-----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, QrnTKiqjeYrgMrBEgYelXBaXlcir/V6t+mmncklWeeuLtRLmZ3TJxyCHEqd9YFk8 Nr4Pnqv8OYY6W8sd4Npz7w== 0000912057-97-000741.txt : 19970114 0000912057-97-000741.hdr.sgml : 19970114 ACCESSION NUMBER: 0000912057-97-000741 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED DEVICES CORP CENTRAL INDEX KEY: 0000869495 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 133087510 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-24012 FILM NUMBER: 97504640 BUSINESS ADDRESS: STREET 1: 2365 MILBURN AVENUE CITY: BALDWIN STATE: NY ZIP: 11510 BUSINESS PHONE: 5162239100 FORMER COMPANY: FORMER CONFORMED NAME: ILLUSTRIOUS MERGERS INC DATE OF NAME CHANGE: 19600201 10KSB40 1 FORM 10KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------------- For the fiscal year ended Commission file number September 30, 1996 0-24012 - ------------------------- ---------------------- ALLIED DEVICES CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Nevada 13-3087510 - ----------------------------- --------------------------- (State of incorporation) (IRS Employer Identification Number) 2365 Milburn Avenue, Baldwin, New York 11510 - -------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 223-9100 Securities registered pursuant to Section 12 (b) of the Exchange Act: Securities registered under Section 12 (g) of the Exchange Act: Title Class Number of Shares Outstanding as of December 13, 1996 - ---------------------------- ---------------------------- Common Stock, $.001 par value 4,401,842 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB ____ Issuer's revenues for its most recent fiscal year: $17,793,072 The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sale price on December 13, 1996 is approximately $5,058,478. PART I ITEM 1 - BUSINESS Allied Devices Corporation ("Allied Devices" or the "Company") is a broad-line manufacturer and distributor of high precision mechanical components used in the manufacture and maintenance of industrial and commercial instruments and equipment. The Company has the capability of producing close tolerance parts and intricate assemblies at competitive costs and with short lead times. The Company's business strategy is to provide prompt service and technical support in certain industrial and high technology markets where customers are generally accustomed to extended lead times, missed deadlines and otherwise poor customer service and support. The Company's major product groups include precision servo and drive- train assemblies, gears and gear products, instrument related fasteners, and related components and sub-assemblies built to customer specifications. Allied Devices' customers are primarily original equipment manufacturers ("OEMs"). Allied Devices' principal marketing tool is its highly effective technical manual of standardized instrument components available through the Company. This catalog is in the hands of buyers and engineers throughout the United States and generates sales nationwide. Management estimates that the Company has distributed more than 85,000 copies of its catalog over the last decade, of which approximately 35,000 copies were distributed during the last three fiscal years. The current edition, published in 1994, is over 650 pages in length. Management intends to update and re-issue the catalog during fiscal 1997 as part of its overall marketing plan. The breadth and standardized nature of the product line result in multiple applications in most industries, stimulating demand at the level of both OEMs and distributors. The Company sells to a wide range of industries, such as medical and operating room equipment; aerospace instrumentation; robotics; laser equipment; computer peripherals; factory automation equipment and controls; machine tool builders; research and development facilities; semiconductor equipment makers; nuclear control devices; scientific instrumentation; and optics. A typical customer is an OEM selling high ticket capital goods equipment. The components supplied by Allied Devices going into such equipment generally constitute a small percentage of the OEM's direct cost of manufacturing, typically $300 to $600 per unit. Failure to deliver reliable quality in a timely manner can have an impact far in excess of the modest direct cost of the parts. As a result, the majority of Allied Devices' customers deem it imperative that parts supplied be on time and of reliably high quality. While these performance criteria are not contractual requirements, they are critical determinants in the placement of repeat business. 2 ITEM 1 - BUSINESS (continued) Allied Devices has structured itself as far as possible to provide the service of "one stop shopping" for mechanical instrument components. Further, the Company's organization and inventory policies are designed to provide fast and timely response to customer orders, and to support "just in time" methods of purchasing being used by more and more companies. Because the Company's lead times in response to customer orders are generally short (four weeks or less), backlog is not a meaningful indicator of business trends; therefore, no effort is made to monitor backlog accurately. Based on new orders, the Company is projecting growth in revenues of approximately 15% and availability of related incremental cash flow in planning for fiscal 1997. Allied Devices' sales volume is not dependent on just a few large customers. The Company draws from a customer list of over 6,000, thereby minimizing its vulnerability to the fortunes of any one industry or group of customers. In each of the past three years, the Company's twenty largest customers have represented as many as ten different industries and account collectively for only about 30% of shipments. Geographic concentration is relatively low and fluctuates with conditions in each of the regions served. Allied Devices uses independent multi-line manufacturers' representatives to gain national coverage, thereby fielding some 70 salespeople in virtually all significant territories in the United States. As the market for the Company's products has evolved, the Company has met its customers' needs by dividing operations into two areas: Catalog Sales and Distribution ("Catalog Operations") and Manufacturing and Subcontracting ("Manufacturing Services"). These two areas of the Company have been defined solely for internal operating effectiveness. Both areas serve the same markets and customer base and do not represent separate business segments. CATALOG OPERATIONS The majority of product sold through Catalog Operations is either manufactured by Catalog Operations or procured from the Manufacturing Services operations of the Company. What is not manufactured internally is purchased from a broad variety of reliable sources under distributorship agreements or similar arrangements. This operation includes telephone sales, inventory and shipping, gear-making, assembly and light manufacturing operations. This part of the Company also sells certain of its standard catalog products to its major competitors on a wholesale basis. In the aggregate, revenues for the Catalog Operations were approximately as follows for the last three years ended September 30th. 1996 $15,145,000 1995 $13,363,000 1994 $10,509,000 3 CATALOG INDUSTRY COMPETITION The Company competes directly with W.M. Berg Co., a subsidiary of BTR Ltd.; PIC Design, a subsidiary of Wells Benrus; Nordex Inc.; and Sterling Instrument, a division of Designatronics. Each of these companies publishes a catalog similar to that issued by the Company, offering a wide range of mechanical instrument components adhering to a single set of standards. In addition, there are many other companies offering a limited selection of materials or "single product" catalogs, most often not adhering to any widely accepted set of standards. This marketplace is highly competitive, yet management believes, based upon feedback from vendors and customers, that the Company's operating principles of immediate product availability, excellent quality control, competitive pricing and responsive customer service and technical support have permitted the Company to maintain and improve its market position. MANUFACTURING SERVICE OPERATIONS The Company's strategy has called for manufacturing the majority of the products that it sells. Management believes that such vertical integration ensures quality control, timely deliveries, control of priorities and cost efficiencies. As a result, the Company has several manufacturing divisions, each with specialized capabilities. In order to promote maximum utilization of productive equipment, each manufacturing operation markets its surplus machine time independently. The following operations, which are divisions of Allied Devices, comprise Manufacturing Services: Absolute Precision Co. A sophisticated computer numerically Ronkonkoma, New York controlled ("CNC") machine shop specialized in close tolerance, intricate machining of complex parts that are sold direct to end users and through Catalog Operations. Adco Devices Co. A screw-machine house manufacturing Freeport, New York instrument quality shoulder screws, thumb screws, nuts, shafting, pins, knobs and washers. Standard stock and custom components are sold to numerous jobbers, distributors and wholesalers. Astro Instrument Co. A general machine shop with diversified Joplin, Missouri CNC and conventional capabilities, dealing principally with an established customer base in several industries. Each of the support operations in Manufacturing Services contributes to the Company's line of standard components and sells them to Catalog Operations and to other catalog houses at uniform list prices. In addition, each operation bids for specialized custom manufacturing work in the open market, taking on machining jobs on fixed price contracts. While long runs are periodically accepted, the structure of Manufacturing Services' organization and production facilities favors shorter runs with higher margins. Pricing is based on combined material cost and standard hourly shop rates for labor and overhead. 4 Approximate revenues for Manufacturing Services were as follows for the last three years: Year Ended September 30, ------------------------------------------ 1996 1995 1994 ------------------------------------------ Sales to Catalog Operations * $2,812,000 $2,319,000 $1,703,000 Sales to outside Customers 2,648,000 2,158,000 1,671,000 ------------------------------------------------------------------ Total Revenues $5,460,000 $4,477,000 $3,374,000 ------------------------------------------------------------------ ------------------------------------------------------------------ * These revenue figures for Sales to Catalog Operations represent interdivisional sales that are eliminated in consolidation. The Company does not report results for Catalog Operations and Manufacturing Services separately, but management believes that both divisions make a positive contribution to operations. While the Company has stepped up efforts to market its Manufacturing Services, management believes that existing capacity will be sufficient to support a substantial increase in volume without adding to current production facilities. Operations are now generally single shift, representing an estimated 60% of capacity, giving the Company the flexibility to respond to increases in sales volume. MANUFACTURING SERVICES COMPETITION Each of the divisions in Manufacturing Services faces intense competition from the many thousands of machine shops and screw machine houses throughout the United States. Each division endeavors to differentiate itself from its competition on the basis of: i) accepting short-run work; ii) offering short lead times; iii) providing exceptional responsiveness to customer requirements; and iv) conforming consistently to unbending quality standards. QUALITY ASSURANCE Although not legally required to do so in order to conduct its current business, the Company has emphasized rigorous standards of high quality in its products and in its manufacturing methods. This has led to the development of an internal quality control manual that sets forth both policy and procedures used throughout the Company. This manual meets or exceeds the requirements of MIL-STD-45208A, which defines acceptable standards for small business suppliers to the U.S. Government. In management's opinion, loss of qualification under MIL- STD-45208A would not have a material impact on the Company's ability to do business; likewise, in management's opinion, such qualification provides an indication to customers and potential customers of the degree of diligence that the Company exercises in adhering to acceptable procedures in pursuit of consistent quality. The Company's measuring instruments are calibrated to standards traceable to the National Bureau of Standards. 5 To ensure consistent awareness and application of quality procedures, the Company has established an on-going program of meetings, lessons and training sessions through its quality assurance manager, disseminating information on policies, procedures and new developments. Management has begun to develop and implement a program of continuous improvement in pursuit of qualification under "Total Quality Management" and ISO-9000 (a voluntary set of standards and guidelines provided by the International Standards Organization), which program is in its early stages. The Company intends to complete the program and apply for ISO certification during its fiscal year 1997. EXPANSION PLANS Management has developed a plan to expand the size of the Company. Basically, the plan has four elements: (1) expand the core business through more intensive marketing efforts; (2) add products within the existing line of business; (3) expand beyond the Company's core business into related lines of business through an acquisition program that will not only add volume but provide marketing, operating and administrative synergies; and (4) raise additional equity capital as required to reduce the Company's indebtedness, thereby lowering financial leverage while expansion plans are being implemented. Certain elements of management's marketing plans have been carried out (principally an advertising campaign and publication of an expanded catalog), while others are in development. Management is pursuing its acquisition strategy but has not yet entered into any agreements with any potential acquisition candidates. During fiscal 1994, the Company raised approximately $1,298,000 of new equity capital through the private placement of Common Stock, applying virtually all of the funds raised to reduction of indebtedness. During fiscal 1995, the Company raised approximately $81,000 of new equity capital from the exercise of 62,500 Class B Warrants, applying such funds to working capital. Likewise, during fiscal 1996, the Company raised approximately $56,000 from the exercise of warrants. Additional funds, if and when raised, will also be applied, at management's discretion, to working capital, thus being available for use in routine operations or for carrying out the Company's expansion plans. MARKETING PROGRAMS The Company has developed a program to stimulate substantial growth within its existing line of business. Feedback from customers and informal market research indicate that Allied Devices does not have widespread customer awareness in the markets it serves. Thus the principal thrust of the Company's plan is to make its target markets more aware of the Company's range of capabilities and the usefulness of standardized components in general. The program is divided into modules and is being implemented as management deems appropriate. The plan includes expansion of the Company's advertising campaign, begun on a restricted budget in 1993. As part of the program, management has undertaken to improve, on a continuous basis, the standards of service and support provided to the Company's customers. Phasing in of expanded engineering support, assembly capabilities, new products, and electronic accessibility for customers are also important elements of the Company's program. Management believes that implementation of its plan will result in accelerated growth of sales and profits. 6 ACQUISITION PROGRAM As part of its plans for growth, management intends to carry out an acquisition program. By its own assessment, management views the market in which it competes as large (over $1 billion), highly fragmented, and poised for consolidation. Strategically, management intends to focus on acquiring businesses with the following characteristics: (a) significant potential for sales growth; (b) high prospects for synergy and/or consolidation in marketing, manufacturing and administrative support functions; (c) relatively high gross margins (30% or more); (d) effective operating management in place; (e) a reputation for quality in its products; and (f) represents lateral or vertical integration. Management has begun the process of assessing prospective candidates. OTHER FACTORS Raw materials for the Company's operations are readily available from multiple sources, such as bar stock of stainless steel and aircraft grade aluminum from metal distributors. Management expects no change to this situation in the foreseeable future. The technological maturity of the Company's product line has resulted in general stability of demand in its markets and of availability of raw materials at stable prices. No material portion of the Company's business is subject to renegotiation of profits or termination of contracts at the election of the United States government or its prime contractors. Procurement of patents is not material to the Company's present marketing program. REGULATION The Company is not subject to any particular form of regulatory control. The Company does not expect that continued compliance with existing federal, state or local environmental regulations will have a material effect on its capital expenditures, earnings or competitive position. EMPLOYEES The Company currently employs 62 salaried and 106 hourly personnel. Wage rates and benefits are competitive in the labor markets from which the Company draws. Thirty-two of its hourly employees are represented by two local unions (19 by the National Organization of Industrial Trade Unions ("NOITU") and 13 by Local 999 of the Teamsters). The three year contract with Local 999 expires in August 1997, and the three year contract with NOITU expires in November 1997. Management knows of no material issues that would enter into negotiations for renewal of either of its collective bargaining agreements. The Company has had no strikes, walkouts or other forms of business disruption attributable to poor labor relations. Relations with employees and the unions are open and constructive. 7 CAPITAL EQUIPMENT The Company uses a wide variety of machinery and equipment in manufacturing and assembly of its product line. While most of the equipment is owned by the Company or its subsidiaries, certain key pieces of equipment are leased. Eight leases, covering seven CNC machines and the Company's computer system, have original lease terms ranging from three to five years, with purchase options at the end of each lease. Rates vary from 8.5% to 13.9%, and expiration dates range from 1998 to 2000. The principal amount outstanding under these leases was approximately $395,000 as of September 30, 1996. ITEM 2 - PROPERTIES Listed below are the principal plants and offices of the Company. All property occupied by the Company is leased except as otherwise noted.
