-----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, Aceuj2ksoIaVzejWmpyOg0drMnZ4XZKkY2miD5qwo2Qk/FeTzz+0qOjIL9Jj7Hgv pMFh6dbear4faYnhYexUig== /in/edgar/work/20000728/0000912057-00-033566/0000912057-00-033566.txt : 20000921 0000912057-00-033566.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-033566 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOW INTERNATIONAL CORP CENTRAL INDEX KEY: 0000713002 STANDARD INDUSTRIAL CLASSIFICATION: [3569 ] IRS NUMBER: 911104842 STATE OF INCORPORATION: WA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12448 FILM NUMBER: 680950 BUSINESS ADDRESS: STREET 1: 23500 64TH AVE S STREET 2: P O BOX 97040 CITY: KENT STATE: WA ZIP: 98032 BUSINESS PHONE: 2538503500 MAIL ADDRESS: STREET 1: 23500 64TH AVENUE SOUTH CITY: KENT STATE: WA ZIP: 98032 FORMER COMPANY: FORMER CONFORMED NAME: FLOW SYSTEMS INC DATE OF NAME CHANGE: 19890320 10-K 1 a10-k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 0-12448 FLOW INTERNATIONAL CORPORATION WASHINGTON 91-1104842 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 23500 - 64TH AVENUE SOUTH KENT, WASHINGTON 98032 (253) 850-3500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 Par Value Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] 1 The aggregate market value of the voting stock held by non affiliates of the registrant based upon the closing price reported by the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") as of June 5, 2000, was $157,000,000. The number of shares of common stock outstanding as of June 5, 2000, was 14,308,917 shares. 2
DOCUMENTS INCORPORATED BY REFERENCE - -------------------------------------------------------------------------------------------------------------------------------- PART I: None PART II: None PART III: All Items -- See Registrant's definitive proxy statement which involves the election of directors and which will be filed with the Commission within 120 days after the close of the fiscal year. Item 10 Directors and Executive Officers of the Registrant Item 11 Executive Compensation Item 12 Security Ownership of Certain Beneficial Owners and Management Item 13 Certain Relationships and Related Transactions PART IV: None
3 PART I ITEM 1. BUSINESS - -------------------------------------------------------------------------------- Flow International Corporation ("Flow" or the "Company") designs, develops, manufactures, markets, and services ultrahigh-pressure ("UHP") products including waterjet cutting and cleaning systems, specialized robotics systems, and food safety applications. Flow provides technologically-advanced, environmentally-sound solutions to the manufacturing, industrial, marine cleaning and food preparation markets. The Company's waterjet cutting systems pressurize water from 30,000 to over 60,000 pounds per square inch (psi) and are used to cut both metallic and nonmetallic materials in many industry segments, including the aerospace, automotive, disposable products, food, glass, job shop, sign, metal cutting, marble, tile and other stone cutting, and paper industries. Additionally, the Company manufactures a product line for use in industrial cleaning, surface preparation, construction, nuclear decontamination, and petro-chemical and oil field applications. The Company also manufactures the robotic articulation equipment used in the cutting and cleaning processes which may also include assembly, pick and place and load/unload operations. The March, 1999 acquisition of Flow Pressure Systems ("Pressure Systems") from Asea Brown Boveri AB ("ABB") increased the Company's product offering with the addition of patented UHP pressure vessel technology used in the automotive, medical and food industries. In addition to UHP cutting and cleaning, the Company has developed a food safety technology known as "Fresher Under Pressure"(R). By exposing foods to pressures from 50,000 psi to over 100,000 psi for a short time, typically 30 seconds to slightly more than 2 minutes, UHP achieves the effects of pasteurization without heat. Not only are spoilage microorganisms destroyed, the process also destroys harmful pathogens such as E. coli, listeria, and salmonella, thus increasing shelf life while ensuring a safe, healthy product. Unlike thermal treatment (pasteurization), UHP technology does not destroy or alter the nutritional qualities, taste, texture and color of the food. Flow has developed a technology which features a `continuous flow' concept whereby pumpable foods such as juice, salsas, guacamole, liquid eggs and salad dressings are pumped into the pressure chambers, pressurized and then pumped into the next stage of the process, such as bottling. This continuous flow process is fully automated and requires just a single operator. The Company also has the ability to UHP process non-pumpable foods as a result of the acquisition of Pressure Systems. Pressure Systems provides Flow the patented large batch system vessel technology. Flow is the leader in both the continuous feed and batch UHP food processing technology. During fiscal 2000 the Company began to recognize revenues from the Fresher Under Pressure technology, which totaled $7.2 million. The Company was formed in 1974, incorporated in 1980, and completed its initial public offering in March 1983. In 1991, the Company's founder retired, and Ronald W. Tarrant was appointed President and Chief Executive Officer. Since 1991, the Company has grown as a result of continued new product development, expanded marketing strategies, and certain strategic acquisitions. 4 In December 1994, the Company purchased certain net assets of Dynovation Machine Systems, Inc. ("Flow Automation"). Flow Automation designs and manufactures robotic waterjet cutting cells and automated assembly systems for the automotive and other industries. In January 1995, the Company purchased certain net assets of ASI Robotics Systems, Inc. ("Flow Robotics"). Flow Robotics designs and manufactures high accuracy gantry-type robots and related systems used in waterjet and factory automation applications. This manufacturing facility supplies products to the aerospace, automotive, job shop, marble and tile and other industries. In May 1995, the Company took a 51% interest in a joint venture with Okura & Co., Ltd., its exclusive Japanese distributor. This joint venture, Flow Japan, supplies UHP products in Japan and to Japanese companies throughout Asia. During fiscal 1998 the Company increased its ownership interest to 95% and during fiscal 2000 the Company obtained 100% ownership. In May 1997, the Company purchased the stock of Foracon Maschinen und Anlagenbau GmbH & CO.KG ("Foracon"). Foracon supplies UHP and related systems to the European market. In September 1997, the Company re-focused on its core ultrahigh-pressure technology and divested itself of its non-core Access and Services business. The Company recorded a $4.9 million restructuring charge during fiscal 1998 and $9 million restructuring charge in fiscal 1997 associated with the divestiture of these operations. In April 1998, the Company purchased certain net assets of CIS Robotics Inc. ("CIS") and acquired the stock of Robot Simulations Limited ("Flow Software Technologies Ltd.") of the U.K. CIS provides robot programming services, primarily to the automotive industry, while Flow Software Technologies Ltd markets a PC software program for control systems and off-line programming of pedestal robots. In March 1999, the Company purchased the stock of Pressure Systems from ABB and acquired a 51% voting interest in a related U.S. joint venture, Flow Autoclave Systems Inc. ("Flow Autoclave"). Pressure Systems is the leading supplier of large, bulk ultrahigh-pressure systems to the food industry and the world leader in isostatic press systems for the aerospace and automotive industries. Flow Autoclave markets the Pressure Systems product domestically. In September 1999 the Company purchased certain net assets of Spearhead Automated Systems, Inc. ("Spearhead"). Spearhead manufactures advanced cutting, trimming and tooling equipment for the automotive and related industries. 5 PRODUCTS AND SERVICES The Company provides UHP systems and related products and services to a wide variety of industries. The Company divides its UHP revenues into two primary categories of product, `UHP Systems' and `UHP Consumable Parts and Services'. In addition to UHP revenue, the Company's fiscal 1998 consolidated revenue also includes the non-core Access and Services operations, which were sold in September 1997:
(In thousands) Year Ended April 30, 2000 % 1999 % 1998 % -------------------------------------------------------------- UHP Systems $138,379 71 $94,040 63 $94,728 66 UHP Consumable Parts and Services 55,708 29 54,162 37 47,904 34 -------------------------------------------------------------- Total UHP Revenue $194,087 100 $148,202 100 $142,632 100 ============================================================== Access and Services - - 16,850 -------------------------------------------------------------- Total Consolidated Revenues $194,087 $148,202 $159,482 ==============================================================
UHP SYSTEMS, CONSUMABLE PARTS AND SERVICES The Company offers a variety of UHP equipment system products, including waterjet cutting tables, waterjet cleaning systems, food safety systems and isostatic press systems, as well as accessories, including robotic articulation equipment. UHP pumps, intensifier and direct-drive, are currently the core components of the Company's product line. An intensifier pump pressurizes water to in excess of 100,000 psi and forces it through a small nozzle, generating a high-velocity stream of water. The Company's unique direct-drive pressure-compensated pumps pressurize water to in excess of 50,000 psi utilizing triplex piston technology. In order to cut metallic and other hard materials, an abrasive substance is added to the waterjet stream, usually garnet, creating an abrasivejet. The Company's abrasivejet cuts with no heat, causes no metallurgical changes, and leaves a high-quality edge that usually requires no secondary operation. A UHP waterjet system consists of an ultrahigh-pressure intensifier or direct drive pump, one or more waterjet cutting or cleaning heads with the necessary robotics, motion control and automation systems. The Company has placed UHP waterjet cutting systems worldwide and in many different industries, including the aerospace, automotive, disposable products, food, glass, job shop, sign, metal cutting, marble, tile and other stone cutting and paper industries. The Company's waterjet systems are also used in industrial cleaning applications such as paint removal, surface preparation, factory and industrial cleaning, ship hull preparation, oil field services and heat exchanger cleaning. Additionally, the Company manufactures systems which 6 combine waterjet applications with other processes such as pick and place operations, inspection, assembly, and other automated processes. UHP systems revenue includes $7.2 million associated with the Company's "Fresher Under Pressure" technology. Sales of UHP systems accounted for 71% of fiscal 2000 revenues. Flow sells various tools and accessories which incorporate waterjet technology, as well as aftermarket consumable parts and service for its products. Consumables primarily represent parts used by the pump and cutting head during operation. Many of these parts are proprietary in nature. Sales of consumable parts and service accounted for 29% of fiscal 2000 revenues. The Company's products are considered productivity enhancing tools and can be cost justified over traditional cutting methods. The Company's sales will be affected by worldwide economic changes, however the Company should continue to gain market share in the machine cutting tool market even in `down' economies due to the cost savings generated by waterjet technology. ACCESS SYSTEMS AND SERVICES Prior to the divestiture of its non-core Access and Services business in September 1997, the Company designed, manufactured, rented, sold, and serviced powered access systems for use in industrial, structural and facade maintenance and construction applications. The Company also provided as a service, the removal of deteriorated concrete from bridges and parking garage surfaces. MARKETING AND SALES The Company markets and sells its products worldwide through its headquarters in Kent, Washington (a suburb of Seattle) and through subsidiaries, divisions and joint ventures in Columbus, Ohio; Detroit, Michigan; Jeffersonville, Indiana; Lafayette, Louisiana; Birmingham, England; Bretton and Darmstadt, Germany; Buenos Aires, Argentina; Burlington and Windsor, Canada; Hsinchu, Taiwan; Sao Paulo, Brazil; Nagoya and Tokyo, Japan and Stockholm, Sweden. The Company sells directly to customers in North and South America, Europe, and Asia, and has distributors or agents in most other countries. No customer accounted for 10% or more of the Company's revenues during any of the three years ended April 30, 2000. Marketing efforts are focused on various target industries, applications and markets. To enhance the effectiveness of sales efforts, the marketing staff and sales force acquire detailed information on the manufacturing applications and requirements in targeted market segments. This information is used to develop standardized and customized solutions using UHP and robotics technologies. The Company provides turnkey systems, including system design, specification, hardware and software integration, equipment testing and simulation, installation, start-up services, technical training and service. 7 One of the Company's marketing techniques utilizes a telemarketing program to identify and qualify sales leads, thus increasing the efficiency of the direct sales staff. Market responses to these activities are carefully screened to identify new areas of interest and new potential applications in our target markets. The Company also attends trade shows for targeted market segments and advertises in selected industry publications. PATENTS AND LICENSES The Company holds a large number of patents relating to UHP technology and related systems. Some of these patents are subject to sub-licenses. In addition, the Company has been granted licenses with respect to other patents used in the business. While the Company believes the patents it uses are valid, it does not consider its business dependent on patent protection. In addition, the Company has over the years developed non-patented proprietary expertise and know-how in waterjet applications, and in the manufacture of these systems, which sets it technologically ahead. The Company believes the patents it holds and has in process, along with the proprietary application and manufacturing know-how, act as a barrier of entry into the markets it serves. BACKLOG At April 30, 2000, the Company's backlog was $43 million compared to the prior year end backlog of $35.8 million. The nature of the Company's business is that most products, exclusive of the Pressure Systems and Fresher Under Pressure product, can be shipped within a four to ten week period and thus backlog and the changes in the Company's backlog are not necessarily indicative of comparable variations in sales or earnings. The April 30, 2000, backlog represented 22.1% of fiscal 2000 sales. Based upon the terms of the customer contracts and the Company's manufacturing schedule, all of the revenue backlog as of April 30, 2000 is expected to be realized during fiscal 2001. The unit sales price for most of the Company's products and services is relatively high (typically ranging from tens of thousands to millions of dollars) and individual orders can involve the delivery of several hundred thousand dollars of products or services at one time. Furthermore, some items in backlog can be shipped more quickly than others, and some have higher profit margins than others. COMPETITION The major competitors for UHP waterjet systems are conventional cutting and cleaning methods. These methods include saws, knives, shears, plasma, lasers, abrasive wheels, grinders, routers, drills, and abrasive cleaning techniques. A UHP waterjet cutting system has many advantages over conventional cutting systems, including no generation of heat or airborne dust, easy adaptability to complex cutting programs, versatility in the different types of product that 8 can be cut, cutting speed and the ability to leave clean-cut edges. These factors, in addition to elimination of secondary processing in most circumstances, enhance manufacturing productivity. Waterjet cleaning offers many advantages over other cleaning methods, such as the ability to remove difficult coatings or deposits from a surface without damaging underlying material. A UHP waterjet system is an environmentally-friendly answer to many difficult cutting and cleaning applications and can often be justified solely on the basis of hazardous material containment or reduction of secondary operations in the cleaning process. The many advantages of a waterjet over traditional cutting and cleaning methods have positioned it in the market as a productivity enhancing tool. The Company also competes with other waterjet cutting equipment manufacturers in the United States, Europe and Asia. Certain of these competitors have greater financial resources than the Company. The Company's robotics technology acquisitions provide a competitive advantage as the only total solution supplier of complete waterjet cutting systems. Although independent market information is not generally available, based upon data assembled from internal and external sources, Company management believes it is the largest manufacturer of UHP waterjet cutting systems in the world. Pasteurization is the primary method used today to help ensure that food is safe to eat. "Fresher Under Pressure" represents a break-through technology which destroys harmful pathogens such as E. coli bacteria, as well as the spoilage microorganisms, thus increasing shelf life while ensuring a safe, healthy product. There are several other companies throughout the world which are trying to develop a similar UHP processing technology. These companies efforts are in the development stages only and management believes the Company's patents and know-how make it the leader in this technology. Currently Flow's equipment is the only equipment being used in any significant commercial applications. In addition, Flow has a very strong backlog of food safety equipment. There are also other technologies being developed related to food safety, including irradiation and ultra-violet light. Overall, the Company believes that its competitive position is enhanced by (1) technically advanced, proprietary products that provide excellent reliability, low operating costs, and user-friendly features, (2) a strong application-oriented, problem-solving marketing and sales approach, (3) an active research and development program that allows it to maintain technological leadership, (4) the ability to provide complete turnkey systems, (5) a strong position in key markets, such as in the U.S., Canada, Japan, southeast Asia and Europe, (6) strong OEM customer ties, and (7) efficient production facilities. RESEARCH AND ENGINEERING The Company has spent between 6% and 9% of revenues in research and engineering during each of the three years ended April 30, 2000. Research and engineering expenses were $14.7 million in 2000, $12.4 million in 1999, and $10.3 million in 1998. The Company will continue a high level of research and engineering spending to maintain its technological 9 leadership position through development of new products and applications as well as enhancing its current product line. EMPLOYEES As of April 30, 2000, the Company employed 998 full time and 12 part time personnel. There are no material collective bargaining agreements to which the Company is a party. FOREIGN AND DOMESTIC OPERATIONS See Note 16 of Notes to Consolidated Financial Statements for information regarding foreign and domestic operations. SAFE HARBOR STATEMENT Statements in this report that are not strictly historical are "forward looking" statements which should be considered as subject to the many uncertainties that exist in the Company's operations and business environment. Significant factors which may affect future Company performance include the following: The Company's growth depends, in part, on the successful development of improvements to its equipment and on the introduction of new products and technologies. Improvements in competing technologies could affect the Company's ability to market its products. The Company's financial performance could be affected if a change in overall economic conditions results in a decrease in the purchase of capital goods by its customers. Changes in the mix of products sold by the Company can also affect the gross margin achieved. The success of "Fresher Under Pressure" will be dependent on consumer acceptance of the technology, as well as the Company's ability to conform the technology to any food and beverage regulations. ITEM 2. PROPERTIES - -------------------------------------------------------------------------------- The Company's headquarters and primary manufacturing facilities are located in two leased facilities in Kent, Washington. The Company also manufactures product in Detroit, Michigan; Jeffersonville, Indiana; Bretton and Darmstadt, Germany; Burlington, Canada; Hsinchu, Taiwan and Stockholm, Sweden. The Company sells products through all of these locations, in addition to offices located in Columbus, Ohio; Lafayette, Louisiana; Birmingham, England; Buenos Aires, Argentina; Nagoya and Tokyo, Japan; Sao Paulo, Brazil and Windsor, Canada. 10 All facilities of the Company are leased with the exception of a manufacturing facility in Jeffersonville, Indiana. The Company believes that its facilities are suitable for its current operations and that expansion in the near term will not require additional space. The Company further considers that its primary manufacturing facility in Kent will be adequate to meet production requirements for the next three to five years. ITEM 3. LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- The Company is party to various legal actions incident to the normal operation of its business, none of which is believed to be material to the financial position and results of operations of the Company. See Notes 1 and 14 of Notes to Consolidated Financial Statements for a description of the Company's product liability insurance coverage and estimated exposure. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------------------------- None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. - -------------------------------------------------------------------------------- See page 13 ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------------------------------------------------------- See page 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. - -------------------------------------------------------------------------------- See pages 14 through 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------------------- See page 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - -------------------------------------------------------------------------------- See pages 24 through 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - -------------------------------------------------------------------------------- None. 12 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------- The principal market for Flow International Corporation's ("Flow" or the "Company") common stock is the over-the-counter market. The Company's stock is traded on the NASDAQ National Market under the symbol "FLOW." The range of high and low sales prices for the Company's common stock for the last two fiscal years is set forth in the following table.
Fiscal Year 2000 Fiscal Year 1999 High Low High Low ----------------------------------------------------------- First Quarter $11.88 $9.75 $12.75 $10.69 Second Quarter 11.97 9.94 10.75 8.38 Third Quarter 12.44 10.00 12.06 9.13 Fourth Quarter 12.88 10.25 11.13 8.44
There were 1,161 shareholders of record as of June 5, 2000. The Company has not paid dividends to common shareholders in the past. The Board of Directors intends to retain future earnings to finance development and expansion of the Company's business and does not expect to declare dividends to common shareholders in the near future. ITEM 6. SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
(in thousands, except per share amounts) Year Ended April 30, - -------------------------------------------------------------------------------------------------------------- 2000 1999 1998* 1997* 1996 ------------------------------------------------------------------- Income Statement Data: Revenue $194,087 $148,202 $159,482 $168,193 $144,905 Pretax Income 8,995 9,336 6,505 963 8,902 Net Income 6,477 6,722 4,803 725 7,085 Basic Earnings Per Share 0.44 0.46 0.33 0.05 0.49 Diluted Earnings Per Share 0.43 0.45 0.32 0.05 0.47 Balance Sheet Data: Working Capital $87,552 $79,993 $59,863 $68,126 $57,866 Total Assets 197,041 179,152 121,181 133,466 126,493 Short-Term Debt 9,216 4,604 6,905 1,730 3,339 Long-Term Obligations 70,397 64,614 32,076 53,569 45,590 Shareholders' Equity 66,669 64,022 61,195 56,753 57,060
* See Note 4 of the Consolidated Financial Statements which describes the disposition of certain business units during fiscal 1998 and the related restructuring provisions in fiscal 1998 and 1997. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The Company provides ultrahigh-pressure ("UHP") systems and related products and services to a wide variety of industries. Waterjet cutting is recognized as a better alternative to traditional cutting methods such as saws, plasma or laser systems. It is faster, has greater versatility in the types of products it can cut and eliminates the need for secondary processing operations. The Company divides its UHP revenues into two primary categories of product, `UHP Systems' and `UHP Consumable Parts and Services'. In addition to UHP revenue, the Company's fiscal 1998 consolidated revenues also include the non-core Access and Services operations that were sold in September 1997. CONSOLIDATED REVENUES BY MAJOR PRODUCT CATEGORIES
Year Ended April 30, (In thousands) 2000 1999 1998 Revenues % Revenues % Revenues % ---------------------------------------------------------------------- UHP Systems $138,379 71 $94,040 63 $94,728 66 UHP Consumable Parts and Services 55,708 29 54,162 37 47,904 34 --------------------------------------------------------------------- Total UHP Revenues 194,087 100 148,202 100 142,632 100 ===================================================================== Access and Services - - 16,850 ---------------------------------------------------------------------- Total Consolidated Revenues $194,087 $148,202 $159,482 ======================================================================
FISCAL 2000 COMPARED TO FISCAL 1999 Revenues for the year ended April 30, 2000 were $194.1 million, an increase of $45.9 million (31%) over the prior year period. This growth was the result of recent acquisitions, as well as revenues generated from the recently commercialized food safety technology, "Fresher Under Pressure"(R). The Company acquired Flow Pressure Systems Vasteras AB ("Pressure Systems") in March 1999 and Spearhead Automated Systems ("Spearhead") in September 1999. Excluding acquisitions and "Fresher Under Pressure", revenues decreased 3% both domestically and internationally; however, this performance was better than the overall machine cutting tool market. The United States machine cutting tool market declined 14% for the 12 months ended April 30, 2000 according to the Association for Manufacturing Technology ("AMT"). Flow's UHP technology continued to gain market share in spite of a decreasing market. The Company's revenues can be segregated into two primary categories, systems sales and consumables sales. Systems are generally comprised of a pump along with the robotics or articulation used to move the cutting or cleaning head. Systems are further broken down between standard systems such as 14 the Bengal-Registered Tradmark-, Integrated Flying Bridge, A-Series, Waterjet Machining Center (R) ("WMC") and standard automotive systems, and special or custom designed systems used primarily in the aerospace and automotive markets. UHP systems also include food safety revenues, as well as isostatic press systems. Systems sales in fiscal 2000 were $138.4 million, an increase of $44.3 million (47%) over the prior year. Excluding acquisitions and "Fresher Under Pressure", systems revenues were down slightly. Consumables are primarily parts used by the pump and cutting head during operation. Consumable parts and services revenues increased $1.5 million (3%) to $55.7 million in fiscal 2000. The slowdown in the consumable sales growth reflects a decrease in the worldwide machine tool market, as well as the Company's goal of providing lower operating costs through longer lived parts. Total domestic revenues increased 42% to $110.3 million and represented 57% of fiscal 2000 sales. European revenues posted a 28% gain to $53.9 million and represented 28% of total revenues. Asian revenues increased 11% to $16.5 million and accounted for 8% of consolidated revenues. Sales in the remainder of the world, primarily Canada, Mexico and South America, decreased 4% to $13.3 million. Growth in both the domestic and European markets resulted from recent acquisitions. While waterjet technology continues to gain market share due to its advantages over traditional cutting technologies, its sales growth year over year is affected by the overall performance of the machine cutting tool market. According to AMT data, it appears that the machine cutting tool market is beginning to rebound as compared to the prior year. While the Company's sales growth rate has historically exceeded the cutting tool market, the Company's fiscal 2001 performance will be affected by the extent of the broader machine tool market rebound. The Company typically sells its products at higher prices outside the United States due to the costs of servicing these markets. The Company did not significantly raise prices during fiscal 2000. Fiscal 2000 revenues included $7.2 million related to food safety or "Fresher Under Pressure". By exposing foods to pressures up to 100,000 pounds per square inch ("psi") for a short time, typically 30 seconds to slightly more than two minutes, UHP achieves the effects of pasteurization without heat. Not only are spoilage microorganisms destroyed, but the process also destroys harmful pathogens such as E. coli, listeria and salmonella, thus increasing shelf life, while ensuring a safe, healthy product. Unlike thermal treatment (pasteurization) or other methods such as irradiation, UHP technology does not destroy or alter the nutritional qualities, taste, texture or color of the food. Flow has a `continuous flow' concept whereby pumpable foods such as juices, salsas, guacamole, liquid eggs and salad dressings are pumped into pressure chambers, pressurized and then pumped into the next stage of the process, such as bottling. This continuous flow process is fully automated and requires just a single operator. The Company also has the ability to UHP process non-pumpable foods as a result of the March 1999 acquisition of Pressure Systems. Pressure Systems provides Flow the patented large vessel technology to make batch systems. This makes Flow the only supplier of complete UHP systems to the food industry. The Company anticipates leasing the continuous flow systems and selling the batch systems. The leases have a fixed monthly charge plus a per gallon or per pound usage fee. Lease revenue is recognized monthly based on throughput. Revenue for the batch systems is recognized on the percentage of completion method. In total, the Company has over 50 15 pressure vessels in operation or on order. Management also anticipates "Fresher Under Pressure" revenues will double each year for the next three years. Gross profit for the year ended April 30, 2000 increased $13.6 million (21%). Gross profit expressed as a percentage of revenue was 41% in fiscal 2000 as compared to 44% in fiscal 1999. In general, gross margin rates on systems sales are less than 45% and on consumables sales are in excess of 50%. On average, standard systems carry higher margins than the custom engineered systems, which include the isostatic pressure vessels manufactured by Pressure Systems. As such, the gross margin percentage varies depending on the revenue mix between systems, both standard and special, and consumables sales. Systems sales represented 71% of fiscal 2000 revenues, up from 63% in the prior year, and consumables sales represented 29% of fiscal 2000 revenues, down from 37% in the prior year. The decrease in current year gross margin was a function of the shift in revenue towards a greater percentage of systems sales, as well as the inclusion of the isostatic press systems in fiscal 2000. Excluding Pressure Systems and Spearhead, operating expenses increased $395,000 (1%) as compared to the prior year. Expressed as a percentage of revenues, total operating expenses decreased to 32% in fiscal 2000 from 35% in fiscal 1999. Marketing expenses of $29 million increased $4.2 million (17%) as compared to the prior year, and expressed as a percentage of revenues, decreased to 15% from 17% in the prior year. Research and engineering expenses in fiscal 2000 increased $2.3 million (18%) to $14.7 million as compared to the prior year. As a percentage of revenues, research and engineering expenses were 8% in both fiscal 2000 and fiscal 1999. Management will continue to aggressively pursue technological advances through increased research and engineering spending to maintain the Company's technological superiority. General and administrative expenses of $19.1 million increased $4.2 million (28%) for the year as compared to the prior year. Expressed as a percentage of revenues however, general and administrative expenses were comparable to the prior year at 10%. Operating income can vary significantly for domestic and foreign operations, but is primarily the result of product mix variations and volume from year to year. Management continues to monitor the economic situation throughout all principal geographic areas. The domestic machine tool market experienced weakness in fiscal 2000, but appeared to begin to rebound during the fourth quarter of fiscal 2000. While the Company's business has historically performed better than the overall market, fiscal 2001 domestic performance will be affected by the strength and timing of the rebound in the machine cutting tool market. Fiscal 2001 European growth is expected to continue but at a lower level than in fiscal 2000. Net interest expense of $5 million increased $1.8 million (57%) in fiscal 2000 compared to fiscal 1999. The increase in interest expense is due to higher debt levels associated with the purchase of Pressure Systems and Spearhead, as well as additional financing related to the development of the "Fresher Under Pressure" program, and increased interest rates. During fiscal 2000, other expense, net, totaled $2 million compared to other expense, net, of $587,000 in fiscal 1999. This change is due to the increase in the minority interest for majority owned joint ventures. 16 For both fiscal 2000 and fiscal 1999, the provision for income taxes was 28% of income before tax. The income tax rates were lower than the statutory rates in both the current and prior years due primarily to lower foreign tax rates and benefits from the foreign sales corporation. Additionally, the Company regularly evaluates the likelihood of utilizing its deferred tax assets and adjusts the valuation allowance thereon based on an evaluation of both positive and negative evidence related to these deferred tax assets. The weighted average number of shares outstanding used for the calculation of Basic and Diluted earnings per share is 14,716,000 and 15,127,000, respectively, for fiscal 2000 and 14,730,000 and 15,059,000, respectively, for fiscal 1999. The Company recorded fiscal 2000 net income of $6.5 million, or $.44 Basic and $.43 Diluted earnings per share as compared to $6.7 million, or $.46 Basic and $.45 Diluted earnings per share in fiscal 1999. FISCAL 1999 COMPARED TO FISCAL 1998 During the second quarter of fiscal 1998 the Company sold its non-core Access and Services operations. The following pro forma table separates the Company's fiscal 1998 consolidated income statement into ongoing operations (UHP) and divested operations (Access and Services). The Access and Services results include an associated $4.9 million restructuring charge. This charge is included as a separate component of operating expenses in the accompanying Consolidated Statements of Income.
(In thousands) Year Ended April 30, 1998 ------------------------------------ Access & UHP Services Consolidated ------------------------------------ Revenue $142,632 $16,850 $159,482 Gross profit 58,958 5,247 64,205 Operating expenses 45,593 8,427 54,020 Operating income / (loss) 13,365 (3,180) 10,185 Interest / other expense, net (3,303) (377) (3,680) Pretax income / (loss) $10,062 $(3,557) $6,505
As fiscal 1999 does not include the divested Access and Services operations, the following Results of Operations review compares only the ongoing UHP operations. 17 UHP RESULTS OF OPERATIONS ANALYSIS The following analysis presents a year over year comparison of the UHP operations. The following pro forma table presents the results of operations of the Company's UHP business only:
(In thousands) Year ended April 30, ------------------------ 1999 1998 ------------------------ Revenue $148,202 $142,632 Gross profit 65,231 58,958 Operating expenses: Marketing 24,847 21,952 Research and engineering 12,396 9,990 General and administrative 14,888 13,651 ------ ------ 52,131 45,593 ------ ------ Operating income 13,100 13,365 Interest expense, net (3,177) (2,886) Other expense, net (587) (417) ------ ------ Pretax income 9,336 10,062 Net income $ 6,722 $ 7,144
Revenues for the year ended April 30, 1999 were $148.2 million, an increase of $5.6 million (4%) over the prior year period. Systems sales in fiscal 1999 were $94 million, a decrease of $688,000 (1%) over the prior year. Included in this decrease was an $8.5 million reduction in large custom designed systems versus the prior year. Weakness in the automotive and aerospace markets account for this decrease. In addition, the average standard domestic system selling price has decreased by 10% as the lower cost systems, such as the Integrated Flying Bridge and Bengal, now deliver improved accuracy and feature enhancements that were formerly found only on the more expensive models. Consumable parts and services revenues increased $6.3 million (13%) to $54.2 million in fiscal 1999. The consumable parts increase reflects the expanding base of waterjet systems installed throughout the world. Domestically, revenues increased 9% to $77.5 million and represented 52% of fiscal 1999 sales. This increase in revenues was achieved in spite of a 27% decrease in the U.S. cutting machine tool market for the 12 months ended April 30, 1999 according to the AMT. The Company did, however, experience weakness domestically during the fourth quarter of fiscal 1999 with an 8% decline in domestic sales as compared to the prior year. According to AMT, the domestic cutting machine tool market dropped 47% during the first calendar quarter of 1999. Management believes the decline in fourth quarter domestic sales is a function of a tightening economy as opposed to a reduction in the benefits of the waterjet cutting technology over 18 competitive technologies. European revenues posted the strongest geographic gain, 22% to $42 million and represented 28% of total revenues. The Company experienced weakness in the Asian region, where revenues decreased $4.4 million (23%) to $14.9 million. Weakness in Japan accounted for $3.5 million of this drop. Sales in the remainder of the world, primarily Canada, Mexico and South America, also decreased 23% to $13.9 million. The Company did not significantly raise prices during fiscal 1999. Gross profit for the year ended April 30, 1999 increased $6.3 million (11%) on just a 4% increase in sales. Gross profit expressed as a percentage of revenue was 44% in fiscal 1999 as compared to 41% in fiscal 1998. The increase in gross margin was a function of the shift in revenue towards a greater percentage of consumables sales, as well as an increase in standard system sales, as compared to special systems. Systems sales represented 63% of fiscal 1999 revenues, down from 66% in the prior year, and consumables sales represented 37% of fiscal 1999 revenues, up from 34% in the prior year. On average, standard systems carry higher margins than the custom engineered systems. Additionally, production efficiencies and greater throughput resulted in reduced costs. Total operating expenses of $52.1 million increased $6.5 million (14%) over the prior year. Expressed as a percentage of revenues, operating expenses increased to 35% in fiscal 1999 from 32% in fiscal 1998. Marketing expenses of $24.8 million increased $2.9 million (13%) as compared to the prior year, and expressed as a percentage of revenues, increased to 17% from 15% in the prior year. This increase includes marketing activity for "Fresher Under Pressure" and several major trade shows. Research and engineering expenses in fiscal 1999 increased $2.4 million (24%) to $12.4 million as compared to the prior year. Approximately $2.1 million of this increase was development of the "Fresher Under Pressure" technology. As a percentage of revenues, research and engineering expenses were 8% in fiscal 1999 as compared to 7% in fiscal 1998. General and administrative expenses of $14.9 million increased $1.2 million (9%) for the year as compared to the prior year. Expressed as a percentage of revenues however, general and administrative expenses were comparable to the prior year at 10%. Operating income can vary significantly for domestic and foreign operations, but is primarily the result of product mix variations and volume from year to year. Management continues to monitor the economic situation throughout all principal geographic areas. Domestic growth was weaker than past years and the Asian region experienced a 23% decline. Net interest expense of $3.2 million increased $291,000 (10%) in fiscal 1999 compared to fiscal 1998. This increase resulted from higher debt levels associated with a $3.3 million stock repurchase program and inventory and capital asset additions related to "Fresher Under Pressure" of approximately $7.7 million. During fiscal 1999, other expense, net, totaled $587,000 compared to other expense, net, of $417,000 in fiscal 1998. Fiscal 1999 income tax expense was 28% of income before tax as compared to 29% in the previous year. The income tax rates were lower than the statutory rates in both the current and prior year due primarily to lower foreign tax rates and benefits from the foreign sales 19 corporation. Additionally, the Company regularly evaluates the likelihood of utilizing its deferred tax assets and adjusts the valuation allowance thereon based on an evaluation of both positive and negative evidence related to these deferred tax assets. The weighted average number of shares outstanding used for the calculation of Basic and Diluted earnings per share is 14,730,000 and 15,059,000, respectively, for fiscal 1999 and 14,707,000 and 15,037,000, respectively, for fiscal 1998. The Company recorded fiscal 1999 net income of $6.7 million, or $.46 Basic and $.45 Diluted earnings per share as compared to $7.1 million, or $.48 Basic and $.47 Diluted earnings per share in fiscal 1998. The Company's pretax investment in "Fresher Under Pressure" in marketing, research and engineering and the carrying costs of inventory and fixed assets was $2.5 million in fiscal 1999. Excluding the effects of "Fresher Under Pressure" spending, fiscal 1999 net income would have been $8.5 million or $.58 Basic and $.57 Diluted earnings per share. LIQUIDITY AND CAPITAL RESOURCES The Company generated $1.8 million in cash flow from operations during fiscal 2000 as compared to $2.9 million in fiscal 1999. Cash flow in fiscal 2000 was impacted by increases in both receivables and inventory as discussed further below, as well as reductions in accounts payable. The Company invested $6.6 million in property and equipment during fiscal 2000 of which $2.4 million related to "Fresher Under Pressure". Additionally, the Company paid $4.5 million, net of cash acquired, for Spearhead. Total debt at April 30, 2000 was $79.6 million, an increase of $10.4 million (15%) from April 30, 1999. Management believes that the available credit facilities and working capital generated by operations will provide sufficient resources to meet its operating and capital requirements for the next 12 months. The Company's Credit Agreement and private placement require the Company to comply with certain financial covenants. The covenants were amended as a result of recent acquisitions. As of April 30, 2000, the Company was in compliance with all such covenants, as amended. The fiscal 1998 Consolidated Statement of Cash Flows reflects the disposition of the Access and Services businesses. See Note 9 of Notes to Consolidated Financial Statements for a schedule of long-term debt maturities. Long-term debt obligations are expected to be met from working capital provided by operations and, as necessary, by other indebtedness. Capital spending plans currently provide for outlays of approximately $8 million to $11 million in fiscal 2001. Of this amount, approximately $4 million to $6 million relates to the manufacture of the continuous feed "Fresher Under Pressure" assets. The timing of these continuous feed asset additions will be determined by market demand. It is expected that funds necessary for these expenditures will be generated internally and through available credit facilities. 20 Gross receivables of $68.7 million at April 30, 2000 increased $12.1 million (21%) from April 30, 1999. This increase is a function of the 39% increase in sales during the fourth quarter of fiscal 2000 as compared to fiscal 1999. Days' sales outstanding in gross accounts receivable is negatively impacted by the traditionally longer payment cycle outside the United States. Additionally, longer payment terms are sometimes negotiated on large system orders. Management does not believe these timing issues will present a material adverse impact on the Company's short-term liquidity requirements. Inventory of $49.2 million at April 30, 2000 represents an increase of $1.4 million (3%) compared to April 30, 1999. Excluding the September 1999 Spearhead acquisition, inventories were flat as compared to April 30, 1999. Certain products manufactured by Pressure Systems and the Company's robotics and automation divisions require an extended manufacturing period, and therefore involve higher levels of work in process. Year 2000 Issues: To date, the Company has not experienced any material issues with respect to Year 2000 that have effected the ongoing operations. Throughout the remainder of Year 2000, there may be dates which do cause interruptions or failures that could materially impact normal business operations. While the Company has taken steps to resolve Year 2000 issues, there can be no assurance that these issues are entirely resolved as of this date. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities", is effective beginning in fiscal 2001, with early adoption permitted. FAS 133 standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the financial statements and measure them at fair value. The Company is currently reviewing the requirements of FAS 133 and assessing its impact on the Company's financial statements. The Company has not made a decision regarding the period of adoption. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management is evaluating the impact of SAB 101 and will adopt this statement no later than February 1, 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: - -------------------------------------------------------------------------------- Market risk exists in the Company's financial instruments related to an increase in interest rates, adverse changes in foreign exchange rates relative to the U.S. dollar, as well as 21 financial risk management and derivatives. These exposures are related to the daily operations of the Company. Interest Rate Exposure - At April 30, 2000 the Company had $79.6 million in interest bearing debt. Of this amount, $16.6 million was fixed rate debt with interest rates ranging from 4.75% to 7.25% per annum. The remaining debt of $63 million was variable with $43.2 million of this total bearing a rate of LIBOR + 2.5% or 8.69% at April 30, 2000. The majority of the remaining floating rate debt was at prime, 9%. See Note 9 to the Consolidated Financial Statements for additional contractual information on the Company's debt obligations. Market risk is estimated as the potential for interest rates to increase 10% on the variable rate debt. A 10% increase in interest rates would result in an approximate additional annual charge to the Company's pretax profits and cash flow of $550,000. At April 30, 2000 the Company had no derivative instruments to offset the risk of interest rate changes. The Company may choose to use derivative instruments, such as interest rate swaps, to manage the risk associated with interest rate changes. Foreign Currency Exchange Rate Risk - The Company transacts business in various foreign currencies, primarily the Canadian dollar, the German mark, the Japanese yen, the New Taiwan dollar, and the Swedish crown. The assets and liabilities of its foreign operations, with functional currencies other than the U.S. dollar, are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. Aggregate transaction gains and losses included in the determination of net income have not been material. Based on the Company's overall currency rate exposure at April 30, 2000, a near-term 10% appreciation or depreciation of the U.S. dollar would have an insignificant effect on the Company's financial position, results of operations and cash flows over the next fiscal year. At April 30, 2000, the Company had several derivative instruments to offset the risk of foreign currency exchange rate changes. The Company may continue to use derivative instruments, such as forward exchange rate contracts, to manage the risk associated with foreign currency exchange rate changes. 22 MANAGEMENT'S STATEMENT OF RESPONSIBILITY Management is responsible for the fair and accurate presentation of information in this Form 10-K. The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States. Financial and operating information comes from Company records and other sources. Certain amounts are, of necessity, based on judgment and estimation. We believe that adequate accounting systems and financial controls are maintained to ensure that the Company's records are free from material misstatement and to protect the Company's assets from loss or unauthorized use. In addition, the Audit Committee of the Board of Directors periodically meets with PricewaterhouseCoopers LLP and management to review the work of each, to discuss financial reporting matters, and to review auditing and internal control procedures. /s/ Stephen D. Reichenbach -------------------------- Stephen D. Reichenbach Executive Vice President, Treasurer and Chief Financial Officer - -------------------------------------------------------------------------------- 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- The following consolidated financial statements are filed as a part of this report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE IN THIS REPORT - -------------------------------------------------------------------------------------------------------------------- Report of Independent Accountants 25 Consolidated Balance Sheets at April 30, 2000 and 1999 26 Consolidated Statements of Income for each of the three years in the period ended April 30, 2000 27 Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 2000 28 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended April 30, 2000 30 Notes to Consolidated Financial Statements 31 FINANCIAL STATEMENT SCHEDULES Schedule VIII Valuation and Qualifying Accounts 51
All other schedules are omitted because they are not applicable. 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Flow International Corporation In our opinion, the consolidated financial statements and related schedules listed in the accompanying index present fairly, in all material respects, the financial position of Flow International Corporation and its subsidiaries at April 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Seattle, Washington June 5, 2000 25 FLOW INTERNATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
April 30, ---------------------- 2000 1999 ---- ---- ASSETS: Current Assets: Cash $6,383 $10,403 Receivables, net 67,793 55,783 Inventories, net 49,168 47,771 Deferred Income Taxes 1,900 1,658 Other Current Assets 5,963 4,849 ------------------------- Total Current Assets 131,207 120,464 Property and Equipment, net 21,024 17,723 Intangible Assets, net of accumulated amortization of $10,306 and $7,000, respectively 39,124 36,211 Deferred Income Taxes 572 1,314 Other Assets 5,114 3,440 ------------------------- $197,041 $179,152 ========================= LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Notes Payable $ 5,290 $ 419 Current Portion of Long-Term Obligations 3,926 4,185 Accounts Payable 15,648 18,411 Accrued Payroll and Related Liabilities 5,948 6,801 Other Accrued Taxes 523 851 Deferred Revenue 2,476 2,888 Other Accrued Liabilities 9,844 6,916 -------------------- Total Current Liabilities 43,655 40,471 Long-Term Obligations 70,397 64,614 Customer Prepayments 14,483 8,931 Commitments and Contingencies (Note 14) Minority Interest 1,837 1,114 Shareholders' Equity: Series A 8% Convertible Preferred Stock - $.01 par value, 1,000,000 shares authorized, none issued Common Stock - $.01 par value, 20,000,000 shares authorized, 14,736,081 shares outstanding at April 30, 2000 14,665,700 shares outstanding at April 30, 1999 147 147 Capital in Excess of Par 41,041 40,260 Retained Earnings 34,514 28,037 Accumulated Other Comprehensive Loss (9,033) (4,422) -------------------------- Total Shareholders' Equity 66,669 64,022 ------------------------- $197,041 $179,152 =========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 26 FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Year Ended April 30, --------------------------------------- 2000 1999 1998 * ----- ---- ------ Revenue $194,087 $148,202 $159,482 Cost of Sales 115,259 82,971 95,277 --------------------------------------- Gross Profit 78,828 65,231 64,205 --------------------------------------- Expenses: Marketing 28,998 24,847 23,972 Research and Engineering 14,684 12,396 10,253 General and Administrative 19,106 14,888 14,885 Restructuring - - 4,910 -------------------------------------- 62,788 52,131 54,020 -------------------------------------- Operating Income 16,040 13,100 10,185 Interest Expense, net (4,998) (3,177) (3,246) Other Expense, net (2,047) (587) (434) -------------------------------------- Income Before Provision for Income Taxes 8,995 9,336 6,505 Provision for Income Taxes 2,518 2,614 1,702 -------------------------------------- Net Income $6,477 $6,722 $4,803 ====================================== Basic Earnings Per Share $ .44 $ .46 $ .33 ====================================== Diluted Earnings Per Share $ .43 $ .45 $ .32 ======================================
* SEE NOTE 4 WHICH DESCRIBES THE DISPOSITION OF CERTAIN BUSINESS UNITS DURING FISCAL 1998 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 27 FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended April 30, -------------------------------------- 2000 1999 1998 * ---- ---- ------ Cash Flows from Operating Activities: Net Income $6,477 $6,722 $4,803 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation and Amortization 7,295 4,882 4,369 Restructuring provision 4,910 Deferred Income Taxes 290 1,327 1,218 Minority Interest 723 56 38 Provision for losses on trade accounts receivable 133 373 508 Provision for slow moving and obsolete inventory (411) (213) 630 Tax effect of exercised stock options 145 218 373 Stock Compensation 319 (Increase) Decrease in Operating Assets and Liabilities, net of effects of business combinations and restructuring: Receivables (10,096) (4,201) (13,667) Inventories (334) (4,494) (3,007) Other Current Assets (1,041) 3,798 (3,454) Accounts Payable (3,795) 4,423 2,009 Accrued Payroll and Related Liabilities (853) 1,168 1,562 Deferred Revenue (412) 2,786 102 Customer Prepayments 5,552 1,009 Other Accrued Liabilities (740) (14,668) 114 Other Long-Term Assets (1,412) (304) 2,201 ------- -------- ------ Cash provided by operating activities 1,840 2,882 2,709 ------- -------- ------ Cash Flows from Investing Activities: Expenditures for property and equipment (6,569) (8,200) (6,600) Payment for business combinations, net of cash acquired (4,499) (13,564) (7,735) Proceeds from sale of certain business units 31,189 Other (151) (44) (186) ------- -------- ------ Cash (used) provided by investing activities (11,219) (21,808) 16,668 ------- -------- ------ Cash Flows from Financing Activities: Borrowings under line of credit agreements, net 13,337 33,594 (24,512) Proceeds from long-term obligations 8,544 Payments of long-term obligations (3,953) (3,357) (1,389) Common stock repurchased (3,266) Proceeds from issuance of common stock 317 948 1,789 ------- -------- ------ Cash provided (used) by financing activities 9,701 27,919 (15,568) ------- -------- ------ Effect of exchange rate changes (4,342) (1,596) (3,282) ------- -------- ------ Increase (decrease) in cash and cash equivalents (4,020) 7,397 527 Cash and cash equivalents at beginning of period 10,403 3,006 2,479 ------- -------- ------ Cash and cash equivalents at end of period $6,383 $10,403 $3,006 ------- -------- ------ ------- -------- ------
* SEE NOTE 4 WHICH DESCRIBES THE DISPOSITION OF CERTAIN BUSINESS UNITS DURING FISCAL 1998 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 28 FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands)
Year Ended April 30, -------------------------------------- 2000 1999 1998 * ---- ---- ------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest $4,844 $3,175 $3,504 Income Taxes 1,882 569 1,656 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Fair value of assets acquired (Note 2) $6,039 $43,703 $10,144 Net Cash paid, stock issued and notes assumed for assets acquired (4,499) (13,564) (7,466) -------- -------- -------- Liabilities assumed $1,540 $30,139 $2,678
29 FLOW INTERNATIONAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Common Stock Accumulated ------------ Capital Other TOTAL Par In Excess Retained Comprehensive SHAREHOLDERS' Shares Value Of Par Earnings Loss EQUITY ------------------------------------------------------------------------------------- Balances, May 1, 1997 14,545 $145 $37,766 $18,946 $(104) $56,753 Components of Comprehensive Income: Net Income 4,803 4,803 Unrealized Loss on Equity Securities Available for Sale, Net of Tax (136) (136) Cumulative Translation Adjustment (2,387) (2,387) -------------- Total Comprehensive Income 2,280 -------------- Exercise of Stock Options 302 3 1,786 1,789 Other 373 373 ------------------------------------------------------------------------------------- Balances, April 30, 1998 14,847 $148 $39,925 $23,749 $(2,627) $61,195 ------------------------------------------------------------------------------------- Components of Comprehensive Income: Net Income 6,722 6,722 Unrealized Loss on Equity Securities Available for Sale, Net of Tax (199) (199) Cumulative Translation Adjustment (1,596) (1,596) -------------- Total Comprehensive Income 4,927 -------------- Exercise of Stock Options 155 2 946 948 Repurchase of Common Stock (336) (3) (829) (2,434) (3,266) Other 218 218 ------------------------------------------------------------------------------------- Balances, April 30, 1999 14,666 $147 $40,260 $28,037 $(4,422) $64,022 ------------------------------------------------------------------------------------- Components of Comprehensive Income: Net Income 6,477 6,477 Unrealized Loss on Equity Securities Available for Sale, Net of Tax (269) (269) Cumulative Translation Adjustment (4,342) (4,342) -------------- Total Comprehensive Income 1,866 -------------- Exercise of Stock Options 71 317 317 Other 464 464 ------------------------------------------------------------------------------------- Balances, April 30, 2000 14,737 $147 $41,041 $34,514 $(9,033) $66,669 =====================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three years ended April 30, 2000 (All tabular dollar amounts in thousands, except per share amounts) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - -------------------------------------------------------------------------------- PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include Flow International Corporation ("Flow" or the "Company"), and its wholly-owned subsidiaries, Flow Europe GmbH ("Flow Europe"), Foracon Maschinen und Anlagenbau GmbH & CO.KG ("Foracon"), Flow Asia Corporation ("Flow Asia"), Flow Automation Inc. ("Flow Automation"), Flow Japan Corporation ("Flow Japan"), Flow Software Technologies Ltd. ("Flow Software"), Flow Pressure Systems Vasteras AB ("Pressure Systems"), Flow Holdings GmbH (SAGL) Limited Liability Company ("Flow Switzerland"), HydroDynamic Cutting Services, Spearhead Automated Systems ("Spearhead"), and a 50% owned joint venture, Flow Autoclave Inc. ("Flow Autoclave"). In addition, periods through the first quarter of fiscal 1998 included the wholly-owned subsidiaries Rampart Waterblast, Inc., Spider Staging Corporation ("Spider"), Power Climber and affiliated companies ("Power Climber") as well as a joint venture, Consortium Europeen du Materiel ("CEM") and the HydroMilling division, collectively ("Access and Services") (see Note 4). All significant intercompany transactions have been eliminated. OPERATIONS The Company develops and manufactures ultrahigh-pressure ("UHP") waterjet cutting, cleaning and specialized robotic systems for the manufacturing, industrial and marine cleaning markets. The Company provides products to a wide variety of industries, including the automotive, aerospace, disposable products, food processing, job shop, marble, tile and other stone cutting, and paper industries. In addition, the Company provides isostatic presses to the automotive and aerospace industries and UHP processing equipment for food. Equipment is designed, developed, and manufactured at the Company's principal facilities in Kent, Washington, and at manufacturing facilities in Bretton and Darmstadt Germany; Burlington, Canada; Hsinchu, Taiwan; Jeffersonville, Indiana; Detroit, Michigan and Vasteras, Sweden. The Company markets its products to customers worldwide through its principal offices in Kent and its subsidiaries in Brazil, Canada, Germany, Japan, Sweden, Switzerland, Taiwan, and the United Kingdom. REVENUE RECOGNITION Revenues are recognized at the time of shipment for products and certain types of systems, and under percentage of completion, measured by the cost to cost method, for other types of systems. Revenues from equipment on lease are recognized as rental income in the period earned. 31 CASH EQUIVALENTS For the purposes of the Consolidated Statements of Cash Flows, the Company considers short-term investments with original or remaining maturities from the date of purchase of three months or less, if any, to be cash equivalents. The Company's cash consists of demand deposits in large financial institutions. At times, balances may exceed federally insured limits. INVENTORIES Inventories are stated at the lower of cost, determined by using the first-in, first-out method, or market. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Additions, leasehold improvements and major replacements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When assets are sold, retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the statement of income. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets, which range from three to eleven years for machinery and equipment; three to nine years for furniture and fixtures and 19 years for buildings. Leasehold improvements are amortized over the related lease term, or the life of the asset, whichever is shorter. INTANGIBLE ASSETS Intangible assets consisting primarily of acquired technology, patents, non-compete agreements and goodwill are amortized on a straight-line basis over fifteen years. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews most long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used in its business annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable in accordance with accounting principles generally accepted in the United States. If determined necessary, an impaired asset is written down to its estimated fair market value based on the best information available. The Company generally measures estimated fair market value by reviewing undiscounted estimated future cash flows. Accordingly, actual results could vary significantly from such estimates. 32 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of all financial instruments on the balance sheet as of April 30, 2000 and 1999 approximates fair value with the exception of the Company's investment in Phenix Composites, Incorporated ("Phenix") (see Note 5). The carrying value of long-term obligations and notes payable approximates fair value because interest rates reflect current market conditions or are based on discounted cash flow analyses. The carrying value of the Company's investment in common stock of Western Garnet International Ltd. ("Western Garnet") is at fair value based on the current market price of the common stock. CONCENTRATION OF CREDIT RISK In countries or industries where the Company is exposed to material credit risk, sufficient collateral, including cash deposits and/or letters of credit, is required prior to the completion of a transaction. The Company does not believe there is a material credit risk beyond that provided for in the financial statements in the ordinary course of business. The Company makes use of foreign exchange contracts to cover some transactions denominated in foreign currencies, and does not believe there is an associated material credit or financial statement risk. WARRANTY LIABILITY Products are warranted to be free from material defects for a period of one year from the date of shipment. Warranty obligations are limited to the repair or replacement of products. The Company's warranty accrual is reviewed quarterly by management for adequacy based upon recent shipments and historical warranty expense. Credit is issued for product returns upon receipt of the returned goods, or, if material, at the time of notification and approval. PRODUCT LIABILITY The Company is obligated under terms of its product liability insurance contracts to pay all costs up to deductible amounts. Included in general and administrative expenses are insurance, investigation and legal defense costs. Legal settlements, if any, are included in other expense. INCOME TAXES The Company accounts for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recorded. 33 MINORITY INTERESTS IN JOINT VENTURES The Company includes income or expense associated with the minority interest in joint ventures as part of Other Expense, net in the accompanying Consolidated Statements of Income. FOREIGN CURRENCY TRANSLATION The functional currency of Flow Asia is the New Taiwan dollar; of Flow Automation, the Canadian dollar; of Flow Europe and Foracon, the German mark; of Flow Japan, the Japanese yen, and of Pressure Systems, the Swedish crown. All assets and liabilities of these foreign subsidiaries are translated at year-end rates. Income and expense accounts of the foreign subsidiaries are translated at the average rates in effect during the year. Adjustments resulting from the translation of Flow Asia, Flow Automation, Flow Europe, Foracon, Flow Japan, and Pressure Systems financial statements are recorded in the accumulated other comprehensive loss account in the shareholders' equity section of the accompanying Consolidated Balance Sheets. The Company uses forward exchange contracts to hedge certain firm purchase and sale commitments and the related receivables and payables, including certain intercompany foreign currency transactions. Hedged transactions are denominated primarily in the Swedish crown. Gains and losses related to hedges of firmly committed transactions and the related receivables are deferred and are recognized in income or as adjustments of carrying amounts when the offsetting gains and losses are recognized on the hedged transactions. The realized and unrealized gains or losses on forward contracts were insignificant. The forward exchange contracts expire at various times through March 2001. The estimated fair values of derivatives used to hedge the Company's risks will fluctuate over time. The fair value of the forward exchange contracts is estimated by obtaining quoted market prices. For the years ended April 30, 2000, 1999 and 1998 a net foreign exchange loss of $110,000, $104,000 and $75,000, respectively, is included in Other Expense, net, in the accompanying Consolidated Statements of Income. BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share represents net income available to common shareholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share represents net income available to common shareholders divided by the weighted average number of shares outstanding including the potentially dilutive impact of stock options. Common stock options are converted using the treasury stock method. 34 The following table sets forth the computation of Basic and Diluted earnings per share for the years ended April 30, 2000, 1999 and 1998:
