== Accumulated benefit obligation 1,152 ====== Projected benefit obligation 1,203 Plan assets at fair value 1,210 ------ Plan assets in excess of the projected benefit obligation 7 ====== Net periodic pension expense recognized from October 28, 1996 to March 31, 1997 22 ------ Accrued pension liability in the consolidated balance sheet $ 15 ====== Actuarial assumptions used in developing this data in 1996 were: Discount rate 8.0% Long-term rate of return on assets 8.5%
Plan assets were invested in a pooled collective investment fund comprised of publicly traded stocks and bonds. Several of the Company's subsidiaries participate in multiemployer pension plans, primarily the United Mine Workers of America (UMWA) Pension Plan, as a result of collective bargaining agreements. In addition to the pension contributions, the Company's subsidiaries also contribute to a UMWA fund for retiree health care benefits. 45 10. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: The Company provides certain retiree health care benefits covering substantially all domestic salaried employees. Employees are generally eligible for benefits upon retirement with the Company and completion of ten years of service. The Company does not currently pre-fund these benefits and retains the right to modify or terminate certain of these benefits in the future. The Company's postretirement benefit expense for the three month period ended March 31, 1997 and December 31, 1996 was as follows:
($ IN THOUSANDS) March 31, December 31, 1997 1996 ----------------------- Current service cost of benefits earned during the period $18 $22 Interest cost on accumulated postretirement benefit obligation 31 34 --- --- Net periodic postretirement benefit cost $49 $56 === ===
The accumulated postretirement benefit obligation which is reflected in the accompanying balance sheets, is comprised of the following at March 31, 1997 and December 31, 1996:
($ IN THOUSANDS) March 31, December 31, 1997 1996 ----------------------- Retirees $ 491 $ 500 Fully eligible active plan participants 422 417 Other active plan participants 519 496 ------ ------ Accrued postretirement benefit cost $1,432 $1,413 ====== ======
Future benefit costs were estimated assuming medical costs would increase by 8.5% per year, decreasing by .7% over each of the next five years and remaining at 5.0% per year thereafter. A 1% increase in this annual trend rate would have increased the accumulated postretirement benefit obligation at March 31, 1997 and December 31, 1996 by approximately $89,000 and $80,000 respectively and increased the postretirement benefit expense for the three month period ended March 31, 1997 and December 31, 1996 by approximately $3,200 and $4,000, respectively. The weighted average discount rate used to estimate the accumulated postretirement benefit obligation at March 31, 1997 and December 31, 1996 was 7.5%. The Company continues to evaluate ways in which it can better manage these benefits and control costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and annual expense. 46 11. DISCONTINUED OPERATIONS: On April 4, 1997, the Company sold its Minerals Processing Group to a group of management employees of such group for $2.1 million. The estimated loss on disposal is $2,426,000 (net of taxes of $1,830,000). The following table illustrates the financial position and results of operations of the Minerals Processing Group for each of the periods presented:
($ in Thousands) ------------------------------- March 31, December 31, 1997 1996 ------------------------------- Total Assets 11,275 13,236 Total Liabilities 5,151 5,597 Revenues 8,110 11,026 Net (loss)/income (745) 19
12. TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES: Effective July 1, 1995, Salem Corporation renewed its coverage for domestic workers' compensation, general liability and automobile insurance. This program provides a $2.0 million primary and a $10.0 million umbrella coverage with deductibles of $250,000 for automobile and workers' compensation claims and $350,000 for general liability claims. Additionally, there is a combined aggregate $3.0 million cap on deductibles. This program resulted in a discontinuance of Essex Insurance Co. Ltd. ("Essex"), Salem Corporation's 65%-owned Bermuda insurance corporation, as a reinsurer. The Company has not written any new policies during the year. Essex continues to provide reinsurance coverage for claims incurred prior to July 1, 1995. At March 31, 1997 and December 31, 1996, cash and cash equivalents of $4.6 million and $4.8 million respectively, has been restricted under facultative reinsurance agreements for the payment of insurance claims. The Company maintains insurance reserves of $1.8 million as of March 31, 1997 and December 31, 1996. See also Notes 7, 14 and 15 for additional related party transactions. 13. DISPOSITIONS: In December 1996, the Company sold substantially all of the assets and liabilities of its United Kingdom subsidiary Salem Automation Limited for cash of $919,000 and a note receivable for approximately $1.0 million which was collected in fiscal year 1997. Salem Automation Limited's net assets exceeded the sale price by approximately $270,000, net of certain intercompany balances. Additionally, in January 1997, the Company liquidated Salem Engineering (UK) Limited. The Company recognized a gain of approximately $250,000 upon liquidation of this subsidiary. The gains and losses related to these dispositions and the related reserves for future losses were accounted for as part of the purchase accounting for the September 27, 1996 purchase transaction. The Company believes that adequate reserves have been established for these transactions; however, future events such as claims, if any, that might be made during the UK liquidation process could result in the need to adjust such reserves. The related reserves totaled $500,000 and $1.0 million as of March 31, 1997 and December 31, 1996, respectively. 47 14. SHAREHOLDERS EQUITY: In accordance with the Agreement and Plan of Merger (the "Agreement") dated June 28, 1996, the Company purchased all outstanding shares of common stock of Salem Corporation and issued 551,818 shares of Class A Voting Common Stock, 948,182 shares of Class B Non-voting Common Stock and 90,000 shares of Redeemable Preferred Stock. All shares of the Company's stock have a par value of $.01 per share. In December 1996, in connection with the Employee Stockholder Agreements and Put Option Agreements dated September 27, 1996, the Company issued a total of 99,800 additional shares of Class B Nonvoting Common Stock to various management employees and certain key executives. Associated with the acquisition, certain executives entered into employment agreements with the Company which outline the terms and conditions of employment. Additionally, the Company entered into employee stockholder agreements which provide for participation in the Company's stock plan by certain management employees for the issuance of up to 400,000 of additional future shares of Common Stock of the Company. The additional 400,000 shares will be granted in accordance with the related agreements as follows: a. First 100,000 shares -- 42,000 granted in five equal amounts and 58,000 granted upon management's recommendation and Board of Directors' approval over the five year period from 1997 to 2001. b. Second 100,000 shares -- 100,000 granted based upon management's recommendation and Board of Directors' approval over the five year period from 1997 to 2001. c. Third 200,000 shares -- 200,000 granted based on determination by the Board of Directors. The executives who have entered into employment agreements with the Company have also entered into put option agreements which provide the right and option to require the Company to purchase any or all of the securities held by the optionee during the designated put period commencing on September 27, 1999 and ending on December 31, 1999. Certain other rights including call rights and provisions related to the discontinuance of employment are also in place. The stock grants made to employees of 99,800 shares and the 400,000 additional grants to be made in the future, also include certain provisions related to, among others, put rights by the employees, call rights by the Company, provisions upon discontinuance of employment and certain other rights. The put rights generally become exercisable one year after the stock award is granted and granted shares may be exercised at a rate of 20% per year over a five year period. 48 The initial stock grant of 99,800 shares has been recorded based on an estimated fair value of approximately $9.00 per share as unearned deferred compensation as of December 31, 1996. As of March 31, 1997, the estimated fair value of the stock grants remained at approximately $9.00 per share. The initial $900,000 of unearned deferred compensation is to be amortized evenly to expense over the five-year period between issuance and the private rights exercised period. However, in connection with the sale of the Minerals Processing Group on April 4, 1997, the stock grants held by the employees of such group immediately vested. Accordingly, the related unamortized deferred compensation of approximately $260,000 was recognized and included in the loss on disposal of discontinued operations. To the extent that the future fair value of such stock increases above this $9.00 per share (as set forth below), additional unearned compensation expense will be recorded for such excess and amortized to expense over the remaining number of years until the put rights become exercisable. In addition, upon issuance of the additional 400,000 shares, they will be recorded as unearned deferred compensation, based on their estimated fair value at time of issuance, and amortized to expense over the period between issuance and the effective date of the related put right including the five year vesting period during which the shares become exercisable (at 20% per year). The value that will be used to establish the price for any shares that the Company is obligated to repurchase under the above described put rights obligation is based on a formula of a multiple of five times earnings before interest, taxes and amortization plus cash minus the total of the average total debt (including capitalized leases) and preferred stock (including accrued dividends) at the end of each of the preceding twelve months. The Company also issued 90,000 shares of redeemable Preferred Stock (par value of $.01 per share) for a total of $9.0 million. Such shares have a liquidation value of $100.00 per share. The Preferred Stock has its own specific rights as set forth in the related legal documents. On March 31, 1997, the Company redeemed the entire $9.0 million of its Preferred Stock and paid the accrued dividend on such shares. The funds used were provided by additional borrowings of approximately $9.4 million under the Company's existing credit facility. 15. BUSINESS SEGMENTS: The Company considers its business to consist primarily of designing, engineering and installing heavy industrial equipment within three segments based upon the markets and industries to which the Company's services and products are sold. These two business segments are; (a) metal processing equipment and (b) industrial furnaces. Summary business segment data for continuing operations for the three months ended March 31, 1997 and December 31, 1996 by industry and geographic segments are as follows: 49 INDUSTRY SEGMENT - ----------------
(DOLLARS IN THOUSANDS) --------------------------------------------------------------- METAL PROCESSING INDUSTRIAL EQUIPMENT FURNACES CORPORATE CONSOLIDATED --------- -------- --------- ------------ 1997 - ---- Gross revenues $14,912 $ 6,860 $ - $21,772 Operating income/(loss) 1,659 762 (1,105) 1,316 Identifiable Assets 29,491 15,383 20,874 65,748 Capital Expenditures 864 28 3 895 Depreciation and Amortization 207 38 12 257 1996 Gross revenues $17,431 $ 9,188 $ - $26,619 Operating income/(loss) 2,376 1,551 (737) 3,190 Identifiable assets 31,633 15,626 30,145 77,404 Capital expenditures 1,621 69 - 1,690 Depreciation and amortization 189 31 118 338
GEOGRAPHIC SEGMENTS - -------------------
(DOLLARS IN THOUSANDS) -------------------------------------------------------------- UNITED STATES EUROPE INTERNATIONAL CONSOLIDATED 1997 - ---- Gross Revenues 19,404 1,170 1,198 21,772 Operating income (loss) 1,201 57 58 1,316 Identifiable assets 56,786 3,435 5,527 65,748 1996 - ---- Gross revenues $17,746 $4,086 $4,787 $26,619 Operating income (loss) 3,996 (827) 21 3,190 Identifiable assets 65,815 5,956 5,633 77,404
Export sales for the three months ended March 31, 1997 and December 31, 1996 were approximately $1.3 and $4.8 million, respectively. 50 16. MANAGEMENT INCENTIVE PLAN: Salem Corporation maintains a Management Incentive Plan ("Plan") for its executive officers. The amount expensed for this Plan for the three months ended March 31, 1997 and December 31, 1996 was $85,000 and $413,000, respectively. 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation in this Form 8-K of our report dated May 20, 1999, relating to the March 31, 1999 and 1998 Consolidated Financial Statements of Precision Industrial Corporation and Subsidiaries and our report dated June 27, 1997, relating to the March 31, 1997 and December 31, 1996 Consolidated Financial Statements of Salem Group, Inc. It should be noted that we have not audited any financial statements of Precision Industrial Corporation and Subsidiaries or Salem Group, Inc. subsequent to March 31, 1999, of performed any audit procedures subsequent to May 20, 1999. /s/ Arthur Anderson LLP - ----------------------- Pittsburgh, Pennsylvania July 13, 1999 52 MONARCH MACHINE TOOL CO. AND SUBSIDIARIES ("MONARCH") PRECISION INDUSTRIAL CORP. AND SUBSIDIARIES ("PRECISION") PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (DOLLARS IN THOUSANDS)
Pro-forma Monarch Precision Adjustments Pro-forma ------- --------- ----------- --------- (1) ASSETS - ------------- CURRENT ASSETS: Cash $ 2,514 $ 4,616 $ $ 7,130 Accounts receivable 21,945 10,252 32,197 Inventories 9,323 5,197 14,520 Costs and estimated earnings in excess of billings on uncompleted contracts 5,828 4,117 9,945 Prepaid expenses and other current assets 661 2,433 3,094 Deferred income taxes 1,933 2,185 4,118 --------- ---------- ---------- ----------- Current Assets 42,204 28,800 71,004 PROPERTY, PLANT, & EQUIPMENT 10,778 16,548 27,326 PREPAID PENSION COSTS 19,391 19,391 DEFERRED INCOME TAXES 1,242 1,566 2,808 GOODWILL 9,658 8,879 51,783 a 70,320 OTHER ASSETS 4,711 1,728 2,725 b 9,164 --------- ---------- ---------- ----------- Total Assets $87,984 $57,521 $ 54,508 $ 200,013 ========= ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - --------------------------------------------- CURRENT LIABILITIES: Short-term debt $ $ 1,250 $ 2,950 c $ 4,200 Accounts payable 6,265 7,728 13,993 Accrued liabilities 10,317 7,091 500 d 17,908 Billings in excess of costs and estimated earnings on uncompleted contracts 9,764 6,951 16,715 --------- ---------- ---------- ----------- Current Liabilities 26,346 23,020 3,450 52,816 LONG-TERM DEBT 16,497 23,750 55,160 c 95,407 POSTRETIRE & OTHER ACCRUED LIABILITIES 2,110 2,899 5,009 SHAREHOLDERS' EQUITY: Preferred stock 14 14 Common stock 5,880 17 3,733 e 9,630 Unearned compensation, restricted stock (29) (1,989) 1,989 f (29) Additional paid-in capital 6,247 (6,247)f Retained earnings 37,435 4,677 (4,677)f 37,435 Accumulated other comprehensive income (269) (1,100) 1,100 f (269) --------- ---------- ---------- ----------- Total shareholders' equity 43,031 7,852 (4,102) 46,781 --------- ---------- ---------- ----------- Total liabilities and shareholders' equity $87,984 $57,521 $ 54,508 $ 200,013 ========= ========== ========== ===========
1- SEE ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION 53 MONARCH MACHINE TOOL CO. AND SUBSIDIARIES ("MONARCH") PRECISION INDUSTRIAL CORP. AND SUBSIDIARIES ("PRECISION") PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro-forma Monarch Precision Adjustments Pro-forma ------- --------- ----------- --------- (1) NET SALES $ 23,009 $ 24,852 $ $ 47,861 COST OF SALES 18,296 18,646 36,942 SELLING, GENERAL AND ADMINISTRATIVE 4,681 3,890 (565)g 8,006 ----------- --------- ---------- ----------- TOTAL COSTS AND OPERATING EXPENSES 22,977 22,536 (565) 44,948 ----------- --------- ---------- ----------- OPERATING INCOME (LOSS) 32 2,316 565 2,913 OTHER INCOME (EXPENSE): INTEREST EXPENSE, NET (290) (580) (1,295)h (2,165) OTHER INCOME (EXPENSE), NET 1,175 93 1,268 ----------- --------- ---------- ----------- 917 1,829 (730) 2,016 INCOME TAX PROVISION (BENEFIT) 329 465 241 i 1,035 ----------- --------- ---------- ----------- NET INCOME (LOSS) $ 588 $ 1,364 $ (971) $ 981 =========== ========= ========== =========== EARNINGS PER COMMON SHARE, BASIC AND DILUTED $ 0.16 $ 0.23 =========== =========== AVERAGE SHARES OUTSTANDING: BASIC 3,776,000 500,000 4,276,000 DILUTED 3,776,000 500,000 4,276,000
1- SEE ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION 54 MARCH 31, 1999 PRO-FORMA ADJUSTMENTS ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION 1. The following reflects the purchase price and acquisition costs for the acquisition of Precision on June 30, 1999.
a. Purchase price: Cash paid to Seller $ 39,295 Value of Monarch Stock (500,000 at $7.00) 3,500b Seller Subordinated Note 15,000 Seller Junior Subordinated Note 840 Acquisition Costs 1,000 -------- Net debt incurred (2.c.) $ 59,635 ========
b. The shares issued in connection with the acquisition have been discounted by 10% to estimate the fair market value of the shares issued, giving effect to the number of shares issued, restrictions on resale and other conditions associated with the issuance. 55 MARCH 31, 1999 PRO-FORMA ADJUSTMENTS ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION 2. The pro-forma balance sheet and statement of earnings have been adjusted to reflect: a. The recording of the excess of the purchase price and acquisition costs ($59,635) over the estimated fair value of assets acquired ($7,852). (See note 1 also). The Company is in the process of obtaining an appraisal of the fair market value of the assets of Precision as of June 30, 1999. To the extent that the appraised value is different than the carrying basis of the assets at June 30, 1999, the Company may record a reallocation of the excess of the purchase price over net assets acquired (goodwill), presently reflected on the pro-forma balance sheet, to the carrying basis of the assets. b. Other assets represent $2,475 for costs related to obtaining the new Credit Agreement and $250 as an estimate of the value of the warrants issued in connection with the seller financing received at the transaction date. c. Funds borrowed under the Company's Credit Agreement, dated June 30, 1999. In addition, all short-term and long-term debt of Monarch and Precision was repaid by using funds borrowed under the same Credit Agreement. d. The accrual represents $300 of estimated costs related to the acquisition and $200 of estimated costs related to obtaining the new Credit Agreement. e. The elimination of Precision's common stock ($17), the issuance of Monarch common stock ($3,500) related to the acquisition, and the estimate of the value of the warrants ($250) issued in connection with the seller financing received at the transaction date. f. The elimination of Precision's shareholders' equity. g. The adjustments to selling, general and administrative expense are related to the impact of goodwill, debt discount amortization, new financing cost amortization, Precision management costs not expected to be incurred subsequent to the acquisition, and elimination of existing Precision goodwill amortization. Precision management costs include salaries and officer expenses, directors' fees, stock grant compensation, and amortization of financing fees. Goodwill amortization (25 year amortization period) $ 620 Debt discount amortization (8.5 year amortization period) 7 New financing cost amortization (7 year amortization period) 88 Precision management costs eliminated (1,242) Existing goodwill amortization (38) ------ Pro-forma adjustment (1) $ (565) ====== h. Borrowings under the Credit Agreement dated June 30, 1999, were for the acquisition of Precision and the refinancing of all borrowings of Monarch and Precision. The amount borrowed for the acquisition of Precision was assumed to have occurred on January 1, 1999. The pro-forma adjustment to interest is based on a rate of 8.25% for $82,311 borrowed under the Credit Agreement, 12% for $15,000 borrowed under a seller provided subordinated note, and 8% for $840 borrowed under a seller provided subordinated note. Amounts borrowed under the Credit Agreement bear interest at a variable rate equal to a premium over LIBOR or Prime Rate. The 8.25% rate used in the calculation is an estimate of the average borrowings rate for the period presented. i. Elimination of existing interest expense, net $ 870 ii. Interest on average outstanding borrowings under the Credit Agreement at 8.25% (1,698) iii. Interest on the seller subordinated note at 12% (450) iv. Interest on the seller subordinated note at 8% (17) -------- Pro-forma adjustment (1) $ (1,295) ======== 56 i. Adjustments reflect the impact of taxes at an estimated rate of 38% (combined federal and state rates) on the pro-forma adjustments. The effective tax provision rate is higher than the statutory rate on income before tax due to the created goodwill being permanently non-deductible for tax purposes. 57
MONARCH MACHINE TOOL CO. AND SUBSIDIARIES ("MONARCH") GFG CORP. AND SUBSIDIARIES ("GFG") PRECISION INDUSTRIAL CORP. AND SUBSIDIARIES ("PRECISION") PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Pro-forma Monarch GFG Precision Adjustments Pro-forma ---------- -------- --------- ----------------------- ---------- (4) (3) NET SALES $ 79,066 $ 20,737 $ 81,212 $ $ $ 181,015 COST OF SALES 63,113 16,428 57,792 183 d 137,516 SELLING, GENERAL AND ADMINISTRATIVE 12,625 3,138 15,985 (14) e (2,408) a 29,326 ---------- -------- -------- ------ -------- ---------- TOTAL COSTS AND OPERATING EXPENSES 75,738 19,566 73,777 169 (2,408) 166,842 ---------- -------- -------- ------ -------- ---------- OPERATING INCOME (LOSS) 3,328 1,171 7,435 (169) 2,408 14,173 OTHER INCOME (EXPENSE): INTEREST EXPENSE, NET (207) (679) (2,332) (266) f (5,015) b (8,499) OTHER INCOME (EXPENSE), NET 62 (213) 248 250 g 347 ---------- -------- -------- ------ -------- ---------- 3,183 279 5,351 (185) (2,607) 6,021 INCOME TAX PROVISION (BENEFIT) 1,100 41 2,773 62 h (613) c 3,363 ---------- -------- -------- ------ -------- ---------- NET INCOME (LOSS) $ 2,083 $ 238 $ 2,578 $ (247) $ (1,994) $ 2,658 ========== ======== ======== ====== ======== ========== EARNINGS PER COMMON SHARE, BASIC AND DILUTED $ 0.55 $ 0.62 ========== ========== AVERAGE SHARES OUTSTANDING: BASIC 3,768,480 500,000 4,268,480 DILUTED 3,768,480 500,000 4,268,480
3- SEE ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION 4- SEE ACCOMPANYING NOTES RELATED TO THE GFG ACQUISITION 58 DECEMBER 31, 1998 PRO-FORMA ADJUSTMENTS ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION - ------------------------------------------------------- 3. The pro-forma statement of earnings has been adjusted to reflect: a. The adjustments to selling, general and administrative expense are related to the impact of goodwill, debt discount amortization, new financing cost amortization, Precision management costs not expected to be incurred subsequent to the acquisition, and elimination of existing Precision goodwill amortization. Precision management costs include salaries and officer expenses, directors' fees, stock grant compensation, and amortization of financing fees. Goodwill amortization (25 year amortization period) $ 2,466 Debt discount amortization (8.5 year amortization period) 29 New financing cost amortization (7 year amortization period) 354 Precision management costs eliminated (4,969) Existing goodwill amortization (288) ------- Pro-forma adjustment (3) $(2,408) =======
b. Borrowings under the Credit Agreement dated June 30, 1999, were for the acquisition of Precision and the refinancing of all borrowings of Monarch and Precision. The amount borrowed for the acquisition of Precision was assumed to have occurred on January 1, 1999. The pro-forma adjustment to interest is based on a rate of 8.25% for $80,387 borrowed under the Credit Agreement, 12% for $15,000 borrowed under a seller provided subordinated note, and 8% for $840 borrowed under a seller provided subordinated note. Amounts borrowed under the Credit Agreement bear interest at a variable rate equal to a premium plus LIBOR or Prime Rate. The 8.25% rate used in the calculation is an estimate of the average borrowing rate for the period presented. i. Elimination of existing interest expense, net $ 3,484 ii. Interest on average outstanding borrowings under the Credit Agreement at 8.25% (6,632) iii. Interest on the seller subordinated note at 12% (1,800) iv. Interest on the seller subordinated note at 8% (67) ------- Pro-forma adjustment (3) $(5,015) =======
c. Adjustments reflect the impact of taxes at an estimated rate of 38% (combined federal and state rates) on the pro-forma adjustments. The effective tax provision rate is higher than the statutory rate on income before tax due to the created goodwill being permanently non-deductible for tax purposes. ACCOMPANYING NOTES RELATED TO THE GFG ACQUISITION - ------------------------------------------------- 4. The pro-forma statement of earnings has been adjusted to reflect: d. The adjustment to cost of sales is related to the write-up of work-in-process inventory and its subsequent charge ($183) to cost of sales as the inventory written-up is sold during the year. e. The adjustments to selling, general and administrative expense are related to the impact of goodwill and the elimination of a deferred compensation plan of a GFG officer: 59 i. Estimated incremental amortization expense relating to the excess of purchase price resulting from the acquisition (amortized over a 25 year life) $ 166 ii. Elimination of the officer's deferred compensation plan. (180) ----- Pro-forma adjustment (4) $ (14) =====
f. The borrowing of $13,497 for the acquisition was assumed to have occurred on January 1, 1998. The pro-forma adjustment to interest is based on a rate of 7.00% (estimated LIBOR base rate of 5.625% for the period plus 1.375%). The existing interest related to cash paid to Derlan Industries Inc. by GFG for interest expense on long-term debt to the parent. This long-term debt was assumed by Derlan Industries Inc. prior to the acquisition. The interest income being eliminated is related to the cash balance (assumed by Derlan Industries Inc. prior to the acquisition) that was allocated to GFG by Derlan Industries Inc. i. Elimination of interest expense, net $ 679 ii. New interest expense (945) ----- Pro-forma adjustment(4) $(266) =====
g. The adjustments to other income (expense) consist of the elimination of the corporate fee of $250 paid by GFG to Derlan Industries Inc. h. Adjustments reflect the impact of taxes at an estimated rate of 38% (combined federal and state rates) on the pro-forma adjustments. The effective tax provision rate is higher than the statutory rate on income before tax due to the created goodwill being permanently non-deductible for tax purposes. EX-2.1 2 EXHIBIT 2.1 1 Exhibit 2.1 STOCK PURCHASE AGREEMENT DATED MAY 13, 1999 BETWEEN THE MONARCH MACHINE TOOL COMPANY AND THE STOCKHOLDERS OF PRECISION INDUSTRIAL CORPORATION REGARDING THE STOCK OF PRECISION INDUSTRIAL CORPORATION 2 TABLE OF CONTENTS
PAGE ARTICLE I PURCHASE OF SHARES......................................................................1 1.1. Purchase of Shares....................................................................1 1.2. Purchase Price........................................................................1 ARTICLE II THE CLOSING AND THE STOCK ISSUANCE......................................................3 2.1. Time and Place of Closing.............................................................3 2.2. Selling Stockholders' Actions at Closing..............................................3 2.3. Buyer's Actions at Closing............................................................4 ARTICLE III REPRESENTATIONS AND WARRANTIES..........................................................6 3.1. Selling Stockholders' Individual Representations and Warranties.......................6 3.2. Selling Stockholders' Joint Representations and Warranties............................7 3.3. Buyer's Representations and Warranties...............................................19 3.4. Remedy for Breaches of Representations and Warranties................................22 ARTICLE IV ACTIONS PRIOR TO THE CLOSING...........................................................23 4.1. Activities Until Closing Date........................................................23 4.2. Financing............................................................................25 4.3. HSR Act Filings......................................................................25 4.4. No Interference with Employee Relationships..........................................26 4.5. Selling Stockholders' Efforts to Fulfill Conditions..................................26 4.6. Buyer's Efforts to Fulfill Conditions................................................26 ARTICLE V CONDITIONS PRECEDENT TO CLOSING........................................................26 5.1. Conditions to Buyer's Obligations....................................................26 5.2. Conditions to Selling Stockholders' Obligations......................................29 ARTICLE VI TERMINATION............................................................................31 6.1. Right to Terminate...................................................................31 6.2. Effect of Termination................................................................34 ARTICLE VII INDEMNIFICATION........................................................................35 7.1. Indemnification Against Loss Due to Inaccuracies in Selling Stockholders' Representations and Warranties.........................................35 7.2. Indemnification Against Loss Due to Inaccuracies in Buyer's Representations and Warranties.......................................................35 7.3. Indemnification Against Liabilities with Regard to Previously Sold Companies............................................................................36 7.4. Tax Indemnification..................................................................36
-i- 3 TABLE OF CONTENTS (CONTINUED)
PAGE 7.5. Limitation on Liabilities of Selling Stockholders....................................38 7.6. Indemnification Sole Remedy..........................................................38 7.7. Computation of Loss..................................................................39 7.9. Procedure Regarding Third Party Claims...............................................40 7.10. Buyer's Right to Withhold Stock Consideration........................................41 7.11. Apportionment of Liability Among Selling Stockholders................................42 ARTICLE VIII ABSENCE OF BROKERS.....................................................................43 8.1. Representations and Warranties Regarding Brokers and Others..........................43 ARTICLE IX STOCKHOLDERS REPRESENTATIVE............................................................44 9.1. Appointment of Stockholders Representative...........................................44 ARTICLE X GENERAL................................................................................45 10.1. Expenses.............................................................................45 10.2. Access to Properties, Books and Records..............................................45 10.3. Press Releases.......................................................................48 10.4. Entire Agreement.....................................................................48 10.5. Captions.............................................................................49 10.6. Assignments..........................................................................49 10.7. Notices and Other Communications.....................................................49 10.8. Governing Law........................................................................50 10.9. Amendments...........................................................................50 10.10. Counterparts.........................................................................50
-ii- 4 An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. 5 STOCK PURCHASE AGREEMENT This is an agreement dated May 13, 1999 between The Monarch Machine Tool Company (the "Buyer"), an Ohio corporation, and the persons listed on A (the "Selling Stockholders") relating to the purchase by the Buyer from the Selling Stockholders of all the outstanding capital stock of Precision Industrial Corporation (the "Company"), a Delaware corporation, which capital stock is comprised of (giving effect to exercise of currently outstanding options) a total of 551,818 shares of Class A Voting Common Stock, par value $.01 per share, and 1,173,282 shares of Class B Non-Voting Common Stock, par value $.01 per share (collectively, the "Shares"): ARTICLE I PURCHASE OF SHARES 1.1. Purchase of Shares. At the Closing described in Paragraph 2.1, the Buyer will purchase from each Selling Stockholder the number of Shares of each class shown opposite the name of that Selling Stockholder in Exhibit A, and each Selling Stockholder will sell those Shares to the Buyer, free and clear of any liens, encumbrances or claims of other persons, other than liens or encumbrances imposed by reason of acts of the Buyer. 1.2. Purchase Price. (a) The purchase price (the "Purchase Price") to be paid by the Buyer for all the Shares will be (i) (t) $54,900,000 plus (u) $19,000,000, minus (v) the indebtedness of the Company for borrowed money at the Closing Date (the "Closing Date Indebtedness"), plus (w) the cash on hand at the Closing Date, minus (x) any of the cash on hand at the Closing Date which is subject to a trust to fund a deferred compensation arrangement, minus (y) any of the cash on hand which is held in escrow in connection with the sale of Salem Furnace Company, minus (z) any amount by which the consolidated working capital of the Company and its subsidiaries at the Closing Date, calculated as provided in subparagraph (c), (the "Closing Date Working Capital") is less than $3,500,000 (together, the "Cash Portion" of the Purchase Price), plus (ii) 500,000 shares (the "Stock Consideration") of common stock, no par value, of the Buyer ("Buyer Common Stock"), plus (iii) the Special Subordinated Note described in subparagraph (b). (b) To the extent that by the Closing Date, the Company has not sold the assets or received the payments listed on Exhibit 1.2-B(1) (the "Non-Operating Assets"), at the Closing, the Buyer will issue to the Selling Stockholders a senior subordinated note (the "Special Subordinated Note") substantially in the form of Exhibit 1.2-B(2) in a principal amount equal to the values shown on Exhibit 1.2-B(1) for the Non-Operating Assets which have not been sold or received. (c) For the purposes of this Paragraph, the consolidated working capital of the Company and its subsidiaries at the Closing Date will be their consolidated current assets (excluding cash on hand, other than cash on hand held in escrow to fund a deferred compensation arrangement, and excluding Non-Operating Assets), minus their consolidated current liabilities (other than (u) short term borrowings, (v) the current portion of long term debt, (w) any liabilities which are payable with funds held in escrow, or any liabilities which are secured by a $350,000 letter of credit, in connection with the sale of Salem Furnace Co., (y) any accruals for severance compensation to Anthony Castor III ("Castor") and (z) any accruals for 1 6 expenses as a result of the transactions which are the subject of this Agreement), calculated in accordance with generally accepted accounting principles ("GAAP") applied in the same manner the Company applies them in preparing its financial statements, as shown on a consolidated balance sheet of the Company and its subsidiaries at the Closing Date certified by the chief financial officer of the Company to have been prepared in accordance with GAAP and to present fairly the consolidated financial position (including the consolidated working capital, calculated as provided above) of the Company and its subsidiaries at the Closing Date (the "Closing Date Balance Sheet"). The Buyer will cause the Company's chief financial officer to prepare the Closing Date Balance Sheet and deliver copies to the Stockholders Representative described in Paragraph 9.1 and to the Buyer as soon as practicable after the Closing Date. For the purpose of determining the cash payment to be made at the Closing, 48 hours before the Closing, the chief financial officer of the Company will deliver to the Buyer and the Stockholders Representative an estimate of what the consolidated working capital of the Company and its subsidiaries shown on the Closing Date Balance Sheet (calculated as provided above) will be, and what the amount of the wire transfer described in Paragraph 2.3(a) will be based upon an assumption that the consolidated working capital shown on the Closing Date Balance Sheet will be 90% of the sum shown on the estimate. Promptly after the Closing Date Balance Sheet is delivered to the Stockholders Representative, the Buyer will pay any additional cash amount (or the Selling Stockholders will refund any excess cash amount) due because the consolidated working capital shown on the Closing Date Balance Sheet is different from 90% of the sum shown on the estimate, plus interest on the amount paid at 10% per annum from the Closing Date to the payment date. ARTICLE II THE CLOSING AND THE STOCK ISSUANCE 2.1. Time and Place of Closing. The closing (the "Closing") of the purchase of the Shares will take place at the offices of Rogers & Wells, 200 Park Avenue, New York, New York, at 10:00 A.M. New York City time, on the day (the "Closing Date") which is the last to occur of (i) July 1, 1999, (ii) the first day on which all the conditions in Paragraphs 5.1 and 5.2, other than conditions relating to occurrences which are to take place on the Closing Date, have been fulfilled and (iii) the third business day after the day on which all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") expire or are terminated. 2.2. Selling Stockholders' Actions at Closing. At the Closing, the Selling Stockholders will deliver to the Buyer the following: (a) The certificates representing all the Shares, endorsed or accompanied by documents of assignment which comply with the requirements of Section 8-401 of the Uniform Commercial Code as in effect in Delaware (but without any requirement of signature guarantees). 2 7 (b) A document by which each Selling Stockholder acknowledges that he, she or it is aware that the Buyer Common Stock included in the Stock Consideration (i) has not been registered under the Securities Act of 1933, as amended (the "Securities Act") and may not be sold or transferred other than in a transaction which is registered under that Act or is exempt from the registration requirements of that Act and (ii) is subject to the Agreement Regarding Shares described in Paragraph 2.3(d) and may not be sold or transferred other than as provided in the Agreement Regarding Shares. 2.3. Buyer's Actions at Closing. At the Closing, the Buyer will deliver to the Stockholders Representative described in Paragraph 9.1 the following: (a) Evidence of a wire transfer of immediately available funds in an amount equal to the Cash Portion of the Purchase Price, calculated as provided in Paragraph 1.2, to an account specified at least 48 hours before the Closing by the Stockholders Representative. (b) A letter acknowledging that the Buyer will be acquiring the Shares for investment, and not with a view to their resale or distribution. (c) A certificate representing the 500,000 shares of Stock Consideration, registered in the name of the Stockholders Representative, or such other name as the Stockholders Representative may specify to the Buyer at least 48 hours before the Closing. That certificate may bear legends to the effect that the shares it represents (i) have not been registered under the Securities Act and may not be sold or transferred other than in a transaction which is registered under that Act or is exempt from the registration requirements of that Act, and (ii) are subject to the Agreement Regarding Shares described in subparagraph (d) and may not be sold or transferred other than as provided in the Agreement Regarding Shares. (d) An agreement (the "Agreement Regarding Shares"), executed by the Buyer, in which the Buyer agrees that: (i) At the request of the Stockholders Representative made on or after the first anniversary of the Closing Date, the Buyer will issue, in exchange for the certificate registered in the name of the Stockholders Representative described in subparagraph (c) or the replacement certificate described in Paragraph 7.10, separate certificates, registered in the names of the respective Selling Stockholders, with the number of shares represented by the certificate registered in the name of each Selling Stockholder being (x) the total number of shares represented by the certificate the Stockholders Representative presents for exchange, divided by (y) 1,725,100, times (z) the number of Shares the Selling Stockholder sold to the Buyer as shown on Exhibit A (with cash in lieu of fractional shares based on the Fair Value of the Buyer Common Stock (calculated as provided in Paragraph 7.10) on the first anniversary of the Closing Date. (ii) When shares of Buyer Common Stock are delivered as described in subparagraph (i), resales of that Buyer Common Stock by the Selling Stockholders will have been registered under the Securities Act, and the registration statement relating to those resales will be effective. 3 8 (iii) The Buyer will keep the registration statement described in subparagraph (ii) effective and available with regard to resales of Buyer Common Stock by the Selling Stockholders until at least the second anniversary of the Closing Date, or until such earlier time as all the Buyer Common Stock delivered to Selling Stockholders under this Agreement has been sold or counsel to the Company has delivered to the Stockholders Representative an opinion that all the Buyer Common Stock which is still owned by Selling Stockholders may be sold without registration under the Securities Act, and the Buyer will do all other things which are required so the Selling Stockholders will at all times be able to resell the Buyer Common Stock they receive without violating the Securities Act. (e) If applicable, the Special Subordinated Note. (f) If applicable, the Seller Subordinated Notes and Warrants described in Paragraph 6.1(e). ARTICLE III REPRESENTATIONS AND WARRANTIES ARTICLE IV 4.1. Selling Stockholders' Individual Representations and Warranties. Each Selling Stockholder represents and warrants to the Buyer, as to himself, herself or itself, but not as to any other Selling Stockholder, as follows: (a) The Selling Stockholder has all power and authority necessary to enable him, her or it to enter into this Agreement and carry out the transactions contemplated by this Agreement. Any corporate, partnership or other actions necessary to authorize the Selling Stockholder to enter into this Agreement and carry out the transactions contemplated by it have been taken. This Agreement has been duly executed by the Selling Stockholder and is a valid and binding agreement of the Selling Stockholder, enforceable against the Selling Stockholder in accordance with its terms. (b) Neither the execution or delivery of this Agreement or of any document to be delivered in accordance with this Agreement nor the consummation of the transactions contemplated by this Agreement or by any document to be delivered in accordance with this Agreement will violate, result in a breach of, or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under, the Certificate of Incorporation, by-laws, partnership agreement or other organizational or governing documents of the Selling Stockholder, if any, any agreement or instrument to which the Selling Stockholder or any subsidiary of the Selling Stockholder is a party or by which any of them is bound, any law, or any order, rule or regulation of any court or governmental agency or other regulatory organization having jurisdiction over the Selling Stockholder or any of its subsidiaries. (c) The Selling Stockholder owns all the Shares he, she or it will be selling to the Buyer as shown on Exhibit A, free and clear of any liens, encumbrances or claims of other persons (except that 50,000 shares to be sold by Vernon E. Collins ("Collins") are the subject of options which have not been exercised at the date of this Agreement, but will be exercised at or before the Closing), and the Selling Stockholder has full authority to sell those Shares as contemplated by this Agreement. Except for the Stockholder Agreements listed on Exhibit 3.1- 4 9 C, the Selling Stockholder has not granted any option or right, and is not a party to any other agreement, which requires, or upon the passage of time, the payment of money, or the occurrence of any other event, may require the Selling Stockholder to transfer any of those Shares to anyone other than the Buyer. When the Buyer acquires Shares from the Selling Stockholder as contemplated by this Agreement, the Buyer will become the owner of those Shares, free and clear of any liens, encumbrances or claims of other persons, other than liens or encumbrances imposed by reason of acts of the Buyer. 