Location Square Lease Expiration Principal Activities Feet ---------------- ---------- ------------------ -------------------------- Baldwin, NY 16,000 December 1996* Catalog Manufacturing and Distribution Operations Freeport, NY 10,000 November 1996* Screw Machine Operations Freeport, NY 5,200 February 1998 Catalog Manufacturing Operations Ronkonkoma, NY 7,200 June 1998 CNC Machine Shop Joplin, MO 13,000 (Owned) CNC and Conventional Machine Shop
* New leases for facilities in Baldwin, NY, and Freeport, NY are in negotiation. In both cases, the Company has been a tenant for over 10 years, and management foresees no difficulty in arriving at terms satisfactory to both the Company and its respective landlords. 8 ITEM 3 - LEGAL PROCEEDINGS The Company knows of no litigation pending, threatened, or contemplated, or unsatisfied judgements, or any proceedings in which it or any of its officers or directors in their capacity as such is a party. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock was listed on NASDAQ SmallCap Market ("NASDAQ") as of November 17, 1994. Trading in the Company's stock has been generally active since then, with a total of 2,127 trades during fiscal 1996 representing approximately 7,004,100 shares (as reported by NASDAQ in their monthly statistical summaries). As of September 30, 1996, the Company had 413 holders of record of its common stock. The Company has 19 listed market-makers, and trading during the fiscal year occurred at prices ranging from a low of $1.75 to a high of $4.50. The trading ranges by quarter for the year were as follows: High Low ---- --- First Quarter $4.00 $1.75 Second Quarter $4.25 $2.812 Third Quarter $4.50 $2.75 Fourth Quarter $4.00 $2.75 9 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following selected consolidated financial data have been derived from the audited financial statements of Allied Devices Corporation. The selected financial data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-KSB. Year Ended September 30, ---------------------------------------------- 1996 1995 1994 ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net sales $17,793,072 $15,521,373 $12,180,122 Net income $1,001,029 $787,302 $456,715 Earnings per share $0.20 $0.15 $0.10 Weighted average number of shares outstanding 5,785,085 5,654,858 4,931,010 BALANCE SHEET DATA: Total assets $10,337,840 $9,403,535 $8,724,025 Working capital $6,466,813 $3,428,117 $2,705,993 Long-term debt $2,642,401 $497,541 $548,031 Stockholders'equity $5,807,364 $4,749,963 $3,859,632 RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1996, COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995. All statements contained herein that are not historical facts, including, but not limited to, statements regarding the Company's current business strategy, the Company's projected sources and uses of cash, and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plans on terms satisfactory to the Company; competitive factors; changes in labor, equipment and capital costs; changes in regulations affecting the Company's business; future acquisitions or strategic partnerships; general business and economic conditions; and factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Litigation Reform Act of 1995 and, as a result, are pertinent only as of the date made. 10 Net sales for fiscal 1996 were $17,793,000 as compared to $15,521,000 in fiscal 1995, an increase of 14.6%, with continuing growth materializing in both Catalog Operations and Manufacturing Services. Management continues to attribute this strength to a combination of factors: (1) the cumulative effect of a continuing series of advertisements running regularly in various industry/trade magazines, helping to create more wide-spread awareness of the Company and its products and services; (2) the carrying out of various programs of continuous improvement, particularly in the areas of customer service and support; (3) a program to expand the range of support services provided to the Company's larger customers; and (4) continued strength in certain sectors of the U.S. economy serviced by the Company. In particular, the aerospace instrumentation, medical equipment, robotics and scientific instrumentation sectors remained strong throughout the year. This was partially offset during the fourth quarter of fiscal 1996 by a downturn in the semiconductor equipment sector; the timing of a recovery of this business is uncertain, but management projects that it will occur in the second half of fiscal 1997. The Company's gross margin was 33.60% of net sales in fiscal 1996, up from 32.87% in fiscal 1995. This improvement is accounted for by the following factors: (1) the Company shipped a higher volume of product on relatively stable costs of factory operations, increasing gross margins by 2.10%; and (2) net materials expense increased as a percentage of sales, reducing gross margins by 1.37%. The Company did not increase prices materially in fiscal 1996 but expects to do so in fiscal year 1997. Selling, general and administrative expenses as a percentage of net sales were 23.2% in fiscal 1996, as compared to 23.3% in fiscal 1995. This improvement is attributable to the following factors: (1) selling and shipping expenses and commissions increased by $131,000 over the prior year but decreased as a percentage of net sales by approximately 0.2% as shipping volume rose at a greater rate than spending on implementation of the Company's marketing strategy; (2) administrative payroll, benefits, and expenses rose $244,000 as compared to the prior year, but not at the same rate as shipping volume, resulting in a decrease of such expenses of 0.2% as a percentage of net sales; and (3) other administrative expenses (collectively) increased as a percentage of net sales by approximately 0.3% or $125,000 as compared to the prior year. Interest expense decreased by $50,000 in fiscal 1996, as the Company lowered its borrowings and negotiated more favorable rates with its lending institutions. Provision for income taxes in fiscal 1996 was $593,000, or 37% of pre-tax income. See the notes to the consolidated financial statements for a reconciliation to the federal statutory rate. 11 RESULTS OF OPERATIONS: YEAR ENDED SEPTEMBER 30, 1995, COMPARED WITH YEAR ENDED SEPTEMBER 30, 1994. Net sales for fiscal 1995 were $15,521,000 as compared to $12,180,000 in fiscal 1994, an increase of 27.4%, with continuing growth materializing in both Catalog Operations and Manufacturing Services. Management attributes this strength to a combination of factors: (1) the cumulative effect of a continuing series of advertisements being run regularly in several industry/trade magazines, helping to create more wide-spread awareness of the Company, its products and services; (2) the carrying out of various programs of continuous improvement, particularly in the areas of customer service and support; (3) a program to expand the range of support services provided to the Company's larger customers; and (4) continued strength in most of the sectors of the U.S. economy serviced by the Company. The Company's gross margin continued to improve to 32.87% of net sales in fiscal 1995, from 32.66% in fiscal 1994. This improvement is accounted for by the following factors: (1) the Company shipped a higher volume of product on relatively stable costs of factory operations, increasing gross margins by 1.28% and (2) net materials expense increased as a percentage of sales, reducing gross margins by 1.07%. The Company did not increase prices in fiscal 1995. Selling, general and administrative expenses as a percentage of net sales were 23.3% in fiscal 1995, as compared to 24.6% in fiscal 1994. This improvement is attributable to the following factors: (1) administrative payroll, benefits, and expenses rose, but not at the same rate as shipping volume, resulting in a decrease of such expenses of 1.6% as a percentage of net sales and (2) selling and shipping expenses and commissions rose as a percentage of net sales by approximately 0.3% as the Company continued to carry out its marketing strategy. Interest expense increased by $33,000 in fiscal 1995, as higher interest rates during the year slightly more than offset lower levels of borrowings. Provision for income taxes in fiscal 1995 was $381,615. See the notes to the consolidated financial statements for a reconciliation to the federal statutory rate. LIQUIDITY AND FINANCIAL RESOURCES The Company's financial condition remained stable during fiscal 1996 as cash generated from operations provided $38,000 over the course of the year and borrowings (net) provided for $72,000. In addition, $56,000 of new equity capital was raised from the exercise of certain warrants issued by the Company. These funds and cash on hand were used for capital expenditures amounting to $310,000. Net working capital increased by $3,039,000 to $6,467,000 during the year. This increase is principally attributable to the following changes in current assets and current liabilities: - - Accounts receivable (net of reserve for doubtful accounts) increased by $11,000. While sales increased by 14.6%, credit management practices resulted in a reduction of the average collection period from 51 days at the end of fiscal 1995 to 45 days at the end of fiscal 1996, which resulted in a nominal increase in receivables. 12 - - Inventories increased 18.4%, or $914,000, during the fiscal year, with the turnover rate decreasing from 2.1 times in fiscal 1995 to 2.0 times at the end of fiscal 1996. Of this increase, a portion ($275,000) was planned as part of a strategy to increase sales of the Company's line of screw machine products. A second portion ($350,000) was budgeted to support the growth in sales in Catalog Operations. The balance ($289,000) built up in the fourth quarter of fiscal 1996 as certain orders from customers in the semiconductor equipment industry were rescheduled to be shipped during fiscal 1997. Management expects all of these orders to be shipped by the end of the third quarter of fiscal 1997. As a general rule, prompt service, product availability and quick turnaround of production orders are key factors in gaining a strong competitive position in the Company's markets. Substantial inventories are, in management's judgment, a necessity in responding to demanding delivery requirements imposed by the Company's customers. As the Company's growth continues, management expects to see improvement in the inventory turnover rate. - - Current liabilities, exclusive of current portions of long-term debt and capital lease obligations, decreased by $2,064,000, as the Company entered into a new credit facility (see below - $1,604,000), shortened its average payment period on accounts payable and accrued expenses from 45 days in fiscal 1995 to 36 days in fiscal 1996 ($229,000), and prepaid certain income taxes payable ($231,000). - - Current portions of long-term debt and capital lease obligations, including notes payable to related parties, decreased by $204,000 (net) as the Company paid off the balance of related party obligations ($143,000) and reduced its current portion of other notes and leases ($61,000) primarily as a result of entering into the new credit facility (see below). The related party debt that was paid off represented the repayment of funds advanced to the Company in 1987 by three members of management and one Director. - - Cash balances decreased by $144,000. Management believes that the Company's working capital as now constituted will be adequate for the needs of the on-going core business. During fiscal 1995, management had concluded that its banking agreements would become a financial constraint during fiscal 1996 if growth in sales volume continued at or above the rates of fiscal 1995. Thus, in January, 1996, the Company negotiated and closed various improvements on certain asset-based lending agreements with its bank. As the year progressed, management concluded that asset-based borrowing was inappropriate to the Company's size and stage of growth and negotiated an agreement with another institution. In September, 1996, the Company closed on a three-year committed revolving credit agreement, providing for a credit line of $4 million and an equipment line of $1.7 million, with rates 1/2 to 1-1/2 points lower and with fewer and less restrictive covenants than in the old asset-based line. Using the new credit line, the Company paid off all borrowings under the prior credit agreement and at fiscal year end was borrowing approximately $2,366,000. 13 Management believed that, in light of the Company's expansion objectives, the Company's working capital would not be adequate to provide for all of the on- going cash needs of the business, particularly in funding acquisitions. Therefore, in 1994, management undertook a campaign to raise new equity capital, initially through a private placement of Common Stock. During fiscal 1994, the Company realized net proceeds of approximately $1,298,000 from this private placement. During fiscal 1995, the Company further realized net proceeds of approximately $81,000 from the exercise (by public warrantholders) of 62,500 warrants to purchase Common Stock. Management expects to require additional financing to carry out its acquisition objectives. Success in this part of the Company's growth program will rely, in large measure, upon completion of additional financing. The Company is not relying on receipt of such funds in its operating budgets or projections. It is important to note that, absent new capital, the Company will not be in a position to undertake some of the most promising elements of management's plans for expansion. In the event that new equity funds are raised, management intends to implement its plans and will do so in keeping with its judgment at that time as to how best to deploy any such capital. Outlay for capital expenditures in fiscal 1996 amounted to $310,000 ($574,000 including capital lease acquisitions), as compared to $253,000 ($500,000 including capital lease acquisitions) in fiscal 1995. These expenditures represent three facets of the Company's capital spending program: (1) a continuation of management's program of continuous improvement through modernization and automation of facilities ($120,000), (2) additions to capacity to allow for expanded volumes of business ($229,000), and (3) purchase and installation of a comprehensive new computer system ($225,000). Capital spending plans for fiscal 1997 call for additional investment in software for the Company's computer system and continued additions to high-efficiency production machinery, with total expenditures projected to be approximately $350,000. Management expects to fund such spending plans out of working capital. VULNERABILITY TO RECESSION The Company's cost structure is largely made up of "fixed costs", with "variable costs" accounting for less than 42% of net sales. The Company could, therefore, experience materially adverse effects on profitability from any marked downturn in sales volume until management was able to reduce fixed costs. Because the Company's delivery lead-times are relatively short, there is as a result little backlog at any given time, and the effect of a downturn in sales volume would be felt almost immediately. 14 EXPANSION PLANS Management has developed a plan to expand the size of the Company. The plan has four basic elements: (1) expand the core business through more intensive marketing efforts; (2) add products within the existing line of business; (3) expand beyond the Company's core business into related lines of business through an acquisition program that will not only add volume but provide marketing, operating and administrative synergies; and (4) raise additional equity capital to reduce the Company's indebtedness, thereby lowering financial leverage while expansion plans are being implemented. Certain elements of management's marketing plans have commenced (principally an advertising campaign and publication of a new and expanded catalog), while others are in development. Management is currently pursuing its acquisition strategy but has not yet entered into any agreements with any potential acquisition candidates. During fiscal 1995, the Company raised approximately $81,000 of new equity capital through the private placement of Common Stock, applying virtually all of the funds raised to reduction of indebtedness. During fiscal 1996, the Company raised approximately $56,000 from the exercise of warrants, and options, applying all of such funds to working capital. Additional funds, if and when raised, will be applied, at management's discretion, to working capital, thus being available for use in routine operations or for carrying out the Company's expansion plans (see above). IMPACT OF INFLATION AND OTHER BUSINESS CONDITIONS Management believes that inflation has no material impact on the operations of the business. The Company has been able to react to increases in material and labor costs through a combination of greater productivity and selective price increases. The Company has no exposure to long-term fixed price contracts. The Company's growth is directly related to the strength exhibited by its customers in a range of industries. Early projections for fiscal 1997 indicate that this pattern of customer strength will continue. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company will adopt SFAS No. 121 as of October 1, 1996. In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 established a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. Effective October 1, 1996, the Company intends to adopt the employee stock-based compensation provisions of SFAS No. 123 by disclosing the pro forma net income and pro forma net income per share amounts, assuming the fair value method was adopted October 1, 1995. The Company does not expect that the adoption of SFAS 121 and 123 will have a material effect on the Company's financial statements or results of operations. 15 ITEM 7 - FINANCIAL STATEMENTS (1) Financial Statements See index to Financial Statements on Page F-2. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 16 PART III ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS The Executive Officers and Directors of the Company are as follows: Name Age Position(s) Held with Company - -------------------------------------------------------------------------------- Mark Hopkinson 49 Chairman of the Board of Directors P.K. Bartow 48 President and Director Salvator Baldi 74 Executive Vice President and Director Andrew J. Beck 48 Director and Assistant Secretary Gail F. Lieberman 53 Director Michael Michaelson 74 Director Robert J. Smallacombe 63 Director 17 ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (Continued) Brief biographies of the Executive Officers and Directors of the Company are set forth below. All Directors hold office until the next Annual Stockholders' Meeting or until their death, resignation, retirement, removal, disqualification or until their successors have been elected and qualified. Vacancies in the existing Board may be filled by majority vote of the remaining Directors. Officers of the Company serve at the will of the Board of Directors. There are no written employment contracts outstanding. Mark Hopkinson, age 49, has been Chairman of the Board since 1981, when he and Mr. Bartow organized the acquisition of the Company. He also served as President of the Company from 1981 until March 1994. He is a graduate of the University of Pennsylvania and of the Harvard Graduate School of Business Administration. Prior to acquiring Allied Devices, he was a management consultant, working originally with Theodore Barry & Associates from 1977 to 1978 and later as an independent and with the Nicholson Group from 1978 to 1981. The focus of his work in the period leading up to 1981 was development of emerging growth companies, both in the United States and in lesser developed countries. He served as an officer in the United States Navy from 1969 to 1972. P.K. Bartow, age 48, has been President of the Company since March 1994. He also served as Vice President of the Company from when he and Mr. Hopkinson organized its acquisition in 1981 until March 1994. Prior to acquiring Allied Devices, Mr. Bartow had joined the Nicholson Group in 1978, and performed facility and feasibility studies for emerging growth companies. While at Allied Devices, he has been the Director of Marketing from 1981 onwards, and in that capacity has set up a network of independent manufacturers' representatives across the United States and in the United Kingdom, Israel and selected regions in Canada. He has also organized and published Allied Devices' 650+ page catalog. Mr. Bartow received a B.A. degree from Williams College in 1970, and a M.Arch degree from the University of Pennsylvania in 1974. Salvator Baldi, age 74, was one of the original founders of the Company in 1947. He has been a Director of the Company since February 1994. The business was started as a general machine shop and developed through the years as a supplier to certain principal competitors of the Company in the market for standardized precision mechanical parts. By the late 1970's, the Company had advanced from vendor to competitor, offering its own catalog of components. He and his partners sold the Company to the investor group assembled by Mr. Hopkinson and Mr. Bartow in October 1981, with Mr. Baldi remaining with the Company under an employment contract. By the time his contract expired two years later, Mr. Baldi had negotiated to repurchase an interest in the Company. He currently works on an abbreviated work schedule. 18 ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (Continued) Andrew J. Beck, age 48, has been a partner with the law firm of Haythe & Curley since prior to 1989. He became a Director of the Company in March 1994. Mr. Beck holds a B.A. in economics from Carleton College and a J.D. from Stanford University Law School. Gail F. Lieberman, age 53, is currently Chief Financial Officer of The Thompson Corp. Financial & Professional Publishing Group. She became a director of the Company in February 1994. Prior to her current association, Ms. Lieberman was Managing Director of Moody's Investors Service, where she was employed from January 1994 to December 1996. Prior to that she was Executive Vice President and Chief Financial Officer at Scali, McCabe, Sloves, Inc. since 1982. She holds a B.A. in Mathematics and Physics and an M.B.A. in Finance from Temple University. Michael Michaelson, age 74, has been a Director of the Company since 1990. He has been President and sole stockholder of Rainwater Enterprises, Ltd. since 1979, providing management and marketing consultation services to clients principally in publishing and related industries. He is also on the boards of directors of the following companies: Metro Tel Corp., a publicly held company in the telecommunications field; and Theater Crafts Associates, a magazine publisher. From 1986 to 1989, he was Chairman of the Council on Economic Priorities. From 1977 to 1979, he was co-founder and Chairman of the Board of Games Magazine, which was sold to Playboy magazine in 1979. From 1970 to 1978, Mr, Michaelson worked for Publishers Clearing House, where he was Senior Vice President. From 1968 to 1970, he was President and Founder of Campus Subscriptions, Inc. Mr. Michaelson served in the United States Army in the South Pacific during World War II, where he was a Company Commander in the 35th infantry, 25th division and received the Bronze Star and the Purple Heart. He received a B.S. degree from New York University in 1948. Mr. Robert J. Smallacombe, age 63, has been a Director of the Company since August, 1996, when he was appointed to the Board by the unanimous vote of the other Directors. For more than five years, he has been the principal of Executive Advisory Group, a management consulting firm. In the capacity of consultant, he is currently serving as a Director of North Star Health Services Inc. From 1994 till May, 1996, as consultant, he served as President of O'Brien Environmental Energy and O'Brien Energy Services. From February, 1993 till July, 1994, as consultant, he served as CEO of Cardinal Publishing Co. Prior to that, he was working as a management consultant and business broker. He currently serves as a Director to Emons Transportation Company and to North Star Health Services Inc. SECTION 16 (a) REPORTING REQUIREMENTS Under Section 16 (a) of the Securities Exchange Act of 1934, directors and executive officers of the Company are required to make certain filings on a timely basis with the Securities and Exchange Commission. One director and executive officer, Mark Hopkinson, failed to make a timely filing of a statement on Form 4 regarding a transaction in the Company's stock. Mr. Hopkinson has subsequently filed the necessary report. 19 ITEM 10 - EXECUTIVE COMPENSATION The following table sets forth the salary and bonus compensation paid during the fiscal years ended September 30, 1996, 1995 and 1994 to the Chairman and Chief Executive Officer of the Company. No other Executive Officer of the Company received fiscal 1996 salary and bonus compensation which exceeded $100,000. The Company's Directors receive $1250 per meeting for their services as such and reimbursement for any expenses they may incur in connection with their services as Directors.
Summary Compensation Table ------------------------------------------------------------------------------------------------ Name and Principal Other Annual Long Term Compensation Position Fiscal Year Salary Compensation Awards-Options SAR's ------------------------------------------------------------------------------------------------ Mark Hopkinson, Chairman and Chief Executive Officer 1996 $98,098 $0 29,000 1995 $90,116 $0 4,600 1994 $86,918 $0 225,000
Under the terms of the Company's 1993 Incentive Stock Option Plan, the following options were granted to the Chief Executive Officer of the Company during fiscal year 1996.