Year Ended April 30, 2000 1999 1998 ------------------------------ Numerator: Net income $6,477 $6,722 $4,803 Denominator: Denominator for basic earnings per share - weighted average shares 14,716 14,730 14,707 Dilutive potential common shares from employee stock options 411 329 330 ------------------------------- Denominator for diluted earnings per share - weighted average shares and assumed conversions 15,127 15,059 15,037 Basic earnings per share $.44 $.46 $.33 Diluted earnings per share $.43 $.45 $.32
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates that are susceptible to significant change in the near term are the percentage of completion estimates and the adequacy of the allowance for obsolete inventory, warranty obligations and doubtful accounts receivable. RECLASSIFICATIONS Certain 1999 and 1998 amounts have been reclassified to conform with the 2000 presentation. These reclassifications had no effect on previously reported net income or cash flows. 35 SEGMENTS The Company is required to report information about operating segments both annually as well as condensed data quarterly. Operating segments are determined based upon the manner in which internal financial information is produced and evaluated by the chief operating decision maker. Additionally certain geographical information is required regardless of how internal financial information is generated. Based on the reporting structure of the Company and how information is evaluated, management believes the Company operates within geographic segments only. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities", is effective beginning in fiscal 2001, with early adoption permitted. FAS 133 standardizes the accounting for derivative instruments by requiring that an entity recognize those items as assets or liabilities in the financial statements and measure them at fair value. The Company is currently reviewing the requirements of FAS 133 and assessing its impact on the Company's consolidated financial statements. The Company has not made a decision regarding the period of adoption. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management has not yet determined the impact SAB 101 would have on the financial position or results of operations of the Company. This statement will be adopted by the Company no later than February 1, 2001. NOTE 2 - BUSINESS COMBINATIONS: - -------------------------------------------------------------------------------- In September 1999, the Company purchased substantially all of the assets and selected liabilities of Spearhead for $4.5 million. Spearhead manufactures advanced cutting, trimming and tooling equipment for the automotive and related industries. The difference between the net fair market value of assets acquired and consideration given totaled $2.8 million and has been recorded as an intangible asset. Operating results have been included in the Consolidated Financial Statements from the date of acquisition based upon the purchase method of accounting. In March 1999, the Company acquired all of the stock of Pressure Systems from Asea Brown Boveri AB ("ABB"). In addition, the Company purchased a 50% ownership in Flow Autoclave from an ABB subsidiary. Pressure Systems manufactures pressure vessels used in batch UHP food processing, a complementary product to the Company's continuous flow food processing technology, as well as isostatic and flex forming presses for the aerospace and 36 automotive industries. Flow Autoclave is the domestic distributor for the Pressure Systems product. Total cash consideration for the above two acquisitions was $22.8 million. The difference between the net fair market value of assets acquired and consideration given totaled $21.1 million and has been recorded as an intangible asset. Operating results have been included in the Consolidated Financial Statements from the date of acquisition based upon the purchase method of accounting. In May 1997, the Company purchased the stock of Foracon. Foracon supplies UHP and related systems to the European market. In April 1998, the Company purchased substantially all the assets and selected liabilities of CIS Robotics Inc. and the stock of Flow Software. These companies develop software used to program industrial robots as well as provide, as a service, industrial robot programming. Total cash consideration for the above two acquisitions was $6.9 million. The difference between the net fair market value of assets acquired and consideration given totaled $6.3 million and has been recorded as an intangible asset. Results have been included in the Consolidated Financial Statements from the date of acquisition based upon the purchase method of accounting. Except as reported in Note 3, unaudited pro forma results are not presented as they are not materially different from the results reported in the Consolidated Financial Statements. During fiscal 1998, the Company invested an additional $800,000 to increase its ownership in two joint ventures, Flow Japan and HydroDynamic Cutting Services. During fiscal 2000, a pre-acquisition contingency related to the valuation of work in process inventory at Pressure Systems was resolved. This resulted in an additional $2.7 million of goodwill being recorded. NOTE 3 - PRO FORMA FINANCIAL INFORMATION (UNAUDITED): - -------------------------------------------------------------------------------- Pressure Systems was a small subsidiary of ABB. Consistent with ABB policy, Pressure Systems was subject to various intercompany charges, many of which will not be recurring in the future. These charges are included in the pro forma financial information below. If Pressure Systems had been acquired at the beginning of the years ended April 30, 1999 and 1998, the results of operations of the Company would be adjusted as follows on a pro forma basis. Total revenues would have been $170.3 million and $189.8 million for the years ended April 30, 1999 and 1998, respectively. Net income for the years ended April 30, 1999 and 1998 would have been $4.8 million and $1.5 million, respectively, Basic earnings per share would have been $.33 and $.10, respectively, and Diluted earnings per share would have been $.32 and $.10, respectively. The adjustments to net income for the years ended April 30, 1999 and 1998 include additional interest expense of $1.1 million and $1.2 million, respectively, and additional goodwill amortization of $1.3 million and $1.4 million, respectively. The pro forma consolidated 37 financial information is presented for information purposes only, does not take into account savings that may have been realized from the combination of the Company and Pressure Systems, and is not indicative of the actual consolidated financial position or results of operations in the future. Pressure Systems utilized the completed contract method of revenue recognition during the year ended April 30, 1998 and through the second quarter of the year ended April 30, 1999. NOTE 4 - BUSINESS DIVESTITURE: - -------------------------------------------------------------------------------- During the second quarter of fiscal 1998 the Company sold its Access and Services operations. The Company recorded a $4.9 million restructuring provision during fiscal 1998 associated with this sale. The primary components of this expense were: write down of assets to net realizable value, $4 million; probable future obligations associated with the sale, $900,000. In addition, during fiscal 1997 the Company recorded a $9 million restructuring provision associated with the then proposed divestiture. The primary components of this expense were: write down of assets to net realizable value, $7.4 million; restructuring costs to be incurred in fiscal 1998, $1.3 million; restructuring costs incurred during fiscal 1997, $300,000. These charges are included as a separate component of operating expenses in the accompanying Consolidated Statements of Income. At April 30, 1998, the Company had $860,000 in asset valuation guarantee reserves related to the sale. During the year ended April 30, 1999, the Company utilized the reserve for $860,000 with no other adjustment to the reserve during the year. For the year ended April 30, 1998, the operating results of the Access and Services operations, excluding the restructuring provisions, were revenues of $16.9 million, Gross Profit of $5.4 million, Operating Profit of $1.7 million, and Pretax Income of $1.4 million. NOTE 5 - RELATED PARTY TRANSACTIONS: - -------------------------------------------------------------------------------- In August 1992, the Company entered into a stock purchase agreement with Phenix and contributed cash and certain equipment valued at cost. The book value of the investment is $484,000 at April 30, 2000 and 1999 and is being accounted for under the cost method. Currently, the Company's CEO and President is a member of the board of directors of Phenix. During fiscal 1997 the Company purchased 369,791 shares or 3.1% of Western Garnet for $1.5 million. Western Garnet is publicly traded on the Toronto stock exchange. This investment was made to secure a long-term relationship with the Company's supplier of its high quality garnet. Garnet is sold by the Company as a consumable used in abrasivejet cutting. The Company classifies this investment as available-for-sale under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity 38 Securities". Based on the April 30, 2000 closing stock price of Western Garnet, the Company recorded a tax-affected unrealized loss of $809,000 which is reflected in Accumulated Other Comprehensive Loss of the accompanying Consolidated Balance Sheets. Currently, the Company's CEO and president is a member of the board of directors of Western Garnet. NOTE 6 - RECEIVABLES: - -------------------------------------------------------------------------------- Receivables consist of the following:
April 30, ------------------------- 2000 1999 Trade Accounts Receivable $44,200 $42,588 Unbilled Revenues 24,492 13,961 ------------------------- 68,692 56,549 Less: Allowance for Doubtful Accounts 899 766 ------------------------- $67,793 $55,783 =========================
NOTE 7 - INVENTORIES: - -------------------------------------------------------------------------------- Inventories consist of the following:
April 30, 2000 1999 ------------------------- Raw Materials and Parts $28,828 $29,090 Work in Process 11,760 11,223 Finished Goods 10,483 9,772 -------------------------- 51,071 50,085 Less: Provision for Slow-Moving and Obsolete Inventory 1,903 2,314 --------------------------- $49,168 $47,771 =========================
NOTE 8 - PROPERTY AND EQUIPMENT: - -------------------------------------------------------------------------------- Property and equipment are as follows:
April 30, 2000 1999 ----------------------- Land and Buildings $ 300 $ 461 Machinery and Equipment 33,706 25,845 Furniture and Fixtures 2,644 2,646 Leasehold Improvements 8,269 8,588 Construction in Progress 2,988 3,620 ----------------------- 47,907 41,160 Less: Accumulated Depreciation and Amortization 26,883 23,437 ------------------------- $21,024 $17,723 =========================
39 Included in Property and Equipment is equipment on lease of $2.6 million and $1 million at April 30, 2000 and 1999, respectively. During fiscal 2000, the Company capitalized interest of $371,000. No interest was capitalized in fiscal 1999 or 1998. NOTE 9 - LONG-TERM OBLIGATIONS AND NOTES PAYABLE: - -------------------------------------------------------------------------------- Long-term obligations are as follows:
April 30, 2000 1999 ------------------------- Flow Line of Credit $53,758 $44,070 Private Debt Placement 12,857 15,000 Term Loans Payable 7,708 9,729 ------------------------- 74,323 68,799 Less: Current Portion 3,926 4,185 ------------------------- $70,397 $64,614 =========================
Current notes payable are as follows:
April 30, 2000 1999 ----------------------- Flow Automation Notes Payable $ 463 $ - Pressure Systems Notes Payable 4,827 - Flow Japan Notes Payable - $ 419 ------------------------- $ 5,290 $ 419 =========================
In August 1998, the Company renegotiated its Credit Agreement. The Company's Credit Agreement provides for a revolving line of credit of up to $75 million, with two financial institutions, which expires on September 30, 2003. The amount that can be borrowed is limited based on certain debt covenant restrictions. Interest rates under the Credit Agreement are at the bank's prime rate or are linked to LIBOR, at the Company's option. The funded debt ratio determines the LIBOR based interest rate. The Company has borrowed $53.8 million under the Credit Agreement as of April 30, 2000, of which $10.3 million carries an interest rate of prime and the remainder carries an interest rate of LIBOR + 2.5%. Prime at April 30, 2000 was 9% and LIBOR was 6.19%. The Company pays 0.1% as an unused commitment fee. As of April 30, 2000, the Company had $7 million of available domestic unused line of credit. The Private Debt Placement is a 10-year note with seven equal principal payments beginning in September 1999. The Company pays interest semi-annually at a fixed rate of 7.2%. The Credit Agreement and Private Debt Placement are collateralized by a general lien on all of the Company's assets. The Company is required to comply with certain covenants relating to the Credit Agreement and Private Debt Placement, including restrictions on dividends and transactions with affiliates, limitations on additional indebtedness, and maintenance of tangible 40 net worth, working capital, fixed charge coverage, funded debt and debt service ratios. The covenants were amended as of April 30, 2000 related to the acquisition of Pressure Systems and Spearhead. As of April 30, 2000, the Company was in compliance with all such covenants, as amended. Included in Term Loans Payable are the following: A German mark denominated loan of $3.7 million. The Company's principal bank has issued a $6.5 million standby letter of credit to the Company's German bank, to secure a credit facility for use by Flow Europe. Principal and interest are payable monthly at a rate of 4.75% through fiscal 2003. At April 30, 2000, Flow Europe had an unused $2.8 million credit facility. A collateralized Japanese yen denominated loan of $3.4 million. Principal and interest are payable monthly at a range of 2% to 2.3% through fiscal 2003. An unsecured $101,000 note to a previous owner of Power Climber in conjunction with the acquisition of assets. The note requires monthly payment of principal and interest, at 7.25%, through fiscal 2003. Current Notes Payable include: A 100 million Japanese yen standby letter of credit has been issued by the Company's principal bank to the Company's Japanese bank, to collateralize a credit facility for use by Flow Japan. As of April 30, 2000 Flow Japan had no outstanding borrowings against this facility and an unused $943,000 credit facility. The Flow Automation credit facility is collateralized by trade accounts receivable and inventory, and is denominated in Canadian dollars at an interest rate of Canadian prime (7% at April 30, 2000) plus 1.25%. Flow Automation has approximately $483,000 dollars in unused credit facilities at April 30, 2000. A 50 million Swedish crown Pressure Systems line of credit is collateralized by trade accounts receivable and inventory, at an interest rate of Swedish prime (4.25% at April 30, 2000) plus 0.75%. As of April 30, 2000, Pressure Systems has approximately $785,000 dollars in unused credit facilities. Principal payments under long-term obligations for the next five years and thereafter are as follows: $3,926,000 in 2001, $4,018,000 in 2002, $2,746,000 in 2003, $59,348,000 in 2004, $2,143,000 in 2005, and $2,142,000 thereafter. - -------------------------------------------------------------------------------- 41 NOTE 10 - INCOME TAXES: - -------------------------------------------------------------------------------- The components of consolidated income before income taxes and the provision for income taxes are as follows:
Year Ended April 30, ------------------------------------------ 2000 1999 1998 ---- ---- ---- Income Before Income Taxes: Domestic $540 $5,753 $3,237 Foreign 8,455 3,583 3,268 ------ ------ ------ Total $8,995 $9,336 $6,505 ====== ====== ======
The provision (benefit) for income taxes comprises:
April 30, ------------------------------------------ 2000 1999 1998 Current: Domestic $137 $443 $(135) State and Local 96 255 219 Foreign 1,995 589 400 ------ ------ ------ Total 2,228 1,287 484 Deferred 290 1,327 1,218 ------ ------ ------ Total $2,518 $2,614 $1,702 ====== ====== ======
42 Net deferred tax assets (liabilities) comprise the following: April 30, 2000 April 30, 1999 -------------- -------------- Current: Accounts receivable allowances $148 $94 Inventory capitalization 169 94 Obsolete inventory 295 325 Restructuring charge - 96 Vacation accrual 350 245 Net operating loss carryover 117 1,287 Business tax credits 219 - Foreign taxes 148 248 AMT credits 168 168 All other 434 191 ----- ----- Subtotal 2,048 2,748 Valuation allowance (148) (1,090) ----- ----- Total Current Deferred Taxes 1,900 1,658 Long-term: Fixed Assets 354 469 Net operating loss carryover 1,061 1,061 Subpart F income 511 369 Foreign taxes (995) (995) AMT credits 496 729 All other (557) (21) ----- ----- Subtotal 870 1,612 Valuation allowance (298) (298) ----- ----- Total Long-Term Deferred Taxes 572 1,314 Total Net Deferred Taxes 2,472 2,972 ===== ===== A reconciliation of income taxes at the federal statutory rate to the provision for income taxes is as follows: Year Ended April 30, --------------------------- 2000 1999 1998 ----- ------ ----- Income taxes at federal statutory rate 34.0% 34.0% 34.0% Foreign sales corporation benefit (2.5) (2.6) (5.0) Foreign operations expense (5.6) (0.4) 3.1 Change in valuation allowances (1.8) (4.9) (10.0) State and local taxes 0.7 1.8 2.2 Non Deductible Meals 1.1 1.1 1.1 Other 2.1 (1.0) 0.8 ----- ------ ----- Income tax provision 28.0% $28.0% 26.2% ===== ====== ===== 43 As of April 30, 2000, the Company had approximately $1 million of domestic net operating loss carryforwards to offset certain earnings for federal income tax purposes, of which the entire amount was currently available. This net operating loss carryforward expires in fiscal 2003. Due to current and expected future earnings, the Company expects to utilize all of its foreign net operating loss carryforwards. Therefore, the foreign valuation allowance associated with the net operating loss carryforward was reduced by a net tax affected amount of $843,000 in fiscal 2000. Provision has not been made for U.S. income taxes or foreign withholding taxes on $15.3 million of undistributed earnings of foreign subsidiaries. Those earnings have been and will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the Company or a U.S. affiliate, or if the Company should sell its stock in the subsidiaries. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings; however, the Company believes that U.S. foreign tax credits would largely eliminate any U.S. tax and offset any foreign tax. NOTE 11 - STOCK OPTIONS: - -------------------------------------------------------------------------------- The Company has stock options outstanding under various option plans described as follows: 1984 RESTATED STOCK OPTION PLAN (THE "1984 RESTATED PLAN"). Approved by the Company's shareholders in September 1984 and subsequently amended and restated, the 1984 Restated Plan provides for grants to employees and contractors to purchase a maximum of 1,800,000 shares of the Company's common stock. The 1984 Restated Plan allows for the grant of either incentive or nonqualified stock options. 1987 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS (THE "1987 NONEMPLOYEE DIRECTORS PLAN"). Approved by the Company's shareholders in September 1987, the 1987 Nonemployee Directors Plan, as subsequently amended, provides for the automatic grant of nonqualified options for 10,000 shares of Company common stock to a nonemployee director when initially elected or appointed, and currently, the issuance of 10,000 options annually thereafter during the term of directorship. 1991 STOCK OPTION PLAN (THE "1991 SO PLAN"). The 1991 SO Plan was adopted in October 1991 and amended in August 1993. Incentive and nonqualified stock options up to 700,000 shares may be issued under this plan. 1995 LONG-TERM INCENTIVE PLAN (THE "1995 LTI PLAN"). The 1995 LTI Plan was adopted in August 1995. In fiscal 2000, the 1995 LTI Plan was amended to increase the number of shares available for grant to 3,350,000 shares. 44 All options become exercisable upon a change in control of the Company. Options have a two-year vesting schedule, and are generally granted with an exercise price equal to the fair market value of the Company's common stock on the date of grant. The maximum term of options is 10 years from the date of grant. During late fiscal 1999 and early fiscal 2000, the Board of Directors of the Company approved options for 272,171 shares which were priced at fair market value on the dates of Board approval, subject however to shareholder approval of a planned increase in the shares available under the 1995 LTI Plan. Grant date for these options occurred at the August 1999 shareholder meeting. Based upon the difference in fair market value between the Board of Directors approval date and grant date, compensation expense of $319,000 was recorded during fiscal 2000. No compensation expense was recorded in fiscal 1999 or 1998. The following chart summarizes the status of the options at April 30, 2000:
1984 1987 1991 SO Plan Restated Nonemployee and 1995 Plan Directors Plan LTI Plan Total --------- -------------- --------- -------- Number of options outstanding 159,000 440,000 2,257,083 2,856,083 Number of options vested 159,000 436,000 1,358,549 1,953,549 Average exercise price per share $2.91 $9.28 $9.06 $8.75 of options outstanding
The Company has adopted the disclosure only provisions of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock Based Compensation". Pro forma information regarding the net income or loss as calculated under FAS 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. If the Company had elected to recognize compensation costs based on the fair value at the date of grant for awards in fiscal 2000, 1999, and 1998, consistent with the provisions of FAS 123, the Company's net income and earnings per Basic and Diluted share would have been reduced to the following pro forma amounts:
Year Ended April 30: --------------------------------------------------- 2000 1999 1998 ------- ------- --------- Net Income: As reported $6,477 $6,722 $4,803 Pro forma $3,943 $5,034 $3,808 Earnings Per Share - Basic: As reported $0.44 $0.46 $0.33 Pro forma $0.27 $0.34 $0.26 Earnings Per Share - Diluted: As reported $0.43 $0.45 $0.32 Pro forma $0.26 $0.33 $0.25
45 Such pro forma disclosures may not be representative of future compensation cost because options vest over two years and additional grants are made each year. The weighted-average fair values at the date of grant for options granted in fiscal 2000, 1999 and 1998 were estimated using the Black-Scholes option-pricing model, based on the following assumptions: (i) no expected dividend yields for fiscal years 2000, 1999 and 1998; (ii) expected volatility rates of 47.4%, 47.9% and 48.9% for fiscal 2000, 1999 and 1998, respectively; and (iii) expected lives of 6 years for fiscal 2000, 1999 and 1998. The risk-free interest rate applied to fiscal 2000, 1999 and 1998 was 6.7%, 6.0% and 5.8%, respectively. The following table summarizes information about stock options outstanding at April 30, 2000:
Number Weighted-Average Number Range of Exercise Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average Prices April 30, 2000 Contractual Life Exercise Price April 30, 2000 Exercise Price - ----------------------------------------------------------------------------------------------------------------------- $1.25 - $4.99 188,000 1.08 years $2.90 188,000 $2.90 $5.00 - $7.99 412,250 3.29 years 5.94 412,250 5.94 $8.00 - $12.25 2,255,833 7.41 years 9.75 1,353,299 9.67 - ----------------------------------------------------------------------------------------------------------------------- Total: 2,856,083 6.40 years $8.75 1,953,549 $8.23 - -----------------------------------------------------------------------------------------------------------------------
The following table rolls forward the stock option activity for the years ended April 30:
2000 1999 1998 Shares Weighted- Shares Weighted- Shares Weighted- Average Average Average Exercise Price Exercise Price Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 2,069,794 $8.10 1,903,593 $7.64 1,887,199 $6.92 Granted during the year: 892,202 9.89 380,100 9.59 423,700 10.21 Exercised during the year: (70,530) 4.48 (155,242) 6.12 (301,648) 5.93 Forfeited during the year: (35,383) 9.94 (58,657) 8.07 (105,658) 9.19 --------- ----- --------- ----- --------- ------ Outstanding, end of year 2,856,083 $8.75 2,069,794 $8.10 1,903,593 $7.64 Exercisable, end of year 1,953,549 $8.23 1,463,794 $7.39 1,231,552 $6.51 Weighted Average fair value of $6.16 $4.26 $4.37 options granted during each period: - -----------------------------------------------------------------------------------------------------------------------------------
46 NOTE 12 - VOLUNTARY PENSION AND SALARY DEFERRAL PLAN: - -------------------------------------------------------------------------------- The Company has a 401(k) savings plan in which employees may contribute a percentage of their compensation. The Company makes contributions based on employee contributions and length of employee service. Company contributions and expenses under the plan for the years ended April 30, 2000, 1999, and 1998 were $758,000, $753,000, and $763,000, respectively. During fiscal 2000, the Company discontinued an ESOP plan. Plan balances were either distributed to the participants or rolled over to a qualified plan. NOTE 13 - PREFERRED SHARE RIGHTS PURCHASE PLAN: - -------------------------------------------------------------------------------- The Board of Directors of the Company has adopted a Preferred Share Rights Purchase Plan under which a Preferred Share Purchase Right (a "Right") is attached to each share of Company common stock. The Rights will be exercisable only if a person or group acquires 10% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 10% or more of the common stock. Each Right entitles shareholders to buy one one-hundredth of a share of Series B Junior Participating Preferred Stock (the "Series B Preferred Shares") of the Company at a price of $45. If the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase a number of the acquiring company's common shares having a value equal to twice the exercise price of the Right. If a person or group acquires 10% or more of the Company's outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to receive, upon exercise, a number of the Company's common shares having a value equal to two times the exercise price of the Right. Following the acquisition by a person or group of 10% or more of the Company's common stock and prior to an acquisition of 50% or more of such common stock, the Board of Directors may exchange each Right (other than Rights owned by such person or group) for one share of common stock or for one one-hundredth of a Series B Preferred Share. Prior to the acquisition by a person or group of 10% of the Company's common stock, the Rights are redeemable, at the option of the Board, for $.0001 per Right. The Rights expire on September 1, 2009. The Rights do not have voting or dividend rights, and until they become exercisable, have no dilutive effect on the earnings of the Company. NOTE 14- COMMITMENTS AND CONTINGENCIES: - -------------------------------------------------------------------------------- The Company rents certain facilities and equipment under agreements treated for financial reporting purposes as operating leases. The majority of leases currently in effect are renewable for periods of two to five years. Rent expense under these leases was approximately $4.8 million, $3.4 million, and $3.4 million for the years ended April 30, 2000, 1999 and 1998, respectively. 47 Future minimum rents payable under operating leases for years ending April 30 are as follows: Year Ending April 30, ---------------------- 2001 $ 4,545 2002 3,624 2003 2,854 2004 1,783 2005 1,005 Thereafter 1,581 ------- $15,392 The Company has been subject to product liability claims primarily through Spider, its former subsidiary that was sold in September 1997. To minimize the financial impact of product liability risks and adverse judgments, product liability insurance has been purchased in amounts and under terms considered acceptable to management. At any point in time covered by these financial statements, there are outstanding product liability claims against the Company, and incidents are known to management that may result in future claims. Management, in conjunction with defense counsel, periodically reviews the likelihood that such product claims and incidents will result in adverse judgments, the estimated amount of such judgments and costs of defense, and accrues liabilities as appropriate. Recoveries, if any, may be realized from indemnitors, codefendants, insurers or insurance guaranty funds. Management, based on estimates provided by the Company's legal counsel on such claims, believes its insurance coverage is adequate. 48
NOTE 15- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): - -------------------------------------------------------------------------------- Fiscal 2000 Quarters First Second Third Fourth Total - -------------------- -------- -------- ------- -------- Revenue $41,261 $46,471 $50,810 $55,545 $194,087 Gross Profit 17,134 18,575 20,328 22,791 78,828 Net Income 1,300 1,462 1,463 2,252 6,477 Earnings Per share: Basic .09 .10 .10 .15 .44 Diluted * .09 .10 .10 .15 .43 Fiscal 1999 Quarters First Second Third Fourth Total - -------------------- -------- -------- ------- -------- Revenue $36,422 $38,383 $33,554 $39,843 $148,202 Gross Profit 15,835 16,928 15,585 16,883 65,231 Net Income 1,796 2,189 1,443 1,294 6,722 Earnings Per share: Basic .12 .15 .10 .09 .46 Diluted * .12 .15 .10 .09 .45
* The total of the four quarters does not equal the year due to rounding. 49
NOTE 16- FOREIGN OPERATIONS: - -------------------------------------------------------------------------------- UNITED OTHER ADJUSTMENTS & STATES EUROPE ASIA FOREIGN ELIMINATIONS CONSOLIDATED - -------------------------------------------------------------------------------------------------------------------------------- FISCAL 2000 Revenues: Customers (1) $101,946 $54,332 $16,490 $21,319 $- $194,087 Inter-area (2) 23,128 21,797 1,187 1,622 (47,734) - -------------------------------------------------------------------------------------------------------------------------------- Total revenues $125,074 $76,129 $17,677 $22,941 $(47,734) $194,087 Long-Lived Assets $26,719 $28,604 $1,793 $9,187 $66,303 FISCAL 1999 - -------------------------------------------------------------------------------------------------------------------------------- Revenues: Customers (1) $74,594 $42,414 $14,877 $16,317 $- $148,202 Inter-area (2) 22,917 - 1,793 1,441 (26,151) - -------------------------------------------------------------------------------------------------------------------------------- Total revenues $97,511 $42,414 $16,670 $17,758 $(26,151) $148,202 Long-Lived Assets $21,095 $26,120 $1,870 $8,855 $57,940 FISCAL 1998 - -------------------------------------------------------------------------------------------------------------------------------- Revenues: Customers (1) $86,561 $36,041 $18,807 $18,073 $- $159,482 Inter-area (2) 16,772 - 3,053 - (19,825) - -------------------------------------------------------------------------------------------------------------------------------- Total revenues $103,333 $36,041 $21,860 $18,073 $(19,825) $159,482 Long-Lived Assets $15,924 $5,155 $1,555 $9,471 $32,105
(1) U.S. sales to unaffiliated customers in foreign countries were $5.7 million, $4 million and $5.3 million in fiscal 2000, 1999, and 1998, respectively. (2) Inter-area sales to affiliates represent products that were transferred between geographic areas at negotiated prices. These amounts have been eliminated in the consolidation. 50 FLOW INTERNATIONAL CORPORATION SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Additions ------------------------ Balance at Charged to Charged Balance Beginning Costs and to Other at End CLASSIFICATION of Period Expenses Accounts Deductions * of Period ------------------------------------------------------------------------ YEAR ENDED APRIL 30: ALLOWANCE FOR DOUBTFUL ACCOUNTS 2000 $766 $469 $31 $(367) $899 1999 669 373 (22) (254) 766 1998 1,008 508 (377) (470) 669 PROVISION FOR SLOW-MOVING AND OBSOLETE INVENTORY 2000 $2,314 $387 $(45) $(753) $1,903 1999 2,527 365 328 (906) 2,314 1998 1,897 1,060 (224) (206) 2,527
- ---------- * Write-offs of uncollectible accounts and disposal of obsolete inventory. 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------------------------------------------------------------------------------- Information regarding directors and executive officers of the registrant is incorporated herein by reference from the Company's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------------------------------------------------------- Information regarding executive compensation is incorporated herein by reference from the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------------------------------------------------------------------------------- Information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------------------------------- Information regarding certain relationships and related transactions is incorporated herein by reference from the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------------- (a) The following documents are filed as a part of this report: 1. Consolidated Financial Statements. See Item 8 of Part II for a list of the Financial Statements filed as part of this report. 2. Financial Statement Schedules. See Item 8 of Part II for a list of the Financial Statement Schedules filed as part of this report. 3. Exhibits. See subparagraph (c) below. (b) Reports on Form 8-K - None. (c) Exhibits. 52 EXHIBIT NUMBER 3.1 Articles of Incorporation, filed with the state of Washington October 1, 1998. (Incorporated by reference to Exhibit 3.1 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1999.) 3.2 By-Laws of Flow International Corporation. (Incorporated by reference to Exhibit 3.1 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1999.) 4.1 Certificate of Designation of Series B Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 4.5 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1990.) 4.2 Amended and Restated Rights Agreement dated as of September 1, 1999, between Flow International Corporation and ChaseMellon Shareholder Services, L.L.C. (Incorporated by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated September 1, 1999.) 10.1 Flow International Corporation 1987 Stock Option Plan for Nonemployee Directors, as amended. (Incorporated by reference to Exhibit 10.5 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1994.) 10.2 Flow International Corporation 1995 Long-Term Incentive Plan. 10.3 Flow International Corporation Voluntary Pension and Salary Deferral Plan and Trust Agreement, as amended and restated effective January 1, 1999. 10.4 Lease dated September 24, 1991, between Flow International and Birtcher LP/LC Partnership, together with Addendum to Lease. (Incorporated by reference to Exhibit 10.25 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1992.) 10.5 Credit agreement amount Flow International Corporation, as borrower, Bank of America National Trust and Savings Association d/b/a SeaFirst Bank and U.S. Bank, National Association, as lenders, and Bank of America National Trust and Savings Association d/b/a SeaFirst Bank as agent for lenders dated August 31, 1998. (Incorporated by reference to Exhibit 10.14 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1999.) 10.6 Amendment Number One to Credit Agreement dated March 1999, between Flow International Corporation and Bank of America National Trust and Savings Association d/b/a SeaFirst Bank. (Incorporated by reference to Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1999.) 10.7 Amendment Number Two to Credit Agreement dated June 21, 1999 between Flow International Corporation and U.S. Bank of Washington, N.A. (Incorporated by reference to Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1999.) 10.8 Amendment Number Three to Credit Agreement dated November 2, 1999 among Bank of America, N.A., U.S. Bank National Association, Bank of America, N.A. and Flow International Corporation. 53 10.9 Amendment Number Four to Credit Agreement dated April 28, 2000 among Bank of America, N.A., U.S. Bank National Association, Bank of America, N.A. and Flow International Corporation. 10.10 Amendment Number Five to Credit Agreement dated June 1, 2000 among Bank of America, N.A., U.S. Bank National Association, Bank of America, N.A. and Flow International Corporation. 10.11 Note purchase agreement dated September 1, 1995. (Incorporated by reference to Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the period ended October 31, 1995.) 10.12 First amendment to Note Purchase Agreement dated July 16, 1997. (Incorporated by reference to Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1997.) 10.13 Second Amendment to Note Purchase Agreement dated as of April 30, 2000 between Flow International Corporation and Connecticut General Life Insurance Company and Life Insurance Company of North America. 10.14 Form of Change in Control Agreement. (Incorporated by reference to Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the year ended April 30, 1996.) 10.15 Asset Purchase Agreement dated August 11, 1999 among Spearhead Automated Systems, Inc., Stephen R. Howard, Liberty Tool and Engineering Corporation and Flow International Corporation. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLOW INTERNATIONAL CORPORATION July 26, 2000 /s/ Ronald W. Tarrant ----------------------- Ronald W. Tarrant Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the behalf of the registrant and in the capacities on this 26th day of July, 2000 Signature Title --------- ------- /s/ Ronald W. Tarrant Chairman, President, Chief Executive Officer - --------------------- (Principal Executive Officer) Ronald W. Tarrant /s/ Stephen D. Reichenbach Executive Vice President, - -------------------------- Chief Financial Officer Stephen D. Reichenbach (Principal Financial Officer & Principal Accounting Officer) /s/ Ronald D. Barbaro Director - -------------------------- Ronald D. Barbaro /s/ Daniel J. Evans Director - -------------------------- Daniel J. Evans /s/ Kathryn L. Munro Director - -------------------------- Kathryn L. Munro 55 Signature Title --------- ------- /s/ Arlen I. Prentice Director - ------------------------ Arlen I. Prentice /s/ J. Michael Ribaudo Director - ------------------------- J. Michael Ribaudo /s/ Kenneth M. Roberts Director - ------------------------- Kenneth M. Roberts /s/ Sandra F. Rorem Director - ------------------------- Sandra F. Rorem /s/ Dean D. Thornton Director - ------------------------- Dean D. Thornton 56 EX-10.2 2 ex-10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 FLOW INTERNATIONAL CORPORATION 1995 LONG-TERM INCENTIVE COMPENSATION PLAN SECTION 1. PURPOSE The purpose of the Flow International Corporation 1995 Long-Term Incentive Compensation Plan (the "Plan") is to enhance the long-term profitability and stockholder value of Flow International Corporation, a Delaware corporation (the "Company"), by offering incentives and rewards to those employees, consultants and agents of the Company and its Subsidiaries (as defined in Section 2 below) who are key to the Company's growth and success, and to encourage them to remain in the service of the Company and its Subsidiaries and to acquire and maintain stock ownership in the Company. SECTION 2. DEFINITIONS For purposes of the Plan, the following terms shall be defined as set forth below: 2.1 AWARD "Award" means an award or grant made to a Participant pursuant to the Plan, including, without limitation, awards or grants of Options, Stock Appreciation Rights, Stock Awards, Other Stock-Based Awards or any combination of the foregoing (including any Dividend Equivalent Rights granted in connection with such Awards). 2.2 BOARD "Board" means the Board of Directors of the Company. 2.3 CAUSE "Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Plan Administrator, and its determination shall be conclusive and binding. 2.4 CODE "Code" means the Internal Revenue Code of 1986, as amended from time to time. -1- 2.5 COMMON STOCK "Common Stock" means the common stock, par value $.01 per share, of the Company. 2.6 CORPORATE TRANSACTION "Corporate Transaction" means any of the following events: (a) Approval by the holders of the Common Stock of any merger or consolidation of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock are converted into cash, securities or other property, other than a merger of the Company in which the holders of the Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (b) Approval by the holders of the Common Stock of any sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the Company's assets other than a transfer of the Company's assets to a majority-owned subsidiary (as the term "subsidiary" is defined in Section 8.3 of the Plan) of the Company; or (c) Approval by the holders of the Common Stock of any plan or proposal for the liquidation or dissolution of the Company. 2.7 DISABILITY "Disability" means "disability" as that term is defined for purposes of the Company's Long Term Disability Income Plan or other similar successor plan applicable to salaried employees. 2.8 DIVIDEND EQUIVALENT RIGHT "Dividend Equivalent Right" means an Award granted under Section 12 of the Plan. 2.9 EARLY RETIREMENT "Early Retirement" means retirement as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.10 EXCHANGE ACT "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.11 FAIR MARKET VALUE "Fair Market Value" means the closing price for the Common Stock as reported in THE WALL STREET JOURNAL NASDAQ National Market Issues (or similar successor transactions reports) for a single trading day. 2.12 GOOD REASON "Good Reason" means the occurrence of any of the following events or conditions: -2- (a) a change in the Holder's status, title, position or responsibilities (including reporting responsibilities) that, in the Holder's reasonable judgment, represents a substantial reduction of the status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Holder of any duties or responsibilities that, in the Holder's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Holder from or failure to reappoint or reelect the Holder to any of such positions, except in connection with the termination of the Holder's employment for Cause, for Disability or as a result of his or her death, or by the Holder other than for Good Reason; (b) a reduction in the Holder's annual base salary; (c) the Company's requiring the Holder (without the Holder's consent) to be based at any place outside a 35-mile radius of his or her place of employment prior to a Corporate Transaction, except for reasonably required travel on the Company's business that is not materially greater than such travel requirements prior to the Corporate Transaction; (d) the Company's failure to (i) continue in effect any material compensation or benefit plan (or the substantial equivalent thereof in which the Holder was participating at the time of a Corporate Transaction, including, but not limited to, the Plan, or (ii) provide the Holder with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Corporate Transaction (or as in effect following the Corporate Transaction, if greater); (e) any material breach by the Company of any provision of the Plan; or (f) any purported termination of the Holder's employment or service for Cause by the Company that does not comply with the terms of the Plan. 2.13 GRANT DATE "Grant Date" means the date designated in a resolution of the Plan Administrator as the date an Award is granted. If the Plan Administrator does not designate a Grant Date in the resolution, the Grant Date shall be the date the Plan Administrator adopted the resolution. 2.14 HOLDER "Holder" means the Participant to whom an Award is granted, or the personal representative of a Holder who has died. 2.15 INCENTIVE STOCK OPTION "Incentive Stock Option" means an option to purchase Common Stock granted under Section 7 of the Plan with the intention that it qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. 2.16 NONQUALIFIED STOCK OPTION "Nonqualified Stock Option" means an option to purchase Common Stock granted under Section 7 of the Plan other than an Incentive Stock Option. -3- 2.17 OPTION "Option" means the right to purchase Common Stock granted under Section 7 of the Plan. 2.18 OTHER STOCK-BASED AWARD "Other Stock-Based Award" means an Award granted under Section 11 of the Plan. 2.19 PARTICIPANT "Participant" means an individual who is a Holder of an Award or, as the context may require, any employee, consultant or agent of the Company or a Subsidiary who has been designated by the Plan Administrator as eligible to participate in the Plan. 2.20 PLAN ADMINISTRATOR "Plan Administrator" means any committee of the Board designated to administer the Plan under Section 3.1 of the Plan. 2.21 RESTRICTED STOCK "Restricted Stock" means shares of Common Stock granted under Section 10 of the Plan, the rights of ownership of which are subject to restrictions prescribed by the Plan Administrator. 2.22 RETIREMENT "Retirement" means retirement as of the individual's normal retirement date under the Company's Voluntary Pension and Salary Deferral Plan or other similar successor plan applicable to salaried employees. 2.23 STOCK APPRECIATION RIGHT "Stock Appreciation Right" means an Award granted under Section 9 of the Plan. 2.24 STOCK AWARD "Stock Award" means an Award granted under Section 10 of the Plan. 2.25 SUBSIDIARY "Subsidiary," except as expressly provided otherwise, means any entity that is directly or indirectly controlled by the Company or in which the Company has a significant ownership interest, as determined by the Plan Administrator, and any entity that may become a direct or indirect parent of the Company. 2.26 WINDOW PERIOD "Window Period" means a period of 10 days on which there is trading in the Common Stock on the NASDAQ National Market, beginning with the second trading day after disclosure by the Company to the public of its earnings for the fiscal period just ended and ending with the eleventh such day. -4- 2.27 WINDOW PERIOD FAIR MARKET VALUE "Window Period Fair Market Value" means the highest Fair Market Value during a Window Period. SECTION 3. ADMINISTRATION 3.1 PLAN ADMINISTRATOR The Plan shall be administered by a committee or committees (which term includes subcommittees) appointed by, and consisting of one or more members of, the Board. The Board may delegate the responsibility for administering the Plan with respect to designated classes of eligible Participants to different committees, subject to such limitations as the Board deems appropriate. Committee members shall serve for such term as the Board may determine, subject to removal by the Board at any time. The composition of any committee responsible for administering the Plan with respect to officers and directors of the Company who are subject to Section 16 of the Exchange Act with respect to securities of the Company shall comply with the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, or any successor provision. 3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR Except for the terms and conditions explicitly set forth in the Plan, the Plan Administrator shall have exclusive authority, in its discretion, to determine all matters relating to Awards under the Plan, including the selection of individuals to be granted Awards, the type of Awards, the number of shares of Common Stock subject to an Award, all terms, conditions, restrictions and limitations, if any, of an Award and the terms of any instrument that evidences the Award. The Plan Administrator shall also have exclusive authority to interpret the Plan and may from time to time adopt, and change, rules and regulations of general application for the Plan's administration. The Plan Administrator's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the Plan, shall be conclusive and binding on all par-ties involved or affected. The Plan Administrator may delegate administrative duties to such of the Company's officers as it so determines. SECTION 4. STOCK SUBJECT TO THE PLAN 4.1 AUTHORIZED NUMBER OF SHARES Subject to adjustment from time to time as provided in Section 16.1, a maximum of 1,350,000 shares of Common Stock shall be available for issuance under the Plan, except that any shares of Common Stock that, as of the date the Plan is approved by the Company's stockholders, are available for issuance under the Company's 1991 Stock Option Plan and 1984 Restated Stock Option Plan (or that thereafter become available for issuance under those plans in accordance with -5- their terms as in effect on such date) and that are not issued under those plans shall be added to the aggregate number of shares available for issuance under the Plan. No more than 250,000 shares may be issued as Stock Awards or Other Stock-Based Awards under the Plan. Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares. 4.2 INDIVIDUAL AWARD LIMIT Subject to adjustment from time to time as provided in Section 16.1, not more than 250,000 shares of Common Stock may be made subject to Awards under the Plan to any Participant in any one fiscal year of the Company, such limitation to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. 4.3 REUSE OF SHARES Any shares of Common Stock that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in shares), including, without limitation, in connection with the cancellation of an Award and the grant of a replacement Award, shall again be available for issuance in connection with future grants of Awards under the Plan. Shares that are subject to tandem Awards shall be counted only once. SECTION 5. ELIGIBILITY Awards may be granted under the Plan to those officers and key employees (including directors who are also employees) of the Company and its Subsidiaries as the Plan Administrator from time to time selects. Awards may also be made to consultants and agents who provide services to the Company and its Subsidiaries. SECTION 6. AWARDS 6.1 FORM AND GRANT OF AWARDS The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of Awards to be made under the Plan. Such Awards may include, but are not limited to, Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Stock Awards, Other Stock-Based Awards and Dividend Equivalent Rights. Awards may be granted singly, in combination or in tandem so that the settlement or payment of one automatically reduces or cancels the other. Awards may also be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee or compensation plan of the Company. -6- 6.2 ACQUIRED COMPANY AWARDS Notwithstanding anything in the Plan to the contrary, the Plan Administrator may grant Awards under the Plan in substitution for awards issued under other plans, or assume under the Plan awards issued under other plans, if the other plans are or were plans of other entities ("Acquired Entities") (or the parent of the acquired entity) and the new Award is substituted, or the old award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation (the "Acquisition Transaction"). In the event that a written agreement pursuant to which the Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the acquired entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, except as may be required for compliance with Rule 16b-3 under the Exchange Act, and the persons holding such Awards shall be deemed to be Participants and Holders. SECTION 7. AWARDS OF OPTIONS 7.1 GRANT OF OPTIONS The Plan Administrator is authorized under the Plan, in its sole discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock Options, which shall be appropriately designated. 7.2 OPTION EXERCISE PRICE The exercise price for shares purchased under an Option shall be as determined by the Plan Administrator, but shall not be less than 100% of the Fair Market Value of the Common Stock on the Grant Date with respect to Incentive Stock Options. 7.3 TERM OF OPTIONS The term of each Option shall be as established by the Plan Administrator or, if not so established, shall be 10 years from the Grant Date. 7.4 EXERCISE OF OPTIONS The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which or the installments in which the Option shall become exercisable, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will become exercisable according to the following schedule, which may be waived or modified by the Plan Administrator at any time: -7- PERIOD OF HOLDER'S CONTINUOUS EMPLOYMENT OR SERVICE WITH THE COMPANY OR ITS SUBSIDIARIES PERCENT OF TOTAL OPTION THAT IS FROM THE OPTION GRANT DATE EXERCISABLE ------------------------------------ ----------------------------------- after one year 50% after two years 100% To the extent that the right to purchase shares has accrued thereunder, an Option may be exercised from time to time by written notice to the Company, in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised and accompanied by payment in full as described in Section 7.5. 7.5 PAYMENT OF EXERCISE PRICE The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash, except that the Plan Administrator may, either at the time the Option is granted or at any time before it is exercised and subject to such limitations as the Plan Administrator may determine, authorize payment in cash and/or one or more of the following alternative forms: (i) Common Stock already owned by the Holder for at least six months (or any shorter period necessary to avoid a charge to the Company's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price; (ii) a promissory note authorized pursuant to Section 13; (iii) delivery of a properly executed exercise notice, together with irrevocable instructions, to (a) a brokerage firm designated by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and (b) the Company to deliver the certificates for such purchased shares directly to such brokerage firm, all in accordance with the regulations of the Federal Reserve Board; or (iv) such other consideration as the Plan Administrator may permit. 7.6 POST-TERMINATION EXERCISES The Plan Administrator shall establish and set forth in each instrument that evidences an Option whether the Option will continue to be exercisable, and the terms and conditions of such exercise, if a Holder ceases to be employed by, or to provide services to, the Company or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time. In case of termination of the Holder's employment or services other than by reason of death or Cause, the Option shall be exercisable, to the extent of the number of shares purchasable by the Holder at the date of such termination, only: (i) within three years if the termination of the Holder's employment or services are coincident with Retirement, Early Retirement at the Company's request or Disability or (ii) within three months after the date the Holder ceases to be an employee, consultant or agent of the Company or a Subsidiary if termination of the Holder's employment or services is for any reason other than Retirement, Early Retirement at the Company's request, or Disability, but in no event later than the remaining term of the Option. Any Option exercisable at the time of the Holder's death may be exercised, to the extent of the number of shares purchasable by the Holder at the date of the Holder's death by the personal representative of the Holder's estate entitled thereto at any time or from time to time -8- within three years after the date of death, but in no event later than the remaining term of the Option. In case of termination of the Holder's employment or services for Cause, the Option shall automatically terminate upon first notification to the Holder of such termination, unless the Plan Administrator determines otherwise. If a Holder's employment or services with the Company are suspended pending an investigation of whether the Holder shall be terminated for Cause, all the Holder's rights under any Option likewise shall be suspended during the period of investigation. A transfer of employment or services between or among the Company and its Subsidiaries shall not be considered a termination of employment or services. Unless the Plan Administrator determines otherwise, a leave of absence approved in accordance with Company procedures shall not be considered a termination of employment or services, except that with respect to Incentive Stock Options such leave of absence shall be subject to any requirements of Section 422 of the Code. SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS To the extent required by Section 422 of the Code, Incentive Stock Options shall be subject to the following additional terms and conditions: 8.1 DOLLAR LIMITATION To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time during any calendar year (under the Plan and all other stock option plans of the Company) exceeds $100,000, such portion in excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event the Participant holds two or more such Options that become exercisable for the first time in the same calendar year, such limitation shall be applied on the basis of the order in which such Options are granted. 8.2 10% STOCKHOLDERS If a Participant owns 10% or more of the total voting power of all classes of the Company's stock, then the exercise price per share of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date and the Option term shall not exceed five years. 8.3 ELIGIBLE EMPLOYEES Individuals who are not employees of the Company or one of its parent corporations or subsidiary corporations may not be granted Incentive Stock Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary corporation" shall have the meanings attributed to those terms for purposes of Section 422 of the Code. 8.4 TERM The term of an Incentive Stock Option shall not exceed 10 years. -9- 8.5 EXERCISABILITY An Option designated as an Incentive Stock Option must be exercised within three months after termination of employment for reasons other than death or one year after termination of employment or services due to Disability to qualify for Incentive Stock Option tax treatment. SECTION 9. STOCK APPRECIATION RIGHTS 9.1 GRANT OF STOCK APPRECIATION RIGHTS The Plan Administrator may grant a Stock Appreciation Right separately or in tandem with a related Option. 9.2 TANDEM STOCK APPRECIATION RIGHTS A Stock Appreciation Right granted in tandem with a related Option will give the Holder the right to surrender to the Company all or a portion of the related Option and to receive an appreciation distribution (in shares of Common Stock or cash or any combination of shares and cash, as the Plan Administrator shall determine at any time) in an amount equal to the excess of the Fair Market Value for the Window Period during which the Stock Appreciation Right is exercised over the exercise price per share of the right, which shall be the same as the exercise price of the related Option, except that if the right is exercised during a Window Period, the amount will be equal to the excess of the Window Period Fair Market Value for the Window Period during which the Stock Appreciation Plight is exercised over the exercise price per share of the right. A tandem Stock Appreciation Right will have the same other terms and provisions as the related Option. Upon and to the extent a tandem Stock Appreciation Right is exercised, the related Option will terminate. 9.3 STAND-ALONE STOCK APPRECIATION RIGHTS A Stock Appreciation Right granted separately and not in tandem with an Option will give the Holder the right to receive an appreciation distribution in an amount equal to the excess of the Fair Market Value for the date the Stock Appreciation Right is exercised over the per share exercise price of the right, except that if the right is exercised during a Window Period, the amount will be equal to the excess of the Window Period Fair Market Value for the Window Period during which the right is exercised over the per share exercise price of the right. A stand-alone Stock Appreciation Right will have such terms as the Plan Administrator may determine, except that the term of the right, if not otherwise established by the Plan Administrator, shall be 10 years from the Grant Date. 9.4 EXERCISE OF STOCK APPRECIATION RIGHTS Unless otherwise provided by the Plan Administrator in the instrument that evidences the Stock Appreciation Right, the provisions of Section 7.6 relating to the termination of a Holder's employment or services shall apply equally, to the extent applicable, to the Holder of a Stock Appreciation Right. Stock Appreciation Rights held by Participants who are subject to Section 16 of the Exchange Act may be exercised solely in accordance with the requirements for compliance with Rule 16b-3 under the Exchange Act. -10- SECTION 10. STOCK AWARDS 10.1 GRANT OF STOCK AWARDS The Plan Administrator is authorized to make Awards of Common Stock to Participants on such terms and conditions and subject to such restrictions, if any (whether based on performance standards, periods of service or otherwise), as the Plan Administrator shall determine, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award. The terms, conditions and restrictions that the Plan Administrator shall have the power to determine shall include, without limitation, the manner in which shares subject to Stock Awards are held during the periods they are subject to restrictions and the circumstances under which forfeiture of Restricted Stock shall occur by reason of termination of the Holder's services. 10.2 ISSUANCE OF SHARES Upon the satisfaction of any terms, conditions and restrictions prescribed in respect to a Stock Award, or upon the Holder's release from any terms, conditions and restrictions of a Stock Award, as determined by the Plan Administrator, the Company shall deliver, as soon as practicable, to the Holder or, in the case of the Holder's death, to the personal representative of the Holder's estate or as the appropriate court directs, a stock certificate for the appropriate number of shares of Common Stock. 10.3 WAIVER OF RESTRICTIONS Notwithstanding any other provisions of the Plan, the Plan Administrator may, in its sole discretion, waive the forfeiture period and any other terms, conditions or restrictions on any Restricted Stock under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate. SECTION 11. OTHER STOCK-BASED AWARDS The Plan Administrator may grant other Awards under the Plan pursuant to which shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 10) are or may in the future be acquired, or Awards denominated in stock units, including ones valued using measures other than market value. Such Other Stock-Based Awards may be granted alone or in addition to or in tandem with any Award of any type granted under the Plan and must be consistent with the Plan's purpose. -11- SECTION 12. DIVIDEND EQUIVALENT RIGHTS Any Awards under the Plan may, in the Plan Administrator's discretion, earn Dividend Equivalent Rights. In respect of any Award that is outstanding on the dividend record date for Common Stock, the Participant may be credited with an amount equal to the cash or stock dividends or other distributions that would have been paid on the shares of Common Stock covered by such Award had such covered shares been issued and outstanding on such dividend record date. The Plan Administrator shall establish such rules and procedures governing the crediting of Dividend Equivalent Plights, including the timing, form of payment and payment contingencies of such Dividend Equivalent Rights, as it deems are appropriate or necessary. SECTION 13. LOANS, LOAN GUARANTEES AND INSTALLMENT PAYMENTS To assist a Holder (including a Holder who is an officer or director of the Company) in acquiring shares of Common Stock pursuant to an Award granted under the Plan, the Plan Administrator may authorize, either at the Grant Date or at any time before the acquisition of Common Stock pursuant to the Award, (i) the extension of a loan to the Holder by the Company, (ii) the payment by the Holder of the purchase price, if any, of the Common Stock in installments, or (iii) the guarantee by the Company of a loan obtained by the grantee from a third party. The terms of any loans, installment payments or guarantees, including the interest rate and terms of repayment, will be subject to the Plan Administrator's discretion. Loans, installment payments and guarantees may be granted with or without security. The maximum credit available is the purchase price, if any, of the Common Stock acquired plus the maximum federal and state income and employment tax liability that may be incurred in connection with the acquisition. SECTION 14. ASSIGNABILITY No Option, Stock Appreciation Right, Other Stock-Based Award or Dividend Equivalent Right granted under the Plan may be assigned or transferred by the Holder other than by will or by the laws of descent and distribution, and during the Holder's lifetime, such Awards may be exercised only by the Holder. Notwithstanding the foregoing, and to the extent permitted by Rule 16b-3 under the Exchange Act and Section 422 of the Code, the Plan Administrator, in its sole discretion, may permit such assignment, transfer and exercisability and may permit a Holder of such Awards to designate a beneficiary who may exercise the Award or receive compensation under the Award after the Holder's death. -12- SECTION 15. ADJUSTMENTS 15.1 ADJUSTMENT OF SHARES In the event that at any time or from time to time a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (i) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (ii) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Common Stock of the Company, then the Plan Administrator, in its sole discretion, shall make such equitable adjustments as it shall deem appropriate in the circumstances in (a) the maximum number of and class of securities subject to the Plan as set forth in Section 4. 