4.2. Selling Stockholders' Joint Representation and Warranties. The Selling Stockholders, jointly and severally, represent and warrant to the Buyer as follows: (a) The Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Copies of the Certificate of Incorporation and all amendments, and of the by-laws, of the Company, as currently in effect, are attached as Exhibit 3.2-A(1). The Company and each of its subsidiaries is qualified to do business as a foreign corporation in each state in which it is required to be qualified, except states in which the failure to qualify, in the aggregate, would not have a material adverse effect upon the Company and it subsidiaries, taken as a whole. Exhibit 3.2-A(2) is a list of all the jurisdictions in which the Company and each of its subsidiaries is qualified to do business as a foreign corporation on the date of this Agreement. Whenever any representation or warranty of the Selling Stockholders (other than the representation and warranty in subparagraph (g)) contains an exception or limitation relating to "materiality," "material adverse" events or omissions, "material adverse effects" or similar concepts (collectively, "Materiality Tests"), the Materiality Tests will be deemed to have been met (i.e., the event or omission will be deemed to be "material," "materially adverse," have a "material adverse effect" or otherwise meet a similar test), and the representation or warranty will be deemed to have been breached, if the event or omission results in an adverse impact with respect to the Company's assets of $200,000 or more or an adverse impact with respect to the Company's consolidated earnings of $200,000 or more; and (ii) whenever any representation or warranty of the Buyer contains a Materiality Test, that representation or warranty will be deemed to have been breached if the event or omission which is the subject of the representation or warranty results in an adverse impact with respect to the Selling Stockholders of $200,000 or more. (b) If the consents listed on Exhibit 3.2-B are obtained, neither the execution or delivery of this Agreement or of any document to be delivered in accordance with this Agreement nor the consummation of the transactions contemplated by this Agreement or by any document to be delivered in accordance with this Agreement will violate, result in a breach of, or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under, the Certificate of Incorporation or by-laws of the Company or any of its subsidiaries, any agreement or instrument to which the Company or any subsidiary of the Company is a party or by which any of them is bound, any law, or any order, rule or regulation of any court or governmental agency or other regulatory organization having jurisdiction over the Company or any of its subsidiaries. 5 10 (c) The only authorized stock of the Company consists of 554,605 shares of Class A Voting Common Stock, par value $.01 per share, 1,465,395 shares of Class B Non-Voting Common Stock, par value $.01 per share, and 90,000 shares of Preferred Stock, par value $.01 per share, of which 551,818, shares, 1,173,282 shares and no shares, respectively are issued and outstanding (including 50,000 shares which are the subject of options which have not yet been exercised, but will be exercised by the Closing Date and are included in the Shares listed on Exhibit A). On the Closing Date, the Shares will constitute 100% of the outstanding stock of the Company. Each of the Shares has been duly authorized and issued and is fully paid and nonassessable. Except as shown on Exhibit 3.2-C, the Company has not issued any options, warrants or convertible or exchangeable securities, and is not a party to any other agreements, which require, or upon the passage of time, the payment of money or the occurrence of any other event may require, the Company to sell or issue any of its stock. (d) No governmental filings, authorizations, approvals or consents, or other governmental action with regard to the Company or any of its subsidiaries, other than the termination or expiration of waiting periods under the HSR Act, are required to permit the Selling Stockholders to fulfill all their obligations under this Agreement. (e) Exhibit 3.2-E is a complete list of all the corporations and other entities of which the Company owns directly or indirectly 50% or more of the equity (each corporation or other entity of which the Company owns directly or indirectly 50% or more of the equity being a "subsidiary" of the Company) and all corporations and other entities of which the Company owns directly or indirectly an equity interest of between 20% and 50%. Except as shown on Exhibit 3.2-E, the Company owns all the outstanding shares of, or other equity interests in, each of its subsidiaries. Each of the shares owned by the Company of each of its subsidiaries which is a corporation has been duly authorized and validly issued and is fully paid and nonassessable. Neither the Company nor any of its subsidiaries has issued any options, warrants or convertible or exchangeable securities, or is a party to any other agreements, which require, or upon the passage of time, the payment of money or the occurrence of any other event may require, the Company or any subsidiary to transfer to anyone or issue any stock of, or other equity interest in, any subsidiary. (f) The consolidated financial statements of the Company and its subsidiaries at December 31, 1996, March 31, 1997 and March 31, 1998, and for the three month, three month and one year periods ended on those dates, and unaudited consolidated financial statements at March 31, 1999 and for the year ended on that date, copies of which are included in Exhibit 3.2-F, were prepared in accordance with GAAP applied on a consistent basis and present fairly the consolidated financial condition and results of operations of the Company and its subsidiaries at the dates, and for the periods, to which they relate (except that the financial statements at March 31, 1999 and for the year ended on that date are without footnotes and are subject to year end adjustments). The Balance Sheet at March 31, 1999 included in Exhibit 3.2-F is referred to in this Agreement as the "Balance Sheet." (g) Since March 31, 1999 (i) there has not been any material adverse change in the consolidated financial condition or results of operations of the Company and its subsidiaries compared with the consolidated financial condition of the Company and its subsidiaries at March 31, 1999, or the consolidated results of operations of the Company and its subsidiaries for the comparable period of the prior year, (ii) the Company and its subsidiaries have 6 11 conducted their businesses in the ordinary course and in the same manner in which they were being conducted on March 31, 1999, and (iii) there has not been any material adverse change, or any event of which any of the persons listed on Exhibit 3.2-G (each a "Management Person") is aware which could reasonably be expected to cause a material adverse change, in the business, operations, properties, prospects or condition (financial or other) of the Company and its subsidiaries taken as a whole. (h) The assets of the Company and its subsidiaries are sufficient to enable them to operate their businesses after the Closing substantially as they are being operated on the date of this Agreement. (i) The Company and its subsidiaries have all licenses and permits from all governmental authorities which are necessary or useful to permit the Company and its subsidiaries to conduct their businesses as those businesses are being conducted at the date of this Agreement, other than licenses and permits from governmental authorities the lack of which would not in aggregate have a Material Adverse Effect. Exhibit 3.2-I is a complete list of all licenses and permits which the Company or any of its subsidiaries holds at the date of this Agreement. The Company and its subsidiaries have at all times operated their businesses in accordance with applicable law in all material respects. (j) Exhibit 3.2-J is a list of all real property, including office space, owned or leased (including subleased) by the Company or by any of its subsidiaries, showing as to each property whether it is owned or leased, by whom it is owned or leased and, if it is leased, the identity of the lessor and the date of the lease. All that real property is being used by the Company or the applicable subsidiary in conformance in all material respects with all zoning, environmental and other laws and regulations, deed restrictions, covenants and lease provisions applicable to it. As to real property which is owned, the Company or the applicable subsidiary owns fee title to the real property, free and clear of any liens or other encumbrances, except (i) the liens and encumbrances shown on Exhibit 3.2-J, (ii) liens securing indebtedness reflected on the Balance Sheet and (iii) easements or similar encumbrances which do not interfere with the use of the real property as it currently is being used and as the Company or a subsidiary currently anticipates using it. As to real property which is leased, the Company or the subsidiary which is the lessee under each of the leases (including subleases) has complied in all material respects with the terms of the lease, and no officer of the Company or any subsidiary has been informed by the lessor under any of the leases, or has any other reason to believe, that the lessor has taken, or intends to take, action to terminate the lease. No Management Person is aware of any obligation of the Company or any of its subsidiaries which would require the Company or a subsidiary to expend more than $100,000 on termination of a lease, assuming no deterioration in the condition of any leased property from its condition at the date of this Agreement. The transactions contemplated by this Agreement will not be a basis for any party to any lease (including sublease) listed on Exhibit 3.2-J to terminate that lease. (k) On the Closing Date, the Company and each of its subsidiaries will own all its assets free and clear of any liens or encumbrances other than (i) the lien of taxes not yet due or other statutory liens relating to governmental obligations which are not yet due, (ii) liens securing indebtedness reflected on the Balance Sheet which do not interfere with the use of the assets to which they relate for the purposes for which those assets were acquired, and (iii) liens 7 12 disclosed on Exhibit 3.2-J or 3.2-K, all of which secure obligations arising out of, or otherwise relating to, the businesses of the Company and its subsidiaries. (l) Exhibit 3.2-L is a complete list of each agreement to which the Company or any of its subsidiaries is a party which will require the Company or any of its subsidiaries to make payments, or under which the Company expects it or its subsidiaries to receive revenues, of more than $200,000 after the Closing Date over the remaining term of the agreement and cannot be cancelled by the Company or the subsidiary, as the case may be, without payment of a penalty in excess of $50,000, other than (i) customer purchase orders entered into in the ordinary course of business and (ii) purchase orders to suppliers (other than purchase orders having a remaining term of more than twelve months or involving the purchase of fixed assets having a purchase price in excess of $250,000) entered into in the ordinary course of business ordering materials which are available from at least several suppliers in quantities consistent with the customary purchasing practices of the Company or the applicable subsidiary and with the customary purchasing practices in the industries in which the Company or the applicable subsidiary participates. The Company and each of its subsidiaries has fulfilled in all material respects all its obligations under all the agreements listed on Exhibit 3.2-L to which it is a party, no Management Person has been informed by any other party to any of those agreements that the Company or any subsidiary is in default in its obligations under any of those agreements and no Management Person has any other reason to believe that another party to any of those agreements intends to terminate the agreement before its stated termination date. Except as shown on Exhibit 3.2-L, the transactions contemplated by this Agreement will not be a basis for any party to any agreement listed on Exhibit 3.2-L to terminate that agreement or alter the basis on which it will being doing business with the Company or with any of its subsidiaries, as the case may be, under that agreement. (m) Exhibit 3.2-M is a complete list of all patents, patent applications, patent licenses, trademarks, trademark licenses, trade names and service marks which are material to the businesses of Company and its subsidiaries taken as a whole. The Company and each subsidiary is entitled to use all the patents, trademarks, trade names and service marks which it uses in connection with its businesses, other than patents, trademarks, trade names and service marks which the Company and the subsidiaries could stop using without there being a Material Adverse Effect. Except as described on Exhibit 3.2-M, no Management Person has been informed of any claim, or is aware, that the Company or any of its subsidiaries is violating any patent, trademark or service mark, or unlawfully using any trade secret or other intellectual property, owned by any other person or that any of them is using any name which is confusingly similar to that of any other person. The transactions which are the subject of this Agreement will not result in the termination of, or otherwise require the consent of any party to, any patent license or trademark license listed on Exhibit 3.2-M. (n) The Company and each of its subsidiaries has filed when due all Tax Returns (as defined below) which it has been required to file and has paid all Taxes (as defined below) shown on those returns to be due. Those Tax Returns accurately reflect the Taxes required to have been paid, except to the extent of items which may be disputed by applicable taxing authorities but for which there is substantial authority to support the position taken by the Company or the subsidiary and which have been adequately reserved against on the Balance Sheet. Except as shown on Exhibit 3.2-N, (i) no extension of time given by the Company or any of its subsidiaries for completion of the audit of any of its Tax Returns is in effect, (ii) no tax lien has been filed by any taxing authority against the Company or any of its subsidiaries or any of 8 13 their assets, (iii) no Federal, state or local audits or other administrative proceedings or court proceedings with regard to Taxes are presently pending with regard to the Company or any of its subsidiaries, (iv) neither the Company nor any subsidiary is a party to any agreement providing for the allocation or sharing of Taxes, (v) neither the Company nor any subsidiary has participated in or cooperated with an international boycott as that term is used in Section 999 of the Internal Revenue Code of 1986, as amended (the "Code") and (vi) neither the Company nor any subsidiary has filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a Subsection (f) asset (as that term is defined in Section 341(f)(4) of the Code) owned by the Company or any subsidiary. For the purposes of this Agreement, the term "Tax" or "Taxes" means all taxes, charges, fees, levies or other assessments imposed by any Federal, state, local, or foreign taxing authority, including without limitation, income, excise, property, sales, use, transfer, payroll, license, employment, production, gross receipts, windfall profits, severance, tariffs, withholding and franchise taxes (including any interest, penalties or additions attributable to or imposed on or with respect to any such assessment); and any amounts that could be charged against the Company or any of its subsidiaries under a tax sharing agreement. "Tax Return" means any return, report, information return, or other document (including any related or supporting information) filed or required to be filed with any Federal, state, local, or foreign governmental entity or other authority in connection with the determination, assessment or collection of any Taxes or the administration of any laws, regulations or administrative requirements relating to any Taxes. (o) Except as shown on Exhibit 3.2-O, neither the Company nor any subsidiary is a party to any suit or proceeding in any court, or by or before any governmental agency, nor has any Management Person been notified that any suit or proceeding is threatened against any of those entities, other than suits or proceedings in each of which the other party seeks only money damages of less than $200,000, nor is any Management Person aware of any circumstances with regard to which there is a reasonable possibility that a suit or proceeding will be brought against the Company or a subsidiary which would result in a payment by the Company or a subsidiary to the other party, not covered by insurance, of more than $500,000. (p) Exhibit 3.2-P(1) is a complete list of all unions which represent any employees of the Company or any of its subsidiaries. No union is attempting to organize or otherwise become the bargaining representative for any employees of the Company or any of the subsidiaries. Exhibit 3.2-P(2) is a complete list of (i) all written agreements and plans, including written employment ,severance, deferred compensation and bonus agreements (other than employment agreements calling for salaries of less than $100,000 per year with terms of not more than 2 years) and including "employee benefit plans," as that term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or other written employee benefit arrangements, to which the Company or any of its subsidiaries is a party under which it is providing compensation, retirement benefits or other benefits to employees, and (ii) all agreements or other commitments by the Company or any of its subsidiaries to provide post-retirement medical benefits or other post-employment benefits to employees or former employees. Except as shown on Exhibit 3.2-P(2), (v) each employee benefit plan or arrangement listed on Exhibit 3.2-P(2) which is intended to be qualified under Section 401 of the Code is qualified under that Section, (w) each employee benefit plan listed on Exhibit 3.2-P(2) has been maintained in all material respects in accordance with its terms and any applicable provisions of ERISA or the Code and any other applicable laws, (x) no plan listed on Exhibit 3.2-P(2) is a "defined benefit plan," as that term is defined in ERISA, (y) neither the Company nor any subsidiary is an "employer" or part of a "single employer," as those terms are used in 9 14 ERISA or the Code, with regard to any benefit plan and (z) no plan shown on Exhibit 3.2-P(2) has an unfunded benefit liability as that term is used in ERISA. (q)(i) Except as shown on Exhibit 3.2-Q, the Company and its subsidiaries are in compliance with all applicable Environmental Laws, other than failures to comply which would not, in the aggregate, have a Material Adverse Effect. (i) The Company and its subsidiaries hold all Environmental Permits necessary to enable them to conduct their respective operations as they are currently conducted without violating any Environmental Laws. No Management Person has any reason to believe that any such Environmental Permits (A) will not be renewed, or (B) will be renewed under terms that are reasonably likely to have a Material Adverse Effect. (ii) No Materials of Environmental Concern are present at, have been released from, or since September 30, 1996 have been removed from, any property currently or formerly owned, leased or otherwise operated by the Company or any subsidiary, that are reasonably likely to be in violation, in a material respect of, or otherwise to give rise to material liability of the Company or any subsidiary under, any Environmental Law. (iii) Except as shown on Exhibit 3.2-Q, neither the Company nor any of its subsidiaries has during the past five years been required to make any reports to any governmental authorities pursuant to any Environmental Laws concerning spills or other releases at or from any property currently or formerly owned, leased or otherwise operated by the Company or any subsidiary, for which spills or other releases the Company or a subsidiary may be liable under any Environmental Law. True and complete copies of all written reports concerning such spills and other releases have been made available to the Buyer. (iv) None of the following is or, insofar as any Management Person is aware, has been, on, under, in or at any property currently or formerly owned, leased or otherwise operated by the Company or any subsidiary at any time while or before the Company or its subsidiary owned, leased or otherwise operated the property: (A) underground or aboveground storage tanks containing any Materials of Environmental Concern, (B) polychlorinated biphenyls, (C) asbestos or asbestos-containing materials, (D) septic tanks, septic fields, dry-wells, or similar structures, (E) lagoons, impoundments, or other bodies of water into which Materials of Environmental Concern have been discharged, (F) landfills, dumping areas, or similar locations where Materials of Environmental Concern have been placed. (v) Neither the Company nor any subsidiary has received any Environmental Claim, and, insofar as any Management Person is aware, no Environmental Claim against the Company or any subsidiary is threatened. (vi) Except as shown on Exhibit 3.2-Q, neither the Company nor any subsidiary has entered into or agreed to, nor is the Company or any subsidiary otherwise subject to, any judgment, decree, order or similar requirement under any 10 15 Environmental Law, nor is the Company or any subsidiary negotiating any such judgment, decree, order or requirement. (vii) Neither the Company nor any subsidiary has assumed or retained, contractually or by operation of law, any material liabilities or obligations, contingent or otherwise, in connection with any Environmental Law (other than as part of a Sold Company Indemnity described in Paragraph 7.3); (viii) There are no past or present actions, activities, events, conditions or circumstances known to any Management Person, including without limitation, the release, threatened release, emission, discharge, generation, treatment, storage or disposal of Materials of Environmental Concern, that give rise to any material liability or obligation of the Company or any subsidiary under any Environmental Laws. (ix) The Company has made available to the Buyer copies of each of the Phase I studies of properties owned by the Company listed on Exhibit 3.2-Q. No Management Person is aware of any condition on any of the properties which is the subject of any of those Phase I studies which (i) is not shown on the applicable Phase I study, but (ii) violates any applicable Federal, state or local environmental laws or regulations. (x) As used in this Agreement the following terms have the following meanings: "Environmental Claim" means a written notice by any governmental authority alleging potential liability arising out of, based on or resulting from (a) the presence, or release into the environment, of any Material of Environmental Concern or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. "Environmental Law" means law, rule, regulation, guideline, code or other legally enforceable requirement of any governmental authority regulating, relating to or imposing liability or standards of conduct concerning protection of the environment or environmental conditions effecting human health or safety. "Environmental Permit" means any permit, authorization, license, approval or filing required under any Environmental Law. "Materials of Environmental Concern" means gasoline, petroleum or petroleum products, polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutants, contaminants, radioactive materials, and any other substances or forces defined as hazardous or toxic under any Environmental Law, or that is regulated pursuant to or could give rise to liability under any Environmental Law. (r) There are no contracts, agreements or other arrangements which could result in the payment by the Company or by any subsidiary of an "Excess Parachute Payment" as that term is used in Section 280G of the Code. (s) The Company has made available to the Buyer a report dated April 1, 1999 of Arthur Andersen LLP (the "Y2K Report") relating to the extent to which computer software and hardware and other equipment used by the Company and its subsidiaries in the conduct of their 11 16 business is capable of recognizing that dates in the year 2000 are subsequent to December 31, 1999 and is otherwise able to operate without being adversely affected by the change from the twentieth to the twenty-first century. No Management Person is aware of any facts which make anything in the Y2K Report incorrect in any material respect. 4.3. Buyer's Representations and Warranties. The Buyer represents and warrants to each of the Selling Stockholders as follows: (a) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio. (b) The Buyer has all corporate power and authority necessary to enable it to enter into this Agreement and carry out the transactions contemplated by this Agreement. All corporate actions necessary to authorize the Buyer to enter into this Agreement and carry out the transactions contemplated by it have been taken. This Agreement has been duly executed by the Buyer and is a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms. (c) Neither the execution and delivery of this Agreement or of any document to be delivered in accordance with this Agreement nor the consummation of the transactions contemplated by this Agreement or by any document to be delivered in accordance with this Agreement will violate, result in a breach of, Ior constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, the Articles of Incorporation or Regulations of the Buyer, any agreement or instrument to which the Buyer or any subsidiary is a party or by which it is bound, any law, or any order, rule or regulation of any court or governmental agency or other regulatory organization having jurisdiction over the Buyer or any of its subsidiaries. (d) No governmental filings, authorizations, approvals or consents, or other governmental action, other than termination or expiration of the waiting periods under the HSR Act, are required to permit the Buyer to fulfill all its obligations under this Agreement. (e) The Buyer has all funds which the Buyer will require, in addition to the Purchase Financing described in Paragraph 4.2, to carry out the transactions which are the subject of this Agreement. (f) The only authorized stock of the Buyer consists of 12,000,000 shares of Buyer Common Stock and 500,000 shares of preferred stock, no par value, of which 3,782,817 shares of Common Stock and 14,642 shares of preferred stock are issued and outstanding. Except as shown on Exhibit 3.3-F, the Buyer has not issued any options, warrants, or convertible or exchangeable securities, and is not party to any other agreements, which require, or upon passage of time, the payment of money or the occurrence of any other event may require, the Company to sell or issue any of its stocks. (g) When the Buyer issues the Stock Consideration as contemplated by this Agreement, all the shares of the Buyer Common Stock included in the Stock Consideration will be duly authorized and issued, fully paid and nonassessable, and the Selling Stockholders will become the owners of the shares of Stock being issued to them, free and clear of any liens or encumbrances other than liens or encumbrances created by the Selling Stockholders. (h) The Buyer's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 10-K"), filed with the Securities and Exchange Commission contained all the information required to be included in that Report and did not contain a misstatement of material fact or a omit to state any fact necessary to make statements made in it not misleading. 12 17 (i) Without limiting anything which is stated in subparagraph (h), the consolidated financial statements of Buyer and its subsidiaries at December 31, 1997 and 1998 and for the two years ended on those dates included in the 1998 10-K were prepared in accordance with GAAP applied on a consistent basis and present fairly the consolidated financial condition and results of operations of the Buyer and its subsidiaries at the dates, and for the periods to which they relate. (j) Since December 1998 (i) there has not been any material adverse change in the consolidated financial condition or results of operations of the Buyer and its subsidiaries compared with the consolidated financial condition of the Buyer and its subsidiaries at December 31, 1998 reflected on the balance sheet at that date included in the 1998 10-K, or the consolidated results of operations of Buyer and its subsidiaries for the comparable period of the prior year, other than a decline in the results of operations of its Machine Tool Division for the quarter ended March 31, 1999, when compared with the comparable period of the prior year, (ii) the Buyer and its subsidiaries have conducted their businesses in the ordinary course and in the same manner in which they were being conducted on December 31, 1998, and (iii) there has not been any material adverse change, or any event of which any executive officer of the Buyer is aware which could reasonably be expected to cause a material adverse change, in the business, operations, properties, prospects, or condition (financial or other) of the Buyer and its subsidiaries taken as a whole, other than the matters related to the Buyer's Machine Tool Division in referred to in clause (i). Since December 31, 1998, there has been no occurrence which the Buyer was required to report on a Form 8-K to be filed with the Securities and Exchange Commission, except that the Buyer was required to file, and did file, a Form 8-K relating to the Buyer's acquisition of GFP Corporation. (k) If the Buyer issues either or both of the Special Subordinated Note or the Seller Notes described in Paragraph 6.1(e), when they are issued, they will be valid and binding debt instruments of the Buyer, enforceable against the Buyer in accordance with their respective terms, (ii) if the Buyer issues Warrants as described in Paragraph 6.1(e) and Exhibit 6.1-E, when they are issued, they will be valid and binding obligations of the Buyer, enforceable against the Buyer in accordance with their terms and (iii) if the Buyer issues shares of Buyer Common Stock on exercise of Warrants or conversion of the Seller Notes, when those shares are issued, they will be duly authorized and issued, fully paid and nonassessable. (l) The issuance of the Stock Consideration, and the issuances of shares of Buyer Common Stock on exercise of Warrants, or conversion of the Seller Notes, described in Paragraph 6.1(e) and Exhibit 6.1-E, have been approved by the Board of Directors of the Buyer, and therefore Chapter 1704 of the Ohio General Corporation Law will not apply to the acquisition of the Stock Consideration by the Selling Stockholders (or by the Stockholders Representative on their behalf) or to the acquisition of Buyer Common Stock (or other securities) upon exercise of Warrants or conversion of Seller Notes. 4.4. Remedy for Breaches of Representations and Warranties. The indemnification in Paragraphs 7.1 and 7.2 will be the only remedies available to the Buyer or the Selling Stockholders for breaches of representations and warranties contained in Paragraph 3.1, 3.2 or 3.3. Any claim for that indemnification must be made as provided in Paragraph 7.6. The only remedy available to the Buyer or to any Selling Stockholder prior to the Closing for breaches of representations and warranties contained in Paragraph 3.1, 3.2 or 3.3 will be to terminate this Agreement to the extent permitted by Paragraph 6.1 or 6.2 and, if applicable, seek remedies because the Selling Stockholders or the Buyer failed to fulfill their or its obligations under this Agreement, as provided in Section 6.2. 13 18 ARTICLE V ACTIONS PRIOR TO THE CLOSING 5.1. Activities Until Closing Date. From the date of this Agreement until the Closing Date, the Selling Stockholders will ensure that the Company and its subsidiaries will, except with the written consent of the Buyer: (a) Operate their respective businesses in the ordinary course and in a manner consistent with the manner in which they are being operated at the date of this Agreement. (b) Take all reasonable steps available to them to maintain the goodwill of their businesses and, except as otherwise requested by the Buyer, the continued employment of their executives and other employees. (c) At their expense, maintain all their assets in good repair and condition, except to the extent of reasonable wear and use and damage by fire or other unavoidable casualty. (d) Not make any borrowings other than borrowings in the ordinary course of business under working capital lines which are disclosed or reflected on the Balance Sheet. (e) Not enter into any contractual commitments involving capital expenditures, loans or advances, and not voluntarily incur any contingent liabilities, except in each case in the ordinary course of business. (f) Not pay any dividends, or make any other distributions, payments or repayments of debt to stockholders other than (i) dividends paid by subsidiaries to the Company or to wholly owned subsidiaries of the Company and (ii) reimbursement of travel and other expenses incurred in the ordinary course by stockholders who are officers or directors of the Company. (g) Not make any loans or advances (other than advances for travel and other normal business expenses) to stockholders, directors, officers or employees. (h) Maintain their books of account and records in the usual manner, in accordance with GAAP applied on a consistent basis, subject to normal year-end adjustments and accruals. (i) Comply in all material respects with all applicable laws and regulations of governmental agencies. (j) Not sell, dispose of or encumber any property or assets, or engage in any activities or transactions, except in each case in the ordinary course of business (with all sales of fixed assets being deemed not to be transactions in the ordinary course of business). (k) Not make any change or amendment to, or repeal, its charter or bylaws or comparable governing instruments. (l) Not issue or sell shares of its capital stock or any other equity securities (other than the Company's issuance of stock on exercise of options which are outstanding at the date of this Agreement), of any of them or issue any securities convertible into or exchangeable for, or rights to purchase relating to, or enter into any contract, commitment or arrangement with respect to the issuance of, any shares of capital stock or any other equity securities of any of them, or adjust, split, combine or reclassify any of their capital stock or other equity securities, or otherwise make any other changes in their capital structures. 14 19 (m) Not (i) adopt or amend any bonus, profit sharing, compensation, severance, stock option, pension, retirement or other employee benefit agreement, trust, plan or arrangement for the benefit or welfare of any present or former director, officer or employee of any of them or (ii) increase the compensation or fringe benefits of any present or former director, officer or employee (except that, in the case of employees who are not officers, individual merit increases and promotional increases, not to exceed 5% of salary, in accordance with past practices may be granted, but no across-the board or generally applicable increases may be granted), or pay any bonus, compensation or benefit not required by any existing Plan, or hire any employee at an annual rate of compensation (including anticipated incentive compensation, if any) in excess of $100,000, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. (n) Not adopt, or become an employer with regard to, any employee compensation, employee benefit or post-employment benefit plan. 5.2. Financing. The Buyer will do all things it is reasonably able to do, including to the extent necessary paying reasonable commitment fees and agreeing to pay or reimburse expenses, to arrange for the commitment letters described in Paragraph 6.1(e) to be delivered to the Stockholders Representative by May 31, 1999 (or such later date as is the same number of days after May 31, 1999 that the day on which the Company delivers the Audited 1999 Financial Statements to the Buyer is after May 20, 1999) and for lenders to make the Loan, and purchasers to purchase the Subordinated Notes, on or before July 1, 1999. 5.3. HSR Act Filings. The Company and the Buyer will each make as promptly as practicable the filing it is required to make under the HSR Act with regard to the transactions which are the subject of this Agreement and each of them will take all reasonable steps within its control (including providing information to the Federal Trade Commission and the Department of Justice) to cause the waiting periods required by the HSR Act to be terminated or to expire as promptly as practicable. The Company and the Buyer will each provide information and cooperate in all other respects to assist the other of them in making its filing under the HSR Act. 5.4. No Interference with Employee Relationships. Neither the Buyer nor anyone else acting on behalf of the Buyer will, without the prior written consent of the Stockholders Representative, discuss or make any arrangement with any officer or other member of the operating management of the Company, other than Collins regarding whether, or on what terms (including what terms as to compensation), that person will be employed by the Company, its subsidiaries or the Buyer after the Closing. 5.5. Selling Stockholders' Efforts to Fulfill Conditions. Each of the Selling Stockholders will use his, her or its best efforts to cause all the conditions contained in Paragraph 5.1 to be fulfilled, insofar as fulfillment of those conditions involves any action by the Selling Stockholder, anything else over which the Selling Stockholder has control, or anything which requires approval of the Company's stockholders (as to which the Selling Stockholder will vote all the stock of the Company which the Selling Stockholder owns or otherwise is entitled to vote in favor of the required approval). 5.6. Buyer's Efforts to Fulfill Conditions. The Buyer will use its best efforts to cause all the conditions contained in Paragraph 5.2 to be fulfilled prior to or at the Closing. ARTICLE VI CONDITIONS PRECEDENT TO CLOSING 15 20 6.1. Conditions to Buyer's Obligations. The obligations of the Buyer at the Closing are subject to satisfaction of the following conditions (any or all of which may be waived by the Buyer): (a) The representations and warranties of the Selling Stockholders contained in this Agreement will, except as contemplated by this Agreement, be true and correct in all material respects at the Closing Date with the same effect as though made on that date, and each of the Selling Stockholders will have delivered to the Buyer a certificate dated that date and signed by the Selling Stockholder; or an officer, general partner or other person authorized to sign on behalf of the Selling Stockholder, to that effect. For the purposes of this subparagraph, materiality will be as defined in Paragraph 3.2(a), but with the figure $1,000,000 substituted for the figure $200,000. (b) Each of the Selling Stockholders will have fulfilled in all material respects all his, her or its obligations under this Agreement required to have been fulfilled prior to or at the Closing. (c) No order will have been entered by any court or governmental authority and be in force which invalidates this Agreement or restrains the Buyer from completing the transactions which are the subject of this Agreement and no action will be pending against the Buyer or the Company relating to the transactions which are the subject of this Agreement which presents a reasonable likelihood of resulting in an award of damages against the Buyer or the Company which would be material to the Buyer and its subsidiaries taken as a whole, or to the Company and its subsidiaries taken as a whole. (d) The consents described in Exhibit 3.2-B will have been obtained. (e) The Buyer will have received an opinion from Rogers & Wells LLP, counsel to the Selling Stockholders, to the effect that (i) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) all the Shares have been duly authorized and issued and are fully paid and nonassessable; (iii) insofar as that counsel is aware, each Selling Stockholder has all power and authority necessary to enable him, her or it to enter into this Agreement and carry out the transactions contemplated by this Agreement; (iv) this Agreement has been duly executed by each of the Selling Stockholders, and is a valid and binding agreement each of the Selling Stockholders, enforceable against each of them in accordance with its terms, except to the extent enforceability may be affected by bankruptcy, reorganization or similar laws affecting the rights of creditors generally or by equitable principles of general application relating to the availability of remedies (whether in an action at law or a proceeding in equity); (v) neither the execution and delivery of this Agreement or of any document to be delivered in accordance with this Agreement nor the consummation of the transactions contemplated by this Agreement or by any document to be delivered in accordance with this Agreement will violate, result in a breach of, or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under, the Certificate of Incorporation or by-laws of the Company, any agreement or instrument of which that counsel is aware to which the Company or any subsidiary of the Company or any Selling Stockholder is a party or by which any of them is bound, any law or rule or regulation of any governmental authority applicable to the Company or any of its subsidiaries or, insofar as that counsel is aware, applicable to any Selling Stockholder, or any order of which that counsel is aware of any court or governmental agency having jurisdiction over the Company or any of its subsidiaries or any Selling Stockholder; and (vi) no governmental filings, authorizations, approvals or consents, or other governmental actions, with regard to the Company or, insofar as that counsel is aware with regard to any Selling Stockholder, other than the termination or expiration of the waiting periods under the HSR Act (which has occurred), are required to permit the Selling 16 21 Stockholders to fulfill all their obligations under this Agreement. The letter containing that opinion will state that in instances in which the opinion is limited to matters of which counsel is aware (x) with regard to the Company, the opinion is given after reasonable investigation, (y) with regard to Selling Stockholders, the opinion is given after inquiry of each of the Selling Stockholders, but without any other investigation, and (z) awareness of counsel refers to awareness of the attorneys in the firm who are working on the transactions which are the subject of this Agreement. (f) The Closing Date will be not later than August 31, 1999. 