Option/SAR Grants in Last Fiscal Year ------------------------------------------------------------------------------------------------ Name Number of Securities % of Total Options Exercise or Expiration Underlying Options Granted to Employees Base Price Date Granted in Fiscal Year ($/Sh) ------------------------------------------------------------------------------------------------ Mark Hopkinson 10,000 $2.50 3/18/06 10,000 $2.25 4/19/06 9,000 $3.00 6/21/06 Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values. Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End (#) FY-End ($) Shares Acquired Value Realized Exercisable/ Exercisable/ Name on Exercise (#) ($) Unexercisable Unexercisable ------------------------------------------------------------------------------------------------ Mark Hopkinson - $ - 295,260/0 $240,885/0
(1) In-the-money options are those for which the fair market value of the underlying Common Stock exceeds the exercise price of the option. The value of the in-the-money options is determined in accordance with regulations of the Securities and Exchange Commission by subtracting the aggregate exercise price of the option from the aggregate year-end value of the underlying Common Stock. 20 No compensation to management has been waived or accrued to date. Under the terms of its employee stock option plan (adopted in October, 1993 and amended in December, 1995), the Board of Directors is empowered at its discretion to award options to purchase an aggregate of 1,250,000 shares of the Company's common stock to key employees. Prior to fiscal 1996, the Company had granted options to purchase an aggregate of 939,600 shares to key employees and Directors, with exercise prices ranging from $.35 to $2.35 per share. During fiscal 1996, the Company granted options to purchase 148,000 shares the Company's common stock, at exercise prices ranging from $2.00 to $3.25 per share to three individuals (one non-management member of the Board of Directors and two non-executive managers). ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number and percentage of the Company' shares of common stock owned of record and beneficially by each person or entity owning more than 5% of such shares and by all executive officers and directors, as a group: (i) at 9/30/96; and (ii) after the exercise of all Class B Warrants issued as part of the units sold to the public pursuant to the Illustrious Mergers, Inc. offering in February, 1991:
Name Number of Current After Warrant Shares Percentage Exercises (9) Owned Percentage ------------------------------------------------------------------------------------------------ Mark Hopkinson (1) (3) (8) 2365 Milburn Avenue P.O. Box 502 Baldwin, NY 11510 1,011,671 21.54% 18.54% P.K. Bartow (1) (4) (8) 2365 Milburn Ave. P.O. Box 502 Baldwin, NY 11510 856,655 18.39% 15.81% Salvator Baldi (1) (5) (8) 2365 Milburn Ave. P.O. Box 502 Baldwin, NY 11510 787,157 16.99% 14.60% Michael Michaelson (2)(6)(8) 2365 Milburn Ave. P.O. Box 502 Baldwin, NY 11510 250,084 5.38% 4.62% Walter S. Grossman 277 North Avenue Westport, CT 06880 231,549 5.38% 4.57% Gail F. Lieberman (2) (7) 175 E. 79th Street New York, NY 10021 110,000 2.44% 2.09% Andrew J. Beck (2) (10) 71 Willow Street, Apt. 1 Brooklyn, NY 11201 10,000 0.23% 0.19% Robert J. Smallacombe (2) (11) 98 Merrick Road Indiana, PA 15701 43,000 0.97% 0.83% All Executive Officers and Directors as a Group (7 persons) 3,068,567 54.82% 48.26%
21 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Continued) (1) Officer and Director (2) Director only. (3) Mark Hopkinson is General Partner of the Hopkinson Family Partnership (in which he has exclusive management rights), which owns 700,000 of the shares included herein. Mr. Hopkinson owns 16,411 shares in his own name. Also included in Mr. Hopkinson's shareholdings are 65,660 shares represented by warrants exercisable by Mr. Hopkinson until December 31, 1999 and 229,600 shares represented by currently exercisable options. Mr. Hopkinson disclaims beneficial ownership of 1,200 shares owned by his wife. (4) Included in Mr. Bartow's shareholdings are 31,722 shares represented by warrants exercisable by Mr. Bartow until December 31, 1999 and 225,000 shares represented by currently exercisable options. (5) Included in Mr. Baldi's shareholdings are 5,898 shares represented by warrants exercisable by Mr. Baldi until December 31, 1999 and 225,000 shares represented by currently exercisable options. (6) Included in Mr. Michaelson's shareholdings are 140,084 shares represented by warrants exercisable by Mr. Michaelson until December 31, 1999 and 100,000 shares represented by currently exercisable options. Mr. Michaelson disclaims ownership of 97,500 shares owned by his wife. (7) Consists of 100,000 shares represented by currently exercisable options. (8) As consideration for various services rendered to the Company in the period 1983 until 1990, the Company issued certain stockholders warrants to purchase up to 340,000 shares of common stock at prices ranging from $0.30 to $0.70 per share. (9) These percentages do not include the exercise of any of the Allied Devices warrants or options other than the exercise of all of the Class B Warrants. (10) Consists of 10,000 shares represented by currently exercisable options. (11) Consists of 43,000 shares represented by options, 3,000 of which were exercisable at September 30, 1996, and 40,000 of which will vest by February, 1997. 22 ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Inapplicable. ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits required to be filed as a part of the form are listed in the attached Index to Exhibits. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of fiscal 1996. 23 SIGNATURES In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIED DEVICES CORPORATION ------------------------------ Mark Hopkinson Chairman of the Board In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signatures Title Date - ---------- ----- ---- ____________________ Chairman of the Board, Mark Hopkinson Principal Executive Officer, and Director January ___, 1997 ____________________ Philip Key Bartow President and Director January ___, 1997 ____________________ Salvator Baldi Director January ___, 1997 ____________________ Michael Michaelson Director January ___, 1997 ____________________ Andrew J. Beck Director January ___, 1997 24 Signatures Title Date - ---------- ----- ---- ______________________ Gail F. Lieberman Director January ___, 1997 ______________________ Robert J. Smallacombe Director January ___, 1997 ______________________ Principal Financial Officer Paul Cervino and Principal Accounting Officer January ___, 1997 25 INDEX TO EXHIBITS Exhibit Number Exhibit Description Page Number - -------------- ------------------- ----------- 10 Revolving Credit Agreement Dated as of September 4, 1996 between the Company and The Chase Manhattan Bank 11.01 EPS Calculation 27 Financial Data Schedules Copies of the exhibits filed with the Annual Report on Form 10-KSB do not accompany copies hereof for distribution to stockholders of the Company. The Company will furnish a copy of any of such exhibits to any stockholder requesting the same. 26 CONSENT OF BDO SEIDMAN, LLP Allied Devices Corporation Baldwin, New York We hereby consent to the incorporation by reference and inclusion in the Prospectus constituting part of this Registration Statement of our report dated December 27, 1996 relating to the consolidated financial statements of Allied Devices Corporation and subsidiaries appearing in the Company's Annual Report on Form 10-KSB for the year ended September 30, 1996. BDO SEIDMAN, LLP January 8, 1997 S-1 ALLIED DEVICES CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1996 AND 1995 F-1 ALLIED DEVICES CORPORATION AND SUBSIDIARIES INDEX - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets F-4 Statements of income F-5 Statements of stockholders' equity F-6 Statements of cash flows F-7 Notes to financial statements F-8 - F-18 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Allied Devices Corporation Baldwin, New York We have audited the accompanying consolidated balance sheets of Allied Devices Corporation and subsidiaries as of September 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allied Devices Corporation and subsidiaries at September 30, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Mitchel Field, New York December 27, 1996 F-3 ALLIED DEVICES CORPORATION AND SUBSIDIARIES BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS (NOTE 4) CURRENT: Cash $ 54,919 $ 198,486 Accounts receivable, net of allowance for doubtful accounts of $58,080 and $49,622, respectively (Notes 4 and 6) 2,193,606 2,182,111 Inventories (Notes 2, 4 and 6) 5,882,556 4,968,370 Prepaid expenses and other current assets 41,619 52,993 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 8,172,700 7,401,960 PROPERTY, PLANT AND EQUIPMENT, AT COST, NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION (NOTES 3, 4 AND 6) 1,965,746 1,756,398 EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET OF ACCUMULATED AMORTIZATION OF $327,748 AND $305,834 110,577 132,491 OTHER ASSETS 88,817 112,686 - --------------------------------------------------------------------------------------------------------------------------------- $10,337,840 $9,403,535 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Revolving loan payable (Note 4) $ - $1,604,038 Accounts payable 1,092,758 1,368,391 Income taxes payable (Note 9) 55,693 286,505 Accrued expenses and other (Note 5) 438,035 391,137 Notes payable to related parties - 142,598 Current portion of long-term debt and capital lease obligations (Note 6) 119,401 181,174 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,705,887 3,973,843 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (NOTE 6) 2,642,401 497,541 DEFERRED INCOME TAXES (NOTE 9) 182,188 182,188 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 4,530,476 4,653,572 - --------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS (NOTES 7 AND 8) STOCKHOLDERS' EQUITY (NOTE 8) Common stock, $.001 par value, authorized 25,000,000 shares, issued and outstanding 4,401,842 and 4,296,842 4,402 4,297 Additional paid-in capital 2,409,086 2,352,819 Retained earnings 3,393,876 2,392,847 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 5,807,364 4,749,963 - --------------------------------------------------------------------------------------------------------------------------------- $10,337,840 $9,403,535 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 STATEMENTS OF INCOME - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, 1996 1995 - -------------------------------------------------------------------------------- NET SALES $17,793,072 $15,521,373 COST OF SALES 11,815,271 10,418,976 - -------------------------------------------------------------------------------- GROSS PROFIT 5,977,801 5,102,397 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,120,136 3,619,998 - -------------------------------------------------------------------------------- INCOME FROM OPERATIONS 1,857,665 1,482,399 INTEREST EXPENSE, NET 263,568 313,482 - -------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR TAXES ON INCOME 1,594,097 1,168,917 TAXES ON INCOME (NOTE 9) 593,068 381,615 - -------------------------------------------------------------------------------- NET INCOME $1,001,029 $787,302 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET INCOME PER SHARE $.20 $.15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,785,085 5,654,858 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Common-Stock $0.001 par valuee ----------------------- Additional Total Number of Paid-in Retained stockholders' Shares Amount Capital Earnings equity - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, OCTOBER 1, 1994 4,234,342 $4,234 $2,249,853 $1,605,545 $3,859,632 PROCEEDS FROM ISSUANCE OF COMMON STOCK (NOTE 8) 62,500 63 80,720 - 80,783 ISSUANCE OF OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK (NOTE 8) - - 22,246 - 22,246 NET INCOME - - - 787,302 787,302 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1995 4,296,842 4,297 2,352,819 2,392,847 4,749,963 NET INCOME - - - 1,001,029 1,001,029 PROCEEDS FROM THE EXERCISE OF OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK (NOTE 8) 105,000 105 56,267 - 56,372 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1996 4,401,842 $4,402 $2,409,086 $3,393,876 $5,807,364 - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,001,029 $787,302 - -------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Reserve on note receivable - 50,000 Provision for doubtful accounts 8,458 9,518 Depreciation and amortization 387,009 336,428 Deferred income taxes - (111,558) Compensation charge for warrants and options issued - 22,246 (Increase) decrease in: Accounts receivable (19,953) (271,404) Inventories (914,186) (330,892) Prepaid expenses and other current assets 11,374 9,585 Other assets 23,869 (11,484) Increase (decrease) in: Accounts payable and accrued expenses (228,735) 287,765 Income taxes payable (230,812) 133,096 - -------------------------------------------------------------------------------- Total adjustments (962,976) 123,300 - -------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 38,053 910,602 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (309,806) (252,603) - -------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (309,806) (252,603) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock, options and warrants 56,372 80,783 Repayment of revolving loan and term loan (2,275,500) (360,004) Proceeds from revolving credit facility 2,366,338 - Principal payments on long-term debt and capital lease obligations (232,888) (213,928) Proceeds from additional financing under old bank agreement and term loan 356,462 - Payments under old borrowing agreement - (360,004) Payment on related party debt (142,598) (74,692) - -------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 128,186 (567,841) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH (143,567) 90,158 CASH, BEGINNING OF PERIOD 198,486 108,328 - -------------------------------------------------------------------------------- CASH, AT END OF PERIOD $54,919 $198,486 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. SUMMARY OF (a) BUSINESS ACCOUNTING POLICIES The Company is comprised of Allied Devices Corporation (ADCO), and its wholly-owned subsidiary, Empire Tyler Company (Empire and collectively the Company). The Company is engaged primarily in the manufacture and distribution of standard precision mechanical components and a line of screw machine products. The Company sells all its products to the same base of customers located throughout the United States. Because the Company's product line comprises a comparable group of precision manufactured parts sold to a similar customer base, it considers itself to be engaged in a single business segment. (b) BASIS OF PRESENTATION The consolidated financial statements include the accounts of ADCO and its subsidiary. All significant intercompany balances and transactions have been eliminated. (c) 1INVENTORIES Inventories are valued at the lower of cost (last- in, first-out (LIFO) method) or market. Management periodically analyzes inventories for obsolescence and records writeoffs as required. Such writeoffs have historically been immaterial. (d) DEPRECIATION AND AMORTIZATION Property, plant and equipment is stated at cost. Depreciation and amortization of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Buildings and improvements 30 years Machinery and equipment 10 years Furniture, fixtures and office equipment 5-7 years Tools, molds and dies 8 years Leasehold improvements Lease term F-8 - -------------------------------------------------------------------------------- (e) INCOME TAXES The Company and its subsidiary file a consolidated federal income tax return and separate state income tax returns. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. (f) EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each period. Earnings per share is computed using the treasury stock method, modified for options and warrants outstanding in excess of 20% of the outstanding shares of the Company's common stock. Under the treasury stock method the number of shares outstanding reflects the use of the proceeds from the assumed exercise of stock options and warrants to repurchase shares of the Company's common stock at the average market value during the period. The proceeds generated from the assumed exercise of options and warrants in excess of 20% of the outstanding shares of common stock are applied to the assumed repayment of company debt with the assumed related interest expense savings being included in the Company's results of operations for earnings per share computations. (g) INTANGIBLE ASSETS The excess of cost over the fair value of net assets acquired is being amortized over a period of 20 years. F-9 (h) REVENUE RECOGNITION Sales are recognized upon shipment of products. All sales are shipped F.O.B. shipping point and are not sold subject to a right of return unless the products are defective. The Company's level of returns arising from defective products has historically been immaterial. The Company provides an allowance for estimated returns when sales are recorded. Such allowances are not material. (i) USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (j) FAIR VALUE FINANCIAL INSTRUMENTS The carrying amounts of financial instruments, including cash and short-term debt, approximated fair value as of September 30, 1996 and 1995. The carrying value of long-term debt and obligations under capital leases, including the current portion, approximates fair value as of September 30, 1996 and 1995 based upon the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. (k) RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company will adopt SFAS No. 121 as of October 1, 1996. F-10 - -------------------------------------------------------------------------------- In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 established a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. Effective October 1, 1996, the Company intends to adopt the employee stock-based compensation provisions of SFAS No. 123 by disclosing the pro forma net income and pro forma net income per share amounts, assuming the fair value method was adopted October 1, 1995. The Company does not expect that the adoption of SFAS 121 and 123 will have a material effect on the Company's financial statements or results of operations. (l) RECLASSIFICATIONS Certain 1995 balances were reclassified to conform with the 1996 presentation. 2. INVENTORIES Inventories are summarized as follows: SEPTEMBER 30, 1996 1995 ----------------------------------------------- Raw materials $238,325 $273,553 Work-in-process 512,527 538,730 Finished goods 6,404,976 5,328,138 ----------------------------------------------- 7,155,828 6,140,421 Less: adjustment to LIFO 1,273,272 1,172,051 ----------------------------------------------- $5,882,556 $4,968,370 ----------------------------------------------- ----------------------------------------------- The adjustment to LIFO represents the excess of current cost (valued at first-in, first-out FIFO) over the LIFO value of the inventories. F-11 - -------------------------------------------------------------------------------- 3. PROPERTY, PLANT Property, plant and equipment consists of the AND EQUIPMENT following: SEPTEMBER 30, 1996 1995 ---------------------------------------------------- Machinery and equipment $4,552,650 $4,104,342 Tools, molds and dies 1,502,276 1,416,974 Furniture, fixtures and office equipment 402,730 399,331 Leasehold improvements 167,180 152,249 Building and improvements 93,530 93,530 Land 5,000 5,000 ---------------------------------------------------- 6,723,365 6,171,426 Less: accumulated depreciation and amortization 4,757,620 4,415,028 ---------------------------------------------------- $1,965,746 $1,756,398 ---------------------------------------------------- ---------------------------------------------------- Included in machinery and equipment and office equipment at September 30, 1996 and 1995 is approximately $560,000 and $295,000, respectively of equipment under capital lease agreements (see Note 6) with related accumulated amortization amounts of approximately $226,000 and $55,000, respectively. 4. REVOLVING CREDIT During most of fiscal 1996, the Company was party AGREEMENT to an asset-based revolving demand loan agreement with a bank, providing for borrowings of up to the lesser of $2,500,000 or 80% of eligible receivables and 20% of eligible inventory up to a maximum of $850,000, as defined in the agreement. Interest was computed at 0.5% above the bank's commercial lending rate, and principal amounts were collateralized by a security interest in substantially all assets of the Company. In September, 1996, the Company entered into a new credit agreement with a different bank and repaid all amounts outstanding under the agreements with its prior lender. Under the terms of its new three-year committed revolving credit agreement, the Company may borrow up to the lesser of $4,000,000 or 85% of eligible receivables and 30% of eligible inventory up to a maximum of $2,000,000, and interest is computed at the bank's prime lending rate (8.25% at September 30, 1996) or at 1.25% to 1.75% over the London InterBank Over-night Rate (LIBOR), at the Company's option, as defined in the agreement. As part of the same credit package, the Company may borrow additional funds, secured by the Company's machinery and equipment, with up to $700,000 available against existing assets and up to $1,000,000 available for new acquisitions of machinery and equipment. The credit facility is secured by a first priority security interest in the Company's assets. In addition, the Company must meet certain financial covenants. As of the end of 1996, borrowings under this credit agreement were approximately $2,366,000. F-12 - -------------------------------------------------------------------------------- 5. ACCRUED EXPENSES AND Accrued expenses consist of the following: OTHER SEPTEMBER 30, 1996 1995 ---------------------------------------------------- Commissions $232,712 $232,679 Payroll and related 45,000 92,622 Other 160,323 65,836 ---------------------------------------------------- $438,035 $391,137 ---------------------------------------------------- ---------------------------------------------------- 6. LONG-TERM DEBT AND Long term debt consists of the following: CAPITAL LEASE OBLIGATIONS SEPTEMBER 30, 1996 1995 ---------------------------------------------------- Revolving credit facility, due September, 1999 (Note 4) $2,366,338 $ - Capital lease obligations with varying monthly payments and interest rates ranging from 8.5% to 13% per annum maturing 1996 through 2001; secured by an interest in machinery and equipment (Note 3) 395,464 243,715 $575,000 term promissory note payable to a bank repaid during fiscal 1996 (Note 4) - 435,000 ---------------------------------------------------- Subtotal 2,761,802 678,715 Less: current maturities 119,401 181,174 ---------------------------------------------------- Long-term debt and capital lease obligations $2,642,401 $497,541 ---------------------------------------------------- ---------------------------------------------------- F-13 - -------------------------------------------------------------------------------- The following is a schedule by years of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments as of September 30, 1996: 1997 $152,615 1998 138,991 1999 104,988 2000 64,916 2001 3,448 ---------------------------------------------------- Total minimum lease payments 464,958 Less: amount representing interest 69,494 ---------------------------------------------------- Present value of net minimum lease payments $395,464 ---------------------------------------------------- ---------------------------------------------------- The following is a schedule of long term debt maturities (including capital lease obligations) as of September 30, 1996: 1996 $119,401 1997 117,606 1998 93,330 1999 2,428,042 2000 3,423 ---------------------------------------------------- $2,761,802 ---------------------------------------------------- ---------------------------------------------------- 7. LEASES The Company rents facilities in Baldwin, Ronkonkoma and Freeport, New York under various operating lease agreements expiring through December 1996. In addition, the Company also leases certain machinery and equipment and office equipment under various capital lease agreements expiring through 2000 (see Note 6). F-14 - -------------------------------------------------------------------------------- Most of the Company's operating leases are on a month to month basis. Rent expense amounted to approximately $256,000 and $250,000 for the fiscal years ended September 30, 1996 and 1995, respectively. 8. STOCKHOLDERS' EQUITY (a) WARRANTS At September 30, 1996 and 1995, the Company had 1,275,414 and 1,313,764 stock warrants outstanding, respectively. The warrants to purchase the Company's common stock were held by the following parties: Officers/stockholders/consultants (1) 515,414 Public (2) 760,000 ---------------------------------------------- 1,275,414 ---------------------------------------------- ---------------------------------------------- (1) Each warrant held by members of management and certain stockholders grants them the right to purchase one share of common stock at various prices between $0.30 and $0.70 per share. These warrants were granted prior to September 30, 1987 and expire at various dates between April 15, 1997 and April 15, 1998. During fiscal 1996 and 1995 the Company issued warrants to purchase 60,000 and 200,000 shares of common stock, respectively, at prices ranging from $3.00 to $4.25 per share to financial consultants to the Company. (2) 760,000 Class B stock warrants outstanding are registered securities originally issued in the Company's initial public offering and held by the public. Each warrant grants the holder the right to purchase 1 share of common stock. The exercise price per warrant is $2.50. The warrants expire January 31, 1997. F-15 - -------------------------------------------------------------------------------- (b) INCENTIVE STOCK OPTION PLAN In October 1993, the Board of Directors adopted an incentive stock option plan. The Plan, as amended on December 11, 1995, allows the Board of Directors to issue options to purchase an aggregate of 1,250,000 shares of the Company's common stock to key employees. As of September 30, 1996, the Company had issued options to purchase an aggregate of 1,087,600 shares of the Company's common stock to members of the Company's Board of Directors and employees. The options expire 10 years from issuance and are exercisable at prices ranging from $.35 to $3.00. During the year ended September 30, 1996, 10,000 options were exercised, 992,600 options were exercisable, and 162,400 options remain to be granted under the Plan. Changes in qualified and non-qualified options and warrants outstanding are summarized as follows:
Warrants Options ---------------------------------------------------------------------- Option price per Shares Exercise Price Shares share --------------------------------------------------------------------------------------- Outstanding October 1, 1994 1,095,000 $.30 - $2.50 905,000 $1.00 - $2.35 Granted 285,864 2.00 - 3.00 34,600 .35 - 3.00 Cancelled (4,600) (.35) - - Exercised (62,500) (2.50) - - Expired - - - - --------------------------------------------------------------------------------------- Outstanding September 30 1995 1,313,764 .30 - 2.50 939,600 .35 - 3.00 Granted 60,000 3.25 - 4.25 148,000 2.00 - 3.00 Cancelled (3,350) .35 Exercised (95,000) (.35) - (2.50) (10,000) 1.00 Expired --------------------------------------------------------------------------------------- Outstanding September 30, 1996 1,275,414 $.30 - $4.25 1,077,600 $.35 - $3.00 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
F-16 - -------------------------------------------------------------------------------- 9. TAXES ON INCOME Provisions for income taxes on income in the consolidated statement of operations consist of the following: YEAR ENDED SEPTEMBER 30, 1996 1995 ------------------------------------------------------- Current: Federal $546,143 $425,133 State 46,925 68,050 ------------------------------------------------------- Total current 593,068 493,183 ------------------------------------------------------- Deferred: Federal - (111,568) ------------------------------------------------------- - (111,568) ------------------------------------------------------- Total taxes on income $593,068 $381,615 ------------------------------------------------------- ------------------------------------------------------- Deferred tax (assets) liabilities consist of the following:
YEAR ENDED SEPTEMBER 30, 1996 1995 ------------------------------------------------------------------------- Tax depreciation in excess of book $235,463 $232,600 Provision for bad debts (19,863) (17,000) Provision on note receivable (included in other assets) (34,000) (34,000) Investment tax credit carryforward (15,000) (15,000) ------------------------------------------------------------------------- Deferred tax liabilities 166,600 166,600 Valuation allowance 15,588 15,588 ------------------------------------------------------------------------- Net deferred tax liabilities $182,188 $182,188 ------------------------------------------------------------------------- -------------------------------------------------------------------------
F-17 - -------------------------------------------------------------------------------- The provision for income taxes on income before taxes differs from the amounts computed applying the applicable Federal statutory rates due to the following: YEAR ENDED SEPTEMBER 30, 1996 1995 ------------------------------------------------------- Provision for Federal income taxes at the statutory rate $541,993 $397,432 Increase (decrease): State taxes, net of Federal tax benefit 30,970 23,137 Other 20,105 (38,954) ------------------------------------------------------- Provision for taxes on income $593,068 $381,615 ------------------------------------------------------- ------------------------------------------------------- 10. CASH FLOWS YEAR ENDED SEPTEMBER 30, 1996 1995 ------------------------------------------------------- Supplemental disclosure of cash flow information Cash paid during the year: Interest $249,168 $313,482 ------------------------------------------------------- ------------------------------------------------------- Income taxes $551,408 $360,077 ------------------------------------------------------- ------------------------------------------------------- Supplemental schedule of non-cash investing and financing: Equipment acquired under capital lease $264,637 $126,500 ------------------------------------------------------- ------------------------------------------------------- F-18 EX-10 2 REVOLVING CREDIT AGREEMENT EXHIBIT 10 REVOLVING CREDIT AGREEMENT dated as of September 4, 1996 between ALLIED DEVICES CORPORATION, as "Borrower" and THE CHASE MANHATTAN BANK, as "Bank" TABLE OF CONTENTS ARTICLE 1 DEFINITIONS; ACCOUNTING TERMS. Section 1.01 Definitions Section 1.02 Accounting Terms ARTICLE 2 THE CREDIT. Section 2.01 Revolving Credit Loans Section 2.02 Borrowing Base Formula Section 2.03 The Revolving Credit Note Section 2.04 Use of Proceeds Section 2.05 Borrowing Procedures for Revolving Credit Loans Section 2.06 Prepayments Section 2.07 Changes of Commitment Section 2.08 Certain Notices Section 2.09 Minimum Amounts Section 2.10 Interest on Revolving Credit Loans Section 2.11 Revolving Credit Commitment Fee Section 2.12 Payments Generally Section 2.13 Capital Requirements Section 2.14 HLT Classification Section 2.15 Additional Costs Section 2.16 Limitation on Types of Loans Section 2.17 Illegality Section 2.18 Compensation Section 2.19 Survival Section 2.20 Late Payment Fee Section 2.21 Default Interest Section 2.22 Excess of Borrowing Base Formula Section 2.23 Interest Periods ARTICLE 3 CONDITIONS PRECEDENT. Section 3.01 Documentary Conditions Precedent Section 3.02 Additional Conditions Precedent Section 3.03 Deemed Representations ARTICLE 4 REPRESENTATIONS AND WARRANTIES. Section 4.01 Incorporation, Good Standing and Due Qualification Section 4.02 Corporate Power and Authority; No Conflicts Section 4.03 Legally Enforceable Agreements Section 4.04 Litigation Section 4.05 Financial Statements Section 4.06 Ownership and Liens Section 4.07 Taxes Section 4.08 ERISA Section 4.09 Subsidiaries and Ownership of Stock Section 4.10 Credit Arrangements Section 4.11 Operation of Business Section 4.12 Hazardous Materials Section 4.13 No Default on Outstanding Judgments or Orders Section 4.14 No Defaults on Other Agreements Section 4.15 Labor Disputes and Acts of God Section 4.16 Governmental Regulation Section 4.17 Partnerships Section 4.18 No Forfeiture Section 4.19 Solvency Section 4.20 Permits and Licenses ARTICLE 5 AFFIRMATIVE COVENANTS. Section 5.01 Maintenance of Existence Section 5.02 Conduct of Business Section 5.03 Maintenance of Properties Section 5.04 Maintenance of Records Section 5.05 Maintenance of Insurance Section 5.06 Compliance with Laws Section 5.07 Right of Inspection Section 5.08 Reporting Requirements Section 5.09 Payment of Obligations Section 5.10 Notice of Subsidiaries and/or Affiliates Section 5.11 Maintenance of Licenses and Permits Section 5.12 Continued Perfection of Lien and Security Agreement Section 5.13 Notice of Adverse Change ARTICLE 6 NEGATIVE COVENANTS. Section 6.01 Debt Section 6.02 Guaranties, Etc. Section 6.03 Liens Section 6.04 Investments Section 6.05 Dividends Section 6.06 Sale of Assets Section 6.07 Stock of Subsidiaries, Etc. Section 6.08 Transactions with Affiliates Section 6.09 Mergers, Etc. Section 6.10 Acquisitions Section 6.11 No Activities Leading to Forfeiture Section 6.12 Change in Senior Management Section 6.13 Sale of Notes/Accounts Receivable Section 6.14 Prepayment of Outstanding Debt ARTICLE 7 FINANCIAL COVENANTS. Section 7.01 Current Ratio Section 7.02 Debt Service Ratio Section 7.03 Leverage Ratio ARTICLE 8 EVENTS OF DEFAULT. Section 8.01 Events of Default Section 8.02 Remedies Section 8.03 Lock Box Arrangement ARTICLE 9 MISCELLANEOUS Section 9.01 Amendments and Waivers Section 9.02 Usury Section 9.03 Expenses Section 9.04 Survival Section 9.05 Assignment; Participations Section 9.06 Notices Section 9.07 Setoff Section 9.08 Jurisdiction; Immunities Section 9.09 Table of Contents; Headings Section 9.10 Severability Section 9.11 Counterparts Section 9.12 Integration Section 9.13 Governing Law EXHIBITS Exhibit A Promissory Note Exhibit B Guaranty Exhibit C Security Agreement Exhibit D Declaration of Restrictions Exhibit E Borrowing Base Certificate Exhibit F Landlord Waiver SCHEDULES Schedule I Subsidiaries of Borrower Schedule II Credit Arrangements Schedule III Hazardous Materials REVOLVING CREDIT AGREEMENT dated as of September 4, 1996, between ALLIED DEVICES CORPORATION, a corporation organized under the laws of the State of Nevada and authorized to do business under the laws of the State of New York (the "Borrower") and THE CHASE MANHATTAN BANK, a banking corporation organized under the laws of the State of New York (the "Bank"). The Borrower desires that the Bank extend credit as provided herein and the Bank is prepared to extend such credit. Accordingly, the Borrower and the Bank agree as follows: ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS. Section 1.01. DEFINITIONS. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have a correlative meaning when used in the plural and VICE VERSA): "Acquisition" means any transaction pursuant to which the Borrower or any of its Subsidiaries, (a) acquires, or enters into an agreement to acquire, equity securities (or warrants, options or other rights to acquire such securities) of any corporation or other business entity which is not then a Subsidiary of the Borrower, pursuant to a solicitation of tenders therefor, or in one or more negotiated block, market or other transaction not involving a tender offer, or a combination of any of the foregoing, which results in the Borrower having a controlling interest in such corporation or other business entity, or (b) makes any entity not then a Subsidiary of the Borrower a Subsidiary of the Borrower, or causes any such entity to be merged into the Borrower or any of its Subsidiaries, in any case pursuant to a merger, purchase of assets or any reorganization providing for the delivery or issuance to the holders of such entity's then outstanding securities, in exchange for such securities, of cash or securities of the Borrower or any of its Subsidiaries, or a combination thereof, or (c) purchases all or substantially all of the business or assets of any entity. "Affiliate" means any Person: (a) which directly or indirectly controls, or is controlled by, or is under common control with, the Borrower or any of its Subsidiaries; (b) which directly or indirectly beneficially owns or holds 5% or more of any class of voting stock of the Borrower or any such Subsidiary; (c) 6 which 5% or more of the voting stock of which is directly or indirectly beneficially owned or held by the Borrower or such Subsidiary; or (d) which is a partnership in which the Borrower or any of its Subsidiaries is a general partner; or (e) which is a limited liability company in which the Borrower or any of its Subsidiaries is a member. 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. Notwithstanding the above, excluded from the definition of Affiliate shall be any natural person or institutional investor. "Agreement" means this Credit Agreement, as amended or supplemented from time to time. References to Articles, Sections, Exhibits, Schedules and the like refer to the Articles, Sections, Exhibits, Schedules and the like of this Agreement unless otherwise indicated. "Amortization" means amortization in accordance with GAAP. "Banking Day" means any day on which commercial banks are not authorized or required to close in New York City. "Borrowing Base" means at any time an amount equal to the sum of (i) eighty-five percent (85%) (the "Accounts Receivable Advance Rate") of the Borrower's "Eligible Accounts Receivable" and (ii) the lower of (x) thirty percent (30%) (the "Inventory Advance Rate" and together with the Accounts Receivable Advance Rate shall be collectively referred to as the "Advance Rates") of the Borrower's "Eligible Inventory", or (y) Two Million and 00/100 ($2,000,000.00) Dollars. At all times, the Bank shall require that 100% of the Revolving Credit Loans shall not exceed the then current Borrowing Base. Notwithstanding the above, the Bank reserves the right to change the Accounts Receivable Advance Rate and/or Inventory Advance Rate in its sole discretion whether such change is based upon the results of a field audit or otherwise, upon 30 days prior written notice to the Borrower. 7 "Borrowing Base Certificate" means a certificate signed by the Chairman of the Board, President or the Chief Financial Officer of the Borrower in the form of Exhibit E annexed hereto with such changes as the Bank may require from time to time. "Capital Expenditures" means for any period, the sum of (a) the Dollar amount of gross expenditures (including obligations under Capital Leases) made for fixed assets, real property, plant and equipment, and all renewals, improvements, additions, and replacements thereto (but not repairs thereof) incurred during such period which would be treated as Capital Expenditures in accordance with GAAP and (b) the portion of all payments with respect to which are required to be capitalized on the balance sheet of the lessor in accordance with GAAP. "Capital Lease" means any lease which has been or should be capitalized on the books of the lessee in accordance with GAAP. "Change In Control" means an event which results in any Person owning a majority of the voting securities of the Borrower or which results in Mark Hopkinson ceasing to hold his current position as an executive officer of the Borrower or ceasing to be involved in the day to day management of the Borrower. "Closing Date" means the date this Agreement and all Facility Documents have been executed by the Borrower, the Guarantors and the Bank. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means all personal property of the Borrower and each of the Guarantors whether now existing or hereafter arising, which is subject or which is to be subject to the Liens granted by the Security Agreement. "Commitment" means the obligation of the Bank to make the Revolving Credit Loans to the Borrower under this Agreement in the maximum aggregate principal amount of $4,000,000.00, as such amount may be reduced or otherwise modified from time to time pursuant to the terms and conditions of this Agreement. 8 "Consolidated Capital Expenditures" means Capital Expenditures of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Current Assets" means Current Assets of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Current Liabilities" means Current Liabilities of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Debt Service Ratio" means the ratio of (i) consolidated Net Income of the Borrower and its Subsidiaries before taxes (excluding extraordinary gains net of cash taxes, if any) plus consolidated depreciation and amortization expenses plus consolidated interest expense minus consolidated unfunded Capital Expenditures minus consolidated cash dividends minus consolidated cash tax payments to (ii) consolidated interest expense plus the consolidated Current Portion of Long Term Debt. All categories shall be measured on a consolidated basis over the immediately preceding four fiscal quarters with the exception of the consolidated Current Portion of Long Term Debt which shall be measured over the future four fiscal quarters. "Consolidated Funded Debt" means Funded Debt of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Subsidiary" means any Subsidiary whose accounts are or are required to be consolidated with the accounts of the Borrower in accordance with GAAP. "Consolidated Tangible Net Worth" means Effective Net Worth of the Borrower and its Consolidated Subsidiaries, as determined on a consolidated basis in accordance with GAAP. "Consolidated Total Assets" means for any date with respect to the Borrower and its Consolidated Subsidiaries, the consolidated aggregated amount which would, in conformity with GAAP, be included under assets on the balance sheet of the Borrower and its Consolidated Subsidiaries as at such date. 9 "Consolidated Total Liabilities" means for any date, the consolidated aggregate amount, without duplication, of (i) all indebtedness outstanding of the Borrower and its Consolidated Subsidiaries for borrowed money, (ii) indebtedness for the deferred purchase price of property or services (including trade obligations), (iii) obligations under capital leases, and (iv) all other liabilities recorded on the consolidated financial statements of the Borrower and its Subsidiaries in accordance with GAAP. "Current Assets" means all assets of the Borrower and its Consolidated Subsidiaries treated as current assets in accordance with GAAP. "Current Liabilities" means all liabilities of the Borrower and its Consolidated Subsidiaries treated as current liabilities in accordance with GAAP, including without limitation (a) all obligations payable on demand or within one year after the date in which the determination is made and (b) installment and sinking fund payments required to be made within one year after the date on which determination is made. "Current Portion of Long Term Debt" means, on the date of determination with respect to any entity, that portion of such entity's Funded Debt (including Capital Leases) that is due and payable within the next 12 months. "Debt" means, without duplication, with respect to any Person: (a) indebtedness of such Person for borrowed money; (b) indebtedness for the deferred purchase price of property or services; (c) Unfunded Benefit Liabilities of such Person (if such Person is not the Borrower, determined in a manner analogous to that of determining Unfunded Benefit Liabilities of the Borrower); (d) the face amount of any outstanding letters of credit issued for the account of such Person; (e) obligations arising under acceptance facilities; (f) guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; (g) obligations secured by any Lien on property of such Person; (h) obligations of such Person as lessee under Capital Leases; and (i) indebtedness of such Person evidenced by a note, bond, indenture or similar instrument and all other liabilities 10 recorded on such Person's financial statements in accordance with GAAP. "Declaration of Restrictions" means that certain agreement made by Borrower and Guarantor to Bank dated as of the date hereof, whereby Borrower and Guarantor agree and covenant not to transfer, assign or otherwise further encumber the interest of the Borrower or Guarantor in the approximate 13,000 square foot building and property owned by Empire-Tyler Corporation and located in Joplin, Missouri, so long as any indebtedness is owed by the Borrower and/or Guarantor to the Bank or while the Commitment is in effect. "Default" means any event which with the giving of notice or lapse of time, or both, would become an Event of Default. "Default Rate" means a rate per annum equal to 2% above the Prime Rate as in effect from time to time. "Depreciation" means depreciation determined in accordance with GAAP. "Dividends" means, for any period, dividends paid by the applicable Person. "Dollars" and the sign "$" mean lawful money of the United States of America. "Effective Net Worth" means, at any particular date with respect to any Person, the amount of excess of Consolidated Total Assets over Consolidated Total Liabilities, excluding subordinated debt, the subordination of which must be satisfactory to the Bank in its sole discretion, which would, in conformity with GAAP, be included under shareholders' equity on a balance sheet of such entity as at such date, excluding, however, from the determination of Consolidated Total Assets, without duplication (i) all intangible assets, including, without limitation, organizational expenses, patents, trademarks, copyrights, goodwill, covenants not to compete, research and developmental costs, training costs, and deferred charges, (ii) all amounts due at any time and from time to time from Affiliates, and (iii) all shareholder loans. "Eligible Accounts Receivable" means accounts receivable of the Borrower for which: (i) delivery of the merchandise or 11 rendition of the service reflected in the applicable invoice has been completed; (ii) no return, rejection or repossession has occurred; (iii) such merchandise or services have been finally accepted by the account debtor without material dispute, setoff, defense, or counterclaim; (iv) are not subject to offset or deduction; (v) the Bank continues to be satisfied with the credit standing of the account debtor in relation to the amount of credit extended; and (vi) are not more than 90 days from invoice date. Ineligible accounts receivable shall be determined by the Bank in its sole and absolute discretion and would include, without limitation, accounts receivable where (i) the account debtor with respect thereto is an Affiliate of the Borrower; (ii) the account debtor with respect thereto is not located in the United States, however foreign accounts receivable that are insured under an insurance policy which such policy to be reviewed and satisfactory to the Bank in all respects, and under which policy the Bank is named as loss payee, will be considered as Eligible Accounts Receivable; (iii) the account debtor with respect thereto is also a supplier to or creditor of the Borrower, unless such supplier or creditor has executed a no-offset letter satisfactory to the Bank, provided however that to the extent that the Bank has not received such no-offset letter and the account debtor's account receivable due to the Borrower exceeds the account payable due from the Borrower to the account debtor (the "Payable"), such excess shall be considered Eligible Accounts Receivable to the extent that such Payable does not exceed (10%), of total accounts receivable from that account debtor; (iv) the account receivable is owing from an account debtor of which more than 50% of the total accounts receivable from such account debtor are more than 90 days past due; (v) the account receivable is owing from an account debtor of which there are credit balances; (vi) the account receivable is a government receivable; (vii) the account debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or if a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the account debtor in an involuntary case under any state or federal bankruptcy laws, as now constituted or hereafter amended, or if any other petition or other application for relief under any state or federal bankruptcy law has been filed against the account debtor, or if the account debtor has failed, suspended business, ceased to be solvent, called a meeting of its creditors, or consented to or suffered a receiver, trustee, liquidator or 12 custodian to be appointed for it or for all or a significant portion of its assets or affairs; and (viii) the sale to the account debtor is on a guaranteed sale, sale-and-return, sale on approval, consignment or any other repurchase or return basis or is evidenced by chattel paper. The foregoing criteria for eligibility may be revised from time to time by the Bank in its exclusive judgement. "Eligible Inventory" means inventory of the Borrower including raw materials such as bar stock stainless steel and aircraft grade aluminum and finished goods consisting of standardized instrument components as sold through the Borrower's current catalog (i) upon which the Bank has obtained a first priority perfected security interest; (ii) for which the Bank has received a properly executed landlord waiver, in form satisfactory to the Bank (should such Eligible Inventory be located at a leased location); (iii) for which the Borrower has made a sale within the past 360 days; (iv) which would not be classified as "obsolete" inventory by the Borrower; (v) which is located in the United States and (vi) which shall be at all times acceptable to the Bank in all respects. In no event shall "Eligible Inventory" include work in process inventory. All inventory or product built to specific customer specifications shall be considered Eligible Inventory until June 30, 1997. At June 30, 1997 or such date thereafter when the Borrower can provide detailed information on inventory or product built to specific customer specifications, such inventory shall be included as Eligible Inventory to the extent that there is a purchase contract specifying delivery within the next ninety (90) days. The foregoing criteria for eligibility may be revised from time to time by the Bank in its exclusive judgment. Reserves against inventory may be established from time to time at the sole discretion of the Bank in order to preserve collateral quality. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, or industrial, toxic or Hazardous Materials or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, 13 disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Borrower is a member, or (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Borrower is a member. "Event of Default" has the meaning given such term in Section 8.01. "Facility Documents" means this Agreement, the Note, the Guaranty, the Security Agreements, Declaration of Restrictions and any and all other documents made by Borrower and/or Guarantor to Bank in connection with the Revolving Credit Loan and/or this Agreement. "Forfeiture Proceeding" means any action, proceeding or investigation affecting the Borrower, Guarantor or any of their Subsidiaries or Affiliates before any court, governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or the receipt of notice by any such party that any of them is a suspect in or a target of any governmental inquiry or investigation, which may result in an indictment of any of them or the seizure or forfeiture of any of their property. "Funded Debt" means, with respect to any Person, all Debt of such Person for money borrowed which by its terms matures more than one year from the date as of which such Funded Debt is incurred, and any Debt of such Person for money borrowed maturing within one year from such date which is renewable or extendable at the option of the obligor to a date beyond one year from such date (whether or not theretofore renewed or extended), including any such indebtedness renewable or extendable at the option of the obligor under, or payable from the proceeds of other indebtedness which may 14 be incurred pursuant to, the provisions of any revolving credit agreement or other similar agreement. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the financial statements referred to in Section 4.05, except for any changes therein required by a change in GAAP. "Grantor" has the meaning given such term in the Security Agreement. "Guarantor" means Empire-Tyler Corporation and all Subsidiaries and Affiliates, now existing or hereafter formed or acquired of the Borrower or any Guarantor. "Guaranty" means the guaranty in the form of Exhibit B to be delivered by a Guarantor under the terms of this Agreement. "Hazardous Materials" means any material, whether animate or inanimate, raw, processed or waste by-product, which in itself or as found or used, is potentially toxic, noxious or harmful to the health or safety of human or animal life or vegetation, regardless of whether such material be found on or below the surface of the ground, in any surface or underground water, or airborne in ambient air or in the air inside of any structure built or located upon or below the surface of the ground, or in any machinery, equipment or inventory located or used in any such structure, including, but in no event limited to, all hazardous materials, hazardous wastes, toxic substances, infectious wastes, pollutants and contaminants from time to time defined or classified as such under any Environmental Law regardless of the quantity found, used, manufactured or removed from a given location. "Interest Expense" means with respect to any entity, such entity's interest expense as reflected in its financial statements and calculated in accordance with GAAP. "Interest Determination Date" shall mean the date on which a Floating Rate Option Loan is converted to a LIBOR Option Loan and in the case of a LIBOR Option Loan, the last day of the interest period. 15 "Interest Period" means the period commencing on the date a Loan is made and ending, as the Borrower may select pursuant to Section 2.05 and in the case of LIBOR Option Loans, either 1,2,3 or 6 months (subject to availability) thereafter. "Interest Rate" means either of the following interest rate options to be selected by the Borrower: (i) FLOATING RATE OPTION: Upon same Banking Day written notice to the Bank, the Prime Rate per annum in effect from time to time. Interest shall be computed on an actual/360 day basis and including any time extended by reason of Saturdays, Sundays and holidays. Revolving Credit Loans subject to the Floating Rate Option shall be in minimum amounts of $100,000.00; or (ii) LIBOR OPTION: Upon three (3) Banking Days written notice to the Bank, the Bank's reserve adjusted London Interbank Offering Rate ("LIBOR") for corresponding deposits of U.S. Dollars, plus the LIBOR Margin for periods of 1,2,3 and 6 months (subject to availability), but in any event not beyond the Revolving Credit Termination Date and for an amount not less than $500,000.00. "LIBOR Margin" shall be determined and adjusted on a semi-annual basis based upon the ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth (the "Leverage Ratio"). Upon the receipt and satisfactory review by the Bank of the consolidated financial statement of the Borrower for the fiscal semi-annual period ended March 31, 1996 and for each fiscal semi-annual period thereafter, the LIBOR Margin shall be determined based upon the Leverage Ratio as contemplated below: LEVERAGE RATIO LIBOR MARGIN (360 DAY BASIS) -------------- ---------------------------- Level 1 < .49 1.50% Level 2 > .50 but < 1.25 1.75% Level 3 > 1.25 2.00% Level 1 and 2 interest rates shall be available to the Borrower provided that (i) the Borrower's financial statements are received 16 within the required time frame pursuant to this Agreement and (ii) no Event of Default has occurred and is continuing under this Agreement. Provided that there is no Event of Default under this Agreement or any related documents, the referenced interest rates shall become effective and shall pertain to each new LIBOR Option Loan five business days after the receipt by the Bank of the consolidated financial statements of the Borrower for such period together with a certificate of the Borrower demonstrating the calculation of the Leverage Ratio and shall remain in effect for the succeeding period until the receipt by the Bank of the financial statements for the next succeeding fiscal period. However, should such financial statements not be submitted to the Bank within the required time frames, LIBOR Margin shall be that outlined above for Level 3. The Bank shall not be deemed to have waived any Event of Default or any of its remedies in connection with the foregoing. "Lending Office" means, the lending office of the Bank (or of an affiliate of the Bank) designated as such on its signature page hereof or such other office of the Bank (or of an affiliate of the Bank) as the Bank may from time to time specify to the Borrower. "Lien" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, financing lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loans" means the Revolving Credit Loans. "Multiemployer Plan" means a Plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA. "Net Income" means with respect to any Person for any period, such Person's net income after taxes for such period as reflected on such entity's financial statements. "Note" means the Revolving Credit Note in the form of Exhibit "A" annexed hereto evidencing the Loans. 17 "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan" means any employee benefit or other plan established or maintained, or to which contributions have been made, by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA, other than a Multiemployer Plan. "Prime Rate" means that rate of interest from time to time announced by the Bank at the Principal Office as its prime commercial lending rate. "Principal Office" means the principal office of the Bank, presently located at 270 Park Avenue, New York, New York 10017. "Regulation G, T, U or X" means Regulation G, T, U or X of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA as to which events the PBGC by regulation has not waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA shall be a Reportable Event regardless of any waivers given under Section 412(d) of the Code. "Revolving Credit Commitment" means the obligation of the Bank to extend Revolving Credit Loans to the Borrower in accordance with the terms hereof in the aggregate principal amount of $4,000,000.00 as such amount may be reduced or otherwise modified from time to time in accordance with the terms hereof. "Revolving Credit Loans" means any Loan made by the Bank pursuant to Section 2.01 hereof. 18 "Revolving Credit Note" means a promissory note of the Borrower in the form of Exhibit A hereto evidencing the Revolving Credit Loans made by the Bank hereunder. "Revolving Credit Termination Date" means the earlier of (i) the date on which the Revolving Credit Loans are paid in full and the Revolving Credit Commitments shall terminate hereunder and the obligations of the Borrower in connection therewith have been satisfied or (ii) the date three (3) years from the date hereof; provided that if such date is not a Business Day, the Revolving Credit Termination Date shall be the next succeeding Business Day. "Security Agreements" means the Security Agreement to be delivered by Borrower and Guarantors under the terms of this Agreement. "Solvent" means when used with respect to any Person on a particular date, that on such date: (a) the present fair saleable value of its assets is in excess of the total amount of its liabilities, including, without limitation, the reasonably expected amount of such Person's obligations with respect to contingent liabilities, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its Debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur Debts or liabilities beyond such Person's ability to pay as such Debts and liabilities mature and (d) such Person is not engaged in business or a transaction, for which such Person's property would constitute an unreasonably small capital. "Subsidiary" means, with respect to any Person, any corporation, partnership or joint venture, whether now existing or hereafter formed or acquired, or other entity and (i) in the case of a corporation, of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person and (ii) in the case of a partnership or joint venture, of which a majority of the partnership or other ownership interests are at the time owned by such Person and/or Subsidiaries of such Person. 19 "Unfunded Benefit Liabilities" means, with respect to any Plan, the amount (if any) by which the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair market value of all Plan assets allocable to such benefit liabilities, as determined on the most recent valuation date of the Plan and in accordance with the provisions of ERISA for calculating the potential liability of the Borrower or any ERISA Affiliate under Title IV of ERISA. Section 1.02. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all financial data required to be delivered hereunder shall be prepared in accordance with GAAP. ARTICLE 2. THE CREDIT. Section 2.01. REVOLVING CREDIT LOANS. (a) Subject to the terms and conditions of this Agreement, and relying on the representations and warranties set forth herein, the Bank agrees to make Revolving Credit Loans in Dollars (the "Revolving Credit Loans") to the Borrower from time to time from and including the date hereof to and including the Revolving Credit Termination Date, up to but not exceeding in the aggregate principal amount at any one time outstanding, the amount of the Commitment. Subject to the foregoing limits, the Borrower may borrow, repay, reborrow, on or after the date hereof and prior to the Revolving Credit Termination Date, all or a portion of the Revolving Credit Commitment hereunder. The Revolving Credit Loans may be made at the Floating Rate Option, the LIBOR Option, or a combination thereof. (b) The principal amount of each Revolving Credit Loan shall be due and payable on the earlier of (i) the last day of the Interest Period therefor or (ii) the Revolving Credit Termination Date . Section 2.02. BORROWING BASE FORMULA. The Loans shall be extended and maintained upon the Borrowing Base formula. The total outstandings under this Agreement, including any requested borrowings, must either be equal to or less than the amount determined each month and before each borrowing to be the Borrower's Borrowing Base formula up to a limit of $4,000,000.00. The borrowings are contingent upon the Bank's receipt of the most current monthly aging of accounts receivable, the most current monthly inventory report and Borrowing Base Certificate of the 20 Borrower. These reports must be delivered to the Bank not more than fifteen (15) days from the last day of each month. A current Borrowing Base Certificate (as of the last day of the preceding month prior to the drawdown) must be submitted to the Bank before each drawdown; Section 2.03. THE REVOLVING CREDIT NOTE. The Revolving Credit Loans shall be evidenced by a single Revolving Credit Note in favor of the Bank substantially in the form of Exhibit A with appropriate insertions, duly executed and completed by the Borrower. The Bank is hereby authorized to record the date and amount of each Revolving Credit Loan, the date and amount of each payment or prepayment of principal thereof and the principal amount subject thereto in the Bank's records and/or on the schedules annexed to and constituting a part of the Note, and any such recordation shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded; provided that the failure to make any such recordation shall not in any way affect the Borrower's obligation to repay the Revolving Credit Loans. The Revolving Credit Note (a) shall be dated the date hereof, (b) shall be stated to mature on the Revolving Credit Termination Date and (c) shall bear interest from and including the date hereof on the unpaid principal amount thereof from time to time outstanding as provided herein. Section 2.04. USE OF PROCEEDS. (a) The Borrower shall use the proceeds of the Revolving Credit Loans to refinance existing bank loans and for general working capital purposes. No part of the proceeds of any of the Revolving Credit Loans will be used for any purpose which violates the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System as in effect on the date of making such Loans. (b) The Borrower agrees to indemnify the Bank and hold the Bank harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for the Bank in connection with any investigative, administrative or judicial proceeding, whether or not the Bank shall be designated a party thereto) which may be incurred by the Bank, relating to or arising out of any actual or proposed use of proceeds of Revolving Credit Loans hereunder. 21 Section 2.05 BORROWING PROCEDURES FOR REVOLVING CREDIT LOANS. The Borrower may request a borrowing under the Revolving Credit Commitment hereunder as provided in Section 2.08. On the date of such borrowing, the Bank shall, subject to the conditions of this Agreement, make available to the Borrower, in immediately available funds, the amount of such borrowing by crediting an account of the Borrower designated by the Borrower and maintained with the Bank. If the amount of said request for borrowing, when combined with all outstanding Revolving Credit Loans exceeds the Borrowing Base formula, the Bank shall not be obligated to make said Loan. Section 2.06. PREPAYMENTS. On any Revolving Credit Loans subject to the Floating Rate Option the Borrower shall have the right to make prepayments of principal, at any time or from time to time, provided that the Borrower shall give the Bank notice of each such prepayment as provided in Section 2.08, and any prepayment must be in minimum amounts of $100,000.00. On any Revolving Credit Loans subject to the LIBOR Option, the Borrower shall have the right to make prepayments of principal only on the last day of the Interest Period corresponding to each Revolving Credit Loan provided that the Borrower shall give the Bank notice of each such prepayment as provided in Section 2.08 and any prepayment must be in minimum amounts of $100,000.00. Section 2.07. CHANGES OF COMMITMENT. The Borrower shall have the right to reduce or terminate the amount of unused Commitment at any time or from time to time, provided that: (a) the Borrower shall give notice of each such reduction or termination to the Bank as provided in Section 2.08; and (b) each partial reduction shall be in an aggregate amount at least equal to $100,000.00. The Commitment once reduced or terminated may not be reinstated. Section 2.08. CERTAIN NOTICES. Notices by the Borrower to the Bank of each borrowing pursuant to Section 2.05, and each prepayment pursuant to Section 2.06, and each reduction or termination of the Commitment pursuant to Section 2.07 shall be irrevocable and shall be effective only if received by the Bank not later than 12:00 noon New York City time, and in the case of borrowings and prepayments, given on or prior to the Banking Day therefor. In the case of reductions or termination of the Commitment, the Bank shall be given notice three Banking Days prior thereto. Each such notice shall specify the Loans to be borrowed 22 or prepaid, and the Interest Rate and the amount (subject to Section 2.09) and the date of the borrowing or prepayment (which shall be a Banking Day). Each such notice of reduction or termination shall specify the amount of the Commitment to be reduced or terminated. Any notice of borrowing that does not specify an Interest Rate option or if a Libor Option Loan matures and Bank does not receive notice of an Interest Rate Option, the Interest Rate shall be deemed a Floating Rate Option Loan and any request for a LIBOR Option Loan which does not request an Interest Period shall be deemed to be a LIBOR Option Loan with an Interest Period of one (1) month. Section 2.09. MINIMUM AMOUNTS. Except for borrowings which exhaust the full remaining amount of the Commitment, and prepayments (in the case of Floating Rate Option Loans) which result in the prepayment of all Loans, each borrowing and prepayment of principal of a Loan shall be in an amount of at least equal to or a multiple of $100,000.00 ($500,000.00 in the case of LIBOR Option Loan). Section 2.10. INTEREST ON REVOLVING CREDIT LOANS.. The Borrower shall pay interest, computed at the "Interest Rate" in effect, on the outstanding and unpaid principal amount of each Revolving Credit Loan made under this Agreement. Interest shall be payable (i) monthly in arrears commencing the last business day of the first month following the date hereof, (ii) on any Interest Determination Date, and (iii) on the Revolving Credit Termination Date. Section 2.11. REVOLVING CREDIT COMMITMENT FEE. (a) The Borrower shall pay to the Bank a commitment fee (the "Commitment Fee") equal to one-quarter of one percent (0.25%) per annum on the average daily unused portion of the Revolving Credit Commitment. The Commitment Fee shall be due and payable in arrears on the last day of each calendar quarter commencing the first calendar quarter immediately following the Closing Date and on the Revolving Credit Termination Date. Section 2.12. PAYMENTS GENERALLY. All payments under this Agreement or the Note shall be made in Dollars in immediately available funds not later than 1:00 p.m. New York City time on the relevant dates specified above (each such payment made after such time on such due date to be deemed to have been made on the next 23 succeeding Banking Day) at the Lending Office of the Bank, provided that, when a new Revolving Credit Loan is to be made by the Bank on a date the Borrower is to repay any principal of any outstanding Revolving Credit Loans, the Bank shall apply the proceeds thereof to the payment of principal to be repaid and only an amount equal to the difference between the principal to be borrowed and the principal to be repaid shall be made available by the Bank to the Borrower as provided in Section 2.05 or paid by the Borrower to the Bank pursuant to this Section 2.12, as the case may be. The Bank shall debit the Borrower's demand deposit account maintained with the Bank for all principal payments, interest payments and payments of any and all fees due the Bank on said due dates. The Borrower shall, at the time of making each payment under this Agreement or the Note, specify to the Bank the principal or other amount payable by the Borrower under this Agreement or the Note to which such payment is to be applied (and in the event that it fails to so specify, or if a Default or Event of Default has occurred and is continuing, the Bank may apply such payment as it may elect in its sole discretion). If the due date of any payment under this Agreement or the Note would otherwise fall on a day which is not a Banking Day, such date shall be extended to the next succeeding Banking Day and interest shall be payable for any principal so extended for the period of such extension. If the due date of any payment under this Agreement or the Note would otherwise fall on a day which is not a Banking Day, such date shall be, in the case of LIBOR Option Loans, extended to the next succeeding Banking Day unless the next succeeding Banking Day would fall in the next calendar month, in which case such date shall be on the next preceding Banking Day. All payments under this Agreement shall be made by the Borrower without defense, setoff or counterclaim to the Bank on the date when due and shall be made in lawful money of the United States of America in immediately available funds. Section 2.13. CAPITAL REQUIREMENTS. (a) The Borrower shall pay to the Bank from time to time on demand such amounts as the Bank may determine to be necessary to compensate the Bank for any costs which the Bank determines are attributable to its obligation to extend credit hereunder in respect of any amount of capital maintained by the Bank or any of its affiliates pursuant to any law or regulation of any jurisdiction or any interpretation, directive or request (whether or not having the force of law) of any court or governmental or monetary authority, whether in effect on the date of this Agreement or thereafter. Without limiting the foregoing, 24 such compensation shall include an amount equal to any reduction in return on assets or return on equity to a level below that which the