1, (b) the maximum number and class of securities that may be made subject to Awards to any individual Participant as set forth in Section 4.2, and (e) the number and class of securities that a-re subject to any outstanding Award and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding. 15.2 CORPORATE TRANSACTION Except as otherwise provided in the instrument that evidences the Award, in the event of any Corporate Transaction, each Option, Stock Appreciation Right or Stock Award that is at the time outstanding shall automatically accelerate so that each such Award shall, immediately prior to the specified effective date for the Corporate Transaction, become 100% vested, except that such acceleration will not occur if in the opinion of the Company's accountants it would render unavailable "pooling of interest" accounting for a Corporate Transaction that would otherwise qualify for such accounting treatment. All such Awards shall terminate and cease to remain outstanding immediately following the consummation of the Corporate Transaction, except to the extent assumed by the successor corporation or its parent corporation. Any such Awards that are assumed or replaced in the Corporate Transaction and do not otherwise accelerate at that time shall be accelerated in the event the Holder's employment or services should subsequently terminate within two years following such Corporate Transaction, unless such employment or services are terminated by the Company for Cause or by the Holder voluntarily without Good Reason. Notwithstanding the foregoing, no Incentive Stock Option shall become exercisable pursuant to this Section 15.2 without the Holder's consent, if the result would be to cause such Option not to be treated as an Incentive Stock Option (whether by reason of the annual limitation described in Section 8.1 or otherwise). 15.3 FURTHER ADJUSTMENT OF AWARDS Without limiting the preceding Section 15.2, and subject to the limitations set forth in Section 11, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Company, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended -13- or additional time for exercise, payment or settlement or lifting restrictions, differing methods for calculating payments or settlements, alternate forms and amounts of payments and settlements and other modifications, and the Plan Administrator may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Plan Administrator may take such actions before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation or change in control that is the reason for such action. 15.4 LIMITATIONS The grant of Awards will in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. SECTION 16. WITHHOLDING OF TAXES The Company may require the Holder to pay to the Company the amount of any withholding taxes that the Company is required to withhold with respect to the grant, exercise, payment or settlement of any Award. In such instances, the Plan Administrator may, in its discretion and subject to the Plan and applicable law, permit the Holder to satisfy withholding obligations, in whole or in part, by paying cash, by electing to have the Company withhold shares of Common Stock or by transferring shares of Common Stock to the Company, in such amounts as are equivalent to the Fair Market Value of the withholding obligation. SECTION 17. AMENDMENT AND TERMINATION OF PLAN 17.1 AMENDMENT OF PLAN The Plan may be amended by the stockholders of the Company. The Board may also amend the Plan in such respects as it shall deem advisable; however, to the extent required for compliance with Rule 16b-3 under the Exchange Act, Section 422 of the Code or any applicable law or regulation, stockholder approval will be required for any amendment that will (i) increase the total number of shares as to which Options may be granted or which may be used in payment of Stock Appreciation Rights, Performance Awards, Other Stock-Based Awards or Dividend Equivalent Rights under the Plan or that may be issued as Restricted Stock, (ii) materially modify the class of persons eligible to receive Awards, (iii) materially increase the benefits accruing to Participants under the Plan, or (iv) otherwise require stockholder approval under any applicable law or regulation. 17.2 TERMINATION OF PLAN The stockholders or the Board may suspend or terminate the Plan at any time. The Plan will have no fixed expiration date; provided, however, that no Incentive Stock Options may be granted more than 10 years after the Plan's effective date. -14- 17.3 CONSENT OF HOLDER The amendment or termination of the Plan shall not, without the consent of the Holder of any Award under the Plan, alter or impair any rights or obligations under any Award theretofore granted under the Plan. SECTION 18. GENERAL 18.1 NOTIFICATION The Plan Administrator shall promptly notify a Participant of an Award, and a written grant shall promptly be executed and delivered by or on behalf of the Company. 18.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS Neither the Plan, participation in the Plan as a Participant nor any action of the Plan Administrator taken under the Plan shall be construed as giving any Participant or employee of the Company any right to be retained in the employ of the Company or limit the Company's right to terminate the employment or services of the Participant. 18.3 REGISTRATION; CERTIFICATES FOR SHARES The Company shall be under no obligation to any Participant to register for offering or resale under the Securities Act of 1933, as amended, or register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal and state securities laws. 18.4 NO RIGHTS AS A STOCKHOLDER No Option, Stock Appreciation Right or Other Stock-Based Award shall entitle the Holder to any dividend (except to the extent provided in an Award of Dividend Equivalent Rights), voting or other right of a stockholder unless and until the date of issuance under the Plan of the shares that are the subject of such Awards, free of all applicable restrictions. 18.5 COMPLIANCE WITH LAWS AND REGULATIONS It is the Company's intention that, so long as any of the Company's equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, the Plan shall comply in all respects with Rule 16b-3 under the Exchange Act and, if any Plan provision is later found not to be in compliance with such Rule, the provision shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. Notwithstanding anything in the Plan to the contrary, the Board, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. Additionally, in interpreting and applying -15- the provisions of the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by law, be construed as an "Incentive stock option" within the meaning of Section 422 of the Code. 18.6 NO TRUST OR FUND The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company. 18.7 GOVERNING LAW The Plan and all interpretations of its provisions shall be governed by the laws of the state of Washington and applicable federal laws. 18.8 SEVERABILITY If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator's determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect. SECTION 19. EFFECTIVE DATE The Plan's effective date is the date on which it is adopted by the Board, so long as it is approved by the Company's stockholders at any time within 12 months of such adoption or, if earlier, and to the extent required for compliance with Rule 16b-3 under the Exchange Act, at the next annual meeting of the Company's stockholders after adoption of the Plan by the Board. ADOPTED BY THE BOARD ON JUNE 6, 1995, AND APPROVED BY THE COMPANY'S STOCKHOLDERS ON AUGUST 30, 1995. A SUBSEQUENT AMENDMENT TO THE PLAN INCREASING THE AMOUNT OF SHARES AVAILABLE FROM 750,000 TO 1,350,000 WAS APPROVED BY THE BOARD ON JUNE 11, 1997, AND APPROVED BY THE COMPANY'S STOCKHOLDERS ON AUGUST 27, 1997. A SECOND SUBSEQUENT AMENDMENT TO THE PLAN INCREASING THE AMOUNT OF SHARES AVAILABLE FROM 1,350,000 TO 3,350,00 WAS APPROVED BY THE BOARD ON JUNE 8, 1999, AND APPROVED BY THE COMPANY'S STOCKHOLDERS ON AUGUST 25, 1999. -16- EX-10.3 3 ex-10_3.txt EXHIBIT 10.3 FLOW INTERNATIONAL CORPORATION VOLUNTARY PENSION AND SALARY DEFERRAL PLAN AND TRUST AGREEMENT ----------------------------------------- ORIGINALLY EFFECTIVE OCTOBER 1, 1986 AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1999 FLOW INTERNATIONAL CORPORATION VOLUNTARY PENSION AND SALARY DEFERRAL PLAN AND TRUST AGREEMENT (AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1999) TABLE OF CONTENTS
PAGE NO. -------- ALPHABETICAL LISTING OF DEFINITIONS vi-vii ARTICLE I - DEFINITIONS 1 1.01 PLAN......................................................................1 1.02 EMPLOYER..................................................................1 1.03 TRUSTEE...................................................................1 1.04 PLAN ADMINISTRATOR........................................................1 1.05 ADVISORY COMMITTEE........................................................1 1.06 EMPLOYEE..................................................................1 1.07 HIGHLY COMPENSATED EMPLOYEE...............................................1 1.08 PARTICIPANT...............................................................2 1.09 BENEFICIARY...............................................................2 1.10 COMPENSATION DEFINITIONS..................................................2 1.11 ACCOUNT...................................................................2 1.12 ACCRUED BENEFIT...........................................................3 1.13 NONFORFEITABLE............................................................3 1.14 PLAN YEAR.................................................................3 1.15 EFFECTIVE DATE............................................................3 1.16 PLAN ENTRY DATE...........................................................3 1.17 ACCOUNTING DATE...........................................................3 1.18 TRUST.....................................................................3 1.19 TRUST FUND................................................................3 1.20 NONTRANSFERABLE ANNUITY...................................................3 1.21 ERISA.....................................................................3 1.22 CODE......................................................................3 1.23 SERVICE...................................................................3 1.24 HOUR OF SERVICE...........................................................3 1.25 DISABILITY................................................................4 1.26 SERVICE FOR PREDECESSOR EMPLOYER..........................................4 1.27 RELATED EMPLOYER..........................................................4 1.28 LEASED EMPLOYEES..........................................................4 1.29 DETERMINATION OF TOP HEAVY STATUS.........................................5 1.30 "EMPLOYER STOCK\..........................................................6 1.31 "EMPLOYER STOCK FUND\.....................................................6 1.32 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER.................................6 ARTICLE II - EMPLOYEE PARTICIPANTS 7 2.01 ELIGIBILITY...............................................................7 2.02 YEAR OF SERVICE - PARTICIPATION...........................................7 2.03 BREAK IN SERVICE - PARTICIPATION..........................................7 2.04 PARTICIPATION UPON RE-EMPLOYMENT..........................................7 ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES 8 3.01 AMOUNT....................................................................8 3.02 DETERMINATION OF CONTRIBUTION.............................................8 3.03 TIME OF PAYMENT OF CONTRIBUTION...........................................8 3.04 CONTRIBUTION ALLOCATION...................................................8 3.05 FORFEITURE ALLOCATION.....................................................10 3.06 ACCRUAL OF BENEFIT........................................................10 3.07 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS......................11 3.08 DEFINITIONS - ARTICLE III.................................................12 ARTICLE IV - PARTICIPANT CONTRIBUTIONS 13 4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS.......................................13 4.02 [Reserved]................................................................13 4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS........................................13 4.04 PARTICIPANT CONTRIBUTION - FORFEITABILITY.................................13 4.05 PARTICIPANT CONTRIBUTION WITHDRAWAL/ DISTRIBUTION.........................13 4.06 PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT................................13 ARTICLE V - TERMINATION OF SERVICE - PARTICIPANT VESTING 14 5.01 NORMAL RETIREMENT AGE.....................................................14 5.02 PARTICIPANT DISABILITY OR DEATH...........................................14 5.03 VESTING SCHEDULE..........................................................14 5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF FORFEITED ACCRUED BENEFIT..............................................14 5.05 ACCOUNTING FOR REPAID AMOUNT..............................................15 5.06 YEAR OF SERVICE - VESTING.................................................15 5.07 BREAK IN SERVICE - VESTING................................................15 5.08 INCLUDED YEARS OF SERVICE - VESTING.......................................15 5.09 FORFEITURE OCCURS.........................................................15 ARTICLE VI - TIME AND METHOD OF PAYMENT OF BENEFITS 17 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT........................................17 6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT......................................18 6.03 BENEFIT PAYMENT ELECTIONS.................................................19 6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES...............21 6.05 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY....................22 6.06 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY.........................22 6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS.............................23 ARTICLE VII - EMPLOYER ADMINISTRATIVE PROVISIONS 24 7.01 INFORMATION TO COMMITTEE..................................................24 7.02 NO LIABILITY..............................................................24 7.03 INDEMNITY OF COMMITTEE....................................................24 7.04 EMPLOYER DIRECTION OF INVESTMENT..........................................24 7.05 AMENDMENT TO VESTING SCHEDULE.............................................24 ii ARTICLE VIII PARTICIPANT ADMINISTRATIVE PROVISIONS 25 8.01 BENEFICIARY DESIGNATION...................................................25 8.02 NO BENEFICIARY DESIGNATION................................................25 8.03 PERSONAL DATA TO COMMITTEE................................................25 8.04 ADDRESS FOR NOTIFICATION..................................................25 8.05 ASSIGNMENT OR ALIENATION..................................................25 8.06 NOTICE OF CHANGE IN TERMS.................................................25 8.07 LITIGATION AGAINST THE TRUST..............................................25 8.08 INFORMATION AVAILABLE.....................................................25 8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS...................................26 8.10 PARTICIPANT DIRECTION OF INVESTMENT.......................................26 ARTICLE IX - ADVISORY COMMITTEE-DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS.......................................................28 9.01 MEMBERS' COMPENSATION, EXPENSES...........................................28 9.02 TERM......................................................................28 9.03 POWERS....................................................................28 9.04 GENERAL...................................................................28 9.05 FUNDING POLICY............................................................28 9.06 MANNER OF ACTION..........................................................28 9.07 AUTHORIZED REPRESENTATIVE.................................................28 9.08 INTERESTED MEMBER.........................................................28 9.09 INDIVIDUAL ACCOUNTS.......................................................29 9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT....................................29 9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS....................29 9.12 INDIVIDUAL STATEMENT......................................................29 9.13 ACCOUNT CHARGED...........................................................30 9.14 UNCLAIMED ACCOUNT PROCEDURE...............................................30 ARTICLE X TRUSTEE, POWERS AND DUTIES 31 10.01 ACCEPTANCE...............................................................31 10.02 RECEIPT OF CONTRIBUTIONS.................................................31 10.03 INVESTMENT POWERS........................................................31 10.04 RECORDS AND STATEMENTS...................................................32 10.05 FEES AND EXPENSES FROM FUND..............................................32 10.06 PARTIES TO LITIGATION....................................................32 10.07 PROFESSIONAL AGENTS......................................................32 10.08 DISTRIBUTION OF CASH OR PROPERTY.........................................33 10.09 DISTRIBUTION DIRECTIONS..................................................33 10.10 THIRD PARTY..............................................................33 10.11 RESIGNATION..............................................................33 10.12 REMOVAL..................................................................33 10.13 INTERIM DUTIES AND SUCCESSOR TRUSTEE.....................................33 10.14 VALUATION OF TRUST.......................................................33 10.15 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER APPOINTED................33 10.16 INVESTMENT IN GROUP TRUST FUND...........................................33 iii 10.17 DUTIES PERTAINING TO THE EMPLOYER STOCK FUND.............................34 ARTICLE XI - PROVISIONS RELATING TO INSURANCE & INSURANCE COMPANY 36 11.01 INSURANCE BENEFIT........................................................36 11.02 LIMITATION ON LIFE INSURANCE PROTECTION..................................36 11.03 DEFINITIONS..............................................................36 11.04 DIVIDEND PLAN............................................................37 11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT...............................37 11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS..................37 11.07 INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE........................37 11.08 ACQUITTANCE..............................................................37 11.09 DUTIES OF INSURANCE COMPANY..............................................37 ARTICLE XII - MISCELLANEOUS 38 12.01 EVIDENCE.................................................................38 12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION....................................38 12.03 FIDUCIARIES NOT INSURERS.................................................38 12.04 WAIVER OF NOTICE.........................................................38 12.05 SUCCESSORS...............................................................38 12.06 WORD USAGE...............................................................38 12.07 STATE LAW................................................................38 12.08 EMPLOYMENT NOT GUARANTEED................................................38 ARTICLE XIII - EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION 39 13.01 EXCLUSIVE BENEFIT........................................................39 13.02 AMENDMENT BY EMPLOYER....................................................39 13.03 DISCONTINUANCE...........................................................39 13.04 FULL VESTING ON TERMINATION..............................................39 13.05 MERGER/DIRECT TRANSFER...................................................39 13.06 TERMINATION..............................................................40 13.07 TRANSFER OF ASSETS FROM THE TRUSTEE OF THE FLOW INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN................................41 ARTICLE XIV - PROVISIONS RELATING TO THE CODE SECTION 401(k) ARRANGEMENT 42 14.01 401(k) ARRANGEMENT.......................................................42 14.02 DEFINITIONS..............................................................42 14.03 ANNUAL ELECTIVE DEFERRAL LIMITATION......................................43 14.04 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST..................................44 14.05 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS............................................................45 14.06 MULTIPLE USE LIMITATION..................................................46 ARTICLE XV - DIRECT ROLLOVERS 48 15.01 APPLICATION..............................................................48 15.02 DEFINITIONS..............................................................48 APPENDIX A - ACCOUNTS TRANSFERRED FROM SPIDER STAGING CORPORATION 401(k) PLAN AND CERTAIN EMPLOYEES OF SPIDER STAGING CORPORATION 49 1.01 DEFINITIONS...............................................................49 iv 1.02 CONTINUING PARTICIPANTS...................................................49 1.03 ELIGIBILITY COMPUTATION PERIOD............................................49 1.04 CREDITING SERVICE FOR ELIGIBILITY.........................................49 1.05 VESTING CREDIT............................................................49 1.06 DISTRIBUTIONS TO VESTED PARTICIPANTS UNDER SPIDER STAGING CORPORATION 401(k) PLAN OTHER THAN 1992 SPIDER STAGING EMPLOYEES......................49 1.07 VALUATION AND TRANSFER OF ACCOUNTS UNDER THE SPIDER STAGING CORPORATION 401(k) SAVINGS PLAN.......................................................49 1.08. PROTECTED BENEFITS........................................................49 1.09. FORFEITURES...............................................................49 1.10. SEPARATE ACCOUNTS.........................................................49 1.11. DEFAULT ON A LOAN MADE UNDER SPIDER STAGING PLAN..........................49 1.12 PARTICIPANT-DIRECTED INVESTMENT...........................................50 1.13 EFFECTIVE DATE............................................................50 APPENDIX B - CERTAIN EMPLOYEES OF ASI ROBOTIC SYSTEMS DIVISION OF CARGILL DETROIT CORPORATION 51 1.01 DEFINITIONS...............................................................51 1.02 CREDITING SERVICE FOR ELIGIBILITY.........................................51 1.03 PLAN ENTRY DATE...........................................................51 1.04 CREDITING SERVICE FOR VESTING.............................................51 1.13 EFFECTIVE DATE............................................................51 APPENDIX C - CERTAIN EMPLOYEES OF FLOW AUTOMATION SYSTEMS CORPORATION 52 1.01 DEFINITIONS...............................................................52 1.02 CREDITING SERVICE FOR ELIGIBILITY.........................................52 1.03 CREDITING SERVICE FOR VESTING.............................................52 1.04 EFFECTIVE DATE............................................................52 APPENDIX D - FORMER CIS ROBOTICS EMPLOYEES 53 1.01 DEFINITIONS...............................................................53 1.02 CREDITING SERVICE FOR ELIGIBILITY.........................................53 1.03 VESTING CREDIT............................................................53 1.04 TRANSFERRED ACCOUNTS......................................................53 1.05 EFFECTIVE DATE............................................................53 EXECUTION PAGE 54 v ALPHABETICAL LISTING OF DEFINITIONS PLAN DEFINITION SECTION REFERENCE Account.....................................................................1.11 Accounting Date.............................................................1.17 Accrued Benefit.............................................................1.12 Actual Contribution Percentage (ACP) Test...................................14.05 Actual Deferral Percentage (ADP)) Test......................................14.03 Advisory Committee..........................................................1.05 Annual Addition.............................................................3.08(a) Annuity Starting Date.......................................................6.01 Beneficiary.................................................................1.09 Break in Service for Eligibility Purposes...................................2.03 Break in Service for Vesting Purposes.......................................5.07 Cash-out Distribution.......................................................5.04 Code........................................................................1.22 Code Section 411(d)(6) Protected Benefits...................................13.02 Compensation................................................................1.10 Compensation for Code Section 415 Purposes..................................3.08(b) Compensation for Top Heavy Purposes.........................................1.29(c) Deemed Cash-out Rule........................................................5.04(C) Deferral Contributions......................................................3.01(A) Deferral Contributions Account..............................................3.04 Defined Contribution Plan...................................................3.08(g) Defined Benefit Plan........................................................3.08(h) Determination Date..........................................................1.29(g) Disability..................................................................1.25 Distribution Date...........................................................6.01 Effective Date..............................................................1.15 Elective Transfer...........................................................13.05 Employee....................................................................1.06 Employer....................................................................1.02 Employer for Code Section 415 Purposes......................................3.08(d) Employer for Top Heavy Purposes.............................................1.29(f) Employer Contribution Account...............................................3.04 Employment Commencement Date................................................2.02 ERISA.......................................................................1.21 Excess Amount...............................................................3.08(e) Forfeiture Break in Service.................................................5.08 Group Trust Fund............................................................10.16 Highly Compensated Employee.................................................1.07 Hour of Service.............................................................1.24 Investment Manager..........................................................9.04(i) Joint and Survivor Annuity..................................................6.04(A) Key Employee................................................................1.29(a) vi Leased Employees............................................................1.28 Limitation Year.............................................................3.08(f) Loan Policy.................................................................9.04(j),10.03(e) Matching Contributions......................................................3.01(A) Maximum Permissible Amount..................................................3.08(c) Non-Key Employee............................................................1.29(b) Nonforfeitable..............................................................1.13 Nontransferable Annuity.....................................................1.20 Normal Retirement Age.......................................................5.01 Participant.................................................................1.08 Participant Forfeiture......................................................3.05 Participant Loans...........................................................9.04(j), 10.03(e) Participant Voluntary Contributions.........................................4.01 Permissive Aggregation Group................................................1.29(e) Plan........................................................................1.01 Plan Entry Date.............................................................1.16 Plan Administrator..........................................................1.04 Plan Year...................................................................1.14 Predecessor Employer........................................................1.26 Preretirement Survivor Annuity..............................................6.04(B) Qualified Domestic Relations Order..........................................6.07 Related Employers...........................................................1.27 Required Aggregation Group..................................................1.29(d) Required Beginning Date.....................................................6.01(B) Rollover Contributions......................................................4.03 Salary Reduction Agreement..................................................3.01A Service.....................................................................1.23 Top Heavy Minimum Allocation................................................3.04(B) Top Heavy Ratio.............................................................1.29 Trust.......................................................................1.18 Trustee.....................................................................1.03 Trustee Powers..............................................................10.03 Trust Fund..................................................................1.19 Valuation Date..............................................................10.14 Year of Service for Eligibility Purposes....................................2.02 Year of Service for Vesting Purposes........................................5.06
vii FLOW INTERNATIONAL CORPORATION VOLUNTARY PENSION AND SALARY DEFERRAL PLAN AND TRUST AGREEMENT (AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1999) Flow International Corporation (the "Employer"), a corporation organized under the laws of the State Delaware, makes this Agreement with Northwestern Trust and Investors Advisory Company as Trustee. WITNESSETH The Flow International Corporation Voluntary Pension and Salary Deferral Plan, originally adopted effective October 1, 1986 by Flow Systems, Inc. (now Flow International Corporation, a Washington corporation), for the benefit of its Employees, is hereby amended and restated by Flow International Corporation, effective January 1, 1999 to read in its entirety as set forth in this Agreement between the Employer and the Trustee with regard to the Trust Fund under the Plan. The provisions of the Plan as amended and restated in this document shall apply solely to an Employee whose employment with the Employer terminates on or after January 1, 1999. The Employer intends that the Plan as so amended and restated shall continue to be maintained exclusively for the purpose of providing benefits to the Plan Participants and their beneficiaries and for defraying the reasonable expenses of administering the Plan. The Employer further intends that the Plan shall at all times be qualified under Section 401(a) of the Code and that the Plan shall meet the special requirements of Sections 401(k) and 401(m) of the Code and that the Trust, which also constitutes a part of the Plan, shall at all times be a trust exempt from taxation under Section 501(a) of the Code. Now, therefore, in consideration of their mutual covenants, the Employer and the Trustee agree as follows: ARTICLE I DEFINITIONS 1.01 "PLAN" means the Flow International Corporation Voluntary Pension and Salary Deferral Plan established and continued by the Employer in the form of this Agreement, as it may be amended from time to time. 1.02 "EMPLOYER" means Flow International Corporation and its successors, or any other employer who with the written consent of Flow International Corporation adopts this Plan. As of January 1, 1993, Spider Staging Corporation has adopted this Plan with the written consent of Flow International Corporation. 1.03 "TRUSTEE" means Northwestern Trust and Investors Advisory Company or any successor in office who in writing accepts the position of Trustee. 1.04 "PLAN ADMINISTRATOR" means Flow International Corporation unless Flow International Corporation designates another person to hold the position of Plan Administrator. In addition to his other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under ERISA as respects this Agreement. 1.05 "ADVISORY COMMITTEE" means the Employer's Advisory Committee as from time to time constituted. 1.06 "EMPLOYEE" means any common-law employee of the Employer. 1.07 "HIGHLY COMPENSATED EMPLOYEE" means an Employee who, during the Plan Year or during the preceding Plan Year is a more than 5% owner of the Employer (applying the constructive ownership rules of Code Section 318, and applying the principles of Code Section 318, for an unincorporated entity); or who, during the preceding Plan Year has Compensation in excess of $80,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year) and, if the Employer elects, was part of the top-paid 20% group of Employees (based on Compensation for the preceding Plan Year). For purposes of this Section 1.07, "Compensation" means the general definition of Compensation as defined in Section 1.10(A), increased for elective contributions. "Elective contributions" are amounts excludible from the Employee's gross income under Code Sections 125, 402(e)(3), 402(h), 403(b) or 408(p), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a Simplified Employee Pension, a SIMPLE plan, a cafeteria plan or tax-sheltered annuity. The Advisory Committee must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top paid 20% group, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year data election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations or by other guidance published in the Internal Revenue Bulletin. A calendar year data election must apply to all plans of the Employer which reference the highly compensated employee definition in Code Section 414(q). The term "Highly Compensated Employee" also includes any former Employee who separated from Service (or has a deemed Separation from Service, as determined under Treasury regulations) prior to the Plan Year, performs no Service for the Employer during the Plan Year, and was a Highly Compensated Employee either for the separation year or for any Plan Year ending on or after his 55th birthday. If the former Employee's Separation from Service occurred prior to January 1, 1987, he is a Highly Compensated Employee only if he satisfied clause (a) of this Section 1.07 [as in effect before 1997] or received Compensation in excess of $50,000 during: (1) the year of his Separation from Service (or the prior year); or (2) any year ending after his 54th birthday. 1.08 "PARTICIPANT" is an Employee who is eligible to be and becomes a Participant in accordance with the provisions of Section 2.01. 1.09 "BENEFICIARY" is a person designated by a Participant under Article VIII who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until the Trustee has fully distributed his benefit to him. A Beneficiary's right to (and the Plan Administrator's, the Advisory Committee's or Trustee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan. 1.10 COMPENSATION DEFINITIONS. Any reference in this Plan to Compensation is a reference to the definition in this Section 1.10, unless the Plan reference specifies a modification to this definition. The Advisory Committee will take into account only Compensation actually paid for the relevant period. (A) GENERAL DEFINITION OF COMPENSATION. All wages, salaries, fees for professional service and other amounts (whether or not paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the plan, but only to the extent includible in gross income. This definition of Compensation includes, but is not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, fringe benefits reimbursements, expense allowances and bonuses). This definition of "Compensation" does not include: (a) Employer contributions to a plan of deferred compensation to the extent the contributions are not included in the gross income of the Employee for the taxable year in which contributed, Employer contributions on behalf of an Employee to a Simplified Employee Pension Plan to the extent such contributions are excludible from the Employee's gross income, and any distributions from a plan of deferred compensation, regardless of whether such amounts are includible in the gross income of the Employee when distributed. (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk or forfeiture. (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option described in Part II, Subchapter D, Chapter 1 of the Code. (d) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee). (B) DEFINITION OF COMPENSATION FOR ALLOCATION PURPOSES. To determine a Participant's contribution allocation under Section 3.04(A), Compensation means the general definition of Compensation described in Section 1.10(A), but excluding reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits, and including elective contributions (as defined in Section 1.07). (C) COMPENSATION DOLLAR LIMITATION. For any Plan Year, the Advisory Committee shall not take into account more than $150,000 (or such larger or smaller amount as the Commissioner of Internal Revenue may prescribe) of any Participant's Compensation. (D) SPECIAL DEFINITION FOR SALARY REDUCTION CONTRIBUTIONS. For purposes of determining the Employee's salary reduction contributions under a salary reduction agreement, "Compensation" means the definition of Compensation for allocation purposes, as defined in Section 1.10(B), determined prior to the reduction authorized by that salary reduction agreement. 1.11 "ACCOUNT" means the following separate account(s) which the Advisory Committee or the Trustee maintains for a Participant under the Plan:
TYPE OF CONTRIBUTIONS NAME OF ACCOUNT --------------------- --------------- Salary Deferral Contributions Deferral Contributions Account Employer Matching Contributions Regular Matching Contributions Account 2 Nonelective Employer Contributions Employer Contributions Account Participant Rollover Contributions Rollover Account Qualified Nonelective Contributions Qualified Nonelective Contributions Account Qualified Matching Contributions Qualified Matching Contributions Account
1.12 "ACCRUED BENEFIT" means the amount standing in a Participant's Account(s) as of any date derived from both Employer contributions and Employee contributions, if any. 1.13 "NONFORFEITABLE" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Accrued Benefit. 1.14 "PLAN YEAR" means the Plan's accounting year, a 12 consecutive month period ending every December 31. 1.15 "EFFECTIVE DATE" of this restated Plan means January 1, 1999. The original effective date of the Plan was October 1, 1986. 1.16 "PLAN ENTRY DATE" means every January 1, April 1, July 1, and October 1. 1.17 "ACCOUNTING DATE" is the last day of the Plan Year. Unless otherwise specified in the Plan, the Advisory Committee will make all Plan allocations for a particular Plan Year as of the Accounting Date of that Plan Year. 1.18 "TRUST" means the separate Trust created under the Plan. 1.19 "TRUST FUND" means all property of every kind held or acquired by the Trustee under the Plan, other than incidental benefit insurance contracts. This Plan creates a single Trust for all Employers participating under the Plan. However, the Trustee will maintain separate records of account in order to reflect properly each Participant's Accrued Benefit derived from each participating Employer. 1.20 "NONTRANSFERABLE ANNUITY" means an annuity which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than the insurance company. If the Trustee distributes an annuity contract, the contract must be a Nontransferable Annuity. 1.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.22 "CODE" means the Internal Revenue Code of 1986, as amended. 1.23 "SERVICE" means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees if the Employee returns to work within the period specified thereunder. "Separation from Service" means a separation from Service with the Employer maintaining this Plan. For purposes of eligibility to participate (Section 2.01) and determining vesting (Section 5.03), "Service" also includes service on or before December 1, 1998, with any of the following affiliated employers: FlowDrill Corporation; Flow Research, Inc.; and FlowMole Corporation. 1.24 "HOUR OF SERVICE" means: (a) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The Advisory Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, irrespective of when paid; (b) Each Hour of Service for back pay, irrespective of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Advisory Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and (c) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment (irrespective of whether the employment relationship is terminated), for reasons other than for the performance of duties during a computation period, such as leave off absence, vacation, holiday, sick leave, illness, incapacity (including disability), layoff, jury duty or military duty. The Advisory Committee will credit no more than 501 Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Advisory Committee credits Hours of Service under this paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Reg. Section2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this paragraph (c). 3 (d) Hour of Service also includes any Service the Plan must credit in order to satisfy the crediting of Service requirements of Code Section 414(u). The Advisory Committee will not credit an Hour of Service under more than one of the above paragraphs. A computation period for purposes of this Section 1.24 is the Plan Year, Year of Service period, Break in Service period or other period, as determined under the Plan provision for which the Advisory Committee is measuring an Employee's Hours of Service. The Advisory Committee will resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee. Hours of Service shall be credited on the basis of actual hours for which an Employee is paid or entitled to payment to the extent the Employer's payroll or accounting records reflect such hours. Otherwise, Employees shall be credited with 190 Hours of Service per month, 95 hours per semimonthly pay period, 45 hours per week or 10 hours per day, depending on the pay period applicable to such Employee for any such pay period in which the Employee has one Hour of Service. Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, the Advisory Committee must credit Hours of Service during an Employee's unpaid absence period due to maternity or paternity leave. The Advisory Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The Advisory Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the Advisory Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of 8 hours per day during the absence period. The Advisory Committee will credit only the number (not exceeding 501) of Hours of Service necessary to prevent an Employee's Break in Service. The Advisory Committee credits all Hours of Service described in this paragraph to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the Advisory Committee credits these Hours of Service to the immediately following computation period. 1.25 "DISABILITY" means the Participant, because of a physical or mental disability, will be unable to perform the duties of his customary position of employment (or is unable to engage in any substantial gainful activity) for an indefinite period which the Advisory Committee considers will be of long continued duration. A Participant also is disabled if he incurs the permanent loss or loss of use of a member or function of the body, or is permanently disfigured, and incurs a separation from Service. The Plan considers a Participant disabled on the date the Advisory Committee determines the Participant satisfies the definition of disability. The Advisory Committee may require a Participant to submit to a physical examination in order to confirm disability. The Advisory Committee will apply the provisions of this Section 1.25 in a nondiscriminatory, consistent and uniform manner. 1.26 "SERVICE FOR PREDECESSOR EMPLOYER" If the Employer maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as service with the Employer. 1.27 "RELATED EMPLOYER" A related group is a controlled group of corporations (as defined in Code Section 414(b)), trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)) or an affiliated service group (as defined in Code Section 414(m) or in Code Section 414(o)). If the Employer is a member of a related group, the term "Employer" includes the related group members for purposes of crediting Hours of Service, determining Years of Service and Breaks in Service under Articles II and V, applying the limitations on allocations in Part 2 of Article III, applying the top heavy rules and the minimum allocation requirements of Article III, the definitions of Employee, Highly Compensated Employee, Compensation and Leased Employee, and for any other purpose required by the applicable Code section or by a Plan provision. However, only an Employer described in Section 1.02 may contribute to the Plan and only an Employee employed by an Employer described in Section 1.02 is eligible to participate in this Plan. For Plan allocation purposes, "Compensation" does not include Compensation received from a related employer that is not participating in this Plan. 1.28 "LEASED EMPLOYEES" The Plan treats a Leased Employee as an Employee of the Employer. A Leased Employee is an individual (who otherwise is not an Employee of the Employer) who, pursuant to a leasing agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer within the meaning of Code Section 144(a)(3)) on a substantially full time basis for at least one year and who performs such services under primary direction or control of the Employer. If a Leased Employee is treated as an Employee by reason of this Section 1.28, "Compensation" includes Compensation from the leasing organization which is attributable to services performed for the Employer. 4 SAFE HARBOR PLAN EXCEPTION. The Plan does not treat a Leased Employee as an Employee if the leasing organization covers the employee in a safe harbor plan and, prior to application of this safe harbor plan exception, 20% or less of the Employer's Employees (other than Highly Compensated Employees) are Leased Employees. A safe harbor plan is a money purchase pension plan providing immediate participation, full and immediate vesting, and a nonintegrated contribution formula equal to at least 10% of the employee's compensation without regard to employment by the leasing organization on a specified date. The safe harbor plan must determine the 10% contribution on the basis of compensation as defined in Code Section 415(c)(3) plus elective contributions ( as defined in Section 1.10). OTHER REQUIREMENTS. The Advisory Committee must apply this Section 1.28 in a manner consistent with Code Sections 414(n) and 414(o) and the regulations issued under those Code sections. 1.29 "DETERMINATION OF TOP HEAVY STATUS" If this Plan is the only qualified plan maintained by the Employer, the Plan is top heavy for a Plan Year if the top heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees as of the Determination Date and the denominator of which is a similar sum determined for all Employees. The Advisory Committee must include in the top heavy ratio, as part of the present value of Accrued Benefits, any contribution not made as of the Determination Date but includible under Code Section 416 and the applicable Treasury regulations, and distributions made within the Determination Period. The Advisory Committee must calculate the top heavy ratio by disregarding the Accrued Benefit (and distributions, if any, of the Accrued Benefit) of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Accrued Benefit (including distributions, if any, of the Accrued Benefit) of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Advisory Committee must calculate the top heavy ratio, including the extent to which it must take into account distributions, rollovers and transfers, in accordance with Code Section 416 and the regulations under that Code section. If the Employer maintains other qualified plans (including a simplified employee pension plan), or maintained another such plan which now is terminated, this Plan is top heavy only if it is part of the Required Aggregation Group, and the top heavy ratio for the Required Aggregation Group and for the Permissive Aggregation Group, if any, each exceeds 60%. The Advisory Committee will calculate the top heavy ratio in the same manner as required by the first paragraph of this Section 1.29, taking into account all plans within the Aggregation Group. To the extent the Advisory Committee must take into account distributions to a Participant, the Advisory Committee must include distributions from a terminated plan which would have been part of the Required Aggregation Group if it were in existence on the Determination Date. The Advisory Committee will calculate the present value of Accrued Benefits under defined benefit plans or simplified employee pension plans included within the group in accordance with the terms of those plans, Code Section 416 and the regulations under that Code section. If a Participant in a defined benefit plan is a Non-Key Employee, the Advisory Committee will determine his Accrued Benefit under the accrual method, if any, which is applicable uniformly to all defined benefit plans maintained by the Employer or, if there is no uniform method, in accordance with the slowest accrual rate permitted under the fractional rule accrual method described in Code Section 411(b)(1)(C). To calculate the present value of benefits from a defined benefit plan, the Advisory Committee will use the actuarial assumptions (interest and mortality only) prescribed by the defined benefit plan(s) to value benefits for top heavy purposes. If an aggregated plan does not have a valuation date coinciding with the Determination Date, the Advisory Committee must value the Accrued Benefits in the aggregated plan as of the most recent valuation date falling within the twelve-month period ending on the Determination Date, except as Code Section 416 and applicable Treasury regulations require for the first and second plan year of a defined benefit plan. The Advisory Committee will calculate the top heavy ratio with reference to the Determination Dates that fall within the same calendar year. DEFINITIONS. For purposes of applying the provisions of this Section 1.29: (a) "Key Employee" means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, for any Plan Year in the Determination Period: (i) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer; (ii) has Compensation in excess of the dollar amount prescribed in Code Section 415(c)(1)(A) (relating to defined contribution plans) and is one of the Employees owning the ten largest interests in the Employer; (iii) is a more than 5% owner of the Employer; or (iv) is a more than 1% owner of the Employer and has Compensation of more than $150,000. The constructive ownership rules of Code Section 318 (or the principles of that section, in the case of an unincorporated Employer) will apply to determine ownership in the Employer. The number of officers taken into account under clause (i) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q)(8) exclusions) of Employees, but no more than 50 officers. The Advisory Committee will make the determination of who is a Key Employee in accordance with Code Section 416(i)(1) and the regulations under that Code section. 5 (b) "Non-Key Employee" is an employee who does not meet the definition of Key Employee. (c) "Compensation" means the general definition of Compensation in Section 1.10(A), increased for elective contributions (as defined in Section 1.07). (d) "Required Aggregation Group" means: (1) each qualified plan of the Employer in which at least one Key Employee participates at any time during the Determination Period; and (2) any other qualified plan of the Employer which enables a plan described in clause (1) to meet the requirements of Code Section 401(a)(4) or Code Section 410. (e) "Permissive Aggregation Group" is the Required Aggregation Group plus any other qualified plans maintained by the Employer, but only if such group would satisfy in the aggregate the requirements of Code Section 401(a)(4) and Code Section 410. The Advisory Committee will determine the Permissive Aggregation Group. (f) "Employer" means the Employer that adopts this Plan and any related employers described in Section 1.27. (g) "Determination Date" for any Plan Year is the Accounting Date of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the Accounting Date of that Plan Year. The "Determination Period" is the 5 year period ending on the Determination Date 1.30 "EMPLOYER STOCK" means common stock of Flow International Corporation. 1.31 "EMPLOYER STOCK FUND" means a pooled investment account limited to shares of Employer Stock. 1.32 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER. If more than one employer maintains this Plan, then for purposes of determining Service and Hours of Service, the Advisory Committee will treat all Employers maintaining this Plan as a single employer. PLAN ALLOCATIONS. The Advisory Committee must allocate all Employer contributions and forfeitures to each Participant in the Plan, in accordance with Article III and Section 9.11, without regard to which contributing Employer employs the Participant. A Participant's Compensation includes Compensation from all participating Employers, irrespective of which Employers are contributing to the Plan. 6 ARTICLE II EMPLOYEE PARTICIPANTS 2.01 ELIGIBILITY. Each Employee (other than an Excluded Employee) becomes a Participant in the Plan on the Plan Entry Date (if employed on that date) coincident with or immediately following the date on which he completes one Year of Service. Each Employee who was a participant in the Plan on the day before the Effective Date of this restated Plan Section 2.01 continues as a Participant in the Plan. SPECIAL ELIGIBILITY RULE FOR CODE SECTION 401(k) ARRANGEMENT. In lieu of the eligibility requirements in the preceding paragraph, each Employee (other than an Excluded Employee) becomes a participant in the Code Section 401(k) arrangement on the Plan Entry Date (if employed on that date) immediately following the Employee's Employment Commencement Date. If, for a Plan Year, an Employee is a Participant solely in the 401(k) arrangement, the Employee does not share in the allocation of any Employer contributions other than deferral contributions, as described in Article III, nor in the allocation of any forfeitures. An Employee is an Excluded Employee if he is: (a) a temporary or casual Employee, as defined under the Employer's normal payroll practices; (b) a nonresident alien who receives no U.S. source earned income; (c) a Leased Employee treated as an Employee under Section 1.28; or (d) a member of a collective bargaining unit, unless the collective bargaining agreement provides otherwise. An Employee is a member of a collective bargaining unit if he is included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. The term "employee representatives" does not include an organization more than one half the members of which are owners, officers or executives of the Employer. If a Participant has not incurred a Separation from Service but becomes an Excluded Employee, then during the period such a Participant is an Excluded Employee, the Advisory Committee will limit that Participant's sharing in the allocation of Employer contributions and Participant forfeitures, if any, under the Plan by disregarding his Compensation paid by the Employer for services rendered in his capacity as an Excluded Employee. However, during such period of exclusion, the Participant, without regard to employment classification, continues to receive credit for vesting under Article V for each included Year of Service and the Participant's Account continues to share fully in Trust Fund allocations under Section 9.11. If an Excluded Employee who is not a Participant becomes eligible to participate in the Plan by reason of a change in employment classification, he will participate in the Plan immediately if he has satisfied the eligibility conditions of Section 2.01 and would have been a Participant had he not been an Excluded Employee during his period of Service. Furthermore, the Plan takes into account all of the Participant's included Years of Service with the Employer as an Excluded Employee for purposes of vesting credit under Article V. 2.02 YEAR OF SERVICE - PARTICIPATION. For purposes of an Employee's participation in the Plan under Section 2.01, the Plan takes into account all of his Years of Service with the Employer, except as provided in Section 2.03. "Year of Service" means a 12 consecutive month period during which the Employee completes not less than 1000 Hours of Service, measuring the beginning of the first 12 month period from the Employment Commencement Date. If the Employee does not complete 1000 Hours of Service during the 12 month period commencing with the Employment Commencement Date, the Plan measures the second 12 month period by reference to the Plan Year which includes the first anniversary of the Employee's Employment Commencement Date. The Plan measures any subsequent 12 month period necessary for a determination of Year of Service for participation by reference to succeeding Plan Years. "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for the Employer. 2.03 BREAK IN SERVICE - PARTICIPATION. For purposes of participation in the Plan, the Plan does not apply any Break in Service rule. 2.04 PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment terminates re-enters the Plan as a Participant on the date of his re-employment. An Employee who satisfies the Plan's eligibility conditions but who terminates employment prior to becoming a Participant becomes a Participant in the Plan on the later of the Entry Date on which he would have entered the Plan had he not terminated employment or the date of his reemployment. Any Employee who terminates employment prior to satisfying the Plan's eligibility conditions becomes a Participant in accordance with the provisions of Section 2.01. 7 ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES PART 1. AMOUNT OF EMPLOYER CONTRIBUTIONS AND PLAN ALLOCATIONS: SECTIONS 3.01 THROUGH 3.06 3.01 AMOUNT. (A) CONTRIBUTION FORMULA. For each Plan Year, the Employer will contribute to the Trust the following amounts: DEFERRAL CONTRIBUTIONS. The amount by which the Participants have elected to reduce their Compensation for the Plan Year under their salary reduction agreements on file with the Advisory Committee. EMPLOYER MATCHING CONTRIBUTIONS. An amount equal to 50% of each Participant's eligible contributions. For Participants with five or more years of vesting service (see Article V), the matching contribution will be 75% instead of 50%. The Employer also may contribute an additional amount, equal to a percentage the Employer from time to time may deem advisable of each Participant's eligible contributions. The Employer will determine the amount of its matching contribution by disregarding Participants not entitled to an allocation of Employer matching contributions. See Sections 3.04 and 3.06. QUALIFIED NONELECTIVE CONTRIBUTIONS. The amount the Employer, in its sole discretion, designates as qualified nonelective contributions. NONELECTIVE CONTRIBUTIONS. Any additional amount the Employer may from time to time deem advisable. RESTRICTIONS ON CONTRIBUTIONS. The Employer will make its contribution under the Plan, irrespective of whether it has net profits. Although, the Employer may contribute to this Plan irrespective of whether it has net profits, the Employer intends this Plan to be a profit sharing plan for all purposes under the Code. The Employer will not make a contribution to the Trust for any Plan Year to the extent the contribution would exceed the Participants' Maximum Permissible Amounts. See Part 2 of this Article III. ELIGIBLE CONTRIBUTIONS. Under the matching contribution formula, a Participant's "eligible contributions" are the deferral contributions allocated to the Participant for the Plan Year not in excess of 6% of the Participant's Compensation for the Plan Year. Eligible contributions do not include deferral contributions attributable to Compensation for any period when the Participant is not eligible to participate in the allocation of matching contributions. Eligible contributions do not include deferral contributions that are excess deferrals under Section 14.03. For this purpose: (a) excess deferrals relate first to deferral contributions for the Plan Year not otherwise eligible for a matching contribution; and (2) if the Plan Year is not a calendar year, the excess deferrals for a Plan Year are the last deferrals made for a calendar year. Notwithstanding any provision in this Article III to the contrary, the Plan will provide contributions and Service credit with respect to qualified military service in accordance with Code Section 414(u). (B) RETURN OF CONTRIBUTIONS. The Trustee, upon written request from the Employer, must return to the Employer the amount of the Employer's contribution made by the Employer by mistake of fact or the amount of the Employer's contribution disallowed as a deduction under Code Section 404. The Trustee will not return any portion of the Employer's contribution under the provisions of this paragraph more than one year after: (a) The Employer made the contribution by mistake of fact; or (b) The disallowance of the contribution as a deduction, and then, only to the extent of the disallowance. The Trustee will not increase the amount of the Employer contribution returnable under this Section 3.01 for any earnings attributable to the contribution, but the Trustee will decrease the Employer contribution returnable for any losses attributable to it. The Trustee may require the Employer to furnish it whatever evidence the Trustee deems necessary to enable the Trustee to confirm the amount the Employer has requested be returned is properly returnable under ERISA. 3.02 DETERMINATION OF CONTRIBUTION. The Employer, from its records, determines the amount of any contributions to be made by it to the Trust under the terms of the Plan. 3.03 TIME OF PAYMENT OF CONTRIBUTION. The Employer may pay its contribution for each Plan Year in one or more installments without interest. The Employer must make its contribution to the Trustee within the time prescribed by the Code or applicable federal regulations. Deferral contributions are Employer contributions for all purposes under this Plan, except to the extent the Code or Treasury regulations prohibit the use of these contributions to satisfy the qualification requirements of the Code. 3.04 CONTRIBUTION ALLOCATION. 