6.2. Conditions to Selling Stockholders' Obligations. The obligations of the Selling Stockholders at the Closing are subject to the following conditions (any or all of which may be waived by the Stockholders Representative): (a) The representations and warranties of the Buyer contained in this Agreement will, except as contemplated by this Agreement, be true and correct in all material respects at the Closing Date with the same effect as though made on that date, and the Buyer will have delivered to the Stockholders Representative a certificate dated that date and signed by the President or a Vice President of the Buyer to that effect. For the purposes of this subparagraph, materiality will be as defined in Paragraph 3.2(a), but with the figure $1,000,000 substituted for the figure $200,000. (b) The Buyer will have fulfilled in all material respects all its obligations under this Agreement required to have been fulfilled prior to or at the Closing. (c) No order will have been entered by any court or governmental authority and be in force which invalidates this Agreement or restrains any Selling Stockholder from completing the transactions which are the subject of this Agreement and no action will be pending against any Selling Stockholder relating to the transactions which are the subject of this Agreement which presents a reasonable likelihood of resulting in an award of damages against that Selling Stockholder which would be material to that Selling Stockholder and its subsidiaries taken as a whole. (d) The Stockholders Representative will have received an opinion from Thompson Hine & Flory LLP, counsel to the Buyer, to the effect that (i) the Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio, (ii) the Buyer has all corporate power and authority necessary to enable it to enter into this Agreement and carry out the transactions contemplated by this Agreement; (iii) all corporate actions necessary to authorize the Buyer to enter into this Agreement and carry out the transactions contemplated by it have been taken; (iv) this Agreement and the Agreement Regarding Shares each has been duly executed by the Buyer and each of them is a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms, except to the extent enforceability may be affected by bankruptcy, reorganization or similar laws affecting the rights of creditors generally or by equitable principles of general application relating to the availability of remedies (whether in an action at law or a proceeding in equity); (v) neither the execution and delivery of this Agreement or of any document to be delivered in accordance with this Agreement (including the Agreement Regarding Shares) nor the consummation of the transactions contemplated by this Agreement or by any document to be delivered in accordance with this Agreement will violate, result in a breach of, or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under, the Articles of Incorporation or Regulations of the Buyer, any agreement or instrument of which that counsel is aware, after a reasonable investigation, to which the Buyer or any subsidiary of the Buyer is a party or by which any of them is bound, any law or rule or regulation of any governmental 17 22 authority, or any order of which that counsel is aware, after a reasonable investigation, of any court or governmental agency having jurisdiction over the Buyer or any of its subsidiaries; and (vii) no governmental filings, authorizations, approvals or consents, or other governmental actions, other than the termination or expiration of the waiting periods under the HSR Act (which has occurred), are required to permit the Buyer to fulfill all its obligations under this Agreement, (viii) when issued as contemplated by this Agreement, all the shares of Buyer Common Stock issued as the Stock Consideration will be duly authorized and issued, fully paid and nonassessable, (ix) if either or both of the Special Subordinated Note or the Seller Notes are issued, when they are issued, they will be valid and binding debt obligations of the Buyer, enforceable against the Buyer in accordance with their respective terms, except to the extent enforceability may be affected by bankruptcy, reorganization or similar laws affecting the rights of creditors generally or by equitable principles of general application relating to the availability of remedies (whether in an action of law or a proceeding in equity); (x) if Warrants are issued as described in Paragraph 6.1(e) and Exhibit 6.1-E, when they are issued, those Warrants will be valid and binding obligations of the Buyer enforceable against the Buyer in accordance with their terms, except to the extent enforceability may be affected by bankruptcy, reorganization or similar laws affecting the rights of creditors generally or by equitable principles of general application relating to the availability of remedies (whether in an action at law or a proceeding in equity); and (xi) if shares of Buyer Common Stock are issued upon exercise of Warrants or conversion of the Seller Notes, when they are issued, those shares of Buyer Common Stock will be duly authorized and issued, fully paid and nonassessable shares of Buyer Common Stock. The letter containing the opinion will state that in instances in which an opinion is limited to matters of which counsel is aware, the opinion is given after reasonable investigation and may state that awareness of counsel refers to awareness of the attorneys in the firm who are working on the transactions which are the subject of this agreement. (e) The Closing Date will be not later than August 31, 1999. ARTICLE VII TERMINATION 7.1. Right to Terminate. This Agreement may be terminated at any time prior to the Closing: (a) By mutual consent of the Buyer and the Stockholders Representative. (b) By either the Buyer or the Stockholders Representative if, without fault of the terminating party, the Closing does not occur on or before the applicable date specified in Paragraph 5.1(f) or 5.2(e). (c) By the Buyer if (i) (x) it is determined that any of the representations or warranties of any Selling Stockholder contained in this Agreement was not complete and accurate in all material respects on the date of this Agreement (with materiality being as defined in Paragraph 3.2(a), but with the figure $1,000,000 substituted for the figure $200,000), (y) the Buyer has notified the Stockholders Representative of the condition which was different from that which was represented or warranted, and (z) that condition has continued for more than 15 days after the notice (or until the Closing Date, if that is earlier), or (ii) any of the conditions in Paragraph 5.1 is not satisfied or waived by the Buyer prior to or on the Closing Date. (d) By the Stockholders Representative if (i) (x) it is determined that any of the representations or warranties of the Buyer contained in this Agreement was not complete and accurate in all material respects on the date of this Agreement (with materiality being as defined 18 23 in Paragraph 3.2(a), but with the figure $1,000,000 substituted for the figure $200,000), (y) the Stockholders Representative has notified the Buyer of the condition which was different from that represented or warranted, and (z) that condition has continued for more than 15 days after the notice (or until the Closing Date, if that is earlier), or (ii) any of the conditions in Paragraph 5.2 is not satisfied or waived by the Stockholders Representative prior to or on the Closing Date. (e) By the Stockholders Representative if the Buyer does not by May 31, 1999, or such later date as is the same number of days after May 31, 1999 that the day on which the Audited 1999 Financial Statements are delivered to the Buyer is after May 20, 1999, deliver to the Stockholders Representative binding commitments, in form reasonably satisfactory to the Stockholders Representative, from a lender or lenders to make a loan (the "Loan") to the Buyer, and of purchasers to purchase subordinated notes of the Buyer ("Subordinated Notes"), with proceeds totaling not less than $90,000,000, which commitments will not be subject to any conditions other than absence of subsequent material adverse change in the financial condition, results of operations, business or prospects of the Company and its subsidiaries taken as a whole, and completion of customary documentation, except that if the total proceeds the Buyer will receive from the Loan and the Subordinated Notes is more than $75,000,000 but less than $95,000,000 the Stockholders Representative may not terminate this Agreement under this Paragraph if the Buyer, by a notice given to the Stockholders Representative not later than May 31, 1999, or such later date as is the same number of days after May 31, 1999 that the day on which the Audited 1999 Financial Statements are delivered to the Buyer is after May 20, 1999, requires the Selling Stockholders to purchase for $15 million subordinated notes ("Seller Subordinated Notes") and warrants ("Warrants") having the terms set forth on Exhibit 6.1-E. If the Buyer elects to require the Selling Stockholders to purchase the Seller Subordinated Notes and the Warrants, promptly after the Buyer notifies the Stockholders Representative of the Buyer's election to require the Selling Stockholders to purchase the Seller Subordinated Notes and Warrants, the Stockholders Representative, on behalf of the Selling Stockholders, and the Buyer will enter into an agreement under which (i) the Selling Stockholders agree to purchase from the Buyer, and the Buyer agrees to sell to the Selling Stockholders, Seller Subordinated Notes and Warrants (including the right under some circumstances to receive additional Warrants in the future) at the Closing for $15,000,000, with the obligations of the Selling Stockholders being subject to (i) all the conditions set forth in Paragraph 5.2, (ii) the Buyer's delivering to the Stockholders Representative at the Closing the Seller Subordinated Notes and the Warrants which are to be issued simultaneously with the issuance of the Seller Subordinated Notes and (iii) the Buyer's purchasing all the Shares from the Selling Stockholders. The term "Audited 1999 Financial Statements" means consolidated financial statements of the Company and its subsidiaries at March 31, 1999 and for the year ended on that date, which have been audited by Arthur Andersen LLP and are accompanied by a report of that firm containing its unqualified opinion. (f) By the Buyer, by a notice given to the Stockholders Representative not later than the tenth day after the day on which the Audited 1999 Financial Statements are delivered to the Buyer, if (i) the consolidated net worth of the Company and its subsidiaries show on the balance sheet included in the Audited 1999 Financial Statements is less than $7,188,000 or (ii) the consolidated EBITDA of the Company and its subsidiaries, based upon the results of operations of the Company and its subsidiaries for the year ended March 31, 1999, reflected on the Audited 1999 Financial Statements, is less than $12,183,000. For the purposes of this Paragraph, the consolidated EBITDA of the Company and its subsidiaries for the year ended March 31, 1999 will be their consolidated (A) earnings before interest and taxes, plus (B) any expense for severance compensation to Castor, plus (C) any expense relating either to the proposed sale of the Company to a group of which Castor was a participant or to the 19 24 transactions which are the subject of this Agreement, plus (D) any other non-recurring charges, plus (E) compensation expense resulting from issuances of stock or grants of stock options, plus (F) depreciation and amortization, all as reflected on the Audited 1999 Financial Statements (all as illustrated on Exhibit 6.1-F). 7.2. Effect of Termination. If this Agreement is terminated pursuant to Paragraph 6.1, after this Agreement is terminated, no party will have any further rights or obligations under this Agreement, except that if this Agreement is terminated pursuant to subparagraph (e), within five days after the Stockholders Representative notifies the Buyer of the termination of this Agreement under that subparagraph, the Buyer will pay the Selling Stockholders, by wire transfer to an account specified by the Stockholders Representative, the sum of $250,000 to reimburse the Selling Stockholders for expenses incurred and opportunities lost because of the negotiation and execution of this Agreement. Nothing contained in this Paragraph will, however, relieve any party of liability for any breach of this Agreement which occurs before this Agreement is terminated. ARTICLE VIII INDEMNIFICATION 8.1. Indemnification Against Loss Due to Inaccuracies in Selling Stockholders' Representations and Warranties. Subject to the limitations in Paragraph 7.5, (a) each Selling Stockholder indemnifies the Buyer against, and agrees to hold the Buyer harmless from, all losses, liabilities and expenses (including, but not limited to, as to claims by third persons, reasonable fees and expenses of counsel and accountants and expenses of investigation) incurred directly or indirectly because (i) any matter which is the subject of a representation and warranty by that Selling Stockholder contained in Paragraph 3.1 was not as represented or warranted, or (ii) the Selling Stockholder fails to fulfill in any respect any of its obligations under this Agreement or under any document delivered in accordance with this Agreement which is required to be fulfilled after the Closing and (b) the Selling Stockholders jointly and severally indemnify the Buyer against, and agree to hold the Buyer harmless from, all losses, liabilities and expenses (including, but not limited to, as to claims by third persons, reasonable fees and expenses of counsel and expenses of investigation) because any matter which is the subject of a representation and warranty in Paragraph 3.2 is not as represented and warranted. 8.2. Indemnification Against Loss Due to Inaccuracies in Buyer's Representations and Warranties. The Buyer indemnifies and each of the Selling Stockholders against, and agrees to hold and each of the Selling Stockholders harmless from, all losses, liabilities and expenses (including, but not limited to, reasonable fees and expenses of counsel and accountants and expenses of investigation) incurred directly or indirectly because (i) any matter which is the subject of a representation or warranty contained in Paragraph 3.3 is not as represented or warranted, or (ii) the Buyer fails to fulfill in any respect any of its obligations under this Agreement or under any document delivered in accordance with this Agreement which is required to be fulfilled after the Closing. 8.3. Indemnification Against Liabilities with Regard to Previously Sold Companies. The Selling Stockholders jointly and severally indemnify the Company against, and agree to hold the Company harmless from, any liabilities under any indemnification provision of any of the agreements listed on Exhibit 7.3 or because of a breach of a representation, warranty or covenant in any such agreement ("Sold Company Indemnities") and all legal fees and other out of pocket expenses reasonably incurred by the Company in defending against claims for Sold Company Indemnities. If any claim is made against the Company after the Closing for any Sold Company Indemnity, that claim will be subject to Paragraph 7.9. The indemnification in this Paragraph 7.3 will extend to the Buyer and to subsidiaries of the Company to the extent, but 20 25 only to the extent, that a claim is made against the Buyer or a subsidiary of the Company that it is contractually obligated to the claimant under an indemnification provision of an agreement listed on Exhibit 7.3. If such a claim is made against the Buyer or a subsidiary, all the provisions of this Paragraph relating to the Company will apply to the Buyer or the subsidiary. 8.4. Tax Indemnification. Without limiting the obligations of the Selling Stockholders under Paragraph 7.1, the Selling Stockholders agree to pay, and jointly and severally indemnify the Company and its subsidiaries against, and agree to hold the Company and its subsidiaries harmless from, any liability for Taxes which relate to a period which ends on or before the Closing Date, whether or not the Taxes were required to be paid on or before the Closing Date, except that the Selling Stockholders will not be required to pay, or indemnify the Company or any subsidiaries against, any Taxes for which an accrual is reflected on the Balance Sheet or which are attributable to operations of the Company or any of its subsidiaries after March 31, 1999. The Company will permit the Stockholders Representative or persons designated by the Stockholders Representative to oversee the preparation of all Tax Returns prepared after the Closing with regard to periods which end on or before the Closing Date and to control all decisions as to elections which may be made on, or after discretionary decisions (including interpretations of requirements of applicable Tax laws or regulations) with regard to, those Tax Returns. The Buyer will cause the Company to cooperate with the Stockholders Representative in all reasonable ways in the preparation of Tax Returns relating periods ending on or before the Closing Date. The Company will bear the costs of preparing those Tax Returns, but the Stockholders Representative will pay the costs of all persons it designates to assist in overseeing the preparation of those Tax Returns. If the Company or any subsidiary is notified that any governmental authority intends to begin an audit or an administrative or judicial proceeding relating to Taxes for which the Company or the subsidiary intends to seek indemnification under this Paragraph, the Company or the subsidiary will promptly notify the Stockholders Representative that the audit or the administrative or judicial proceeding is going to take place and the Stockholders Representative may, if it elects to do so, control the audit, or the defense of the administrative or judicial proceeding, on behalf of the Company or the subsidiary. If, because the Company or a subsidiary makes any Tax payment for which it is indemnified under this Paragraph, the Company or a subsidiary becomes entitled to a refund or reduction of Taxes with regard to any other period (whether before or after the Closing), any other type of Tax, or any Tax in any other jurisdiction, the liability of the Selling Stockholders under this Paragraph will be limited to the amount by which the Taxes for which the Company or subsidiary is entitled to be indemnified under this Paragraph exceed the amount of the refunds or reductions in Taxes to which the Company or a subsidiary become, or will become, entitled because of the payment of Taxes for which the Company or a subsidiary is entitled to be indemnified under this Paragraph. If the amounts of refunds or reductions in Taxes cannot be determined with reasonable certainty, they will be estimated, based on the highest rate of Federal corporate income tax at the time the indemnification payment is due. 8.5. Limitation on Liabilities of Selling Stockholders Except in instances of knowing, intentional fraud, neither the Selling Stockholders together, nor any individual Selling Stockholder, will be liable under Paragraph 7.1, or any other provision of this Agreement, because matters which are the subject of representations or warranties contained in Paragraph 3.2 (other than Paragraph 3.2(c)) are not as represented or warranted, to the extent the losses, liabilities and expenses incurred by the Buyer for which the Buyer is entitled to indemnification under clause (b) of Paragraph 7.1, or for which any Selling Stockholder would, except for this Paragraph, otherwise be liable, are in total less than $500,000 or exceed in total $ 4,500,000. The liability of an individual Selling Stockholder under Paragraph 7.1 or otherwise because 21 26 matters which are the subject of representations and warranties contained in Paragraph 3.2 (other than Paragraph 3.2(c)) are not as represented or warranted will under no circumstances exceed (x) $4,000,000 times (y) the percentage of all the Shares which that Selling Stockholder is selling to the Buyer. 8.6. Indemnification Sole Remedy. The indemnification in Paragraph 7.1 and 7.2, as the case may be, will be the sole remedy of the Buyer or any Selling Stockholder because any matter which is the subject of a representation or warranty contained in Paragraph 3.1, 3.2 or 3.3 is not as represented or warranted. Any claim for that indemnification, other than a claim for indemnification with regard to Paragraph 3.1(c) or the last sentence of Paragraph 3.2(c), must be made not later than December 31, 2000 in a written notification to the party from which indemnification is sought which describes in reasonable detail the claim and the facts on which it is based. A claim for indemnification with regard to Paragraph 3.1(c) or the last sentence of Paragraph 3.2(c) may be made at any time in a written notification containing the information described in the preceding sentence. None of the Selling Stockholders or the Buyer will have any liability because any matter which is the subject of a representation or warranty contained in Paragraph 3.1, 3.2 or 3.3 is not as represented or warranted, unless it is described in a notification given as (including within the time) provided in this Paragraph. 8.7. Computation of Loss. (a) The Buyer's loss because any matter which is the subject of a representation or warranty in Paragraph 3.1 or 3.2 is not as represented or warranted will be (i) the amount by which the value of the Shares on the Closing Date is less because that matter was not as represented or warranted than it would have been if the matter had been as represented or warranted (taking account, among other things, of any insurance proceeds or other sums received by the Company with regard to the matter) plus (ii) the amount of any losses, liability or expenses incurred directly by the Buyer because the matter was not as represented or warranted. (b) Whenever the Buyer or any Selling Stockholder (the "Indemnifying Party") is required by Paragraph 7.1 or 7.2, or any other provision of this Article VII, to indemnify any other of them (the "Indemnified Party") against, and hold the Indemnified Party harmless from, any item of loss, liability or expense, the Indemnifying Party will pay the Indemnified Party the sum which, after payment by the Indemnified Party of all Federal (but not state or local) income or gains taxes, or similar Taxes, resulting from the payment, minus all tax savings because of deductions or credits available to the Indemnified Party because of the loss, liability or expense, will equal the amount of the loss, liability or expense. 8.8. Indemnification Against Pending Litigation and Directors and Officers Claims. The Selling Stockholders jointly and severally indemnify the Company against, and agree to hold the Company harmless from, the following: (a) Any loss, liability or expense (other than fees and expenses of counsel shared with other defendants) in any of the actions listed on Exhibit 7. 8 The Stockholders Representative may, if it chooses to do so, assume control of the defense of any or all of those actions, but if the Stockholders Representative causes the Company to be represented by separate counsel in any of those actions, the Selling Stockholders will pay the costs of that separate counsel. The Selling Stockholders will not be responsible for the costs of any settlement of any of the actions listed on Exhibit 7.8, unless the Stockholders Representative consents to that settlement. 22 27 (b) Any sums the Company or any subsidiary is required to pay to persons who were directors or officers of the Company or any subsidiary before the Closing Date as indemnification under the Company's or its subsidiary's by-laws or otherwise, because of acts or omissions by them on or before the Closing Date in their capacities as directors or officers of the Company or a subsidiary, to the extent the Company's or its subsidiary's indemnification obligation is not covered by insurance. 8.9. Procedure Regarding Third Party Claims. If a third party makes a claim or demand against an indemnified party as to which the indemnified party intends to seek indemnification under this Article VII (other than under Paragraph 7.8) with regard to the claim or demand, the indemnified party will promptly, and in any event within 30 days after receipt of notice of the claim or demand, notify the indemnifying party (or, as to notice to the Selling Stockholders, notify the Stockholders Representative) of the claim or demand, provided that failure to notify the indemnifying party of a claim or demand will not relieve the indemnifying party from any obligations it may have to the indemnified party, except to the extent that the defense against the claim or demand, or the cost of that defense, is prejudice by the failure to give notice. If a demand for indemnification is made under the Article VII with regard to a claim or demand of a third party, the indemnifying party will be entitled to participate in the defense of the claim or demand, and if it wishes to do so to assume and control the defense against the claim or demand with counsel of its choice. If the indemnifying party assumes the defense against a claim or demand, (a) the indemnified party will be entitled to participate in the defense, but only at the indemnified party's cost and expense and without any right to be reimbursed by the indemnifying party for that expense, and (b) no settlement or compromise of the subject matter of the claim or demand may be effected by the indemnified party without the consent of the indemnifying party. If the indemnifying party does not assume the defense against a claim or demand, no compromise or settlement with regard to that claim or demand maybe effected at the expense of the indemnifying party without the consent of the indemnifying party, which consent will not be unreasonably with held or delayed. In any event, the indemnified party will cooperate with indemnifying party in the defense against any claim or demand for which the indemnified party is entitled to be indemnified. 8.10. Buyer's Right to Withhold Stock Consideration. (a) If, at least 10 days before the first anniversary of Closing Date, the Buyer notifies the Stockholders Representative that the Buyer wishes to apply Stock Consideration to satisfy a sum due from the Selling Stockholders to the Buyer under this Article VII which the Buyer had requested at least 30 days before the first anniversary of Closing Date, the Stockholders Representative will return to the Buyer, and the Buyer will apply against the sum which has been unpaid for at least 30 days, a number of shares of Buyer Common Stock, valued at their Fair Value on the day which is 10 days before the first anniversary of the Closing Date, with a value equal to the sum which has been unpaid for at least 30 days. As used in this Agreement, the Fair Value of a share of Buyer Common Stock on a day will be the average of the last sale price of the Buyer Common Stock reported on the New York Stock Exchange Composite Tape (or in such other market as may be the principal market for the Buyer Common Stock) on each of the twenty trading days immediately preceding (but not including) the day on which the Fair Value is determined. (b) If the Stockholders Representative is required by subparagraph (a) to return Buyer Common Stock to the Buyer, prior to the fist anniversary of the Closing Date, the Stockholders Representative will deliver to the Buyer the certificate delivered to the 23 28 Stockholders Representative at the Closing, and the Buyer will issue in exchange a stock certificate representing the number of shares of Buyer Common Stock, net of the shares applied against the sum due to the Buyer, to which the Selling Stockholders are entitled. (c) If the reason a sum has been unpaid for more than 30 days is that the Stockholders Representative has contested an assertion by the Buyer that the Selling Stockholders are required to pay that sum, the Stockholders Representative will not return Buyer Common Stock to the Company with regard to that sum, but when the Stockholders Representative distributes the Stock Consideration to the Selling Stockholders, the Stockholders Representative (i) will retain a number of shares of Buyer Common Stock which has a Fair Value on the day which is ten days before the first anniversary of the Closing Date equal to the contested sum, (ii) will promptly sell those shares, and (iii) will hold the sale proceeds until there is a final determination of whether the Selling Stockholders are required to pay all or a portion of the contested sum to the Buyer, at which time the Stockholders Representative will (x) pay to the Buyer out of the sale proceeds any amount to which it is determined the Buyer is entitled, and (y) distribute the balance of the sale proceeds, and any interest earned on the sale proceeds, to the Selling Stockholders. Failure of the Buyer to request the return of Buyer Common Stock and apply the Buyer Common Stock against an obligation of the Selling Stockholders under this Article VII, whether because the Buyer has not yet made the claim which creates that obligation or otherwise, will not affect the obligation. It will, however, end the right of the Buyer to apply Stock Consideration against the obligation. 8.11. Apportionment of Liability Among Selling Stockholders. Each Selling Stockholder will be responsible for a portion of any sums the Selling Stockholders are required to pay under Paragraph 7.1 equal to the portion of all the Shares which that Selling Stockholder is selling to the Company. If any Selling Stockholder is required by any court order to otherwise to pay a greater portion of any sum the Selling Stockholders are required to pay under Paragraph 7.1 than is provided in the preceding sentence, each of the other Selling Stockholders will make a payment to that Selling Stockholder so that, after the payment to that Selling Stockholder (and to any other Selling Stockholder who or which are required to pay a greater portion of the sum the Selling Stockholders are required to pay under Paragraph 7.1 than that provided in the preceding sentence), each of the Selling Stockholders will have paid the portion provided in the preceding sentence of the total sum the Selling Stockholders are required to pay under Paragraph 7.1. In any action or proceeding brought against any Selling Stockholder to recover a sum it is claimed the Selling Stockholders are required to pay under Paragraph 7.1, that Selling Stockholder may implead the other Selling Stockholders so that any award can be apportioned among the Selling Stockholders in the manner provided in the first sentence of this Paragraph. This Paragraph will not affect the liabilities of the respective Selling Stockholders to the Buyer, which will be individual or joint and several as provided in the respective provisions under which the indemnification obligations arise. ARTICLE IX ABSENCE OF BROKERS 9.1. Representations and Warranties Regarding Brokers and Others. The Buyer, and the Selling Stockholders jointly, each represents and warrants to the other of them that nobody acted as a broker, a finder or in any similar capacity in connection with the transactions which 24 29 are the subject of this Agreement, except that (i) ING Baring Furman Selz ("Furman Selz") as financial advisor to the Buyer and (ii) Salomon Smith Barney, Inc. ("SSB") acted as financial advisor to the Selling Stockholders. All fees of Furman Selz will be paid by the Buyer and all fees of SSB will be paid by the Selling Stockholders. The Buyer, and the Selling Stockholders jointly, each indemnifies the other of them against, and agrees to hold the other of them harmless from, all losses, liabilities and expenses (including, but not limited to, reasonable fees and expenses of counsel and costs of investigation) incurred because of any claim by anyone for compensation as a broker, a finder or in any similar capacity by reason of services allegedly rendered to the indemnifying party in connection with the transactions which are the subject of this Agreement. ARTICLE X STOCKHOLDERS REPRESENTATIVE 10.1. Appointment of Stockholders Representative (a) Each Selling Stockholder, by executing this Agreement, irrevocably appoints Three Cities Research, Inc. (the "Stockholders Representative") to serve as the representative of that Selling Stockholder with respect to all matters concerning the Selling Stockholders set forth in this Agreement or in any other agreements entered into by the Selling Stockholders in accordance with this Agreement. Any action taken by the Stockholders Representative will bind each Selling Stockholder as fully as though it had been taken by the Selling Stockholder himself, herself or itself. If, for any reason, the Stockholders Representative named in this Paragraph becomes unable or unwilling to serve, the Selling Stockholders will promptly designate a successor Stockholders Representative, which or who will have all the powers of the Stockholders Representative described in this Paragraph and elsewhere in this Agreement. (b) Without limiting what is said in subparagraph (a), each of the Selling Stockholders, by executing this Agreement, irrevocably appoints the Stockholders Representative as the agent, proxy and attorney in fact for that Selling Stockholder to, among other things, (i) deliver all documents and take all other actions which are required in order to complete the transactions contemplated by this Agreement, (ii) receive on behalf of that Selling Stockholder (for disbursement to that Selling Stockholder) any payments to which the Selling Stockholder is entitled under this Agreement, (iii) receive on behalf of that Selling Stockholder (for delivery to that Selling Stockholder) any document the Selling Stockholder is entitled to receive under this Agreement and (iv) execute and deliver on behalf of that Selling Stockholder any document which is required by this Agreement. When any payment is made, or document is delivered, to the Stockholders Representative as agent of a Selling Stockholder, that payment or document will be deemed to have been made or delivered to that Selling Stockholder. The agency and proxy contained in this subparagraph will be deemed coupled with an interest, and therefore to be irrevocable, and will, to the fullest extent permitted under applicable law, survive the death, incapacity, bankruptcy or dissolution of any Selling Stockholder. (c) Whenever any payment due to the Selling Stockholders is made to the Stockholders Representative (including the Cash Portion of the Purchase Price and payments with regard to the Seller Subordinated Notes) or securities (including Buyer Common Stock or Warrants) are delivered to the Stockholders Representative, the payment or delivery to the Stockholders Representative will constitute payment or delivery by the Buyer to the Selling Stockholders, and the Stockholders Representative will be responsible for distributing the payment or the securities to the individual Selling Stockholders. 25 30 ARTICLE XI GENERAL 11.1. Expenses. The Buyer and the Selling Stockholders will each pay its or their own expenses in connection with the transactions which are the subject of this Agreement, including legal fees. The Selling Stockholders will reimburse the Company for any payments it is required to make (i) to prepay indebtedness at or before the Closing, (ii) after the Closing Date to reimburse Castor for expenses relating to his efforts to purchase the Company or (iii) after the Closing Date to James L. Phillis under a Severance Agreement dated April 29, 1999, to the extent the payments to James L. Phillis under that agreement which are made after the Closing Date exceed $28,750. 11.2. Access to Properties, Books and Records. (a) From the date of this Agreement until the Closing Date, the Selling Stockholders will cause the Company and each of its subsidiaries to give representatives of the Buyer full access during normal business hours to all of their respective properties, books and records to the extent (but only to the extent) examination of those properties, books and records is, or could be, relevant to the Buyer's determination whether the representations and warranties of the Selling Stockholders in Article III are true and correct in all material respects or whether there is any other reason why the Buyer is not required to complete the transactions which are the subject of this Agreement. The Buyer will not include among its representatives who are to be given access to the properties, books and records of the Company anybody who, on behalf of Buyer, is involved in decisions as to how products sold by the Buyer which compete with products sold by the Company are priced or marketed. Until the Closing, the Buyer will, and will cause its representatives to, hold all information it receives as a result of its access to the properties, books and records of the Company or its subsidiaries in confidence and use that information solely in connection with the transactions which are the subject of this Agreement, except to the extent that information (i) is or becomes available to the public (other than through a breach of this Agreement), (ii) becomes available to the Buyer from a third party which, insofar as the Buyer is aware, is not under an obligation to the Selling Stockholders, to the Company or to a subsidiary to keep the information confidential, (iii) was known to the Buyer before it was made available to the Buyer or its representative by a Selling Stockholder, the Company or a subsidiary, or (iv) otherwise is independently developed by the Buyer. If this Agreement is terminated prior to the Closing, the Buyer will, at the request of the Stockholders Representative, deliver to the Stockholders Representative all documents and other material obtained by the Buyer from any Selling Stockholder, the Company or a subsidiary in connection with the transactions which are the subject of this Agreement or evidence that that material has been destroyed by the Buyer. (b) After the Closing, the Buyer will use its best efforts to cause the Company to provide each Selling Stockholder with access to the books and records and knowledgeable personnel of the Company and of its subsidiaries during normal business hours in connection with the preparation of financial statements by the Selling Stockholder or its affiliates, the preparation of Tax Returns by the Selling Stockholder or its affiliates or audits of Tax Returns which were filed by the Selling Stockholder or its affiliates. Each Selling Stockholder will, and will cause its affiliates and representatives to, hold all the information the Selling Stockholder receives as a result of access to the books, records and knowledgeable personnel of the Company and its subsidiaries in confidence and use that information solely for the purposes 26 31 described in the preceding sentence, except to the extent that information (i) is or becomes available to the public (other than through a breach of this Agreement), (ii) becomes available to the Selling Stockholder from a third party which, insofar as the Selling Stockholder is aware, is not under an obligation to the Buyer, to the Company or to a subsidiary to keep the information confidential, (iii) was known to the Selling Stockholder before it was made available to the Selling Stockholder or its affiliate or representative by the Company or a subsidiary, or (iv) otherwise is independently developed by the Selling Stockholder or by an affiliate or representative of the Selling Stockholder. (c) Until the third anniversary of the Closing Date, as to Three Cities Fund II, L.P. and Three Cities Offshore II C.V. (the "Three Cities Funds") and until the first anniversary of the Closing Date as to A.A. Fornataro ("Fornataro") (each the "Noncompetition Period" as to the applicable entities or person), none of the Three Cities Funds or Fornataro will invest in, or engage directly or indirectly, as an employee, a director or otherwise, in the business of, any of the companies listed on Exhibit 10.2-C, PROVIDED, HOWEVER, that nothing in this Paragraph 10.2 will prevent the Three Cities Funds together, or Fornataro, from owning less than 5% of the outstanding stock of any publicly-traded corporation. During the applicable Noncompetition Period, neither of the Three Cities Funds nor Fornataro will, on behalf of any entity other than the Company or a subsidiary, solicit or otherwise attempt to hire or retain, in any capacity, any person who is, at that time an employee or officer of the Company or a subsidiary or attempt to cause any such person to terminate his or her employment with the Company or a subsidiary. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Paragraph is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability will have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement will be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 11.3. Press Releases. Neither the Buyer nor the Selling Stockholders will issue any press release or otherwise make any public statement regarding this Agreement or the transactions contemplated by it, unless the press release or public statement has been approved by the Buyer and by the Stockholders Representative, except that nothing in this Paragraph will prevent any party from making any statement when and as required by law or by the rules of any securities exchange or securities quotation system on which securities of that party or an affiliate are listed or quoted. 11.4. Entire Agreement. This Agreement (including the Exhibits) and the documents to be delivered in accordance with this Agreement contain the entire agreement between the Buyer and the Selling Stockholders relating to the transactions which are the subject of this Agreement and those other documents, all prior negotiations, understandings and agreements between the Buyer and any of the Selling Stockholders are superseded by this Agreement and those other documents, and there are no representations, warranties, understandings or agreements concerning the transactions which are the subject of this Agreement or those other documents other than those expressly set forth in this Agreement or those other documents. 27 32 11.5. Captions. The captions of the articles and paragraphs of this Agreement are for reference only, and do not affect the meaning or interpretation of this Agreement. 11.6. Assignments. Neither this Agreement nor any right of any party under it may be assigned, except that the Buyer may assign its rights and obligations under this Agreement to a corporation which is wholly owned by the Buyer, if the Buyer unconditionally guarantees that the corporation to which the Buyer's rights and obligations are assigned will perform fully all the obligations of the Buyer under this Agreement. 11.7. Notices and Other Communications. Any notice or other communication under or relating to this Agreement must be in writing and will be deemed given when delivered in person or sent by facsimile (with proof of receipt at the number to which it is required to be sent), on the business day after the day on which it is delivered to a major nationwide delivery service for overnight delivery, or on the third business day after the day on which it is mailed by first class mail from within the United States of America, to the following addresses (or such other address as may be specified as provided in this Agreement after the date of this Agreement by the party to which the notice or communication is sent): If to any Selling Stockholder: Three Cities Research, Inc. as Stockholders Representative 650 Madison Avenue New York, New York 10022 Attention: W. Robert Wright II Facsimile No.: (212) 980-1142 with a copy to: Rogers & Wells LLP 200 Park Avenue New York, New York 10166 Attention: David W. Bernstein Facsimile No.: (212) 878-8375 If to the Buyer: The Monarch Machine Tool Company 2600 Kettering Tower Dayton, Ohio 45423 Attention: Richard E. Clemens, President Facsimile No.: (937) 910-9305 with a copy to: Thompson Hine & Flory LLP 2000 Courthouse Plaza N.E. Dayton, Ohio 45402 Attention: Joseph M. Rigot Facsimile No.: (937) 443-6635 28 33 11.8. Governing Law. This Agreement will be governed by, and construed under, the substantive laws of the State of Delaware. 11.9. Amendments. This Agreement may be amended only by a document in writing signed by both the Buyer and the Stockholders Representative. 11.10. Counterparts. This Agreement may be executed in two or more counterparts, some of which may be signed by fewer than all the parties or may contain facsimile copies of pages signed by some of the parties. Each of those counterparts will be deemed to be an original copy of this Agreement, but all of them together will constitute one and the same agreement. 29 34 IN WITNESS WHEREOF, the Buyer and the Selling Stockholders have executed this Agreement, intending to be legally bound by it, on the day shown on the first page of this Agreement. THE MONARCH MACHINE TOOL COMPANY. By:_______________________________ Title: THREE CITIES FUND II, L.P. THREE CITIES OFFSHORE II C.V By TCR Associates, L.P. By: TCR Offshore Associates L.P. General Partner General Partner By: THREE CITIES RESEARCH, INC By: THREE CITIES ASSOCIATES N.V. General Partner General Partner By:_______________________________ By:_______________________________ Title: Title: ALLIED CAPITAL CORPORATION ALLIED INVESTMENT CORPORATION By:_______________________________ By:_______________________________ Title: Title: WYNNEFIELD PARTNERS SMALL CAP _______________________________ VALUE, L.P. Anthony T. Castor III _______________________________ By:_______________________________ Vernon E. Collins Title: * * ------------------------------- ------------------------------- Michael H. Bulkin Martin C. Dilner * * ------------------------------- ------------------------------- J. Murfree Butler M. James Ditallo * * ------------------------------- ------------------------------- Stephen G. Cerri George A. Douglas * * ------------------------------- ------------------------------- A.A. Fornataro Audie K. Dunbar * * ------------------------------- ------------------------------- Michael S. Levin John A. Fischer 30 35 * * ------------------------------- ------------------------------- Gerald L. Brenneman Thomas M. Fitzwilliams * * ------------------------------- ------------------------------- William H. Carver George R. Goldner * * ------------------------------- ------------------------------- Steven B. Chinchi Richard L. Goldner * * ------------------------------- ------------------------------- Joseph L. Cugini Francis J. Gordon * * ------------------------------- ------------------------------- Wesley M. Dias Gary D. Hart * * ------------------------------- ------------------------------- Thomas F. Hazen Mark J. Menego * * ------------------------------- ------------------------------- Marvin T. Knepp Robert F. Mikesell * * ------------------------------- ------------------------------- Harry F. Leonard Charles L. Miller * * ------------------------------- ------------------------------- William A. Lindner Kenneth H. Miller * * ------------------------------- ------------------------------- Frank S. Ludwiczak Donald J. Mudric * * ------------------------------- ------------------------------- John A. Marzula Frank W. Petraglia * * ------------------------------- ------------------------------- Miros J. Maszczak Teresa D. Phillips * * ------------------------------- ------------------------------- Michael W. McGraw James L. Phillis * * ------------------------------- ------------------------------- Melinda S. McKee William D. Presutti * * ------------------------------- ------------------------------- James H. McKenna Michael A. Santillo * * ------------------------------- ------------------------------- Karl T. Schoeffel Henry E. Theis * * ------------------------------- ------------------------------- Carl H. Simpson Glyn R. Vaughan 31 36 * * ------------------------------- ------------------------------- Blake C. Steele William R. Weber * * ------------------------------- ------------------------------- Richard J. Stock Edward R. Woods * * ------------------------------- ------------------------------- David D. Struth Lloyd P. Zahn * ------------------------------- Mark E. Sutherland * ------------------------------- Mark T. Swain *By_________________________ W. Robert Wright II Attorney-in-Fact 32 EX-4.1 3 EXHIBIT 4.1 1 Exhibit 4.1 EXECUTION COPY ================================================================================ CREDIT AGREEMENT AMONG THE MONARCH MACHINE TOOL COMPANY, AS BORROWER, THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO, AND ING (U.S.) CAPITAL LLC, AS ADMINISTRATIVE AGENT DATED AS OF JUNE 30, 1999 ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- SECTION 1. DEFINITIONS.....................................................................................1 1.1 Defined Terms...................................................................................1 1.2 Other Definitional Provisions..................................................................20 SECTION 2. AMOUNT AND TERMS OF TERM LOAN COMMITMENTS......................................................21 2.1 Tranche A Term Loan Commitments................................................................21 2.2 Tranche A Term Notes...........................................................................21 2.3 Tranche B Term Loan Commitments................................................................21 2.4 Tranche B Term Notes...........................................................................22 2.5 Procedure for Term Loan Borrowing..............................................................22 2.6 Commitment Fee.................................................................................23 SECTION 3. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS...............................................23 3.1 Revolving Credit Commitments...................................................................23 3.2 Revolving Credit Notes.........................................................................23 3.3 Procedure for Revolving Credit Borrowing.......................................................24 3.4 Commitment Fee.................................................................................24 3.5 Termination or Reduction of Revolving Credit Commitments.......................................24 SECTION 4. LETTERS OF CREDIT..............................................................................25 4.1 L/C Commitment.................................................................................25 4.2 Procedure for Issuance of Letters of Credit....................................................26 4.3 Fees, Commissions and Other Charges............................................................26 4.4 L/C Participations.............................................................................27 4.5 Reimbursement Obligations of the Borrower......................................................28 4.6 Obligations Absolute...........................................................................28 4.7 Letter of Credit Payments......................................................................29 4.8 Application....................................................................................29 SECTION 5. GENERAL PROVISIONS APPLICABLE TO LOANS.........................................................29 5.1 Interest Rates and Payment Dates...............................................................29 5.2 Conversion and Continuation Options............................................................30 5.3 Minimum Amounts and Maximum Number of Tranches.................................................30 5.4 Optional Prepayments...........................................................................30 (b) Any Lender holding a Tranche B Term Loan may elect, by notice to the Administrative Agent by telephone (confirmed by telecopy or otherwise in writing) at least one Business Day prior to the prepayment date, to decline all or any portion of a prepayment of its Tranche B Term Loan pursuant to this Section 5.4, in which case the aggregate amount of prepayments that would have been applied to Tranche B Term Loans but was so declined shall be applied to prepay Tranche A Term Loans and Tranche B Term Loans of Lenders who accept prepayment of their Tranche B Term Loans pursuant to this Section, on a pro-rata basis based on their respective then outstanding principal amounts........................................................................................31 5.5 Mandatory Prepayments..........................................................................31 5.6 Computation of Interest and Fees...............................................................33 5.7 Inability to Determine Interest Rate...........................................................33 5.8 Pro Rata Treatment and Payments................................................................34
-i- 3 5.9 Illegality.....................................................................................35 5.10 Requirements of Law............................................................................35 5.11 Taxes..........................................................................................36 5.12 Indemnity......................................................................................38 5.13 Lending Offices; Change of Lending Office; Replacement of Lenders..............................38 SECTION 6. REPRESENTATIONS AND WARRANTIES.................................................................39 6.1 Financial Condition............................................................................39 6.2 No Change......................................................................................41 6.3 Existence; Compliance with Law.................................................................41 6.4 Power; Authorization; Enforceable Obligations..................................................41 6.5 No Legal Bar...................................................................................42 6.6 No Material Litigation.........................................................................42 6.7 No Default.....................................................................................42 6.8 Ownership of Property; Liens...................................................................42 6.9 Intellectual Property..........................................................................42 6.10 No Burdensome Restrictions.....................................................................42 6.11 Taxes..........................................................................................42 6.12 Federal Regulations............................................................................43 6.13 ERISA..........................................................................................43 6.14 Investment Company Act; Other Regulations......................................................43 6.15 Subsidiaries...................................................................................43 6.16 Security Documents.............................................................................44 6.17 Accuracy and Completeness of Information.......................................................44 6.18 Labor Relations................................................................................45 6.19 Insurance......................................................................................45 6.20 Solvency.......................................................................................45 6.21 Purpose of Loans...............................................................................46 6.22 Environmental Matters..........................................................................46 6.23 Regulation H...................................................................................47 6.24 Year 2000 Compliance...........................................................................47 SECTION 7. CONDITIONS PRECEDENT...........................................................................47 7.1 Conditions to Initial Loans....................................................................47 7.2 Conditions to Each Loan........................................................................53 SECTION 8. AFFIRMATIVE COVENANTS..........................................................................54 8.1 Financial Statements...........................................................................54 8.2 Certificates; Other Information................................................................55 8.3 Payment of Obligations.........................................................................56 8.4 Conduct of Business and Maintenance of Existence...............................................56 8.5 Maintenance of Property; Insurance.............................................................56 8.6 Inspection of Property; Books and Records; Discussions.........................................56 8.7 Notices........................................................................................56 8.8 Environmental Laws.............................................................................57 8.9 Periodic Audit of Accounts Receivable and Inventory............................................57 8.10 Additional Collateral; Additional Guarantors...................................................58 8.11 Year 2000 Covenants............................................................................58 8.12 Interest Rate Protection Arrangements..........................................................59
-ii- 4 SECTION 9. NEGATIVE COVENANTS.............................................................................59 9.1 Financial Condition Covenants..................................................................59 9.2 Limitation on Indebtedness.....................................................................63 9.3 Limitation on Liens............................................................................63 9.4 Limitation on Guarantee Obligations............................................................64 9.5 Limitation on Fundamental Changes..............................................................65 9.6 Limitation on Sale of Assets...................................................................65 9.7 Limitation on Dividends........................................................................66 9.8 Limitation on Capital Expenditures.............................................................66 9.9 Limitation on Investments, Loans and Advances..................................................67 9.10 Limitation on Optional Payments and Modifications of Debt Instruments..........................67 9.11 Limitation on Transactions with Affiliates.....................................................67 9.12 Limitation on Sales and Leasebacks.............................................................68 9.13 Limitation on Changes in Fiscal Year...........................................................68 9.14 Limitation on Negative Pledge Clauses..........................................................68 9.15 Limitation on Lines of Business................................................................68 9.16 Governing Documents............................................................................68 9.17 Limitation on Subsidiary Formation.............................................................68 SECTION 10. EVENTS OF DEFAULT..............................................................................68 SECTION 11. THE ADMINISTRATIVE AGENT.......................................................................72 11.1 Appointment....................................................................................72 11.2 Delegation of Duties...........................................................................72 11.3 Exculpatory Provisions.........................................................................72 11.4 Reliance by Administrative Agent...............................................................72 11.5 Notice of Default..............................................................................73 11.6 Non-Reliance on Administrative Agent and Other Lenders.........................................73 11.7 Indemnification................................................................................74 11.8 Administrative Agent in Its Individual Capacity................................................74 11.9 Successor Administrative Agent.................................................................74 SECTION 12. MISCELLANEOUS..................................................................................75 12.1 Amendments and Waivers.........................................................................75 12.2 Notices........................................................................................75 12.3 No Waiver; Cumulative Remedies.................................................................76 12.4 Survival of Representations and Warranties.....................................................76 12.5 Payment of Expenses and Taxes..................................................................76 12.6 Successors and Assigns; Participations and Assignments.........................................77 12.7 Adjustments; Set-off...........................................................................79 12.8 Counterparts...................................................................................80 12.9 Severability...................................................................................80 12.10 Integration....................................................................................80 12.11 GOVERNING LAW..................................................................................80 12.12 Submission To Jurisdiction; Waivers............................................................80 12.13 Acknowledgements...............................................................................81 12.14 WAIVERS OF JURY TRIAL..........................................................................81 12.15 Confidentiality................................................................................81
-iii- 5 SCHEDULES: - ---------- Schedule 1.1 Lenders, Commitments and Lending Offices Schedule 2.2 Tranche A Term Loan Payments Schedule 2.4 Tranche B Term Loan Payments Schedule 6.6 Litigation Schedule 6.15 Subsidiaries Schedule 6.16 Filing Jurisdictions; Excluded Collateral Schedule 6.19 Insurance Schedule 6.22 Environmental Matters Schedule 7.1(a)(viii) Mortgage Locations Schedule 7.1(a)(ix) Leasehold Mortgage Locations Schedule 9.2 Existing Indebtedness Schedule 9.3 Existing Liens Schedule 9.4 Existing Guarantee Obligations Schedule 9.5 Permitted Restructuring EXHIBITS: - --------- Exhibit A-1 Form of Tranche A Term Note Exhibit A-2 Form of Tranche B Term Note Exhibit A-3 Form of Revolving Credit Note Exhibit B Form of Assignment of Precision Acquisition Documents Exhibit C Form of Guarantee Exhibit D Form of Leasehold Mortgage Exhibit E Form of Mortgage Exhibit F Form of Pledge Agreement Exhibit G Form of Security Agreement Exhibit H Form of Borrowing Request Exhibit I Form of Non-Bank Status Certificate Exhibit J Form of Secretary's Certificate Exhibit K-1 Form of Legal Opinion Exhibit K-2 Form of Local Counsel Legal Opinion Exhibit K-3 Form of United Kingdom Legal Opinion Exhibit L Form of Assignment and Acceptance -iv- 6 CREDIT AGREEMENT CREDIT AGREEMENT, dated as of June 30, 1999, among THE MONARCH MACHINE TOOL COMPANY, an Ohio corporation (the "BORROWER"), the lenders from time to time parties to this Agreement (the "LENDERS") and ING (U.S.) CAPITAL LLC, as administrative agent for the Lenders hereunder. RECITALS The Borrower has requested that (a) the Lenders make a tranche A term loan to the Borrower in the aggregate principal amount of $50,000,000, the proceeds of which would be used to partially finance the acquisition (the "PRECISION ACQUISITION") of 100% of the issued and outstanding capital stock of Precision Industrial Corporation, a Delaware corporation ("PRECISION"), to refinance substantially all indebtedness of the Borrower, Precision and each of their subsidiaries and to pay fees and expenses incurred in connection herewith and therewith, (b) the Lenders make a tranche B term loan to the Borrower in the aggregate principal amount of $20,000,000, the proceeds of which would be used to partially finance the Precision Acquisition, to refinance substantially all indebtedness of the Borrower, Precision and each of their subsidiaries and to pay fees and expenses incurred in connection herewith and therewith, and (c) the Lenders make available to the Borrower revolving credit loans in an aggregate principal amount at any one time outstanding not to exceed $30,000,000, the proceeds of which would be used to partially finance the Precision Acquisition, to refinance substantially all indebtedness of the Borrower, Precision and each of their subsidiaries, to finance the working capital requirements of the Borrower and its subsidiaries in the ordinary course of business and to pay fees and expenses incurred in connection herewith and therewith. The Lenders are willing to make such credit available to the Borrower, but only on the terms, and subject to the conditions, set forth in this Agreement. The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "ADJUSTED CONSOLIDATED NET INCOME": for any period, Consolidated Net Income adjusted to give effect to (i) adjustments to Consolidated Net Worth in the ordinary course of business that are not otherwise reflected in Consolidated Net Income in accordance with GAAP, including, without limitation, foreign exchange translation adjustments, pension related items and adjustments in connection with derivative securities and (ii) the retirement of any shares of Capital Stock of the Borrower held as assets of a pension plan in accordance with Section 5.5(b) hereof. 7 "ADMINISTRATIVE AGENT": ING (U.S.) Capital LLC, together with its affiliates, as the arranger of the Commitments and as the Administrative Agent for the Lenders under this Agreement and the other Loan Documents. "AFFILIATE": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "CONTROL" of a Person (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power in the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "AGGREGATE OUTSTANDING RC EXTENSIONS OF CREDIT": as to any Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by such Lender then outstanding and (b) such Lender's Revolving Credit Commitment Percentage of the L/C Obligations then outstanding. "AGREEMENT": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "APPLICABLE LENDING OFFICE": for each Lender and for each Type of Loan, the lending office of such Lender designated for such Type of Loan on Schedule 1.1 hereto (or any other lending office from time to time notified to the Administrative Agent by such Lender) as the office at which its Loans of such Type are to be made and maintained. "APPLICABLE MARGIN": (a) for any Tranche A Term Loan or any Revolving Credit Loan of any Type, during the period commencing on the Closing Date and ending on the date which is six months following the Closing Date, the rate per annum set forth under the relevant column heading below:
----------------------------------------------- Base Rate Loans Eurodollar Loans ----------------------------------------------- 1.75% 2.75% -----------------------------------------------
(b) for any Tranche A Term Loan or Revolving Credit Loan of any Type, at any time following the date which is six months following the Closing Date on which the Leverage Ratio, as most recently determined as of the date the certificate containing such Leverage Ratio is delivered pursuant to Section 8.2(b), is within any of the ranges set forth below, the rate per annum set forth under the relevant column heading opposite the applicable range below: -2- 8
----------------------------------------------------------------- Leverage Ratio Base Rate Loans Eurodollar Loans ----------------------------------------------------------------- Greater than or equal 1.75% 2.75% to 3.5 ----------------------------------------------------------------- Less than 3.5 but 1.375% 2.375% greater than or equal to 3.0 ----------------------------------------------------------------- Less than 3.0 but 1.00% 2.00% greater than or equal to 2.5 ----------------------------------------------------------------- Less than 2.5 .625% 1.625% -----------------------------------------------------------------
PROVIDED, that in the event that the certificate containing the determination of the Leverage Ratio is not delivered on the date specified and otherwise in accordance with to Section 8.2(b) hereof, the applicable margin shall be the highest rate per annum for such Type of Loan set forth above from the date on which such certificate was required to be delivered in accordance with Section 8.2(b) until such time as such certificate is delivered to the Lenders. (c) for any Tranche B Term Loan of any Type, the rate per annum set forth under the relevant column heading below: ---------------------------------------------------- Base Rate Loans Eurodollar Loans ---------------------------------------------------- 2.25% 3.50% ----------------------------------------------------
"APPLICATION": an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to open a Letter of Credit. "ASSIGNEE": as defined in Section 11.6(c). "ASSIGNMENT AND ACCEPTANCE": as defined in Section 11.6(c). "ASSIGNMENT OF PRECISION ACQUISITION DOCUMENTS": the assignment of the Precision Acquisition Documents, in the form of Exhibit B attached hereto. "AVAILABLE RC COMMITMENT": as to any Lender at any time, an amount equal to the excess, if any, of (a) the amount of such Lender's Revolving Credit Commitment at such time OVER (b) the Aggregate Outstanding RC Extensions of Credit by such Lender at such time. -3- 9 "BASE RATE": for any day, the rate per annum (rounded upward, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "PRIME RATE" shall mean the average of the prime commercial lending interest rates publicly announced by The Chase Manhattan Bank (National Association), Citibank, N.A. and Morgan Guaranty Trust Company of New York, as announced from time to time at their respective head offices (the prime rate not being intended to be the lowest rate of interest charged by such banks in connection with extensions of credit to debtors). "BASE RATE LOANS": Loans the rate of interest applicable to which is based upon the Base Rate. "BORROWER": as defined in the heading to this Agreement. "BORROWING DATE": any Business Day specified in a notice pursuant to Section 2.5 or 3.3 as a date on which the Borrower requests the Lenders to make Loans hereunder. "BORROWING REQUEST": as defined in Section 3.3. "BUSINESS": as defined in Section 6.22. "BUSINESS DAY": a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close, and, if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or a Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice by the Borrower with respect to any such borrowing, payment, prepayment, Conversion or Interest Period, which is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "CAPITAL STOCK": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "CASH EQUIVALENTS": (a) securities with maturities of 90 days or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of 90 days or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than seven days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-1 or the equivalent thereof by Standard and Poor's Ratings Group ("S&P") or P-1 or -4- 10 the equivalent thereof by Moody's Investors Service, Inc. ("MOODY'S") and in either case maturing within 90 days after the day of acquisition, (e) securities with maturities of 90 days or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's, (f) securities with maturities of 90 days or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition. "CHANGE OF CONTROL": any transaction or event occurring on or after the date hereof as a direct or indirect result of which (a) any Person or group shall (i) beneficially own (directly or indirectly) in the aggregate Capital Stock of the Borrower having 35% or more of the aggregate voting power of all Capital Stock of the Borrower at the time outstanding or (ii) have the right or power to appoint a majority of the board of directors of the Borrower, or (b) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Borrower (together with any new directors whose election by such board of directors or whose nomination for election by the shareholders of the Borrower was approved by a vote of a majority of the directors of the Borrower then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute at least a majority of the board of directors of the Borrower then in office. For purposes of this definition, the terms "beneficially own" and "group" shall have the respective meanings ascribed to them pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, except that a Person or group shall be deemed to beneficially own all securities that such Person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time. "CLOSING DATE": the date on which the conditions precedent set forth in Section 7.1 shall be satisfied. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL": all property and interests in property of the Loan Parties, now owned or hereinafter acquired, upon which a Lien is purported to be created by any Security Document. "COMMERCIAL LETTER OF CREDIT": as defined in Section 4.1(b). "COMMITMENTS": the collective reference to the Revolving Credit Commitments, the Tranche A Term Loan Commitments and the Tranche B Term Loan Commitments. -5- 11 "COMMONLY CONTROLLED ENTITY": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "CONSOLIDATED CURRENT ASSETS": at a particular date, all amounts which would, in conformity with GAAP, be included under current assets on a consolidated balance sheet of the Borrower and its Subsidiaries as at such date; PROVIDED, HOWEVER, that such amounts shall not include (a) any amounts for any Indebtedness owing by an Affiliate of the Borrower, unless such Indebtedness arose in connection with the sale of goods or other property in the ordinary course of business and would otherwise constitute current assets in conformity with GAAP, (b) any shares of stock issued by an Affiliate of the Borrower, or (c) the cash surrender value of any life insurance policy. "CONSOLIDATED CURRENT LIABILITIES": at a particular date, all amounts which would, in conformity with GAAP, be included under current liabilities on a consolidated balance sheet of the Borrower and its Subsidiaries as at such date. "CONSOLIDATED EBITDA": for any period, the sum for such period of: (a) Consolidated Net Income for such period, (b) the sum of provisions for such period for income taxes, interest expense, and depreciation and amortization expense used in determining such Consolidated Net Income, (c) amounts deducted in such period in respect of non-cash expenses in accordance with GAAP, (d) the amount of any aggregate net loss (or minus the amount of any gain) during such period arising from the sale, exchange or other disposition of capital assets and (e) non-cash expenses deducted in such period in connection with any earn-out agreements, stock appreciation rights, "phantom" stock plans, employment agreements, non-competition agreements, subscription and stockholders agreements and other incentive and bonus plans and similar arrangements made in connection with acquisitions of Persons or businesses by the Borrower or its Subsidiaries or the retention of executives, officers or employees by the Borrower or its Subsidiaries, including (but without duplication) any Person that has become a Subsidiary during such period, on a PRO FORMA basis as if such acquisition had occurred on the first day of such period; PROVIDED, that Consolidated EBITDA shall in any event exclude, from and after the Closing Date: -6- 12 (u) the effect of any write-up of any assets, (v) the effect of any loss recognized on a sale of the Borrower's machine tool division if completed not later than June 30, 2001, (w) the amount of any non-cash income recognized during any period for which Consolidated EBITDA is determined, including, without limitation, (A) the income (or deficit) of any Person (other than a Subsidiary) in which the Borrower or any Subsidiary has an ownership interest, except to the extent that any such income has been actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions, (B) the undistributed earnings of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation, Governing Document or Requirement of Law applicable to such Subsidiary, (C) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period or such reserve is an ongoing reserve recorded in the ordinary course of business and (D) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary, (x) any aggregate net gain (but not any aggregate net loss) during such period arising from the sale, exchange or other disposition of capital assets (such term to include all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets and all securities), (y) any net gain from the collection of the proceeds of life insurance policies, and (z) any gain arising from the acquisition of any securities, or the extinguishment, under GAAP, of any Indebtedness, of the Borrower or any Subsidiary; PROVIDED, FURTHER, that in calculating Consolidated EBITDA, no items shall be included or excluded more than once. "CONSOLIDATED FIXED CHARGES": for any period, the sum of (i) the amounts deducted for the cash portion of Consolidated Interest Expense and Consolidated Lease Expense in determining Consolidated Net Income for such period, (ii) the amount of scheduled payments of principal of Indebtedness during such period, (iii) all amounts of capital expenditures made during such period (other than capital expenditures in respect of Financing Leases to the extent the same are included in clauses (i) or (ii) of this definition); PROVIDED, that such amount shall not exceed $3,500,000 for any period of four consecutive fiscal quarters (or if less than four consecutive fiscal quarters have elapsed following the Closing Date, $3,500,000 times 1/4, 1/2 or 3/4, respectively, for the -7- 13 period of one, two or three consecutive fiscal quarters elapsed following the Closing Date) and (iv) the amount of cash income taxes paid during such period. "CONSOLIDATED INDEBTEDNESS": for any period, the sum of (a) the sum of (i) the aggregate outstanding principal amount of the Term Loans as of the last day of such period, (ii) the outstanding principal amount of the Revolving Credit Loans on the last day of such period and (iii) the outstanding face amount of the Letters of Credit on the last day of such period and (b) the outstanding principal amount of all other Indebtedness of the Borrower and its Subsidiaries as of the last day of such period, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED INTEREST EXPENSE": for any period, the amount which, in conformity with GAAP, would be set forth opposite the caption "interest expense" or any like caption (including without limitation, imputed interest included in payments under Financing Leases) on a consolidated income statement of the Borrower and the Subsidiaries for such period excluding the amortization of any original issue discount. "CONSOLIDATED LEASE EXPENSE": for any period, the aggregate amount of fixed or contingent rentals payable by the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period with respect to leases of real and personal property. "CONSOLIDATED NET INCOME": for any period, the consolidated net income (or deficit) of the Borrower and the Subsidiaries for such period (taken as a cumulative whole), determined in accordance with GAAP; PROVIDED, that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Borrower or any Subsidiary, and (b) in the case of a successor to the Borrower by consolidation or merger or as a transferee of its assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "CONSOLIDATED NET WORTH": as of any date of determination, all items, which in conformity with GAAP, would be included under shareholders' equity on a consolidated balance sheet of the Borrower. "CONSOLIDATED SENIOR INDEBTEDNESS": for any period, the sum of (i) the aggregate outstanding principal amount of the Term Loans as of the last day of such period, and (ii) the outstanding principal amount of the Revolving Credit Loans as of the last day of such period. "CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the continuation of a Eurodollar Loan from one Interest Period to the next Interest Period. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. -8- 14 "CONVERT", CONVERSION" and "CONVERTED" shall refer to a conversion of Base Rate Loans into Eurodollar Loans or of Eurodollar Loans into Base Rate Loans, which may be accompanied by the transfer by a Lender (at its sole discretion) of a Loan from one Applicable Lending Office to another. "CREDIT EXPOSURE": as to any Lender at any time, the sum of (a) its Revolving Credit Commitment (or, if the Revolving Credit Commitments shall have expired or been terminated, the sum of (i) the aggregate unpaid principal amount of its Revolving Credit Loans and (ii) its Revolving Credit Commitment Percentage of the aggregate outstanding L/C Obligations) and (b) the unpaid principal amount of its Term Loans. "CREDIT EXPOSURE PERCENTAGE": as to any Lender at any time, the fraction (expressed as a percentage), the numerator of which is the Credit Exposure of such Lender at such time and the denominator of which is the aggregate Credit Exposures of all of the Lenders at such time. "DEFAULT": any of the events specified in Section 10, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "DOLLARS" and "$": dollars in lawful currency of the United States of America. "DOMESTIC SUBSIDIARY": any Subsidiary organized under the laws of the United States or any political subdivision thereof. "ENVIRONMENTAL LAWS": any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "EUROCURRENCY RESERVE REQUIREMENTS": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. "EURODOLLAR BASE RATE": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum equal to the corresponding -9- 15 rate appearing at page 3750 of the Dow Jones Telerate Service at or about 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period, or if such rate no longer so appears, the average of the rates per annum at which each of The Chase Manhattan Bank (National Association), Citibank, N.A. and Morgan Guaranty Trust Company of New York is offered Dollar deposits at or about 10:00 a.m., local time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. "EURODOLLAR LOANS": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "EURODOLLAR RATE": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): EURODOLLAR BASE RATE ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "EVENT OF DEFAULT": any of the events specified in Section 10; PROVIDED that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "EXCESS CASH FLOW": as to the Borrower and its consolidated Subsidiaries for each fiscal year: (a) Consolidated EBITDA for such fiscal year (excluding any portion of Consolidated EBITDA resulting from a PRO FORMA inclusion of Consolidated EBITDA of any Person that becomes a Subsidiary of the Borrower during such fiscal year as if such acquisition had occurred on the first day of such period); PLUS (b) the decrease (if any) in the amount of the excess of Consolidated Current Assets (excluding cash and Cash Equivalents) over Consolidated Current Liabilities at the end of such fiscal year compared to the amount of the excess of Consolidated Current Assets (excluding cash and Cash Equivalents) over Consolidated Current Liabilities at the end of the immediately preceding fiscal year of the Borrower, excluding such decrease attributable to the sale of the machine tools division of the Borrower and attributable to other sales of divisions or other business units by the Borrower and its Subsidiaries; MINUS (c) the sum of (i) the amount of (A) all regularly scheduled payments of principal of the Term Loans actually made during such fiscal year, (B) any voluntary prepayment of principal of the Term Loans made during such fiscal year, (C) any -10- 16 permanent reduction in the Revolving Credit Commitments made during such fiscal year to the extent that, before giving effect to such reduction, the average outstanding principal balance of the Revolving Credit Loans for the thirty (30) days prior to such reduction exceeds the aggregate Revolving Credit Commitments after giving effect to such reduction and (D) any voluntary prepayment of other permitted Indebtedness to the extent not subject to reborrowing, made during such fiscal year, (ii) the amount of all interest payments actually made in cash during such fiscal year by the Borrower and its consolidated Subsidiaries, (iii) the amount of capital expenditures (other than capital expenditures in respect of Financing Leases) actually made during such fiscal year by the Loan Parties to the extent permitted by Section 9.8, (iv) cash income taxes paid by the Loan Parties during such fiscal year and (v) the increase (if any) in the amount of the excess of Consolidated Current Assets (excluding cash and Cash Equivalents) over Consolidated Current Liabilities at the end of such fiscal year compared to the amount of the excess of Consolidated Current Assets (excluding cash and Cash Equivalents) over Consolidated Current Liabilities at the end of the immediately preceding fiscal year of the Borrower, excluding such increase attributable to the sale of the machine tools division of the Borrower and attributable to other sales of divisions or other business units by the Borrower and its Subsidiaries. "FEDERAL FUNDS EFFECTIVE RATE": for any day, 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 on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "FEE LETTER": the Fee Letter, dated June 2, 1999, between the Administrative Agent and the Borrower, as the same may be amended, supplemented or otherwise modified from time to time. "FINANCING LEASE": any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee. "FOREIGN PLEDGE AGREEMENT": with respect to any Foreign Subsidiary organized under the laws of the United Kingdom, the pledge agreement to be executed and delivered by the Loan Parties, in form and substance satisfactory to the Administrative Agent, as the same may be amended, supplemented or otherwise modified from time to time. "FOREIGN SUBSIDIARY": any Subsidiary of the Borrower which is organized under the laws of a jurisdiction outside of the United States. "GAAP": generally accepted accounting principles in the United States of America in effect from time to time. -11- 17 "GOVERNING DOCUMENTS": as to any Person, its articles or certificate of incorporation and by-laws, its partnership agreement, its certificate of formation and operating agreement, and/or the other organizational or governing documents of such Person. "GOVERNMENTAL AUTHORITY": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEE": the Guarantee to be executed and delivered by the Subsidiaries, substantially in the form of Exhibit C, as the same may be amended, supplemented or otherwise modified from time to time. "GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative meaning. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "GUARANTOR": any Person delivering a Guarantee pursuant to this Agreement. -12- 18 "INDEBTEDNESS": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of such Person under Financing Leases, (d) all obligations of such Person in respect of letters of credit, acceptances or similar instruments issued or created for the account of such Person and (e) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "INSOLVENT": pertaining to a condition of Insolvency. "INTEREST PAYMENT DATE": (a) as to any Base Rate Loan, the last day of each calendar month, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) as to any Eurodollar Loan having an Interest Period longer than three months, (i) each day which is three months or a whole multiple thereof, after the first day of such Interest Period, and (ii) the last day of such Interest Period. "INTEREST PERIOD": with respect to any Eurodollar Loan: (i) initially, the period commencing on the borrowing or Conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of Conversion, as the case may be, given with respect thereto; and (ii) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; PROVIDED that, all of the foregoing provisions relating to Interest Periods are subject to the following: (1) if any Interest Period pertaining to a Eurodollar Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; -13- 19 (2) any Interest Period that would otherwise extend beyond the Revolving Credit Termination Date or beyond the date final payment is due on the Term Loans shall end on the Revolving Credit Termination Date or such date of final payment, as the case may be; (3) any Interest Period pertaining to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (4) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. "ISSUING LENDER": ING (U.S.) Capital LLC, in its capacity as issuer of any Letter of Credit, and any other Lender that is designated an Issuing Lender by the Administrative Agent. "L/C COMMITMENT": $10,000,000. "L/C FEE PAYMENT DATE": the last Business Day of each month. "L/C OBLIGATIONS": at any time, an amount equal to the sum of (a) the aggregate then undrawn amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed. "L/C PARTICIPANTS": the collective reference to all the Lenders other than the Issuing Lender. "LEASEHOLD MORTGAGE": each Leasehold Mortgage to be executed and delivered by the Loan Parties, substantially in the form of Exhibit D, as the same may be amended, supplemented or otherwise modified from time to time. "LENDERS": as defined in the heading hereto, which shall include in any event the Issuing Lender. "LETTERS OF CREDIT": as defined in Section 4.1(a). "LEVERAGE RATIO": as of any date of determination, for the period of four consecutive fiscal quarters most recently ended, the ratio of (i) Consolidated Indebtedness for such period to (ii) Consolidated EBITDA for such period; PROVIDED that in calculating the Leverage Ratio for the periods of four fiscal quarters ending September 30, 1999, December 31, 1999 and March 31, 2000, Consolidated EBITDA for the fiscal quarters ending December 31, 1998, March 31, 1999 and June 30, 1999 shall be deemed to be $5,250,000, $5,250,000 and $5,250,000, respectively. -14- 20 "LIEN": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any Financing Lease having substantially the same economic effect as any of the foregoing), and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing. "LOAN": any Term Loan or Revolving Credit Loan made by any Lender pursuant to this Agreement. "LOAN DOCUMENTS": this Agreement, the Notes, the Guarantee, the Security Documents and the Fee Letter. "LOAN PARTIES": the Borrower and each Subsidiary of the Borrower which is a party to a Loan Document, including, without limitation, from and after the Closing Date, Precision and each Subsidiary of Precision which is party to a Loan Document. "MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "MATERIALS OF ENVIRONMENTAL CONCERN": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "MORTGAGE": each Mortgage to be executed and delivered by the Loan Parties, substantially in the form of Exhibit E, as the same may be amended, supplemented or otherwise modified from time to time. "MULTIEMPLOYER PLAN": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET PROCEEDS": (i) the aggregate cash consideration received by the Borrower or a Subsidiary in connection with any transaction referred to in Section 5.5(b) less (ii) the expenses (including out-of-pocket expenses) incurred by the Borrower or such Subsidiary in connection with such transaction (including, in the case of any issuance of debt or equity securities, underwriters' commissions and fees) and the amount of any federal and state taxes incurred in connection with such transaction, in each case as certified by a Responsible Officer to the Administrative Agent at the time of such transaction. -15- 21 "NON-BANK STATUS CERTIFICATE": as defined in Section 5.11(b)(i)(B). "NON-EXCLUDED TAXES": as defined in Section 5.11. "NOTES": the collective reference to the Revolving Credit Notes, the Tranche A Term Notes and the Tranche B Term Notes. "OBLIGATIONS": the unpaid principal amount of, and interest (including, without limitation, interest accruing after the maturity of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) on the Loans, and all other obligations and liabilities of the Loan Parties to the Administrative Agent and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, or out of or in connection with this Agreement, the Notes, the Guarantees, the Security Documents and any other Loan Documents and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by a Loan Party pursuant to the terms of the Loan Documents) or otherwise. "PARTICIPANT": as defined in Section 12.6(b). "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "PERSON": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "PLAN": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PLAN TERMINATION": the termination of The Monarch Machine Tool Company Pension Plan A and The Monarch Machine Tool Company Pension Plan B effective February 28, 1999, as authorized by the Board of Directors of the Borrower at a meeting on November 3, 1998, and for which the Borrower made a Form 5310--Application for Determination for Terminating Plan with the Internal Revenue Service on March 3, 1999. "PLEDGE AGREEMENT": the Pledge Agreement to be executed and delivered by the Loan Parties relating to all Domestic Subsidiaries of the Borrower, substantially in -16- 22 the form of Exhibit F, as the same may be amended, supplemented or otherwise modified from time to time. "PRECISION": as defined in the Recitals hereto. "PRECISION ACQUISITION": as defined in the Recitals hereto. "PRECISION ACQUISITION AGREEMENT": the Stock Purchase Agreement, dated May 13, 1999, among the Borrower and the stockholders of Precision, as the same may be amended, supplemented or otherwise modified from time to time. "PRECISION ACQUISITION DOCUMENTS": the collective reference to the Precision Acquisition Agreement and any other documents executed in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time. "PROPERTIES": as defined in Section 6.22. "REIMBURSEMENT OBLIGATION": the obligation of the Borrower to reimburse the Issuing Bank pursuant to Section 4.5(a) for amounts drawn under a Letter of Credit. "REGISTER": as defined in Section 12.6(d). "REGULATION U": Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "REPLACEMENT SUBORDINATED DEBT": any subordinated indebtedness of the Borrower or any of its Subsidiaries incurred after the Closing Date, the proceeds of which are used to refinance existing Subordinated Debt, which shall either (a) have a final maturity date no earlier, an average life to maturity no shorter, and a priority no higher than the existing Subordinated Debt being refinanced and be in form and substance satisfactory to the Administrative Agent and the Required Lenders, or (b) be in form and substance satisfactory to all the Lenders. "REPORTABLE EVENT": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under Sections .21, .22, .23, .26, .27 or .28 of PBGC Reg. ss. 4043. "REQUIRED LENDERS": at any time, Lenders the Credit Exposure Percentages of which aggregate at least 66-2/3%. "REQUIREMENT OF LAW": as to any Person, the certificate of incorporation and by-laws or other organizational or Governing Documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other -17- 23 Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESPONSIBLE OFFICER": the chief executive officer and the president of the Borrower or, with respect to financial matters, the chief financial officer of the Borrower. "RESTRUCTURING": as defined in Section 9.5(c) hereof. "REVOLVING CREDIT COMMITMENT": as to any Lender, the obligation of such Lender to make Revolving Credit Loans to the Borrower pursuant to Section 3.1 and/or to issue or participate in Letters of Credit issued on behalf of the Borrower hereunder in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 1.1 under the caption "Revolving Credit Commitment" or in an Assignment and Acceptance, as such amount may be reduced from time to time in accordance with the provisions of this Agreement. "REVOLVING CREDIT COMMITMENT PERCENTAGE": as to any Lender at any time, the percentage which such Lender's Revolving Credit Commitment then constitutes of the aggregate Revolving Credit Commitments (or, at any time after the Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Revolving Credit Loans then outstanding constitutes of the aggregate principal amount of the Revolving Credit Loans then outstanding). "REVOLVING CREDIT COMMITMENT PERIOD": the period from and including the date hereof to but not including the Revolving Credit Termination Date or such earlier date on which the Revolving Credit Commitments shall terminate as provided herein. "REVOLVING CREDIT LOANS": as defined in Section 3.1. "REVOLVING CREDIT NOTE": as defined in Section 3.2. "REVOLVING CREDIT TERMINATION DATE": June 30, 2006. "SECURITY AGREEMENT": the Security Agreement to be executed and delivered by the Loan Parties, substantially in the form of Exhibit G, as the same may be amended, supplemented or otherwise modified from time to time. "SECURITY DOCUMENTS": the collective reference to the Assignment of Precision Acquisition Documents, the Foreign Pledge Agreements, the Leasehold Mortgages, the Mortgages, the Pledge Agreement, the Security Agreement and all other security documents hereafter delivered to the Administrative Agent granting a Lien on any asset or assets of any Person to secure any of the Obligations or to secure any guarantee of any such Obligations. -18- 24 "SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SPECIAL SUBORDINATED NOTES": the collective reference to any "Special Subordinated Notes" issued to the selling holders of Capital Stock of Precision pursuant to Section 1.2(b) of the Precision Acquisition Agreement, which shall be in form and substance satisfactory to the Administrative Agent and the Required Lenders. "STANDBY LETTER OF CREDIT": as defined in Section 4.1(b). "SUBORDINATED DEBT": any Special Subordinated Notes, the Three Cities Subordinated Debt and any Replacement Subordinated Debt. "SUBORDINATED DEBT DOCUMENTS": the collective reference to any documents evidencing any Subordinated Debt, together with any other documents executed in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time in accordance herewith. "SUBSIDIARY": as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower and shall included, without limitation, Precision and its Subsidiaries. "TERM LOAN": any Tranche A Term Loan or Tranche B Term Loan. "THREE CITIES SUBORDINATED DEBT": the subordinated loans in an aggregate amount equal to $15,000,000 made by Three Cities Research, Inc., a Delaware corporation, or other Persons acceptable to the Administrative Agent and the Required Lenders to the Borrower, the proceeds of which shall be used to partially finance the Precision Acquisition, which shall be in form and substance satisfactory to the Administrative Agent and the Required Lenders. "TRANCHE": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day); Tranches may be identified as "EURODOLLAR TRANCHES". "TRANCHE A TERM LOAN": as defined in Section 2.1. -19- 25 "TRANCHE A TERM LOAN COMMITMENT": as to any Lender, its obligation to make a Tranche A Term Loan to the Borrower pursuant to Section 2.1 in the amount set forth opposite such Lender's name on Schedule 1.1 under the caption "Tranche A Term Loan". "TRANCHE A TERM LOAN COMMITMENT PERCENTAGE": as to any Lender, the percentage equal to the quotient of such Lender's Tranche A Term Loan Commitment divided by the aggregate Tranche A Term Loan Commitments. "TRANCHE A TERM NOTE": as defined in Section 2.2. "TRANCHE B TERM LOAN": as defined in Section 2.3. "TRANCHE B TERM LOAN COMMITMENT": as to any Lender, its obligation to make a Tranche B Term Loan to the Borrower pursuant to Section 2.3 in the amount set forth opposite such Lender's name on Schedule 1.1 under the caption "Tranche B Term Loan". "TRANCHE B TERM LOAN COMMITMENT PERCENTAGE": as to any Lender, the percentage equal to the quotient of such Lender's Term Loan Commitment divided by the aggregate Term Loan Commitments. "TRANCHE B TERM NOTE": as defined in Section 2.4. "TRANSACTION PARTIES": the Loan Parties and Precision. "TRANSFEREE": as defined in Section 12.6(f). "TYPE": as to any Loan, its nature as a Base Rate Loan or a Eurodollar Loan. "UNIFORM CUSTOMS": the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "YEAR 2000 PROBLEM": the risk that computer applications used by the Borrower and its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to, and any date on or after, December 31, 1999. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in any Notes or any certificate or other document made or delivered pursuant hereto. (b) As used herein and in any Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to the Borrower and its -20- 26 Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF TERM LOAN COMMITMENTS 2.1 TRANCHE A TERM LOAN COMMITMENTS. Subject to the terms and conditions hereof, each Lender severally agrees to make a term loan (a "TRANCHE A TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the amount of the Tranche A Term Loan Commitment of such Lender then in effect; PROVIDED, that the Term Loan Commitments shall terminate at 3:00 p.m., New York City time, on August 31, 1999, if the Tranche A Term Loans have not been made prior to that time. The Tranche A Term Loans may from time to time be (a) Eurodollar Loans, (b) Base Rate Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.5 and 5.2. 2.2 TRANCHE A TERM NOTES. The Tranche A Term Loan of each Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-1 with appropriate insertions as to payee, date and principal amount (a "TRANCHE A TERM NOTE"), payable to the order of such Lender and representing the obligation of the Borrower to pay the amount of the Tranche A Term Loan made by such Lender. Each Lender is hereby authorized to record the date, Type and amount of its Tranche A Term Loan and the date and amount of each payment or prepayment of principal thereof and each Conversion of all or a portion thereof to another Type and, and in the case of Eurodollar Loans, the Interest Period with respect thereto, on the schedule annexed to and constituting a part of its Tranche A Term Note, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided, that the failure of such Lender to make any such recordation shall not impair or otherwise affect the validity or enforceability of its Tranche A Term Note. Each Tranche A Term Note shall (a) be dated the Closing Date, (b) be stated to mature in installments in amounts equal to such Lender's Tranche A Term Loan Commitment Percentage of the amounts, and payable on the dates, set forth on Schedule 2.2, and (c) bear interest for the period from the date thereof on the unpaid principal amount thereof at the applicable interest rates per annum specified in Section 5.1. Interest on the Tranche A Term Notes shall be payable on the dates specified in Section 5.1(d). 2.3 TRANCHE B TERM LOAN COMMITMENTS. Subject to the terms and conditions hereof, each Lender severally agrees to make a term loan (a "TRANCHE B TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the amount of the -21- 27 Tranche B Term Loan Commitment of such Lender then in effect; provided, that the Tranche B Term Loan Commitments shall terminate at 3:00 p.m., New York City time, on August 31, 1999, if the Tranche B Term Loans have not been made prior to that time. The Tranche B Term Loans may from time to time be (a) Eurodollar Loans, (b) Base Rate Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.5 and 5.2. 2.4 TRANCHE B TERM NOTES. The Tranche B Term Loan of each Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-2 with appropriate insertions as to payee, date and principal amount (a "TRANCHE B TERM NOTE"), payable to the order of such Lender and representing the obligation of the Borrower to pay the amount of the Tranche B Term Loan made by such Lender. Each Lender is hereby authorized to record the date, Type and amount of its Tranche B Term Loan and the date and amount of each payment or prepayment of principal thereof and each Conversion of all or a portion thereof to another Type and, and in the case of Eurodollar Loans, the Interest Period with respect thereto, on the schedule annexed to and constituting a part of its Tranche B Term Note, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided, that the failure of such Lender to make any such recordation shall not impair or otherwise affect the validity or enforceability of its Tranche B Term Note. Each Tranche B Term Note shall (a) be dated the Closing Date, (b) be stated to mature in installments in amounts equal to such Lender's Tranche B Term Loan Commitment Percentage of the amounts, and payable on the dates, set forth on Schedule 2.4, and (c) bear interest for the period from the date thereof on the unpaid principal amount thereof at the applicable interest rates per annum specified in Section 5.1. Interest on the Tranche B Term Notes shall be payable on the dates specified in Section 5.1(d). 2.5 PROCEDURE FOR TERM LOAN BORROWING. The Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 a.m., New York City time, (a) three Business Days prior to the Closing Date, if all or any part of the Term Loans are to be initially Eurodollar Loans, or (b) one Business Day prior to the Closing Date, otherwise) requesting that the Lenders make the Term Loans on the Closing Date and specifying (i) the Closing Date, (ii) the amount to be borrowed, (iii) whether the Term Loans are to be initially Eurodollar Loans, Base Rate Loans or a combination thereof, and (iv) if the Term Loans are to be entirely or partly Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Periods therefor. Upon receipt of such notice the Administrative Agent shall promptly notify each Lender thereof. Not later than 11:00 a.m. on the Closing Date each Lender shall make available to the Administrative Agent at its office specified in Section 12.2 the amount of such Lender's pro rata share of such borrowing in immediately available funds. The Administrative Agent shall on such date credit the account of the Borrower on the books of such office of the Administrative Agent with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. -22- 28 2.6 COMMITMENT FEE. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee for the period from and including the Closing Date to the date on which the Tranche A Term Loan Commitments and the Tranche B Term Loan Commitments have been fully funded, computed at the rate of 1/2 of 1% per annum on the aggregate unfunded amount of the Tranche A Term Loan Commitment and the Tranche B Term Loan Commitment of such Lender during the period for which payment is made, calculated on the basis of the actual days elapsed over a 360 day year, payable monthly in arrears on the last Business Day of each calendar month or such earlier date as the Tranche A Term Loan Commitments and the Tranche B Term Loan Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. SECTION 3. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS 3.1 REVOLVING CREDIT COMMITMENTS. (a) Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("REVOLVING CREDIT LOANS") to the Borrower from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the amount of such Lender's Revolving Credit Commitment then in effect; PROVIDED, that the Revolving Credit Commitments shall terminate at 3:00 p.m., New York City time, on August 31, 1999, if the Term Loans have not been made prior to that time. During the Revolving Credit Commitment Period the Borrower may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Revolving Credit Loans may from time to time be (i) Eurodollar Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 3.3 and 5.2, PROVIDED, that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Revolving Credit Termination Date. 3.2 REVOLVING CREDIT NOTES. The Revolving Credit Loans made by each Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A-3 with appropriate insertions as to payee, date and principal amount (a "REVOLVING CREDIT NOTE"), payable to the order of such Lender and evidencing the obligation of the Borrower to pay a principal amount equal to the lesser of (a) the amount of the Revolving Credit Commitment of such Lender and (b) the aggregate unpaid principal amount of all Revolving Credit Loans made by such Lender. Each Lender is hereby authorized to record the date, Type and amount of each Revolving Credit Loan made or Converted by such Lender, the date and amount of each payment or prepayment of principal thereof, and, in the case of Eurodollar Loans, the Interest Period with respect thereto, on the schedule annexed to and constituting a part of its Revolving Credit Note, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. Each Revolving Credit Note shall (x) be dated the Closing Date, (y) be stated to mature on the Revolving Credit -23- 29 Termination Date and (z) bear interest on the unpaid principal amount thereof from time to time outstanding at the applicable interest rate per annum determined as provided in Section 5.1. Interest on each Revolving Credit Note shall be payable on the dates specified in Section 5.1(d). 3.3 PROCEDURE FOR REVOLVING CREDIT BORROWING. The Borrower may borrow under the Revolving Credit Commitments during the Revolving Credit Commitment Period on any Business Day in an aggregate principal amount not exceeding the aggregate Available RC Commitments then in effect; PROVIDED, that the Borrower shall give the Administrative Agent irrevocable notice in the form of a Borrowing Request in the form of Exhibit H hereto (a "BORROWING REQUEST") (which notice must be received by the Administrative Agent prior to 10:00 a.m., New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Credit Loans are to be initially Eurodollar Loans or (b) one Business Day prior to the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Periods therefor. Each borrowing under the Revolving Credit Commitments shall be in an amount equal to (x) in the case of Base Rate Loans, $500,000 or a whole multiple of $100,000 in excess thereof (or, if the then Available RC Commitments are less than $500,000, such lesser amount) and (y) in the case of Eurodollar Loans, $3,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Lender thereof. Each Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Section 12.2 prior to 11:00 a.m., New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. 3.4 COMMITMENT FEE. The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee for the period from and including the first day of the Revolving Credit Commitment Period to the Revolving Credit Termination Date, computed at the rate of 1/2 of 1% per annum on the average daily amount of the Available RC Commitment of such Lender during the period for which payment is made, calculated on the basis of the actual days elapsed over a 360 day year, payable monthly in arrears on the last Business Day of each calendar month and on the Revolving Credit Termination Date or such earlier date as the Revolving Credit Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. 3.5 TERMINATION OR REDUCTION OF REVOLVING CREDIT COMMITMENTS. The Borrower shall have the right, upon not less than five Business Days' notice to the Administrative Agent, to terminate or reduce the Revolving Credit; PROVIDED, that no such -24- 30 termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the Aggregate Outstanding RC Extensions of Credit would exceed the Revolving Credit Commitments then in effect. Any such reduction shall be in an amount equal to $1,000,000 or a whole multiple thereof and shall reduce permanently the Revolving Credit Commitments then in effect. SECTION 4. LETTERS OF CREDIT 4.1 L/C COMMITMENT. (a) Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Lenders set forth in Section 4.4(a), agrees to issue letters of credit ("LETTERS OF CREDIT") for the account of the Borrower on any Business Day during the Revolving Credit Commitment Period in such form as may be approved from time to time by the Issuing Lender; PROVIDED that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (1) the L/C Obligations would exceed the L/C Commitment or (2) the aggregate Available RC Commitments would be less than zero. (b) Each Letter of Credit shall: (1) be denominated in Dollars (or another currency requested by the Borrower unless the issuance of such a Letter of Credit by the Issuing Lender at the time of such request is not permitted under applicable law or is otherwise not acceptable to the Issuing Lender) and shall be either (A) a standby letter of credit issued to support obligations of the Borrower, contingent or otherwise, in respect of (u) warranty obligations or equipment performance assurance obligations, (v) insurance obligations, (w) obligations to workman's compensation board or similar Governmental Authority for workman's compensation liabilities of the Borrower or a Subsidiary, (x) other contractual obligations of the Borrower or a Subsidiary in respect of which advance payments have been made, (y) existing letters of credit outstanding as of the Closing Date and listed on Schedule 9.2 hereof and (z) such other obligations or for such other purposes as may be approved by the Issuing Lender and the Administrative Agent (such consent not to be unreasonably withheld) (a "STANDBY LETTER OF CREDIT"), or (B) a commercial letter of credit issued in respect of the purchase of goods or services by the Borrower in the ordinary course of business (a "COMMERCIAL LETTER OF CREDIT"); and (2) expire no later than the earlier of (i) five Business Days prior to the Revolving Credit Termination Date and (ii) 364 days from the date of issuance (subject to renewal). (c) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. -25- 31 (d) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. 4.2 PROCEDURE FOR ISSUANCE OF LETTERS OF CREDIT. The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. 4.3 FEES, COMMISSIONS AND OTHER CHARGES. (a) The Borrower shall pay to the Administrative Agent, for the account of the Issuing Lender and the L/C Participants, a letter of credit commission with respect to each Letter of Credit, computed for the period from the date of such payment to the date upon which the next such payment is due hereunder at a rate equal to the Applicable Margin for Revolving Credit Loan which are Eurodollar Loans then in effect, calculated on the basis of the actual days elapsed over a 360 day year, of the aggregate amount available to be drawn under such Letter of Credit on the date on which such fee is calculated and shall be payable to the L/C Participants and the Issuing Lender to be shared ratably among them in accordance with their respective Revolving Credit Commitment Percentages. Such commissions shall be payable in arrears on each L/C Fee Payment Date to occur after the issuance of each Letter of Credit and shall be nonrefundable. Additionally, the Borrower shall pay to the Administrative Agent, solely for the account of the Issuing Lender, a per annum fronting fee of one-quarter of one percent (.25%) of the aggregate amount available to be drawn under each Letter of Credit. Such fronting fee shall be nonrefundable and shall be payable in arrears on each L/C Fee Payment Date to occur after the issuance of each Letter of Credit and upon expiration or draw of such Letter of Credit. (b) In addition to the foregoing fees and commissions, the Borrower shall pay or reimburse the Issuing Lender for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, effecting payment under, amending or otherwise administering any Letter of Credit. -26- 32 (c) The Administrative Agent shall, promptly following its receipt thereof, distribute to the Issuing Lender and the L/C Participants all fees and commissions received by the Administrative Agent for their respective accounts pursuant to this subsection. 4.4 L/C PARTICIPATIONS. (a) The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk, an undivided interest equal to such L/C Participant's Revolving Credit Commitment Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Revolving Credit Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 4.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (1) such amount, times (2) the daily average Federal funds rate, as quoted by the Issuing Lender, during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (3) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 4.4(a) is not in fact made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to Base Rate Loans hereunder. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with Section 4.4(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its pro rata share thereof; PROVIDED, HOWEVER, that in the event that any such payment received by the Issuing Lender -27- 33 shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 4.5 REIMBURSEMENT OBLIGATIONS OF THE BORROWER. (a) The Borrower agrees to reimburse the Issuing Lender on each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender or, if later, on each date on which such draft is paid by the Issuing Lender for the amount of (1) such draft so paid and (2) any taxes and any reasonable fees, charges or other costs or expenses incurred by the Issuing Lender at its address for notices specified herein in lawful money of the United States of America and in immediately available funds. (b) Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which would be payable on any outstanding Base Rate Loans which were then overdue. (c) Each drawing under any Letter of Credit shall constitute a request by the Borrower to the Administrative Agent for a borrowing pursuant to Section 4.3 of Base Rate Loans in the amount of such drawing. The Borrowing Date with respect to such borrowing shall be the date of such drawing. 4.6 OBLIGATIONS ABSOLUTE. (a) The Borrower's obligations under this Section 4 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender or any beneficiary of a Letter of Credit. (b) The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower's Reimbursement Obligations under Section 4.5(a) shall not be affected by, among other things, (1) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or (2) any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (3) any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. (c) The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Issuing Lender's gross negligence or willful misconduct. (d) The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if -28- 34 done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York (including, without limitation, the honoring of drawings on a Letter of Credit), shall be binding on the Borrower and shall not result in any liability of the Issuing Lender to the Borrower. 4.7 LETTER OF CREDIT PAYMENTS. If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit. 4.8 APPLICATION. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 4, the provisions of this Section 4 shall apply. SECTION 5. GENERAL PROVISIONS APPLICABLE TO LOANS 5.1 INTEREST RATES AND PAYMENT DATES. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin. (c) If all or a portion of (i) any principal of any Loan, (ii) any interest payable thereon, (iii) any commitment fee or (iv) any other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), the principal of the Loans and any such overdue interest, commitment fee or other amount shall bear interest at a rate per annum which is (x) in the case of principal, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% or (y) in the case of any such overdue interest, commitment fee or other amount, the rate described in paragraph (b) of this Section plus 2%, in each case from the date of such non-payment until such overdue principal, interest, commitment fee or other amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section shall be payable from time to time on demand. -29- 35 5.2 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may elect from time to time to Convert Eurodollar Loans to Base Rate Loans by giving the Administrative Agent at least one Business Day's prior irrevocable notice of such election, PROVIDED, that any such Conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to Convert Base Rate Loans to Eurodollar Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election. Any such notice of Conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and Base Rate Loans may be Converted as provided herein, provided that (i) no Loan may be Converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined in their sole discretion that such a Conversion shall not be permitted, (ii) any such Conversion may only be made if, after giving effect thereto, Section 5.3 shall not have been contravened, and (iii) no Loan may be converted into a Eurodollar Loan after the date that is one month prior to the Revolving Credit Termination Date (in the case of Conversions of Revolving Credit Loans) or the date of the final installment of principal (in the case of Conversions of Term Loans). (b) Any Eurodollar Loans may be Continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, PROVIDED, that no Eurodollar Loan may be Continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has or the Required Lenders have determined in their sole discretion that such a Continuation shall not be permitted, (ii) if, after giving effect thereto, Section 5.3 would be contravened or (iii) after the date that is one month prior to the Revolving Credit Termination Date (in the case of Continuations of Revolving Credit Loans) or the date of the final installment of principal (in the case of Continuations of Term Loans) and PROVIDED, FURTHER, that if the Borrower shall fail to give such notice or if such Continuation is not permitted such Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. 5.3 MINIMUM AMOUNTS AND MAXIMUM NUMBER OF TRANCHES. All borrowings, conversions and continuations of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising each Eurodollar Tranche shall be equal to $3 million or a whole multiple of $1 million in excess thereof. In no event shall there be more than six Eurodollar Tranches outstanding at any time. 5.4 OPTIONAL PREPAYMENTS. (a) The Borrower may at any time and from time to time prepay the Loans, in whole or in part, subject to payments of any amounts required pursuant to Section 5.12 hereof, without premium or penalty, upon at least four Business -30- 36 Days' irrevocable notice to the Administrative Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, Base Rate Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any amounts payable pursuant to Section 5.12 and, in the case of prepayments of the Term Loans only, accrued interest to such date on the amount prepaid. Partial prepayments of the Term Loans pursuant to this Section shall be applied to the installments of principal thereof in the inverse order of their scheduled maturities; PROVIDED, that, other than with respect to prepayments in full, any Lender holding a Tranche B Term Loan may elect to reject acceptance of any partial prepayment in respect of its Tranche B Term Loan by giving notice to such effect to the Administrative Agent prior to the making of such prepayment by the Borrower, in which case the amount of such rejected prepayment shall be applied to installments of principal of the Tranche A Term Loans in the inverse order of their scheduled maturities. Amounts prepaid on account of the Term Loans may not be reborrowed. Partial prepayments pursuant to this Section shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof. (b) Any Lender holding a Tranche B Term Loan may elect, by notice to the Administrative Agent by telephone (confirmed by telecopy or otherwise in writing) at least one Business Day prior to the prepayment date, to decline all or any portion of a prepayment of its Tranche B Term Loan pursuant to this Section 5.4, in which case the aggregate amount of prepayments that would have been applied to Tranche B Term Loans but was so declined shall be applied to prepay Tranche A Term Loans and Tranche B Term Loans of Lenders who accept prepayment of their Tranche B Term Loans pursuant to this Section, on a pro-rata basis based on their respective then outstanding principal amounts. 5.5 MANDATORY PREPAYMENTS. (a) Subject to Section 5.12, if on any date the Aggregate Outstanding Extensions of Credit exceeds the Revolving Credit Commitments, the Borrower shall immediately prepay the Revolving Credit Loans and/or cash collateralize or replace Letters of Credit in an amount equal to the amount of such excess. (b) The Borrower shall prepay the Loans and reduce the Commitments in an amount equal to (i) 100% of the Net Proceeds from the termination of any pension plans of the Borrower or any Subsidiary (including, without limitation, the Plan Termination); PROVIDED, that the Borrower may retain and retire shares of Capital Stock of the Borrower held as assets of the Plan that is subject of the Plan Termination to the extent that the Net Proceeds from the Plan Termination otherwise applied to prepayment of the Loans is at least $10,000,000, (ii) 100% of the Net Proceeds of -31- 37 any sale or issuance of debt securities (other than Replacement Subordinated Debt), (iii) 100% of the Net Proceeds of any sale or issuance of any equity securities, in either case by the Borrower or any Subsidiary, whether in a public offering, a private placement or otherwise (other than issuances of equity securities pursuant to employee benefit plans issued in the ordinary course of business) and (iv) 100% of the Net Proceeds of any sale, lease, assignment, exchange or other disposition for cash of any asset or group of assets (including, without limitation, but subject to clause (d) of this Section 5.5, insurance proceeds paid as a result of any destruction, casualty or taking of any property of the Borrower or any Subsidiary), not made in the ordinary course of business, by the Borrower or any Subsidiary of the Borrower, in any such case no later than three Business Days following receipt by the Borrower or such Subsidiary of such proceeds, together with accrued interest to such date on the amount prepaid; PROVIDED, that, during any fiscal year, no such prepayment shall be required pursuant to subclause (iv) of this Section 5.5(b) unless the aggregate amount of such Net Proceeds received by the Borrower and its Subsidiaries and not previously applied to prepayment of the Term Loans and the reduction of the Commitments pursuant to Section 5.5(b)(iv) is at least $250,000 for such fiscal year. Amounts prepaid pursuant to this Section 5.5(b) shall be applied FIRST to installments of principal of the Term Loans until paid in full, and SECOND to the reduction of the Revolving Credit Commitments and the prepayment of the Revolving Credit Loans and/or to cash collateralize or replace Letters of Credit. Prepayments of installments of Term Loans shall be applied in the inverse order of maturity and such amounts so prepaid may not be reborrowed. Nothing in this Section 5.5(b) shall be construed to derogate any restriction or limitation contained in any Loan Document imposed on any transaction of the types described in this Section 5.5(b), including without limitation the restrictions set forth in Sections 9.2, 9.5 and 9.6 hereof. (c) If at the end of a fiscal year of the Borrower the Leverage Ratio is greater than 3.0 to 1.0, on or before the earlier of the date on which the financial statements referred to in Section 8.1(a) are required to be delivered in respect of such fiscal year of the Borrower, beginning with the fiscal year ending December 31, 2000, and the date on which such financial statements are actually delivered, the Borrower shall prepay the Term Loans and permanently reduce the Commitments in the amount of 50% of Excess Cash Flow for such fiscal year covered by such financial statements, together with accrued interest to such date on the amount prepaid. Amounts prepaid pursuant to this Section 5.5(c) shall be applied FIRST to installments of principal of the Term Loans until paid in full, and SECOND to the reduction of the Revolving Credit Commitments and the prepayment of the Revolving Credit Loans and/or to cash collateralize or replace Letters of Credit. Prepayments of installments of Term Loans shall be applied in the inverse order of maturity and such amounts so prepaid may not be reborrowed. (d) Net Proceeds received by the Borrower or any Subsidiary as proceeds of insurance upon any destruction, casualty or taking with respect to any property of the Borrower or any Subsidiary need not be applied as set forth in Section 5.5(b) to the extent that such Net Proceeds are committed by the Borrower or such Subsidiary to the repair, rebuilding or replacement of the property which was the subject of such destruction, casualty or taking within 120 days after the receipt of such Net Proceeds and applied no later than 360 days following receipt of such Net Proceeds. If required by the Administrative Agent, such Net Proceeds shall be held in a special collateral account, subject to the sole dominion and control of the Administrative Agent and in a manner reasonably satisfactory to the Administrative Agent, as additional Collateral for the Obligations and the Guarantees, until such time as it is to be applied to such repair, rebuilding or replacement. -32- 38 (e) Any Lender holding a Tranche B Term Loan may elect, by notice to the Administrative Agent by telephone (confirmed by telecopy or otherwise in writing) at least one Business Day prior to the prepayment date, to decline all or any portion of a prepayment of its Tranche B Term Loan pursuant to this Section 5.5, in which case the aggregate amount of prepayments that would have been applied to Tranche B Term Loans but was so declined shall be applied to prepay Tranche A Term Loans and Tranche B Term Loans of Lenders who accept prepayment of their Tranche B Term Loans pursuant to this Section, on a pro-rata basis based on their respective then outstanding principal amounts. 5.6 COMPUTATION OF INTEREST AND FEES. (a) Interest, whenever it is calculated on the basis of the Base Rate, shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed; and, interest, whenever it is calculated on the basis of the Eurodollar Rate, and Commitment Fees shall be calculated on the basis of a 360-day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 5.1(a) or (b). 5.7 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from Lenders the Credit Exposure Percentages of which aggregate more than 50% that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as Base Rate Loans, (y) any Loans that were to have been Converted on the first day of such Interest Period to -33- 39 Eurodollar Loans shall be Converted to or Continued as Base Rate Loans and (z) any outstanding Eurodollar Loans shall be Converted, on the first day of such Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or Continued as such, nor shall the Borrower have the right to Convert Loans to Eurodollar Loans. 5.8 PRO RATA TREATMENT AND PAYMENTS. (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee hereunder and any reduction of the Tranche A Term Loan Commitments, Tranche B Term Loan Commitments or the Revolving Credit Commitments of the Lenders shall be made pro rata according to the respective Tranche A Term Loan Commitment Percentages, Tranche B Term Loan Commitment Percentages or Revolving Credit Commitment Percentages, as applicable, of the Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Tranche A Term Loans, Tranche B Term Loans or the Revolving Credit Loans shall be made pro rata according to the respective outstanding principal amounts of the Tranche A Term Loans, Tranche B Term Loans or the Revolving Credit Loans, as applicable, then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set-off or counterclaim and shall be made prior to 12:00 noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in Section 12.2, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month in which event such payment shall be made on the immediately preceding Business Day. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its Tranche A Term Loan Commitment Percentage, Tranche B Term Loan Commitment Percentage or Revolving Credit Commitment Percentage, as applicable, of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to -34- 40 any Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. If such Lender's Tranche A Term Loan Commitment Percentage, Tranche B Term Loan Commitment Percentage or Revolving Credit Commitment Percentage, as applicable, of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to Base Rate Loans hereunder, on demand, from the Borrower. 5.9 ILLEGALITY. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans and Continue Eurodollar Loans as such shall forthwith be cancelled and (b) such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be Converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such Conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 5.12. 5.10 REQUIREMENTS OF LAW. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 5.11 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, Converting into, Continuing or maintaining Eurodollar Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender such additional amount -35- 41 or amounts as will compensate such Lender for such increased cost or reduced amount receivable. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this Section submitted by such Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 5.11 TAXES. (a) All payments made by the Borrower under this Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any Note). If any such non-excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under any Note, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of -36- 42 America or a state thereof if such Lender fails to comply with the requirements of clause (b) of this Section. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated under the laws of the United States of America or a state thereof shall: (i) (A) if such Lender is a "bank" within the meaning of Section 881(c)(3)(A) of the Code, deliver to the Borrower and the Administrative Agent (x) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, and (y) an Internal Revenue Service Form W-8 or W-9, or successor applicable form, as the case may be, or (B) if such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224, deliver (x) a certificate substantially in the form of Exhibit I (a "NON-BANK STATUS CERTIFICATE") and (y) two completed and signed copies of Internal Revenue Service Form W-8 or successor applicable form; (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form or certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; unless in any such case an event (including, without limitation, any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is entitled -37- 43 to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, (ii) in the case of a Non-Bank Status Certificate, that it is not a "bank" as such term is defined in Section 881(c)(3)(A) of the Code, and (iii) in the case of a Form W-8 or W-9, that it is entitled to an exemption from United States backup withholding tax. Each Person that shall become a Lender or a Participant pursuant to Section 12.6 shall, upon the effectiveness of the related transfer, be required to provide all of the forms and statements required pursuant to this Section, PROVIDED that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased. 5.12 INDEMNITY. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, Conversion into or Continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, Converted or Continued, for the period from the date of such prepayment or of such failure to borrow, Convert or Continue to the last day of such Interest Period (or, in the case of a failure to borrow, Convert or Continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 5.13 LENDING OFFICES; CHANGE OF LENDING OFFICE; REPLACEMENT OF LENDERS. (a) Loans of each Type made by any Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. (b) Each Lender agrees that if it makes any demand for payment under Section 5.10 or 5.11(a), or if any adoption or change of the type described in Section 5.9 shall occur with respect to it, it will use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrower to make payments under Section 5.10 or 5.11(a), or would eliminate or reduce the effect of any adoption or change described in Section 5.9. (c) If any Lender requests compensation under Section 5.10, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 5.11(a), then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, -38- 44 require such Lender to assign all of its interests, rights and obligations to an assignee who shall assume such obligations; provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Revolving Credit Commitment is being assigned, the Issuing Bank), which consent shall not be unreasonably withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees, and all other amount payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts owing hereunder) and (iii) such assignment will result in a material reduction in the amount of compensation or payment to be made by the Borrower. A Lender shall not be required to make any such assignment if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment cease to apply. SECTION 6. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that: 6.1 FINANCIAL CONDITION. (a) The consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at December 31, 1998 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by PricewaterhouseCoopers LLP, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in accordance with GAAP the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at March 31, 1999 and the related unaudited consolidated statements of income and of cash flows for the 3-month period ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in accordance with GAAP (subject to normal year-end adjustments) the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the 3-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Borrower nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other financial derivative, which is not reflected in the foregoing statements or in the notes thereto. During the period from December 31, 1998 to and including the date hereof there has been no sale, -39- 45 transfer or other disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any Capital Stock of any other Person) material in relation to the consolidated financial condition of the Borrower and its consolidated Subsidiaries at December 31, 1998. (b) The consolidated balance sheet of Precision and its consolidated Subsidiaries as at March 31, 1999 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by Arthur Andersen LLP, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in accordance with GAAP the consolidated financial condition of Precision and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither Precision nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other financial derivative, which is not reflected in the foregoing statements or in the notes thereto. During the period from March 31, 1999 to and including the date hereof there has been no sale, transfer or other disposition by Precision or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any Capital Stock of any other Person) material in relation to the consolidated financial condition of Precision and its consolidated Subsidiaries at March 31, 1999. (c) The PRO FORMA consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at March 31, 1999 certified by a Responsible Officer of the Borrower (the "PRO FORMA BALANCE SHEET"), a copy of which has been provided to the Administrative Agent and each Lender, is the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries adjusted to give effect (as if such events had occurred on such date) to (i) the refinancing of any Indebtedness to be made with the proceeds of Loans hereunder, (ii) the making of the Term Loans, (iii) the making of the Revolving Credit Loans to be made on the Closing Date, (iv) the Precision Acquisition, (v) the issuance of all Subordinated Debt to be made on the Closing Date, (vi) the application of the proceeds of the foregoing in accordance with the terms of the Loan Documents and (vii) the payment of all fees and expenses related to the foregoing transactions, as estimated in good faith as of the date of the Pro Forma Balance Sheet. The Pro Forma Balance Sheet, together with the notes thereto, presents fairly, on a pro forma basis, the consolidated financial position of the Borrower and its Subsidiaries as at March 31, 1999, assuming that the events specified in the preceding sentence had actually occurred on such date. -40- 46 (d) The operating forecast and cash flow projections of the Borrower and its consolidated Subsidiaries, copies of which have heretofore been furnished to the Lenders, have been prepared in good faith under the direction of a Responsible Officer of the Borrower, and in accordance with GAAP. The Borrower has no reason to believe that as of the date of delivery thereof such operating forecast and cash flow projections are materially incorrect or misleading in any material respect, or omit to state any material fact which would render them misleading in any material respect. 6.2 NO CHANGE. (a) Since December 31, 1998 there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect, and (b) during the period from December 31, 1998 to and including the date hereof, the Capital Stock of the Borrower has not been redeemed, retired, purchased or otherwise acquired for value by the Borrower or any of its Subsidiaries. 6.3 EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law, except with respect to (c) and (d) to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.4 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and any Notes and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents to which the Borrower is a party, other than the filing of UCC Financing Statements and the recording of Mortgages and Leasehold Mortgages contemplated by Section 6.16 hereof and any other recordings or filings relating to intellectual property or vehicles of the Borrower as required by the Security Agreement. This Agreement has been, and each other Loan Document to which it is a party will be, duly executed and delivered on behalf of the Borrower. This Agreement constitutes, and each other Loan Document to which it is a party when executed and delivered will constitute, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. -41- 47 6.5 NO LEGAL BAR. The execution, delivery and performance of the Loan Documents to which the Borrower is a party, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation (other than Liens created by the Security Documents in favor of the Administrative Agent). 6.6 NO MATERIAL LITIGATION. Other than as disclosed on Schedule 6.6 hereof, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 6.7 NO DEFAULT. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 6.8 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and its Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such property is subject to any Lien except as permitted by Section 9.3. 6.9 INTELLECTUAL PROPERTY. The Borrower and each of its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "INTELLECTUAL PROPERTY"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Borrower know of any valid basis for any such claim. The use of such Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 6.10 NO BURDENSOME RESTRICTIONS. No Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 6.11 TAXES. Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which -42- 48 are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 6.12 FEDERAL REGULATIONS. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect, or for any purpose which violates, or which would be inconsistent with, the provisions of the regulations of such Board of Governors. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation U. 6.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. Except for the Plan Termination, no termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. 6.14 INVESTMENT COMPANY ACT; OTHER REGULATIONS. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board of Governors of the Federal Reserve System) which limits its ability to incur Indebtedness. 6.15 SUBSIDIARIES. Schedule 6.15 sets forth the name of each direct or indirect Subsidiary of the Borrower, its form of organization, its jurisdiction of organization, the total number of issued and outstanding shares or other interests of Capital Stock thereof, the classes and number of issued and outstanding shares or other interests of Capital Stock of each such class, the name of each holder of Capital Stock thereof and the number of shares or other interests of such Capital Stock held by each such holder and the percentage of all outstanding shares or other interests of such class of Capital Stock held by such holders. -43- 49 6.16 SECURITY DOCUMENTS. (a) The provisions of each Security Document are effective to create in favor of the Administrative Agent for the ratable benefit of the Lenders a legal, valid and enforceable security interest in all right, title and interest of the Loan Party which is party thereto in the "Collateral" described therein. (b) (i) When financing statements have been filed in the offices in the jurisdictions listed in Schedule 6.16 Part A, the Security Agreement shall each constitute a fully perfected first Lien on, and security interest in, all right, title and interest of the Borrower in the "Collateral" described therein, which can be perfected by such filing. When certificates representing the Pledged Stock (as defined in the Pledge Agreement) are delivered to the Administrative Agent, together with stock powers endorsed in blank by a duly authorized officer of the pledgor thereof, the Pledge Agreement shall constitute a fully perfected first Lien on, and security interest in, all right, title and interest of the pledgors parties thereto in the "Collateral" described therein. (iii) When each Leasehold Mortgage and Mortgage is recorded with the appropriate jurisdiction listed on Schedule 6.16 Part B, such Leasehold Mortgage or Mortgage shall constitute a fully perfected first Lien on, and security interest in, all right, title and interest of the Loan Party which is party thereto in the "Collateral" described therein. (c) Neither the Borrower nor any Domestic Subsidiary owns any property, or has any interest in any property, that is not subject to a fully perfected first priority Lien on, or security interest in, such property in favor of the Administrative Agent, other than any such property having an aggregate fair market value at any one time not exceeding $250,000 and other than any property listed on Schedule 6.16, Part C. 6.17 ACCURACY AND COMPLETENESS OF INFORMATION. (a) All factual information, reports and other papers and data with respect to the Loan Parties (other than projections) furnished, and all factual statements and representations made, to the Administrative Agent or the Lenders by a Loan Party, or on behalf of a Loan Party, were, at the time the same were so furnished or made, when taken together with all such other factual information, reports and other papers and data previously so furnished and all such other factual statements and representations previously so made, complete and correct in all material respects, to the extent necessary to give the Administrative Agent and the Lenders true and accurate knowledge of the subject matter thereof in all material respects, and did not, as of the date so furnished or made, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which the same were made. -44- 50 (b) All projections with respect to the Loan Parties furnished by or on behalf of a Loan Party to the Administrative Agent or the Lenders were prepared and presented in good faith by or on behalf of such Loan Party. No fact is known to a Loan Party which materially and adversely affects or in the future is reasonably likely (so far as such Loan Party can reasonably foresee) to have a Material Adverse Effect which has not been set forth in the financial statements referred to in Section 6.1 or in such information, reports, papers and data or otherwise disclosed in writing to the Administrative Agent or the Lenders prior to the Closing Date. 6.18 LABOR RELATIONS. No Loan Party is engaged in any unfair labor practice which could reasonably be expected to have a Material Adverse Effect. There is (a) no unfair labor practice compliant pending or, to the best knowledge of each Loan Party and each of the Subsidiaries, threatened against a Loan Party before the National Labor Relations Board which could reasonably be expected to have a Material Adverse Effect and no grievance or arbitration proceeding arising out of or under a collective bargaining agreement is so pending or threatened; (b) no strike, labor dispute, slowdown or stoppage pending or, to the best knowledge of each Loan Party, threatened against a Loan Party; and (c) no union representation question existing with respect to the employees of a Loan Party and no union organizing activities are taking place with respect to any thereof. 6.19 INSURANCE. Each Loan Party has, with respect to its properties and business, insurance covering the risks, in the amounts, with the deductible or other retention amounts, and with the carriers, listed on Schedule 6.19, which insurance meets the requirements of Section 8.5 hereof and Section 5 of the Security Agreement and Section 6 of the Leasehold Mortgages and Mortgages as of the date hereof and the Closing Date. 6.20 SOLVENCY. After giving effect to the consummation of the refinancing of existing Indebtedness, the Precision Acquisition and to the incurrence of all indebtedness (including any Subordinated Debt) and obligations being incurred on or prior to such date in connection herewith and therewith and after giving effect to the making of each Loan and the issuance of each Letter of Credit, (i) the amount of the "present fair saleable value" of the assets of the Borrower and of the Borrower and its Subsidiaries, taken as a whole, will, as of such date, exceed the amount of all "liabilities of the Borrower and of the Borrower and its Subsidiaries, taken as a whole, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (ii) the present fair saleable value of the assets of the Borrower and of the Borrower and its Subsidiaries, taken as a whole, will, as of such date, be greater than the amount that will be required to pay the liabilities of the Borrower and of the Borrower and its Subsidiaries, taken as a whole, on their respective debts as such debts become absolute and matured, (iii) neither the Borrower nor the Borrower and its Subsidiaries, taken as a whole, will have, as of such date, an unreasonably small amount of capital with which to conduct their respective businesses, and (iv) each of the Borrower and the Borrower and its Subsidiaries, taken as a whole, will be able to pay their respective debts as they mature. For purposes of this Section 6.20, "debt" means "liability on a claim", "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, -45- 51 unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, and (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. 6.21 PURPOSE OF LOANS. The proceeds of the Loans shall be used by the Borrower to partially finance the Precision Acquisition, to refinance existing Indebtedness of the Borrower, Precision and their Subsidiaries, to pay fees, commissions and expenses in connection herewith and therewith, and for working capital purposes in the ordinary course of business 6.22 ENVIRONMENTAL MATTERS. Except as disclosed on Schedule 6.22 attached hereto: (a) The facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "PROPERTIES") and all operations at the Properties are in compliance, and have in the last two years been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "BUSINESS") which could materially interfere with the continued operation of the Properties or materially impair the fair saleable value thereof. (b) Neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened, that has not been resolved and which could reasonably be expected to have a Material Adverse Effect. (c) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability under, any applicable Environmental Law. (d) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business. (e) There has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations -46- 52 of the Borrower or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably give rise to liability under Environmental Laws. 6.23 REGULATION H. No Mortgage or Leasehold Mortgage encumbers improved real property which is located in an area that has been identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968. 6.24 YEAR 2000 COMPLIANCE. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the computer systems of the Borrower, Precision and their Subsidiaries and (ii) equipment of the Borrower, Precision and their Subsidiaries containing embedded microchips (including systems and equipment supplied by others in which their systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be completed no later than October 31, 1999. The cost to the Borrower and Precision of such reprogramming and testing and of the reasonably foreseeable consequences of the Year 2000 Problem to the Borrower and Precision (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower, Precision and their Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower, Precision and their Subsidiaries to conduct their business without a Material Adverse Effect. SECTION 7. CONDITIONS PRECEDENT 7.1 CONDITIONS TO INITIAL LOANS. The agreement of each Lender to make the initial Loan requested to be made by it and the agreement of the Issuing Lender to issue the initial Letter of Credit is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan on the Closing Date, of the following conditions precedent: (a) LOAN DOCUMENTS. The Administrative Agent shall have received: (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, with a counterpart for each Lender, (ii) for the account of each Lender having a Tranche A Term Loan Commitment, a Tranche A Term Loan Note of the Borrower conforming to the requirements hereof and executed by a duly authorized officer of the Borrower, (iii) for the account of each Lender having a Tranche B Term Loan Commitment, a Tranche B Term Loan Note of the Borrower conforming to the requirements hereof and executed by a duly authorized officer of the Borrower, -47- 53 (iv) for the account of each Lender having a Revolving Credit Commitment, a Revolving Credit Note of the Borrower conforming to the requirements hereof and executed by a duly authorized officer of the Borrower, (v) the Pledge Agreement, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender, (vi) the Guarantee, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender, (vii) the Security Agreement, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender, (viii) each of the Mortgages relating to the locations listed on Schedule 7.1(a)(viii), each executed and delivered by a duly authorized officer of the party thereto, with a counterpart or a conformed copy for each Lender, (ix) each of the Leasehold Mortgages relating to the locations listed on Schedule 7.1(a)(ix), each executed and delivered by a duly authorized officer of the party thereto, with a counterpart or a conformed copy for each Lender; (x) the Assignment of Precision Acquisition Documents, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender; and (xi) each Foreign Pledge Agreement, executed and delivered by a duly authorized officer of each party thereto, with a counterpart or a conformed copy for each Lender. (b) RELATED AGREEMENTS. The Administrative Agent shall have received, with a copy for each Lender, true and correct copies, certified as to authenticity by the Borrower, of all Precision Acquisition Documents, all Subordinated Debt Documents and such other documents or instruments as may be reasonably requested by the Administrative Agent, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which the Borrower, Precision or any of their Subsidiaries may be a party. (c) CONCURRENT TRANSACTIONS. (i) The Precision Acquisition shall have been, or shall be concurrently with the making of the initial Loans, consummated in accordance with the terms of the Precision Acquisition Documents for a total purchase price not exceeding $73,900,000 (subject to adjustments in the purchase price pursuant to Section 2.1 of the Precision Acquisition Agreement), without any amendment, modification or waiver thereof except with the consent of the Required Lenders, and the Administrative Agent shall have received evidence satisfactory to it to that effect. -48- 54 (ii) All amounts owing to the existing creditors of the Borrower, Precision or any of their Subsidiaries (other than Indebtedness permitted under Section 9.2 hereof) under existing financing documents shall have been, or shall be concurrently with the making of the initial Loans, repaid in full, and any Liens created pursuant to such existing financing documents shall have been or shall, concurrently with the making of the initial Loans, released, and such existing financing documents shall terminate and be of no further force and effect upon such repayment; in each case pursuant to such payoff letters, Lien releases, termination statements, mortgage satisfactions and other documents as the Administrative Agent may require, each of which shall be in form and substance satisfactory to the Administrative Agent. (iii) The Three Cities Subordinated Debt and any Special Subordinated Notes shall have been, or shall be concurrently with the making of the initial Loans, consummated in accordance with the terms of the related Subordinated Debt Documents, without any amendment, modification or waiver thereof except with the consent of the Required Lenders, and the Administrative Agent shall have received evidence satisfactory to it to that effect. (iv) The Administrative Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of Precision authorizing the execution, delivery and performance of the Precision Acquisition Documents. (d) SECRETARY'S CERTIFICATES. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of each Loan Party, dated the Closing Date, substantially in the form of Exhibit J, with appropriate insertions and attachments, satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of such Loan Party. (e) CORPORATE PROCEEDINGS OF THE LOAN PARTIES. The Administrative Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of each Loan Party authorizing (i) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party, (ii) the borrowings contemplated hereunder and (iii) the granting by it of the Liens created pursuant to the Security Documents, certified by the Secretary or an Assistant Secretary of such Loan Party as of the Closing Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (f) INCUMBENCY CERTIFICATES. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of each Loan Party, dated the Closing Date, as to the incumbency and signature of the officers of such Loan Party executing any Loan Document satisfactory in form and substance to the Administrative Agent, executed by the President or any Vice President and the Secretary or any Assistant Secretary of such Loan Party. -49- 55 (g) CORPORATE DOCUMENTS. The Administrative Agent shall have received, with a counterpart for each Lender, true and complete copies of the certificate of incorporation and by-laws of each Loan Party, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of such Loan Party. (h) GOOD STANDING CERTIFICATES. The Administrative Agent shall have received, with a copy for each Lender, certificates dated as of a recent date from the Secretary of State or other appropriate authority, evidencing the good standing of each Transaction Party (i) in the jurisdiction of its organization and (ii) in each other jurisdiction where its ownership, lease or operation of property or the conduct of its business requires it to qualify as a foreign Person except, as to this subclause (ii), where the failure to so qualify would not have a Material Adverse Effect. (i) CONSENTS, LICENSES AND APPROVALS. The Administrative Agent shall have received, with a counterpart for each Lender, a certificate of a Responsible Officer of the Borrower (i) attaching copies of all consents, authorizations and filings referred to in Section 6.4, and (ii) stating that such consents, licenses and filings are in full force and effect, and each such consent, authorization and filing shall be in form and substance satisfactory to the Administrative Agent. (j) FEES AND EXPENSES. The Administrative Agent shall have received the fees to be received on the Closing Date referred to in the Fee Letter and all expenses required to be reimbursed in accordance herewith. (k) LEGAL OPINIONS. The Administrative Agent shall have received, with a counterpart for each Lender, the following executed legal opinions: (i) the executed legal opinion of Thompson, Hine & Flory LLP, counsel to the Borrower and the other Loan Parties, substantially in the form of Exhibit K-1; (ii) the executed legal opinion of local counsel to the Borrower and the other Loan Parties with respect to Pennsylvania, Ohio, New York and Indiana, substantially in the form of Exhibit K-2; and (iii) the executed legal opinion of local counsel to the Borrower and the other Loan Parties with respect to the United Kingdom, substantially in the form of Exhibit K-3. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (l) PLEDGED STOCK; STOCK POWERS. (i) The Administrative Agent shall have received the certificates representing the shares pledged pursuant to the Pledge Agreement, together with an undated stock -50- 56 power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof. (ii) Each Issuer referred to in the Pledge Agreement shall have delivered an acknowledgement of and consent to such Pledge Agreement, executed by a duly authorized officer of such Issuer, in substantially the form appended to such Pledge Agreement. (m) ACTIONS TO PERFECT LIENS. The Administrative Agent shall have received evidence in form and substance satisfactory to it that all filings, recordings, registrations and other actions, including, without limitation, the filing of duly executed financing statements on form UCC-1, necessary or, in the opinion of the Administrative Agent, desirable to perfect the Liens created by the Security Documents shall have been completed. (n) SURVEYS. The Administrative Agent shall have received, and the title insurance company issuing the policy referred to in Section 7.1(o) (the "TITLE INSURANCE COMPANY") shall have received, maps or plats of an as-built survey of the sites of the property covered by each Mortgage and Leasehold Mortgage certified to the Administrative Agent and the Title Insurance Company in a manner satisfactory to them, dated a date satisfactory to the Administrative Agent and the Title Insurance Company by an independent professional licensed land surveyor satisfactory to the Administrative Agent and the Title Insurance Company, which maps or plats and the surveys on which they are based shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1962, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such maps, plats or surveys the following: (i) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines; (ii) the lines of streets abutting the sites and width thereof; (iii) all access and other easements appurtenant to the sites or necessary or desirable to use the sites; (iv) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting the site, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (v) any encroachments on any adjoining property by the building structures and improvements on the sites; and (vi) if the site is described as being on a filed map, a legend relating the survey to said map. (o) TITLE INSURANCE POLICY. The Administrative Agent shall have received in respect of each parcel covered by each Mortgage and Leasehold Mortgage a mortgagee's title policy (or policies) or marked up unconditional binder for such insurance dated the Closing Date. Each such policy shall (i) be in an amount satisfactory to the Administrative Agent; (ii) be issued at ordinary rates; (iii) insure that the Mortgage or Leasehold Mortgage insured thereby creates a valid first Lien on such parcel free and clear of all defects and encumbrances, except such as may be approved by the Administrative Agent; (iv) name the Administrative Agent for the benefit of the Lenders as the insured thereunder; (v) be in the form of ALTA Loan Policy - 1970 (Amended 10/17/70); (vi) contain such endorsements and affirmative coverage as the Administrative Agent may request and (vii) be issued by title companies -51- 57 satisfactory to the Administrative Agent (including any such title companies acting as co-insurers or reinsurers, at the option of the Administrative Agent). The Administrative Agent shall have received evidence satisfactory to it that all premiums in respect of each such policy, and all charges for mortgage recording tax, if any, have been paid. (p) FLOOD INSURANCE. If requested by the Administrative Agent, the Administrative Agent shall have received (i) a policy of flood insurance which (A) covers any parcel of improved real property which is encumbered by any Mortgage (B) is written in an amount not less than the outstanding principal amount of the indebtedness secured by such Mortgage which is reasonably allocable to such real property or the maximum limit of coverage made available with respect to the particular type of property under the Act, whichever is less, and (C) has a term ending not later than the maturity of the indebtedness secured by such Mortgage and (ii) confirmation that the Company has received the notice required pursuant to Section 208(e)(3) of Regulation H of the Board of Governors of the Federal Reserve System. (q) COPIES OF DOCUMENTS. The Administrative Agent shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to in Section 7.1(o) and a copy, certified by such parties as the Administrative Agent may deem appropriate, of all other documents affecting the property covered by each Mortgage. (r) LIEN SEARCHES. The Administrative Agent shall have received the results of a recent search by a Person satisfactory to the Administrative Agent, of the Uniform Commercial Code, judgment and tax lien filings which may have been filed with respect to personal property of each Loan Party, and the results of such search shall be satisfactory to the Administrative Agent. (s) INSURANCE. The Administrative Agent shall have received evidence in form and substance satisfactory to it that all of the requirements of Section 8.5 hereof and Section 5 of the Security Agreement and Section 6 of the Mortgages and Leasehold Mortgages shall have been satisfied. (t) ENVIRONMENTAL REPORTS. The Administrative Agent shall have received Phase I environmental reports, and, if requested by the Administrative Agent based upon its review of the Phase I environmental reports, Phase II or other environmental reports, prepared by a Person satisfactory to the Administrative Agent, and which such Person shall have confirmed in writing that the Administrative Agent and the Lenders shall be entitled to rely upon, with respect to each of the Properties, and such environmental reports shall be in form and substance satisfactory to the Administrative Agent. (u) LANDLORD ESTOPPEL AGREEMENTS. The Administrative Agent shall have received a landlord estoppel agreement, in form and substance satisfactory to the Administrative Agent, with respect to each parcel of real property leased by any Loan Party as of the Closing Date, duly executed and delivered on behalf of the lessor of such real property. -52- 58 (v) FINANCIAL STATEMENTS. The Administrative Agent and each Lender shall have received and reviewed all financial projections and financial statements listed in Section 6.1 hereof, which shall be in form and substance satisfactory to the Administrative Agent and the Lenders. (w) DUE DILIGENCE. The Administrative Agent and each Lender shall have completed to its satisfaction due diligence with respect to the Borrower, Precision, each of their Subsidiaries and their respective businesses and properties; including, without limitation, review of and satisfaction with (i) the tax assumptions of the Transaction Parties, (ii) the ownership, capital, corporate, organization and legal structure of each Transaction Party, (iii) the value, scope and extent of the Collateral which secures the Obligations hereunder, (iv) all material contracts of the Transaction Parties, including without limitation all documents relating to existing Indebtedness or Guarantee Obligations of the Loan Parties and all material supply and purchase contracts of the Loan Parties, (v) the structure of the Precision Acquisition and the financings relating thereto, (vi) all shareholder agreements, employment agreements, non-compete agreements and any other agreements among any Transaction Party and its key personnel and (vii) any collective bargaining agreements and employee benefit plans of the Transaction Parties. (x) SOLVENCY LETTER. The Administrative Agent and the Lenders shall have received a certificate from the chief financial officer of the Borrower, in form and substance satisfactory to the Administrative Agent and the Lenders, as to the solvency of the Loan Parties after giving effect to all of the transactions contemplated hereby. (y) APPROVALS AND WAITING PERIODS. The Administrative Agent shall have received evidence to its satisfaction of the termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with the Precision Acquisition and the transactions relating thereto. 7.2 CONDITIONS TO EACH LOAN. The agreement of each Lender to make any Loan requested to be made by it on any date (including, without limitation, its initial Loan) and the agreement of the Issuing Lender to issue any Letter of Credit (including, without limitation, its initial Letter of Credit) is subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties made by the Borrower and the other Loan Parties in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loans requested to be made on such date. (c) NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred and be continuing that has had a Material Adverse Effect. -53- 59 (d) ADDITIONAL MATTERS. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing by the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date thereof that the conditions contained in this Section 7.2 have been satisfied. SECTION 8. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as any of the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall and (except in the case of delivery of financial information, reports and notices) shall cause each of its Subsidiaries to: 8.1 FINANCIAL STATEMENTS. Furnish to each Lender: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated and unaudited consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related audited consolidated and unaudited consolidating statements of income and retained earnings and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by PricewaterhouseCoopers LLP or other independent certified public accountants of nationally recognized standing; (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated and consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated and consolidating statements of income and retained earnings and of cash flows of the Borrower and its consolidated Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects in accordance with GAAP (subject to normal year-end audit adjustments); and (c) as soon as available, but in any event not later than 30 days after the end of each calendar month, the unaudited consolidated and consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such month and the related unaudited consolidated and consolidating statements of income and retained earnings and of cash flows of the Borrower and its consolidated Subsidiaries for such month and the portion of -54- 60 the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects in accordance with GAAP (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 8.2 CERTIFICATES; OTHER INFORMATION. Furnish to each Lender: (a) concurrently with the delivery of the financial statements referred to in Section 8.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in Sections 8.1(a), (b) and (c), a certificate of a Responsible Officer (i) stating that, to the best of such Officer's knowledge, the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) showing in detail the calculations supporting such Officer's certification of the Borrower's compliance with the requirements of Section 9.1(a) through 9.1(h); (c) not later than thirty days after the end of each fiscal year of the Borrower, a copy of the then current three-year projections by the Borrower of the operating budget and cash flow budget of the Borrower and its Subsidiaries for the succeeding three fiscal years, such projections to be accompanied by a certificate of a Responsible Officer to the effect that such projections have been prepared on the basis of sound financial planning practice and that such Officer has no reason to believe they are incorrect or misleading in any material respect; (d) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to its stockholders, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; (e) during the month of June in each calendar year, a report of a reputable insurance broker with respect to the insurance maintained by the Borrower and its Subsidiaries in accordance with Section 8.5 of this Agreement and Section 5 of each Security Agreement and Section 6 of each Mortgage and Leasehold Mortgage, and such supplemental reports as the Administrative Agent may from time to time request; and -55- 61 (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 8.3 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 8.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to Section 9.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, be reasonably expected to have a Material Adverse Effect. 8.5 MAINTENANCE OF PROPERTY; INSURANCE. Keep all property useful and necessary in its business in good working order and condition (ordinary wear and tear excepted); maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business, which insurance shall name the Administrative Agent as lender loss payee, in the case of property or casualty insurance, and as an additional insured, in the case of liability insurance; and furnish to each Lender, upon written request, full information as to the insurance carried. 8.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants. 8.7 NOTICES. Promptly give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; -56- 62 (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries in which the amount involved is $1,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) of the acquisition by any Loan Party of any property or interest in property (including, without limitation, real property), that is not subject to a perfected Lien in favor of the Administrative Agent pursuant to the Security Documents; (e) of the occurrence of any transaction or occurrence referred to in Section 5.5(b), and the receipt of any Net Proceeds or any insurance proceeds as a result thereof (whether or not such Net Proceeds or proceeds are then required to be applied to the repayment of Loans and reduction of Revolving Credit Commitments as specified in Section 5.5(b)); (f) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; and (g) any development or event which has had or could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower proposes to take with respect thereto. 8.8 ENVIRONMENTAL LAWS. (a) Comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply with and maintain, and ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws. 8.9 PERIODIC AUDIT OF ACCOUNTS RECEIVABLE AND INVENTORY. The Administrative Agent shall be entitled to perform a periodic due diligence inspection, test and review of the accounts receivable and inventory of the Borrower and its Subsidiaries on a -57- 63 mutually convenient Business Day twice during each calendar year and shall in each case be satisfied in all material respects with the results thereof; PROVIDED HOWEVER, if the Administrative Agent in its reasonable judgment is not satisfied that the results of any due diligence inspection, test, and review performed pursuant to this Section 8.10, the Administrative Agent shall be entitled to perform additional due diligence inspections, tests and reviews of such inventory and accounts receivable on mutually convenient Business Days during the succeeding twelve-month period until the Administrative Agent shall be so satisfied; and PROVIDED FURTHER, that upon the occurrence and during the continuation of an Event of Default, the Administrative Agent shall be entitled to perform such additional due diligence inspections, tests and review of such accounts receivable as any Lender shall deem necessary or advisable. 8.10 ADDITIONAL COLLATERAL; ADDITIONAL GUARANTORS. (a) In the event that the Borrower or any Subsidiary acquires any property or interest in property (including, without limitation, real property), that is not subject to a perfected Lien in favor of the Administrative Agent pursuant to the Security Documents, the Borrower shall, and shall cause Subsidiary to, take such action (including, without limitation, the preparation and filing of mortgages or deeds of trust in form and substance satisfactory to the Administrative Agent) as the Administrative Agent shall request in order to create and/or perfect a Lien in favor of the Administrative Agent on such property. (b) In the event that the Borrower is permitted to acquire or form any additional Subsidiary, such Subsidiary shall execute a guarantee and a security agreement, or supplements to the Guarantee and the Security Agreement, and the Borrower and/or any Subsidiary which is a holder of any Capital Stock of such Subsidiary shall execute such pledge agreements or supplements to the Pledge Agreements, each in form and substance satisfactory to the Administrative Agent, and shall take such other action as shall be necessary or advisable (including, without limitation, the execution of financing statements on form UCC-1) in order to perfect the Liens granted by such Subsidiary in favor of the Administrative Agent for the benefit of the Lenders and to effect and perfect the pledge of all of the Capital Stock of such Subsidiary in favor of the Administrative Agent for the benefit of the Lenders. Such Subsidiary shall thereupon become a Guarantor for all purposes under the Loan Documents, including, without limitation, Section 8.10(a) of this Agreement. The Administrative Agent shall be entitled to receive legal opinions of one or more counsel to the Borrower and such Subsidiary addressing such matters as the Administrative Agent or its counsel may reasonably request, including, without limitation, the enforceability of the guaranty and the security agreement to which such Subsidiary becomes a party and the pledge of the Capital Stock of such Subsidiary, and the creation, validity and perfection of the Liens so granted by such Subsidiary and the Borrower and/or other Subsidiaries to the Administrative Agent for the benefit of the Lenders. 8.11 YEAR 2000 COVENANTS. (a) Take all necessary action to (i) comply with the provisions of Section 6.24 hereof and (ii) test all of its systems and equipment supplied by others or with which the Borrower's systems interface on or prior to June 30, 1999 to verify -58- 64 the absence of a Year 2000 Problem, and (b) from time to time, at the request of the Administrative Agent, provide to the Administrative Agent such updated information or documentation as is requested regarding the status of their efforts to address the Year 2000 Problem. 8.12 INTEREST RATE PROTECTION ARRANGEMENTS. No later than 180 days following the Closing Date, enter into interest rate protection arrangements in respect of 50% of the initial aggregate principal balance of the Tranche A Term Loans and the Tranche B Term Loans as such aggregate principal amount is scheduled to be reduced from time to time, in form and substance acceptable to the Administrative Agent. SECTION 9. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as any of the Commitments remain in effect or any amount is owing to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall not, and (except with respect to Section 9.1) shall not permit any of its Subsidiaries to, directly or indirectly: 9.1 FINANCIAL CONDITION COVENANTS. (a) SENIOR LEVERAGE RATIO PRIOR TO PLAN TERMINATION. (1) Permit, for any period of four consecutive fiscal quarters ending during a period set forth below that occurs prior to the date of the Plan Termination and the application of the net proceeds thereof to repayment of the Loans in accordance with Section 5.5(b), the ratio of (i) Consolidated Senior Indebtedness to (ii) Consolidated EBITDA to be greater than the amount set forth opposite such period below; PROVIDED, that in calculating Consolidated EBITDA for the periods of four fiscal quarters ending September 30, 1999, December 31, 1999 and March 31, 2000, Consolidated EBITDA for the fiscal quarters ending December 31, 1998, March 31, 1999 and June 30, 1999 shall be deemed to be $5,250,000, $5,250,000 and $5,250,000, respectively: -59- 65
------------------------------------------------------- Test Period Ending Ratio ------------------------------------------------------- 9/30/99 4.00 ------------------------------------------------------- 12/31/99 4.00 ------------------------------------------------------- 3/31/00 3.70 ------------------------------------------------------- 6/30/00 3.60 ------------------------------------------------------- 9/30/00 3.40 ------------------------------------------------------- 12/31/00 3.20 ------------------------------------------------------- 3/31/01 2.80 ------------------------------------------------------- 6/30/01 2.70 ------------------------------------------------------- 9/30/01 2.60 ------------------------------------------------------- 12/31/01 AND THEREAFTER 2.50 -------------------------------------------------------