8 (A) METHOD OF ALLOCATION. To make allocations under the Plan, the Advisory Committee must establish a Deferral Contributions Account, a Regular Matching Contributions Account, a Qualified Matching Contributions Account, a Qualified Nonelective Contributions Account and an Employer Contributions Account for each Participant. DEFERRAL CONTRIBUTIONS. The Advisory Committee will allocate to each Participant's Deferral Contributions Account the deferral contributions the Employer makes to the Trust on behalf of the Participant. The Advisory Committee will make this allocation of deferral contributions as of the date they actually are paid to the Trust. MATCHING CONTRIBUTIONS. The Advisory Committee will allocate matching contributions as of the date the corresponding deferral contributions actually are paid to the Trust. The Advisory Committee will allocate the matching contributions to the Regular Matching Contributions Account of the Participant on whose behalf the Employer makes that contribution. The Employer, at the time of contribution, must designate which portion, if any, of its discretionary matching contribution is allocable to the Qualified Matching Contributions Accounts of the Participants and which portion, if any, of its discretionary matching contributions is allocable to the Regular Matching Contributions Accounts of the Participants. The allocation of discretionary matching contributions to a Participant's Account is in the same proportion that each Participant's eligible contributions (as defined in Section 3.01) bears to the total eligible contributions of all Participants, taking into account only the eligible contributions subject to the matching contribution formula. QUALIFIED NONELECTIVE CONTRIBUTIONS. If the Employer, at the time of contribution, designates a contribution to be a qualified nonelective contribution for the Plan Year, the Advisory Committee will allocate that qualified nonelective contribution to the Qualified Nonelective Contributions Account of each Participant eligible for an allocation of qualified nonelective contributions. The Advisory Committee will make the allocation to each eligible Participant's Account in the same ratio that the Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. For purposes of allocating the qualified nonelective contributions, the term "Participant" means any Participant who satisfies the conditions of Section 3.06. NONELECTIVE CONTRIBUTIONS. Subject to any restoration allocation required under Section 5.04, the Advisory Committee will allocate and credit each annual Employer nonelective contribution, if any (and Participant forfeitures, if any), to the Employer Contributions Account of each Participant who satisfies the conditions of Section 3.06. The Advisory Committee will make this allocation in the same ratio that each Participant's Compensation for the Plan Year for which the Employer makes the contribution bears to the total Compensation of all Participants for the Plan Year. (B) TOP HEAVY MINIMUM ALLOCATION. (1) MINIMUM ALLOCATION. If the Plan is top heavy in any Plan Year: (a) Each Non-Key Employee (as defined in Section 1.29) who is a Participant and is employed by the Employer on the last day of the Plan Year will receive a top heavy minimum allocation for that Plan Year, irrespective of whether he satisfies the Hours of Service condition under Section 3.06; and (b) The top heavy minimum allocation is the lesser of 3% of the Non-Key Employee's Compensation for the Plan Year or the highest contribution rate for the Plan Year made on behalf of any Key Employee (as defined in Section 1.29). However, if a defined benefit plan maintained by the Employer which benefits a Key Employee depends on this Plan to satisfy the antidiscrimination rules of Code Section 401(a)(4) or the coverage rules of Code Section 410 (or another plan benefiting the Key Employee so depends on such defined benefit plan), the top heavy minimum allocation is 3% of the Non-Key Employee's Compensation regardless of the contribution rate for the Key Employees. (2) SPECIAL DEFINITIONS. For purposes of this Section 3.04(B), the term "Participant" includes any Employee otherwise eligible to participate in the Plan but who is not a Participant because of his failure to make elective deferrals under a Code Section 401(k) arrangement or because of his failure to make mandatory employee contributions. For purposes of clause (b), "Compensation" means the general definition of Compensation in Section 1.10(A). (3) DETERMINING CONTRIBUTION RATES. For purposes of this Section 3.04(B), a Participant's contribution rate is the sum of Employer contributions (not including Employer contributions to Social Security) and forfeitures allocated to the Participant's Account for the Plan Year divided by his Compensation for the entire Plan Year. However, for Plan Years beginning after December 31, 1988, a Non-Key Employee's contribution rate does not include any elective contributions under a Code Section 401(k) arrangement nor any Employer matching contributions necessary to satisfy the nondiscrimination requirements of Code Section 401(k) or of Code Section 401(m). To determine a Participant's contribution rate, the Advisory Committee must treat all qualified top heavy defined contribution plans maintained by the Employer (or by any related Employers described in Section 1.27) as a single plan. 9 (4) NO ALLOCATIONS. If, for a Plan Year, there are no allocations of Employer contributions or forfeitures for any Key Employee, the Plan does not require any top heavy minimum allocation for the Plan Year, unless a top heavy minimum allocation applies because of the maintenance by the Employer of more than one plan. (5) METHOD OF COMPLIANCE. The Plan will satisfy the top heavy minimum allocation in accordance with this Section 3.04(B)(5). The Employer guarantees the top heavy minimum allocation in the employee stock ownership plan it maintains. This Plan does not provide the top heavy minimum allocation. However, the Employer will contribute an additional amount for the Account of any Participant who is entitled under this Section 3.04(B) to a top heavy minimum allocation but who is not a Participant in the employee stock ownership plan, if that Participant's contribution rate for the Plan Year is less than the top heavy minimum allocation. The additional amount is the amount necessary to increase the Participant's contribution rate to the top heavy minimum allocation. The Advisory Committee will allocate the additional contribution to the Account of the Participant on whose behalf the Employer makes the contribution. 3.05 FORFEITURE ALLOCATION. The amount of a Participant's Accrued Benefit forfeited under the Plan is a Participant forfeiture. Subject to any restoration allocation required under Sections 5.04 or 9.14 and the special forfeiture allocation for certain excess aggregate contributions described in Section 14.05, the Advisory Committee will allocate the amount of a Participant forfeiture in accordance with Section 3.04, to reduce the Employer matching contribution contributions and nonelective contributions for the Plan Year in which the forfeiture occurs. The Advisory Committee will continue to hold the undistributed, non-vested portion of a terminated Participant's Accrued Benefit in his Account solely for his benefit until a forfeiture occurs at the time specified in Section 5.09, or, if applicable, until the time specified in Section 9.14. Except as provided under Section 5.04, a Participant will not share in the allocation of a forfeiture of any portion of his Accrued Benefit. FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. A Participant will forfeit any matching contributions allocated with respect to excess deferrals, excess contributions or excess aggregate contributions, as determined under Article XIV. The Advisory Committee will allocate these forfeited amounts in accordance with this Section 3.05. 3.06 ACCRUAL OF BENEFIT. The Advisory Committee will determine the accrual of benefit (Employer contributions and Participant forfeitures) on the basis of the Plan Year. (A) COMPENSATION TAKEN INTO ACCOUNT. In allocating an Employer qualified nonelective contribution or nonelective contribution to a Participant's Account, the Advisory Committee, except for purposes of determining the top heavy minimum contribution under Section 3.04(B), will take into account only the Compensation determined for the portion of the Plan Year in which the Employee actually is a Participant. (B) HOURS OF SERVICE REQUIREMENT. Subject to the top heavy minimum allocation requirement of Section 3.04(B), the Advisory Committee will not allocate any portion of an Employer contribution for a Plan Year to any Participant's Account if the Participant does not complete a minimum of 1,000 Hours of Service during the Plan Year, unless the Participant terminates employment during the Plan Year because of death or disability or because of the attainment of Normal Requirement Age in the current Plan Year or in a prior Plan Year. The 1,000 Hours of Service requirement does not apply to an allocation of deferral contributions or matching contributions. (C) EMPLOYMENT REQUIREMENT. A Participant who, during a particular Plan Year, completes the Hours of Service requirement under Section 3.06(B) will not share in the allocation of Employer contributions and Participant forfeitures, if any, for that Plan Year unless he is employed by the Employer on the Accounting Date of that Plan Year. This employment requirement does not apply if the Participant terminates employment during the Plan Year because of death or disability or because of attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year. This employment requirement will not apply to an allocation of matching contributions or deferral contributions.. (D) SUSPENSION OF ACCRUAL REQUIREMENTS. The Plan suspends the accrual requirements under Sections 3.06(B) and (C) if the Plan fails to satisfy the Coverage Test. A Plan satisfies the Coverage Test if for the Plan Year, the number of Nonhighly Compensated Employees who benefit under the Plan is at least equal to 70% of the total number of Includible Nonhighly Compensated Employees as of such day. "Includible" Employees are all Employees other than: (1) those Employees excluded from participating in the Plan for the entire Plan Year by reason of the collective bargaining unit exclusion or the nonresident alien exclusion described in the Code or by reason of the age and service requirements of Article II; and (2) any Employee who incurs a Separation from Service during the Plan Year and fails to complete at least 501 Hours of Service for the Plan Year. A "Nonhighly Compensated Employee" is an Employee who is not a Highly Compensated Employee. For purposes of the Coverage Test, an Employee is benefiting under the Plan for a Plan Year if, under Section 3.04, he is entitled to an allocation for the Plan Year. If this Section 3.06(D) applies for a Plan Year, the Advisory Committee will suspend the accrual requirements for the Includible Employees who are Participants, beginning first with the Includible Employee(s) employed with the Employer on the last day of the Plan Year, then the Includible Employee(s) who have the latest Separation from Service 10 during the Plan Year, and continuing to suspend the accrual requirements for each Includible Employee who incurred an earlier Separation from Service, from the latest to the earliest Separation from Service date, until the Plan satisfies the Coverage Test for the Plan Year. If two or more Includible Employees have a Separation from Service on the same day, the Advisory Committee will suspend the accrual requirements for all such Includible Employees, irrespective of whether the Plan can satisfy the Coverage Test by accruing benefits for fewer than all such Includible Employees. If the Plan suspends the accrual requirements for an Includible Employee, that Employee will share in the allocation of Employer contributions and Participant forfeitures, if any, without regard to the number of Hours of Service he has earned for the Plan Year and without regard to whether he is employed by the Employer on the last day of the Plan Year. PART 2. LIMITATIONS ON ALLOCATIONS: SECTIONS 3.07 AND 3.08 3.07 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. The amount of Annual Additions which the Advisory Committee may allocate under this Plan on a Participant's behalf for a Limitation Year may not exceed the Maximum Permissible Amount. If the amount the Employer otherwise would contribute to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the Employer will reduce the amount of its contribution so the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. If an allocation of Employer contributions, pursuant to Section 3.04, would result in an Excess Amount (other than an Excess Amount resulting from the circumstances described in Section 3.07(B)) to the Participant's Account, the Advisory Committee will reallocate the Excess Amount to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The Advisory Committee will make this reallocation on the basis of the allocation method under the Plan as if the Participant whose Account otherwise would receive the Excess Amount is not eligible for an allocation of Employer contributions. (A) ESTIMATION OF COMPENSATION. Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Advisory Committee may determine the Maximum Permissible Amount on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Advisory Committee must make this determination on a reasonable and uniform basis for all Participants similarly situated. The Advisory Committee must reduce any Employer contributions (including any allocation of forfeitures) based on estimated annual Compensation by any Excess Amount carried over from prior years. As soon as is administratively feasible after the end of the Limitation Year, the Advisory Committee will determine the Maximum Permissible Amount for such Limitation Year on the basis of the Participant's actual Compensation for the Limitation Year. (B) DISPOSITION OF EXCESS AMOUNT. If, pursuant to Section 3.07(A), or because of the allocation of forfeitures, there is an Excess Amount with respect to a Participant for a Limitation Year, the Advisory Committee shall dispose of such Excess Amount as follows: (1) The Advisory Committee will return any nondeductible voluntary Employee contributions to the Participant to the extent that the return would reduce the Excess Amount. (2) If, after the application of paragraph (1), an Excess Amount still exists, and the Plan covers the Participant at the end of the Limitation Year, then the Advisory Committee will use the Excess Amount(s) to reduce future Employer contributions (including any allocation of forfeitures) under the Plan for the next Limitation Year and for each succeeding Limitation Year, as is necessary, for the Participant. (3) If, after the application of paragraph (1), an Excess Amount still exists, and the Plan does not cover the Participant at the end of the Limitation Year, then the Advisory Committee will hold the Excess Amount unallocated in a suspense account. The Advisory Committee will apply the suspense account to reduce Employer Contributions (including allocation of forfeitures) for all remaining Participants in the next Limitation Year, and in each succeeding Limitation Year if necessary. (4) The Advisory Committee will not distribute any Excess Amount(s) to Participants or to former Participants. (5) If, as a result of a reasonable error in determining the amount of elective deferrals an Employee may make without violating the limitations of Part 2 of Article III, an Excess Amount results, the Advisory Committee will return the Excess Amount (as adjusted for allocable income) attributable to the elective deferrals. The Advisory Committee will make this distribution before taking any corrective steps in the prior paragraphs of this Section 3.07(B). The Advisory Committee will disregard any elective deferrals returned under this paragraph for purposes of Article XIV. (C) MORE THAN ONE PLAN. If the Advisory Committee allocated an Excess Amount to a Participant's Account on an allocation date of this Plan which coincides with an allocation date of another defined contribution plan maintained by the Employer, the Advisory Committee will attribute the total Excess Amount allocated as of such date to such other plan. 11 (D) DEFINED BENEFIT PLAN LIMITATION. The Employer does not maintain and never has maintained a defined benefit plan covering any Participant in this Plan. Accordingly, no special defined benefit plan limitation applies under this Plan. 3.08 DEFINITIONS - ARTICLE III. For purposes of Part 2 Article III, the following terms mean: (a) "ANNUAL ADDITION" - The sum of the following amounts allocated on behalf of a Participant for a Limitation Year, of (i) all Employer contributions; (ii) all forfeitures; and (iii) all Employee contributions. Except to the extent provided in Treasury regulations, Annual Additions include excess contributions described in Code Section 401(k) and excess aggregate contributions described in Code Section 401(m) irrespective of whether the plan distributes or forfeits such excess amounts. Excess deferrals under Code Section 402(g) are not Annual Additions unless distributed after the correction period described in Code Section 402(g). Annual Additions also include Excess Amounts reapplied to reduce Employer contributions under Section 3.07. Amounts allocated after March 31, 1984, to an individual medical account (as defined in Code Section415(1)(2)) included as part of a defined benefit plan maintained by the Employer are Annual Additions. Furthermore, Annual Additions include contributions paid or accrued after December 31, 1985, for taxable years ending after December 31, 1985, attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Codes Section 419A(d)(3) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, but only for purposes of the dollar limitation applicable to the Maximum Permissible Amount. (b) "COMPENSATION" - Compensation as determined under the general definition in Section 1.10(A). (c) "MAXIMUM PERMISSIBLE AMOUNT" - The lesser of (i) $30,000 (or, if greater, the $30,000 amount as adjusted under Code Section 415(d)), or (ii) 25% of the Participant's Compensation for the Limitation Year. If there is a short Limitation Year because of a change in Limitation Year, the Advisory Committee will multiply the $30,000 limitation (or larger limitation) by the following fraction: NUMBER OF MONTHS IN THE SHORT LIMITATION YEAR 12 (d) "EMPLOYER" - The Employer that adopts this Plan and any related employers described in Section 1.27. Solely for purposes of applying the limitations of Part 2 of this Article III, the Advisory Committee will determine related employers described in Section 1.27 by modifying Code Sections 414(b) and (c) in accordance with Code Section 415(h). (e) "EXCESS AMOUNT" - The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (f) "LIMITATION YEAR" - The Plan Year. If the Employer amends the Limitation Year to a different 12 consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year. (g) "DEFINED CONTRIBUTION PLAN" - A retirement plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which the plan may allocate to such participant's account. The Advisory Committee must treat all defined contribution plans (whether or not terminated) maintained by the Employer as a single plan. For purposes of the limitations of Part 2 of this Article III , the Advisory Committee will treat employee contributions made to a defined benefit plan maintained by the Employer as a separate defined contribution plan. The Advisory Committee also will treat as a defined contribution plan an individual medical account (as defined in Code Section 415(1)(2)) included as part of a defined benefit plan maintained by the Employer and, for taxable years ending after December 31, 1985, a welfare benefit fund under Code Section 419(e) maintained by the Employer to the extent there are post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)). (h) "DEFINED BENEFIT PLAN" - A retirement plan which does not provide for individual accounts for Employer contributions. The Advisory Committee must treat all defined benefit plans (whether or not terminated) maintained by the Employer as a single plan. 12 ARTICLE IV PARTICIPANT CONTRIBUTIONS 4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS. The Plan does not permit nor require Participant voluntary contributions. 4.02 [Reserved] 4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS. Any Participant, with the Employer's written consent and after filing with the Trustee the form prescribed by the Advisory Committee, may contribute cash or Flow ESOP Stock to the Trust other than as a voluntary contribution if the contribution is a "rollover contribution" which the Code permits an employee to transfer either directly or indirectly from one qualified plan to another qualified plan. Before accepting a rollover contribution, the Trustee may require an Employee to furnish satisfactory evidence that the proposed transfer is in fact a "rollover contribution" which the Code permits an employee to make to a qualified plan. A rollover contribution is not an Annual Addition under Part 2 of Article III. "Flow ESOP Stock" is stock in Flow International Corporation received by a participant in the Flow International Corporation Employee Stock Ownership Plan (or by a participant's beneficiary) in a distribution after March 31, 1998, on account of the termination of the Flow International Corporation Employee Stock Ownership Plan. If the Participant makes a rollover contribution to the Trust Fund, such amount shall be subject to the Participant's direction of investment in accordance with Section 8.10. Rollover contributions will be credited to the Participant's "Rollover Account." The Trustee shall hold, administer and distribute a rollover contribution in the same manner as any Employer discretionary contribution made to the Trust, except that distributions of a rollover contribution that consists of Flow ESOP Stock shall be only in lump sum. 4.04 PARTICIPANT CONTRIBUTION - FORFEITABILITY. A Participant's Accrued Benefit is, at all times, 100% Nonforfeitable to the extent the value of his Accrued Benefit is derived from Participant contributions made by him to the Trust for his own benefit. 4.05 PARTICIPANT CONTRIBUTION WITHDRAWAL/ DISTRIBUTION. A Participant, by giving prior written notice to the Trustee, may withdraw all or any part of the value of his Accrued Benefit derived from his Participant contributions described in this Article IV. A distribution of Participant contributions must comply with the joint and survivor requirements described in Article VI, if those requirements apply to the Participant. A Participant may not exercise his right to withdraw the value of his Accrued Benefit derived from his Participant contributions more than once during any Plan Year. The Trustee, in accordance with the direction of the Advisory Committee, will distribute a Participant's unwithdrawn Accrued Benefit attributable to his Participant contributions in accordance with the provisions of Article VI applicable to the distribution of the Participant's Nonforfeitable Accrued Benefit. 4.06 PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT. The Advisory Committee must maintain, or must direct the Trustee to maintain, a separate Account(s) in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan derived from his Participant contributions. A Participant's Accrued Benefit derived from his Participant contributions as of any applicable date is the balance of his separate Participant contribution Account(s). 13 ARTICLE V TERMINATION OF SERVICE - PARTICIPANT VESTING 5.01 NORMAL RETIREMENT AGE. A Participant's Normal Retirement Age is 65 years of age. A Participant who remains in the employ of the Employer after attaining Normal Retirement Age will continue to participate in Employer contributions. A Participant's Accrued Benefit derived from Employer contributions is 100% Nonforfeitable upon and after his attaining Normal Retirement Age (if employed by the Employer on or after that date). 5.02 PARTICIPANT DISABILITY OR DEATH. If a Participant's employment with the Employer terminates as a result of death or disability, the Participant's Accrued Benefit derived from Employer contributions will be 100% Nonforfeitable. 5.03 VESTING SCHEDULE. A Participant has a 100% Nonforfeitable interest at all times in his Deferral Contributions Account, Qualified Matching Contributions Account, and Qualified Nonelective Contributions Account . Except as provided in Sections 5.01 and 5.02, for each Year of Service, a Participant's Nonforfeitable percentage of his Regular Matching Contributions Account and Employer Contributions Account equals the percentage in the following vesting schedule:
Percent of Years of Service Nonforfeitable with the Employer Accrued Benefit ----------------- --------------- Less than 1 None 1 20% 2 40% 3 60% 4 80% 5 or more 100%
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF FORFEITED ACCRUED BENEFIT. If pursuant to Article VI, a partially-vested Participant receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in Section 5.08), the cash-out distribution will result in an immediate forfeiture of the nonvested portion of the Participant's Accrued Benefit derived from Employer contributions. See Section 5.09. A partially-vested Participant is a Participant whose Nonforfeitable Percentage determined under Section 5.03 is less than 100%. A cash-out distribution is a distribution of the entire present value of the Participant's Nonforfeitable Accrued Benefit. (A) RESTORATION AND CONDITIONS UPON RESTORATION. A partially-vested Participant who is re-employed by the Employer after receiving a cash-out distribution of the Nonforfeitable percentage of his Accrued Benefit may repay the Trustee the amount of the cash-out distribution attributable to Employer contributions, unless the Participant no longer has a right to restoration under the requirements of this Section 5.04. If a partially-vested Participant makes the cash-out distribution repayment, the Advisory Committee, subject to the conditions of this paragraph (A), must restore his Accrued Benefit attributable to Employer contributions to the same dollar amount as the dollar amount of his Accrued Benefit on the Accounting Date, or other valuation date, immediately preceding the cash-out distribution date, unadjusted for any gains or losses occurring subsequent to that Accounting Date, or other valuation date. Restoration of the Participant's Accrued Benefit shall include restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Accrued Benefit, in accordance with applicable Treasury regulations. The Advisory Committee shall not restore a re-employed Participant's Accrued Benefit under this paragraph if: (1) 5 years have elapsed since the Participant's first re-employment date following the cash-out distribution; or (2) The Participant incurred a Forfeiture Break in Service (as defined in Section 5.08). This condition also applies if the Participant makes repayment within the Plan Year in which he incurs the Forfeiture Break in Service and that Forfeiture Break in Service would result in a complete forfeiture of the amount the Advisory Committee otherwise would restore. (B) TIME AND METHOD OF RESTORATION. If neither of the two conditions preventing restoration of the Participant's Accrued Benefit applies, the Advisory Committee will restore the Participant's Accrued Benefit as of the Plan Year Accounting Date coincident with or immediately following the repayment. To restore the Participant's Accrued Benefit, the Advisory Committee, to the extent necessary, will allocate to the Participant's Account: (1) First, the amount, if any, of Participant forfeitures the Advisory Committee would otherwise allocate under Section 3.05; 14 (2) Second, the amount, if any, of the Trust Fund net income or gain for the Plan Year; and (3) Third, the Employer contribution for the Plan Year to the extent made under a discretionary formula. To the extent the amounts described in clauses (1), (2) and (3) are insufficient to enable the Advisory Committee to make the required restoration, the Employer must contribute, without regard to any requirement or condition of Section 3.01, the additional amount as is necessary to enable the Advisory Committee to make the required restoration. If, for a particular Plan Year, the Advisory Committee must restore the Accrued Benefit of more than one re-employed Participant, then the Advisory Committee will make the restoration allocation(s) to each such Participant's Account in the same proportion that a Participant's restored amount for the Plan Year bears to the restored amount for the Plan Year of all re-employed Participants. The Advisory Committee will not take into account the allocation under this Section 5.04 in applying the limitation on allocations under Part 2 of Article III. (C) 0% VESTED PARTICIPANT. The deemed cash-out rule applies to a 0% vested Participant. A 0% vested Participant is a Participant whose Accrued Benefit derived from Employer contributions is entirely forfeitable at the time of his Separation from Service. Under the deemed cash-out rule, the Advisory Committee will treat the 0% vested Participant as having received a cash-out distribution on the date of the Participant's Separation from Service or, if the Participant's Account is entitled to an allocation of Employer contributions for the Plan Year in which he separates from Service, on the last day of that Plan Year. For purposes of applying the restoration provisions of this Section 5.04, the Advisory Committee will treat the 0% vested Participant as repaying his cash-out "distribution" on the first date of his re-employment with the Employer. 5.05 ACCOUNTING FOR REPAID AMOUNT. Until the Advisory Committee restores the Participant's Accrued Benefit, as described in Section 5.04, the Trustee will invest the cash-out amount the Participant has repaid in the same manner that salary deferral contributions for such Participant would be invested. Unless the repayment qualifies as a rollover contribution, the Advisory Committee will direct the Trustee to repay to the Participant as soon as is administratively practicable the full amount of the Participant's repayment (with earnings or losses as determined under a weighting method similar to that described under Section 9.11) if the Advisory Committee determines either of the conditions of Section 5.04(A) prevents restoration as of the applicable Accounting Date, notwithstanding the Participant's repayments. 5.06 YEAR OF SERVICE - VESTING. For purposes of vesting under Section 5.03, Year of Service means the following: (a) Vesting Service from May 1, 1986 to April 30, 1988: any Plan Year (based on the prior plan year, which was the 12 consecutive month period ending every April 30) during which the Employee completes not less than 1,000 Hours of Service with the Employer, including Plan Years prior to the Effective Date of the Plan. (b) Vesting Service from May 1, 1988 to December 31, 1989: There shall be special vesting computation periods of May 1, 1988 to April 30, 1989 and January 1, 1989 to December 31, 1989. A Participant who is credited with at least 1,000 hours of service in any such computation period shall be credited with a year of Vesting Service for such period. Any employee who is credited with at least 1,000 hours of service in both computation periods shall be credited with two years of Vesting Service for such periods. (c) Vesting Service from and after January 1, 1990: any Plan Year (based on the Plan Year, which is the 12 consecutive month period ending every December 31) during which the Employee completes not less than 1,000 Hours of Service with the Employer. 5.07 BREAK IN SERVICE - VESTING. For purposes of this Article V, a Participant shall incur a "Break in Service" if, during any Plan Year, he does not complete more than 500 Hours of Service with the Employer. 5.08 INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining "Years of Service" under Section 5.06, the Plan takes into account all Years of Service an Employee completes with the Employer, except any Year of Service before the Plan Year in which the Participant attained the age of 18. For the sole purpose of determining a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions which accrued for his benefit prior to a Forfeiture Break in Service, the Plan disregards any Year of Service after the Participant first incurs a Forfeiture Break in Service. The Participant incurs a Forfeiture Break in Service when he incurs 5 consecutive Breaks in Service. 5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his Accrued Benefit derived from Employer contributions occurs under the Plan on the earlier of: (a) The last day of the Plan Year in which the Participant first incurs a Forfeiture Break in Service; or, (b) The date the Participant receives a cash-out distribution. 15 The Advisory Committee determines the percentage of a Participant's Accrued Benefit forfeiture, if any, under this Section 5.09 solely by reference to the vesting schedule of Section 5.03. A Participant will not forfeit any portion of his Accrued Benefit for any other reason or cause except as expressly provided by this Section 5.09 or as provided under Section 9.14. 16 ARTICLE VI TIME AND METHOD OF PAYMENT OF BENEFITS 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT. Unless the Participant or the Beneficiary elects in writing to a different time of payment, the Advisory Committee will direct the Trustee to commence distribution of a Participant's Nonforfeitable Accrued Benefit in accordance with this Section 6.01. A Participant must consent, in writing, to any distribution required under this Section 6.01 if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $5,000 and the Participant has not attained the later of Normal Retirement Age or age 62. Furthermore, the Participant's spouse also must consent, in writing, to any distribution, for which Section 6.04 requires the spouse's consent. For all purposes of this Article VI, the term "annuity starting date" shall mean the date on which the Plan pays a distribution as an annuity or in any other form but in no event is the "annuity starting date" earlier than a Participant's Separation from Service with the Employer. A distribution date under this Article VI, unless otherwise specified within the Plan, is each March 1, June 1, September 1, or December 1, or as soon as administratively practicable following such dates. For purposes of the consent requirements under this Article VI, if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of any distribution, exceeds $5,000, the Advisory Committee must treat that present value as exceeding $5,000 for purposes of all subsequent Plan distributions to the Participant. (A) SEPARATION FROM SERVICE FOR A REASON OTHER THAN DEATH. For a Participant who incurs a Separation from Service for a reason other than death, the Advisory Committee will direct the Trustee to commence distribution of the Participant's Accrued Benefit, as follows: (1) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT NOT EXCEEDING $5,000. In a lump sum, on the first distribution date after the close of the quarter Plan Year in which the Participant separates from Service with the Employer, but in no event later than the 60th day following the close of the Plan Year in which the Participant attains Normal Retirement Age. (2) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $5,000. In a form and at a time elected by the Participant, pursuant to Section 6.03. In the absence of an election by the Participant, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a lump sum (or, if applicable, the normal annuity form of distribution required under Section 6.04) on the 60th day following the close of the Plan Year in which the latest of the following events occurs: (a) the Participant attains Normal Retirement Age; (b) the Participant attains age 62; or (c) the Participant's Separation from Service. (B) REQUIRED BEGINNING DATE. (1) TIMING OF REQUIRED DISTRIBUTIONS. If any distribution commencement date described under Paragraph (A) of this Section 6.01, either by Plan provision or by Participant election (or nonelection), is later than the Participant's Required Beginning Date, the Advisory Committee instead must direct the Trustee to make distribution to the Participant on the Participant's Required Beginning Date. A Participant's Required Beginning Date is the April 1 following the close of the calendar year in which the Participant attains age 70 1/2 if the Participant is a more than 5% owner with respect to the Plan Year ending in that calendar year. For any other Participant, the Required Beginning Date is the April 1 following the close of the calendar year in which the Participant separates from Service or, if later, the April 1 following the close of the calendar year in which the Participant attains age 70 1/2. A mandatory distribution at the Participant's Required Beginning Date will be in lump sum (or, if applicable, the normal annuity form of distribution required under Section 6.04) unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment. (2) PARTICIPANT ELECTION UPON ATTAINING AGE 70 1/2. A Participant upon attaining age 70 1/2, until he retires, has a continuing election to receive all or any portion of his Accrued Benefit. A Participant only may make one withdrawal per Plan Year. The Trustee, as directed by the Advisory Committee, will distribute the amount(s) withdrawn by a Participant in single sum. A Participant must make an election under this Section 6.01(B)(2) on a form prescribed by the Advisory Committee at any time during the Plan Year for which his election is to be effective. In his written election, the Participant must specify the percentage or dollar amount of his Accrued Benefit he wishes the Trustee to distribute to him. The Participant's election relates solely to the percentage or dollar amount specified in his election form and his right to elect to receive an amount, if any, for a particular Plan year greater than the percentage or dollar amount specified in his election form terminates on the Accounting Date of that Plan Year. The Trustee must make a distribution to a Participant in accordance with his election under this Section 6.01(B)(2) as soon as administratively practicable after the Participant files his written election with the Advisory Committee. The Trustee will distribute the balance of the Participant's Accrued Benefit not distributed pursuant to his election(s) in accordance with the other distribution provisions of this Plan. 17 (C) DEATH OF THE PARTICIPANT. The Advisory Committee will direct the Trustee, in accordance with this Section 6.01(C) to distribute to the Participant's Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the Trust at the time of the Participant's death. Subject to the requirements of Section 6.04, the Advisory Committee will determine the death benefit by reducing the Participant's Nonforfeitable Accrued Benefit, by any security interest the Plan has against that Nonforfeitable Accrued Benefit by reason of an outstanding Participant loan. (1) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT DOES NOT EXCEED $5,000. The Advisory Committee, subject to the requirements of Section 6.04, must direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit in a single cash sum, on the first distribution date after, but valued as of, the close of the quarter Plan Year in which the Participant's death occurs or, if later, on the first distribution date after the close of the quarter Plan Year in which the Advisory Committee receives notification of or otherwise confirms the Participant's death. (2) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $5,000. Subject to the requirements of Section 6.04, the Advisory Committee will direct the Trustee to distribute the Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum on the first distribution date after, but valued as of, the close of the quarter Plan Year in which the Participant's death occurs or, if later, on the first distribution date after the close of the quarter Plan Year in which the Advisory Committee receives notification of or otherwise confirms the Participant's death. If the death benefit is payable to the Participant's surviving spouse in full, the surviving spouse may elect distribution at any time or in any form (other than the joint and survivor annuity) this Article VI would permit for a Participant. (D) DEFAULT ON A LOAN. If a Participant or Beneficiary defaults on a loan made pursuant to a loan policy adopted by the Advisory Committee pursuant to Section 9.04, the Plan treats the default as a distributable event. The Trustee, at the time of the default, will reduce the Participant's Nonforfeitable Accrued Benefit by the less of the amount in default (plus accrued interest) or the Plan's security interest in that Nonforfeitable Accrued Benefit. To the extent the loan is attributable to the Participant's Deferral Contributions Account, Qualified Matching Contributions Account or Qualified Nonelective Contributions Account, the Trustee will not reduce the Participant's Nonforfeitable Accrued Benefit unless the Participant has separated from Service or unless the Participant has attained age 59 1/2. 6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to the annuity distribution requirements, if any, prescribed by Section 6.04, and any restrictions prescribed by Section 6.03, a Participant or Beneficiary may elect distribution under one, or any combination, of the following methods: (a) by payment in a lump sum; (b) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and his Beneficiary; or (c) by payment in the form of the following types of annuity: straight life annuity, single life annuity with certain periods of five, ten or fifteen years or installment refund, survivorship life annuities with survivorship percentages of 50, 66-2/3 or 100 percent (as those types of annuity are described in the Spider Staging Corporation 401(k) Savings Plan in effect on December 31, 1992). The distribution options permitted under this Section 6.02 are available only if the present value of the Participant Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $5,000. To facilitate installment payments under this Article VI, the Advisory Committee may direct the Trustee to segregate all or any part of the Participant's Accrued Benefit in a separate Account. The Trustee will invest the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated Account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. A Participant or Beneficiary may elect to receive an installment distribution in the form of a Nontransferable Annuity Contract. Under an installment distribution, the Participant or Beneficiary, at any time, may elect to accelerate the payment of all, or any portion, of the Participant's unpaid Nonforfeitable Accrued Benefit, subject to the requirements of Section 6.04. (A) MINIMUM DISTRIBUTION REQUIREMENTS FOR PARTICIPANTS. The Advisory Committee may not direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit, nor may the Participant elect to have the Trustee distribute his Nonforfeitable Accrued Benefit, under a method of payment which, as of the Required Beginning Date, does not satisfy the minimum distribution requirements under Code Section 401(a)(9) and the applicable Treasury regulations. The minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the Participant's life expectancy or, if applicable, the joint and last survivor expectancy of the Participant and his designated Beneficiary (as determined under Article VIII, subject to the requirements of the Code Section 401(a)(9) regulations). The Advisory Committee will increase the Participant's Nonforfeitable Accrued Benefit, as determined on the relevant valuation date, for contributions or forfeitures allocated after the valuation date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the valuation date and by December 31 of the valuation calendar year. For purposes of this valuation, the Advisory Committee 18 will treat any portion of the minimum distribution for the first distribution calendar year made after the close of that year as a distribution occurring in that first distribution calendar year. In computing a minimum distribution the Advisory Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9. The Advisory Committee, only upon the Participant's written request, may compute the minimum distribution for a calendar year subsequent to the first calendar year for which the Plan requires a minimum distribution by redetermining the applicable life expectancy. However, the Advisory Committee may not redetermine the joint life and last survivor expectancy of the Participant and a nonspouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant's life expectancy. If the Participant's spouse is not his designated Beneficiary, a method of payment to the Participant (whether by Participant election or by Advisory Committee direction) may not provide more than incidental benefits to the Beneficiary. For Plan Years beginning after December 31, 1988, the Plan must satisfy the minimum distribution incidental benefit ("MDIB") requirement in the Treasury regulations issued under Code Section 401(a)(9) for distributions made on or after the Participant's Required Beginning Date and before the Participant's death. To satisfy the MDIB requirement, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lessor number. Following the Participant's death, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor. For Plan Years beginning prior to January 1, 1989, the Plan satisfies the incidental benefits requirement if the distributions to the Participant satisfied the MDIB requirement or if the present value of the retirement benefits payable solely to the Participant is greater than 50% of the present value of the total benefits payable to the Participant and his Beneficiaries. The Advisory Committee must determine whether benefits to the Beneficiary are incidental as of the date the Trustee is to commence payment of the retirement benefits to the Participant, or as of any date the payment period to the Participant is redetermined. The minimum distribution for the first distribution calendar year is due by the Participant's Required Beginning Date. The minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant's Required Beginning Date falls, is due by December 31 of that year. If the Participant receives distribution in the form of a Nontransferable Annuity Contract, the distribution satisfies this Section 6.02(A) if the contract complies with the requirements of Code Section 401(a)(9) and the applicable Treasury regulations. (B) MINIMUM DISTRIBUTION REQUIREMENTS FOR BENEFICIARIES. The method of distribution to the Participant's Beneficiary must satisfy Code Section 401(a)(9) and the applicable Treasury regulations. If the Participant's death occurs after his Required Beginning Date or, if earlier, the date the Participant commences an irrevocable annuity pursuant to Section 6.04, the method of payment to the Beneficiary must provide for completion of payment over a period which does not exceed the payment period which had commenced for the Participant. If the Participant's death occurs prior to his Required Beginning Date, and the Participant had not commenced an irrevocable annuity pursuant to Section 6.04, the method of payment to the Beneficiary, subject to Section 6.04, must provide for completion of payment to the Beneficiary over a period not exceeding: (i) 5 years after the date of the Participant's death; or (ii) if the Beneficiary is a designated Beneficiary, the designated Beneficiary's life expectancy. The Advisory Committee may not direct payment of the Participant's Nonforfeitable Accrued Benefit over a period described in clause (ii) unless the Trustee will commence payment to the designated Beneficiary no later than the December 31 following the close of the calendar year in which the Participant's death occurred or, if later, and the designated Beneficiary is the Participant's surviving spouse, December 31 of the calendar year in which the Participant would have attained age 70 1/2. If the Trustee will make distribution in accordance with clause (ii), the minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the designated Beneficiary's life expectancy. The Advisory Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9 for purposes of applying this paragraph. The Advisory Committee, only upon the written request of the Participant or of the Participant's surviving spouse, may recalculate the life expectancy of the Participant's surviving spouse not more frequently than annually, but may not recalculate the life expectancy of a nonspouse designated Beneficiary after the Trustee commences payment to the designated Beneficiary. The Advisory Committee will apply this paragraph by treating any amount paid to the Participant's child, which becomes payable to the Participant's surviving spouse. Upon the Beneficiary's written request, the Advisory Committee must direct the Trustee to accelerate payment of all, or any portion, of the Participant's unpaid Accrued Benefit, as soon as administratively practicable following the effective date of that request. 6.03 BENEFIT PAYMENT ELECTIONS. Not earlier than 90 days, but not later than 30 days, before the Participant's annuity starting date, the Plan Administrator must provide a benefit notice to a Participant who is eligible to make an election under this Section 6.03. The benefit notice must explain the optional forms of benefits in the Plan, including the material features and relative values of those options, and, if applicable, the Participant's right to defer distribution until he attains the later of Normal Retirement Age or age 62. 19 If a Participant or Beneficiary makes an election prescribed by this Section 6.03, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with that election. Any election under this Section 6.03 is subject to the requirements of Section 6.02 and of Section 6.04. The Participant or Beneficiary must make an election under this Section 6.03 by filing his election form with the Advisory Committee at any time before the Trustee otherwise would commence to pay a Participant's Accrued Benefit in accordance with the requirements of Article VI. (A) PARTICIPANT ELECTIONS AFTER SEPARATION FROM SERVICE. If the present value of a Participant's Nonforfeitable Accrued Benefit exceeds $5,000, he may elect to have the Trustee commence distribution as of any distribution date. The Participant may reconsider an election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date. (B) PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE. (1) DEFERRAL CONTRIBUTIONS ACCOUNT AND QUALIFIED NONELECTIVE CONTRIBUTIONS ACCOUNT. The Participant, until he retires, has a continuing election to receive a distribution from his Deferral Contributions Account and Qualified Nonelective Contributions Account if: he has attained age 59 1/2; or, in the case of his Deferral Contributions Account, he satisfies the conditions for a hardship, as described in paragraph (4). A hardship distribution option may not apply to the Participants Qualified Nonelective Contributions Accounts, except as provided in paragraph (5). If the Employer sells substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business or sells a subsidiary (within the meaning of Code Section 409(d)(3)), a Participant who continues employment with the acquiring corporation is eligible for distribution from these Accounts as if he has a Separation from Service. After March 31, 1988, a distribution authorized solely by reason of the prior sentence must constitute a lump sum distribution, determined in a manner consistent with Code Section 401(k)(10) and the applicable Treasury regulations. (2) QUALIFIED MATCHING CONTRIBUTIONS ACCOUNT. The Participant, until he retires, has a continuing election to receive all or any portion of his Qualified Matching Contributions Account if he has attained age 59 1/2. (3) PROCEDURE. A Participant must make an election under this Section 6.03(B) on a form prescribed by the Advisory Committee at any time during the Plan Year for which his election is to be effective. In his written election, the Participant must specify the percentage or dollar amount he wishes the Trustee to distribute to him. The Participant's election relates solely to the percentage or dollar amount specified in his election form and his right to elect to receive an amount, if any, for a particular Plan Year greater than the dollar amount or percentage specified in his election form terminates on the Accounting Date. The Trustee must make a distribution to a Participant in accordance with his election under this Section 6.03(B) within the 90-day period (or as administratively practicable) after the Participant files his written election with the Trustee. The Trustee will distribute the balance of the Participant's Accrued Benefit not distributed pursuant to his election(s) in accordance with the other distribution provisions of this Plan. (4) DEFINITION OF HARDSHIP. For purposes of this Section 6.03(B), a hardship distribution, must be on account of one or more of the following immediate and heavy financial needs: (1) medical expenses described in Code Section 213(d) incurred by the Participant, by the Participant's spouse, or by any of the Participant's dependents (as defined in Code Section 152), or necessary for these persons to obtain such medical care; (2) costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; (3) the payment of post-secondary education tuition and related educational fees, for the next 12 months, for the Participant, for the Participant's spouse, or for any of the Participant's dependents (as defined in Code Section 152); or (4) to prevent the eviction of the Participant from his principal residence or the foreclosure on the mortgage of the Participant's principal residence. The amount of a Participant's immediate and heavy financial need may include amounts necessary to pay any Federal, State, or local income taxes or penalties reasonably anticipated to result from the hardship distribution. (5) DISTRIBUTABLE AMOUNT FOR HARDSHIP DISTRIBUTIONS. For Plan Years beginning after December 31, 1988, a hardship distribution may not include earnings on an Employee's elective deferrals credited after December 31, 1988. Qualified matching contributions and qualified nonelective contributions, and earnings on such contributions, are not subject to hardship withdrawal unless credited by December 31, 1988. (6) EMPLOYEE REPRESENTATION. No hardship distribution may be made to a Participant unless the Participant represents, and the Advisory Committee determines under the facts and circumstances it is reasonable to rely on that representation, that he is not able to relieve his immediate and heavy financial need: (a) Through reimbursement or compensation by insurance or otherwise; (b) By reasonable liquidation of the Participant's assets, to the extent such liquidation would not itself cause an immediate and heavy financial need (including those assets of the Participant's spouse or of the Participant's minor children, if those assets are reasonably available to the Participant.); 20 (c) By cessation of elective deferrals or employee contributions under the Plan; or (d) By other distributions or nontaxable (at the time of the loan) loans from this Plan or any other qualified plan maintained by the Employer or by any other employer; or (e) By borrowing from commercial sources on reasonable commercial terms. (7) DESIGNATION OF DIRECTED INVESTMENT FUND. As part of any hardship withdrawal request, a Participant may designate the directed investment fund or funds that his withdrawal will be charged against. If the amount invested in such designated fund or funds is not sufficient, the withdrawal will be charged against each other fund on a prorata basis. If no designation is made, the withdrawal will be charged against each fund on a prorata basis. (C) DEATH BENEFIT ELECTIONS. If the present value of the deceased Participant's Nonforfeitable Accrued Benefit exceeds $5,000, and if the death benefit is payable to the Participant's surviving spouse in full, the surviving spouse may elect to have the Trustee distribute the Participant's Nonforfeitable Accrued Benefit in a form and within a period this Article VI would permit for a Participant. (D) [RESERVED] 6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. (A) JOINT AND SURVIVOR ANNUITY. The Advisory Committee must direct the Trustee to distribute a married or unmarried Participant's Nonforfeitable Accrued Benefit in the form of a qualified joint and survivor annuity, unless the Participant makes a valid waiver election as (and within the period) described in Section 6.05. If, as of the annuity starting date, the Participant is married, a qualified joint and survivor annuity is an immediate annuity which is purchasable with the Participant's Nonforfeitable Accrued Benefit and which prides a life annuity for the Participant and a survivor annuity payable for the remaining life of the Participant's surviving spouse equal to 50% of the amount of the annuity payable during the life of the Participant. If, as of the annuity starting date, the Participant is not married, a qualified joint and survivor annuity is an immediate life annuity for the Participant which is purchasable with the Participant's Nonforfeitable Accrued Benefit. Upon a Participant's separation from service, the Advisory Committee, without Participant or spousal consent, must direct the Trustee to pay the Participant's Nonforfeitable Accrued Benefit in a lump sum, in lieu of a qualified joint and survivor annuity, in accordance with Section 6.01, if the Participant's Nonforfeitable Accrued Benefit is not greater than $5,000. (B) PRERETIREMENT SURVIVOR ANNUITY. If a married Participant dies prior to his annuity starting date, the Advisory Committee will direct the Trustee to distribute a portion of the Participant's Nonforfeitable Accrued Benefit to the Participant's surviving spouse in the form of a preretirement survivor annuity, unless the Participant has a valid waiver election (as described in Section 6.06) in effect, or unless the Participant and his spouse were not married throughout the one year period ending on the date of his death. A preretirement survivor annuity is an annuity which is purchasable with 50% of the Participant's Nonforfeitable Accrued Benefit (determined as of the date of the Participant's death) and which is payable for the life of the Participant's surviving spouse. The value of the preretirement survivor annuity is attributable to Employer contributions and to Employee contributions in the same proportion as the Participant's Nonforfeitable Accrued Benefit is attributable to those contributions. The portion of the Participant's Nonforfeitable Accrued Benefit not payable under this paragraph is payable to the Participant's Nonforfeitable Accrued Benefit not payable under this paragraph is payable to the Participant's Beneficiary, in accordance with the other provisions of this Article VI. If the present value of the preretirement survivor annuity does not exceed $5,000, the Advisory Committee, on or before the annuity starting date (as determined under Section 6.01(C)), must direct the Trustee to make a lump sum distribution to the Participant's surviving spouse, in lieu of a preretirement survivor annuity. (C) SURVIVING SPOUSE ELECTIONS. If the present value of the preretirement survivor annuity exceeds $5,000, the Participant's surviving spouse may elect to have the Trustee commence payment of the preretirement survivor annuity at any time following the date of the Participant's death, but not later than the mandatory distribution periods described in Section 6.02, and may elect either or any combination of the two forms of payment described in Section 6.02, in lieu of the preretirement survivor annuity. In the absence of an election by the surviving spouse, the Advisory Committee must direct the Trustee to distribute the preretirement survivor annuity on the first distribution date following the close of the Plan Year in which the latest of the following events occurs: (i) the Participant's death; (ii) the date the Advisory Committee receives notification of or otherwise confirms the Participant's death; (iii) the date the Participant would have attained Normal Retirement Age; or (iv) the date the Participant would have attained age 62. (D) SPECIAL RULES. If the Participant has in effect a valid waiver election regarding the qualified joint and survivor annuity or the preretirement survivor annuity, the Advisory Committee must direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with Sections 6.01, 6.02 and 6.03. The Advisory Committee will reduce the Participant's Nonforfeitable Accrued Benefit by any security interest (pursuant to any offset rights authorized by Section 21 10.03[B]) held by the Plan by reason of a Participant loan to determine the value of the Participant's Nonforfeitable Accrued Benefit distributable in the form of a qualified joint and survivor annuity or preretirement survivor annuity, provided any post - August 18, 1985, loan satisfied the spousal consent requirement described in Section 10.03[B] of the Plan. For purposes of applying this Article VI, the Advisory Committee treats a former spouse as the Participant's spouse or surviving spouse to the extent provided under a qualified domestic relations order described in Section 6.07. The provisions of this Section 6.04, and of Sections 6.05 and 6.06, apply separately to the portion of the Participant's Nonforfeitable Accrued Benefit subject to the qualified domestic relations order and to the portion of the Participant's Nonforfeitable Accrued Benefit not subject to that order. 6.05 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY.At least 30 days (but not earlier than 90 days), before the Participant's annuity starting date, the Plan Administrator must provide the Participant a written explanation of the terms and conditions of the qualified joint and survivor annuity, the Participant's right to make, and the effect of, an election to waive the joint and survivor form of benefit, the rights of the Participant's spouse regarding the waiver election and the Participant's right to make, and the effect of, a revocation of a waiver election. The Plan does not limit the number of times the Participant may revoke a waiver of the qualified joint and survivor annuity or make a new waiver during the election period. The Participant (and his spouse, if the Participant is married), may revoke an election to receive a particular form of benefit at any time until the annuity starting date. The Participant (and his spouse, if applicable) may waive the 30-day election period if the distribution of the elected form of benefit commences more than 7 days after the Plan Administrator provides the Participant (and his spouse, if applicable) the written explanation. A married Participant's waiver election is not valid unless (a) the Participant's spouse (to whom the survivor annuity is payable under the qualified joint and survivor annuity) has consented in writing to the waiver election, the spouse's consent acknowledges the effect of the election, and a notary public or the Plan Administrator (or his representative) witnesses the spouse's consent, (b) the spouse consents to the alternate form of payment designated by the Participant or to any change in the designated form of payment, and (c) unless the spouse is the Participant's sole primary Beneficiary, the spouse consents to the Participant's Beneficiary designation or to any change in the Participant's Beneficiary designation. The spouse's consent to a waiver of the qualified joint and survivor annuity is irrevocable, unless the Participant revokes the waiver election. The spouse may execute a blanket consent to any form of payment designation or to any Beneficiary designation made by the Participant, if the spouse acknowledges the right to limit that consent to a specific designation but, in writing, waives that right. The consent requirements of this Section 6.05 apply to a former spouse of the Participant, to the extent required under a qualified domestic relations order described in Section 6.07. The Plan Administrator will accept as valid a waiver election which does not satisfy the spousal consent requirements if the Plan Administrator establishes the Participant does not have a spouse, the Plan Administrator is not able to locate the Participant's spouse, the Participant is legally separated or has been abandoned (within the meaning of State law) the Participant has a court order to that effect, or other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Participant) may give consent. 6.06 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. The Plan Administrator must provide a written explanation of the preretirement survivor annuity to each married Participant, within the following period which ends last: (1) the period beginning on the first day of the Plan Year in which the Participant attains age 32 and ending of the last day of the Plan Year in which the Participant attains age 34; (2) a reasonable period after an Employee becomes a Participant; (3) a reasonable period after the joint and survivor rules become applicable to the Participant; or (4) a reasonable period after a fully subsidized preretirement survivor annuity no longer satisfies the requirements for a fully subsidized benefit. A reasonable period described in clauses (2), (3) and (4) is the period beginning one year before and ending one year after the applicable event. If the Participant separates from Service before attaining age 35, clauses (1), (2), (3) and (4) do not apply and the Plan Administrator must provide the written explanation within the period beginning one year before and ending one year after the Separation from Service. The written explanation must describe, in a manner consistent with Treasury regulations, the terms and conditions of the preretirement survivor annuity comparable to the explanation of the qualified joint and survivor annuity required under Section 6.05. The Plan does not limit the number of times the Participant may revoke a waiver of the preretirement survivor annuity or make a new waiver during the election period. The election period for waiver of the preretirement survivor annuity ends on the date of the Participant's death. A Participant's waiver election of the preretirement survivor annuity is not valid unless (a) the Participant makes the waiver election no earlier than the first day of the Plan Year in which he attains age 35 and (b) the Participant's spouse (to whom the preretirement survivor annuity is payable) satisfies the consent requirements described in Section 6.05, except the spouse need not consent to the form of benefit payable to the designated Beneficiary. The spouse's consent to the waiver of the preretirement survivor annuity is irrevocable, unless the Participant revokes the waiver election. Irrespective of the time of election requirement described in clause (a), if the Participant separates from Service prior to the first day of 22 the Plan Year in which he attains age 35, the Plan Administrator will accept a waiver election as respects the Participant's Accrued Benefit attributable to his Service prior to his Separation from Service. Furthermore, if a requirement of clause (a), the Plan Administrator will accept that election as valid, but only until the first day of the Plan Year in which the Participant attains age 35. 6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in this Plan prevents the Trustee, in accordance with the direction of the Advisory Committee, from complying with the provisions of a qualified domestic relations order (as defined in Code Section 414(p)). This Plan specifically permits distribution to an alternate payee under a qualified domestic relations order at any time, irrespective of whether the Participant has attained his earliest retirement age (as defined under Code Section 414(p)) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of earliest retirement age is available only if: (1) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee's benefits under the Plan exceeds $5,000, and the order requires, the alternate payee consents to any distribution occurring prior to the Participant's attainment of earliest retirement age. Nothing in this Section 6.07 permits a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not permitted under the Plan. The Plan Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of its determination. The Plan Administrator must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. If any portion of the Participant's Nonforfeitable Accrued Benefit is payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, the Advisory Committee must provide for a separate accounting of the amounts payable. If the Plan Administrator determines the order is qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Advisory Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the Plan Administrator does not make its determination of the qualified status of the order within the 18 month determination period, the Advisory Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Plan Administrator later determines the order is qualified domestic relations order. The Trustee will make any payments or distributions required under this Section 6.07 by separate benefit checks or other separate distribution to the alternate payee(s). 