(b) SENIOR LEVERAGE RATIO FOLLOWING PLAN TERMINATION. (1) Permit, for any period of four consecutive fiscal quarters ending during a period set forth below that occurs from or after the date of the Plan Termination and the application of the net proceeds thereof to repayment of the Loans in accordance with Section 5.5(b), the ratio of (i) Consolidated Senior Indebtedness to (ii) Consolidated EBITDA to be greater than the amount set forth opposite such period below; PROVIDED that in calculating Consolidated EBITDA for the periods of four fiscal quarters ending September 30, 1999, December 31, 1999 and March 31, 2000, Consolidated EBITDA for the fiscal quarters ending December 31, 1998, March 31, 1999 and June 30, 1999 shall be deemed to be $5,250,000, $5,250,000 and $5,250,000, respectively:
------------------------------------------------------- Test Period Ending Ratio ------------------------------------------------------- 9/30/99 4.00 ------------------------------------------------------- 12/31/99 3.50 ------------------------------------------------------- 3/31/00 3.10 ------------------------------------------------------- 6/30/00 3.00 ------------------------------------------------------- 9/30/00 2.70 ------------------------------------------------------- 12/31/00 AND THEREAFTER 2.50 -------------------------------------------------------
(c) INTEREST COVERAGE PRIOR TO PLAN TERMINATION. Permit, for any period of four consecutive fiscal quarters ending during any period set forth below, or if less than four consecutive fiscal quarters have elapsed since the Closing Date, such period of one, two or three consecutive fiscal quarters following the Closing Date ending during any period set forth below, that occurs prior to the date of the Plan Termination and the application of the net proceeds thereof to repayment of the Loans in accordance with Section 5.5(b), the ratio of (i) Consolidated EBITDA for such period to (ii) Consolidated Interest Expense for such period, to be less than the amount set forth opposite such period below: -60- ----------------------------------- --------------------- Test Period Ending Ratio ----------------------------------- --------------------- 9/30/99 2.00 ----------------------------------- --------------------- 12/30/99 2.00 ----------------------------------- --------------------- 3/31/00 2.10 ----------------------------------- --------------------- 6/30/00 2.25 ----------------------------------- --------------------- 9/30/00 2.40 ----------------------------------- --------------------- 12/31/00 2.60 ----------------------------------- --------------------- 3/31/01 2.70 ----------------------------------- --------------------- 6/30/01 2.80 ----------------------------------- --------------------- 9/30/01 2.90 ----------------------------------- --------------------- 12/31/01 3.00 ----------------------------------- --------------------- 3/31/02 3.10 ----------------------------------- --------------------- 6/30/02 3.20 ----------------------------------- --------------------- 9/30/02 3.30 ----------------------------------- --------------------- 12/31/02 3.40 ----------------------------------- --------------------- 3/31/03 AND THEREAFTER 3.50 ----------------------------------- --------------------- (d) INTEREST COVERAGE FOLLOWING PLAN TERMINATION. Permit, for any period of four consecutive fiscal quarters ending during any period set forth below, or if less than four consecutive fiscal quarters have elapsed since the Closing Date, such period of one, two or three consecutive fiscal quarters following the Closing Date ending during any period set forth below, that occurs from or after the date of the Plan Termination and the application of the net proceeds thereof to repayment of the Loans in accordance with Section 5.5(b), the ratio of (i) Consolidated EBITDA for such period to (ii) Consolidated Interest Expense for such period, to be less than the amount set forth opposite such period below: -61- 66 ----------------------------------- --------------------- Test Period Ratio ----------------------------------- --------------------- 9/30/99 2.00 ----------------------------------- --------------------- 12/31/99 2.00 ----------------------------------- --------------------- 3/31/00 2.25 ----------------------------------- --------------------- 6/30/99 2.40 ----------------------------------- --------------------- 9/30/99 2.55 ----------------------------------- --------------------- 12/31/00 2.75 ----------------------------------- --------------------- 3/31/01 2.85 ----------------------------------- --------------------- 6/30/01 3.00 ----------------------------------- --------------------- 9/30/01 3.10 ----------------------------------- --------------------- 12/31/01 3.20 ----------------------------------- --------------------- 3/31/02 3.30 ----------------------------------- --------------------- 6/30/02 3.40 ----------------------------------- --------------------- 9/30/02 AND THEREAFTER 3.50 ----------------------------------- --------------------- (e) MINIMUM FIXED CHARGE COVERAGE PRIOR TO PLAN TERMINATION. Permit, for any period of four consecutive fiscal quarters ending during any period set forth below, or if less than four consecutive fiscal quarters have elapsed since the Closing Date, such period of one, two or three consecutive fiscal quarters following the Closing Date ending during any period set forth below, that occurs prior to the date of the Plan Termination and the application of the net proceeds thereof to repayment of the Loans in accordance with Section 5.5(b), the ratio of (i) the sum of (A) Consolidated EBITDA and (B) Consolidated Lease Expense to (ii) Consolidated Fixed Charges to be less than the ratio set forth opposite such period below: ----------------------------------- --------------------- Test Period Ratio ----------------------------------- --------------------- 9/30/99 1.00 ----------------------------------- --------------------- 12/31/99 1.00 ----------------------------------- --------------------- 3/31/00 1.10 ----------------------------------- --------------------- 6/30/00 1.10 ----------------------------------- --------------------- 9/30/00 1.20 ----------------------------------- --------------------- 12/31/00 AND THEREAFTER 1.25 ----------------------------------- --------------------- (f) MINIMUM FIXED CHARGE COVERAGE FOLLOWING PLAN TERMINATION. Permit, for any period of four consecutive fiscal quarters ending during any period set forth below, or if less than four consecutive fiscal quarters have elapsed since the Closing Date, such period of one, two or three consecutive fiscal quarters following the Closing Date ending during any period set forth below, that occurs from or after the date of the Plan Termination and the application of the net proceeds thereof to repayment of the Loans in accordance with Section 5.5(b), the ratio of (i) the sum of (A) Consolidated EBITDA and (B) Consolidated Lease -62- 67 Expense to (ii) Consolidated Fixed Charges to be less than the ratio set forth opposite such period below: ----------------------------------- --------------------- Test Period Ratio ----------------------------------- --------------------- 9/30/99 1.00 ----------------------------------- --------------------- 12/31/99 1.00 ----------------------------------- --------------------- 3/31/00 1.10 ----------------------------------- --------------------- 6/30/00 1.20 ----------------------------------- --------------------- 9/30/00 AND THEREAFTER 1.25 ----------------------------------- --------------------- (g) MAINTENANCE OF CONSOLIDATED NET WORTH. Permit Consolidated Net Worth at any time, to be less than the sum of (i) $46,000,000 LESS any net losses from write down of assets recorded prior to June 30, 1999 relating to the sale of the machine tool division and (ii) the sum of 75% of Adjusted Consolidated Net Income for each fiscal quarter ended prior to such time, commencing with the fiscal quarter ended September 30, 1999. 9.2 LIMITATION ON INDEBTEDNESS. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Borrower under this Agreement; (b) the Subordinated Debt; (c) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary; and (d) Indebtedness outstanding on the date hereof and listed on Schedule 9.2. 9.3 LIMITATION ON LIENS. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, PROVIDED that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings; -63- 68 (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or such Subsidiary; (f) Liens in existence on the date hereof listed on Schedule 9.3, securing Indebtedness permitted by Section 9.2(d), PROVIDED that no such Lien is spread to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) unperfected Liens arising by operation of law under Article 2 of the Uniform Commercial Code in favor of unpaid sellers or prepaying buyers of goods; (h) statutory Liens arising from leases or subleases which are entered into in the ordinary course of business and which do not interfere in any material respect with the ordinary conduct of the business of the Borrower or its Subsidiaries; and (i) Liens created pursuant to the Security Documents. 9.4 LIMITATION ON GUARANTEE OBLIGATIONS. Create, incur, assume or suffer to exist any Guarantee Obligation except: (a) Guarantee Obligations in existence on the date hereof and listed on Schedule 9.4; (b) guarantees made in the ordinary course of its business by the Borrower of obligations of any of its Subsidiaries, which obligations are otherwise permitted under this Agreement; and (c) the Guarantees. -64- 69 9.5 LIMITATION ON FUNDAMENTAL CHANGES. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (PROVIDED that the Borrower shall be the continuing or surviving corporation) or with or into any one or more wholly owned Subsidiaries of the Borrower (PROVIDED that a wholly owned Subsidiary or Subsidiaries shall be the continuing or surviving corporation); (b) any wholly owned Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any other wholly owned Subsidiary of the Borrower; and (c) the restructuring of the Borrower and its Subsidiaries as described on Schedule 9.5 hereof (the "RESTRUCTURING"). 9.6 LIMITATION ON SALE OF ASSETS. Convey, sell, lease, assign, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock (other than directors' qualifying shares of Foreign Subsidiaries) to any Person other than the Borrower or any wholly owned Subsidiary, except: (a) the sale or other disposition of obsolete or worn out property in the ordinary course of business; PROVIDED, that the Net Proceeds of each such transaction are applied to the prepayment of the Loans as provided in Section 5.5(b); (b) the sale of inventory in the ordinary course of business; (c) the sale of the Borrower's machine tool division; PROVIDED, that the Net Proceeds of such transaction are applied to the prepayment of the Loans as provided in Section 5.5(b); (d) the sale or discount without recourse of accounts receivable Farising in the ordinary course of business in connection with the compromise or collection thereof; (e) as permitted by Section 9.5(b); and (f) the sale of assets listed on Schedule 9.6 hereof; PROVIDED, that the Net Proceeds of each such transaction are applied to the prepayment of the Loans as provided in Section 5.5(b). -65- 70 9.7 LIMITATION ON DIVIDENDS. Declare or pay any dividend (other than dividends payable solely in common stock of the Borrower) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any warrants or options to purchase any such Capital Stock or make any prepayment, repurchase, redemption or defeasance in respect of the Three Cities Subordinated Debt or any Special Subordinated Debt (other than with the proceeds of Replacement Subordinated Debt and regularly scheduled payments in accordance with the terms thereof), whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary (such declarations, payments, setting apart, purchases, redemptions, defeasances, retirements, acquisitions and distributions being herein called "RESTRICTED PAYMENTS"), except that the Borrower may make Restricted Payments as follows: (a) dividends in respect of preferred stock of the Borrower in an amount not to exceed $30,000 during any period of four consecutive fiscal quarters; (b) dividends in respect of common stock of the Borrower in an amount not to exceed, during any period of four consecutive fiscal quarters, when combined with the amount of Restricted Payments made during such period pursuant to Section 9.7(a), the lesser of (i) $1,000,000 and (ii) 25% of Consolidated Net Income during such period; (c) prepayments, repurchases, redemptions or defeasances of any Subordinated Debt made with the proceeds of Replacement Subordinated Debt; (d) prepayments, repurchases, redemptions or defeasances of any Special Subordinated Debt made no earlier than June 30, 2002 (unless paid from proceeds described in Exhibit 1.2-B(1) of the Precision Acquisition Agreement) in an amount not to exceed $3,000,000; (e) purchases of the Capital Stock of the Borrower in connection with the payment of the option price or taxes in connection with the exercising of options or the grant of restricted shares under compensation plans of the Borrower done in the ordinary course of the Borrower's business and consistent with past practices of the Borrower; (f) purchases of the Capital Stock of the Borrower in connection with the termination of any pension plans to the extent permitted by Section 5.5(b). 9.8 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any expenditure in respect of the purchase or other acquisition of fixed or capital assets (excluding any such asset acquired in connection with normal replacement and maintenance programs properly charged to current operations) except for expenditures in the ordinary course of business not exceeding, in the aggregate for the Borrower and its Subsidiaries (i) during the period of four consecutive fiscal -66- 71 quarters of the Borrower ending on June 30, 2000, $9,000,000, (ii) during the fiscal year of the Borrower ending December 31, 2000, the sum of (A) $5,000,000 and (B) the lesser of (x) $4,000,000 and (y) the excess (if any) of $9,000,000 over the actual capital expenditures of the Borrower and its Subsidiaries during the period of four consecutive fiscal quarters of the Borrower ending on June 30, 2000 and (iii) during any fiscal year of the Borrower thereafter, $5,000,000. 9.9 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except : (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) investments by the Borrower in any Subsidiary and investments by such Subsidiary in the Borrower and in other Subsidiaries of the Borrower; (d) seller financing for assets sold by the Borrower or any of its Subsidiaries in accordance with Section 9.6(f) hereof; PROVIDED, that any promissory note relating thereto shall have been pledged to the Administrative Agent for the benefit of the Lenders pursuant to the Security Agreement and shall be delivered to the Administrative Agent; (e) loans to employees for relocation expenses in an aggregate amount at any time outstanding not to exceed $500,000; and (f) payment of contingent payments if required under Section 2.5 of the Stock Purchase Agreement, dated as of December 30, 1998 (the "GFG AGREEMENT"), between Durlan Industries, Inc. and the Borrower in an aggregate amount not to exceed $1,780,000, or in payment of the amount required under Section 6.6(b) of the GFG Agreement if the Borrower elects to make a 338(h)(10) election as permitted by Section 6.6(b) of the GFG Agreement in an amount not to exceed $1,000,000. 9.10 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT INSTRUMENTS. (a) Make any optional payment or prepayment on or redemption or purchase of any Subordinated Debt, (b) amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any Subordinated Debt Documents (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon) or any Precision Acquisition Documents. 9.11 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) otherwise permitted -67- 72 under this Agreement, (b) in the ordinary course of the Borrower's or such Subsidiary's business and (c) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 9.12 LIMITATION ON SALES AND LEASEBACKS. Enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary. 9.13 LIMITATION ON CHANGES IN FISCAL YEAR. Permit the fiscal year of the Borrower to end on a day other than December 31. 9.14 LIMITATION ON NEGATIVE PLEDGE CLAUSES. Enter into with any Person any agreement, other than (a) this Agreement and (b) any industrial revenue bonds, purchase money mortgages or Financing Leases permitted by this Agreement (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby), which prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. 9.15 LIMITATION ON LINES OF BUSINESS. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the date of this Agreement. 9.16 GOVERNING DOCUMENTS. Amend its certificate of incorporation (except to increase the number of authorized shares of common stock or to change its name in connection with the Restructuring; PROVIDED, that notice of such name change is given to the Administrative Agent in accordance with the Security Agreement), partnership agreement or other Governing Documents, without the prior written consent of the Required Lenders, which shall not be unreasonably withheld or delayed. 9.17 LIMITATION ON SUBSIDIARY FORMATION. Form any Subsidiaries unless, immediately upon the formation of such Subsidiary, all requirements of Section 8.10 shall have been satisfied. SECTION 10 EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan when due in accordance with the terms thereof or hereof; or the Borrower shall fail to pay any interest on any Loan, or any other amount payable hereunder or under the other Loan -68- 73 Documents, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or (b) Any representation or warranty made or deemed made by the Borrower or any other Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower or any other Loan Party shall default in the observance or performance of any agreement contained in Section 9 hereof, Section 10 (b) or 10 (h) of the Mortgage or the Leasehold Mortgage, Section 5 (b) or 5 (g) of the Pledge Agreement or Section 5 (h), 5 (i) or 5 (p) of the Security Agreement; or (d) The Borrower or any other Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days; or (e) The Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest of any Indebtedness (other than the Loans) or in the payment of any Guarantee Obligation, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created, if the aggregate amount of the Indebtedness and/or Guarantee Obligations in respect of which such default or defaults shall have occurred is at least $1,000,000; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or Administrative Agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or (f) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, -69- 74 or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance, subject to customary deductibles) of $1,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (i) (i) Any of the Security Documents shall cease, for any reason, to be in full force and effect, or the Borrower or any other Loan Party which is a party to any of the Security Documents shall so assert or (ii) the Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; or -70- 75 (j) Any Guarantee shall cease, for any reason, to be in full force and effect or any Guarantor shall so assert; or (k) The subordination provisions relating to any Subordinated Debt shall cease for any reason to be effective in respect of the Loans, or any holder thereof shall so assert; or (l) A Change of Control shall occur; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon the Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. The Borrower hereby grants to the Administrative Agent, for the benefit of the Issuing Lender and the L/C Participants, a security interest in such cash collateral to secure all obligations of the Borrower under this Agreement and the other Loan Documents. Amounts held in such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the Notes. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower. The Borrower shall execute and deliver to the Administrative Agent, for the account of the Issuing Lender and the L/C Participants, such further documents and instruments as the Administrative Agent may request to evidence the creation and perfection of the within security interest in such cash collateral account. -71- 76 SECTION 11 THE ADMINISTRATIVE AGENT 11.1 APPOINTMENT. Each Lender hereby irrevocably designates and appoints the Administrative Agent as the Administrative Agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 11.2 DELEGATION OF DUTIES. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through Administrative Agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any Administrative Agents or attorneys in-fact selected by it with reasonable care. 11.3 EXCULPATORY PROVISIONS. Neither the Administrative Agent nor any of its officers, directors, employees, Administrative Agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 11.4 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower or any other Loan Party), independent accountants and other experts selected by the -72- 77 Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 11.5 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 11.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, Administrative Agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower or any other Loan Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and the other Loan Parties and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder or under the other Loan Documents, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any -73- 78 credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower or any other Loan Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, Administrative Agents, attorneys-in-fact or Affiliates. 11.7 INDEMNIFICATION. The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Credit Exposure Percentages in effect on the date on which indemnification is sought, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder. 11.8 ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. The Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and the other Loan Parties as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 11.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may resign as Administrative Agent upon 10 days' notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor Administrative Agent for the Lenders, which successor Administrative Agent shall be approved by the Borrower, whereupon such successor Administrative Agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor Administrative Agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. -74- 79 SECTION 12 MISCELLANEOUS 12.1 AMENDMENTS AND WAIVERS. Neither this Agreement nor any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 12.1. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (a) enter into with the Borrower written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Borrower hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; PROVIDED, HOWEVER, that no such waiver and no such amendment, supplement or modification shall (i) reduce the amount or extend the scheduled date of maturity of any Loan or of any installment thereof, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitments, in each case without the consent of each Lender affected thereby, or (ii) amend, modify or waive any provision of this Section 12.1 or reduce the percentage specified in the definition of Required Lenders, or consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents or release all or substantially all of the Collateral or release all or substantially all of the Guarantors from their obligations under the Guarantees, in each case without the written consent of each of the Lenders directly affected thereby, or (iii) amend, modify or waive any provision of Section 11 without the written consent of the then Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Borrower, the Lenders and the Administrative Agent shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Notwithstanding anything to the contrary contained in this Section 12.1, the Restructuring and all amendments, modifications and releases necessary to give effect thereto shall be permitted and shall not require the consent of the Lenders. 12.2 NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three days after being deposited in the mails, postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been electronically confirmed, addressed as follows in the case of the Borrower and the Administrative Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: -75- 80 The Borrower: The Monarch Machine Tool Company 2600 Kettering Tower Dayton, Ohio 45423 Attention: Richard E. Clemens Fax: (937) 910-9305 Telephone: (937) 910-9300 The Administrative Agent: ING (U.S.) Capital LLC 55 East 52nd Street New York, New York 10055 Attention: Robert L. Fellows Fax: (212) 309-8900 Telephone: (212) 409-1727 PROVIDED that any notice, request or demand to or upon the Administrative Agent or the Lenders pursuant to Section 2.5, 3.3, 3.5, 5.2, 5.4 or 5.8(b) shall not be effective until received. 12.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 12.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees (a) to pay or reimburse the Administrative Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the fees and disbursements of counsel to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which -76- 81 may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents, the Precision Acquisition Documents, the Subordinated Debt Documents, the Precision Acquisition or the use of the proceeds of the Loans in connection with the Precision Acquisition and any such other documents, including, without limitation, any of the foregoing relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower, any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "INDEMNIFIED LIABILITIES"), provided, that the Borrower shall have no obligation hereunder to the Administrative Agent or any Lender with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of the Administrative Agent or any such Lender or (ii) legal proceedings commenced against the Administrative Agent or any such Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such. The agreements in this Section shall survive repayment of the Loans and all other amounts payable hereunder. 12.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business, commercial lending or investment business and in accordance with applicable law, at any time sell to one or more banks or other entities ("PARTICIPANTS") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the -77- 82 amount of its participating interest were owing directly to it as a Lender under this Agreement, PROVIDED that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 12.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 5.10, 5.11, and 5.12 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; PROVIDED that, in the case of Section 5.11, such Participant shall have complied with the requirements of said Section and PROVIDED, FURTHER, that no Participant shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking business, commercial lending or investment business and in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Administrative Agent and the Borrower (which in each case shall not be unreasonably withheld), to an additional bank or financial institution ("an ASSIGNEE") all or any part of its rights and obligations under this Agreement and the other Loan Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit L, with appropriate completions (an "ASSIGNMENT AND ACCEPTANCE"), executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Administrative Agent and the Borrower) and delivered to the Administrative Agent for its acceptance and recording in the Register; PROVIDED, that no such assignment shall be permitted if the aggregate amount of the Loans, L/C Obligations and Available RC Commitments assigned shall be less than $5,000,000, unless otherwise agreed by the Administrative Agent. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with Commitments as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this paragraph (c) and paragraph (e) of this Section, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the assigning Lender, new Notes shall not be required to be executed and delivered by the Borrower, for any assignment which occurs at any time when any of the events described in Section 10(f) shall have occurred and be continuing. (d) The Administrative Agent, on behalf of the Borrower, shall maintain at the address of the Administrative Agent referred to in Section 12.2 a copy of each Assignment and Acceptance delivered to it and a register (the "REGISTER") for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amounts of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders -78- 83 may (and, in the case of any Loan or other obligation hereunder not evidenced by a Note, shall) treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Administrative Agent) together with payment to the Administrative Agent of a registration and processing fee of $3,500, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. (f) The Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "TRANSFEREE") and any prospective Transferee any and all financial information in such Lender's possession concerning the Borrower and its Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Affiliates prior to becoming a party to this Agreement. (g) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. 12.7 ADJUSTMENTS; SET-OFF. (a) If any Lender (a "BENEFITED LENDER") shall at any time receive any payment of all or part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 10(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such benefited Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefited -79- 84 Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrower agrees that each Lender so purchasing a portion of another Lender's Loan may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such set-off and application made by such Lender, PROVIDED, that the failure to give such notice shall not affect the validity of such set-off and application. 12.8 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission of signature pages hereto), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 12.9 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 unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12.10 INTEGRATION. This Agreement and the other Loan Documents represent the agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 12.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 12.12 SUBMISSION TO JURISDICTION; WAIVERS. The Borrower hereby irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for -80- 85 recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 12.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 12.13 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Borrower and the other Loan Parties, on one hand, and Administrative Agent and Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 12.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 12.15 CONFIDENTIALITY. Each Lender agrees to keep confidential any written or oral information (a) provided to it by or on behalf of the Borrower or any of its Subsidiaries -81- 86 pursuant to or in connection with this Agreement or (b) obtained by such Lender based on a review of the books and records of the Borrower or any of its Subsidiaries; PROVIDED, that nothing herein shall prevent any Lender from disclosing any such information (i) to the Administrative Agent or any other Lender, (ii) to any Transferee which agrees to comply with the provisions of this Section 12.15, (iii) to its employees, directors, agents, attorneys, accountants and other professional advisors, (iv) upon the request or demand of any examiner or other Governmental Authority having jurisdiction over such Lender, (v) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (vi) which has been publicly disclosed other than in breach of this Agreement, or (vii) in connection with the exercise of any remedy hereunder. [Signature Pages Follow] -82- 87 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. THE MONARCH MACHINE TOOL COMPANY By:________________________________ Title: ING (U.S.) CAPITAL LLC, as Administrative Agent and as a Lender By:________________________________ Title: [Credit Agreement - Signature Page] 88 SCHEDULE 1.1
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES ----------------------------------------------------------------------------------------------- Tranche A Tranche B Lender and Lending Offices Term Loan Term Loan Revolving Credit Commitment Commitment Commitment ----------------------------------------------------------------------------------------------- ING (U.S.) CAPITAL LLC Applicable Lending Offices: Base Rate Loans and Eurodollar Loans: 55 East 52nd Street New York, New York 10055 Attention: Lisa H. Cummings Telephone: 212-409-1676 Telecopy: 212-486-6341 ----------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- Total: $50,000,000 $20,000,000 $30,000,000 =========== =========== =========== -----------------------------------------------------------------------------------------------
89 Schedule 2.2 SCHEDULED TRANCHE A TERM LOAN REPAYMENTS The Tranche A Term Loans shall be repaid in 28 quarterly installments of principal payable on the last day of each March, June, September and December, commencing September 1999, each in the aggregate amount set forth below opposite such installment (as they may be reduced in accordance with the terms of this Agreement): INSTALLMENT NO. AMOUNT --------------- ------ 1-4 $1,000,000 5-8 $1,250,000 9-12 $1,750,000 13-16 $1,750,000 17-20 $2,000,000 21-24 $2,250,000 25-28 $2,500,000 90 Schedule 2.4 SCHEDULED TRANCHE B TERM LOAN REPAYMENTS The Tranche B Term Loans shall be repaid in 30 quarterly installments of principal payable on the last day of each March, June, September and December, commencing September 1999, each in the aggregate amount set forth below opposite such installment (as they may be reduced in accordance with the terms of this Agreement): INSTALLMENT NO. AMOUNT --------------- ------ 1-28 $50,000 29-30 $9,300,000 EX-4.2 4 EXHIBIT 4.2 1 Exhibit 4.2 AGREEMENT This is an agreement dated June 30, 1999 between The Monarch Machine Tool Company (the "Buyer"), an Ohio corporation, and the persons (the "Selling Stockholders") listed on Exhibit A to the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated May 13, 1999, among the Buyer and those persons. 1. PURCHASE OF NOTE AND WARRANTS. The Selling Stockholders agree to purchase from Buyer, and Buyer agrees to sell to the Selling Stockholders, at the Closing (as defined below) (i) a promissory note in the principal amount of $15,000,000 (the "Note"), in the form attached to this Agreement as Exhibit A and (ii) Warrants, in the form attached to this Agreement as Exhibit B, as follows: (a) At the Closing, warrants to purchase 100,000 shares of the Buyer's common stock, no par value ("Buyer Common Stock"), at a purchase price of $7.75 per share, subject to adjustment as provided in the Warrants; (b) on June 30, 2000, unless the principal and interest on the Note has been paid in full by that date, warrants to purchase 150,000 shares of Buyer Common Stock at a purchase price equal to the lower of (i) $7.75 per share and (ii) the market price of the Buyer Common Stock at June 30, 2000, subject to adjustment as provided in the Warrants; (c) on each of October 2, 2000, and January 2, April 2, July 2 and October 1, 2001 (or such of these dates as fall before the principal and interest of the Note has been paid in full) warrants to purchase 50,000 shares of Buyer Common Stock at a purchase price equal to the lower of (x) $7.75 per share and (y) the market price of the Buyer Common Stock at the date of purchase, subject to adjustment as provided in the Warrants. (d) For the purpose of determining the exercise price of the warrants, the "market price" of the Buyer Common Stock will be the arithmetic mean of the last reported sale prices of Buyer Common Stock reported on the New York Stock Exchange (or in such other market as is the principal market for Buyer Common Stock) on each of the five trading days before the date as of which the market price is determined. (e) If when the Buyer is required by subparagraph (c) to issue Warrants, the rules of the New York Stock Exchange require that the Company's stockholders approve the Company's issuance of Common Stock on exercise of those Warrants, but the Company's stockholders have not approved that issuance of Common Stock, on the day when the Company was required to issue those Warrants, the Company will, instead of issuing the Warrants, issue to the Selling Stockholders a number of stock appreciation rights ("SARs") equal to the number of Warrants the Company was required to issue on that day, which SARs will have the following principal terms: 2 (i) The exercise price of the SARs will be the same as the exercise price of the warrants would have been, as provided in subparagraph (c above. (ii) The expiration date of the SARs will be June 30, 2009. (iii) The SARs will include provisions which are substantially identical with Article III of the Warrants regarding adjustment to the exercise price and to the number of shares of Common Stock or other securities or assets which the holders will receive upon exercise. (iv) When an SAR is exercised (x) the holder will not have to pay the exercise price or any other sum to the Company and (y) the holder will receive cash per share as to which the SAR is exercised equal to (A) the fair value on the day the SAR is exercised of Common Stock or other securities or assets as to which the SAR is exercised (which, as to Common Stock, will be the average of the last sale price of the Common Stock reported on the New York Stock Exchange composite tape (or in such other market as is the principal market for the Common Stock) on each of the ten trading days next preceding the day for which the fair value is being determined, and as to any other securities or assets will be their fair value as determined in good faith by the Board of Directors of the Company), minus (B) the per share exercise price of the SAR. The SARs will also have other customary terms which will be nearly as possible the same as the comparable terms of the Warrants. 2. PURCHASE PRICE. The price to be paid by the Selling Stockholders for the Note and the Warrants (or SARs) described in Section 2 will be $15,000,000, which will be paid by wire transfer of immediately available funds on the date of the Closing to an account with a bank in the United States of America which Buyer specifies at least 48 hours before the Closing to the Three Cities Research, Inc., as Stockholders Representative for the Selling Stockholders. 3. BOARD OF DIRECTORS. The Stockholders' Representative will have the right, which the Stockholders Representative may exercise at any time beginning 90 days after the day of the Closing, to nominate two individuals to serve on the Board of Directors of Buyer, and Buyer agrees to take all actions in its power to cause the election of the individuals designated by the Stockholders Representative to its Board of Directors as promptly as practicable. Buyer further agrees to take all actions in its power to maintain two individuals nominated by the Stockholders Representative on its Board of Directors until the Note is repaid in full, except that at any time when, because of prepayments or transfers of portions of the Note, the principal amount of the Note beneficially owned by Selling Stockholders is less than 50% of the original principal amount of the Note, the Buyer need only take all actions in its power to maintain one individual nominated by the Stockholders Representative on its Board of Directors. The Stockholders Representative will use its best efforts to cause the individuals who it nominates to resign from the Board of Directors promptly after the Note is paid in full, and if at the time the principal amount of the Note beneficially owned by Selling Stockholders ceases to be at least 50% of the original principal amount of the Note, there are two individuals nominated by the Stockholders Representative serving on the Board of Directors, at the Company's request the Stockholders Representative will use its best efforts to cause one of those individuals to resign from the Board of Directors. 2 3 4. CLOSING. The closing (the " Closing") of the purchase of the Notes and the Warrants to be issued at the Closing will take place at the same place and time as the closing under the Stock Purchase Agreement. At the Closing, (i) the Buyer will deliver to the Stockholders Representative, on behalf of the Selling Stockholders, the Note and the Warrants described in subparagraph 1(a), registered in the name of the Stockholders Representative, as Stockholders Representative, and (ii) the Stockholders Representative will deliver to the Buyer evidence of the wire transfer described in Paragraph 2. 5. CONDITIONS TO OBLIGATIONS OF SELLING STOCKHOLDERS. The obligations of the Selling Stockholders at the Closing are subject to (i) satisfaction of all the conditions set forth in Section 5.2 of the Stock Purchase Agreement and (ii) Buyer's purchasing all the outstanding stock of Precision Industrial Corporation from the Selling Stockholders at the Closing under the Stock Purchase Agreement. 6. CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of the Buyer at the Closing are subject to (i) satisfaction of all the conditions set forth in Section 5.1 of the Stock Purchase Agreement and (ii) Buyer's purchasing all the outstanding stock of Precision Industrial Corporation from the Selling Stockholders at the Closing under the Stock Purchase Agreement. 7. SECURITIES LAW MATTERS. Each of the Selling Stockholders acknowledges that the Note and the Warrants, and the shares of Buyer Common Stock issuable upon the Warrants, may not have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold or transferred other than in a transaction which is registered under the Securities Act or is exempt from the registration requirements of the Securities Act. 8. AUTHORITY OF STOCKHOLDERS REPRESENTATIVE. The Stockholders Representative represents and warrants to the Buyer that the Stockholders Representative is duly authorized to execute and delivery this Agreement on behalf of each of the Selling Stockholders. IN WITNESS WHEREOF, the Buyer and the Stockholders Representative, on behalf of the Selling Stockholders, have executed this Agreement, intending to be legally bound by it, on the day shown on the first page of this Agreement. THE MONARCH MACHINE TOOL COMPANY By:________________________________ Title: President THREE CITIES RESEARCH, INC., as Stockholders Representative By:________________________________ Title: 3 EX-4.2.1 5 EXHIBIT 4.2.1 1 Exhibit 4.2.1 THE MONARCH MACHINE TOOL COMPANY 12% JUNIOR SUBORDINATED NOTE $15,000,000.00 June 30, 1999 The Monarch Machine Tool Company (the "Company"), an Ohio corporation, promises to pay to Three Cities Research, Inc., as Sellers Representative under a Stock Purchase Agreement (the "Agreement") dated May 13, 1999 between the Company and the stockholders of Precision Industrial Corporation (the "Holder"), at the times and in the respective amounts described below, the total principal sum of $15,000,000.00. The Company also promises to pay interest on the unpaid principal amount of this Note at the rate which is 12% per annum until June 30, 2000 and increases by 50 basis points on July 1, 2000 and each October 1, January 1, April 1 and July 1 after that until October 1, 2002, on and after which the rate of interest payable under this Note will be 17% per annum. Interest will be based on a year of 365/366 days. To the extent any interest payment (other than a payment under Paragraph 4 below) is at a rate in excess of 14% per annum, the amount above 14% per annum will be paid with a note containing the same terms as this Note, dated the date of the interest payment, in a principal amount equal to the amount by which the interest payment exceeds what it would have been at 14% per annum. 1. The entire unpaid principal balance of the sum evidenced by this Note will be due and payable on December 31, 2007. (the "Maturity Date"). If, however, at any time or times prior to the Maturity Date, the Company completes a public offering for cash of equity securities or of debt securities which are subordinated to some or all of the Company's Senior Indebtedness described in Paragraph 8, other than upon exercise of options granted to directors of the Company or officers of the Company or its subsidiaries under a stock option plan for directors or employees, simultaneously with the sale of the securities which are the subject of that public offering, the Company will make a prepayment of the principal sum evidenced by this note which is equal to at least 80% of the proceeds of the public offering, net of underwriting discounts and commissions, or which is equal to the entire unpaid balance of that principal sum if that is less, and the Company will pay all accrued but unpaid interest on the principal sum which is being prepaid. 2. Interest will be payable on March 31, June 30, September 30 and December 31 of each year (each an "Interest Payment Date"), with the first interest payment to be made on the first of those dates after interest begins to accrue. 