23 ARTICLE VII EMPLOYER ADMINISTRATIVE PROVISIONS 7.01 INFORMATION TO COMMITTEE. The Employer must supply current information to the Advisory Committee as to the name, date of birth, date of employment, annual compensation, leaves of absence, Years of Service and date of termination of employment of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the Advisory Committee considers necessary. The Employer's records as to the current information the Employer furnishes to the Advisory Committee are conclusive as to all persons. 7.02 NO LIABILITY. The Employer assumes no obligation or responsibility to any of its Employees, Participants or Beneficiaries for any act of, or failure to act, on the part of its Advisory Committee (unless the Employer is the Advisory Committee), the Trustee or the Plan Administrator (unless the Employer is the Plan Administrator). 7.03 INDEMNITY OF COMMITTEE. The Employer indemnifies and saves harmless the members of the Advisory Committee, and each of them, from and against any and all loss resulting from liability to which the Advisory Committee, or the members of the Advisory Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of this Trust or Plan or both, including all expenses reasonably incurred in their defense, in case the Employer fails to provide such defense. The indemnification provisions of this Section 7.03 do not relieve any Advisory Committee member from any liability he may have under ERISA for breach of a fiduciary duty. Furthermore, the Advisory Committee members and the Employer may execute a letter agreement further delineating the indemnification agreement of this Section 7.03, provided the letter agreement must be consistent with and must not violate ERISA. The indemnification provisions of this Section 7.03 extend to the Trustee solely to the extent provided by a letter agreement executed by the Trustee and the Employer, except that such indemnification provisions shall automatically apply to a trustee who is also an Employee. 7.04 EMPLOYER DIRECTION OF INVESTMENT. The Employer and Advisory Committee has the right to direct the Trustee with respect to the investment and re-investment of assets comprising the Trust Fund. Any such direction must be in writing. To the extent the Employer directs the Trustee, the Employer indemnifies and saves harmless the Trustee from and against any and all loss resulting from liability to which the Trustee may be subjected by reason of any act or conduct (except the Trustee's misconduct or negligence) in its official capacity in the administration and investment of the Trust Fund, including all expenses reasonably incurred in its defense, in case the Employer fails to provide such defense. Notwithstanding the foregoing, the indemnification provisions of this Section 7.04 do not indemnify or relieve the Trustee from any liability it may have under ERISA for breach of a fiduciary duty. 7.05 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right to amend the vesting schedule at any time, the Advisory Committee will not apply the amended vesting schedule to reduce the Nonforfeitable percentage of any Participant's Accrued Benefit derived from Employer contributions (determined as of the later of the date the Employer adopts the amendment, or the date the amendment becomes effective) to a percentage less than the Nonforfeitable percentage computed under the Plan without regard to the amendment. If the Employer makes a permissible amendment to the vesting schedule, each Participant having at least 3 Years of Service with the Employer may elect to have the percentage of his Nonforfeitable Accrued Benefit computed under the Plan without regard to the amendment. The Participant must file his election with the Plan Administrator within 60 days of the latest of (a) the Employer's adoption of the amendment; (b) the effective date of the amendment; or (c) his receipt of a copy of the amendment. The Plan Administrator, as soon as practicable, must forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of this amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. For purposes of this Section 7.05, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the Nonforfeitable percentage of an Employee's rights to his Employer derived Accrued Benefit. 24 ARTICLE VIII PARTICIPANT ADMINISTRATIVE PROVISIONS 8.01 BENEFICIARY DESIGNATION. Any Participant may from time to time designate, in writing, any person or persons, contingently or successively, to whom the Trustee shall pay his Accrued Benefit (including any life insurance proceeds payable to the Participant's Account) on event of his death. The Advisory Committee will prescribe the form for the written designation of Beneficiary and, upon the Participant's filing the form with the Advisory Committee, the form effectively revokes all designations filed prior to that date by the same Participant. A married Participant's Beneficiary designation is not valid unless the Participant's spouse consents, in writing, to the Beneficiary designation. The spouse's consent must acknowledge the effect of that consent and a notary public or the Plan Administrator (or his representative) must witness that consent. The spousal consent requirements of this paragraph do not apply if: (1) the Participant and his spouse are not married throughout the one year period ending on the date of the Participant's death; (2) the Participant's spouse is the Participant's sole primary beneficiary; (3) the Plan Administrator is not able to locate the Participant's spouse; (4) the Participant is legally separated or has been abandoned (within the meaning of State law) and the Participant has a court order to that effect; or (5) other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Participant) may give consent. 8.02 NO BENEFICIARY DESIGNATION. If a Participant fails to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a Participant predeceases him or dies before complete distribution of the Participant's Accrued Benefit, then the Trustee will pay the Participant's Accrued Benefit in accordance with Section 6.02 in the following order of priority to: (a) The Participant's surviving spouse; (b) The Participant's surviving children, including adopted children, in equal shares; (c) The Participant's surviving parents, in equal shares; or (d) The legal representative of the estate of the last to die of the Participant and his Beneficiary. The Advisory Committee will direct the Trustee as to the method and to whom the Trustee will make payment under this Section 8.02. 8.03 PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a deceased Participant must furnish to the Advisory Committee such evidence, data or information as the Advisory Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the Advisory Committee, provided the Advisory Committee advises each Participant of the effect of his failure to comply with its request. 8.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary of a deceased Participant must file with the Advisory Committee from time to time, in writing, his post office address and any change of post office address. Any communication, statement or notice addressed to a Participant, or Beneficiary, at his last post office address filed with the Advisory Committee, or as shown on the records of the Employer, binds the Participant, or Beneficiary, for all purpose of this Plan. 8.05 ASSIGNMENT OR ALIENATION. Subject to Code Section 414(p) relating to qualified domestic relations orders, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Furthermore, a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process. 8.06 NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time prescribed by ERISA and the applicable regulations, must furnish all Participants and Beneficiaries a summary description of any material amendment to the Plan or notice of discontinuance of the Plan and all other information required by ERISA to be furnished without charge. 8.07 LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of ERISA or to enforce any provisions of ERISA or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan. 8.08 INFORMATION AVAILABLE. Any Participant in the Plan or any Beneficiary may examine copies of the summary Plan description, latest annual report, any bargaining agreement, this Plan and Trust, contract or any other instrument under which the Plan was established or is operated. The Plan Administrator will maintain all of the items listed in this Section 8.08 in his office, or in such other place or places as he may designate from time to time in order to comply 25 with the regulations issued under ERISA, for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary the Plan Administrator will furnish him with a copy of any item listed in this Section 8.08. The Plan Administrator may make a reasonable charge to the requesting person for the copy so furnished. 8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. The Plan Administrator will provide adequate notice in writing to any Participant or to any Beneficiary ("Claimant") whose claim for benefits under the Plan the Advisory Committee has denied. The Plan Administrator's notice to the Claimant must set forth: (a) The specific reason for the denial; (b) Specific references to pertinent Plan provisions on which the Advisory Committee based its denial; (c) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and (d) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the Advisory Committee within 75 days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the Advisory Committee in writing within the 75 day period will render the Advisory Committee's determination final, binding and conclusive. If the Claimant should appeal to the Advisory Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. The Claimant, or his duly authorized representative, may review pertinent Plan documents. The Advisory Committee will re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Advisory Committee must advise the Claimant of its decision within 60 days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60 day limit unfeasible, but in no event may the Advisory Committee render a decision respecting a denial for a claim for benefits later than 120 days after its receipt of a request for review. The Plan Administrator's notice of denial of benefits must identify the name of each member of the Advisory Committee and the name and address of the Advisory Committee member to whom the Claimant may forward his appeal. 8.10 PARTICIPANT DIRECTION OF INVESTMENT. A Participant has the right to direct the investment or re-investment of the assets comprising the Participant's individual Account from among the investment choices designated by the Advisory Committee from time to time. As of October 1, 1992, the investment choices include the Employer Stock Fund. To effect Participant direction of investment, a Participant will follow such methods as the Advisory Committee shall from time-to-time prescribe, which may include telephone voice-response systems with subsequent written confirmation to the Participant. The Advisory Committee will separately account for participants' investments, and will direct the Trustee as to the overall investment of the Trust Fund pursuant to Section 7.04. Each Participant's investment election shall be in multiples of five percent (5%) or in any other multiple as prescribed by the Advisory Committee. Each Participant will be permitted to change his or her election of the percentage to be allocated to each investment choice out of future contributions and/or prior contributions at such times as the Advisory Committee prescribes. The requested change in investments will be processed and become effective on the first business day after it is received by the Plan's recordkeeper, or as soon as administratively practicable thereafter. Each Participant shall be solely responsible for the selection of his investments as allowed under the Plan. The fact that an investment is available to a Participant for investment under the Plan shall not be construed as a recommendation to invest in that particular investment. A Participant may not direct that more than 25% of future contributions be invested in the Employer Stock Fund. A Participant may not change the percentage allocation of his existing Account balances to be invested in the Employer Stock Fund to exceed 25% (calculating the percentage by using existing Account balances as of the most recent valuation date preceding the Participant's requested investment direction). If, due to market gains or losses or for any other reason, the Employer Stock Fund comprise 25% or more of the value of the Participant's Account balances (calculating the percentage by using existing Account balances as of the most recent valuation date preceding the Participant's requested investment direction), the Participant will not be required to move assets out of Employer Securities and into other funds in order to keep the percentage invested the Employer Stock Fund below 25%, and such Participant may continue to direct that up to 25% of future contributions be invested in the Employer Stock Fund. Because the Employer Stock Fund is a pooled account consisting of shares of Employer Stock, a Participant's investment in the Employer Stock Fund is an interest in the Employer Stock Fund. No shares of Employer Stock are actually allocated to a Participant's Account on account of investment in the Employer Stock Fund. 26 Participants who direct investment of their Accounts into the Employer Stock Fund have voting and similar rights with respect to the underlying Employer Stock as described in Sections 10.17[A] and 10.17[B]. When exercising those rights, a Participant who is allocated voting or similar rights acts as a "named fiduciary" within the meaning of ERISA Section 403(a)(1) with respect to the shares of Employer Stock effectively allocated to the Participant. 27 ARTICLE IX ADVISORY COMMITTEE-DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS 9.01 MEMBERS' COMPENSATION, EXPENSES. The employer must appoint an Advisory Committee to administer the Plan, the members of which may or may not be Participants in the Plan, or which may be the Plan Administrator acting alone. The members of the Advisory Committee shall serve without compensation for services as such, but the Employer will pay all expenses of the Advisory Committee, including the expense for any bond required under ERISA. 9.02 TERM. Each member of the Advisory Committee serves until the appointment of his successor. 9.03 POWERS. In case of a vacancy in the membership of the Advisory Committee, the remaining members of the Advisory Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the Advisory Committee pending the filling of the vacancy. 9.04 GENERAL. The Advisory Committee has the following powers and duties: (a) To select a Secretary, who need not be a member of the Advisory Committee; (b) To determine the rights of eligibility of an Employee to participate in the Plan, the value of the Participant's Accrued Benefit and the Nonforfeitable percentage of each Participant's Accrued Benefit; (c) To adopt rules of procedure and regulations necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Agreement; (d) To enforce the terms of the Plan and the rules and regulations it adopts; (e) To direct the Trustee, in writing, as respects the investment and distribution of the Trust; (f) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan and to exercise discretionary authority to determine eligibility for benefits or to construe the terms of the Plan; (g) To furnish the Employer with information which the Employer may require for tax or other purposes; (h) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; (i) To engage the services of an Investment Manager or Managers (as defined in ERISA Section 3(38)), each of whom will have full power and authority to manage, acquire or dispose (or direct the Trustee, in writing, with respect to acquisition or disposition) of any Plan asset under its control; (j) To establish a nondiscriminatory policy which the Trustee must observe in making loans, if any, to Participants; and (k) To establish and maintain a funding standard account and to make credits and charges to the account to the extent required by and in accordance with the provisions of the Code. The Advisory Committee must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner. LOAN POLICY. A loan policy described in paragraph (j) must be a written document and must include: (1) the identity of the person or positions authorized to administer the participant loan program; (2) a procedure for applying for the loan; (3) the criteria for approving or denying a loan; (4) the limitations, if any, on the types and amounts of loans available; (5) the procedure for determining a reasonable rate of interest; (6) the types of collateral which may secure the loan; and (7) the events constituting default and the steps the Plan will take to preserve plan assets in the event of default. 9.05 FUNDING POLICY. The Advisory Committee will review, not less often than annually, all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan's objectives. The Advisory Committee must communicate periodically, as it deems appropriate, to the Trustee and to any Plan Investment Manager the Plan's short-term and long-term financial needs so investment policy can be coordinated with Plan financial requirements. 9.06 MANNER OF ACTION. The decision of a majority of members appointed and qualified controls. 9.07 AUTHORIZED REPRESENTATIVE. The Advisory Committee may authorize any one of its members, or its Secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters or other documents. The Advisory Committee must evidence this authority by an instrument signed by all members and filed with the Trustee. 9.08 INTERESTED MEMBER. No member of the Advisory Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an 28 election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the Advisory Committee. 9.09 INDIVIDUAL ACCOUNTS. The Advisory Committee will maintain a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan. If a Participant re-enters the Plan subsequent to his having a Forfeiture Break in Service (as defined in Section 5.08), the Advisory Committee must maintain a separate Account for the Participant's pre-Forfeiture Break in Service Accrued Benefit and a separate Account for his post-Forfeiture Break in Service Accrued Benefit unless the Participant's entire Accrued Benefit under the Plan is 100% Nonforfeitable. The Advisory Committee will make its allocations to the Accounts of the Participants in accordance with the provisions of Section 9.11. The Advisory Committee may direct the Trustee to maintain a temporary segregated investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations under Section 9.11. The Advisory Committee must maintain records of its activities. 9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each Participant's Accrued Benefit consists of that proportion of the net worth (at fair market value) of the Employer's Trust Fund which the net credit balance in his Account (exclusive of the cash value of incidental benefit insurance contracts) bears to the total net credit balance in the Accounts (exclusive of the cash value of incidental benefit insurance contracts) of all Participants plus the cash surrender value of any incidental benefit insurance contracts held by the Trustee on the Participant's life. For purposes of a distribution under the Plan, the value of a Participant's Accrued Benefit is its value as of the valuation date that coincides with the date on which the assets allocated to the Participant's Account are liquidated by the Plan's recordkeeper (or if there is no valuation date on the liquidation date, the valuation date immediately preceding the liquidation date). 9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. A "valuation date" under this Plan is each Accounting Date and each interim valuation date determined under Section 10.14. As of each valuation date the Advisory Committee must adjust Accounts to reflect net income, gain or loss since the last valuation date. The valuation period is the period beginning the day after the last valuation date and ending on the current valuation date. TRUST FUND ACCOUNTS. The allocation provisions of this paragraph apply to all Participant Accounts other than segregated investment Accounts. The Advisory Committee first will adjust the Participant Accounts, as those Accounts stood at the beginning of the current valuation period, by reducing the Accounts for any forfeitures arising under Section 5.09 or under Section 9.14, for amounts charged during the valuation period to the Accounts in accordance with Section 9.13 (relating to distributions), for the cash value of incidental benefit insurance contracts and for the amount of any Account which the Trustee has fully distributed since the immediately preceding valuation date. The Advisory Committee then, subject to the restoration allocation requirements of Section 5.04 or of Section 9.14, will allocate the net income, gain or loss pro rata to the adjusted Participant Accounts. The allocable net income, gain or loss is the net income (or net loss), including the increase or decrease in the fair market value of assets, since the last valuation date. To the extent there is Participant direction of investment under Section 8.10, the net income, gain or loss will be allocated to Participant Accounts according to the amount each Participant has invested in each investment. The net income, gain or loss on salary deferral contributions and matching contributions will be credited according to a "weighted average allocation" method, which will treat a portion of the applicable contributions actually paid to the Trust during the valuation period as if includible in the Participant's Account as of the beginning of the valuation period. The method of fixing such portion will be determined in a nondiscriminatory and uniform manner by the Advisory Committee. SEGREGATED INVESTMENT ACCOUNTS. A segregated investment Account receives all income it earns and bears all expense or loss it incurs. As of the valuation date, the Advisory Committee must reduce a segregated Account for any forfeiture arising under Section 5.09 after the Advisory Committee has made all other allocations, changes or adjustments to the Account for the Plan Year. ADDITIONAL RULES. An Excess Amount or suspense account described in Part 2 of Article III does not share in the allocation of net income, gain or loss described in this Section 9.11. This Section 9.11 applies solely to the allocation of net income, gain or loss of the Trust. The Advisory Committee will allocate the Employer contributions and Participant forfeitures, if any in accordance with Article III. 9.12 INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date of each Plan Year but within the time prescribed by ERISA and the regulations under ERISA, the Plan Administrator will deliver to each Participant a statement reflecting the condition of his Accrued Benefit in the Trust as of that date and such other 29 information ERISA requires be furnished the Participant or Beneficiary. No Participant, except a member of the Advisory Committee, has the right to inspect the records reflecting the Account of any other Participant. 9.13 ACCOUNT CHARGED. The Advisory Committee will charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made. 9.14 UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require either the Trustee or the Advisory Committee to search for, or ascertain the whereabouts of, any Participant or Beneficiary. At the time the Participant's or Beneficiary's benefit becomes distributable under Article VI, the Advisory Committee, by certified or registered mail addressed to his last known address of record with the Advisory Committee or the Employer, must notify any Participant, or Beneficiary, that he is entitled to a distribution under this Plan. The notice must quote the provisions of this Section 9.14 and otherwise must comply with the notice requirements of Article VI. If the Participant, or Beneficiary, fails to claim his distributive share or make his whereabouts known in writing to the Advisory Committee within 6 months from the date of mailing of the notice, the Advisory Committee will treat the Participant's or Beneficiary's unclaimed payable Accrued Benefit as forfeited and will reallocate the unclaimed payable Accrued Benefit in accordance with Section 3.05. Where the benefit is distributable to the Participant, the forfeiture under this paragraph occurs as of the last day of the notice period, if the Participant's Nonforfeitable Accrued Benefit does not exceed $5,000, or as of the first day the benefit is distributable without the Participant's consent, if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $5,000. Where the benefit is distributable to a Beneficiary, the forfeiture occurs on the date the notice period ends except, if the Beneficiary is the Participant's spouse and the Nonforfeitable Accrued Benefit payable to the spouse exceeds $5,000, the forfeiture occurs as of the first day the benefit is distributable without the spouse's consent. Pending forfeiture, the Advisory Committee, following the expiration of the notice period, may direct the Trustee to segregate the Nonforfeitable Accrued Benefit in a segregated Account and to invest that segregated Account in Federally insured interest bearing savings accounts or time deposits (or in a combination of both), or in other fixed income investments. If a Participant or Beneficiary who has incurred a forfeiture of his Accrued Benefit under the provisions of the first paragraph of this Section 9.14 makes a claim, at any time, for his forfeited Accrued Benefit, the Advisory Committee must restore the Participant's or Beneficiary's forfeited Accrued Benefit to the same dollar amount as the dollar amount of the Accrued Benefit forfeited, unadjusted for any gains or losses occurring subsequent to the date of the forfeiture. The Advisory Committee will make the restoration during the Plan Year in which the Participant or Beneficiary makes the claim first from the amount, if any, of Participant forfeitures the Advisory Committee otherwise would allocate for the Plan Year and then from the amount, or additional amount, the Employer contributes to enable the Advisory Committee to make the required restoration. The Advisory Committee will direct the Trustee to distribute the Participant's or Beneficiary's restored Accrued Benefit to him not later than 60 days after the close of the Plan Year in which the Advisory Committee restores the forfeited Accrued Benefit. The forfeiture provisions of this Section 9.14 shall apply solely to the Participant's or to the Beneficiary's Accrued Benefit derived from Employer contributions. 30 ARTICLE X TRUSTEE, POWERS AND DUTIES 10.01 ACCEPTANCE. The Trustee accepts the Trust created under the Plan and agrees to perform the obligations imposed. The Trustee must provide bond for the faithful performance of its duties under the Trust to the extent required by ERISA. 10.02 RECEIPT OF CONTRIBUTIONS. The Trustee is accountable to the Employer for the funds contributed to it by the Employer, but does not have any duty to see that the contributions received comply with the provisions of the Plan. The Trustee is not obliged to collect any contributions from the Employer, nor is obliged to see that funds deposited with it are deposited according to the provisions of the Plan. 10.03 INVESTMENT POWERS. [A] TRUSTEE POWERS. The Trustee has full discretion and authority with regard to the investment of the Trust Fund, except with respect to a Plan asset under the control or direction of a properly appointed Investment Manager or with respect to a Plan asset subject to Employer, Participant or Advisory Committee direction of investment (including direction of investment by the Employer as provided in Section 7.04 and by a Participant as provided in Section 8.10). The Trustee must coordinate its investment policy with Plan financial needs as communicated to it by the Advisory Committee. The Trustee is authorized and empowered, but not by way of limitation, with the following powers, rights and duties: (a) To invest in Employer Stock (that is, to hold and acquire Employer Stock) comprising up to 100% of the value of the Trust Fund and to invest any part or all of the Trust Fund in any common or preferred stocks, open-end or closed-end mutual funds, put and call options traded on a national exchange, United States retirement plan bonds, corporate bonds, debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S. Treasury notes and other direct or indirect obligations of the United States Government or its agencies, improved or unimproved real estate situated in the United States, limited partnerships, insurance contracts of any type, mortgages, notes or other property of any kind, real or personal, and to buy or sell options on common stock on a nationally recognized exchange with or without holding the underlying common stock, and to make any other investments the Trustee deems appropriate, as a prudent man would do under like circumstances with due regard for the purposes of this Plan. Any investment made or retained by the Trustee in good faith is proper but must be of a kind (with the exception of Employer Securities) constituting a diversification considered by law suitable for trust investments; (b) To retain in cash so much of the Trust Fund as it may deem advisable to satisfy liquidity needs of the Plan and to deposit any cash held in the Trust Fund in a bank account at reasonable interest. If the Trustee is a bank or similar financial institution supervised by the United States or by a State, this paragraph (b) includes specific authority to invest in any type of deposit of the Trustee (or of a bank related to the Trustee within the meaning of Code Section 414(b)) at a reasonable rate of interest or in a common trust fund (the provisions of which govern the investment of such assets and which the Plan incorporates by this reference) as described in Code Section 584 which the Trustee (or its affiliate, as defined in Code Section 1504) maintains exclusively for the collective investment of money contributed by the bank (or the affiliate) in its capacity as trustee and which conforms to the rules of the Comptroller of the Currency; (c) To manage, sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease for any term even though commencing in the future or extending beyond the term of the Trust, and otherwise deal with all property, real or personal, in such manner, for such considerations and on such terms and conditions as the Trustee decides; (d) To credit and distribute the Trust as directed by the Advisory Committee. The Trustee is not obliged to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or as to the manner of making any payment or distribution. The Trustee accountable only to the Advisory Committee for any payment or distributions made by it in good faith on the order or direction of the Advisory Committee; (e) To borrow money, to assume indebtedness, extend mortgages and encumber by mortgage or pledge; (f) To compromise, contest, arbitrate or abandon claims and demands, in its discretion; (g) To have with respect to the Trust all of the rights of an individual owner, including the power to give proxies, to participate in any voting trusts, mergers, consolidations or liquidations, and to exercise or sell stock subscriptions or conversion rights, subject to the requirements of Section 10.17; (h) To lease for oil, gas and other mineral purposes and to create mineral severances by grant or reservation; to pool or unitize interests in oil, gas and other minerals; and to enter into operating agreements and to execute division and transfer orders; 31 (i) To hold any securities or other property in the name of the Trustee or its nominee, with depositories or agent depositories or in another form as it may deem best, with or without disclosing the trust relationship; (j) To perform any and all other acts in its judgment necessary or appropriate for the proper and advantageous management, investment and distribution of the Trust; (k) To retain any funds or property subject to any dispute without liability for the payment of interest, and to decline to make payment or delivery of the funds or property until final adjudication is made by a court of competent jurisdiction; (l) To file all tax returns required of the Trustee; (m) To furnish to the Employer, the Plan Administrator and the Advisory Committee a quarterly statement of account, within 30 days of the close of each quarter Plan Year, showing the condition of the Trust Fund and all investments, receipts, disbursements and other transactions effected by the Trustee during the Plan Year covered by the statement and also stating the assets of the Trust held at the end of the Plan Year, which accounts are conclusive on all persons, including the Employer, the Plan Administrator and the Advisory Committee, except as to any act or transaction concerning which the Employer, the Plan Administrator or the Advisory Committee files with the Trustee written exceptions or objections within 90 days after the receipt of the accounts or for which ERISA authorizes a longer period within which to object. (n) To begin, maintain or defend any litigation necessary in connection with the administration of the Plan, except that the Trustee is not obliged or required to do so unless indemnified to its satisfaction. [B] PARTICIPANT LOANS. This Section 10.03[B] specifically authorizes the Trustee to make loans on a nondiscriminatory basis to a Participant in accordance with the loan policy established by the Advisory Committee, provided: (1) the loan policy satisfies the requirements of Section 9.04; (2) loans are available to all Participants on a reasonably equivalent basis and are not available in a greater amount for Highly Compensated Employees than for other Employees; (3) any loan is adequately secured and bears a reasonable rate of interest; (4) the loan provides for repayment within a specified time; (5) the default provisions of the note prohibit offset of the Participant's Nonforfeitable Accrued Benefit prior to the time the Trustee otherwise would distribute the Participant's Nonforfeitable Accrued Benefit; (6) the amount of the loan does not exceed (at the time the Plan extends the loan) the present value of the Participant's Nonforfeitable Accrued Benefit; and (7) the loan otherwise conforms to the exemption provided by Code Section 4975(d)(1). If the joint and survivor requirements of Article VI apply to the Participant, the Participant may not pledge any portion of his Accrued Benefit as security for a loan made after August 18, 1985, unless, within the 90 day period ending on the date the pledge becomes effective, the Participant's spouse, if any, consents (in a manner described in Section 6.05 other than the requirement relating to the consent of a subsequent spouse) to the security or, by separate consent, to an increase in the amount of security. 10.04 RECORDS AND STATEMENTS. The records of the Trustee pertaining to the Plan must be open to the inspection of the Plan Administrator, Advisory Committee and the Employer at all reasonable times and may be audited from time to time by any person or persons as the Employer, Plan Administrator or Advisory Committee may specify in writing. The Trustee must furnish the Plan Administrator or Advisory Committee with whatever information relating to the Trust Fund the Plan Administrator or Advisory Committee considers necessary. 10.05 FEES AND EXPENSES FROM FUND. The Trustee will receive reasonable annual compensation as may be agreed upon from time to time between the Employer and the Trustee. The Trustee will pay all fees and expenses reasonably incurred for administration of the Plan from the Trust Fund unless the Employer pays the fees and expenses. The Advisory Committee will not treat any fee or expense paid, directly or indirectly, by the Employer as an Employer contribution, provided the fee or expense relates to the ordinary and necessary administration of the Fund. No person who is receiving full pay from the Employer shall receive compensation for services as Trustee. 10.06 PARTIES TO LITIGATION. Except as otherwise provided by ERISA, only the Employer, the Plan Administrator, the Advisory Committee, and the Trustee are necessary parties to any court proceeding involving the Trustee or the Trust Fund. No Participant, or Beneficiary, is entitled to any notice of process unless required by ERISA. Any final judgment entered in any proceeding will be conclusive upon the Employer, the Plan Administrator, the Advisory Committee, the Trustee, Participants and Beneficiaries. 10.07 PROFESSIONAL AGENTS. The Trustee may employ and pay from the Trust Fund reasonable compensation to agents, attorneys, accountants and other persons to advise the Trustee as in its opinion may be necessary. The Trustee may delegate to any agent, attorney, accountant or other person selected by it any non-Trustee power or duty vested in it by the Plan, and the Trustee may act or refrain from acting on the advice or opinion of any agent, attorney, accountant or other person so selected. 32 10.08 DISTRIBUTION OF CASH OR PROPERTY. The Trustee may make distribution under the Plan in cash or property, or partly in each, at its fair market value as determined by the Trustee. For purposes of a distribution to a Participant or to a Participant's designated Beneficiary or surviving spouse, "property" includes a Nontransferable Annuity contract, provided the contract satisfies the requirements of this Plan. 10.09 DISTRIBUTION DIRECTIONS. If no one claims a payment or distribution made from the Trust, the Trustee shall promptly notify the Advisory Committee and then dispose of the payment in accordance with the subsequent direction of the Advisory Committee. 10.10 THIRD PARTY. No person dealing with the Trustee is obligated to see to the proper application of any money paid or property delivered to the Trustee, or to inquire whether the Trustee has acted pursuant to any of the terms of the Plan. Each person dealing with the Trustee may act upon any notice, request or representation in writing by the Trustee, or by the Trustee's duly authorized agent, and is not liable to any person whomsoever in so acting. The certificate of the Trustee that it is acting in accordance with the Plan will be conclusive in favor of any person relying on the certificate. If more than two persons act as Trustee, the decision of a majority of such persons controls with respect to any decision regarding the administration or investment of the Trust Fund. 10.11 RESIGNATION. The Trustee may resign at any time as Trustee of the Plan by giving 30 days' written notice in advance to the Employer and to the Advisory Committee. If the Employer fails to appoint a successor Trustee within 60 days of its receipt of the Trustee's written notice of resignation, the Trustee will treat the Employer as having appointed itself as Trustee and as having filed its acceptance of appointment with the former Trustee. 10.12 REMOVAL. The Employer, by giving 30 days' written notice in advance to the Trustee, may remove any Trustee. In the event of the resignation or removal of a Trustee, the Employer must appoint a successor Trustee if it intends to continue the Plan. If two or more persons hold the position of Trustee, in the event of the removal of one such person, during any period the selection of a replacement is pending, or during any period such person is unable to serve for any reason, the remaining person or persons will act as the Trustee. 10.13 INTERIM DUTIES AND SUCCESSOR TRUSTEE. Each successor Trustee succeeds to the title to the Trust vested in his predecessor by accepting in writing his appointment as successor Trustee and filing the acceptance with the former Trustee and the Advisory Committee without the signing or filing of any further statement. The resigning or removed Trustee, upon receipt of acceptance in writing of the Trust by the successor Trustee, must execute all documents and do all acts necessary to vest the title of record in any successor Trustee. Each successor Trustee has and enjoys all of the powers, both discretionary and ministerial, conferred under this Agreement upon his predecessor. A successor Trustee is not personally liable for any act or failure to act of any predecessor Trustee, except as required under ERISA. With the approval of the Employer and the Advisory Committee, a successor Trustee, with respect to the Plan, may accept the account rendered and the property delivered to it by a predecessor Trustee without incurring any liability or responsibility for so doing. 10.14 VALUATION OF TRUST. The Trustee must value the Trust Fund as of each Accounting Date and each March 31, June 30 and September 30 to determine the fair market value of the assets in the Trust Fund. The Trustee must also value the Trust Fund on such other dates as directed in writing by the Advisory Committee. Effective October 1, 1998, assets of the Trust Fund that (1) are first contributed to the Trust Fund after September 30, 1998, and (2) are allocated to Participants' Accounts after September 30, 1998, shall also be valued as of each business day; and the other assets of the Trust Fund (or any portion of them) shall also be valued as of each business day, effective, however, only at a date or dates as determined in writing by the Advisory Committee. Collectively, all such dates shall be known as the "valuation dates." 10.15 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER APPOINTED. The Trustee is not liable for the acts or omissions of any Investment Manager or Managers the Advisory Committee may appoint, nor is the Trustee under any obligation to invest or otherwise manage any asset of the Plan which is subject to the management of a properly appointed Investment Manager. The Advisory Committee, the Trustee and any properly appointed Investment Manager may execute a letter agreement as a part of this Plan delineating the duties, responsibilities and liabilities of the Investment Manager with respect to any part of the Trust Fund under the control of the Investment Manager. 10.16 INVESTMENT IN GROUP TRUST FUND. The Trustee, for collective investment purposes, may combine into one trust fund the Trust created under this Plan with the Trust created under any other qualified retirement plan the Employer maintains. However, separate records of account must be maintained for the assets of each Trust in order to reflect properly each Participant's Accrued Benefit under the plan(s) in which he is a Participant. The Employer specifically authorizes the Trustee to invest all or any portion of the assets comprising the Trust Fund in any group trust fund which at the time of the investment provides for the pooling of the assets of plans qualified under Code Section 401(a). This authorization applies solely to a group trust fund exempt from taxation under code Section 501(a) and 33 the trust agreement of which satisfies the requirements of Revenue Ruling 81-100. The provisions of the group trust fund agreement, as amended from time to time, are by this reference incorporated within this Plan and Trust. The provisions of the group trust fund will govern any investment of Plan assets in that fund. 10.17 DUTIES PERTAINING TO THE EMPLOYER STOCK FUND. [A] INVESTMENT. The Trustee will purchase or sell Employer Stock for the Employer Stock Fund through transactions on the open market. Generally, the Trustee will purchase or sell Employer Stock for the Employer Stock Fund at least once each month, unless the Advisory Committee directs the Trustee to purchase and sell more frequently. [B] VOTING. Each Participant with an interest in the Employer Stock Fund shall have the right to participate confidentially in the exercise of voting rights appurtenant to shares held in the Employer Stock Fund, provided that such person had an interest in the Employer Stock Fund as of the most recent valuation date coincident with or preceding the applicable record date for which records are available. Such participation shall be achieved by completing and filing with the Trustee (or such other person who shall be independent of the Employer as the Advisory Committee shall designate), at least 10 days prior to the date of the meeting of holders of shares at which such voting rights will be exercised, a written direction in the form and manner prescribed by the Advisory Committee. The Trustee (or such other person designated by the Advisory Committee) shall tabulate the directions given on a strictly confidential basis. (If tabulated by a person other than the Trustee, the results shall be transmitted confidentially to the Trustee.) The Trustee shall follow the final results of the tabulation as to the manner in which such voting rights shall be exercised. As to each matter in which the holders of shares are entitled to vote, the Trustee shall cast votes described below. (1) The Trustee shall cast a number of affirmative votes equal to the product of (a) the total number of shares held in the Employer Stock Fund as of the applicable record date; and (b) a fraction, the numerator of which is the aggregate value (as of the valuation date coincident with or immediately preceding the applicable record date) of the interests in the Employer Stock Fund of all persons directing that an affirmative vote be cast, and the denominator of which is the aggregate value (as of the valuation date coincident with or immediately preceding the applicable record date) of the interests in the Employer Stock Fund of all persons. (2) The Trustee shall cast a number of negative votes, which shall be determined in the same manner as the number of affirmative votes to be cast, as described in (1) above, except that the word "negative" shall be substituted for the word "affirmative" throughout (1)(b) above. (3) With respect to stock for which the Trustee is not obligated to cast either affirmative or negative votes, the Trustee shall cast votes in such manner as the Trustee, its sole discretion, shall decide. The Advisory Committee shall furnish, or cause to be furnished, to each person with an interest in the Employer Stock Fund, all annual reports, proxy materials and other information known to have been furnished by the issuer of shares or by any proxy solicitor, to the holder of shares. [C] TENDER OFFERS. Each person with an interest in the Employer Stock Fund shall have the right to participate confidentially in the response to a tender offer, or to any other offer, made to the holders of shares generally, to purchase, exchange, redeem or otherwise transfer shares; provided that such person had an interest in the Employer Stock Fund as of the valuation date coincident with or immediately preceding the first day for delivery shares or otherwise responding to such tender or other offer. Such participation shall be achieved by completing and filing with the Trustee (or such other person who shall be independent of the Employer as the Advisory Committee shall designate), at least 10 days prior to the last day for delivering shares or otherwise responding to such tender or other offer, a written direction in the form and manner prescribed by the Advisory Committee. The Trustee (or such person designated by the Advisory Committee) shall tabulate the directions given on a strictly confidential basis. (If tabulated by a person other than the Trustee, the final results of the tabulation shall be transmitted in confidence to the Trustee). The final results of the tabulation shall be followed by the Trustee as to the number of shares to be delivered. On the last day for delivering shares or otherwise responding to such a tender, or other offer, the Trustee shall deliver or withhold shares as described below. (1) In response to such tender or offer, the Trustee shall deliver a number of shares equal to the product of: (a) the total number of shares then held in the Employer Stock Fund; and (b) a fraction, the numerator of which is the aggregate value (as of the valuation date coincident with or immediately preceding the first day for delivering shares or otherwise responding to such tender or other offer) of the interests in the Employer Stock Fund of all persons directing that shares be delivered in response to such tender or other offer, and the denominator of which is the aggregate value (as of the valuation date coincident with or immediately preceding the first day 34 for delivering shares or otherwise responding to such tender or other offer) of the interests in the Employer Stock Fund of all persons. (2) In response to such tender or offer, the Trustee shall withhold a number of shares, which shall be determined in the same manner as the number of shares to deliver was determined in (1) above, except that in (1)(b) the word "withheld" shall be substituted for the word "deliver." (3) With respect to stock that the Trustee is not obligated to deliver or withhold, in response to such tender or offer, the Trustee shall deliver or withhold shares as the Trustee, its sole discretion, shall decide. The Advisory Committee shall furnish, or cause to be furnished, to each Participant whose Account is invested in whole or in part in the Employer Stock Fund, all information concerning such tender or other offer furnished by the issuer of shares, or information furnished by or on behalf of the person making such tender or other offer. 35 ARTICLE XI PROVISIONS RELATING TO INSURANCE & INSURANCE COMPANY 11.01 INSURANCE BENEFIT. The Employer may elect to provide incidental life insurance benefits for insurable Participants who consent to life insurance benefits by signing the appropriate insurance company application form. The Trustee will not purchase any incidental life insurance benefit for any Participant prior to the Accounting Date as of which the Advisory Committee first makes an Employer contribution allocation to the Participant's Account. The Employer will direct the Trustee as to the insurance company and insurance agent through which the Trustee is to purchase the insurance contracts, the amount of the coverage and the applicable dividend plan. Each application for a policy, and the policies themselves, must designate the Trustee as sole owner, with the right reserved to the Trustee to exercise any right or option contained in the policies, subject to the terms and provisions of this Agreement. The Trustee must be the named beneficiary for the Account of the insured Participant. Proceeds of insurance contracts paid to the Participant's Account under this Article XI are subject to the distribution requirements of Article V and of Article VI. The Trustee will not retain any such proceeds for the benefit of the Trust. The Trustee will charge the premiums on any incidental benefit insurance contract covering the life of a Participant against the Account of that Participant. The Trustee will hold all incidental benefit insurance contracts issued under the Plan as assets of the Trust created under the Plan. INCIDENTAL INSURANCE BENEFITS. The aggregate of life insurance premiums paid for the benefit of a Participant, at all times, may not exceed the value of the Participant's Nonforfeitable Accrued Benefit nor the following percentages of the aggregate of the Employer's contributions allocated to any Participant's Account: (i) 49% in the case of the purchase of ordinary life insurance contracts; or (ii) 25% in the case of the purchase of term life insurance contracts. If the Trustee purchases a combination of ordinary life insurance contract(s) and term life insurance contract(s), then the sum of one-half of the premiums paid for the ordinary life insurance contract(s) and the premiums paid for the term life insurance contract(s) may not exceed 25% of the Employer contributions allocated to any Participant's Account. 11.02 LIMITATION ON LIFE INSURANCE PROTECTION. The Trustee will not continue any life insurance protection for any Participant beyond the last of his termination of employment, his attaining Normal Retirement Age, or notification from the Advisory Committee of his termination of employment. If the Trustee holds any incidental benefit insurance contract(s) on the life of a Participant when he terminates his employment (other than by reason of death), the Trustee must proceed as follows: (a) If the entire cash value of the contract(s) is vested in the terminating Participant, or if the contract(s) will have no cash value at the end of the policy year in which termination of employment occurs, the Trustee will transfer the contract(s) to the Participant endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Trust; subject however, to restrictions as to surrender or payment of benefits as the issuing insurance company may permit and as the Advisory Committee directs; (b) If only part of the cash value of the contract(s) is vested in the terminating Participant, the Trustee, to the extent the Participant's interest in the cash value of the contract(s) is not vested, may adjust the Participant's interest in the value of his Account attributable to Trust assets other than incidental benefit insurance contracts and proceed as in (a), or the Trustee must effect a loan from the issuing insurance company on the sole security of the contract(s) for an amount equal to the difference between the cash value of the contract(s) at the end of the policy year in which termination of employment occurs and the amount of the cash value that is vested in the terminating Participant, and the Trustee must transfer the contract(s) endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Trust; subject however, to the restrictions as to surrender or payment of benefits as the issuing insurance company may permit and the Advisory Committee directs; (c) If no part of the cash value of the contract(s) is vested in the terminating Participant, the Trustee must surrender the contract(s) for cash proceeds as may be available. In accordance with the written direction of the Advisory Committee, the Trustee will make any transfer of contract(s) under this Section 11.02 on the Participant's annuity starting date (or as soon as administratively practicable after that date). The Trustee may not transfer any contract under this Section 11.02 which contains a method of payment not specifically authorized by Article VI or which fails to comply with the joint and survivor annuity requirements, if applicable, of Article VI. In this regard, the Trustee either must convert such a contract to cash and distribute the cash instead of the contract, or before making the transfer, require the issuing company to delete the unauthorized method of payment option from the contract. 11.03 DEFINITIONS. For purposes of this Article XI: 36 (a) "Policy" means an ordinary life insurance contract or a term life insurance contract issued by an insurer on the life of a Participant. (b) "Issuing insurance company" is any life insurance company which has issued a policy upon application by the Trustee under the terms of this Agreement. (c) "Contract" or "Contracts" means a policy of insurance. In the event of any conflict between the provisions of this Plan and the terms of any contract or policy of insurance issued in accordance with this Article XI, the provisions of the Plan control. (d) "Insurable Participant" means a Participant to whom an insurance company, upon an application being submitted in accordance with the Plan, will issue insurance coverage, either as a standard risk or as a risk in an extra mortality classification. (e) "Term life insurance contract" includes, in addition to a traditional term life insurance contract, a universal life insurance contract and any other life insurance contract which is not an ordinary life insurance contract. 11.04 DIVIDEND PLAN. The dividend plan is premium reduction unless the Advisory Committee directs the Trustee to the contrary. The Trustee must use all premiums for a contract to purchase insurance benefits or additional insurance benefits for the Participant on whose life the insurance company has issued the contract. Furthermore, the Trustee must arrange, where possible, for all policies issued on the lives of Participants under the Plan to have the same premium due date and all ordinary life insurance contracts to contain guaranteed cash values with as uniform basic options as are possible to obtain. The term "dividends" includes policy dividends, refunds of premiums and other credits. 11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT. No insurance company, solely in its capacity as an issuing insurance company, is a party to this Agreement nor is the company responsible for its validity. 11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS. No insurance company, solely in its capacity as an issuing insurance company, need examine the terms of this Agreement nor is responsible for any action taken by the Trustee. 11.07 INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE. For the purpose of making application to an insurance company and in the exercise of any right or option contained in any policy, the insurance company may rely upon the signature of the Trustee and is saved harmless and completely discharged in acting at the direction and authorization of the Trustee. 11.08 ACQUITTANCE. An insurance company is discharged from all liability for any amount paid to the Trustee or paid in accordance with the direction of the Trustee, and is not obliged to see to the distribution or further application of any moneys it so pays. 11.09 DUTIES OF INSURANCE COMPANY. Each insurance company must keep such records, make such identification of contracts, funds and accounts within funds, and supply such information as may be necessary for the proper administration of the Plan under which it is carrying insurance benefits. 37 ARTICLE XII MISCELLANEOUS 12.01 EVIDENCE. Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. Both the Advisory Committee and the Trustee are fully protected in acting and relying upon any evidence described under the immediately preceding sentence. 12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor the Advisory Committee has any obligation nor responsibility with respect to any action required by the Plan to be taken by the Employer, any Participant or eligible Employee, or for the failure of any of the above persons to act or make any payment or contributions, or to otherwise provide any benefit contemplated under this Plan. Furthermore, the Plan does not require the Trustee or the Advisory Committee to collect any contribution required under the Plan, or determine the correctness of the amount of any Employer contribution. Neither the Trustee nor the Advisory Committee need inquire into or be responsible for any action or failure to act on the part of the others. Any action required of a corporate Employer must be by its Board of Directors, or by any person or persons duly authorized by resolution of said Board to take such action. 12.03 FIDUCIARIES NOT INSURERS. The Trustee, the Advisory Committee, the Plan Administrator and the Employer in no way guarantee the Trust Fund from loss or depreciation. The Employer does not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Advisory Committee and the Trustee to make any payment from the Trust Fund at any time and all times is limited to the then available assets of the Trust. 12.04 WAIVER OF NOTICE. Any person entitle to notice under the Plan may waive the notice. 12.05 SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns who so agree in writing, and upon the Trustee, the Advisory Committee, the Plan Administrator and their successors who so agree in writing. 12.06 WORD USAGE. Words used in the masculine also apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural includes as the singular and the singular includes the plural. 12.07 STATE LAW. Washington law will determine all questions arising with respect to the provisions of this Agreement except to the extent Federal statute supersedes Washington law. 12.08 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, gives any Employee, Employee-Participant or any Beneficiary any right to continue employment, any legal or equitable right against the Employer, or Employee of the Employer, or against the Trustee, or its agents or employees, or against the Plan Administrator, except as expressly provided by the Plan, the Trust, ERISA or by a separate agreement. 38 ARTICLE XIII EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION 13.01 EXCLUSIVE BENEFIT. Except as provided under Article III, the Employer has no beneficial interest in any asset of the Trust and no part of any asset in the Trust shall ever revert to or be repaid to an Employer, either directly or indirectly; nor prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries under the Plan, may any part of the corpus or income of the Trust Fund, or any asset of the Trust, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries. 13.02 AMENDMENT BY EMPLOYER. The Employer has the right at any time and from time to time: (a) To amend this Agreement in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) this Plan and the Trust created under it under the appropriate provisions of Code Section 401(a); and (b) To amend this Agreement in any other manner. The Advisory Committee is authorized to make any amendments under Section 13.02(a). Moreover, the Advisory Committee is authorized to make any amendments under Section 13.02(b) that are administrative in nature (e.g., amendments relating to elections and procedures and the investment, valuation and distribution of Plan assets). No amendment may authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. No amendment may cause or permit any portion of the Trust Fund to revert to or become a property of the Employer. The Employer also may not make any amendment which affects the rights, duties or responsibilities of the Trustee, the Plan Administrator or the Advisory Committee without the written consent of the affected Trustee, the Plan Administrator or the affected member of the Advisory Committee. CODE SECTION 411(d)(6) PROTECTED BENEFITS. An amendment (including the adoption of this Plan as a restatement of an existing plan) may not decrease a Participant's Accrued Benefit, except to the extent permitted under Code Section 412(c)(8), and may not reduce or eliminate Code Section 411(d)(6) protected benefits determined immediately prior to the adoption date (or, if later, the effective date) of the amendment. An amendment reduces or eliminates Code Section 411(d)(6) protected benefits if the amendment has the effect of either (1) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in Treasury regulations), or (2) except as provided by Treasury regulations, eliminating an optional form of benefit. The Advisory Committee must disregard an amendment to the extent application of the amendment would fail to satisfy this paragraph. If the Advisory Committee must disregard an amendment because the amendment would violate clause (1) or clause (2), the Advisory Committee must maintain a schedule of the early retirement option or other optional forms of benefit the Plan must continue for the affected Participants. The Employer (or Advisory Committee to the extent authorized in this Section 13.02) must make all amendments in writing. Each amendment shall state the date to which it is either retroactively or prospectively effective. 13.03 DISCONTINUANCE. The Employer has the right, at any time, to suspend or discontinue its contributions under the Plan, and to terminate, at any time, this Plan and the Trust created under this Agreement. The Plan will terminate upon the first to occur of the following: (a) The date terminated by action of the Employer; (b) The date the Employer shall be judicially declared bankrupt or insolvent, unless the proceeding authorized continued maintenance of the Plan; (c) The dissolution, merger, consolidation or reorganization of the Employer or the sale by the Employer of all or substantially all of its assets, unless the successor or purchaser makes provision to continue the Plan, in which event the successor or purchaser shall substitute itself as the Employer under this Plan. 13.04 FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, or, if applicable, upon complete discontinuance of profit sharing plan contributions to the Plan, affected Participant's right to his Accrued Benefit is 100% Nonforfeitable, irrespective of the Nonforfeitable percentage which otherwise would apply under Article V. 13.05 MERGER/DIRECT TRANSFER. The Trustee may not consent to, or be a party to, any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation or transfer, the surviving Plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the Plan terminated immediately before the merger or consolidation or transfer. The Trustee possesses the specific authority to enter into merger agreements or direct transfer of assets agreements with the trustees of other retirement plans described in Code Section 401(a), including an elective transfer, and to accept the direct transfer of plan assets, or to transfer plan assets, as a party to any such agreement. 39 The Trustee may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan's eligibility conditions(s). If the Trustee accepts a direct transfer of plan assets, the Advisory Committee and Trustee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of making voluntary contributions under Article IV or sharing in Employer contributions or Participant forfeitures under the Plan until he actually becomes a Participant in the Plan. The Trustee may not consent to, or be a party to a merger, consolidation or transfer of assets with a defined benefit plan, except with respect to an elective transfer. The Trustee will hold, administer and distribute the transferred assets as a part of the Trust Fund and the Trustee will maintain a separate Employer contribution Account for the benefit of the Employee on whose behalf the Trustee accepted the transfer in order to reflect the value of the transferred assets. Unless a transfer of assets to this Plan is an elective transfer, the Plan will preserve all Code Section411 (d)(6) protected benefits with respect to those transferred assets, in the manner described in Section 13.02. A transfer is an elective transfer if: (1) the transfer satisfies the first paragraph of this Section 13.05; (2) the transfer is voluntary, under a fully informed election by the Participant; (3) the Participant has an alternative that retains his Code Section 411(d)(6) protected benefits (including an option to leave his benefit in the transferor plan, if that plan is not terminating); (4) the transfer satisfies the applicable spousal consent requirements of the Code; (5) the transferor plan satisfies the joint and survivor notice requirements of the Code, if the Participant's transferred benefit is subject to those requirements; (6) the Participant has a right to immediate distribution from the transferor plan, in lieu of the elective transfer; (7) the transferred benefit is at least the greater of the single sum distribution provided by the transferor plan for which the Participant is eligible or the present value of the Participant's accrued benefit under the transferor plan payable at that plan's normal retirement age; (8) the Participant has a 100% Nonforfeitable interest in the transferred benefit; and (9) the transfer otherwise satisfies applicable Treasury regulations. An elective transfer may occur between qualified plans of any type. DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(K). If the Plan receives a direct transfer (by merger or otherwise) of elective contributions (or amounts treated as elective contributions) under a Plan with a Code Section 401(k) arrangement, the distribution restrictions of Code Sections 401(k)(2) and (10) continue to apply to those transferred elective contributions. 