3. Each payment of principal or interest will be made to the Holder by certified or bank cashier's check or wire transfer, at such address or to such account as the Holder specifies to the Company in writing at least three business days before the payment is to be made. 4. Any payment of principal or interest which is not made when it is due will bear interest from the date it is due until it is paid at the rate which is 200 basis points higher than the interest rate in effect on the day the payment is due, or such lower rate as is the maximum rate permitted by law. 5. The Company may at any time prepay all or any portion of the outstanding balance of the principal sum evidenced by this Note (provided that each prepayment must be at least $100,000, or such lesser amount as is the entire outstanding balance of principal immediately before the 2 prepayment). Each prepayment will be applied against the payments of principal required by this Note in the reverse of the order in which they are to be made. Each prepayment of principal will be accompanied by all accrued but unpaid interest on the principal sum being prepaid. 6. Each of the following events will constitute an Event of Default: (a) The Company fails to make any payment of principal on or before the day on which it is due; or (b) The Company fails to make any payment of interest within ten days after the day on which is it due; or (c) The Company defaults in any of its obligations under this Note other than obligations described in subparagraphs (a) and (b) and fails to cure that default within 30 days after a written demand from the Holder that the Company do so; or (d) The Company or a significant subsidiary (as that term is defined in Securities and Exchange Commission Regulation S-X) commences a proceeding seeking relief as a debtor under the Bankruptcy Code or any state or foreign insolvency law; or (e) An order is entered in a proceeding under the Bankruptcy Code or any state or foreign insolvency law declaring the Company or a significant subsidiary to be insolvent or appointing a receiver or similar official for substantially all the Company's or a significant subsidiary's properties, and that order is not dismissed within 90 days; or (f) Because of an event of default with regard to Senior Indebtedness, a holder of Senior Indebtedness accelerates the time when the principal of the Senior Indebtedness is due and payable. (g) Because of events of default with regard to indebtedness which is not Senior Indebtedness, holders of indebtedness aggregating $500,000 which is not Senior Indebtedness accelerate the time when that indebtedness is due and payable. 7. Upon the occurrence of an Event of Default, the Holder may, by a notice to the Company given while the Event of Default is continuing, declare the entire unpaid balance of the principal sum evidenced by this Note and the accrued but unpaid interest to be due and payable, in which event that principal balance and accrued but unpaid interest will be immediately due and payable, except that if the Event of Default is of the type described in subparagraph (d) or (e), the entire unpaid balance of the principal sum evidenced by this Note and all accrued but unpaid interest will be immediately due and payable when the Event of Default occurs, without requiring any notice or other action by the Holder. 8. (a) The Company's obligations to make payments of principal and interest under this Note are subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. "Senior Indebtedness" means all principal, premium, interest, and other sums due with regard to all indebtedness for money borrowed (including the obligation to reimburse for amounts drawn against letters of credit) from banks, insurance companies or other financial institutions which the Company states, in the instrument governing the indebtedness or a document delivered to the holder of the indebtedness, to be Senior Indebtedness with regard to this Note, except that no indebtedness (and no obligations with regard to the indebtedness) will be Senior Indebtedness to the extent that incurrence of the indebtedness would cause the entire Senior Indebtedness at the time the indebtedness is incurred to exceed $100,000,000, plus, as to Senior Indebtedness which when it was incurred did not cause the entire 2 3 Senior Indebtedness to exceed that amount, additional advances totaling not more than 10% of the maximum committed amount of that Senior Indebtedness made by the lender to protect the Senior Indebtedness already held by the lender. In furtherance and not in limitation of the foregoing, but subject to the foregoing limitation on amount, "Senior Indebtedness" includes all principal, interest and other obligations of the Company under a Credit Agreement dated as of June 30, 1999 among the Company, the lenders party thereto, and ING (U.S.) Capital LLC as administrative agent, as amended, supplemented and otherwise modified from time to time. (b) No payment of principal or interest on this Note will be made (i) unless all amounts then due for principal, premium, if any, and interest on Senior Indebtedness have been paid in cash or provided for, or (ii) during the period (a "Blockage Period") between the time the Company is notified by a holder of Senior Indebtedness that an event of default with respect to that Senior Indebtedness exists which permits the holder of that Senior Indebtedness to accelerate its maturity (a "Blockage Event") and the earlier of (x) the time that event of default is cured or waived or ceases to exist, and (y) 180 days after the holder of that Senior Indebtedness became entitled to accelerate its maturity, unless the holder of that Senior Indebtedness has accelerated its maturity. (c) During a Blockage Period, the Holder of this Note shall not ask for, sue for, take, demand or set off or in any other manner, direct or indirect, attempt to enforce any right or collect any payment or distribution on account of this Note, nor present this Note for payment. (d) Upon any distribution of assets of the Company as a result of any dissolution, winding up, liquidation or reorganization (whether in a bankruptcy or insolvency proceeding or otherwise) (an "Insolvency Event"), (i) all Senior Indebtedness must be paid in full in cash, or provision made for its payment, before any payment is made on account of principal or interest on this Note, (ii) any payment or distribution of assets of the Company to which the Holder would be entitled except for this Paragraph must be paid or delivered by the Company or by any trustee in bankruptcy, receiver, assignee for the benefit of creditors or other liquidating agent, directly to the holders of the Senior Indebtedness, pro rata to the amounts of Senior Indebtedness held by each of them (or in accordance with any subordination agreements or other agreements among them), to the extent necessary to pay all Senior Indebtedness in full after giving effect to any concurrent payments or distributions to the holders of the Senior Indebtedness or provision for payment or distribution to them, and (iii) if, notwithstanding the foregoing, the Holder receives any payment or distribution of property of the Company before all Senior Indebtedness is paid in full, or provision made for its payment, the Holder will receive the cash or property paid or distributed to the Holder in trust for the holders of the Senior Indebtedness, and, upon a request made to the Holder by a holder of Senior Indebtedness within one year after the cash or property is paid or distributed to the Holder, the Holder will pay or deliver that cash or property to the holders of the Senior Indebtedness, for application to the payment of any Senior Indebtedness remaining unpaid after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness or provision for payment or distribution to them. If no claim is made by holders of Senior Indebtedness to cash or property paid or distributed to the Holder within one year after the payment or distribution to the Holder, after the end of the one year period, the Holder will hold the cash or property free of any trust. 3 4 (e) Following the occurrence and during the continuation of any Insolvency Event: i. the Holder of this Note shall take such action, duly and promptly, as any holder of Senior Indebtedness may request from time to time (A) to collect this Note for the account of the holders of Senior indebtedness and (B) to file appropriate proofs of claim in respect of this Note; ii. the Holder of this Note irrevocably authorizes and empowers each holder of Senior Indebtedness (A) to demand, sue for, collect and receive every payment or distribution on account of this Note payable or deliverable in connection with such event or proceeding and give acquittance therefor, and (B) to file claims and proofs of claim in any statutory or non-statutory proceeding and take such other actions, in its own name, or in the name of the Holder of this Note or otherwise, as such holders of Senior Indebtedness may deem necessary or advisable for the enforcement of the provisions of this Note; PROVIDED, HOWEVER, that the foregoing authorization and empowerment imposes no obligation on the holders of Senior Indebtedness to take any such action; and iii. the Holder of this Note shall execute and deliver such powers of attorney, assignments or proofs of claim or other instruments as any holder of Senior Indebtedness may reasonably request to enable such holder of Senior Indebtedness to enforce any and all claims in respect of this Note and to collect and receive any and all payments and distributions which may be payable or deliverable at any time upon or in respect of this Note; PROVIDED, that the holders of Senior Indebtedness shall not exercise the rights granted under this paragraph unless the Holder of this Note has failed to take the necessary actions referenced above on or prior to the date which is 15 days prior to the last date on which such actions may be taken in accordance with applicable law. (f) The Holder of this Note consents that, without the necessity of any reservation of rights against the Holder of this Note, and without notice to or further assent by the Holder of this Note: i. any demand for payment of any Senior Indebtedness made by any holder of Senior Indebtedness may be rescinded in whole or in part by such holder of Senior Indebtedness, and any obligations under the Senior Indebtedness may be continued, and the Senior Indebtedness, or the liability of the Company or any guarantor or any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, or any obligation or liability of the Company or any other party under the Senior Indebtedness or any other agreement, may, from time to time, in whole or in part, be renewed, extended, modified, accelerated, compromised, waived, surrendered, or released by any holder of Senior Indebtedness; and ii. the agreements relating to the Senior Indebtedness may be amended, modified, supplemented or terminated, in whole or in part, as any holder of Senior Indebtedness may deem advisable from time to time, and any collateral security at any time held by any holder of Senior Indebtedness for the payment of any of the Senior Indebtedness may be sold, exchanged, waived, surrendered or released, in each case all without notice to or further assent by the Holder of this Note, which will remain bound under this Section 8, and all without impairing, abridging, releasing or affecting the subordination provided for herein. 4 5 (g) Subject to the payment in full of all Senior Indebtedness, the Holder will be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of property of the Company made with regard to the Senior Indebtedness until the principal and interest with regard to this Note is paid in full. For the purpose of that subrogation, no payment or distribution to the holders of Senior Indebtedness, which, except for the provisions of this Paragraph 8, would be payable or distributable to the Holder, will, as between the Company, its creditors other than holders of Senior Indebtedness, and the Holder, be deemed to be a payment by the Company with regard to the Senior Indebtedness, it being understood that the provisions of this Paragraph 8, other than subparagraph (c), are intended solely for the purpose of defining the relative rights of the Holder, on the one hand, and the holders of the Senior Indebtedness, on the other. (h) Nothing in this Paragraph 8 is intended to impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holder, the obligation of the Company, which is absolute and unconditional, to pay the principal and interest on this Note when they become due. Nothing in this Paragraph 8 prevents the Holder from exercising all remedies otherwise permitted by law upon default under this Note, subject to the rights of holders of Senior Indebtedness under this Paragraph 8. (i) Any person who becomes the Holder of this Note, or an interest in it, will be deemed to have agreed by acquiring this Note, or the interest in it, to be bound by the provisions of this Paragraph 8. 9. No amendment of this Note, waiver of any provision of this Note, or extension of the time by which the Company must make any payment of principal or interest on this Note, will be effective unless it is made in writing by the Holder. Any waiver or extension will be effective only in the instance and for the purpose for which it is given. 10. The remedies provided in this Note are cumulative and are not exclusive of any other remedies provided by law. The Company will pay on demand any expenses (including reasonable attorneys fees and expenses) incurred by the Holder in enforcing its rights under this Note. 11. Any notices or other communications required or permitted to be given under this Note must be in writing and will be deemed given on the day when delivered in person or sent by facsimile (with proof of receipt at the number to which it is required to be sent), or on the third business day after the day on which it is mailed by first class mail from within the United States of America, addressed (i) if to the Company, to the Company's principal executive offices and to the principal facsimile number at those executive offices, Attention: President, or at such other address or facsimile number as the Company may specify to the Holder in writing, and (ii) if to the Holder, at the address or facsimile number specified by the Holder to the Company in writing. 12. This Note will be binding upon Company and its assigns, and will inure to the benefit of the Holder and the Holder's assigns. This Note will be governed by, and construed under, the laws of the State of New York. 5 6 IN WITNESS WHEREOF, the Company is executing this Note as of the date shown on the first page. THE MONARCH MACHINE TOOL COMPANY By:________________________________ President 6 EX-4.2.2 6 EXHIBIBT 4.2.2 1 Exhibit 4.2.2 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF THIS WARRANT MAY BE TRANSFERRED EXCEPT IN A TRANSACTION REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR WHICH IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THAT ACT. VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON JUNE 30, 2009 No. W-001 100,000 SHARES WARRANT TO PURCHASE SHARES OF COMMON STOCK OF THE MONARCH MACHINE TOOL COMPANY This certifies that Three Cities Research, Inc., as Sellers Representative under a Stock Purchase Agreement, dated May 13, 1999 between The Monarch Machine Tool Company (the "Company") and the stockholders of Precision Industrial Corporation, or registered assigns, (the "Warrant Holder") is entitled to purchase from The Monarch Machine Tool Company (the "Company"), an Ohio corporation, at any time on or after July 1, 2000 and before 5:00 P.M., New York City time, on the Expiration Date described in paragraph 1.01(c), the number of fully paid and nonassessable shares of Common Stock, without par value, of the Company ("Common Stock") stated above at the Exercise Price described in Section 1.01(b). The Exercise Price and the number and nature of the Warrant Shares which may be purchased on exercise of this Warrant are subject to adjustment as provided in Article III. ARTICLE I Definitions ----------- Section 1.01. (a) The term "Business Day" means a day other than a Saturday, Sunday or other day on which banks in the State of New York are authorized by law to remain closed. (b) The term "Exercise Price" means $7.75 per share, as that price may be adjusted from time to time as provided in Article III. (c) The term "Expiration Date" means June 30, 2009. 2 (d) The term "Warrant Holder" means the person or entity named above or any other person or entity in whose name this Warrant is registered on the books of the Company. (e) The term "Warrants" means this Warrant and all similar warrants which together entitle the holders to purchase a total of 100,000 shares of Common Stock. (f) The term "Warrant Shares" means the shares of Common Stock or other securities deliverable upon exercise of the Warrants. ARTICLE II Duration and Exercise of Warrant -------------------------------- Section 2.01. This Warrant may be exercised at any time before 5:00 P.M., New York City time, on the Expiration Date. If this Warrant is not exercised at or before 5:00 P.M., New York City time, on the Expiration Date, it will become void and neither the Warrant Holder nor any other person will have any rights under this Warrant. (a) To exercise this Warrant, in whole or in part, the Warrant Holder must surrender this Warrant, with the Subscription Form on it duly executed, to the Company at its principal office accompanied by a certified or official bank check payable to the order of the Company in an amount equal to the Exercise Price for the Warrant Shares as to which this Warrant is being exercised. (b) When the Company receives this Warrant with the Subscription Form duly executed and accompanied by payment of the full Exercise Price for the Warrant Shares as to which this Warrant is being exercised, the Company will issue certificates, registered in the name of the Warrant Holder or such other names as are designated by the Warrant Holder, representing the total number of shares of Common Stock (and other securities, if any) as to which this Warrant is being exercised, and the Company will deliver those certificates to the Warrant Holder. (c) If the Warrant Holder exercises this Warrant with respect to fewer than all the Warrant Shares to which it relates, the Company will execute a new Warrant for the balance of the Warrant Shares that may be purchased upon exercise of this Warrant and deliver that new Warrant to the Warrant Holder. (d) The Company will pay any issuance, transfer or similar taxes which may be payable in respect of the issuance of Warrant Shares or in respect of the issuance of a new Warrant if this Warrant is exercised as to fewer than all the Warrant Shares to which it relates. The Company will not, however, be required to pay any transfer tax which becomes payable because Warrant Shares or a new Warrant are to be registered in a name other than that of the Warrant Holder, and the Company will not be required to issue any Warrant Shares or to issue a new Warrant registered in a name other than that of the Warrant Holder until the Company receives either evidence that any applicable transfer taxes have been paid or funds with which to pay those taxes. 2 3 (e) If, when the Warrant Holder delivers the Subscription Form, the Warrant Holder notifies the Company that the Warrant Holder believes the purchase of the Warrant Shares as to which this Warrant is being exercised must be preceded by a notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), or if upon receiving the Subscription Form the Company notifies the Warrant Holder that the Company believes a notification under the HSR Act is required, (i) unless the Warrant Holder and the Company subsequently agree that notification under the HSR Act is not required, the Warrant Holder and the Company each will, as promptly as practicable, make the filing it is required (or that one of the parties believes it is required) to make under the HSR Act with regard to the issuance of the Warrant Shares as to which this Warrant is being exercised, and each of them will take all reasonable steps within its control (including providing information to the Federal Trade Commission and the Department of Justice) to cause the waiting periods required by the HSR Act to be terminated or to expire as promptly as practicable, (ii) the Warrant Holder and the Company will cooperate in all other respects to assist the other of them in making its filing under the HSR Act, (iii) the Company will not issue the Warrant Shares as to which this Warrant is being exercised until the waiting periods under the HSR Act are terminated or expire, and (iv) if the waiting periods under the HSR Act are not terminated or do not expire within 60 days after the Warrant Holder delivers the Subscription Form to the Company, the Warrant Holder will be entitled to rescind the exercise of this Warrant at any time between the expiration of the 60 day period and the day the waiting periods under the HSR Act are terminated or expire, in which case the Company will promptly return to the Warrant Holder the amount the Warrant Holder had paid to the Company as the (x) Exercise Price of this Warrant and (y) deliver to the Warrant Holder a new Warrant for the shares as to which exercise of this Warrant was rescinded. ARTICLE III Adjustment of Warrant Securities and Warrant Price ----------------- Section 3.01. The Exercise Price and the shares of Common Stock or other securities issuable on exercise of this Warrant are subject to adjustment as follows: (a) If, after the date Warrants are first issued, the Company (i) makes a distribution on its Common Stock in shares of its capital stock, (ii) subdivides the outstanding Common Stock into a greater number of shares, or (iii) combines the outstanding Common Stock into a lesser number of shares, in each such case, the Exercise Price in effect at the record date for the distribution or the effective date of the subdivision or combination will be adjusted so that upon exercise of this Warrant after the record date or effective date with respect to the shares which can be purchased for a specified total purchase price, the Warrant Holder will receive the kind and number of shares which the Warrant Holder would have owned if the Warrant Holder had exercised this Warrant with respect to the shares which could be purchased for that total purchase price immediately before the first of those events and retained all the shares and other securities which the Warrant Holder received as a result of each of those events. (b) If, after the date Warrants are first issued, the Company fixes a record date for the issuance (or issues without fixing a record date) to the holders of the Common Stock of rights, options or warrants to subscribe for or purchase Common Stock, or securities which are 3 4 convertible into or exchangeable for Common Stock, at an exercise, conversion or exchange price per share less than the Exercise Price in effect on the record date (or on the date of issuance, if there is no record date), the Exercise Price will be adjusted by multiplying the Exercise Price in effect immediately prior to that record date (or issuance date) by a fraction, the numerator of which is the number of shares of Common Stock outstanding on that record date (or issuance date) plus the number of shares of Common Stock which the aggregate exercise, conversion or exchange price would purchase at that Exercise Price, and the denominator of which is the number of shares of Common Stock outstanding on that record date (or issuance date) plus the number of additional shares of Common Stock which the Company would be required to issue upon exercise, conversion or exchange of all the rights, options, warrants or convertible or exchangeable securities. Each adjustment will become effective at the close of business on the record date for issuance of the rights, options, warrants or convertible or exchangeable securities (or the date of issuance, if there is no record date). For the purposes of this paragraph 3.01(b), the exercise, conversion or exchange price of rights, options, warrants or convertible or exchangeable securities will include any consideration the holders of the Common Stock are required to pay in order to receive the rights, options, warrants or convertible or exchangeable securities, as well as any consideration the holders are required to pay upon exercise, conversion or exchange (other than surrender of the securities being exercised, converted or exchanged). If the right to exercise any rights, options or warrants, or to convert or exchange any convertible or exchangeable securities, the issuance of which results in an adjustment under this paragraph 3.01(b), expires in whole or in part without being exercised, when that occurs, the Exercise Price will be readjusted as though the rights, options, warrants or convertible or exchangeable securities which were not exercised, converted or exchanged had not been issued. However, no readjustment will affect any exercise of this Warrant which takes place before the readjustment. (c) If, after the date Warrants are first issued, the Company distributes to the holders of its Common Stock any cash, evidences of indebtedness or other assets (other than distributions to which paragraph 3.01(a) or (b) applies and other than cash dividends totaling (i) in either of 1999 or 2000, an amount per share not higher than the per share dividends paid with regard to the Common Stock in 1998, and (ii) in 2001 or any subsequent calendar year, not more than 5% of the Company's net income in the prior calendar year), in each such case, the Exercise Price will be adjusted by subtracting from the Exercise Price in effect immediately prior to the record date for the determination of stockholders entitled to receive the distribution the value of the cash, evidences of indebtedness or other assets to be distributed with respect to a share of Common Stock. Each adjustment under this paragraph will be effective at the close of business on the record date for the determination of stockholders entitled to receive the distribution which results in the adjustment. The value of evidences of indebtedness or other assets will be their fair market value as determined in good faith by the Board of Directors of the Company. (d) If, after the date Warrants are first issued, the Company sells or otherwise issues any Common Stock (other than in a transaction to which paragraph 3.01(a) applies or upon exercise of rights, options or warrants, or conversion or exchange of convertible or exchangeable securities) at a price per share which is less than the Exercise Price in effect immediately before the sale or other issuance, in each such case, the Exercise Price will be adjusted, effective at the close of business on the date of the sale or other issuance, by multiplying the Exercise Price in effect immediately before the sale or other issuance by a fraction (i) the numerator of which will 4 5 be equal to the sum of (A) the number of shares of Common Stock outstanding immediately before the sale or other issuance plus (B) the number of shares of Common Stock which could be purchased at the Exercise Price in effect immediately before the sale or other issuance for the consideration received by the Company upon the sale or other issuance, and (ii) the denominator of which will be the total number of shares of Common Stock outstanding immediately after the sale or other issuance. If, after the date the Warrants are first issued, the Company sells or otherwise issues any rights, options, warrants or convertible or exchangeable securities (other than (x) in a distribution to which paragraph 3.01(b) applies, (y) under stock option and compensation plans for the Company's directors or for employees of the Company and its subsidiaries which do not at any time authorize the Company to issue more than 10% of the outstanding Common Stock, or (z) under the Agreement dated June 30, 1999 between the Company and the then stockholders of Precision Industrial Corporation pursuant to which this Warrant, or a predecessor Warrant, was issued), when it does so it will, for the purpose of this paragraph 3.01(d), be treated as having sold the Common Stock it would be required to issue upon exercise of all the rights, options or warrants, or upon conversion or exchange of all the convertible or exchangeable securities, for a price per share equal to (i) (A) the total price paid for the rights, options or warrants or convertible or exchangeable securities, divided by (B) the number of shares of Common Stock issuable on exercise, conversion or exchange of the rights, options, warrants or convertible or exchangeable securities, plus (ii) any additional consideration per share of Common Stock which must be paid upon exercise of the rights, options or warrants or conversion or exchange of the convertible or exchangeable securities (other than surrender of the securities being exercised, converted or exchanged). If the right to exercise any rights, options or warrants, or to convert or exchange any convertible or exchangeable securities, the issuance of which results in an adjustment under this paragraph 3.01(d), expires in whole or in part without being exercised, when that occurs, the Exercise Price will be readjusted as though the rights, options, warrants or convertible or exchangeable securities which were not exercised, converted or exchanged had not been issued. However, no readjustment will affect any exercise of this Warrant which takes place before the readjustment. (e) If, after the date Warrants are first issued, there is a reclassification or change of outstanding shares of Common Stock (other than a change in par value or a change as a result of a subdivision or combination to which paragraph 3.01(a) applies) or a merger or consolidation of the Company with any other entity that results in a reclassification, change, conversion, exchange or cancellation of outstanding shares of Common Stock, or a sale or transfer of all or substantially all the assets of the Company and distribution of all or a portion of the proceeds of that sale or transfer, upon any subsequent exercise of this Warrant as to a specified number of Warrant Shares, the Warrant Holder will receive the kind and amount of securities, cash and other property which the Warrant Holder would have received if the Warrant Holder had exercised this Warrant as to that number of Warrant Shares immediately before the first of those events and had retained all the securities, cash and other assets received as a result of these events. (f) If all or part of the consideration for, or payable on exercise, conversion or exchange of, any shares of Common Stock, rights, options, warrants or convertible or exchangeable securities is other than cash, for the purposes of this Section 3.01, the non-cash consideration will be valued at its fair market value as determined in good faith by the Board of Directors of the Company. If, in connection with any sale or other issuance of Common Stock or 5 6 other securities or assets, the Company is required to pay underwriting discounts or other fees or commissions, for the purposes of this Section 3.01, the consideration the Company receives will be the amount it receives net of the underwriting discounts, fees or commissions. (g) If the exercise price of any rights, options or warrants, or the conversion or exchange price of any convertible or exchangeable securities, is changed, on the day the change becomes effective, the Company will be treated for the purposes of the Warrants (other than to determine for the purposes of paragraph 3.01(d) the date on which the rights, options or warrants, or convertible or exchangeable securities were issued) as having (i) cancelled the outstanding rights, options, warrants or convertible or exchangeable securities which were exercisable, convertible or exchangeable at the prior price and (ii) issued new rights, options, warrants or convertible or exchangeable securities which are exercisable, convertible or exchangeable at the new price. (h) No adjustment in the Exercise Price will be required if the adjustment is less than $.10 per Warrant Share. However, any adjustments which are not made because of this paragraph 3.01(h) will be carried forward and taken into account in any subsequent adjustments. All calculations under this Section 3.01 will be made to the nearest cent. (i) Upon each adjustment of the Exercise Price under subparagraph (a), (b) or (d) of this Section 3.01, the number of Warrant Shares which will be issued upon exercise of this Warrant will be adjusted so that (i) if this Warrant is exercised in full, the Warrant Holder will receive (A) the number of Warrant Shares the Warrant Holder would receive by exercising this Warrant in full immediately before the adjustment, times (B) the Exercise Price in effect immediately before the adjustment, divided by (C) the Exercise Price in effect after the adjustment, and (ii) if this Warrant is exercised only in part, the Warrant Holder will receive the fraction of the number of Warrant Shares the Warrant Holder would have received if it had exercised this Warrant in full of which the numerator is the number of Warrant Shares as to which this Warrant is exercised and the denominator is the total number of Warrant Shares issuable on exercise of this Warrant. (j) If any adjustment in the Exercise Price or in the number of shares or type of securities to be issued upon exercise of this Warrant becomes effective as of a record date for a specified event, and this Warrant is exercised between that record date and the date the event occurs, the Company may elect to defer, until the event occurs, issuing to the Warrant Holder the shares of Common Stock or other securities to which the Warrant Holder is entitled solely by reason of that event. However, if the Company does that, when this Warrant is exercised, the Company will deliver to the Warrant Holder a due bill or other instrument evidencing the Warrant Holder's right to receive the additional shares or other securities upon occurrence of the event. Section 3.02. Whenever the Warrant Price or the Warrant Shares are adjusted as provided in this Section, the Company will send to the Warrant Holder a certificate signed by its principal accounting officer setting forth the adjusted Warrant Price, the adjusted number of Warrant Shares and the date the adjustment became effective, and containing a brief description of the events which caused the adjustment. 6 7 Section 3.03. If at any time after the Warrants are first issued: (a) the Company declares a dividend or other distribution on its Common Stock (other than a cash dividend which, together with all other cash dividends in the same calendar year, totals (i) if the dividend is paid in either of 1999 or 2000, an amount per share not higher than the per share dividends paid with regard to the Common Stock in 1998 and (ii) if the dividend is paid in 2001 or any subsequent year, not more than 5% of the Company's net income in the prior calendar year); or (b) the Company authorizes the granting to the holders of its Common Stock of rights to subscribe for or purchase any shares of any class or any other securities; or (c) there is any reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock), or any consolidation or merger to which the Company is a party and for which approval of the holders of the Common Stock is required, or a sale or transfer of all or substantially all the assets of the Company; or (d) there is a voluntary or involuntary dissolution, liquidation or winding up of the Company; in each case, the Company will mail to the Warrant Holder at least days before the applicable record date, a notice stating (i) the record date for the dividend, distribution or rights, or, if there will not be a record date, the date as of which the holders of record of Common Stock who will be entitled to the dividend, distribution or rights will be determined, or (ii) the date on which the reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected the holders of record of Common Stock who will be entitled to receive securities or other property with respect to their Common Stock as a result of the reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up will be determined. Failure to give any notice or any defect in the notice will not affect the validity of the action which should have been the subject of the notice. (e) The form of Warrant need not be changed because of any change in the Warrant Price or in the number of Warrant Shares which may be purchased by exercising Warrants and Warrants issued after the change may state the same Warrant Price and the same number of Warrant Shares as are stated in Warrants issued before the change. However, the Company may at any time make any change in the form of Warrant that it deems appropriate to reflect a change in the Warrant Price or in the Warrant Shares which may be purchased by exercising Warrants (provided the change in the form of Warrant does not otherwise affect the substance of the Warrant), and any Warrant issued after the form of Warrant is changed may be in the changed form. 7 8 ARTICLE IV Other Provisions Relating to Rights of Warrant Holder ------------------------ Section 4.01. The Warrant Holder will not, as such, be entitled to vote, to receive dividends or to have any other of the rights of a shareholder of the Company, except that when this Warrant is exercised, the persons in whose names the Warrant Shares purchased through exercise of this Warrant are to be issued will be deemed to become the holders of record of those Warrant Shares for all purposes even if certificates representing those Warrant Shares are not issued. Section 4.02. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction and such indemnity (which may include a bond), as the Company may require (and, in the case of a mutilated Warrant, surrender of the mutilated Warrant), issue a new Warrant relating to the same number of shares of Common Stock as the lost, stolen, mutilated or destroyed Warrant. Section 4.03. (1) The Company will at all times reserve and keep available for issuance upon exercise of this Warrant a number of shares of Common Stock equal to the maximum number of shares of Common Stock the Company may be required to issue upon exercise of this Warrant at the Warrant Price in effect from time to time. (2) All shares of Common Stock issued on exercise of this Warrant will, when they are issued, be validly issued, fully paid, nonassessable and free of preemptive rights. (3) When shares of Common Stock (or other securities) are issued on exercise of this Warrant, resales of these securities will have been registered under the Securities Act of 1933, as amended (the "Securities Act") and the registration statement relating to these resales will be effective. (4) The Company will keep the registration statement described in subparagraph (3) effective and available with regard to resales of the shares of Common Stock (or other securities) issued upon exercise of this Warrant until at least the second anniversary of the issuance of those securities or until such earlier time as all the Common Stock (or other securities) issued upon exercise of this Warrant have been sold or counsel to the Company has delivered to the Warrant Holder an opinion that all of the shares issued upon exercise of this Warrant may be sold without registration under the Securities Act, and the Company will do all other things that are required so that all shares of Common Stock (or other securities) issued upon exercise of this Warrant may at all times be resold without violating the Securities Act. (5) The Company will take all steps which are necessary so that all the shares of Common Stock (or other securities) which the Company may be required to issue on exercise of this Warrant will, upon issuance, be listed on each securities exchange and quoted on each automated quotation system on which the Common Stock is (or those other securities are) listed or quoted. 8 9 Section 4.04. The Company will not be required to issue any fraction of a share upon exercise of this Warrant. In any case in which the Warrant Holder would, except for the provisions of this Section 4.03, be entitled to receive a fraction of a share upon exercise of this Warrant, the Company will, upon exercise of this Warrant, issue the maximum number of whole shares it is required to issue, and the Company will pay the Warrant Holder cash in lieu of the fraction of a share based upon the last sale price (or if there is none, the mean of the high bid and low asked prices) of the Common Stock on the day this Warrant is exercised. Section 4.05. The Company will maintain a Warrant Register in which the name and address of each registered holder of Warrants will be recorded. Section 4.06. Notices or other communications to the Warrant Holder will be deemed given by the Company on the day on which they are delivered to the Warrant Holder, or on the third Business Day after the day on which they are sent by first class mail addressed to the Warrant Holder at the Warrant Holder's last known address shown on the Warrant Register maintained by the Company. Section 4.07. Until this Warrant is presented to the Company for transfer with the Assignment on it duly executed and with all other documentation the Company may reasonably require in connection with the transfer (including evidence that any applicable transfer taxes have been paid), the Company may treat the Warrant Holder as the owner of this Warrant for all purposes, including for the purpose of determining who is entitled to exercise this Warrant, despite any notice to the contrary. ARTICLE V Other Matters ------------- Section 5.01. The provisions of this Warrant will bind, and inure to the benefit of, the Company and its successors and assigns. Section 5.02. (a) Any notice or other communication to the Company relating to this Warrant will be deemed given on the day when it is delivered or sent by facsimile transmission (with a confirmation of receipt at the facsimile number to which it is to be sent), or on the third Business Day after the day on which it is sent by first-class mail, to the following address (or such other address as may be specified by the Company after the date of this Warrant): The Monarch Machine Tool Company 2600 Kettering Tower Dayton, Ohio 4525 Attention: President Facsimile No.: 937-910-9305 (b) Any notice or other communication to the Warrant Holder will be deemed given when it is given as provided in Section 4.06. Section 5.03. This Warrant will be governed by, and construed under, the laws of the State of Delaware relating to contracts made and to be performed in that state. 9 10 Section 5.04. The Article headings in this Warrant are for convenience only, are not part of this Warrant and are not intended to affect the meaning or interpretation of any of the terms of this Warrant. Section 5.05. The respective rights and obligations of the Company and the Warrant Holder may be modified only by a writing executed by the party against whom the amendment or waiver is sought to be enforced. IN WITNESS WHEREOF, the Company has executed this Warrant on June 30, 1999. THE MONARCH MACHINE TOOL COMPANY By: ____________________________ Name: Title: 10 11 ASSIGNMENT (To Be Signed Only Upon Assignment) FOR VALUE RECEIVED, the undersigned sells, assigns and transfers the attached Warrant to __________________________________ to the extent of the right to purchase _________________ Warrant Shares, and the undersigned appoints ___________________________, with full power of substitution, to transfer that Warrant, with respect to the right to purchase that number of Warrant Shares, on the books of The Monarch Machine Tool Company. Dated: ___________, ___ SIGNATURE GUARANTEED ________________________________ (Signature must conform to the name of the Warrant ________________________________________ Holder specified on the face of the Warrant) By:_____________________________________ Dated:__________________________________ 11 12 SUBSCRIPTION FORM ----------------- To: The Monarch Machine Tool Company The undersigned irrevocably elects to purchase _______________ Warrant Shares by exercising the Warrant to which this form is attached and tenders payment of the full Exercise Price with respect to those Warrant Shares. The undersigned requests that the certificates representing the Warrant Shares as to which the Warrant is being exercised be registered as follows: Name:______________________ Social Security or Employer Identification Number:__________________________ Address:____________________________ Deliver to:_________________________ Address:____________________________ [ ] (Check if applicable) The undersigned will be acquiring the Warrant Shares as to which this Warrant is being exercised for investment and not with a view to their resale or distribution. If the Warrant Shares as to which the Warrant is being exercised are fewer than all the Warrant Shares to which the Warrant relates, please issue a new Warrant for the balance of the Warrant Shares registered in the name of the undersigned and deliver it to the undersigned at the following address: ________________________ ________________________ ________________________ Date:__________________ _______________________________ (Signature must conform to the name of the Warrant Holder specified on the face of the Warrant) 12 -----END PRIVACY-ENHANCED MESSAGE-----