13.06 TERMINATION. Upon termination of the Plan, the distribution provisions of Article VI shall remain operative except, in lieu of the timing and form of distribution options available under Article VI, the Advisory Committee will direct the Trustee to distribute each Participant's Nonforfeitable Accrued Benefit, in lump sum, as soon as administratively practicable after the termination of the Plan, irrespective of the present value of the Participant's Nonforfeitable Accrued Benefit and whether the Participant consents to that distribution. This paragraph is null and void if, as of the period between the Plan termination date and the final distribution of assets, the Employer maintains any other defined contribution plan (other than an ESOP). If the first paragraph of this Section 13.06 is null and void, the Advisory Committee will proceed with distribution of the terminated Plan in accordance with the distribution provisions of Article VI, with the following exceptions: (1) if the present value of the Participant's Nonforfeitable Accrued Benefit does not exceed $5,000, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum as soon as administratively practicable after the Plan terminates; and (2) if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $5,000, the Participant or the Beneficiary, in addition to the distribution events permitted under Article VI, may elect to have the Trustee commence distribution of his Nonforfeitable Accrued Benefit as soon as administratively practicable after the Plan terminates. If the Participant fails to make an election under this paragraph (2), the Advisory Committee, to liquidate the Trust, may transfer the Participant's Nonforfeitable Accrued Benefit to the other defined contribution plan maintained by the Employer, or purchase a deferred annuity contract for each such Participant which protects the Participant's distribution rights under the Plan. On each valuation date, the Advisory Committee will credit any part of a Participant's Accrued Benefit retained in the Trust with its proportionate share of the Trust's income, expenses, gains and losses, both realized and unrealized. Upon termination of the Plan, the amount, if any, in a suspense account under Article III will revert to the Employer, subject to the conditions of the Treasury regulations permitting such a reversion. A resolution or amendment to freeze all future benefit accrual but otherwise to continue maintenance of this Plan, is not a termination for purposes of this Section 13.06. DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 410(K). The portion of the Participant's Nonforfeitable Accrued Benefit attributable to elective contributions under a Code Section 401(k) arrangement (or to amounts treated under the Code Section 401(k) arrangement as elective contributions) is not distributable on account of Plan termination, as described in this Section 13.06, unless: (a) the Participant otherwise is entitled to a distribution of that portion of his Nonforfeitable Accrued Benefit; or (b) the Plan termination occurs without the establishment of a successor plan. A plan is a successor plan under clause (b) if: (i) the plan is a defined contribution plan (other than an ESOP) maintained by the Employer (or by a related employer); 40 (ii) at least 2% of the employees who were eligible under the terminated Code Section 401(k) arrangement are or were eligible under the terminated Code Section 401(k) arrangement are or were eligible under the successor plan at any time within the 24-month period ending after the time of termination; and (iii) the successor plan is in existence at the time the 401(k) arrangement terminates or within the 12-month period after final distribution of assets of the plan which includes the Code Section401(k) arrangement. A distribution made after March 31, 1988, pursuant to clause (b), must be part of a lump sum distribution to the Participant of his Nonforfeitable Accrued Benefit. 13.07 TRANSFER OF ASSETS FROM THE TRUSTEE OF THE FLOW INTERNATIONAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN. If the Trustee accepts a transfer of assets from the trustee of the Flow International Plan Employee Stock Ownership Plan after March 31, 1998 (whether or not in an elective transfer within the meaning of Section 13.05), then, in addition to the provisions of Section 13.05, the following provisions shall also apply: (a) The assets in the Account the Trustee maintains for the transferred assets shall be subject to the Participant's (or Participant's beneficiary's) direction of investment in accordance with Section 8.10. (b) The assets in the Account the Trustee maintains for the transferred assets shall be distributed only in a single lump sum (regardless whether the assets include stock in Flow International Corporation or cash). (c) If at the time of distribution the assets in the Account the Trustee maintains for the transferred assets include stock in Flow International Corporation, the Participant (or Participant's beneficiary) may elect to receive the entire distribution in cash. 41 ARTICLE XIV PROVISIONS RELATING TO THE CODE SECTION 401(K) ARRANGEMENT 14.01 401(k) ARRANGEMENT. The Employer makes the deferral contribution described in Section 3.01(a) pursuant to a 401(k) arrangement. An Employee who is eligible to participate in the 401(k) arrangement may file a salary reduction agreement with the Advisory Committee. The salary reduction agreement may not be effective earlier than the following date which occurs last: (i) the Employee's Plan Entry Date (or, in the case of a reemployed Employee, his reparticipation date under Article II); or (ii) the execution date of the Employee's salary reduction agreement. A salary reduction agreement must specify the percentage of Compensation (as defined in Section 1.10) the Employee wishes to defer. The salary reduction agreement will apply only to Compensation which becomes currently available to the Employee after the effective date of the salary reduction agreement. The Employer will apply a reduction election to all Compensation (and to increases in such Compensation) unless the Employee specifies in his salary reduction agreement to limit the election to certain Compensation. The salary reduction agreement form approved by the Advisory Committee from time to time will specify the minimum and maximum reduction percentages and the options available for the Employee to so limit his election. An Employee's salary reduction contributions for the Plan Year, subject to the elective deferral limitation of Section 14.03, may not exceed 15% of his Compensation for the entire Plan Year. An Employee may modify his salary reduction agreement, either to reduce or to increase the amount of deferral contributions, as of any July 1 or January 1 or any other date established by the Advisory Committee. The Employee will make this modification by filing a new salary reduction agreement with the Advisory Committee. An Employee may revoke a salary reduction agreement at any time, with such revocation to be effective as soon as practicable thereafter. An Employee who revokes his salary reduction agreement may file a new salary reduction agreement as of any July 1 or January 1 or any other date established by the Advisory Committee. The Advisory Committee may amend or revoke its salary reduction agreement with any Participant, if it determines that such revocation is necessary, helpful or advisable to satisfy the special rules under Code Sections 401(k), 401(m) or 402(g) (see Sections 14.03, 14.04, 14.05 and 14.06), or the maximum limitations of Code Section 415 (see Sections 3.07 and 3.08). Moreover, prior to any July 1 or January 1 the Advisory Committee may establish special deferral limits for highly compensated employees (as defined in Section 14.02). 14.02 DEFINITIONS. (a) "Highly Compensated Employee" means an Eligible Employee who satisfies the definition in Section 1.07 of the Plan. (b) "Nonhighly Compensated Employee" means an Eligible Employee who is not a Highly Compensated Employee and who is not a family member treated as a Highly Compensated Employee. (c) "Eligible Employee" means, for purposes of the ADP test described in Section 14.04, an Employee who is eligible to participate in the Code Section 401(k) arrangement, irrespective of whether the Employer actually makes deferral contributions on behalf of the Employee. For purposes of the ACP test described in Section 14.05, an "Eligible Employee" means a Participant who is eligible to receive an allocation of Employer matching contributions (or would be eligible if he made the type of contributions necessary to receive an allocation of matching contributions) and a Participant who is eligible to make employee contributions, irrespective of whether he actually makes employee contributions. An Employee continues to be an Eligible Employee during a period the Plan suspends the Employee's right to make elective deferrals or nondeductible contributions following a hardship distribution. (d) "Highly Compensated Group" means the group of Eligible Employees who are Highly Compensated Employees for the Plan Year. (e) "Nonhighly Compensated Group" means the group of Eligible Employees who are Nonhighly Compensated Employees for the Plan Year. (f) "Compensation" means, except as specifically provided under this Article XIV, Compensation as defined for nondiscrimination purposes in Code Section 414(s), uniformly applied to all Eligible Employees for the Plan Year. The Advisory Committee may use the general definition of Compensation in Section 1.10(A) or may modify that definition (including "grossing up" that definition for elective contributions, as defined in Section 1.07) in any manner which satisfies Code Section 414(s). To compute an Employee's ADP or ACP, the Advisory Committee may limit Compensation taken into account to Compensation received only for the portion of the Plan Year in which the Employee was an Eligible Employee and only for the portion of the Plan Year in which the Code Section 401(k) arrangement was in effect. 42 (g) "Deferral contributions" means the sum of the deferral contributions the Employer contributes to the Trust on behalf of an Eligible Employee, pursuant to Section 3.01. (h) "Elective deferrals" are the deferral contributions the Employer contributes to the Trust at the election of an Eligible Employee. If the Code Section 401(k) arrangement includes a cash or deferred feature, any portion of a cash or deferred contribution contributed to the Trust because of the Employee's failure to make a cash election is an elective deferral, but any portion of a cash or deferred contribution over which the Employee does not have a cash election is not an elective deferral. Elective deferrals do not include amounts which have become currently available to the Employee prior to the election nor amounts designated as nondeductible employee contributions at the time of deferral or contribution. (i) "Matching contributions" are contributions made by the Employer on account of elective deferrals under a Code Section 401(k) arrangement or on account of employee contributions. Matching contributions also include Participant forfeitures allocated on account of such elective deferrals or employee contributions. (j) "Nonelective contributions" are contributions made by the Employer which are not subject to a deferral election by an Employee and which are not matching contributions. (k) "Qualified matching contributions" are matching contributions which are 100% Nonforfeitable at all times and which are subject to the distribution restrictions described in paragraph (m) Matching contributions are not 100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest because of his Years of Service taken into account under a vesting schedule. (l) "Qualified nonelective contributions" are nonelective contributions which are 100% Nonforfeitable at all times and which are subject to the distribution restrictions described in paragraph (m) Nonelective contributions are not 100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest because of his Years of Service taken into account under a vesting schedule. Any nonelective contributions allocated to a Participant's Qualified Nonelective Contributions Account under the Plan automatically satisfy the definition of qualified nonelective contributions. (m) "Distribution restrictions" means the Employee may not receive a distribution of the specified contributions (nor earnings on those contributions) except in the event of (1) the Participant's death, disability, termination of employment, attainment of age 59 1/2, (2) financial hardship satisfying the requirements of Code Section 401(k) and the applicable Treasury regulations, (3) plan termination, without establishment of a successor defined contribution plan (other than an ESOP), (4) a sale of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business, but only to an employee who continues employment with the corporation acquiring those assets, or (5) a sale by a corporation of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)), but only to an employee who continues employment with the subsidiary. For Plan Years beginning after December 31, 1988, a distribution on account of financial hardship, as described in clause (2), may not include earnings on elective deferrals credited as of a date later than December 31, 1988, and may not include qualified matching contributions and qualified nonelective contributions, nor any earnings on such contributions, credited after December 31, 1988. A distribution described in clauses (3), (4) or (5), if made after March 31, 1988, must be a lump sum distribution, as required under Code Section 401(k)(10). (n) "Employee contributions" are contributions made by a Participant on an after-tax basis, whether voluntary or mandatory, and designated, at the time of contribution, as an employee (or nondeductible) contribution. Elective deferrals and deferral contributions are not employee contributions. Participant nondeductible contributions, made pursuant to Section 4.01 of the Plan, are employee contributions. 14.03 ANNUAL ELECTIVE DEFERRAL LIMITATION. ANNUAL ELECTIVE DEFERRAL LIMITATION. An Employee's elective deferrals for a calendar year beginning after December 31, 1986, may not exceed the 402(g) limitation. The 402(g) limitation is the greater of $7,000 or the adjusted amount determined by the Secretary of the Treasury. If the Employer determines the Employee's elective deferrals to the Plan for a calendar year would exceed the 402(g) limitation for the calendar year, the Employer will not make any additional elective deferrals with respect to that Employee for the remainder of that calendar year, paying in cash to the Employee any amounts which would result in the Employee's elective deferrals for the calendar year exceeding the 402(g) limitation. If the Advisory Committee determines an Employee's elective deferrals already contributed to the Plan for a calendar year exceed the 402(g) limitation, the Advisory Committee will distribute the amount in excess of the 402(g) limitation (the "excess deferral"), as adjusted for allocable income, no later than April 15 of the following calendar year. If the Advisory Committee distributes the excess deferral by the appropriate April 15, it may make the distribution irrespective of any other provision under this Plan or under the Code. The Advisory Committee will reduce the amount of 43 excess deferrals for a calendar year distributable to the Employee by the amount of excess contributions (as determined in Section 14.04), if any, previously distributed to the Employee for the Plan Year beginning in that calendar year. If an Employee participates in another plan under which he makes elective deferrals pursuant to a Code Section 401(k) arrangement, elective deferrals under a Simplified Employee Pension, or salary reduction contributions to a tax-sheltered annuity, irrespective of whether the Employer maintains the other plan, he may provide the Advisory Committee a written claim for excess deferrals made for a calendar year. The Employee must submit the claim no later than the March 1 following the close of the particular calendar year and the claim must specify the amount of the Employee's elective deferrals under this Plan which are excess deferrals. If the Advisory Committee receives a timely claim, it will distribute the excess deferral (as adjusted for allocable income) the Employee has assigned to this Plan, in accordance with the distribution procedure described in the immediately preceding paragraph. ALLOCABLE INCOME. For purposes of making a distribution of excess deferrals, allocable income means net income or net loss allocable to the excess deferrals for the calendar year in which the Employee made the excess deferral, determined in a manner which is uniform, nondiscriminatory and reasonably reflective of the manner used by the Plan to allocate income to Participants' Accounts. 14.04 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST. For each Plan Year, the Advisory Committee must determine whether the Plan's Code Section 401(k) arrangement satisfies one of the following ADP tests: (i) The average ADP for the Highly Compensated Group does not exceed 1.25 times the average ADP of the Nonhighly Compensated Group; or (ii) The average ADP for the Highly Compensated Group does not exceed the average ADP for the Nonhighly Compensated Group by more than two percentage points (or the lesser percentage permitted by the multiple use limitation in Section 14.06) and the average ADP for the Highly Compensated Group is not more than twice the average ADP for the Nonhighly Compensated Group. CALCULATION OF ADP. The average ADP for a group is the average of the separate ADPs calculated for each Eligible Employee who is a member of that group. An Eligible Employee's ADP for a Plan Year is the ratio of the Eligible Employee's deferral contributions for the Plan Year to the Employee's Compensation for the Plan Year. A Nonhighly Compensated Employee's ADP does not include elective deferrals made to this Plan or to any other Plan maintained by the Employer, to the extent such elective deferrals exceed the 402(g) limitation described in Section 14.03. In determining whether the Plan's Code Section 401(k) arrangement satisfies either ADP test, the Advisory Committee will use the average ADP of the Nonhighly Compensated Group for the Plan Year preceding the Plan Year of the calculation, unless the Employer elects to use the current Plan Year's average ADP of the Nonhighly Compensated Group. An Employer may not change an election to use current average ADP except as the Treasury otherwise may provide. SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the ADP of any Highly Compensated Employee, the deferral contributions taken into account must include any elective deferrals made by the Highly Compensated Employee under any other Code Section 401(k) arrangement maintained by the Employer, unless the elective deferrals are to an ESOP. If the plans containing the Code Section 401(k) arrangements have different plan years, the Advisory Committee will determine the combined deferral contributions on the basis of the plan years ending in the same calendar year. AGGREGATION OF CERTAIN CODE SECTION 401(k) ARRANGEMENTS. If the Employer treats two plans as a unit for coverage or nondiscrimination purposes, the Employer must combine the Code Section 401(k) arrangements under such plans to determine whether either plan satisfies the ADP test. This aggregation rule applies to the ADP determination for all Eligible Employees, irrespective of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. For Plan Years beginning after December 31, 1989, an aggregation of Code Section 401(k) arrangements under this paragraph does not apply to plans which have different plan years and, for Plan Years beginning after December 31, 1988, the Advisory Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). CHARACTERIZATION OF EXCESS CONTRIBUTIONS. If, pursuant to this Section 14.04, the Advisory Committee has elected to include qualified matching contributions in the average ADP, the Advisory Committee will treat excess contributions as attributable proportionately to deferral contributions and to qualified matching contributions allocated on the basis of those deferral contributions. If the total amount of a Highly Compensated Employee's excess contributions for the Plan Year exceeds his deferral contributions or qualified matching contributions for the Plan Year, the Advisory Committee will treat the remaining portion of his excess contributions as attributable to qualified nonelective contributions. The Advisory Committee will reduce the amount of excess contributions for a Plan Year distributable to a Highly Compensated Employee by the amount of excess deferrals (as defined in Section 14.03), if any, previously distributed to that Employee for the Employee's taxable year ending in that Plan Year. 44 DISTRIBUTION OF EXCESS CONTRIBUTIONS. If the Advisory Committee determines the Plan fails to satisfy the ADP test for a Plan Year, the Trustee, as directed by the Advisory Committee, must distribute the excess contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of excess contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess contributions are the amount of deferral contributions made by the Highly Compensated Employees which causes the Plan to fail to satisfy the ADP test. The Advisory Committee will determine the amount of excess contributions by starting with the Highly Compensated Employee(s) who has the greatest ADP, reducing his ADP (but not below the next highest ADP), then, if necessary, reducing the ADP of the Highly Compensated Employee(s) at the next highest ADP including the ADP of the Highly Compensated Employee(s) whose ADP the Advisory Committee already has reduced (but not below the next highest ADP), and continuing in this manner until the average ADP for the Highly Compensated Group satisfies the ADP test. After the Advisory Committee has determined the excess contribution amount, the Trustee, as directed by the Advisory Committee, then will distribute to each Highly Compensated Employee his respective share(s) of the excess contributions. The Advisory Committee will determine the respective shares(s) of excess contributions by starting with the Highly Compensated Employee(s) who has the highest elective contributions, reducing his elective contributions (but not below the next highest level of elective contributions), then, if necessary, reducing the elective contributions of the Highly Compensated Employee(s) at the next highest level of elective contributions including the elective contributions of the Highly Compensated Employee(s) whose elective contributions the Advisory Committee already has reduced (but not below the next highest level of elective contributions), and continuing in this manner until the Trustee has distributed all excess contributions. ALLOCABLE INCOME. To determine the amount of the corrective distribution required under this Section 14.04, the Advisory Committee must calculate the allocable income for the Plan Year in which the excess contributions arose. "Allocable income" means net income or net loss. To calculate allocable income for the Plan Year, the Advisory Committee will use a uniform and nondiscriminatory method which reasonably reflects the manner used by the Plan to allocate income to Participants' Accounts. 14.05 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS. The Advisory Committee must determine whether the annual Employer matching contributions (other than qualified matching contributions used in the ADP test), if any, and the Employee contributions, if any, satisfy one of the following average contribution percentage ("ACP") tests: (i) The ACP for the Highly Compensated Group does not exceed 1.25 times the ACP of the Nonhighly Compensated Group; or (ii) The ACP for the Highly Compensated Group does not exceed the ACP for the Nonhighly Compensated Group by more than two percentage points (or the lesser percentage permitted by the multiple use limitation in Section 14.06) and the ACP for the Highly Compensated Group is not more than twice the ACP for the Nonhighly Compensated Group. CALCULATION OF ACP. The average contribution percentage for a group is the average of the separate contribution percentages calculated for each Eligible Employee who is a member of that group. An Eligible Employee's contribution percentage for a Plan Year is the ratio of the Eligible Employee's aggregate contributions for the Plan Year to the Employee's Compensation for the Plan Year. "Aggregate contributions" are matching contributions (other than qualified matching contributions used in the ADP test) and Employee contributions. In determining whether the Plan satisfies either ACP test, the Advisory Committee will use the ACP of the Nonhighly Compensated Group for the Plan Year preceding the Plan Year of the calculation, unless the Employer elects to use the current Plan Year's ACP of the Nonhighly Compensated Group. An Employer may not change an election to use current ACP except as the Treasury otherwise may provide. SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the contribution percentage of any Highly Compensated Employee, the aggregate contributions taken into account must include any matching contributions (other than qualified matching contributions used in the ADP test) and any Employee contributions made on his behalf to any other plan maintained by the Employer, unless the other plan is an ESOP. If the plans have different plan years, the Advisory Committee will determine the combined aggregate contributions on the basis of the plan years ending in the same calendar year. AGGREGATION OF CERTAIN PLANS. If the Employer treats two plans as a unit for coverage or nondiscrimination purposes, the Employer must combine the plans to determine whether either plan satisfies the ACP test. This aggregation rule applies to the contribution percentage determination for all Eligible Employees, irrespective of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. For Plan Years beginning after December 31, 1989, an aggregation of plans under this paragraph does not apply to plans which have different plan years, 45 and for Plan Years beginning after December 31, 1988, the Advisory Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. The Advisory Committee will determine excess aggregate contributions after determining excess deferrals under Section 14.03 and excess contributions under Section 14.04. If the Advisory Committee determines the Plan fails to satisfy the ACP test for a Plan Year, the Trustee, as directed by the Advisory Committee, must distribute the excess aggregate contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of excess aggregate contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess aggregate contributions are the amount of the aggregate contributions allocated on behalf of the Highly Compensated Employees which causes the Plan to fail to satisfy the ACP test. The Advisory Committee will determine the respective shares of excess aggregate contributions by starting with the Highly Compensated Employee(s) who has the greatest contribution percentage, reducing his contribution percentage (but not below the next highest contribution percentage), then, if necessary, reducing the contribution percentage of the Highly Compensated Employee(s) at the next highest contribution percentage level including the contribution percentage of the Highly Compensated Employee(s) whose contribution percentage the Advisory Committee already has reduced, and continuing in this manner until the ACP for the Highly Compensated Group satisfies the ACP test. After the Advisory Committee has determined the excess aggregate contribution amount, the Trustee, as directed by the Advisory Committee, then will distribute to each Highly Compensated Employee his respective share(s) of the excess aggregate contributions. The Advisory Committee will determine the respective shares(s) of excess aggregate contributions by starting with the Highly Compensated Employee(s) who has the greatest amount of aggregate contributions, reducing the amount of his aggregate contributions (but not below the next highest level of aggregate contributions), then, if necessary, reducing the amount of aggregate contributions of the Highly Compensated Employee(s) at the next highest level of aggregate contributions, including the aggregate contributions of the Highly Compensated Employee(s) whose aggregate contributions the Advisory Committee already has reduced (but not below the next highest level of aggregate contributions), and continuing in this manner until the Trustee has distributed all excess aggregate contributions. ALLOCABLE INCOME. To determine the amount of the corrective distribution required under this Section 14.05, the Advisory Committee must calculate the allocable income for the Plan Year in which the excess aggregate contributions arose. "Allocable income" means net income or net loss. The Advisory Committee will determine allocable income in the same manner as described in Section 14.04 for excess contributions. CHARACTERIZATION OF EXCESS AGGREGATE CONTRIBUTIONS. The Advisory Committee will treat a Highly Compensated Employee's allocable share of excess aggregate contributions in the following priority: (1) first as attributable to his Employee contributions which are voluntary contributions, if any; (2) then as matching contributions allocable with respect to excess contributions determined under the ADP test; (3) then on a pro rata basis to matching contributions and to the deferral contributions relating to those matching contributions which the Advisory Committee has included in the ACP test; (4) then on a pro rate basis to Employee contributions which are mandatory contributions, if any, and to the matching contributions allocated on the basis of those mandatory contributions; and (5) last to qualified nonelective contributions used in the ACP test. To the extent the Highly Compensated Employee's excess aggregate contributions are attributable to matching contributions, and he is not 100% vested in his Accrued Benefit attributable to matching contributions, the Advisory Committee will distribute only the vested portion and forfeit the nonvested portion. The vested portion of the Highly Compensated Employee's excess aggregate contributions attributable to Employer matching contributions is the total amount of such excess aggregate contributions (as adjusted for allocable income) multiplied by his vested percentage (determined as of the last day of the Plan Year for which the Employer made the matching contribution). The Plan will allocate forfeited excess aggregate contributions to reduce Employer matching contributions for the Plan Year in which the forfeiture occurs. 14.06 MULTIPLE USE LIMITATION. If at least one Highly Compensated Employee is includible in the ADP test and in the ACP test, the sum of the Highly Compensated Group's ADP and ACP may not exceed the multiple use limitation. The multiple use limitation is the sum of (i) and (ii): (i) 125% of the greater of: (a) the ADP of the Nonhighly Compensated Group under the Code Section 401(k) arrangement; or (b) the ACP of the Nonhighly Compensated Group for the Plan Year beginning with or within the Plan Year of the Code Section 401(k) arrangement. (ii) 2% plus the lesser of (i)(a) or (i)(b), but no more than twice the lesser of (i)(a) or (i)(b). 46 The Advisory Committee, in lieu of determining the multiple use limitation as the sum of (i) and (ii), may elect to determine the multiple use limitation as the sum of (iii) and (iv): (iii) 125% of the lesser of: (a) the ADP of the Nonhighly Compensated Group under the Code Section 401(k) arrangement; or (b) the ACP of the Nonhighly Compensated Group for the Plan Year beginning with or within the Plan Year of the Code Section 401(k) arrangement. (iv) 2% plus the greater of (iii)(a) or (iii)(b), but no more than twice the greater of (iii)(a) or (iii)(b). This Section 14.06 does not apply unless, prior to application of the multiple use limitation, the ADP and the ACP of the Highly Compensated Group each exceeds 125% of the respective percentages of the Nonhighly Compensated Group. The Advisory Committee will determine whether the Plan satisfies the multiple use limitation after applying the ADP test under Section 14.04 and the ACP test under Section 14.05 and after making any corrective distributions required by those Sections. If, after applying this Section 14.06, the Advisory Committee determines the Plan has failed to satisfy the multiple use limitation, the Advisory Committee will correct the failure by treating the excess amount as excess aggregate contributions under Section 14.05. 47 ARTICLE XV DIRECT ROLLOVERS 15.01 APPLICATION. This Article XV applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article XV, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. 15.02 DEFINITIONS. (a) "Eligible rollover distribution." An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) or the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion of net unrealized appreciation with respect to employer securities). (b) "Eligible retirement plan." An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) "Distributee." A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section414(p), are distributee with regard to the interest of the spouse or former spouse. (d) "Direct rollover." A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 48 APPENDIX A ACCOUNTS TRANSFERRED FROM SPIDER STAGING CORPORATION 401(k) PLAN AND CERTAIN EMPLOYEES OF SPIDER STAGING CORPORATION 1.01 DEFINITIONS. "1992 Spider Staging Employee" means an employee of Spider Staging Corporation who was employed by Spider Staging Corporation on December 31, 1992. "Spider Staging Plan" means the Spider Staging Corporation 401(k) Savings Plan. 1.02 CONTINUING PARTICIPANTS. Notwithstanding Sections 2.01 and 2.02 of the Plan, a 1992 Spider Staging Employee who was a participant in the Spider Staging Plan on December 31, 1992, and is employed by Spider Staging Corporation on January 1, 1993, shall be a Participant in the Plan on January 1, 1993. 1.03 ELIGIBILITY COMPUTATION PERIOD. If a 1992 Spider Staging Employee has not satisfied the service requirement for eligibility to participate under the Spider Staging Plan as of December 31, 1992, he or she may satisfy the service requirement as provided in Section 2.02 of the Plan, or as modified in the following sentence, whichever permits earlier participation in the Plan. As modified for purposes of this Section 1.03, the third and fourth sentences of Section 2.02 read: "If the Employee does not complete 1000 Hours of Service during the 12 month period commencing with the Employment Commencement Date, the Plan measures the subsequent periods as the 12 consecutive month periods beginning with each anniversary of the Employee's Employment Commencement Date." 1.04 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section 2.02 of the Plan (including as modified under Section 1.03 above of this Appendix A), a 1992 Spider Staging Employee shall receive credit for a period of service with Spider Staging Corporation before January 1, 1993, to the extent that period of service is credited for eligibility purposes under the Spider Staging Plan. 1.05 VESTING CREDIT. For purposes of vesting under Section 5.03 of the Plan: (a) Year of Service includes vesting credit for full years of service as of December 31, 1992, to the extent credited for vesting purposes under the Spider Staging Plan as of December 31, 1992; and (b) A.1992 Spider Staging Employee shall receive vesting credit for his or her number of Hours of Service with Spider Staging Corporation or the Employer for the 12 month period beginning in 1992 on the Employee's Employment Commencement Date with Spider Staging Corporation (or its anniversary), to the extent credited for vesting purposes under the Spider Staging Plan as of December 31, 1992. 1.06 DISTRIBUTIONS TO VESTED PARTICIPANTS UNDER SPIDER STAGING CORPORATION 401(k) PLAN OTHER THAN 1992 SPIDER STAGING EMPLOYEES. With respect to a participant in the Spider Staging Plan who retired, died or terminated service with vested accrued benefits under the Spider Staging Plan (regardless whether benefits have commenced), benefits shall be paid to, or in respect of, such participant under the applicable sections of the Spider Staging Plan in accordance with the terms of that plan. 1.07 VALUATION AND TRANSFER OF ACCOUNTS UNDER THE SPIDER STAGING CORPORATION 401(k) SAVINGS PLAN. The value of the account of each participant under the Spider Staging Plan shall be determined as of December 31, 1992. The balance of that account shall be transferred to the trust established under the Plan as of that date, shall constitute the balance of the Account of that person. 1.08. PROTECTED BENEFITS. Accounts under the Plan representing accounts transferred as described in Section 1.07 of this Appendix A shall be subject to all provisions of the Plan relating to Accounts, provided, however, that Code Section 411(d)(6) protected benefits pertaining to those accounts shall not be eliminated (except as Treasury Regulations may permit). This means, for example, that optional forms of benefits provided under the Spider Staging Plan as of December 31, 1992, shall not be eliminated with respect to such transferred accounts. (Benefits accrued under the Plan after December 31, 1992, however, shall be paid only in one of the forms permitted under Section 6.02 of the Plan.) 1.09. FORFEITURES. Any amount forfeited under the Spider Staging Plan after the most recent reallocation of forfeitures and before January 1, 1993, shall be reallocated under the terms of the Spider Staging Plan as of December 31, 1992. 1.10. SEPARATE ACCOUNTS. The Advisory Committee shall maintain separate accounts representing accounts transferred as described in Section 1.07 of this Appendix A. 1.11. DEFAULT ON A LOAN MADE UNDER SPIDER STAGING PLAN. To the extent the assets in an account transferred as described in Section 1.07 of this Appendix A consist of loans to the participant for whom the account 49 is maintained, the Plan shall treat a default in the same manner as provided under the Spider Staging Plan as in effect on December 31, 1992, which provides, in Section 6.01(k) of the Adoption Agreement: If a Participant or Beneficiary defaults on a loan . . .the [Spider Staging] Plan . . .[t]reats the default as a distributable event. The Trustee, at the time of the default, will reduce the Participant's Nonforfeitable Accrued Benefit by the lesser of the amount in default (plus accrued interest) or the Plan's security interest in that Nonforfeitable Accrued Benefit. To the extent the loan is attributable to the Participant's Deferral Contributions Account, Qualified Matching Contributions Account or Qualified Nonelective Contributions Account, the Trustee will not reduce the Participant's Nonforfeitable Accrued Benefit unless the Participant has separated from Service or unless the Participant has attained age 59 1/2. 1.12 PARTICIPANT-DIRECTED INVESTMENT. Notwithstanding Section 10.03[A](a) of the Plan, the investment choices for accounts transferred as described in Section 1.07 of this Appendix A and for employees of Spider Staging Corporation shall not include the Employer Stock Fund until so designated by the Advisory Committee. 1.13 EFFECTIVE DATE. This Appendix A is effective on and after January 1, 1993. 50 APPENDIX B CERTAIN EMPLOYEES OF ASI ROBOTIC SYSTEMS DIVISION OF CARGILL DETROIT CORPORATION 1.01 DEFINITIONS. "1994 ASI Division Employee" means an employee of the ASI Robotic Systems Division of Cargill Detroit Corporation who, on or before January 3, 1995, accepts an offer of employment by Flow International Corporation. The "Business" means the manufacture and sale of high precision multi-axis gantry and cantilever robotics equipment through the ASI Robotic Systems Division of Cargill Detroit Corporation. 1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section 2.02 of the Plan, a 1994 ASI Division Employee shall be credited with an Hour of Service for each hour of service with Cargill Detroit Corporation while working in the Business before January 3, 1995, as if such service had been Service with Flow International Corporation. 1.03 PLAN ENTRY DATE. Notwithstanding Sections 1.16 and 2.01 of the Plan, a 1994 ASI Division Employee who completes a Year of Service (taking into account Section 1.02 of this Appendix B) on or before January 31, 1995, shall become a Participant in the Plan on January 31, 1995 (if employed by Flow International Corporation on that date). 1.04 CREDITING SERVICE FOR VESTING. For purposes of vesting under Section 5.03 of the Plan, a 1994 ASI Division Employee shall be credited under Section 5.06 of the Plan (subject to Sections 5.07 and 5.08 of the Plan) with an Hour of Service for each hour of service with Cargill Detroit Corporation while working in the Business before January 3, 1995, as if such service had been Service with Flow International Corporation. 1.05 EFFECTIVE DATE. This Appendix B is effective on and after January 1, 1995. 51 APPENDIX C CERTAIN EMPLOYEES OF FLOW AUTOMATION SYSTEMS CORPORATION 1.01 DEFINITIONS. "Automation Employee" means an individual who was an employee of Flow Automation Systems Corporation, formerly known as Dynovation Machine Systems, Inc. ("Flow Automation"), on December 15, 1994. 1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section 2.02 of the Plan, an Automation Employee shall be credited with an Hour of Service for each hour of service with Flow Automation before December 15, 1994, as if such service had been Service with Flow International Corporation. 1.03 CREDITING SERVICE FOR VESTING. For purposes of vesting under Section 5.03 of the Plan (and for purposes of vesting service described in Section 3.01(A) for Employer Matching Contributions), a an Automation Employee shall be credited under Section 5.06 of the Plan (subject to Sections 5.07 and 5.08 of the Plan) with an Hour of Service for each hour of service with Flow Automation before December 15, 1994, as if such service had been Service with Flow International Corporation. 1.04 EFFECTIVE DATE. This Appendix C is effective on and after December 15, 1994. 52 APPENDIX D FORMER CIS ROBOTICS EMPLOYEES 1.01 DEFINITIONS. "CIS Robotics" means CIS Robotics, Inc. "Former CIS Robotics Employee" means an employee of CIS Robotics who was employed by CIS Robotics on April 8, 1998. "CIS Robotics Plan" means the CIS Robotics 401(k) Profit Sharing Plan & Trust. "Transferred Account" means the account of a Former CIS Employee under the CIS Robotics Plan that is transferred from the CIS Robotics Plan to the Plan in a trust-to-trust transfer. 1.02 CREDITING SERVICE FOR ELIGIBILITY. For purposes of satisfying Section 2.02 of the Plan, a Former CIS Employee shall be credited with (1) all service with which he or she is credited for eligibility purposes under the CIS Robotics Plan, or (2) shall be credited with an Hour of Service for each hour of service with CIS Robotics, as if such service had been Service with Flow International Corporation, whichever method results in the Former CIS Employee becoming a Participant in the Plan on the earliest Plan Entry Date. 1.03 VESTING CREDIT. For purposes of vesting under Section 5.03 of the Plan (and for purposes of vesting service described in Section 3.01(A) of the Plan for Employer Matching Contributions), a Former CIS Robotics Employee shall be credited under Section 5.06 of the Plan (subject to Sections 5.07 and 5.08 of the Plan) with all service with which he or she is credited for vesting purposes under the CIS Robotics Plan. 1.04 TRANSFERRED ACCOUNTS. (a) A Former CIS Robotics Employee shall be 100% vested in his or her Transferred Account. (b) Immediately after the transfer and assignment of a Transferred Account to the Plan from the CIS Robotics Plan, each Participant shall have account balances in the Plan equal to the sum of the account balances each Participant had in the CIS Robotics Plan and in the Plan immediately prior to the transfer and assignment. (c) A Transferred Account shall be subject to all provisions of the Plan relating to Accounts under the Flow Plan, provided, however, that Code Section 411(d)(6) protected benefits pertaining to a Transferred Account shall not be eliminated (except as Treasury Regulations may permit). (d) If a Transferred Account includes amounts attributable to contributions other than Code section 401(k) salary deferral contributions (and the related gains, earnings and losses), then unless and until the entire account balance under the Flow Plan of the affected Former CIS Robotics Employee is 100% nonforfeitable, the Advisory Committee shall maintain separate accounts for that Former CIS Robotics Employee to reflect properly the different percentages of vesting he or she may have in the account balance under the Flow Plan. 1.05 EFFECTIVE DATE. This Appendix D is effective on and after April 8, 1998. 53 EXECUTION PAGE IN WITNESS WHEREOF, Flow International Corporation, the Employer, by its duly authorized representative, has executed this Flow International Corporation Voluntary Pension and Salary Deferral Plan and Trust Agreement, and Northwestern Trust and Investors Advisory Company, the Trustee, by its duly authorized representative, has accepted its position and agreed to the duties, obligations and responsibilities under this Flow International Corporation Voluntary Pension and Salary Deferral Plan and Trust Agreement. "EMPLOYER" "TRUSTEE" FLOW INTERNATIONAL CORPORATION NORTHWESTERN TRUST AND INVESTORS ADVISORY COMPANY By: [Illegible] By: [Illegible] -------------------------------- -------------------------------- Title: Secretary Title: Vice President -------------------------- -------------------------- December 23, 1998 December 28, 1998 54 EX-10.8 4 ex-10_8.txt EXHIBIT 10.8 AMENDMENT NUMBER THREE TO CREDIT AGREEMENT THIS AMENDMENT NUMBER THREE TO CREDIT AGREEMENT (this "Amendment") is made as of this 2nd day of September, 1999 by and among BANK OF AMERICA, N.A. formerly known as Bank of America National Trust and Savings Association, a national banking association, and U.S. BANK NATIONAL ASSOCIATION, a national banking association (each a "Lender"), BANK OF AMERICA, N.A. formerly known as Bank of America National Trust and Savings Association, a national banking association, as agent for the Lenders (the "Agent"), and FLOW INTERNATIONAL CORPORATION, a Washington corporation ("Borrower"). RECITALS A. Lenders, Agent and Borrower are parties to that certain Credit Agreement dated as of August 31, 1998, as amended by that Amendment Number One to Credit Agreement dated as of March 26, 1999 and as amended by that Amendment Number Two to Credit Agreement dated as of June 21, 1999 (the "Credit Agreement"). B. Borrower has requested, and Lenders and Agent have agreed to amend the Credit Agreement upon certain terms and conditions contained in this Amendment. NOW, THEREFORE, the parties hereto agree as follows: AGREEMENT 1. DEFINITIONS. Capitalized terms not otherwise defined in this Amendment shall have the meanings set forth in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is amended as follows: a. AMENDMENT TO DEFINITION OF "APPLICABLE INTEREST PERIOD." In Section 1.1, the definition of "Applicable Interest Period" is hereby amended as follows: "APPLICABLE INTEREST PERIOD" means, with respect to any Loan accruing interest at the LIBOR Rate or the Multi-Currency Rate, the period commencing on the first date Borrower elects to have such rate apply to such Loan and ending one, two, three or six months thereafter as specified in the Interest Rate Notice given in respect of such Loan (or as otherwise determined in accordance with the terms of this Agreement) PROVIDED, that in no event may the Applicable Interest Period for any Revolving Loan extend beyond the Revolving Maturity Date and in no event may the Applicable Interest Period for any Multi-Currency Loan extend beyond the Multi-Currency Maturity Date and PROVIDED, FURTHER, that for Applicable Interest Periods selected after January 31, 2000 and prior to April 30, 2000, the Borrower may, in addition to the preceding options, select Applicable Interest Periods of 7, 14 or 21 days in duration. b. AMENDMENTS TO DEFINITION OF "APPLICABLE MARGIN." In Section 1.1, the definition of "Applicable Margin" is hereby amended as follows: "APPLICABLE MARGIN" means on any date, with respect to any LIBOR Loans or Multi-Currency Loans, the rate per annum that is determined by reference to the following matrix or subclauses (ii) and (iii) below:
Senior Funded Debt Ratio as of the end Applicable of the previous fiscal quarter Margin ------------------------------ ------ Less than 2.0: .75% Equal to or greater than 2.0:1 and less than 2.35:1 .90% Equal to or greater than 2.35:1 and less than 2.6:1 1.00% Equal to or greater than 2.60:1 and less than 3.0:1 1.25% FOR THE FISCAL QUARTER ENDING ON OCTOBER 31, 1999: -------------------- Equal to or greater than 3.0:1 and less than 3.5:1 1.50% Equal to or greater than 3.5:1 and less than 4.25:1 1.75% 2 AND FOR FISCAL QUARTERS ENDING ON JANUARY 31, 2000: -------------------- Equal to or greater than 3.0:1 and less than 4.25:1 2.50%
(i) Subject to the limitations and exceptions set forth below, the Applicable Margin shall be adjusted forty-five (45) days after the end of each of the first three fiscal quarters in each of Borrower's fiscal years and ninety (90) days after the end of each fiscal year of Borrower. (A) In the event that any of the financial statements or quarterly compliance certificates required to be delivered pursuant to Section 6.9 are not delivered when due, then (aa) if such financial statements and certificates are delivered after the date such financial statements and certificates were required to be delivered (without giving effect to any applicable cure period) and the Applicable Margin increases from that previously in effect as a result of the delivery of such financial statements, then the Applicable Margin during the period from the date upon which such financial statements were required to be delivered (without giving effect to any applicable cure period) until the date upon which they actually are delivered shall, except as otherwise provided in clause (cc) below, be the Applicable Margin as so increased; (bb) if such financial statements and certificates are delivered after the date such financial statements and certificates are required to be delivered (without giving effect to any applicable cure period) and the Applicable Margin decreases from that previously in effect as a result of the delivery of such financial statements, then such decrease in the Applicable Margin shall not become effective until the date upon which the financial statements and certificates actually were delivered; and (cc) if such financial statements and certificates are not delivered prior to the expiration of the applicable cure period, then, effective upon such expiration, for the period from 3 the date upon which such financial statements and certificates were required to be delivered (after the expiration of the applicable cure period) until two (2) Business Days following the date upon which they actually are delivered, the Applicable Margin shall be 2.50% (250 basis points). (B) As used herein, "Interim Period" shall mean the period beginning on January 31, 2000 and continuing until the earlier of (aa) the date on which the Applicable Margin is set under subclause (iii) hereof or (bb) the first date after the fiscal quarter ending April 30, 2000 on which the Applicable Margin would be reset under subclause (i)(A). Unless as of January 31, 2000 (aa) the Senior Secured Funded Debt Ratio is equal to or greater than 3.0:1 and less than 4.25:1 and (bb) Borrower has failed to secure an aggregate of $25,000,000 in new equity infusions, Subordinated Debt or Senior Unsecured Debt, then the Applicable Margin for the Interim Period shall be set as provided elsewhere in this definition. If both such conditions are true, however, the Applicable Margin for the Interim Period will be set as follows: The Applicable Margin will be established at 2.50% as of January 31, 2000 (rather than forty-five days thereafter) and shall continue at such rate for the remainder of the Interim Period, PROVIDED, HOWEVER, that if prior to the expiration of the Interim Period, Borrower secures an aggregate of $25,000,000 in new equity infusions, Subordinated Debt or Senior Unsecured Debt, the Applicable Margin will be lowered to 1.00% for the balance of the Interim Period. (ii) Notwithstanding the foregoing to the contrary, however, if Borrower fails to provide Agent with an executed Mandate on or before November 15, 1999, then the Applicable Margin will be 2.50% at all times from November 16, 1999 until the date on which Borrower secures an aggregate of an additional $25,000,000 in equity infusions, Subordinated Debt or Senior Unsecured Debt. As used in this definition, "Mandate" shall mean an agreement with an investment banking firm in form and substance reasonably satisfactory to Lenders to obtain for Borrower Subordinated Debt, 4 Senior Unsecured Debt or equity contributions in an aggregate amount of not less than $25,000,000 for funding on or before April 29, 2000. (iii) Notwithstanding the foregoing to the contrary (including subclause (ii) of this definition)and without limiting any other rights which the Agent or Lenders may have under any Loan Document or applicable law in respect thereof, at any time that Borrower is in default of its obligations under either Section 6.13 or 6.17 of this Agreement, the Applicable Margin will be 5.00%. c. AMENDMENT TO DEFINITION OF "APPLICABLE UNUSED FEE PERCENTAGE." In Section 1.1, the definition of "Applicable Unused Fee Percentage" is hereby amended by adding the following sentence at the conclusion of such definition: At all times that the Applicable Margin is greater than 1.75%, the Applicable Unused Fee Percentage will be 37.5 basis points. d. AMENDMENT TO DEFINITION OF "MAJORITY LENDERS." In Section 1.1, the definition of "Majority Lenders" is hereby amended as follows: "MAJORITY LENDERS" means at any time Lenders then holding in excess of seventy-five percent (75%) of the aggregate unpaid principal amount of the Commitments. 5 e. AMENDMENT TO DEFINITION OF "MULTI-CURRENCY MATURITY DATE." In Section 1.1, the definition of "Multi-Currency Maturity Date" is hereby amended as follows: "MULTI-CURRENCY MATURITY DATE" means September 30, 2003. f. AMENDMENT TO DEFINITION OF "TANGIBLE NET WORTH." In Section 1.1, the definition of "Tangible Net Worth" is hereby amended as follows: "TANGIBLE NET WORTH" means the total assets less total liabilities excluding, however, from the determination of total assets: (a) intangible assets, (such as goodwill, patents, trademarks, copyrights, franchises and deferred taxes, including unamortized debt discount and research and development costs); (b) cash held in a sinking fund or other similar fund established for the purpose of redemption or other retirement of capital stock; (c) reserves for depreciation, depletion, obsolescences, or amortization of properties and other reserves or appropriations of retained earnings which have been established in connection with Borrower's business; and (d) any revaluation or other write-up in book value of assets subsequent to the fiscal year of Borrower last ended as of August 31, 1998; and, for clarification purposes, excluding from total liabilities, minority interests. g. DELETION OF DEFINITION OF "TOTAL LIABILITIES." In Section 1.1, the definition of "Total Liabilities" is hereby deleted. h. ADDITION OF DEFINITION OF "SENIOR UNSECURED DEBT." In Section 1.1, the following definition of "Senior Unsecured Debt" is hereby added as follows: "SENIOR UNSECURED DEBT" means Indebtedness for borrowed monies incurred by Borrower, which Indebtedness (a) is evidenced by loan agreement(s), promissory note(s) or other documents and instruments in each case in form and substance reasonably satisfactory to Lenders, (b) is wholly unsecured, (c) 6 is owing to one or more financial institutions, and (d) does not have a final maturity date for the repayment of principal on or before April 30, 2005. 7 i. ADDITION OF DEFINITION OF "SENIOR FUNDED DEBT RATIO." In Section 1.1, the following definition of "Senior Funded Debt Ratio" is hereby added as follows: "SENIOR FUNDED DEBT RATIO" shall have the meaning given in Section 6.17. j. ADDITION OF DEFINITION OF "SUBORDINATED DEBT." In Section 1.1, the following definition of "Subordinated Debt" is hereby added as follows: "SUBORDINATED DEBT" means all Indebtedness of Borrower where the terms of the instrument or agreement creating or evidencing such Indebtedness has been approved in writing by Lenders and Agent and provides that such Indebtedness is subordinated in right of payment to the Indebtedness of Borrower to Lenders hereunder and unsecured (and therefore subordinated in lien priority). k. AMENDMENT TO SECTION 2.2(a). Section 2.2(a) is hereby amended by reversing the references to "Article 4" and "Article 5." l. AMENDMENT TO SECTION 6.1. Section 6.1 is hereby amended and restated as follows: SECTION 6.1 USE OF PROCEEDS. The proceeds of the Loans and the Letters of Credit will be used only for working capital, other general corporate purposes, and for Acquisitions permitted under Section 7.2 and 7.4. m. AMENDMENT TO SECTION 6.9(a). Section 6.9(a) is hereby amended and restated as follows: (a) ANNUAL AUDITED FINANCIAL STATEMENTS. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower, the consolidated balance sheet of Borrower and its Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and the consolidated statement of retained earnings and statement of cash flows of Borrower and its Subsidiaries for such year, accompanied by (i) the 8 audit report thereon by independent certified public accountants selected by Borrower and reasonably satisfactory to Agent (which reports shall be prepared in accordance with GAAP and shall not be qualified by reason of restricted or limited examination of any material portion of the records of Borrower or any Subsidiary and shall contain no disclaimer of opinion or adverse opinion except such as Agent in its sole discretion determines to be immaterial)and (ii) an Officer's Certificate of Borrower certifying that as of the close of such year no Event of Default or Default had occurred and was continuing; n. AMENDMENT TO SECTION 6.9(b). Section 6.9(b) is hereby amended and restated as follows: (b) QUARTERLY UNAUDITED FINANCIAL STATEMENTS. As soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of Borrower, the unaudited consolidated balance sheet of Borrower as of the end of such fiscal quarter and the unaudited consolidated statement of income and consolidated statement of cash flows of Borrower for the fiscal year to the end of such fiscal quarter, unless the same has been provided in the form of Borrower's Form 10Q; accompanied by an Officer's Certificate of Borrower certifying that (i) such reports have been prepared in accordance with GAAP consistently applied and results of operation of Borrower as at the end of and for such fiscal quarter and that since the previous fiscal year-end report referred to in clause (a) there has been no material adverse change in the financial condition of Borrower and that (ii) as of the close of such fiscal quarter no Event of Default or Default had occurred and was continuing; o. AMENDMENT TO SECTION 6.9(f). Section 6.9(f) is hereby amended and restated as follows: (f) COMPLIANCE CERTIFICATES. Within ninety (90) days after the close of each fiscal year of Borrower and within forty-five (45) days after the close of each of Borrower's fiscal quarters (other than the fourth 9 fiscal quarter), an officer's certificate signed by the chief financial officer of Borrower stating that to the best of the signer's knowledge and belief after due inquiry no Default or Event of Default had occurred and was continuing and setting forth calculations evidencing compliance with Sections 6.12, 6.13, 6.14, 6.15, and 6.17 hereof; p. AMENDMENT TO SECTION 6.13. Section 6.13 is hereby amended and restated as follows: SECTION 6.13 FUNDED DEBT RATIO. As of the end of each fiscal quarter, Borrower shall maintain, on a consolidated basis, a Funded Debt Ratio of not more than (a) 3.0 to 1 for fiscal quarters ending from the date hereof until the date on which Borrower acquires both ABB Pressure Systems and ABB Autoclave Systems, (b) 4.0 to 1 for fiscal quarters ending on and after the date on which Borrower acquires both ABB Pressure Systems and ABB Autoclave Systems through and including October 30, 1999, (c) 4.25 to 1 for fiscal quarters ending on October 31, 1999 and thereafter. As used herein "Funded Debt Ratio" shall mean as of the end of any fiscal quarter, the quotient obtained by dividing (a) the Funded Debt as of the end of such fiscal quarter by (b) the EBITDA for such quarter and the three immediately preceding fiscal quarters, PLUS, in the event that Borrower has acquired any Subsidiaries during such fiscal quarter or during the immediately preceding three fiscal quarters, the EBITDA of such Subsidiaries from the first day of the immediately preceding three fiscal quarters through the date of acquisition of each Subsidiary, EXCEPT, HOWEVER, the EBITDA of ABB Pressure Systems and ABB Autoclave Systems for the fiscal quarters ending prior to the fiscal quarter ending July 31, 1999. "Funded Debt" shall mean all interest bearing liabilities of Borrower, including capitalized lease obligations. "EBITDA" shall mean pre-tax net income (or pre-tax net loss), PLUS, the sum of (i) interest expense, (ii) depreciation expense, (iii) depletion expense, and (iv) amortization expense. q. AMENDMENT TO SECTION 6.14. Section 6.14 is hereby 10 amended and restated as follows: SECTION 6.14. MINIMUM NET WORTH. Borrower shall maintain, on a consolidated basis, as at the end of each fiscal quarter, a Tangible Net Worth equal to or greater than the then applicable Minimum Net Worth. "Minimum Net Worth" shall mean $25,000,000, PLUS cumulative quarterly increases equal to fifty percent (50%) of Borrower's net income for all fiscal quarters ending on or after July 31, 1999, excluding any adjustments thereto for losses, PLUS all amounts contributed to Borrower as equity at any time after September 1, 1999. r. AMENDMENT TO SECTION 6.15. Section 6.15 is hereby amended and restated as follows: SECTION 6.15 DEBT TO TANGIBLE NET WORTH RATIO. Borrower shall maintain, on a consolidated basis, as at the end of each fiscal quarter commencing with the fiscal quarter ending October 31, 1998, a ratio of Debt to Tangible Net Worth of not more than (a) 1.75 to 1 as at the fiscal quarters ending October 31, 1998 and January 31, 1999, (b) 4.0 to 1 as at the fiscal quarter ending April 30, 1999, (c) 3.85 to 1 as at the fiscal quarter ending July 31, 1999, (d) 4.25 to 1 as at the fiscal quarter ending October 31, 1999, (e) 4.25 to 1 as at the fiscal quarter ending January 31, 2000, (f) 3.25 to 1 as at the fiscal quarters ending April 30, 2000, July 31, 2000, October 31, 2000 and January 31, 2001, and (g) 2.50 to 1 as at the fiscal quarters ending April 30, 2001 and thereafter. As used herein, "Debt" shall mean, on a consolidated basis, all liabilities of Borrower as determined and computed in accordance with GAAP other than Senior Unsecured Debt, Subordinated Debt, and for clarification purposes only, minority interests. s. NEW SECTION 6.17. A new Section 6.17 is hereby added to the Credit Agreement: SECTION 6.17 SENIOR FUNDED DEBT RATIO. As of the end of the fiscal quarter ending on January 31, 2000, Borrower shall maintain, on a consolidated basis, a 11 Senior Funded Debt Ratio of not more than 4.25 to 1. As of the end of each fiscal quarter ending on or after April 30, 2000, Borrower shall maintain, on a consolidated basis, a Senior Funded Debt Ratio of not more than 3.0 to 1. As used herein, "Senior Funded Debt Ratio" shall mean as of the end of any fiscal quarter, the quotient obtained by dividing (a) the sum of Funded Debt less Senior Unsecured Debt and less Subordinated Debt, each as of the end of such fiscal quarter by (b) the EBITDA for such quarter and the three immediately preceding fiscal quarters, PLUS, in the event that Borrower has acquired any Subsidiaries during such fiscal quarter or during the immediately preceding three fiscal quarters, the EBITDA of such Subsidiaries from the first day of the immediately preceding three fiscal quarters through the date of acquisition of each Subsidiary, EXCEPT, HOWEVER, the EBITDA of ABB Pressure Systems and ABB Autoclave Systems for the fiscal quarters ending prior to the fiscal quarter ending July 31, 1999. "Funded Debt" shall mean all interest bearing liabilities of Borrower, including capitalized lease obligations. "EBITDA" shall mean pre-tax net income (or pre-tax net loss), PLUS, the sum of (i) interest expense, (ii) depreciation expense, (iii) depletion expense, and (iv) amortization expense. t. AMENDMENT TO SECTION 7.2. Section 7.2 is hereby amended and restated as follows: SECTION 7.2 LIQUIDATION, MERGER, SALE OF ASSETS. Neither Borrower nor any Guarantor shall liquidate, dissolve or enter into any consolidation, joint venture, partnership or other combination or sell, lease, or dispose of (including through transfers to any Subsidiary that has not executed a guaranty and security agreement pursuant to Section 6.16) all or any substantial portion of its business or assets or of any Collateral (excepting sales of goods in the ordinary course of business). Neither Borrower nor any Guarantor shall merge with any other person except that the Borrower or Guarantor may merge with another person engaged in business similar or related to Borrower's PROVIDED that (a) such a merger is an 12 Acquisition, (b) prior to such Acquisition, no Default or Event of Default has occurred nor is continuing and such Acquisition shall not cause a Default or an Event of Default hereunder, (c) ten (10) days prior to such Acquisition, Borrower provides to Agent and each Lender written notice of such Acquisition and evidence that such Acquisition complies with the terms and conditions contained herein, and (d) the amount of such Acquisition, together with the amount of all other acquisitions consummated within the twelve (12) consecutive months (including all other Acquisitions by merger or otherwise as permitted under this Section 7.2 and Section 7.4 hereof), does not exceed $10,000,000. u. AMENDMENT TO SECTION 7.3. Section 7.3 is hereby amended and restated as follows: SECTION 7.3 INDEBTEDNESS. Neither Borrower nor any Guarantor shall create, incur or become liable for any Indebtedness except (a) the Loans and Indebtedness hereunder in respect of the Letters of Credit and Swap Documents, (b) existing Indebtedness reflected on the balance sheets referred to in Section 5.7, (c) current accounts payable or accrued or other current liabilities incurred by Borrower or Guarantor in the ordinary course of business, (d) indebtedness for the deferred purchase price, or for obligations under leases, of real and personal property used by Borrower or Guarantor in its business, (e) Indebtedness incurred in respect of any Acquisition permitted under Section 7.2 or 7.4, which, in the aggregate, measured on any rolling twelve (12) month period, does not exceed Five Million Dollars ($5,000,000, and (f) Senior Unsecured Debt and Subordinated Debt which when taken together do not exceed, in the aggregate, at any one time outstanding, Twenty-Five Million Dollars ($25,000,000). 13 v. AMENDMENT TO SECTION 7.4. Section 7.4 is hereby amended and restated as follows: SECTION 7.4 INVESTMENTS. Borrower shall not make any loan or advance to any person or purchase or otherwise acquire the capital stock, assets or obligations of, or any interest in, any person, except (a) commercial bank time deposits maturing within one year, (b) marketable general obligations of the United States or a State or marketable obligations fully guaranteed by the United States, (c) short-term commercial paper with the highest rating of a generally recognized rating service; (d) the Acquisition of Spearhead Automated Systems, Inc. (d) an Acquisition of another person engaged in business similar or related to Borrower's PROVIDED that (i) prior to such Acquisition, no Default or Event of Default has occurred nor is continuing and such Acquisition shall not cause a Default or an Event of Default hereunder, (ii) ten (10) days prior to such Acquisition, Borrower provides to Agent and each Lender written notice of such Acquisition and evidence that such Acquisition complies with the terms and conditions contained herein, and (iii) the amount of such Acquisition, together with the amount of all other acquisitions consummated within the twelve (12) consecutive months (including any Acquisitions by merger as permitted under Section 7.2 hereof), does not exceed $10,000,000. w. NEW SECTION 7.9. A new Section 7.9 is hereby added to the Credit Agreement: SECTION 7.9 SENIOR UNSECURED DEBT. Borrower shall maintain no funds on deposit with, shall not acquire any certificates of deposit or other financial instruments from, nor hold any Indebtedness owing to Borrower by, any Senior Unsecured Bank unless such Senior Unsecured Bank shall first have executed a written agreement in favor of Lenders (in form and substance acceptable to Lenders) subordinating or waiving its rights to set-off or to assert any "bankers lien." Borrower shall comply at all times with all terms and conditions set forth in any 14 document or instrument evidencing any Senior Unsecured Debt and shall take all other actions as may be necessary to ensure that at all times (before or after the expiration of any applicable grace periods), no Senior Unsecured Bank shall have the right to accelerate the maturity of any installment of the Senior Unsecured Debt. x. AMENDMENT TO SECTION 8.1(c). Section 8.1(c) is hereby amended and restated as follows: (c) BREACH OF CERTAIN COVENANTS. Borrower shall have failed to comply with Sections 6.2, 6.8, 6.10(e), 6.12, 6.13, 6.14, 6.15, 6.17, any provision of Article 7 of this Agreement, or, to the extent that it relates to the obtaining and maintaining of insurance or delivery of evidence of same, Section 11 of the Security Agreement; or 3. AMENDMENT FEE. On the date of this Amendment, Borrower shall pay to Agent, for the account of Lenders, an amendment fee equal to Seventy Thousand Dollars ($70,000) (the "Amendment Fee"). Such fee shall be fully earned upon the execution of this Amendment and irrevocable upon payment. 4. CONDITIONS TO EFFECTIVENESS. Notwithstanding anything contained herein to the contrary, this Amendment shall not become effective until each of the following conditions is fully and simultaneously satisfied: a. DELIVERY OF AMENDMENT. Borrower, Agent and each Lender shall have executed and delivered counterparts of this Amendment to Agent. b. PAYMENT OF AMENDMENT FEE. Borrower shall have paid the Amendment Fee to Agent. c. REPRESENTATIONS TRUE; NO DEFAULT. The representations of Borrower as set forth in Article 5 of the Credit Agreement shall be true on and as of the date of this Amendment with the same force and effect as if made on and as of this date. No Event of Default and no event which, with notice or lapse of time or both, would constitute a Event of Default, shall have occurred and be continuing or will occur as a result 15 of the execution of this Amendment. 5. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to the Lenders and Agent that each of the representations and warranties set forth in Article 5 of the Credit Agreement is true and correct in each case as if made on and as of the date of this Amendment and Borrower expressly agrees that it shall be an additional Event of Default under the Credit Agreement if any representation or warranty made hereunder shall prove to have been incorrect in any material respect when made. 6. NO FURTHER AMENDMENT. Except as expressly modified by the terms of this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and the parties hereto expressly reaffirm and ratify their respective obligations thereunder. 7. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Washington. 8. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 9. ORAL AGREEMENTS NOT ENFORCEABLE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the parties hereto have executed this Amendment Number Three to Credit Agreement as of the date first above written. BORROWER: FLOW INTERNATIONAL CORPORATION By _________________________________________ 16 Its ______________________________ LENDERS: BANK OF AMERICA, N.A. By _________________________________________ Its ______________________________ U.S. BANK NATIONAL ASSOCIATION By _________________________________________ Its ______________________________ AGENT: BANK OF AMERICA, N.A. By _________________________________________ Its ______________________________ 17 EX-10.9 5 ex-10_9.txt EXHIBIT 10.9 AMENDMENT NUMBER FOUR TO CREDIT AGREEMENT THIS AMENDMENT NUMBER FOUR TO CREDIT AGREEMENT (this "Amendment") is made as of April 28, 2000, by and among BANK OF AMERICA, N.A., formerly known as Bank of America National Trust and Savings Association, a national banking association, and U.S. BANK NATIONAL ASSOCIATION, a national banking association (each a "Lender"), BANK OF AMERICA, N.A., as agent for the Lenders (the "Agent"), and FLOW INTERNATIONAL CORPORATION, a Washington corporation ("Borrower"). RECITALS A. Lenders, Agent and Borrower are parties to that certain Credit Agreement dated as of August 31, 1998, as amended by that certain Amendment Number One to Credit Agreement dated as of March 26, 1999, by that certain Amendment Number Two to Credit Agreement dated as of June 21, 1999, and that certain Amendment Number Three to Credit Agreement dated as of September 2, 1999 (the "Credit Agreement"). B. Borrower has requested, and Lenders and Agent have agreed, to amend the Credit Agreement upon certain terms and conditions contained in this Amendment. NOW, THEREFORE, the parties hereto agree as follows: AGREEMENT 1. DEFINITIONS. Capitalized terms not otherwise defined in this Amendment shall have the meaning set forth in the Credit Agreement. 2. AMENDMENTS TO DEFINITION OF "APPLICABLE MARGIN". In Section 1.1, the definition of "Applicable Margin" is hereby amended to read as follows: "APPLICABLE MARGIN" means on any date, with respect to any LIBOR Loans or Multi-Currency Loans, the rate per annum that is determined by reference to the following matrix or subclauses (ii) below:
Senior Funded Debt Ratio as of Applicable the end of the previous fiscal quarter: Margin --------------------------------------- ---------- Less than 2.00:1 1.00% Equal to or greater than 2.00:1 and less than 2.50:1 1.25% Equal to or greater than 2.50:1 and less than 3.00:1 1.50% Equal to or greater than 3.00:1 2.50%
(i) Subject to the limitations and exceptions set forth below, the Applicable Margin shall be adjusted forty-five (45) days after the end of each of the first three fiscal quarters in each of Borrower's fiscal years and ninety (90) days after the end of each fiscal year of Borrower. In the event that any of the financial statements or quarterly compliance certificates required to be delivered pursuant to Section 6.9 are not delivered when due, then (aa) if such financial statements and certificates are delivered after the date such financial statements and certificates were required to be delivered (without giving effect to any applicable cure period) and the Applicable Margin increases from that previously in effect as a result of the delivery of such financial statements, then the Applicable Margin during the period from the date upon which such financial statements were required to be delivered (without giving effect to any applicable cure period) until the date upon which they actually are delivered shall, except as otherwise provided in clause (cc) below, be the Applicable Margin as so increased; (bb) if such financial statements and certificates are delivered after the date such financial statements and certificates are required to be delivered (without giving effect to any applicable cure period) and the Applicable Margin decreases from that previously in effect as a result of the delivery of such financial statements, then such decrease in the Applicable Margin shall not become effective until the date upon which the financial statements and certificates actually were delivered; and (cc) if such financial statements and certificates are not delivered prior to the expiration of the applicable cure period, then, effective upon such expiration, for the period from the date upon which such financial statements and certificates were required to be delivered (after the expiration of the applicable cure period) until two (2) Business Days following the date upon which they actually are delivered, the Applicable Margin shall be 2.50% (250 basis points). (ii) Notwithstanding the foregoing to the contrary and without limiting any other rights which the Agent or Lenders may have under any Loan Document or applicable law in respect thereof, at any time that Borrower is in default of its obligations under either Section 6.13 or 6.17 of this Agreement, the Applicable Margin will be 5.00%. 3. AMENDMENT TO DEFINITION OF "FUNDED DEBT". In Section 1.1, the definition of "Funded Debt" is hereby amended to read as follows: "FUNDED DEBT" shall mean all interest bearing liabilities of Borrower, including capitalized lease obligations. 4. AMENDMENT TO DEFINITION OF "SENIOR FUNDED DEBT". In Section 1.1, the definition of "Senior Funded Debt" is hereby amended to read as follows: 2 "SENIOR FUNDED DEBT" means, as of the end of any fiscal quarter, the sum of Funded Debt less Senior Unsecured Debt and less Subordinated Debt, each as of the end of such fiscal quarter. 5. AMENDMENT TO DEBT TO TANGIBLE NET WORTH RATIO. Section 6.15 of the Credit Agreement is amended and restated as follows: SECTION 6.15 DEBT TO TANGIBLE NET WORTH RATIO. Borrower shall maintain, on a consolidated basis, a ratio of Debt to Tangible Net Worth of not more than (a) 4.00 to 1 as at the fiscal quarters ending April 30, 2000, July 31, 2000, October 31, 2000 and January 31, 2001; (b) 3.25 to 1 as at the fiscal quarters ending April 30, 2001, July 31, 2001, October 31, 2001 and January 31, 2002; and (c) 2.75 to 1 as at the fiscal quarters ending April 30, 2002 and thereafter. As used herein, "Debt" shall mean, on a consolidated basis, all liabilities of Borrower as determined and computed in accordance with GAAP other than Senior Unsecured Debt, Subordinated Debt, and for clarification purposes only, minority interests. 6. AMENDMENT TO SENIOR FUNDED DEBT RATIO. Section 6.17 of the Credit Agreement is amended and restated as follows: SECTION 6.17 SENIOR FUNDED DEBT RATIO. Borrower shall maintain, on a consolidated basis, a Senior Funded Debt Ratio of not more than (a) 4.00 to 1 as at the fiscal quarters ending April 30, 2000 and July 31, 2000; (b) 3.75 to 1 as at the fiscal quarters ending October 31, 2000; (c) 3.50 to 1 as at the fiscal quarters ending January 31, 2001; (d) 3.25 to 1 as at the fiscal quarters ending April 30, 2001 and July 31, 2001; and (e) 3.00 to 1 as at the fiscal quarters ending October 31, 2001 and thereafter. As used herein, "Senior Funded Debt Ratio" shall mean, as of the end of any fiscal quarter, the quotient obtained by dividing (A) Senior Funded Debt as of the end of such fiscal quarter by (B) the EBITDA for such quarter and the three immediately preceding fiscal quarters, PLUS, in the event that Borrower has acquired any Subsidiaries during such fiscal quarter or during the immediately preceding three fiscal quarters, the EBITDA of such Subsidiaries from the first day of the immediately preceding three fiscal quarters through the date of acquisition of each Subsidiary. "EBITDA" shall mean pre-tax net income (or pre-tax net loss), PLUS, the sum of (i) interest expense, (ii) depreciation expense, (iii) depletion expense, and (iv) amortization expense. 7. ADDITION OF AFFIRMATIVC COVENANT. A new Section 6.18 is hereby added to the Credit Agreement: SECTION 6.18 SENIOR FUNDED DEBT. As at the end of each fiscal quarter, Borrower shall cause, on a consolidated basis, Senior Funded Debt to be less than or equal to the sum of (i) 75% of Borrower's consolidated accounts receivable, plus (ii) 40% of Borrower's consolidated inventory (valued as the lesser of cost or fair market value), plus (iii) 100% of the net book value of Borrower's consolidated equipment (excluding Fresher Under Pressure equipment). 3 8. AMENDMENT FEE. On the date of this Amendment, Borrower shall pay to Agent, for the account of Lenders in accordance with their Pro Rata Shares, an amendment fee equal to 0.25% of the sum of the Total Revolving Commitment (the "Fourth Amendment Fee"). Such fee shall be fully earned upon the execution of this Amendment and irrevocable and non-refundable upon payment. 9. CONDITIONS TO EFFECTIVENESS. Notwithstanding anything contained herein to the contrary, this Amendment shall not become effective until each of the following conditions fully and simultaneously satisfied: a. DELIVERY OF AMENDMENT. Borrower, Agent and each Lender shall have executed and delivered counterparts of this Amendment to Agent. b. PAYMENT OF FOURTH AMENDMENT FEE. Borrower shall have paid the Fourth Amendment Fee to Agent. 10. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to the Lenders and Agent that each of the representations and warranties set forth in Article 5 of the Credit Agreement is true and correct in each case as if made on and as of the date of this Amendment and Borrower expressly agrees that it shall be an additional Event of Default under the Credit Agreement if any representation or warranty made hereunder shall prove to have been incorrect in any material respect when made. 11. NO FURTHER AMENDMENT. Except as expressly modified by the terms of this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and the parties hereto expressly reaffirm and ratify their respective obligations thereunder. 12. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Washington. 13. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 14. ORAL AGREEMENTS NOT ENFORCEABLE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the parties hereto have executed this Amendment Number Four to Credit Agreement as of the date first above written. 4 BORROWER: FLOW INTERNATIONAL CORPORATION By: ------------------------------------- Its: ----------------------------------- LENDERS: BANK OF AMERICA, N.A. By: ------------------------------------- Its: ----------------------------------- U.S. BANK NATIONAL ASSOCIATION By: ------------------------------------- Its: ----------------------------------- AGENT: BANK OF AMERICA, N.A. By: ------------------------------------- Its: ----------------------------------- 5 EX-10.10 6 ex-10_10.txt EXHIBIT 10.10 AMENDMENT NUMBER FIVE TO CREDIT AGREEMENT THIS AMENDMENT NUMBER FIVE TO CREDIT AGREEMENT (this "Amendment") is made as of June 1, 2000, by and among BANK OF AMERICA, N.A., formerly known as Bank of America National Trust and Savings Association, a national banking association, and U.S. BANK NATIONAL ASSOCIATION, a national banking association (each a "Lender"), BANK OF AMERICA, N.A., as agent for the Lenders (the "Agent"), and FLOW INTERNATIONAL CORPORATION, a Washington corporation ("Borrower"). RECITALS A. Lenders, Agent and Borrower are parties to that certain Credit Agreement dated as of August 31, 1998, as amended by that certain Amendment Number One to Credit Agreement dated as of March 26, 1999, by that certain Amendment Number Two to Credit Agreement dated as of June 21, 1999, by that certain Amendment Number Three to Credit Agreement dated as of September 2, 1999, and by that certain Amendment Number Four to Credit Agreement dated as of April 28, 2000 (the "Credit Agreement"). B. Borrower has requested, and Lenders and Agent have agreed, to amend the Credit Agreement upon certain terms and conditions contained in this Amendment. NOW, THEREFORE, the parties hereto agree as follows: AGREEMENT 1. DEFINITIONS. Capitalized terms not otherwise defined in this Amendment shall have the meaning set forth in the Credit Agreement. 2. AMENDMENTS TO DEFINITION OF "TANGIBLE NET WORTH." In Section 1.1, the definition of "Tangible Net Worth" is hereby amended to read as follows: "TANGIBLE NET WORTH" means the total assets less total liabilities excluding, however, from the determination of total assets: (a) intangible assets, (such as goodwill, patents, trademarks, copyrights, franchises and deferred taxes, including unamortized debt discount and research and development costs); (b) cash held in a sinking fund or other similar fund established for the purpose of redemption or other retirement of capital stock; (c) reserves for depreciation, depletion, obsolescences, or amortization of properties and other reserves or appropriations of retained earnings which have been established in connection with Borrower's business; (d) any revaluation or other write-up in book value of assets subsequent to the fiscal year of Borrower last ended as of August 31, 1998; and, for clarification purposes, excluding from total liabilities, minority interests; and (e) cumulative translation adjustment. 3. AMENDMENT TO MINIMUM NET WORTH. Section 6.14 of the Credit Agreement is amended and restated as follows: SECTION 6.14 MINIMUM NET WORTH. Borrower shall maintain, on a consolidated basis, as at the end of each fiscal quarter, a Tangible Net Worth equal to or greater than the then applicable Minimum Net Worth. "Minimum Net Worth" shall mean $27,800,000, PLUS cumulative quarterly increases equal to fifty percent (50%) of Borrower's net income for all fiscal quarters ending on or after July 31, 1999, excluding any adjustments thereto for losses, PLUS all amounts contributed to Borrower as equity at any time after September 1, 1999. 5. AMENDMENT TO DEBT TO TANGIBLE NET WORTH RATIO. Section 6.15 of the Credit Agreement is amended and restated as follows: SECTION 6.15 DEBT TO TANGIBLE NET WORTH RATIO. Borrower shall maintain, on a consolidated basis, a ratio of Debt to Tangible Net Worth of not more than (a) 3.70 to 1 as at the fiscal quarters ending April 30, 2000, July 31, 2000, October 31, 2000 and January 31, 2001; (b) 3.10 to 1 as at the fiscal quarters ending April 30, 2001, July 31, 2001, October 31, 2001 and January 31, 2002; and (c) 2.60 to 1 as at the fiscal quarters ending April 30, 2002 and thereafter. As used herein, "Debt" shall mean, on a consolidated basis, all liabilities of Borrower as determined and computed in accordance with GAAP other than Senior Unsecured Debt, Subordinated Debt, and for clarification purposes only, minority interests. 6. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective when Borrower, Agent and each Lender have executed and delivered counterparts hereof to Agent. 7. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to the Lenders and Agent that each of the representations and warranties set forth in Article 5 of the Credit Agreement is true and correct in each case as if made on and as of the date of this Amendment and Borrower expressly agrees that it shall be an additional Event of Default under the Credit Agreement if any representation or warranty made hereunder shall prove to have been incorrect in any material respect when made. 8. NO FURTHER AMENDMENT. Except as expressly modified by the terms of this Amendment, all of the terms and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and the parties hereto expressly reaffirm and ratify their respective obligations thereunder. 9. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Washington. 10. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 2 11. ORAL AGREEMENTS NOT ENFORCEABLE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. IN WITNESS WHEREOF, the parties hereto have executed this Amendment Number Five to Credit Agreement as of the date first above written. BORROWER: FLOW INTERNATIONAL CORPORATION By: ___________________________________ Its: ___________________________________ LENDERS: BANK OF AMERICA, N.A. By: ___________________________________ Its: ___________________________________ U.S. BANK NATIONAL ASSOCIATION By: ___________________________________ Its: ___________________________________ AGENT: BANK OF AMERICA, N.A. By: ___________________________________ Its: ___________________________________ 3 EX-10.13 7 ex-10_13.txt EXHIBIT 10.13 SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT This SECOND AMENDMENT TO NOTE PURCHASE AGREEMENT (this "Amendment"), dated as of April 30, 2000 is made by and between FLOW INTERNATIONAL CORPORATION, a Delaware corporation (the "Company"), and each of CONNECTICUT GENERAL LIFE INSURANCE COMPANY and LIFE INSURANCE COMPANY OF NORTH AMERICA (the "Holders"). BACKGROUND A. Pursuant to the Note Purchase Agreement[the "Note Agreement"), dated as of September 1, 1995, between the Company and the Holders the Company issued and the Holders purchased Fifteen Million Dollars ($15,000,000) in aggregate principal amount of the Company's 7.20% Notes due September 26, 2005 (the "Notes"). B. The Company has requested that the Holders amend certain of the Company's obligations under the Note Agreement. C. The Company and the Holders desire to enter into this Amendment to effectuate the above-mentioned amendments. NOW, THEREFORE, in order to induce the Holders to grant the amendments specified below and in consideration of other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged) the Company and the Holders agree as follows: 1. DEFINITIONS. All capitalized terms used, but not specifically defined, in this Amendment have the respective meanings assigned to them in the Note Agreement. 2. EFFECTIVE DATE. The provisions of Section 4 shall take effect as of April 30, 2000 provided that the following conditions precedent have been and remain satisfied: (a) CONSENTING PARTIES - Holders holding not less than sixty-six and two-thirds percent (66-2/3%) in aggregate principal amount of the Notes then outstanding (exclusive of Notes then owned by any one or more of the Company, any Subsidiaries and any affiliates) and the Company shall have duly authorized, executed and delivered this Amendment; PAGE 1 (b) NO DEFAULTS - no Default or Event of Default exists after giving effect to the amendments set forth in Section 4; (c) PAYMENT OF FEES AND EXPENSES - the Company shall have paid the legal fees and disbursements of the Holders' in-house legal department allocable to this Amendment; and (d) ACKNOWLEDGMENT AND CONSENT OF EACH GUARANTOR - Each Guarantor shall have duly authorized, executed and delivered the Acknowledgement and Consent attached to this Amendment. 3. FALSE OR MISLEADING INFORMATION. The amendments set forth in Section 4 shall terminate and shall be null and void and of no force and effect if any written materials furnished in connection with this Amendment shall have been false or misleading in any material respect when made. 4. AMENDMENTS. (a) Section 11.3. Clause (ii) of Section 11.3(a) of the Note Agreement shall be amended and restated in its entirety as follows: (ii) Consolidated Funded Debt does not exceed 58% of Consolidated Total Capitalization. (b) Schedule B. The definition of "Consolidated Income Available for Fixed Charges" contained in Schedule B to the Note Agreement shall be amended and restated in its entirety as follows: "CONSOLIDATED INCOME AVAILABLE FOR FIXED CHARGES" means, with respect to any period, Consolidated Net Income for such period plus all amounts deducted in the computation thereof on account of (a) Fixed Charges, (b) taxes imposed on or measured by income or excess profits, and (c) Amortization of Intangibles. (c) Schedule B shall be amended by adding, in the correct alphabetical order, the following definition of the defined term "Amortization of Intangibles" to the list of definitions: "Amortization of Intangibles" means the amortization of the book value of all assets, after deducting any reserves applicable thereto, which would be treated as an intangible under GAAP, including, without limitation, good will, trademarks, trade names, service marks, brand names, copyrights, patents, PAGE 2 organizational expenses and the excess of the equity in any Subsidiary over the cost of the investment in such Subsidiary. 6. EFFECT OF AGREEMENT. Except as expressly provided in this Amendment, the Note Agreement and all documents and instruments executed in connection with, or contemplated by, the Note Agreement shall remain in full force and effect, without modification or amendment. This Amendment shall be binding upon, and shall inure to the benefit of, the successors and assigns of the parties hereto and the holders from time to time of the Notes. 7. DUPLICATE ORIGINALS: EXECUTION IN COUNTERPART. Two or more duplicate originals of this Amendment and the attached Acknowledgment and Consent may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Amendment and the attached Acknowledgment and Consent may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party to this Amendment and the attached Acknowledgment and Consent, and each set of counterparts which, collectively, show execution by each such party to this Amendment and the attached Acknowledgment and Consent shall constitute one duplicate original. 8. GOVERNING LAW. This Amendment shall be governed by, and construed and enforced in accordance with, internal Connecticut law. IN WITNESS WHEREOF, the undersigned have each caused this Amendment to Note Purchase Agreement to be duly executed and delivered by their respective, duly authorized officers as of the date first above written. COMPANY: FLOW INTERNATIONAL CORPORATION BY: /s/ Steve Reichenbach ------------------------- Name: Steve Reichenbach Title: EVP, CFO [SIGNATURES CONTINUED ON NEXT PAGE] PAGE 3 HOLDERS: CONNECTICUT GENERAL LIFE INSURANCE COMPANY* By: CIGNA Investments, Inc. By: /s/ Stephen A. Osborn ------------------------- Name: Stephen A. Osborn Title: Managing Director LIFE INSURANCE COMPANY OF NORTH AMERICA* By: CIGNA Investments, Inc. By: /s/ Stephen A. Osborn ------------------------- Name: Stephen A. Osborn Title: Managing Director *The entity signing this agreement is either a holder of a Note referred to herein or the beneficial holder of such Note registered in the name of the nominee of such beneficial holder. Signature page to Amendment to Note Purchase Agreement dated as of April 30, 2000 by and between FLOW INTERNATIONAL CORPORATION,), and each of CONNECTICUT GENERAL LIFE INSURANCE COMPANY and LIFE INSURANCE COMPANY OF NORTH AMERICA PAGE 4 ACKNOWLEDGMENT AND CONSENT Reference is made to the Guaranty (the "Guaranty"), dated as of April 30, 2000, between RAMPART WATERBLAST, INC., (the "Guarantor"), and the Holders named in the foregoing Second Amendment to Note Purchase Agreement (the "Amendment"). The Guarantor hereby (a) acknowledges and consents to the execution and delivery of the Amendment, (b) declares and confirms that its obligations under the Guaranty to any holder of Notes (as defined pursuant to the Amendment), regardless of whether such holder of Notes is a signatory to the Amendment, shall not be affected in any way to the execution and delivery of the Amendment. Dated as of April 30, 2000. GUARANTOR: RAMPART WATERBLAST, INC. By: /s/ [Illegible] ---------------------------- Name: Title: PAGE 5 ACKNOWLEDGMENT AND CONSENT Reference is made to the Guaranty (the "Guaranty"), dated as of April 30, 2000, between SPIDER STAGING CORPORATION, (the "Guarantor), and the Holders named in the foregoing Second Amendment to Note Purchase Agreement (the "Amendment"). The Guarantor hereby (a) acknowledges and consents to the execution and delivery of the Amendment, (b) declares and confirms that its obligations under the Guaranty to any holder of Notes (as defined pursuant to the Amendment), regardless of whether such holder of Notes is a signatory to the Amendment, shall not be affected in any way due to the execution and delivery of the Amendment. Dated as of April 30, 2000. GUARANTOR: SPIDER STAGING CORPORATION By: /s/ [Illegible] ---------------------------- Name: Title: PAGE 6 EX-10.15 8 ex-10_15.txt EXHIBIT 10.15 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("AGREEMENT"), is entered into this _____ day of _____________, 1999 ("EFFECTIVE DATE"), by and among Spearhead Automated Systems, Inc., a Michigan corporation ("COMPANY"), Stephen R. Howard and Liberty Tool and Engineering Corporation ("SHAREHOLDERS"), and Flow International Corporation, a Washington corporation ("BUYER"). RECITALS A. Shareholders own all the issued and outstanding stock of Company. B. Buyer wishes to buy the assets of Company pursuant to the terms and conditions set forth herein. INTENDING TO BE LEGALLY BOUND, and in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, Buyer, Company, and Shareholders hereby agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, capitalized terms shall have the following meanings: "AFFILIATE"--a Person (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, another Person, or (ii) which beneficially owns or holds 5% or more of any class of the voting stock of another Person, or (iii) 5% or more of the voting stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by another Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "AGREEMENT" means this Asset Purchase Agreement. "ASSETS" shall have the meaning given in Section 2.1. "BUSINESS CONDITION" shall have the meaning given in Section 3.1. "BUYER" means Flow International Corporation, a Washington corporation. Page 1 of 44 "BUYER DISCLOSURE SCHEDULE" means a document referring specifically to the representations and warranties in this Agreement that is delivered by Buyer to Shareholders within five (5) business days after the execution of this Agreement. "BUYER REQUIRED STATUTORY APPROVALS" shall have the meaning given in Section 4.2. "CHARTER DOCUMENTS" shall have the meaning given in Section 3.1. "CLAIM NOTICE" means a written notice in reasonable detail of the facts and circumstances that form the basis of an indemnification claim hereunder and setting forth an estimated amount of the potential Losses, if possible, and the sections of this Agreement upon which the claim for indemnification for such Losses is based. "CLOSING" means the closing of the Transaction. "CLOSING DATE" means the date of the Closing. "COMPANY" means Spearhead Automated Systems, Inc., a Michigan corporation. "COMPANY DISCLOSURE SCHEDULE" means a document containing the factual disclosures called for by the representations and warranties in this Agreement that is delivered by Company and Shareholders to Buyer within five (5) business days after the execution of this Agreement. "COMPANY FINANCIAL STATEMENTS" shall have the meaning given in Section 3.4. "COMPANY INTELLECTUAL PROPERTY" shall have the meaning given in Section 3.13. "COMPANY REQUIRED STATUTORY APPROVALS" shall have the meaning given in Section 3.2. "COMPANY SHARES" means the issued and outstanding shares of capital stock of Company. "CONFIDENTIAL INFORMATION" shall have the meaning given in Section 11.8. "CONSENT" means a consent, approval, Order, or authorization of, or registration, declaration, or filing with, or exemption by a Governmental Entity. "COUNTERNOTICE" means a written objection to a claim or payment setting forth the basis for disputing such claim or payment. "DUE DILIGENCE" shall have the meaning set forth in Section 7.5. "ENVIRONMENTAL LAWS" shall have the meaning given in Section 3.17. Page 2 of 44 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Page 3 of 44 "ESCROW AGREEMENT" means the Escrow Agreement called for by Section 2.1. "GAAP" means generally accepted accounting principles consistently applied. "GOVERNMENTAL ENTITY" means a court, administrative agency, or commission or other governmental authority or instrumentality, whether domestic or foreign. "HAZARDOUS SUBSTANCES" shall have the meaning given in Section 3.17. "KEY EMPLOYEES" shall mean those employees of Company who are employed in managerial, technical or professional capacities.. "KNOWLEDGE" in reference to Company means that Stephen R. Howard, President of the Company, has reviewed the specific representation and warranty and the related Company Disclosure Schedule to which such knowledge statement is made, and, in so doing, has exercised reasonable due diligence, and based upon the foregoing, he is not aware and has no reason to be aware of any inaccuracies in such specific representation and warranty and related Company Disclosure Schedule with respect to which such knowledge statement is made. "LEASED PROPERTY" shall have the meaning given in Section 3.16. "LIENS" means any mortgage, deed of trust, security interest, retention of title or lease for security purposes, pledge, charge, encumbrance, equity, claim, easement, right of way, covenant, condition or restriction, leasehold interest or any right of any kind of any other Person in or with respect to any property of Company. "LOSSES" shall mean direct and actual losses, damages, liabilities, claims, judgments, settlements, fines, costs, and expenses (including reasonable attorneys' fees) of any kind, net of any insurance proceeds, but excluding all indirect and/or consequential damages of any kind. "ORDER" means a decree, judgment, injunction, ruling, or other order of a Governmental Entity having jurisdiction, whether temporary, preliminary, or permanent. "PAYMENT CERTIFICATE" shall mean a written claim for payment of Losses, in reasonable detail and specifying the amount of such Losses. "PERSON" means an individual, partnership, corporation, trust or unincorporated organization, or a Governmental Agency. "PLAN" shall mean an employee bonus, profit sharing, retirement, stock purchase, stock option, recapitalization, insurance, medical, life, disability, severance, or other benefit plan. "PURCHASE PRICE" shall have the meaning given in Section 2.1. "REAL PROPERTY" shall have the meaning given in Section 3.17. Page 4 of 44 "RETURNS" means all returns, information statements, declarations, reports, statements and other documents required to be filed in respect of Taxes, and any claims for refunds of Taxes, including any amendments or supplements to any of the foregoing. The term "Return" means any one of the foregoing Returns. "SCHEDULE OF EXCEPTIONS" shall mean a document containing all exceptions to the representations and warranties in this Agreement, other than those exceptions specifically set forth in this Agreement, that is delivered by Company and Shareholders to Buyer prior to the execution of this Agreement. "SHAREHOLDERS" shall mean Stephen R. Howard and Liberty Tool and Engineering Corporation. "STUB BALANCE SHEET" shall have the meaning given in Section 3.4. "STUB PERIOD DATE" shall have the meaning given in Section 3.4. "SUBSIDIARY" shall have the meaning given in Section 3.1. "TAX" or "TAXES" means any income, corporation, gross receipts, profits, gains, capital stock, capital duty, franchise, withholding, social security, unemployment, disability, property, wealth, welfare, stamp, excise, occupation, sales, use, value added, alternative minimum, estimated or other similar tax or obligation (including any fee, assessment or other charge in the nature of or in lieu of any tax) imposed by any governmental entity (whether national, local, municipal or otherwise) or political subdivision thereof, and any interest penalties, additions to tax or additional amounts in respect of the foregoing, and including any transferee or secondary liability in respect of any tax (whether imposed by law, contractual agreement or otherwise) and any liability in respect of any tax as a result of being a member of any affiliated, consolidated, combined, unitary or similar group, including any liability for taxes under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law). "TAX PERIOD" means, with respect to any tax, the period for which the Tax is reported as provided under applicable tax law. "TRANSACTION" shall mean the purchase of the Assets by Buyer pursuant to the terms of this Agreement. "THRESHOLD AMOUNT" shall have the meaning given in Section 9.6. "VIOLATION" shall have the meaning given in Section 3.3. "YEAR 2000 COMPLIANT" shall have the meaning given in Section 3.13. Page 5 of 44 ARTICLE II PURCHASE OF ASSETS 2.1 PURCHASE OF ASSETS. Subject to the terms and conditions of this Agreement, at the Closing, as defined below, Company shall sell, convey, transfer, assign and deliver to Buyer, and Buyer shall purchase, acquire and accept from Company, all of the operating assets of Company (the "Assets"), which are currently owned by, or being used by the Company in its business, except for those assets listed on Schedule 2.1. The Assets include, but are not limited to the following: (a) Office furniture and fixtures (b) Equipment (c) Inventory and Supplies (d) Accounts Receivable (e) Leasehold Improvements (f) Goodwill and Going Concern Value (g) Promotional and Proprietary Rights (h) All jobs and work in progress (i) Company's customer lists (j) Company's interest in its contracts and leases (k) Cash 2.2 ASSUMPTION OF LIABILITIES. Buyer shall assume or pay at Closing the liabilities of Company included on the Stub Balance Sheet, together with such changes through Closing as may occur in the ordinary course of Company's business. 2.3 PURCHASE PRICE. In consideration for the sale, assignment and transfer of the Assets and the representations, warranties, and covenants contained herein, Buyer agrees to pay to Company the aggregate amount of Two Million Eight Hundred Thousand Dollars ($2,800,000) together with the assumption of liabilities in Section 2.2, ("PURCHASE PRICE"). Two Million Four Hundred Fifty Thousand Dollars ($2,450,000) of the Purchase Price shall be payable at Closing by wire transfer of immediately available funds. Two Hundred Fifty Thousand Dollars ($250,000) of the Purchase Price shall be paid on the Effective Date by wire transfer. One Hundred Thousand Dollars ($100,000) of the Purchase Price shall be placed in escrow pursuant to the terms of an escrow agreement ("ESCROW AGREEMENT") in form and substance satisfactory to both Buyer and Company to be held for six months following the Closing Date. Disbursement of the funds placed in escrow shall be subject to offset rights in Section 9.7. 2.4 CLOSING DATE. The Closing shall take place on September 1, 1999 (the "CLOSING DATE" or "CLOSING"), at the offices of Jaffe, Raitt, Heuer & Weiss, unless another date or place is agreed to in writing by the parties hereto. Page 6 of 44 2.5 CLOSING DATE DELIVERIES. (a) On the Closing Date, Company and Shareholders shall deliver to Buyer the following validly executed instruments: (i) certified copy of resolutions of the Board of Directors and shareholders of Company authorizing the execution and performance of this Agreement and the transaction contemplated hereby; (ii) validly executed assignments of all leases listed on the Company Disclosure Schedule and all required lessor's consents to such assignments, satisfactory in form and substance to Buyer; (iii) validly executed assignments of all contracts to be assumed by Buyer as set forth on the Company Disclosure Schedule, together with such additional contracts as the Company may have entered into between the Effective Date and Closing, together with all necessary third party consents to such assignments, satisfactory in form and substance to Buyer; (iv) bill of sale for all Assets being purchased by Buyer, satisfactory in form and substance to Buyer; (v) an opinion of Jaffe, Raitt, Heuer & Weiss, Professional Corporation, counsel to Company and Shareholders required by Section 8.2.3; (vi) the closing certificate required by Sections 8.2.1 and 8.2.2; (vii) lien releases for any Assets being purchased hereunder, subject to Buyer paying or assuming the related liabilities, satisfactory in form and substance to Buyer; (viii) assignments in recordable form with the applicable trademark, patent or copyright office of all Company Intellectual Property being purchased or transferred hereunder, satisfactory in form and substance to Buyer; (ix) validly executed assignments of title for all vehicles being purchased hereunder, so that the titles may be transferred to Buyer; (x) the executed Escrow Agreement; (xi) the documents required by Sections 5.5(e) and (f) herein; (xii) the Employment Agreement described in Section 8.2.5 hereof, executed by Stephen R. Howard; Page 7 of 44 (xiii) the Non-Compete Agreement described in Section 8.2.6 hereof, executed by Stephen R. Howard; and Page 8 of 44 (xiv) such other instruments or documents necessary or reasonably desirable to consummate the Transaction, all satisfactory in form and substance to Buyer. (b) On the Closing Date, Buyer shall deliver to Company the following validly executed instruments: (i) Two Million Four Hundred and Fifty Thousand Dollars ($2,450,000) payable to Company by wire transfer of immediately available funds; (ii) The Escrow Agreement; (iii) Certified copy of resolutions of the Board of Directors of Buyer authorizing the execution and performance of this Agreement and the Transaction contemplated hereby; (iv) Opinion of counsel to Buyer as required by Section 8.3.3; (v) The closing certificate required by Sections 8.3.1 and 8.3.2; (vi) The Employment Agreement described in Section 8.2.5 hereof signed by the Buyer; (vii) The Non-Compete Agreement described in Section 8.2.6 hereof signed by the Buyer; (viii) Assumption agreement for all liabilities being assumed by Buyer, satisfactory in form and substance to Seller; and (ix) Such other instruments or documents necessary or desirable to consummate the Transaction, all satisfactory in form and substance to Buyer. (c) On the Closing Date, Buyer shall deliver to Escrow Agent the following validly executed instruments: (i) The executed Escrow Agreement; and (ii) One Hundred Thousand Dollars ($100,000) by wire transfer. Page 9 of 44 ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY AND SHAREHOLDERS Except as disclosed in a document referring specifically to the representations and warranties in this Agreement which identifies by section number the section and subsection to which such disclosure relates and is delivered by Shareholders and Company to Buyer prior to the execution of this Agreement (the "SCHEDULE OF EXCEPTIONS"), and whether or not the Schedule of Exceptions is referred to in a specific section or subsection, Company and Shareholders, jointly and severally, represent and warrant to Buyer as follows: 3.1 ORGANIZATION, STANDING, AND POWER. Company is a corporation duly organized, validly existing, and in good standing under the laws of Michigan. Company has all requisite power and authority to own, lease, and operate its properties and to carry on its businesses as now being conducted, and is duly qualified, validly existing and in good standing (in such jurisdictions in which good standing is applicable) to do business in each jurisdiction in which a failure to so qualify would have a material adverse effect on the Business Condition (as hereinafter defined) of Company. As used in this Agreement, "BUSINESS CONDITION" with respect to any entity shall mean the business, financial condition, results of operations or assets. In this Agreement, a "SUBSIDIARY" of any corporation or other entity means a corporation, partnership, limited liability company, or other entity of which such corporation or entity directly or indirectly owns or controls voting securities or other interests that are sufficient to elect a majority of the Board of Directors or other managers of such corporation, partnership, limited liability company or other entity. Company has no Subsidiary. 3.2 AUTHORITY. Company and Shareholders have, or shall have prior to the Closing, all requisite corporate power and authority to enter into this Agreement and, subject to the Company's Required Statutory Approvals, to consummate the transactions contemplated hereby. As used in this Agreement "COMPANY'S REQUIRED STATUTORY APPROVALS" means such filings, authorizations, Orders and approvals as may be required under federal or foreign laws, or securities laws. The execution and delivery by Company and Shareholders of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Company and Shareholders, including the approval of the Board of Directors and all shareholders of Company. This Agreement has been duly executed and delivered by Company and Shareholders and constitutes a valid and binding obligation of Company and Shareholders enforceable in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, or other similar laws relating to enforcement of creditors' rights generally and (ii) general equitable principles, including the availability of specific performance, injunctive relief and other equitable remedies. Page 10 of 44 3.3 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS. (a) Company holds, and at all times has held, all licenses, permits, and authorizations from all Governmental Entities necessary for the lawful conduct of its business pursuant to all applicable statutes, laws, ordinances, rules, and regulations of all such authorities having jurisdiction over it or any part of its operations, excepting, however, when such failure to hold would not have a material adverse effect on Company's Business Condition. To Company's Knowledge, there are and for the past three years there have been no material violations or claimed material violations of any federal, state or local license, permit, or authorization or any statute, law, ordinance, judgment, decree, rule or regulation applicable to Company. Subject to the satisfaction of the conditions set forth in Section 8, neither the execution and delivery of this Agreement and all other agreements contemplated hereby by Company nor the consummation of the transactions contemplated hereby and thereby will conflict with or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, or acceleration of any material obligation or to loss of a material benefit under, or the creation of a lien, pledge, security interest, charge, or other encumbrance on the assets or contracts of Company or the Company Shares (any such conflict, violation, default, right, loss or creation being referred to herein as a "VIOLATION") pursuant to, (i) any provision of the Charter Documents of Company or the comparable governing instruments, or (ii) any loan or credit agreement, note, bond, mortgage, indenture, contract, lease, or other agreement or instrument, permit, concession, franchise, license, Order, statute, law, ordinance, rule or regulation applicable to Company or its respective properties or assets, other than, in the case of (ii), any such Violation which individually or in the aggregate would not have a material adverse effect on the Business Condition of Company. (b) No Consent by any Governmental Entity is required by or with respect to Company in connection with the execution and delivery of this Agreement and all other agreements contemplated hereby by Company or the consummation by Company of the transactions contemplated hereby. 3.4 FINANCIAL STATEMENTS. Company has delivered to Buyer the balance sheets and statements of income of Company, as of and for the years ended November 30, 1996, 1997 and 1998 which have been compiled by Conway MacKenzie & Dunleavy, Company's independent public accountants, whose reports with respect to such financial statements are included. The Company has delivered to Buyer financial statements of Company as of and for the period ended May 31, 1999 (the "STUB PERIOD DATE"). The financial statements as described above are the "COMPANY FINANCIAL STATEMENTS." The balance sheet as of the Stub Period Date is the "STUB BALANCE SHEET." The Company Financial Statements, (a) have been prepared in accordance with GAAP throughout the periods indicated and in prior periods, (b) except for normal year-end adjustments with regard to the Stub Balance Sheet, fairly present the financial position of Company, as of the respective dates indicated and the results of its operations for the respective periods indicated, and (c) were prepared from the books and records of Company, which books and records are complete and correct and accurately reflect in all material respects the transactions of and other events applicable to Company. There are no material liabilities or obligations except, (i) liabilities that are accrued or reserved against in the Stub Balance Sheet, or Page 11 of 44 (ii) additional liabilities reserved against since the Stub Period Date that (x) have arisen in the ordinary course of business; and (y) are accrued or reserved against on the books and records of Company. 3.5 ACCOUNTS RECEIVABLE. All accounts receivable are not subject to counterclaims or setoffs and are fully collectible within 90 days of the date of Closing without any cost whatsoever to Buyer or Company in collection efforts therefor, except in the case of accounts receivable shown on the Stub Balance Sheet, to the extent of the appropriate reserves set forth on the Stub Balance Sheet, and, in the case of accounts receivable arising since the date of the Stub Balance Sheet, to a reasonable allowance for bad debt which does not reflect a rate of bad debt more than that reflected by the reserve for bad debt on the Stub Balance Sheet. 3.6 INVENTORIES. The values at which the inventories are shown on the Company Financial Statements have been determined in accordance with GAAP and the normal valuation policy of Company. Said inventories (and items of inventory acquired or manufactured subsequent to the date of the Company Financial Statements), consist only of items of quality and quantity commercially usable and salable in the ordinary course of business, except for any items of obsolete material or material below standard quality, all of which have been written down to realizable market value, or for which adequate reserves have been provided, and the present quantities of all inventory are reasonable in the present circumstances of its business. 3.7 ABSENCE OF CERTAIN CHANGES AND EVENTS. Since May 31, 1999, there has not been: (a) Any change (or any development or combination of developments of which, to the Company's Knowledge, is reasonably likely to result in such a change) in Company's Business Condition, other than changes in the ordinary course of business which in the aggregate have not been and will not have a material adverse effect on Company's Business Condition; or, without limiting the foregoing, any disposition, loss of or damage to any of the properties of Company, whether or not insured, amounting to more than $25,000 in the aggregate; (b) Any declaration, payment, or setting aside of any dividend or other distribution (including tax distributions) to or for any of the shareholders of Company of any Company Shares or cash or payment obligations or any payment of fees or costs to any Affiliate of an officer, director or shareholder of the Company, including management fees, administrative fees, royalties or license fees other than management fees, rental payments and tax distributions paid to Liberty Tool and Engineering Corporation ("Liberty"), payment of life insurance premiums on the life of a shareholder of Liberty and transactions between the Company and Spearhead Development Technology, Inc. ("SDI"), Spearhead Trading, Inc. ("Trading"), Frimo, Inc. ("Frimo") and Empowered Production Services, Inc. ("EPS"), as a supplier and customer, all of which fees, rental payments and distributions have been made in the ordinary course of business, consistent with past practice; Page 12 of 44 (c) Any termination, modification, or rescission of, or waiver by Company of rights under, any existing contract having or likely to have a material adverse effect on Company's Business Condition other than in the ordinary course of business; (d) Capital expenditure or transaction by Company exceeding $30,000; (e) Entering into or assumption of any material contract or obligation by Company, except in the ordinary course of business (none of which would have a material adverse effect on the Company's Business Condition); (f) Revaluation by Company of any of its assets or change in accounting methods or practices; (g) Granting of stock options, restricted stock awards, stock bonuses, stock appreciation rights and similar equity based awards relating to the capital stock of the Company; (h) Except for normal yearly adjustments, none of which exceed five percent (5%) per year, increase in the salary or other compensation payable or to become payable by Company to any of its officers, directors or employees, or the declaration, payment or commitment or obligation of any kind for the payment of a bonus or other additional salary or compensation to any such individual; (i) Labor dispute or other event or condition with respect to the officers or employees of Company; or (j) Any mortgage, pledge, imposition of any security interest, claim, encumbrance, or other restriction on any of the assets, tangible or intangible, of Company having or likely to have a material adverse effect on Company's Business Condition. 3.8 TAXES. (a) All Returns required to be filed on or prior to the date hereof have been properly completed and filed on a timely basis (with extensions) and in correct form in all material respects. As of the time of filing, the foregoing Returns correctly reflected the facts regarding the income, business, assets, operations, activities, status or other matters of Company or any other information required to be shown thereon. In particular, and without in any manner limiting the foregoing, none of the foregoing Returns contains any position which is or would be subject to penalties under section 6662 of the Code (or any corresponding provision of state, local or foreign Tax law). To the Knowledge of Company, there is no investigation or other proceeding pending, threatened or expected to be commenced by any taxing authority for any jurisdiction in which Company files or Company's predecessor has or should have filed Returns and no issue or claim has been raised by any taxing authority which, by application of similar principles, reasonably could be expected to result in a proposed deficiency. To the Knowledge of Company, there is no investigation or other proceeding pending, threatened or expected to be commenced by any taxing authority for any jurisdiction in which Company does not file tax Page 13 of 44 returns that may lead to an assertion that Company is or may be subject to a given Tax liability in such jurisdiction, and, to Company's Knowledge, there is no meritorious basis for such an investigation or other proceeding that would result in such an assessment.. (b) With respect to all amounts in respect of Taxes imposed upon Company, or for which Company is or could be liable, whether to taxing authorities (as, for example, under law) or to other persons or entities (as, for example, under tax allocation agreements), with respect to all taxable periods (or portions thereof) ending on or before the Closing Date, all applicable tax laws and agreements have been fully complied with, and all such amounts required to be paid by Company to taxing authorities or others on or before the date hereof have been paid. No issues have been raised (and are currently pending) by any taxing authority in connection with any Returns of Company. No waivers of statutes of limitation with respect to such Returns have been given by or requested from Company. There are no outstanding rulings of, or requests for rulings with, any Tax authority addressed to Company that are, or if issued would be, binding on Company. The Company Disclosure Schedule sets forth (i) the taxable years of the Company as to which the respective statutes of limitations with respect to Taxes have not expired, and (ii) with respect to such taxable years, sets forth those years for which examinations have been completed, those years for which examinations are presently being conducted, those years for which examinations have not been initiated, and those years for which required Returns have not yet been filed. All deficiencies asserted or assessments made as a result of any examinations have been fully paid, or are fully reflected as a liability in the financial statements of Company, or are being contested and an adequate reserve therefor has been established and is fully reflected in the financial statements of the Company. (c) There are no Liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of Company. Company is not a party to or bound by (nor will Company, prior to the Closing, become a party to or bound by) any tax indemnity, tax sharing or tax allocation agreement or arrangement other than its current tax allocation arrangement with Liberty. Company is a member of an affiliated group of corporations, within the meaning of section 1504 of the Code, as a subsidiary. (d) All material elections with respect to Taxes affecting Company as of the date hereof are set forth in the Company Disclosure Schedule. None of the assets of Company is property that Company is required to treat as being owned by any other person pursuant to the so-called "safe harbor lease" provisions of former section 168(f)(8) of the Code. None of the assets of Company directly or indirectly secures any debt the interest on which is tax exempt under section 103(a) of the Code. None of the assets of Company is "tax-exempt use property" within the meaning of section 168(h) of the Code. Company has not made nor is bound by any election under Section 197 of the Code. No consent or agreement has been made under section 341 of the Code by or on behalf of Company or any predecessor thereof. Company has not participated in, or cooperated with, an international boycott within the meaning of Section 999 of the Code. Page 14 of 44 (e) Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of section 280G of the Code or any similar provision of foreign, state or local law. Company is not, and has not been, a United States real property holding corporation (as defined in section 897(c)(2) of the Code) during the applicable period specified in section 897(c)(1)(A)(ii) of the Code. Shareholders is not a person other than a United States person within the meaning of the Code. The transactions contemplated herein are not subject to the tax withholding provisions of Code section 3406, or of subchapter A of Chapter 3 of the Code or of any other provision of law. Company is not a party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. (f) Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country. (g) The unpaid Taxes of Company do not materially exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth or included in Company's Stub Balance Sheet as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company. (h) Each asset with respect to which Company claims depreciation, amortization or similar expense for Tax purposes is owned for Tax purposes by Company. No material item of income or gain reported by Company for financial accounting purposes in any pre-closing period is required to be included in taxable income for a post-closing period. 3.9 SUPPLIERS, TRADE CREDITORS. Except for utilities, the Company Disclosure Schedule sets forth a complete and accurate list by amount of purchases of the top ten, by dollar volume, suppliers from which Company purchased goods or services from December 1, 1997 through the date hereof. Company has no Knowledge indicating that any of its suppliers intends to cease doing business, or materially restrict or adversely change the terms of the business done, with Company. Company is not contesting the payment of any material obligations to any trade creditors and has paid all amounts in the ordinary course of business. 3.10 EMPLOYEES. The Company Disclosure Schedule lists, (a) the names, salaries and titles of all Key Employees of Company, and (b) all claims, strikes, grievances, and dismissals and/or resignations of Key Employees after December 31, 1997. Company does not have any written contract of employment or other employment agreement with any of its employees that is not terminable at will without payment of any consideration by Company. There are no pending, or to Company's Knowledge, threatened, labor disputes or claims of any nature by any former or current Company employees. Company is not a party to any collective bargaining agreements. Company has complied in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations and requirements relating to the employment of labor, including the provisions thereof relating to wages, hours, collective bargaining, payment of Page 15 of 44 social security, unemployment, and withholding taxes, except when failure to comply would not have a material adverse effect on the Company's Business Condition. The consummation of the Transaction will not entitle any Company employee to severance pay, unemployment compensation or any other payment or accelerate the time of payment or vesting of or increase the amount of compensation due to any Company employee. 3.11 EMPLOYEE BENEFIT PLANS. Each employee benefit plan maintained by Company ("PLAN") covering active, former, or retired employees of Company is listed in the Company Disclosure Schedule. Company has provided to Buyer a copy of each Plan, and where applicable, any related trust agreement, annuity, or insurance contract, and to the extent applicable, the three most recent annual reports (Form 5500) filed with the Internal Revenue Service. To the extent applicable, each Plan either is exempt from or complies, in all material respects, with the requirements of the Employee Retirement Income Security Act of 1974 as amended ("ERISA"), and the Code, and any Plan intended to be qualified under Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified and has remained tax-qualified to this date and its related trust is tax-exempt and has been so since its creation. No Plan is covered by Title IV of ERISA or Section 412 of the Code. To Company's knowledge, no "PROHIBITED TRANSACTION," as defined in ERISA Section 406 or Code Section 4975 has occurred with respect to any Plan. Each Plan has been maintained and administered in material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to such Plans. There are no pending or, to Company's knowledge, anticipated claims against or otherwise involving any of the Plans and no suit, action, or other litigation (excluding claims for benefits incurred in the ordinary course of Plan activities) has been brought against or with respect to any Plan. All contributions, reserves, or premium payments to the Plan, accrued to the date hereof have been made or provided for. Company has not incurred any liability under Subtitle C or D of Title IV of ERISA with respect to any "SINGLE-EMPLOYER PLAN," within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by Company, or any entity which is considered one employer with Company under Section 4001 of ERISA. Company has not incurred any withdrawal liability under Subtitle E of Title IV of ERISA with respect to any "MULTIEMPLOYER PLAN," within the meaning of Section 4001(a)(3) of ERISA. Company has not engaged in or is a successor or parent corporation to an entity that has engaged in a transaction described in ERISA Section 4069. Company does not have any current or projected liability in respect of post-employment or post-retirement welfare benefits for retired or former employees of Company other than health care continuation benefits required to be provided under applicable law. Company has not incurred any tax under Section 4980B of the Code in respect of any Plan that is a group health plan, as defined in Section 5000(b)(1) of the Code. 3.12 CERTAIN AGREEMENTS. Neither the execution and delivery of this Agreement and all other agreements contemplated hereby, nor the consummation of the transactions contemplated hereby will reasonably be expected to: (a) result in any payment by Company (including, severance, unemployment compensation, parachute payment, bonus or otherwise) becoming due to any director, employee, or independent contractor of Company under any Plan, agreement, or otherwise, other than payments to Stephen R. Howard pursuant to the Employment Page 16 of 44 Agreement (defined below) and the Non-Compete Agreement (defined below), (b) increase any benefits otherwise payable under any Plan or agreement, or (c) result in the acceleration of the time of payment or vesting of any such benefits. 3.13 TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS. All patents, trademarks, trade names, service marks, copyrights and any renewal rights therefor, software, mask works, net lists, schematics, technology, manufacturing processes, supplier lists, trade secrets, know-how, moral rights, applications for any of the foregoing, and all other tangible or intangible proprietary information or materials that are or have been used in (including in the development of) any product, technology or process (i) currently being or formerly manufactured, developed or marketed by Company, or (ii) previously or currently under development for possible future manufacturing, development, marketing or other use by Company will hereinafter be referred to as the "COMPANY INTELLECTUAL PROPERTY." (a) The Company Disclosure Schedule lists: (i) all patents, copyrights, trademarks and any applications and registrations for any of the foregoing included in the Company Intellectual Property, together with a list of all of Company's currently manufactured products and currently published software products, (ii) all licenses, sublicenses and other agreements to which Company is a party and pursuant to which Company or any other person is authorized to use any of the Company Intellectual Property, and (iii) all development agreements entered into by Company. (b) The Company Intellectual Property consists solely of items and rights which are: (i) owned by Company, (ii) in the public domain, or (iii) rightfully used by Company and its successors pursuant to a valid written license and, with respect to Company Intellectual Property owned by Company, Company owns the entire right, title and interest in and to such Company Intellectual Property free and clear of any Liens. To the Knowledge of Company, Company has all rights in the Company Intellectual Property necessary to carry out Company's current, former, and anticipated future (up to the Closing) activities, including rights to make, use, exclude others from using, sell, reproduce, modify, adapt, create derivative works based on, translate, distribute (directly and indirectly), transmit, display and perform publicly, license, rent, lease, assign, and sell the Company Intellectual Property in all geographic locations and fields of use, and to sublicense any or all such rights to third parties, including the right to grant further sublicenses. (c) All right and title in the patents and applications thereto included in the Company Intellectual Property ("PATENTS") are owned exclusively by Company. To the Knowledge of Company, the inventions which are the subject of the Patents were not known or used by Company or its employees or agents or by third parties in any country before the invention thereof by said employees or agents. To the Knowledge of Company, the inventions which are the subject of the Patents were not patented or described in a printed publication in any country or placed in public use or on sale in any country more than one year prior to the date of application for patents by Company. To the Knowledge of Company there is no prior art more relevant to the inventions which are the subject of the Patents than that considered by the relevant Page 17 of 44 patent office during the prosecution of the patent applications and patents for the inventions which are the subject of the Patents. Page 18 of 44 (d) Company is not, nor, as a result of the execution or delivery of this Agreement, or performance of Company's obligations hereunder, will Company be, in violation of any license, sublicense or agreement to which Company is a party or otherwise bound. Company is not obligated to provide any consideration (whether financial or otherwise) to any third party, nor is any third party otherwise entitled to any consideration with respect to any exercise of rights by Company or Buyer in the Company Intellectual Property. (e) To the knowledge of Company, the Company Intellectual Property does not infringe on any patent, copyright, trade secret, trademark, service mark, trade name, firm name, logo, trade dress, mask work, or moral rights, of any Person. No claims (i) challenging the validity, effectiveness, or ownership by Company of any of the Company Intellectual Property, or (ii) to the effect that the Company Intellectual Property infringes or will infringe on any intellectual property or other proprietary right of any person have been asserted against the Company or, to the Knowledge of Company, are threatened by any person against the Company nor to the Knowledge of Company are there any valid grounds for any bona fide claim of any such kind against the Company. All granted or issued patents and mask works and all trademarks and copyrights held by Company are valid, enforceable and subsisting, and all patent applications, provisional patents, copyright applications and trademark applications with respect to the Company Intellectual Property are pending and in good standing, all without challenge of any kind; and no aspect thereof is subject to any outstanding order, ruling, decree, judgment or stipulation by or with any governmental authority or arbitrator. To the Knowledge of Company, there is no material unauthorized use, infringement or misappropriation of any of the Company Intellectual Property by any third party, employee or former employee. (f) Company has secured from all parties who have created any portion of, or otherwise have any rights in or to, the Company Intellectual Property valid and enforceable written assignments of any such work or other rights to Company. (g) All software included in the Company Intellectual Property relating to any critical business function of the Company, other than any software included in any products sold by the Company at any time prior to a date one year prior to Closing, is year 2000 Compliant ("YEAR 2000 COMPLIANT"). All software included in any products sold by the Company was purchased from and warranted by third party vendors. Year 2000 Compliant means date information that accurately processes date/time data (including storing, calculating, comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries, the years 1999, 2000 and 2001 specifically, and the leap year calculations. 3.14 PERSONAL PROPERTY. Company has good and marketable title, free and clear of all title defects, security interests, pledges, options, claims, Liens, and restrictions of any nature whatsoever (including leases, chattel mortgages, conditional sale contracts, purchase money security interests, collateral security arrangements, and other title or interest-retaining agreements) to all inventory, receivables, furniture, machinery, equipment, and other personal property, tangible or otherwise, reflected on the balance sheet included in the Company Financial Statements or used in Company's business as of the date of such balance sheet even if not reflected thereon, except for acquisitions and dispositions since the Stub Period Date in the Page 19 of 44 ordinary course of business and except for a security interest in favor of Comerica Bank in substantially all of the Company's assets securing a line of credit, leases on certain vehicles and a lease of the premises upon which the Company conducts its business. The Company Disclosure Schedule lists all personal property having a depreciated book value of $2,000 or more, which are used by Company in the conduct of its business and all such equipment and property, in the aggregate, is in good operating condition and repair, reasonable wear and tear excepted. 3.15 MAJOR CONTRACTS. The Company Disclosure Schedule sets forth a complete and accurate list of any contract (other than contracts under which no party thereto has any remaining liability, absolute or contingent and other than contracts included or listed in another Schedule) to which Company is a party other than, (a) purchase or sale contracts for the purchase or sale of supplies or inventory entered into in the ordinary course of business of Company, which do not commit Company for a period of more than six (6) months or involve commitments for sale or purchase in excess of $100,000 per contract, and (b) contracts entered into in the ordinary course of business, no one of which involves obligations by or to Company of $50,000 or more and which, in the aggregate, do not involve obligations by Company of more than $100,000. The contracts listed on the Company Disclosure Schedule are, and upon purchase of the Assets by Buyer and satisfaction of the conditions set forth in Section 8 hereof, shall remain, in full force and effect and are valid and enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and by general equitable principles. To the Knowledge of Company, no event has occurred and no condition exists which constitutes, or with notice or lapse of time or both would constitute, a material default by Company, or to the Knowledge of Company, by any other party to such contracts. 3.16 REAL PROPERTY. All real property deeds (for real property owned by Company), leases and subleases as to which Company is a party ("LEASED PROPERTY") and any amendments or modifications thereof are listed on the Company Disclosure Schedule are valid, in full force and effect and enforceable, and there are no existing defaults, and Company has not received or given notice of default or claimed default with respect to any lease, nor is there any event that with notice or lapse of time, or both, would constitute a default by Company thereunder. The Leased Property is not the subject of any official complaint or notice of violation of any applicable zoning, building or environmental protection code, and no such violation, to the Knowledge of Company exists, except when such violation would not have a material adverse effect on the Company's Business Condition. 3.17 ENVIRONMENTAL MATTERS. (a) Neither Company nor, to the Knowledge of Company, any previous owner, tenant, occupant or user of real property, used, owned or leased by Company (the "REAL PROPERTY has discharged or released on the Real Property any Hazardous Material (as defined below) in violation of any federal, state or local statute, regulation, rule or order applicable to health, safety and the environment, including contamination of soil, groundwater or the environment, generation, handling, storage, transportation or disposal of Hazardous Materials or exposure to Hazardous Materials ("ENVIRONMENTAL LAWS"), except for those that would not, Page 20 of 44 individually or in the aggregate have a material adverse effect on the Business Condition of Company; (b) No Hazardous Material has been used by Company in the operation of Company's business and discharged or disposed of by the Company in violation of Environmental Laws in amounts that would violate any Environmental Laws; (c) Company has not received from any Governmental Entity or third party any request for information, notice of claim, demand letter, or other notification, notice or information that Company is or may be potentially subject to or responsible for any investigation or clean-up or other remediation of Hazardous Material present on any Real Property; (d) To the Knowledge of Company, there have been no environmental investigations, studies, audits, tests, reviews, or other analyses, the purpose of which was to discover, identify, or otherwise characterize the condition of the soil, groundwater, air, or presence of asbestos at any of the Real Property sites other than an environmental review conducted by Company's landlord in connection with refinancing the office park that encompassed Company's facility (e) To the Knowledge of Company, there is no asbestos present in any Real Property presently owned or operated by Company, and no asbestos has been removed from any Real Property while such Real Property was owned or operated by Company; and (f) To the Knowledge of Company, there are no underground storage tanks on, in or under any of the Real Property and no underground storage tanks have been closed or removed from any Real Property which are or have been in the ownership of Company. "HAZARDOUS MATERIAL" means any substance (i) that is a "hazardous waste" or "hazardous substance" under any federal, state or local statute, regulation, rule, or order, (ii) that is toxic, explosive, corrosive, flammable, infectious, radioactive, or otherwise hazardous and is regulated by any Governmental Entity, (iii) the presence of which on any of the Real Property causes or threatens to cause a nuisance on any of the Real Property or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about any of the Real Property, or (iv) the presence of which on adjacent properties could constitute a trespass by Company or the then current owner(s) of any of the Real Property. 3.18 LITIGATION AND OTHER PROCEEDINGS. Neither Company nor any of its officers, directors, or employees is a party to any pending or, to the Knowledge of Company, threatened action, suit, labor dispute (including any union representation proceeding), proceeding, investigation, or discrimination claim in or by any court or governmental board, commission, agency, Governmental Entity, department, or officer, or any arbitrator, arising from the actions or omissions of Company or, in the case of an individual, from acts in his or her capacity as an officer, director, or employee of Company, which individually or in the aggregate would be have a material adverse effect on the Business Condition of Company. Company is not subject to any order, writ, judgment, decree, or injunction that has or will have a material adverse effect on Company's Business Condition. Page 21 of 44 3.19 PRODUCT LIABILITY. To the Knowledge of Company, each product manufactured, sold or distributed by Company has been in material conformity with all applicable contractual commitments and all express and implied warranties and in material compliance with all applicable laws and regulations. Since December 31, 1995, there is no existing liability, claim or obligation arising from or alleged to arise from any actual or alleged injury to persons or property as a result of the ownership, possession or use of any product manufactured, sold or distributed by Company, nor, to the Knowledge of Company, are there any reasonable basis for such claims. No warranty costs for known claims will be incurred in excess of the amount reserved for. 3.20 CERTAIN TRANSACTIONS. Except for (a) relationships with Company as an officer, director, or employee thereof (and compensation by Company in consideration of such services) and (b) relationships with Company as stockholders, no directors, officers, or shareholders of Company, or any member of any of their families, is presently a party to, or was a party to during the year preceding the date of this Agreement, any transaction with Company, other than payment of certain management fees, tax distributions and lease payments from the Company to Liberty, payment of life insurance premiums on the life of a shareholder of Liberty, and transactions between the Company and SDT, Trading, Frimo and EPS as a supplier and customer. None of Company's officers or directors has any interest in any property, real or personal, tangible or intangible, including inventions, copyrights, trademarks, or trade names, used in or pertaining to the business of Company, or any supplier, distributor, or customer of Company, except for (i) the normal rights of a stockholder, (ii) rights under existing employee benefit plans, and (iii) and the interest of Liberty as a shareholder in Frimo of which Stephen R. Howard is President and the interest of Stephen R. Howard as a shareholder, officer and director of SDT. 3.21 INSURANCE AND BANKING FACILITIES. The Company Disclosure Schedule contains a complete and correct list of (a) all contracts of insurance or indemnity of Company in force at the date of this Agreement (including name of insurer or indemnitor, agent, annual premium, coverage, deductible amounts, and expiration date) and (b) the names and locations of all banks in which Company has accounts or safe deposit boxes, the designation of each such account and safe deposit box, and the names of all persons authorized to draw on or have access to each such account and safe deposit box. All premiums and other payments due from Company with respect to any such contracts of insurance or indemnity have been paid, and Company does not know of any fact, act, or failure to act which has or might cause any such contract to be canceled or terminated. All known claims for insurance or indemnity have been presented. 3.22 GUARANTIES AND SURETYSHIPS. Company has no powers of attorney outstanding (other than those issued in the ordinary course of business with respect to tax matters), Company has no obligations or liabilities (absolute or contingent) as guarantor, surety, cosigner, endorser, co-maker, indemnitor, or otherwise respecting the obligations or liabilities of any person, corporation, partnership, joint venture, association, organization, or other entity. 3.23 CERTAIN PAYMENTS. Neither Company, nor to the Knowledge of Company, any person or other entity acting on behalf of Company has, directly or indirectly, on behalf of or with respect to Company: (a) made an unreported political contribution, (b) made or received Page 22 of 44 any payment which was not legal to make or receive, (c) engaged in any material transaction or made or received any material payment which was not properly recorded on the books of Company, or (d) created or used any "off-book" bank or cash account or "slush fund". Neither Company, nor, to the Knowledge of the Company, any director, officer, employee, or agent of Company has been or is the subject of any investigation by any Governmental Entity in connection with any such payment, provision of services, or contribution. 3.24 BOOKS AND RECORDS. All records of Company, including all customer, intellectual property, supplier, accounting, personnel and computer records, are maintained with reasonable completeness and accuracy. 3.25 BROKERS AND FINDERS. Company has not retained any broker, finder, or investment banker in connection with this Agreement or any of the transactions contemplated by this Agreement, nor does or will Company owe any fee or other amount to any broker, finder, or investment banker in connection with this Agreement or the transactions contemplated by this Agreement. 3.26 ASSETS SUFFICIENT TO OPERATE BUSINESS. The Assets, Company Intellectual Property, agreements and instruments being acquired pursuant to this Agreement include all assets, Company Intellectual Property, agreements and instruments of Company, used in or intended for use in the Company's business and are sufficient to operate Company's business as it was being conducted as of the Stub Period Date. 3.27 DISCLOSURE. Neither the representations or warranties made by Company in this Agreement, nor the final Company Disclosure Schedule or any other certificate executed and delivered by Company pursuant to this Agreement, when taken together, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they were furnished. To the Knowledge of Company, there are no fact or facts pertaining to Company or its businesses which could have a material adverse effect on the Business Condition of Company and which have not been disclosed to Buyer by Company in writing. 3.28 RELIANCE. The foregoing representations and warranties are made by Company and Shareholders with the knowledge and expectation that Buyer is placing reliance thereon. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Except as disclosed in a document referring specifically to the representations and warranties in this Agreement which identifies by section number the section and subsection to which such disclosure relates and is delivered by Buyer to Shareholders and Company prior to the execution of this Agreement (the "BUYER DISCLOSURE SCHEDULE"), and whether or not the Page 23 of 44 Buyer Disclosure Schedule is referred to in a specific section or subsection, Buyer represents and warrants to Company as follows: 4.1 ORGANIZATION; STANDING AND POWER. Buyer is a corporation duly organized, and validly existing under the laws of the state of Washington, has all requisite power and authority to own, lease, and operate its properties and to carry on its businesses as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which a failure so to qualify would have a material adverse effect on the Business Condition of Buyer. 4.2 AUTHORITY. Buyer has, or shall have prior to the Closing, all requisite corporate power and authority to enter into this Agreement and, subject to the Buyer's Required Statutory Approvals, to consummate the transactions contemplated hereby. As used in this Agreement "BUYER'S REQUIRED STATUTORY APPROVALS" means such filings, authorizations, Orders and approvals as may be required under federal or foreign laws, or securities laws. The execution and delivery by Buyer of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer including the approval of the Board of Directors of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes a valid and binding obligation of Buyer enforceable in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, or other similar laws relating to enforcement of creditors' rights generally and (ii) general equitable principles, including the availability of specific performance, injunctive relief and other equitable remedies. 4.3 COMPLIANCE WITH LAWS AND OTHER INSTRUMENTS. (a) Buyer holds, and at all times has held, all licenses, permits, and authorizations from all Governmental Entities necessary for the lawful conduct of its business pursuant to all applicable statutes, laws, ordinances, rules, and regulations of all such authorities having jurisdiction over it or any part of its operations, excepting, however, when such failure to hold would not have a material adverse effect on the Business Condition of Buyer. There are no material violations or claimed material violations of any such license, permit, or authorization or any such statute, law, ordinance, rule or regulation. Subject to the satisfaction of the conditions set forth in Section 8, neither the execution and delivery of this Agreement and all other agreements contemplated hereby by Buyer nor the consummation of the transactions contemplated hereby and thereby will conflict with or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or the creation of a lien, pledge, security interest, charge, or other encumbrance on the assets or contracts of Buyer pursuant to, (i) any provision of the Articles of Incorporation or Bylaws of Buyer, or (ii) any loan or credit agreement, note, bond, mortgage, indenture, contract, lease, or other agreement or instrument, permit, concession, franchise, license, Order, statute, law, ordinance, rule or regulation applicable to Buyer or its respective properties or assets, other than, in the case of (ii), any such violation which individually or in the aggregate would not have a material adverse effect on the Business Condition of Buyer. Page 24 of 44 (b) No Consent by any Governmental Entity, except for Buyer's Required Statutory Approvals, is required by or with respect to Buyer in connection with the execution and delivery of this Agreement and all other agreements contemplated hereby by Buyer or the consummation by Buyer of the transactions contemplated hereby. 4.4 BROKERS AND FINDERS. Neither Buyer, nor any of its directors, officers, or employees has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or similar payments in connection with the transactions contemplated by this Agreement. 4.5 RELIANCE. The foregoing representations and warranties are made by Buyer with the knowledge and expectation that Company is placing reliance thereon. ARTICLE V COVENANTS OF COMPANY During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, Company and Shareholders agree (except as expressly contemplated by this Agreement or with Buyer's prior written consent, which will not be unreasonably withheld or delayed) that: 5.1 CONDUCT OF BUSINESS. 5.1.1 ORDINARY COURSE. Company shall carry on its business in the usual, regular, and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent with such business, use all reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers, consultants, and employees, and preserve its relationships with customers, suppliers, distributors and others having business dealings with it. Company shall promptly notify Buyer of any event or occurrence or emergency not in the ordinary course of business of Company that is material and adverse to the Business Condition of Company. Company shall not: (a) Grant any severance or termination pay to any officer or director or, except in the ordinary course of business consistent with past practices to any employee of Company; (b) Commence a lawsuit other than: (i) for the routine collection of bills; (ii) in such cases where Company in good faith determines that failure to commence suit would result in a material impairment of a valuable aspect of Company's business, Page 25 of 44 provided Company consults with Buyer prior to filing such suit; or (iii) for a breach of this Agreement; (c) Enter into any contract, commitment, or transaction not in the usual and ordinary course of its business; (d) Make any capital expenditures in excess of $5,000 for any single item or $10,000 in the aggregate, or enter into any leases of capital equipment or property under which the annual lease charge is in excess of $1,000; or (e) Sell or dispose of any capital assets not in the ordinary course of business. 5.1.2 DIVIDENDS; CHANGES IN STOCK. Company shall not: (a) declare or pay any dividends on or make other distributions (whether in cash, stock, or property) in respect to any of its capital stock; (b) split, combine, or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; (c) repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock; or (d) propose any of the foregoing. 5.1.3 NO ACQUISITIONS. Company shall not acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association, or other business organization or division thereof or otherwise acquire or agree to acquire any assets that are material, individually or in the aggregate, to the Business Condition of Company. 5.1.4 NO DISPOSITIONS. Company shall not sell, lease, license, transfer, mortgage, encumber, or otherwise dispose of any of its assets or cancel, release, or assign any indebtedness or claim, except in the ordinary course of business or in amounts which are not material, individually or in the aggregate, to the Business Condition of Company. 5.1.5 INDEBTEDNESS. Company shall not incur any indebtedness for borrowed money by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, guarantee, or otherwise, except in the ordinary course of business or in amounts that are not material, individually or in the aggregate, to the Business Condition of Company. 5.1.6 PLANS; EMPLOYEES. Company shall not adopt or amend in any material respect any Plan, or pay any pension or retirement allowance not required by any existing Plan. Company shall not enter into any employment contracts, pay any special bonuses or special remuneration to officers, directors, or employees, or increase the salaries, wage rates, or fringe benefits of its officers or employees other than pursuant to scheduled reviews under Company's normal compensation review cycle, in all cases consistent with Company's existing policies and past practice. Page 26 of 44 5.1.7 CLAIMS. Company shall not settle any claim, action, or proceeding, except in the ordinary course of business or in amounts that are not material, individually or in the aggregate, to the Business Condition of Company. 5.1.8 AGREEMENT. Company shall not agree to take any of the actions prohibited by this Section 5.1. 5.2 BREACH OF REPRESENTATION AND WARRANTIES. Company and Shareholders shall not take any action that would cause or constitute a breach of any of the representations and warranties set forth in this Agreement or that would cause any of such representations and warranties to be inaccurate in any material respect. In the event of, and promptly after becoming aware of, the occurrence of or the pending or threatened occurrence of any event that would cause or constitute such a breach or inaccuracy, Company will give detailed notice thereof to Buyer and will use reasonable efforts to prevent or promptly remedy such breach or inaccuracy. 5.3 CONSENTS. Company will promptly apply for or otherwise seek, and use reasonable efforts to obtain, all consents and approvals, and make all filings, required with respect to Company for the consummation of the Transaction, except such consents and approvals as Buyer and Company agree that Company shall not seek to obtain. 5.4 REASONABLE EFFORTS. Company will use reasonable efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to closing under this Agreement, provided that Company shall in no event be required to agree to the imposition of, or comply with, any condition, obligation, or restriction on Company of the type referred to in Section 8.1.3 hereof. 5.5 TAXES. (a) PREPARATION AND FILING OF RETURNS. Between the date hereof and the Closing Date, Shareholders shall cause Company to prepare and file on or before the due date therefor all Returns required to be filed by Company (except for any Return for which an extension has been granted as permitted hereunder) on or before the Closing Date, and shall pay, or cause Company to pay, all Taxes (including estimated Taxes) due on such Return (or due with respect to Returns for which an extension has been granted as permitted hereunder) or which are otherwise required to be paid at any time prior to or during such period. Such Returns shall be prepared in accordance with the most recent Tax practices as to elections and accounting methods except for new elections that may be made therein that were not previously available, subject to Buyer's consent (not to be unreasonably withheld or delayed). (b) NOTIFICATION OF TAX PROCEEDINGS. Between the date hereof and the Closing Date, to the extent Shareholders or Company has knowledge of the commencement or scheduling of any Tax audit, the assessment of any Tax, the issuance of any notice of Tax due or any bill for collection of any Tax due for Taxes, or the commencement or scheduling of any other administrative or judicial proceeding with respect to the determination, assessment or collection of any Tax of Company, Shareholders shall provide prompt notice to Buyer of such matter, Page 27 of 44 setting forth information (to the extent known) describing any asserted Tax liability in reasonable detail and including copies of any notice or other documentation received from the applicable Tax authority with respect to such matter. (c) TAX ELECTIONS, WAIVERS AND SETTLEMENTS. Company and Shareholders shall not, and Shareholders shall cause Company not to, take any of the following actions: (i) make, revoke or amend any Tax election; (ii) execute any waiver of restrictions on assessment or collection of any Tax; or (iii) enter into or amend any agreement or settlement with any Tax authority. (d) NONFOREIGN AFFIDAVIT. Shareholders shall furnish Buyer an affidavit, stating, under penalty of perjury, the transferor's United States taxpayer identification number and that the transferor is not a foreign person, pursuant to section 1445(b)(2) of the Code. ARTICLE VI NONCOMPETITION AND NONSOLICITATION 6.1 NONCOMPETITION. At the Closing, Shareholders shall enter into a Non-Compete Agreement with the Buyer (the "Non-Compete Agreement"), in the form of Exhibit 8.2.6 attached hereto. 6.2 SPEARHEAD TRADING COMPANY. Following the Closing Date, Shareholders shall ensure that Spearhead Trading Company will cease selling spare parts to Company and Company's customers. ARTICLE VII ADDITIONAL AGREEMENTS In addition to the foregoing, Buyer and Company each agree to take the following actions after the execution of this Agreement. 7.1 ACCESS TO INFORMATION. Company shall, subject to applicable law, afford to Buyer and its respective accountants, counsel, and other representatives, reasonable access during normal business hours (a) to all of its properties, books, contracts, commitments, and records, and (b) to all other information concerning the business, properties and personnel of Company, and (c) to conduct an environmental assessment of Company as Buyer may reasonably request and as is necessary to complete the Transaction and prepare for an orderly transition to operations after the Closing. Shareholders and Buyer further agree that (i) Buyer shall only be provided access to the Company's books, records, contracts and commitments at the officers of Conway, MacKenzie & Dunleavy, 401 South Old Woodward Ave., Suite 340, Birmingham, Michigan 48009, (ii) inspection of the Company's tangible assets shall only take Page 28 of 44 place by prior appointment made with Stephen R. Howard only, (iii) Buyer shall not contact any customers, suppliers, creditors or employees of the Company without the Company's prior written consent, and (iv) Company shall not be obligated to give Buyer access to its active quote log or similar data, customer lists or any contract with motoman supplier. Buyer agrees to return all information received from the Company, including all copies made of any such information, upon termination of this Agreement. No information or knowledge obtained in any investigation pursuant to this Section 7.1 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Transaction. 7.2 EXPENSES. Whether or not the Transaction is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby and thereby shall be paid by the party incurring such expense. 7.3 ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any further action is reasonably necessary or desirable to carry out the purposes of this Agreement or to vest Buyer with full title to all properties, assets, rights, approvals, immunities, and franchises, the proper officers and directors of each party to this Agreement shall take all such necessary action. 7.4 PUBLIC ANNOUNCEMENTS. Buyer, Shareholders and Company shall cooperate with each other in releasing information concerning this Agreement and the Transaction, and no release of information shall be made without the consent of both Stephen R. Howard and Buyer. Where practicable each of the parties shall furnish to the other drafts of all releases prior to publication. Buyer represents to the Company that the execution of this Agreement will not require it to make any public disclosure of the existence of this Agreement. Nothing contained herein shall prevent either party at any time from furnishing any information to any Governmental Entity or from issuing any release when it believes it is legally required to do so, provided such party gives the other party prompt notice of such Order, if applicable, and complies with any protective order (or equivalent) imposed on such disclosure. 7.5 DUE DILIGENCE. Buyer will perform a due diligence review ("DUE DILIGENCE") with regard to the Company. Buyer shall commence its review after it receives the Company Disclosure Schedule and complete its review within two (2) weeks of beginning the review (the "Due Diligence Period"). Shareholders and Company will cooperate with Buyer in this review. Buyer shall, upon execution of this Agreement, deliver to Company by wire transfer to Fidelity Bank, 1040 Maple, Birmingham, Michigan 48009, ABA Routing No. 072412655, for credit to Conway, MacKenzie & Dunleavy, Account No. 00-809-593, as a non-refundable deposit, the sum of Two Hundred Fifty Thousand Dollars ($250,000) (the "Deposit"). If Buyer notifies the Company in writing within the Due Diligence Period that it is not satisfied with its due diligence (the "Due Diligence Notice"), this Agreement shall terminate, the Company shall retain the Deposit, together with any interest thereon, and neither the Company, the Shareholders nor the Buyer shall have any further obligations to each other, except that the provisions of Sections 7.2, 7.4, 10.2, 11.7, 11.8 and 11.9 shall survive any such termination. In the event of such termination, Company shall retain the Deposit, unless Buyer's decision is specifically attributable to a material breach of one of the representations and warranties in this Agreement Page 29 of 44 and, as a result of such breach, Buyer will be unable to operate the business of Company as it is operated at the Effective Date. If Buyer does not send the Due Diligence Notice within the Due Diligence Period, Buyer shall be deemed to be satisfied with its Due Diligence and shall be deemed to have waived the condition to Buyer's obligations set forth in Section 8.2.7 of this Agreement without further action on the part of Buyer. Notwithstanding the above, Buyer may terminate this Agreement, and Company shall return the Deposit, if Buyer is not reasonably satisfied with the results of a Phase I environmental audit to be commenced during the Due Diligence Period and completed no more than one week after completion of the Due Diligence Period. 7.6 POST-CLOSING EMPLOYEE AND EMPLOYEE BENEFIT MATTERS. (a) Subject to the provisions of this Section 7.6, as of the Closing Date, Buyer shall offer employment on substantially the same terms and conditions (including, without limitation, substantially the same positions, seniority and responsibilities and compensation and fringe benefits that in the aggregate are of comparable value to the compensation and benefits received from Company) to all individuals then employed by the Company, whether or not such individuals are active or inactive, including, without limitation, such individuals employed by the Company who are absent from active employment on the Closing Date by reason of an approved leave of absence, sickness, disability, lay off, or vacation. For purposes of this Agreement, employees of the Company who, on or after the Closing Date, become employees of Buyer shall be referred to herein as the "Hired Employees." (b) Effective as of the Closing Date, Buyer shall cover each Hired Employee under new or existing Plans of Buyer (collectively the "Buyer Plans" and individually a "Buyer Plan"). With respect to each Buyer Plan that on or after the Closing Date covers Hired Employees, employment with the Company prior to the Closing Date shall be considered as employment with Buyer for purposes of eligibility to participate, waiting or elimination periods, preexisting condition limitation periods, eligibility to receive benefits (including early retirement and disability benefits), vesting and benefit accrual. With respect to each such Buyer Plan that is a defined contribution profit sharing or savings plan and that is intended to be qualified under Section 401(a) of the Code, Buyer shall cause such plan to accept qualifying rollover contributions with respect to the Hired Employees upon evidence satisfactory to Buyer that the transferring plan is tax-qualified under Section 401(a) of the Internal Revenue Code. (c) For purposes of determining the rate of future vacation accruals under each vacation policy of Buyer that, on or after the Closing Date, covers Hired Employees, employment with the Company prior to the Closing Date shall be considered as employment with Buyer. (d) With respect to each Buyer Plan that is an employee welfare benefit plan (as such term is defined in Section 3(1) of ERISA) ("Buyer Welfare Plan") that on or after the Closing Date covers Hired Employees, Buyer shall cause each such Buyer Welfare Plan to credit each Hired Employee with such employee's 1999 year-to-date deductibles and co-payments paid under the Company's Plans that are employee welfare benefit plans. Buyer shall Page 30 of 44 cause one or more Buyer Plans that are group health plans to provide benefits pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), to each individual who, as of the Closing Date, is considered a "qualified beneficiary" (as such term is defined in COBRA) under EACH Company Plan that is a group health plan and who, as of such date, is either receiving or entitled to receive COBRA benefits or who, as of such date, is entitled to elect to receive such benefits. Buyer shall timely provide COBRA notices to each Company employee who does not become a Hired Employee on or after the Closing Date and each other individual who, as of the Closing Date, is otherwise entitled to receive a COBRA notice by reason of having been a participant in a Company Plan that is a group health plan and having experienced a "qualifying event" (as such term is defined in COBRA) whether or not such qualifying event is attributable, directly or indirectly, to any transaction contemplated by this Agreement. ARTICLE VIII CONDITIONS PRECEDENT 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE TRANSACTION. The respective obligation of each party to effect the Transaction shall be subject to the satisfaction prior to the Closing Date of the following conditions: 8.1.1 CONSENTS. All Consents legally required for the consummation of the Transaction shall have been filed, occurred, or been obtained, other than such Consents, the failure of which to obtain would not have a material adverse effect on the consummation of the Transaction contemplated hereby or on the Business Condition of Buyer or Company. 8.1.2 NO RESTRAINTS. No statute, rule, regulation, or Order shall have been enacted, entered, promulgated, or enforced by any Governmental Entity of competent jurisdiction that enjoins or prohibits the consummation of the Transaction and that is then in effect. 8.1.3 NO BURDENSOME CONDITION. There shall not be any action taken, or any statute, rule, regulation, or Order enacted, entered, enforced, or deemed applicable to the Transaction by any Governmental Entity which, in connection with the grant of any Required Statutory Approval, imposes any restriction, condition or obligation upon Buyer or Company which would have a material adverse effect on the economic or business benefits of the transactions contemplated by this Agreement. 8.2 CONDITIONS OF OBLIGATIONS OF BUYER. The obligations of Buyer to effect the Transaction are subject to the satisfaction of the following conditions, unless waived by Buyer in writing: 8.2.1 REPRESENTATIONS AND WARRANTIES OF COMPANY AND SHAREHOLDERS. The representations and warranties of Company and Shareholders set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on Page 31 of 44 and as of the Closing Date, except: (a) as otherwise contemplated by this Agreement, or (b) in respects that do not have a material adverse effect on the Business Condition of Company or on the benefits of the transactions provided for in this Agreement. Buyer shall have received a certificate signed on behalf of Company by an authorized officer to such effect on the Closing Date. 8.2.2 PERFORMANCE OF OBLIGATIONS OF COMPANY AND SHAREHOLDERS. Company and Shareholders shall have performed all agreements and covenants required to be performed by them under this Agreement prior to the Closing Date, except for breaches that do not have a material adverse effect on the Business Condition of Company or on the benefits of the transactions provided for in this Agreement. Buyer shall have received a certificate signed on behalf of Company by an officer of Company to such effect. 8.2.3 OPINION OF COMPANY'S COUNSEL. Buyer shall have received an opinion dated the Closing Date of Jaffe, Raitt, Heuer & Weiss, Professional Corporation, counsel to Company in form and substance acceptable to Buyer. 8.2.4 NO MATERIALLY ADVERSE CHANGE. No materially adverse change shall have occurred between the Stub Period Date and the Closing. 8.2.5 HOWARD EMPLOYMENT AGREEMENT. Company and Stephen R. Howard shall have entered into an employment agreement providing for, among other things, a term of one year, renewable for two additional years in Stephen R, Howard's discretion and substantially in the form attached as EXHIBIT 8.2.5 (the "Employment Agreement"). 8.2.6 NON-COMPETE AGREEMENT Company and Stephen R. Howard shall have entered into a non-compete agreement substantially in the form attached hereto as Exhibit 8.2.6 (the "Non-Compete Agreement"). 8.2.7 DUE DILIGENCE. Buyer's satisfaction, in its reasonable discretion with its Due Diligence, including the completion of a Phase I environmental review. 8.3 CONDITIONS OF OBLIGATIONS OF COMPANY. The obligation of Company to effect the Transaction is subject to the satisfaction of the following conditions unless waived by Company in writing: 8.3.1 REPRESENTATIONS AND WARRANTIES OF BUYER. The representations and warranties of Buyer set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, except: (a) as otherwise contemplated by this Agreement, or (b) in respects that do not have a material adverse effect on the Business Condition of Buyer or on the benefits of the transactions provided for in this Agreement. Company shall have received a certificate signed on behalf of Buyer by an authorized officer and Controller of Buyer to such effect on the Closing Date. Page 32 of 44 8.3.2 PERFORMANCE OF OBLIGATIONS OF BUYER. Buyer shall have performed all agreements and covenants required to be performed by them under this Agreement prior to the Closing Date except for breaches that do not have a material adverse effect on the Business Condition of Buyer or on the benefits of the transactions provided for in this Agreement, and Company shall have received a certificate signed on behalf of Buyer by an authorized officer of Buyer to such effect. 8.3.3 OPINION OF BUYER'S COUNSEL. Shareholders shall have received an opinion dated the Closing Date of counsel to Buyer, in form and substance acceptable to Company. 8.3.4 EMPLOYMENT AND NON-COMPETE AGREEMENTS. Company and Stephen R. Howard shall have entered into the Employment Agreement and the Non-Compete Agreement. ARTICLE IX INDEMNIFICATION 9.1 INDEMNIFICATION BY SHAREHOLDERS. Subject to Sections 9.5 and 9.6, Shareholders shall defend, indemnify, and hold Buyer and its employees, officers, directors and agents (and, following the Closing Date, Company and its employees, officers, directors and agents) harmless from and against, and reimburse Buyer with respect to, any and all Losses incurred by Buyer, or Company by reason of or arising out of or in connection with (a) any breach, or any third party claim that if true, would constitute a breach, by Company or Shareholders of any representation or warranty of Company or Shareholders contained in this Agreement or in any certificate delivered to Buyer pursuant to the provisions of this Agreement and/or (b) the failure, partial or total, of Company or Shareholders to perform any agreement or covenant required by this Agreement to be performed by it. Neither Shareholders nor any of its Affiliates shall make any claim against Company, its employees, officers, directors and agents after the Closing Date for any breach of representation, warranty or covenant under this Agreement or seek contribution or indemnification from Company, its employees, officers, directors and agents with respect to any such breach. 9.2 INDEMNIFICATION BY BUYER. Subject to Sections 9.5 and 9.6, Buyer shall defend, indemnify, and hold Shareholders harmless from and against, and reimburse Shareholders with respect to, any and all Losses incurred by Shareholders by reason of or arising out of or in connection with: (a) any breach, or any third party claim that if true, would constitute a breach by Buyer of any representation or warranty of Buyer contained in this Agreement or in any certificate delivered to Shareholders pursuant to the provisions of this Agreement and/or (b) the failure, partial or total, of Buyer to perform any agreement or covenant required by this Agreement to be performed by it. 9.3 NOTICE OF CLAIMS. All claims for indemnification under this Agreement shall be resolved in accordance with the following procedures: Page 33 of 44 (a) If an indemnified party reasonably believes that it may incur any Losses, it shall deliver a Claim Notice to the indemnifying party for such Losses. If an indemnified party receives notice of a third-party claim for which it intends to seek indemnification hereunder, it shall give the indemnifying party prompt written notice of such claim, so that the indemnifying party's defense of such claim under Section 9.4 hereunder may be timely instituted. (b) When Losses are actually incurred or paid by an indemnified party or on an indemnified party's behalf or otherwise fixed or determined, the indemnified party shall deliver a Payment Certificate to the indemnifying party for such Losses. If a Claim Notice or Payment Certificate refers to any claim, action, suit, or proceeding made or brought by a third party, the Claim Notice or Payment Certificate shall include copies of the claim, any process served, and all legal proceedings with respect thereto. (c) If, after receiving a Claim Notice or Payment Certificate, the indemnifying party desires to dispute such claim or the amount claimed in the Claim Notice or Payment Certificate, it shall deliver to the indemnified party a Counternotice as to such claim or amount. Such Counternotice shall be delivered within thirty (30) days after the date the Claim Notice or Payment Certificate to which it relates is received by the indemnifying party. If no such Counternotice is received within the aforementioned 30-day period, the indemnifying party shall have waived any further objection to the Claim Notice or Payment Certificate or the Losses described in it, and the indemnified party shall be entitled to prompt payment for such Losses from the indemnifying party. (d) If, within thirty (30) days after receipt by the indemnified party of the Counternotice to a Claim Notice or Payment Certificate, the parties shall not have reached agreement as to the claim or amount in question, the claim for indemnification shall be decided in accordance with the provisions of Section 11.10. (e) With respect to any Losses based upon an asserted liability or obligation to a person or entity not a party to this Agreement for which indemnification is being claimed, the obligations of the indemnifying party hereunder shall not be reduced as a result of any action by the party furnishing the notice of third party claim responding to such claim if such action is reasonably required to minimize damages or to avoid a forfeiture or penalty or to comply with a requirement imposed by law. 9.4 DEFENSE OF THIRD PARTY CLAIMS. The indemnifying party under this Article IX shall have the right to conduct and control, through counsel of its own choosing, any third-party claim, action, or suit or compromise or settlement thereof. The indemnified party may, at its election, participate in the defense of any such claim, action, or suit through counsel of its choosing, but the fees and expenses of such counsel shall be at the expense of the indemnified party, unless the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it that are different from or in addition to those available to the indemnifying party (in which case, if the indemnified party notifies the indemnifying party in writing that it elects separate counsel at the expense of the indemnifying party, the Page 34 of 44 indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party with respect to such defenses). If the indemnifying party shall fail to defend any such third-party action, claim, or suit, then the indemnified party may defend, through counsel of its own choosing, such action, claim, or suit and may settle such action, claim, or suit and recover from the indemnifying party the amount of such settlement or of any judgment and the costs and expenses of such defense; provided, however, that the indemnifying party shall not be liable to pay any such settlement unless the indemnified party shall have given the indemnifying party written notice of the terms of the proposed settlement and the indemnifying party shall have failed, within twenty (20) days of receipt of such notice, to undertake the defense of such action, claim, or suit. The indemnifying party shall not compromise or settle any third-party action, claim, or suit which includes any term that shall require any act or forbearance by the indemnified party from all liability in respect of such claim, action, or suit without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld or delayed. Assumption by an indemnifying party of control of any such defense, compromise, or settlement shall not be deemed a waiver by it of its right to challenge its obligation to indemnify the indemnified party. Buyer, Company and Shareholders shall cooperate in all reasonable respects with each other in connection with the defense, negotiation, or settlement of any legal proceeding, claim, or demand referred to in this Section 9.4. 9.5 TIME LIMIT. The provisions of this Article IX shall apply only to Losses that are incurred or relate to claims, demands, or liabilities that are asserted or threatened within two (2) years of the Closing Date, except for Tax Losses and Losses with respect to breaches of Section 3.13 and Section 3.17 which shall survive for the applicable statute of limitations; provided, however, that the indemnification obligations for such claims for which a Claim Notice is given within the time period set forth above shall continue until the final resolution of each such claim. 9.6 LIMITATIONS. Except for breaches of Section 3.8, 3.13 and 3.17 which shall not be subject to any Threshold Amount, the indemnified party shall be entitled to indemnification only if the aggregate Losses exceed Twenty Five Thousand Dollars ($25,000) (the "THRESHOLD AMOUNT"). Once the Threshold Amount has been exceeded, the indemnified party shall be entitled to indemnification for all amounts including the Threshold Amount. The aggregate amount to which an indemnified party shall be entitled to be indemnified will not exceed the Purchase Price. The sole remedy of Buyer, Shareholders and Company for breaches of this Agreement shall be claims made in accordance with and subject to the limitations of this Article IX. 9.7 OFFSET. Subject to Sections 9.3, 9.5 and 9.6, Buyer shall have the right to offset from the amount held pursuant to the Escrow Agreement, if any,, any amounts representing Losses resulting to Buyer as a result of any indemnification claim contained in this Agreement. Buyer's exercise of its offset rights shall not limit Buyer's right to recover any amounts owed it that exceed the amount obtained by exercise of those rights and such exercise shall not be in substitution of or in any way limit Buyer's exercise of its other rights and remedies. Shareholders acknowledges and agrees that Buyer's exercise of its rights pursuant to this section shall not limit Buyer's right to recover any amounts owed to it that exceed the amount obtained by exercise of Page 35 of 44 those rights and, subject to Sections 9.5 and 9.6, such exercise shall not limit Buyer's exercise of its other rights and remedies under this Agreement. 9.8 LIABILITY FOR FAILURE TO CLOSE. If all conditions to Closing specified in Article VIII have been satisfied or, in the case of the conditions specified by Section 8.2, waived by Buyer, or, in the case of the conditions specified by Section 8.3, waived by Shareholders, and either Buyer or Shareholders fail or refuse to consummate this Transaction, then the party that fails or refuses to consummate this Transaction shall be liable to the other party for all direct and actual losses and damages, including indirect and consequential damages, and expenses (including attorneys fees and related expenses), provided that, should Buyer commence its Due Diligence and elect to terminate this Agreement as provided in Section 7.5 hereof, the Company shall retain the Deposit, subject to the conditions of Section 7.5 hereof. ARTICLE X TERMINATION, AMENDMENT AND WAIVER 10.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing Date, whether before or after approval of matters presented in connection with the Transaction by Company: (a) by mutual consent of Buyer and Company; (b) by either Buyer or Company (provided that the terminating party is not then in material breach of any representation, warranty, covenant, or agreement contained in this Agreement) if there has been a breach of any representation, warranty, covenant, or agreement that has a material adverse effect on the Business Condition of the Company, on one hand, or Buyer, on the other hand, as the case may be, or on the benefits of the transaction provided for in this Agreement, and such breach has not been cured, or reasonable efforts are not being employed to cure such breach, within ten (10) days after written notice thereof is given to the party committing such breach; (c) by either Buyer or Company if the Transaction shall not have been consummated before September 1, August 20], 1999; or (d) by either Buyer or Company if any permanent injunction or other Order of a court or other competent authority preventing the Transaction shall have become final and non-appealable. 10.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by Buyer or Company as provided in Section 10.1, this Agreement shall forthwith become void and have no effect, and there shall be no liability or obligation on the part of the Buyer, Shareholders or Company or their respective officers or directors, except that (i) the provisions of Sections 7.2, 7.4, 10.2, 11.7, 11.8 and 11.9 shall survive any such termination and abandonment, (ii) no party Page 36 of 44 shall be released or relieved from any liability arising from the willful breach by such party of any of its representations, warranties, covenants, or agreements as set forth in this Agreement, and (iii) the Deposit shall be treated in accord with Section 7.5. ARTICLE XI GENERAL PROVISIONS 11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations, warranties, and agreements in this Agreement or in any instrument delivered pursuant to this Agreement survive the Closing as provided herein 11.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed sufficiently given and served for all purposes when personally delivered or given by telex or machine-confirmed facsimile or three business days after a writing is deposited in the United States mail, first class postage or other charges prepaid and registered, return receipt requested, addressed as follows (or at such other address for a party as shall be specified by like notice): (a) if to Buyer: Flow International Corporation 23500 - 64th Avenue South P.O. Box 97040 Kent, WA 98032 Attention: John Leness Phone: (253) 850-3500 Fax: (253) 813-3280 WITH A COPY TO: Preston Gates & Ellis LLP 5000 Columbia Center 701 Fifth Ave. Seattle, WA 98104-7078 Attention: Robert S. Jaffe Phone: (206) 623-7580 Fax: (206) 623-7022 b) if to Company: Page 37 of 44 Spearhead Automated Systems, Inc. 41211 Vincinti Court Novi, MI 48876 Attention: Stephen R. Howard Phone: (248) 474-5263 Fax: 248-474-5286 WITH A COPY TO: Jaffe, Raitt, Heuer & Weiss One Woodward Ave., Suite 2400 Detroit, MI 48226 Attention: Stephen G. Schafer Phone: (313) 961-8380 Fax: (313) 961-8358 11.3 INTERPRETATION. When a reference is made in this Agreement to Sections or Exhibits, such reference shall be to a Section or Exhibit to this Agreement unless otherwise indicated. The words "INCLUDE", "INCLUDES", and "INCLUDING" when used therein shall be deemed in each case to be followed by the words "WITHOUT LIMITATION". The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof will not be construed for or against either party. A reference to a Section or an Exhibit will mean a section in, or exhibit to, this Agreement unless otherwise explicitly set forth. 11.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to each of the other parties, it being understood that all parties need not sign the same counterpart. 11.5 MISCELLANEOUS. This Agreement and the documents referred to herein (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided. 11.6 NO JOINT VENTURE. Nothing contained in this Agreement will be deemed or construed as creating a joint venture or partnership between any of the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee, or legal representative of any other party. No party will have the power to control the activities and operations of any other and their status is, and at all times, will continue to be, that of independent contractors with respect to each Page 38 of 44 other. No party will have any power or authority to bind or commit any other. No party will hold itself out as having any authority or relationship in contravention of this Section. 11.7 TRANSACTIONAL EXPENSES. Whether or not the transactions contemplated by this Agreement are consummated, each of Buyer, Shareholders and Company shall pay its own fees and expenses incident to the negotiation, preparation, execution, delivery and performance hereof, including, without limitation, the fees and expenses of its counsel, accountants and other experts. 11.8 CONFIDENTIALITY. Each party ("Receiving Party") acknowledges that the Confidential Information of the other party ("Disclosing Party") is the valuable confidential property of the Disclosing Party. Each party agrees to hold Confidential Information received or otherwise obtained from the other in confidence. The Receiving Party shall not disclose the Confidential Information of the Disclosing Party to any third persons or use it in any manner except as contemplated by this Agreement. The parties further agree that Confidential Information of the Disclosing Party shall be disclosed to the Receiving Party's officers, employees, and third-party consultants, only on a reasonable need-to-know basis and only with instructions to such persons that they comply with the restrictions of this provision. "CONFIDENTIAL INFORMATION" means all information, including all technical and commercial information and data, disclosed by one party to this Agreement to the other or otherwise obtained, directly or indirectly, by one party from the other, in the course of this transaction with respect to Buyer, Company or Shareholders which, at the time it was disclosed to or otherwise obtained by a party, was not rightfully in that party's possession and was not common general public knowledge. This transaction and its terms and conditions shall be treated as Confidential Information. The restrictions of this section shall not, (i) apply to Confidential Information of the Disclosing Party (a) which enters into the public domain through no fault of the Receiving Party, (b) which is disclosed to the Receiving Party by a third party with no restriction on disclosure, or (c) which is independently developed by the Receiving Party; or (ii) prohibit disclosure of Confidential Information of the Disclosing Party when required by a court or governmental agency of competent jurisdiction so long as the Receiving Party takes appropriate steps to attempt to obtain a protective or other such order with respect to such Confidential Information and advises the Disclosing Party as soon as reasonably possible of the requirement to make such disclosure; or (iii) restrict Buyer in its due diligence. This confidentiality and nondisclosure section shall, except as provided herein, survive termination of this Agreement and the Closing. Notwithstanding the foregoing, the limitations on the use of Confidential Information shall not be construed to limit Buyer's right to make full use of the assets of the Company after the Closing. Except as otherwise provided in this Agreement, the terms of this Agreement and the Transaction shall not be disclosed by either party except to confirm that a sale has occurred after consummation of the Transaction. 11.9 GOVERNING LAW. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the state of Michigan. Page 39 of 44 11.10 ARBITRATION. This paragraph shall control the disposition of any claim, controversy, or dispute between the parties to this Agreement and arising out of or related to this Agreement (a "Claim"). Prior to the institution of formal arbitration, a party who has or believes it has a claim shall notify the other party of such Claim and include a short statement of the facts and circumstances supporting the Claim. Both parties shall then meet and in good faith attempt to resolve the Claim within twenty (20) days thereof. In the event the parties cannot resolve the Claim within such period of time, either party may submit the Claim to the American Arbitration Association in accordance with its Commercial Arbitration Rules and Expedited Procedures except as specified below. The parties shall cooperate and endeavor to appoint a single, mutually acceptable arbitrator within twenty (20) days of filing of a Claim. Such arbitrator need not be a member of the American Arbitration Association Commercial Panel. In the event the parties are unable to agree to the appointment of such an arbitrator within such time, they shall request the American Arbitration Association to furnish a list of ten (10) of its approved commercial arbitrators. Within twenty (20) days of the receipt of such list, the parties shall have the opportunity to strike three (3) proposed arbitrators and shall rank the remaining proposed arbitrators in order of preference (one being first preference). The American Arbitration Association shall appoint the person with the lowest total score who does not have a conflict. That person shall be the sole arbitrator in arbitrating the Claim or Claims. the arbitrator shall allow and order such reasonable discovery as the parties request, consistent with the parties' desire to have an efficient but fair resolution of any Claim(s). the arbitrator shall be required to schedule a hearing on any claim as soon as possible after the completion of any necessary discovery and issue an award within thirty (30) days of such hearing. Such a ruling shall, as the arbitrator deems appropriate, apportion costs of the arbitration. the decision of the arbitrator shall be binding and conclusive as to all parties hereto and a judgment upon such award may be entered in any court of competent jurisdiction. The arbitration shall take place in Southfield, Michigan and no other place. (THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK) Page 40 of 44 SIGNATURE PAGE - ASSET PURCHASE AGREEMENT IN WITNESS WHEREOF, Buyer, Company, and Shareholders have caused this Agreement to be executed by their respective and duly authorized officers, have duly executed this Agreement, all as of the date first written above. FLOW INTERNATIONAL CORPORATION SPEARHEAD AUTOMATED SYSTEMS, INC. By ______________________________ By ______________________________ Ronald Tarrant, Chairman, Its ____________________________ Chief Executive Officer and President LIBERTY TOOL AND ENGINEERING CORPORATION By ______________________________ _________________________________ Its ____________________________ Stephen R. Howard Page 41 of 44 EXHIBITS Exhibit 8.2.5 - Employment Agreement Exhibit 8.2.6 -- Non-Compete Agreement Page 42 of 44 SCHEDULE 2.1 1. Desk and furnishings in Stephen R. Howard's office 2. Artwork and artifacts in Stephen R. Howard's office 3. Framed travel and sports posters in office 4. Framed auto prints in superintendent's office 5. Rights to season tickets to the Detroit Red Wings and Detroit Tigers 6. Trophy case in lobby (owned by Stephen R. Howard) Page 43 of 44 SCHEDULE 2.2 1. All liabilities set forth on May 31, 1999 Balance Sheet, as adjusted through the Closing Date as a result of transactions in the ordinary course of business Page 44 of 44 EX-21.1 9 ex-21_1.txt EXHIBIT 21.1 SUBSIDIARIES OF FLOW INTERNATIONAL CORPORATION State or other Jurisdiction of Subsidiary Incorporation or Organization ---------- ----------------------------- CIS Acquisition Corporation Michigan Flow Asia Corporation Taiwan Flow Asia International Corporation Mauritius Flow Autoclave Systems, Inc. Delaware Flow Automation Systems Corporation Ontario Flow Europe, GmbH Germany Flow Holdings GmbH (SAGL) Limited Liability Company Switzerland Flow International Sales Corporation Guam Flow Pressure Systems Vasteras AB Sweden Foracon Maschinen und Anlagenbau GmbH & CO.KG Germany Hydrodynamic Cutting Services Louisiana Robotic Simulations Limited United Kingdom Flow Japan Corporation Japan CEM-FLOW France EX-23.1 10 ex-23_1.txt EXHIBIT 23.1 [LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 33-57100) and Forms S-8 (No. 33-40397 and No. 33-44776) of Flow International Corporation of our report dated June 5, 2000 relating to the financial statements and financial statement schedules, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Seattle, Washington July 25, 2000 EX-27.1 11 ex-27_1.txt EXHIBIT 27.1
5 YEAR APR-30-2000 MAY-01-1999 APR-30-2000 6,383 0 68,692 899 44,168 131,207 47,907 26,883 197,041 43,655 0 0 0 147 66,522 197,041 194,087 194,087 115,259 178,047 2,047 373 4,998 8,995 2,518 6,477 0 0 0 6,477 0.44 0.43
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