Bank could have achieved but for such law, regulation, interpretation, directive or request. The Bank will notify the Borrower if it is entitled to compensation pursuant to this Section as promptly as practicable after it determines to request such compensation. (b) Determinations and allocations by the Bank for purposes of this Section as to the effect of capital requirements on its obligation to extend credit, and of the additional amounts required to compensate the Bank under this Section shall be conclusive, provided that such determinations and allocations are conclusive absent manifest error. For purposes of this Section 2.13, in calculating the amount necessary to compensate the Bank for any such cost, the Bank shall calculate the amount payable to it in a manner consistent with the manner in which it shall calculate similar compensation payable to it by other borrowers having provisions in their credit agreements comparable to this Section 2.13. Section 2.14. HLT CLASSIFICATION. If, after the date hereof, the Bank has received notice from any governmental authority, central bank or comparable agency having jurisdiction over the Bank that the definition of highly leveraged transaction has been modified with the result that its Loans hereunder are classified as a "highly leveraged transaction" (an "HLT Classification") or if the Borrower takes any action which causes this transaction to be subject to HLT Classification the Bank shall promptly give notice of such HLT Classification to the Borrower. The Bank and the Borrower shall commence negotiations in good faith to agree on whether and, if so, the extent to which commitment fees, interest rates and/or margins hereunder should be increased so as to reflect such HLT Classification. If the Borrower and the Bank fail to agree on such increases within thirty (30) days after notice is given as provided above, then (i) the Bank shall, by notice to the Borrower immediately terminate the Commitment, and (ii) the Borrower shall be obligated to prepay on the date of such termination of the Commitment each outstanding Loan by paying the aggregate principal amount to be prepaid together with all accrued interest thereon to the date of such prepayment; provided that, if the Borrower prepays any LIBOR Option Loans pursuant to this clause, the Borrower shall compensate the Bank for any resulting 25 funding losses. The Bank acknowledges that a HLT Classification is not a Default or an Event of Default hereunder. Section 2.15. ADDITIONAL COSTS. (a) Borrower shall pay to Bank from time to time such amounts as Bank may determine to be necessary to compensate it for any costs which the Bank determines are attributable to its making or maintaining any LIBOR Option Loan under this Agreement or its undertaking to make or maintain any such LIBOR Option Loans hereunder, or any reduction in any amount receivable by Bank hereunder in respect of any such LIBOR Option Loans or such undertaking (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any regulatory change applicable to Bank which: (i) changes the basis of taxation of any amounts payable to Bank under this Agreement in respect of any of such LIBOR Option Loans (other than federal and state taxes imposed on the net income of Bank on account of any of such LIBOR Option Loans by the jurisdiction in which the Bank is located); or (ii) imposes or modifies any reserve, special deposit, deposit insurance or assessment, capital or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, Bank; or (iii) imposes any other condition affecting this Agreement (or any of such extensions of credit or liabilities ). Bank will notify Borrower of any event occurring after the date of this Agreement which will entitle Bank to compensation pursuant to this Section 2.15 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. All payments required from Borrower hereunder shall be made within fifteen (15) days of Borrower's receipt of notice that such payments are due. (b) Without limiting the effect of the foregoing provisions of this Section 2.15, in the event that, by reason of any regulatory change applicable to Bank, Bank either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of Bank which includes deposits by reference to which the LIBOR Option Interest Rate is determine, as provided in this Agreement or a category of extensions of credit or other assets of Bank which includes LIBOR Option Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if Bank so elects by notice to Borrower, the undertaking of Bank to make such LIBOR Option Loans, or to renew the LIBOR Option Interest Rate or to convert any 26 interest rate option to the LIBOR Option Interest Rate shall be suspended until the date such applicable regulatory change ceases to be in effect, and Borrower shall on the last day of the then current Interest Period for such affected outstanding Loans, pay such Loans in accordance with this Agreement. (c) Determinations and allocations by Bank for purposes of this Section 2.15 of the effect of any applicable regulatory change on its costs of making or maintaining such LIBOR Option Loans or on amounts receivable by it in respect of such LIBOR Option Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive, provided that such determinations are made in good faith on a reasonable basis and are made in a manner consistent with the manner in which it shall calculate similar compensation payable to it by other borrowers having provisions in their credit agreements comparable to this Section 2.15. Section 2.16. LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, if Bank determines (which determination shall be conclusive) that the relevant rates of interest which are the basis of the LIBOR Option Interest Rate do not adequately cover the cost to Bank of making or maintaining the LIBOR Option Loans, then Bank shall give Borrower prompt notice thereof, and so long as such condition remains in effect, Bank shall be under no obligation to make such LIBOR Option Loans and Borrower shall, on the last day(s) of the current Interest Period(s) for the outstanding LIBOR Option Loans of the affected type, pay such LIBOR Option Loans in accordance with this Agreement. Section 2.17. ILLEGALITY. Notwithstanding any other provisions in this Agreement, in the event that it becomes unlawful for Bank to (a) honor its undertaking to make LIBOR Option Loans hereunder, or (b) maintain such LIBOR Option Loans hereunder, then Bank shall promptly notify Borrower thereof and Bank's undertaking to make such LIBOR Option Loans shall be suspended until such time as Bank may again make and maintain such affected LIBOR Option Loans and LIBOR Option Interest Rate, and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding LIBOR Option Loans (or on such earlier date as Bank may specify to Borrower, due to the illegality of maintaining such 27 LIBOR Option Loans), pay such LIBOR Option Loans in accordance with this Agreement. Section 2.18. COMPENSATION. Borrower shall pay to Bank, upon the request of Bank and within fifteen (15) days of such request, such amount or amounts as shall be sufficient (in the reasonable opinion of Bank) to compensate it for any loss, cost or expense which Bank determines is attributable to: (a) any payment or prepayment of a LIBOR Option Loan, where such payment or prepayment occurs on a date other than the last day of an Interest Period for the respective LIBOR Option Loans (whether by reason of demand by Bank for payment or otherwise); or (b) any failure by Borrower to, on the date specified therefor in the relevant notice under this Agreement, enter into a LIBOR Option Loan. Without limiting the foregoing, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest which otherwise would have accrued on the principal amount so paid or prepaid or not borrowed for the period from and including the date of such payment or prepayment or failure to borrow to but excluding the last day of the then current Interest Period for such LIBOR Option Loan (or, in the case of a failure to borrow to but excluding the last day of the Interest Period for such LIBOR Option Loan which would have commenced on the date specified therefor in the relevant notice) at the applicable rate of interest for such LIBOR Option Loan provided for herein over (ii) the amount of interest (as reasonably determined by Bank) the reference bank would have bid in the London interbank market (if such Loan is a LIBOR Option Loan) for U.S. Dollar deposits for amounts comparable to such principal amount and maturities comparable to such Interest Period. A determination of the Bank as to the amounts payable pursuant to this Section 2.18 shall be conclusive absent manifest error. Section 2.19. SURVIVAL. The undertaking of Borrower under this Article 2 shall survive the repayment of the Loans and termination of the Revolving Credit Commitment. Section 2.20. LATE PAYMENT FEE. If Borrower fails to maintain sufficient available funds on the respective payment due dates in 28 its demand deposit account maintained with the Bank, as set forth in Section 2.12, for the payment of principal, interest and/or fees due the Bank, the Borrower shall be required to pay additional interest on said late payment by calculating the amount of principal and/or interest and/or fees past due times (x) the Prime Rate plus two percent (2%) per annum/(360 days) times (y) the number of days the payment(s) are past due. Section 2.21. DEFAULT INTEREST. Notwithstanding any other provision of this Agreement, upon the occurrence and during the continuance of an Event of Default, each Loan outstanding hereunder shall bear interest at a rate per annum equal to the Default Rate until such Event of Default has been either cured or waived by the Bank. No payment of the default interest shall be required in respect to any amount for which a payment has been made pursuant to Section 2.20. Section 2.22. EXCESS OF BORROWING BASE FORMULA. If at any time the total outstandings of the Revolving Credit Loans exceed the maximum amount available under the Borrowing Base formula, upon notice by the Bank to the Borrower, the Borrower shall reduce the outstanding balance of the Revolving Credit Loans, on the same day as notice is received by the Borrower, in an amount sufficient to reduce the total outstandings of the Revolving Credit Loans to be within the maximum amount available under the Borrowing Base formula. Said payments shall be applied first to Floating Rate Option Loans and then the balance to the reduction of LIBOR Option Loans. Section 2.23. INTEREST PERIODS. In the case of each Loan, the Borrower shall select an Interest Period of any duration in accordance with the definition of Interest Period in Section 1.01, subject to the following limitations: (a) no Interest Period may extend beyond the Revolving Credit Termination Date; and (b) if an Interest Period would end on a day which is not a Banking Day, such Interest Period shall be extended to the next Banking Day unless such Banking Day would fall in the next calendar month in which event such Interest Period shall end on the immediately preceding Banking Day. ARTICLE 3. CONDITIONS PRECEDENT. 29 Section 3.01. DOCUMENTARY CONDITIONS PRECEDENT. The obligation of the Bank to make the Revolving Credit Loan constituting the initial borrowing is subject to the condition precedent that the Bank shall have received on or before the date of such Revolving Credit Loan each of the following, in form and substance satisfactory to the Bank and its counsel: (a) the Note duly executed by the Borrower; (b) the Guaranty duly executed by each Guarantor; (c) a certificate of the Secretary or Assistant Secretary of the Borrower and each Guarantor, dated the Closing Date, attesting to all corporate action taken by the Borrower and each Guarantor, including resolutions of its Board of Directors authorizing the execution, delivery and performance of the Facility Documents to which it is a party and each other document to be delivered pursuant to this Agreement together with certified copies of the certificate or articles of incorporation and the by laws and any amendments thereto of the Borrower and Guarantor; each such certificate shall be executed by the respective Secretary or Assistant Secretary of the Borrower and Guarantor and shall state that the resolutions and corporate documents thereby certified have not been amended, modified , revoked or rescinded as of the date of the initial borrowing of the Loans; (d) a certificate of the Secretary or Assistant Secretary of the Borrower and Guarantor, dated the Closing Date, certifying the names and true signatures of the officers of the Borrower and Guarantor authorized to sign the Facility Documents to which it is a party and the other documents to be delivered by the Borrower and Guarantor under this Agreement; (e) a certificate of a duly authorized officer of the Borrower and Guarantor, dated the Closing Date, stating that the representations and warranties in Article 4 are true and correct on such date as though made on and as of such date and that no event has occurred and is continuing which constitutes a Default or Event of Default; (f) a "long form" certificate of good standing of the Borrower and Guarantor; 30 (g) the Security Agreements duly executed by the Borrower and Guarantor together with (a) Financing Statements on Form UCC-1 under the Uniform Commercial Code for all jurisdictions necessary or, in the opinion of the Bank, desirable to perfect the security interests created by the Security Agreement and (b) UCC search results indicating that no party claims an interest in any of the Collateral; (h) satisfactory evidence that the Borrower's current lenders, including Fleet Bank, N.A., shall have been (or shall concurrently be) paid in full, all commitments shall have been terminated, all guaranties of Borrower and Guarantor shall have been released and that all liens granted to such lenders by Borrower and/or Guarantor shall have been terminated, which evidence shall include UCC-3 Termination Statements for all UCC-1 Financing Statements filed on behalf of such lenders; (i) a favorable opinion of counsel for the Borrower and Guarantor, dated the Closing Date, which must be deemed acceptable to the Bank and its counsel; (j) a Declaration of Restrictions of Guarantor, dated the Closing Date, in substantially the form of Exhibit D and as to such other matters as the Bank may request; (k) an all-risk property insurance policy issued by a company satisfactory to the Bank in its sole and absolute discretion, naming the Bank, as loss payee and additional insured and a general public liability insurance policy satisfactory to the Bank, in its sole discretion, naming the Bank as additional insured. Said insurance policies must be issued by licensed New York insurance companies maintaining an "A" rating or better by A.M. Best Insurance Guide; (l) all documentation required by the terms and conditions of this Agreement; (m) the consolidated financial statements of the Borrower and its Subsidiaries for the fiscal year ended September 30, 1995 and the interim consolidated financial statements of the Borrower and its Subsidiaries for the nine (9) month period ending June 30, 1996, which each must be in a form and substance satisfactory to the Bank; 31 (n) a payoff letter from Fleet Bank, N.A. evidencing the full repayment and satisfaction of all obligations of the Borrower and Guarantors under all existing credit facilities with Fleet Bank, N.A.; (o) the most recent (to be dated within 30 days of the date hereof) aging of accounts receivable of the Borrower, in form and substance satisfactory to the Bank; (p) the most recent (to be dated within 30 days of the date hereof) inventory designation schedule of the Borrower (and other inventory reports to be determined by the Bank); (q) an updated Borrowing Base Certificate which is dated as of the date hereof; (r) a field audit report which must be satisfactory in form and substance to the Bank; (s) landlord waivers for all leased locations where assets of the Borrower and Guarantors are located, in the form of Exhibit F annexed hereto and which must be satisfactory in form and substance to the Bank and the Bank's counsel; (t) due diligence reports with respect to the Borrower and the Guarantors including, without limitation, bank checkings, trade checkings, customer checkings and litigation checkings and all due diligence with respect to management; (u) all material loan or credit agreements entered into by the Borrower or any Guarantor and all material shareholder, employee and management agreements with respect to the Borrower or any Guarantor; (v) a schedule of all lease agreements affecting the Borrower and the Guarantor which such schedule shall include without limitation the lessor, the lessee, the term of the lease, the annual lease expenditure, the expiration of the lease and whether such lease is an operating or capital lease; (w) the agreement for the Borrower's private placement of the common stock completed during 1994; 32 (x) nothing shall have occurred to the Borrower and/or Guarantor, which in the Bank's sole judgment could, individually or in aggregate, have a material adverse effect on (a) the rights and remedies of the Bank under the definitive documentation for the Revolving Credit Loan, (b) the ability of the Borrower and the Guarantor to perform their respective obligations or (c) the business, property, assets, liabilities, condition (financial or otherwise), operations, results of operations or prospects of the Borrower or any Guarantor prior to and after giving effect to the financing contemplated herein; (y) such other documents, instruments, approvals, opinions and evidence as the Bank may reasonably require; (z) the Borrower shall have paid or caused to be paid all fees required to be paid hereunder or in connection herewith which are accrued through the date hereof including audit and legal fees; (aa) the Borrower and the Guarantor shall have obtained all consents, permits and approvals required in connection with the execution, delivery and performance by the Borrower of its obligations hereunder and under the other Facility Documents and such consents, permits and approvals shall continue in full force and effect; (bb) the satisfactory evidence to the Bank that the Borrower and the Guarantor are not in default with respect to any material contractual obligations to which they are a party; (cc) satisfactory evidence that no litigation is pending or threatened against the Borrower or the Guarantor which, if adversely determined, may have a materially adverse effect upon the business, properties, assets, financial or other condition of the Borrower and the Guarantor or on the ability of the Borrower or the Guarantor to perform its obligations hereunder or under the Facility Documents; (dd) satisfactory evidence that the Borrower and the Guarantor are in compliance with all applicable laws and regulations, including without limitation all Environmental Laws, which, if the Borrower and the Guarantor were not in compliance therewith, may have a materially adverse effect upon the business, properties, assets, financial or other condition of the Borrower and the 33 Guarantor or on the ability of the Borrower and the Guarantor to perform its obligations hereunder or under the Facility Documents; and (ee) all legal matters in connection with this financing shall be satisfactory to the Bank and its counsel. Section 3.02. ADDITIONAL CONDITIONS PRECEDENT. The obligation of the Bank to make the Loans pursuant to a borrowing which increases the amount outstanding hereunder (including the initial borrowing) shall be subject to the further conditions precedent that on the date of such Loan: (a) the following statements shall be true and the Bank shall have received a certificate signed by the Chairman of the Board or President or Chief Financial Officer of the Borrower and Guarantor dated the date of such Revolving Credit Loan stating that: (i) the representations and warranties contained in Article 4, in the Guaranty and in Article 2 of the Security Agreement, are true and correct on and as of the date of such Loan as though made on and as of such date; and (ii) no Default or Event of Default has occurred and is continuing, or would result from such Loan; (b) the Bank shall have received the Borrowing Base Certificate; and (c) the Bank shall have received such approvals, opinions or documents as the Bank may reasonably request. Section 3.03. DEEMED REPRESENTATIONS. Each notice of borrowing hereunder and acceptance by the Borrower of the proceeds of such borrowing shall constitute a representation and warranty that the statements contained in Section 3.02(a) are true and correct both on the date of such notice and, unless the Borrower otherwise notifies the Bank prior to such borrowing, as of the date of such borrowing. ARTICLE 4. REPRESENTATIONS AND WARRANTIES. 34 The Borrower and each Guarantor (as appropriate) hereby represent and warrant that: Section 4.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. Each of the Borrower and its Subsidiaries and Guarantor are duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required. Section 4.02. CORPORATE POWER AND AUTHORITY; NO CONFLICTS. The execution, delivery and performance by the Borrower and/or Guarantor of the Facility Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders; (b) contravene its charter or by-laws; (c) violate any provision of, or require any filing (other than the filing of the financing statements contemplated by the Security Agreement), registration, consent or approval under, any law, rule, regulation (including, without limitation, Regulation G, T, U or X of the Board of Governors of the Federal Reserve System as in effect from time to time), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower or any of its Subsidiaries or Affiliates; (d) result in a breach of or constitute a default or require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; (e) result in, or require, the creation or imposition of any Lien (other than as created under the Security Agreement), upon or with respect to any of the properties now owned or hereafter acquired by the Borrower; or (f) cause the Borrower (or any Subsidiary or Affiliate, as the case may be) to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. Section 4.03. LEGALLY ENFORCEABLE AGREEMENTS. Each Facility Document to which the Borrower and/or Guarantor is a party is, or when delivered under this Agreement will be, a legal, valid and binding obligation of the Borrower and/or Guarantor enforceable 35 against the Borrower and/or Guarantor in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally. Section 4.04. LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower and/or Guarantor, threatened, against or affecting the Borrower and/or Guarantor or any of their Subsidiaries before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the condition (financial or otherwise), operations, properties, prospects or business of the Borrower and/or Guarantor or any such Subsidiary or the ability of the Borrower and/or Guarantor to perform its obligations under the Facility Documents to which it is a party. Section 4.05. FINANCIAL STATEMENTS. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries for the fiscal year ended September 30, 1995, and the related consolidated income statement and statements of cash flows and changes in stockholders' equity of the Borrower and its Consolidated Subsidiaries for the fiscal year then ended, and the accompanying footnotes, together with the opinion thereon, of BDO Seidman, LLP, independent certified public accountants, and the interim financial statement of the Borrower and its Consolidated Subsidiaries for the period ended June 30, 1996, copies of each of which have been furnished to the Bank, are complete and correct in all material respects and fairly present the financial condition of the Borrower and its Subsidiaries as at such dates and the results of the operations of the Borrower and its Subsidiaries for the periods covered by such statements, all in accordance with GAAP consistently applied, subject (in the case of the interim financial statements) to normal year-end audit adjustments. There are no liabilities of the Borrower or any of its Subsidiaries, fixed or contingent, which are material but are not reflected in the financial statements or in the notes thereto, other than liabilities arising in the ordinary course of business since September 30, 1995. No information, exhibit or report furnished by the Borrower to the Bank in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading. Since September 30, 1995, there has been no material adverse change in the condition (financial or 36 otherwise), business, operations or prospects of the Borrower or any of its Subsidiaries. Section 4.06. OWNERSHIP AND LIENS. Each of the Borrower and its Subsidiaries has title to, or valid leasehold interests in, all of its properties and assets, real and personal, including the properties and assets, and leasehold interests reflected in the financial statements referred to in Section 4.05 (other than any properties or assets disposed of in the ordinary course of business), and none of the properties and assets owned by the Borrower or any of its Subsidiaries and none of its leasehold interests is subject to any Lien, except as disclosed in such financial statements or as may be permitted hereunder and except for the Lien created by the Security Agreement. Section 4.07. TAXES. Each of the Borrower and its Subsidiaries has filed all tax returns (federal, state and local) required to be filed and has paid all taxes, assessments and governmental charges and levies thereon to be due, including interest and penalties. Section 4.08. ERISA. Each Plan, and, to the best knowledge of the Borrower, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other applicable Federal or state law, and no event or condition is occurring or exists concerning which the Borrower would be under an obligation to furnish a report to the Bank in accordance with Section 5.08(i) hereof. As of the most recent valuation date for each Plan, each Plan was "fully funded", which for purposes of this Section 4.08 shall mean that the fair market value of the assets of the Plan is not less than the present value of the accrued benefits of all participants in the Plan, computed on a Plan termination basis. To the best knowledge of the Borrower, no Plan has ceased being fully funded as of the date these representations are made with respect to any Loan under this Agreement. Section 4.09. SUBSIDIARIES AND OWNERSHIP OF STOCK. Schedule I is a complete and accurate list of the Subsidiaries of the Borrower, showing the jurisdiction of incorporation or organization of each Subsidiary and showing the percentage of the Borrower's ownership of the outstanding stock or other interest of each such 37 Subsidiary. All of the outstanding capital stock or other interest of each such Subsidiary has been validly issued, is fully paid and nonassessable and is owned by the Borrower free and clear of all Liens. Section 4.10. CREDIT ARRANGEMENTS. Schedule II is a complete and correct list of all credit agreements, indentures, purchase agreements, guaranties, Capital Leases and other investments, agreements and arrangements presently in effect providing for or relating to extensions of credit (including agreements and arrangements for the issuance of letters of credit or for acceptance financing) in respect of which the Borrower or any of its Subsidiaries is in any manner directly or contingently obligated; and the maximum principal or face amounts of the credit in question, outstanding and which can be outstanding, are correctly stated, and all Liens of any nature given or agreed to be given as security therefor are correctly described or indicated in such Schedule II. Section 4.11. OPERATION OF BUSINESS. Each of the Borrower and its Subsidiaries possesses all licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted, and neither the Borrower nor any of its Subsidiaries is in violation of any valid rights of others with respect to any of the foregoing, which violation, in any one case or in the aggregate, may reasonably be expected to have a material adverse affect on the consolidated financial condition, operations, business, properties or prospects of the Borrower and its Subsidiaries. Section 4.12. HAZARDOUS MATERIALS. The Borrower and each of its Subsidiaries have obtained all permits, licenses and other authorizations which are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a material adverse effect on the consolidated financial condition, operations, business, properties or prospects of the Borrower and its Subsidiaries. The Borrower and each of its Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations schedules and timetables contained in any applicable Environmental 38 Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply would not have a material adverse effect on the consolidated financial condition, operations, business, properties or prospects of the Borrower and its Subsidiaries. In addition, except as set forth in Schedule III hereto: (a) No notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or threatened by any governmental or other entity with respect to any alleged failure by the Borrower or any of its Subsidiaries to have any permit, license or authorization required in connection with the conduct of the business of the Borrower or any of its Subsidiaries or with respect to any generation, treatment, storage, recycling, transportation, release or disposal, or any release as defined in 42 U.S.C. Section 9601(22) ("RELEASE"), of any substance regulated under Environmental Laws ("HAZARDOUS MATERIALS") generated by the Borrower or any of its Subsidiaries. (b) Neither the Borrower nor any of its Subsidiaries has handled any Hazardous Materials, other than as a generator, on any property now or previously owned or leased by the Borrower or any of its Subsidiaries to an extent that it has, or may reasonably be expected to have, a material adverse effect on the consolidated financial condition, operations, business or prospects taken as a whole of the Borrower and its Subsidiaries; and (i) no polychlorinated biphenyl is or has been present at any property now or previously owned or leased by the Borrower or any of its Subsidiaries; (ii) no asbestos is or has been present at any property now or previously owned or leased by the Borrower or any of its Subsidiaries; (iii) there are no underground storage tanks for Hazardous Materials, active or abandoned, at any property now or previously owned or leased by the Borrower or any of its Subsidiaries; and 39 (iv) no Hazardous Materials have been Released, in a reportable quantity, where such a quantity has been established by statute, ordinance, rule, regulation or order, at, on or under any property now or previously owned by the Borrower or any of its Subsidiaries. (c) Neither the Borrower nor any of its Subsidiaries has transported or arranged for the transportation of any Hazardous Material to any location which is listed on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), listed for possible inclusion on the National Priorities List by the Environmental Protection Agency in the Comprehensive Environmental Response and Liability Information System as provided by 40 C.F.R. Section 300.5 ("CERCLIS") or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against the Borrower or any of its Subsidiaries for clean-up costs, remedial work, damages to natural resources or for personal injury claims, including, but not limited to, claims under CERCLA. (d) No Hazardous Materials generated by the Borrower or any of its Subsidiaries have been recycled, treated, stored, disposed of or Released by the Borrower or any of its Subsidiaries at any location other than those listed in Schedule III hereto. (e) No oral or written notification of a Release of a Hazardous Material has been filed by or on behalf of the Borrower or any of its Subsidiaries and no property now or previously owned or leased by the Borrower or any of its Subsidiaries is listed or proposed for listing on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS or on any similar state list of sites requiring investigation or clean-up. (f) There are no Liens arising under or pursuant to any Environmental Laws on any of the real property or properties owned or leased by the Borrower or any of its Subsidiaries, and no government actions have been taken or are in process which could subject any of such properties to such Liens and neither the Borrower nor any of its Subsidiaries would be required to place any notice or restriction relating to the presence of Hazardous Materials at any property owned by it in any deed to such property. 40 (g) There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by or which are in the possession of the Borrower or any of its Subsidiaries in relation to any property or facility now or previously owned or leased by the Borrower or any of its Subsidiaries which have not been made available to the Bank. Section 4.13. NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS. Each of the Borrower and its Subsidiaries has satisfied all judgments and neither the Borrower nor any of its Subsidiaries is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court, arbitrator or federal, state, municipal or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign. Section 4.14. NO DEFAULTS ON OTHER AGREEMENTS. Neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction which could have a material adverse effect on the business, properties, assets, operations or condition, financial or otherwise, of the Borrower or any of its Subsidiaries, or the ability of the Borrower to carry out its obligations under the Facility Documents to which it is a party. Neither the Borrower nor any of its Subsidiaries is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument material to its business to which it is a party. Section 4.15. LABOR DISPUTES AND ACTS OF GOD. Neither the business nor the properties of the Borrower or of any of its Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance), materially and adversely affecting such business or properties or the operation of the Borrower or such Subsidiary. Section 4.16. GOVERNMENTAL REGULATION. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce Act, the Federal Power Act or 41 any statute or regulation limiting its ability to incur indebtedness for money borrowed as contemplated hereby. Section 4.17. PARTNERSHIPS. Neither the Borrower nor any of its Subsidiaries is a partner in any partnership. Section 4.18. NO FORFEITURE. Neither the Borrower nor any of the Guarantors is engaged in or proposes to be engaged in the conduct of any business or activity which could result in a Forfeiture Proceeding and no Forfeiture Proceeding against any of them is pending or threatened. Section 4.19. SOLVENCY. (a) The present fair saleable value of the assets of the Borrower after giving effect to all the transactions contemplated by the Facility Documents and the funding of all Commitments hereunder exceeds the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of the Borrower and its Subsidiaries as they mature. (b) The property of the Borrower does not constitute unreasonably small capital for the Borrower to carry out its business as now conducted and as proposed to be conducted including the capital needs of the Borrower. (c) The Borrower does not intend to, nor does it believe that it will, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by the Borrower, and of amounts to be payable on or in respect of debt of the Borrower). The cash available to the Borrower after taking into account all other anticipated uses of the cash of the Borrower, is anticipated to be sufficient to pay all such amounts on or in respect of debt of the Borrower when such amounts are required to be paid. (d) The Borrower does not believe that final judgments against it in actions for money damages will be rendered at a time when, or in an amount such that, the Borrower will be unable to satisfy any such judgments promptly in accordance with their terms (taking into account the maximum reasonable amount of such judgments in any such actions and the earliest reasonable time at 42 which such judgments might be rendered). The cash available to the Borrower after taking into account all other anticipated uses of the cash of the Borrower (including the payments on or in respect of debt referred to in paragraph (c) of this Section 4.19), is anticipated to be sufficient to pay all such judgments promptly in accordance with their terms. Section 4.20. PERMITS AND LICENSES. The Borrower, Guarantor and each of their Subsidiaries have all the necessary permits and licenses to lawfully own and operate their businesses. ARTICLE 5. AFFIRMATIVE COVENANTS. So long as the Note shall remain unpaid or the Bank shall have any Commitment under this Agreement, the Borrower and each Guarantor shall: Section 5.01. MAINTENANCE OF EXISTENCE. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence and good standing in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each of its Subsidiaries to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is required. Section 5.02. CONDUCT OF BUSINESS. Continue, and cause each of its Subsidiaries to continue, to engage in an efficient and economical manner in a business of the same general type as conducted by it on the date of this Agreement. Section 5.03. MAINTENANCE OF PROPERTIES. Maintain, keep and preserve, and cause each of its Subsidiaries to maintain, keep and preserve, all material items of its properties, (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. Section 5.04. MAINTENANCE OF RECORDS. Keep, and cause each of its Subsidiaries to keep adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all financial transactions of the Borrower, the Guarantor and their Subsidiaries. 43 Section 5.05. MAINTENANCE OF INSURANCE. Maintain, and cause each of its Subsidiaries to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated, which insurance may provide for reasonable deductibility from coverage thereof. With respect to all such insurance coverage, the Borrower shall cause the Bank to be named additional insured as to all liability coverage and cause the Bank to be named loss payee and additional insured as to all property insurance coverage. The Borrower shall provide to the Bank, promptly upon receipt thereof, evidence of the annual renewal of each such policy. Section 5.06. COMPLIANCE WITH LAWS. Comply, and cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property, except any such taxes, assessments or charges being contested in good faith by appropriate proceedings and for which appropriate reserves have been established. Section 5.07. RIGHT OF INSPECTION. (a) At any reasonable time and from time to time, and upon reasonable notice, permit the Bank or any agent or representative thereof, to examine and make copies and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Subsidiaries and Guarantor, and to discuss the affairs, finances and accounts of the Borrower and any such Subsidiary and Guarantor with any of their respective officers and directors and the Borrower's and Guarantor's independent accountants. (b) In the sole discretion of the Bank, the Bank may reasonably perform field inventory and accounts receivable audits on the Borrower and Guarantor to be performed by an organization acceptable to the Bank one time each year and upon an Event of Default, at the sole cost and expense of the Borrower. The Bank may perform additional field inventory and/or accounts receivable audits upon reasonable notice to the Borrower at the Bank's sole cost and expense. 44 Section 5.08. REPORTING REQUIREMENTS. Borrower shall furnish to the Bank and where applicable shall cause the Guarantor to furnish to the Bank: (a) as soon as available and in any event within one hundred twenty [120] days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and a consolidated income statement and consolidated statements of cash flows and changes in stockholders' equity of the Borrower and its Subsidiaries each on an audited basis for such fiscal year, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the prior fiscal year and all prepared in accordance with GAAP and as to the statements accompanied by an opinion thereon acceptable to the Bank by BDO Seidman, LLP or other independent accountants of national standing and acceptable to the Bank in their sole discretion selected by the Borrower; (b) as soon as available and in any event within sixty (60) days after the end of each of the first three quarters of each fiscal year of the Borrower and its Subsidiaries, a balance sheet of the Borrower as of the end of such quarter and a consolidated income statement of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the previous fiscal year and all internally prepared in accordance with GAAP and certified by the chief financial officer of the Borrower (subject to year-end adjustments); (c) promptly upon receipt thereof, copies of any reports submitted to the Borrower or any of its Subsidiaries or Guarantor, including a copy of the management letter, by independent certified public accountants in connection with examination of the financial statements of the Borrower or any such Subsidiary or Guarantor made by such accountants; (d) simultaneously with the delivery of the annual financial statements referred to above, a certificate of the chief financial officer of the Borrower and Guarantor (i) certifying that to the best of his knowledge no Default or Event of Default has occurred 45 and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (ii) with computations demonstrating compliance with the covenants contained in Article 7; (e) simultaneously with the delivery of the annual financial statements referred to in Section 5.08(a), a certificate of the independent public accountants who audited such statements to the effect that, in making the examination necessary for the audit of such statements, they have obtained no knowledge of any condition or event which constitutes a Default or Event of Default, or if such accountants shall have obtained knowledge of any such condition or event, specifying in such certificate each such condition or event of which they have knowledge and the nature and status thereof; (f) as soon as available and in any event within fifteen (15) days after the end of each month, the monthly accounts receivable aging, inventory reports of the preceding month and Borrowing Base Certificate as of the last business day of the immediately preceding month in a form satisfactory to the Bank. Notwithstanding the foregoing, the Borrower and Guarantors shall provide inventory reporting commencing the month ended June 30, 1997, and each month thereafter which shall include actual work-in-progress and usage (movement) reports, provided however if the Borrower can not input historical data required to prepare usage (movement) reports by June 30, 1997, such reporting shall begin with the month ended November 30, 1997. The usage report shall provide a breakdown of raw materials and finished goods and the most recent usage date for each; (g) promptly after the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower or any of its Subsidiaries or Guarantor which, if determined adversely to the Borrower or such Subsidiary or Guarantor, could have a material adverse effect on the condition (financial or otherwise), properties, prospects, or operations of the Borrower or such Subsidiary or Guarantor; 46 (h) as soon as possible and in any event within two (2) days after the occurrence of each Default or Event of Default a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by the Borrower and/or Guarantor with respect thereto; (i) as soon as possible, and in any event within two (2) days after the Borrower knows or has reason to know that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan have occurred or exist, a statement signed by a senior financial officer of the Borrower setting forth details respecting such event or condition and the action, if any, which the Borrower or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Borrower or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code) and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Borrower or an ERISA Affiliate to terminate any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Borrower or any ERISA Affiliate that 47 results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; (vi) the adoption of an amendment to any Plan that pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Borrower or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (vii) any event or circumstance exists which may reasonably be expected to constitute grounds for the Borrower or any ERISA Affiliate to incur liability under Title IV of ERISA or under Sections 412(c)(11) or 412(n) of the Code with respect to any Plan; and (viii) the Unfunded Benefit Liabilities of one or more Plans increase after the date of this Agreement in an amount which is material in relation to the financial condition of the Borrower and its Subsidiaries, on a consolidated basis; (j) promptly after the request of the Bank, copies of each annual report filed pursuant to Section 104 of ERISA with respect to each Plan (including, to the extent required by Section 104 of ERISA, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information referred to in Section 103) and each annual report filed with respect to each Plan under Section 4065 of ERISA; provided, however, that in the case of a Multiemployer Plan, such annual reports shall be furnished only if they are available to the Borrower or an ERISA Affiliate; 48 (k) promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Bank pursuant to any other clause of this Section 5.08; (l) promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which the Borrower, the Guarantors or any of their Subsidiaries sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements which the Borrower or any such Subsidiary files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (m) promptly after the commencement thereof or promptly after the Borrower and/or any Guarantor knows of the commencement or threat thereof, notice of any Forfeiture Proceeding; and (n) such other information respecting the condition or operations, financial or otherwise, of the Borrower and/or any Guarantor or any of its Subsidiaries as the Bank may from time to time reasonably request. Section 5.09. PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy as and when due and payable or before they become delinquent by their specific terms, or if there are no specific terms, before an action for collection is commenced, as the case may be, all of its material Debt and other material obligations of whatever nature (including any obligation for taxes and wages), except for any such obligation being contested in good faith by appropriate proceedings and for which appropriate reserves have been established. Section 5.10. NOTICE OF SUBSIDIARIES AND/OR AFFILIATES. Borrower shall provide Bank and cause Guarantor to provide Bank with written notice, fifteen (15) days prior to the creation, establishment or acquisition of any Subsidiary or Affiliate of the Borrower and/or Guarantor. The Borrower shall and shall cause Guarantor to have each Subsidiary or Affiliate execute a Guaranty and Security Agreement within two (2) Business Days of said creation, establishment or acquisition and shall furnish a legal 49 opinion of the Borrower and/or Guarantor's legal counsel and all other such documentation as the Bank or its counsel may require. Section 5.11. MAINTENANCE OF LICENSES AND PERMITS. Maintain and cause each of its Subsidiaries to maintain all licenses and permits required of the Borrower, Guarantor and each of their Subsidiaries in order to lawfully own and operate their businesses. Section 5.12 CONTINUED PERFECTION OF LIEN AND SECURITY AGREEMENT. Record or file or rerecord or refile the Facility Documents or a financing statement or any other filing or recording or refiling or rerecording in each and every office where and when necessary to preserve and perfect the security interests of the Facility Documents. Section 5.13. NOTICE OF ADVERSE CHANGE. Promptly, but in any event not later than one Banking Day after any change or information shall have come to the attention of the Chief Financial Officer of the Borrower, Guarantor and/or any of their Subsidiaries, notify the Bank in writing of (a) any material adverse change in the business or the operation, prospects, properties or assets or to the condition, financial or otherwise, of the Borrower, Guarantor and/or any of their Subsidiaries disclosing the nature thereof, and (b) any information which indicates that any financial statements which are the subject of any representation contained in this Agreement, or which are furnished to the Bank pursuant to this Agreement, fail, in any material respect, to present fairly the financial condition and results of operations purported to be presented therein, disclosing the nature thereof. ARTICLE 6. NEGATIVE COVENANTS. So long as the Revolving Credit Note shall remain unpaid or the Bank shall have any Commitment under this Agreement, the Borrower and/or Guarantor shall not: Section 6.01. DEBT. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist any Debt without prior written consent from the Bank, except: 50 (a) Debt of the Borrower under this Agreement or the Revolving Credit Note or any other Debt of the Borrower or Guarantors to the Bank; (b) Debt described in Section 4.10, to be scheduled satisfactory to the Bank, but no renewals, extensions or refinancing thereof, provided however that any refinance shall be permitted provided there is no increase in the aggregate amount of such debt or no increase in the amount of the scheduled payments; (c) Debt subordinated to the Bank in a form and substance satisfactory to the Bank and with the prior written consent of the Bank; (d) Unsecured indebtedness of a Guarantor owing to the Borrower or another Guarantor and unsecured indebtedness of the Borrower owing to a Guarantor; (e) Debt of the Borrower to any such Subsidiary or of any Subsidiary to the Borrower or another such Subsidiary; (f) Debt of the Borrower or any such Subsidiary secured by purchase money Liens permitted by Section 6.03; (g) The Borrower's and its Subsidiaries unsecured accounts payable to trade creditors for goods or services which are not aged more than ninety (90) days from billing date and current operating liabilities (other than for borrowed money) which are not more than ninety (90) days past due, in each case incurred in the ordinary course of business and paid within the specified time, unless contested in good faith and by appropriate proceedings or as agreed to by the specific trade creditor. Section 6.02. GUARANTIES, ETC. Assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable, or permit any of its Subsidiaries to assume, guarantee, endorse or otherwise be or become directly or indirectly responsible or liable (including, but not limited to, an agreement to purchase any obligation, stock, assets, goods or services or to supply or advance any funds, asset, goods or services, or an agreement to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss) for the obligations of any Person, 51 except: (a) guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (b) existing guaranties, to be scheduled satisfactory to the Bank; and (c) the guaranty of indebtedness hereunder or any other indebtedness to the Bank. Section 6.03. LIENS. Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien, upon or with respect to any of its properties, now owned or hereafter acquired, except: (a) Liens securing the Loans hereunder or any other Liens granted in favor of the Bank; (b) Liens for taxes or assessments or other government charges or levies, statutory Liens or deposits under Social Security if not yet due and payable or if due and payable if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained in conformity with GAAP; (c) Liens imposed by law, such as mechanic's, supplier's, materialmen's, landlord's, warehousemen's and carrier's Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are not past due or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; (d) Liens, pledges or deposits under worker's compensation, unemployment insurance, social security or similar legislation (other than ERISA); (e) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, or other similar obligations arising in the ordinary course of business; (f) judgment and other similar Liens arising in connection with court proceedings; provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; 52 (g) easements, rights-of-way, restrictions and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by the Borrower or any such Subsidiary of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (h) purchase money Liens on any property hereafter acquired or the assumption of any Lien on property existing at the time of such acquisition, or a Lien incurred in connection with any conditional sale or other title retention agreement or a Capital Lease; provided that: (i) any property subject to any of the foregoing is acquired by the Borrower or any such Subsidiary in the ordinary course of its business and the Lien on any such property is created contemporaneously with such acquisition; (ii) each such Lien shall attach only to the property so acquired and fixed improvements thereon and shall not exceed the lesser of the purchase price or the fair market value of the property acquired; (iii) the Debt secured by any such Liens shall not exceed $100,000.00 at any time outstanding in the aggregate; (iv) the obligations secured by such Lien are permitted by the provisions of Section 6.01; (v) no other covenants are violated; and (i) Liens existing on the date hereof and described in Section 4.10 herein, not to be renewed or rescheduled. Section 6.04. INVESTMENTS. Make, or permit any of its Subsidiaries to make, any loan or advance to any Person or purchase or otherwise acquire, or permit any such Subsidiary to purchase or otherwise acquire, any capital stock, assets (other than purchases of assets in the ordinary course of business), obligations or other securities of, make any capital contribution to, or otherwise invest in, or acquire any interest in, any Person without prior written consent from the Bank, except: (a) direct obligations of the United States of America or any agency thereof with maturities 53 of one year or less from the date of acquisition; (b) commercial paper of a domestic issuer rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc.; (c) certificates of deposit in U.S. Dollars with maturities of one year or less from the date of acquisition issued by any commercial bank operating within the United States of America having capital and surplus in excess of $1,000,000,000.00; (d) for stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to the Borrower or any such Subsidiary; (e) any Acceptable Acquisition permitted by Section 6.10; (f) money market funds with assets of $2,500,000,000.00 or more; (g) tax exempt securities maturing within one (1) year rated A or better by Standard & Poor's Corporation or Moody's Investors Service, Inc.; (h) loans and advances from the Borrower to any Guarantor or (i) purchases of warrants permitted by Section 6.05. Section 6.05. DIVIDENDS. Declare or pay any dividends, purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, or make any distribution of assets to its stockholders as such whether in cash, assets or in obligations of the Borrower, or allocate or otherwise set apart any sum for the payment of any dividend or distribution on, or for the purchase, redemption or retirement of any shares of its capital stock, or make any other distribution by reduction of capital or otherwise in respect of any shares of its capital stock or permit any of its Subsidiaries to purchase or otherwise acquire for value any stock of the Borrower or another such Subsidiary, except that Borrower may redeem warrants in an amount not to exceed $100,000.00 in any fiscal year provided that no Default or Event of Default exists or would result therefrom and except dividends from Subsidiaries paid directly to the Borrower. Section 6.06. SALE OF ASSETS. Sell, lease, assign, transfer or otherwise dispose of or enter into any sale leaseback transaction, or permit any of its Subsidiaries to sell, lease, assign, transfer or otherwise dispose of or enter into any sale leaseback transaction of any of its now owned or hereafter acquired assets except: (a) for inventory disposed of in the ordinary course of business; (b) the sale or other disposition of assets no longer used or useful in the conduct of its business; and (c) that any such Subsidiary may sell, lease, assign, or otherwise transfer its assets to the Borrower. 54 Section 6.07. STOCK OF SUBSIDIARIES, ETC. Sell or otherwise dispose of any shares of capital stock of any of its Subsidiaries or permit any such Subsidiary to issue any additional shares of its capital stock, except directors' qualifying shares. Section 6.08. TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate or permit any of its Subsidiaries to enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would obtain in a comparable arm's length transaction with a Person not an Affiliate. Section 6.09. MERGERS, ETC. Merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, or acquire all or substantially all of the assets or the business of any Person (or enter into any agreement to do any of the foregoing), or permit any of its Subsidiaries to do so except: (a) that upon thirty (30) days prior written notice to the Bank, any Guarantor may merge with any other Guarantor or with the Borrower provided that the Borrower is the surviving entity, and; (b) for Acceptable Acquisitions as contemplated below in Section 6.10. Section 6.10. ACQUISITIONS. Make any Acquisition without the prior written consent from the Bank other than Acceptable Acquisitions. "Acceptable Acquisitions" shall be defined as those acquisitions of the stock or assets (excluding real property) of another person or entity of any kind, which meet the following criteria: (i) the Borrower is the surviving entity, (ii) the proposed acquiree is in the same general line of business as the Borrower and the Guarantor (or the assets to be acquired are utilized in the same general line of business as the Borrower and the Guarantor), (iii) the proposed acquiree is incorporated or organized in the United States, (iv) the acquisition is to be non- 55 hostile in nature, (v) prior to and immediately following such acquisition, there shall not be a Default or Event of Default under the terms of this Agreement, (vi) all third party consents and approvals necessary in connection with the acquisition shall have been obtained, (vii) evidence that such stock or assets are to be purchased free and clear of any liens or encumbrances other than any liens or encumbrances permitted under this Agreement and, in the case of stock, free of any restrictions other than those acceptable to the Bank, (viii) if the proposed acquiree becomes a Subsidiary of the Borrower (1) the Bank and its counsel shall be satisfied with all issues relating to consideration for such entity to guaranty and pledge all of its assets as Collateral and (2) such Subsidiary shall immediately (a) execute and deliver its Guarantee of the Borrower's obligations under the Revolving Credit Commitment in form and substance satisfactory to the Bank and its counsel and (b) pledge all of its assets as Collateral to secure the Borrower's obligations under the Revolving Credit Commitment and shall execute all such documentation required by the Bank to perfect a first priority security interest in such Collateral, all to be in form and substance satisfactory to the Bank and its counsel; (ix) evidence that the proposed acquiree is in compliance with all environmental, federal, state and local laws, rules and regulations with respect to all real estate which is to be acquired by the Borrower; and (x) the aggregate consideration to be paid by the Borrower (including without limitation, cash, stock, transaction costs, guarantees and other contingent obligations, assumed liabilities, compensation to be paid to former shareholders of the proposed acquiree pursuant to any employment agreements, consulting agreements or non-compete agreements, fees, earn-out provisions, any deferred portions of the purchase price or any other costs paid in connection with the acquisition) (collectively, "Consideration") does not exceed $2,000,000.00 in aggregate during the term of this Agreement. The Bank shall have the right in its sole discretion to reset the financial covenants to reflect the effects of the acquisition immediately upon the consummation of said acquisition and the Borrower and the Guarantors will execute any amendment or documents deemed necessary by the Bank and its counsel. In addition to all Acquisitions meeting the above criteria, the Bank shall have received prior to the consummation of said Acceptable Acquisition, for its satisfactory review and approval, the following: (i) copies of all documentation (including but not limited to financial information and otherwise with respect to the 56 Borrower, the Guarantors, the proposed acquiree and the proposed transaction, in a level of detail satisfactory to the Bank, including evidence of compliance with this Agreement) related to the Acceptable Acquisitions as may be required by the Bank; (ii) (a) evidence that the Acquisitions shall not double the Consolidated Total Liabilities (including non-perpetual preferred stock) and shall not result in a leverage ratio as measured by Consolidated Total Liabilities (including non-perpetual preferred stock) to Consolidated Total Assets (the "Leverage Ratio") higher than 50% (for the purposes hereof, Consolidated Total Liabilities and Consolidated Total Assets shall be of the Borrower and its Subsidiaries); or (b) evidence that the acquisition shall not result in a Leverage Ratio higher than 75% and shall not cause 25% or more of the Consolidated Total Liabilities (including non-perpetual preferred stock) after the acquisition to be derived from past or present buyouts, acquisitions or recapitalizations (for the purposes hereof, Consolidated Total Liabilities and Consolidated Total Assets shall be of the Borrower and its Subsidiaries); and (iii) such other information, documentation, information (financial or otherwise) or certificates as the Bank shall reasonably request, all in form and substance satisfactory to the Bank. Section 6.11. NO ACTIVITIES LEADING TO FORFEITURE. Neither the Borrower nor any of its Subsidiaries or Affiliates shall engage in, or propose to be engaged in, the conduct of any business or activity which could result in a Forfeiture Proceeding. Section 6.12. CHANGE IN SENIOR MANAGEMENT: Make any change in the Chairman of the Board or President of the Borrower or any of its Subsidiaries or Affiliates without the written consent of the Bank. Section 6.13. SALE OF NOTES/ACCOUNTS RECEIVABLE. Sell, transfer, discount or otherwise dispose of notes, accounts receivable or other rights to receive payment, with or without recourse, except for collection in the ordinary course of business. Section 6.14. PREPAYMENT OF OUTSTANDING DEBT. Prepay any outstanding Debt, in whole or in part, except for: i) any Debt owed to the Bank; and ii) as permitted in Section 6.01(b). ARTICLE 7. FINANCIAL COVENANTS. 57 So long as the Revolving Credit Note shall remain unpaid or the Bank shall have any Commitment under this Agreement: Section 7.01. CURRENT RATIO. The Borrower and its Subsidiaries shall maintain a minimum ratio of Consolidated Current Assets of the Borrower and its Subsidiaries to Consolidated Current Liabilities of the Borrower and its Subsidiaries (including, without limitation, all outstanding Revolving Credit Loans) of 1.50 to 1.0 at any time. Section 7.02. DEBT SERVICE RATIO. The Borrower and its Subsidiaries shall maintain a minimum Consolidated Debt Service Ratio of 1.25 to 1.0 at any time. Section 7.03. LEVERAGE RATIO. The Borrower shall maintain a ratio of Consolidated Total Liabilities (excluding subordinated debt, if any) to Consolidated Tangible Net Worth (plus subordinated debt, if any) of not greater than 1.50 to 1.0 at any time. ARTICLE 8. EVENTS OF DEFAULT. Section 8.01. EVENTS OF DEFAULT. Any of the following events shall be an "Event of Default": (a) the Borrower shall: (i) fail to pay the principal of or interest on the Note as and when due and payable; or (ii) fail to pay any fee or other amount due hereunder as and when due and payable; or (iii) fail to pay the principal of or interest on any current or future Debt owed to the Bank; or (b) any representation or warranty made or deemed made by the Borrower in this Agreement or in any other Facility Document or by Guarantor in any Facility Document to which it is a party or which is contained in any certificate, document, opinion, financial or other statement furnished at any time under or in connection with any Facility Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) the Borrower shall: (i) fail to perform or observe any term, covenant or agreement contained in Section 2.04, 2.21, 5.07, 5.08, 5.10, 5.11, 5.12 or Articles 6 or 7; or (ii) fail to perform or observe any term, covenant or agreement on its part to be 58 performed or observed in any Facility Document and such failure shall continue for 15 consecutive days; or (d) the Borrower or any Guarantor or any Affiliate or their respective Subsidiaries shall: (i) fail to pay any indebtedness in excess of $10,000.00 in the aggregate (other than the Note), including but not limited to indebtedness for borrowed money, of the Borrower, such Guarantor or such Affiliate or Subsidiary, as the case may be, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise); or (ii) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such indebtedness, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, after the giving of notice or passage of time, or both, the maturity of such indebtedness, whether or not such failure to perform or observe shall be waived by the holder of such indebtedness; or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) the Borrower, Guarantor or any Affiliate or their respective Subsidiaries: (i) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as such debts become due; or (ii) shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (iii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (iv) shall have had any such petition or application filed or any such proceeding shall have been commenced, against it, in which an adjudication or appointment is made or order for relief is entered, or which petition, application or proceeding remains undismissed for a period of 30 days or more; or shall be the subject of any proceeding under which its assets may be subject to seizure, forfeiture or divestiture; or (v) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (vi) 59 shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of 30 days or more; or (f) one or more final judgments, decrees or orders for the payment of money in excess of $50,000.00 in the aggregate shall be rendered against the Borrower, or Guarantor or any of their respective Subsidiaries and such judgments, decrees or orders shall continue unsatisfied and in effect for a period of 30 consecutive days without being vacated, discharged, satisfied or stayed or bonded pending appeal; or (g) any event or condition shall occur or exist with respect to any Plan or Multiemployer Plan concerning which the Borrower is under an obligation to furnish a report to the Bank in accordance with Section 5.08(i) hereof and as a result of such event or condition, together with all other such events or conditions, the Borrower or any ERISA Affiliate has incurred or in the opinion of the Bank is reasonably likely to incur a liability to a Plan, a Multiemployer Plan, the PBGC, or a Section 4042 Trustee (or any combination of the foregoing) which is material in relation to the financial position of the Borrower and its Subsidiaries, on a consolidated basis; or (h) the Unfunded Benefit Liabilities of one or more Plans have increased after the date of this Agreement in an amount which is material (as specified in Section 8.01(g) hereof); or (i) the Guaranty shall at any time after its execution and delivery and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Guarantor or the Guarantor shall deny it has any further liability or obligation thereunder or shall fail to perform its obligations thereunder; or (j) the Security Agreement shall at any time after its execution and delivery and for any reason cease: (A) to create a valid and perfected first priority security interest in and to the property purported to be subject to such Agreement; or (B) to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Grantor or the Grantor shall deny it has any further liability or obligation under the Security Agreement or the Grantor shall fail to perform any of its obligations thereunder; or 60 (k) if Borrower, Guarantor and/or their Subsidiaries shall materially alter the nature of their business; or (l) if Borrower, Guarantor and/or their Subsidiaries shall change their fiscal year ends; or (m) if Borrower, Guarantor and/or their Subsidiaries shall change their tax status from a "C" corporation; or (n) if Borrower, Guarantor and/or their Subsidiaries shall change accounting treatments and reporting practices except as otherwise required or permitted by changes in GAAP; or (o) if the Borrower or Guarantor shall incur a consolidated net loss (which shall be calculated inclusive of extraordinary losses in any period but exclusive of extraordinary gains in any period) for any fiscal quarter or any fiscal year; or (p) if there shall occur a Change In Control of the Borrower or any Guarantor; or (q) if there is a default under the Declaration of Restrictions. Section 8.02. REMEDIES. If any Event of Default shall occur and be continuing, the Bank may, by notice to the Borrower, (a) declare the Commitment to be terminated, whereupon the same shall forthwith terminate, and (b) declare the outstanding principal of the Note, all interest thereon and all other amounts payable under this Agreement and the Note to be forthwith due and payable, whereupon the Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided that, in the case of an Event of Default referred to in Section 8.01(e) above, the Commitment shall be immediately terminated, and the Note, all interest thereon and all other amounts payable under this Agreement shall be immediately due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. Section 8.03. LOCK BOX ARRANGEMENT. If any Event of Default shall occur, the Bank may, in addition to any and all other 61 remedies afforded to the Bank as per the terms of the Facility Documents, in its sole and absolute discretion, require the Borrower to commence a lock-box account arrangement with the Bank, on terms and conditions satisfactory to the Bank in all respects. ARTICLE 9. MISCELLANEOUS. Section 9.01. AMENDMENTS AND WAIVERS. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or modified only by an instrument in writing signed by the Borrower and the Bank, and any provision of this Agreement may be waived only by an instrument signed by the Borrower and the Bank. No failure on the part of the Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Section 9.02. USURY. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Agreement and the Note shall be subject to the limitation that payments of interest shall not be required to the extent that receipt thereof would be contrary to provisions of law applicable to the Bank limiting rates of interest which may be charged or collected by the Bank. Section 9.03. EXPENSES. The Borrower shall reimburse the Bank on demand for all costs, expenses, and charges (including, without limitation, reasonable fees and charges of external legal counsel for the Bank and costs allocated by its internal legal department) incurred by the Bank in connection with the preparation, performance, or enforcement of this Agreement or the Note, provided that the Borrower shall only be liable for up to $7,500.00, plus disbursements, of such legal fees in connection with the preparation of the Facility Documents. The Borrower agrees to indemnify the Bank and its directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to any actual or proposed use by the Borrower or any 62 Subsidiary of the proceeds of the Loans, including without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings, but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. Section 9.04. SURVIVAL. The obligations of the Borrower under Sections 2.13, 2.15 and 9.03 shall survive the repayment of the Loans and the termination of the Commitment. Section 9.05. ASSIGNMENT; PARTICIPATIONS. (a) This Agreement shall be binding upon, and shall inure to the benefit of, the Borrower, the Bank and their respective successors and assigns, except that the Borrower may not assign or transfer its rights or obligations hereunder. The Bank may assign, or sell participations in, all or any part of the Revolving Credit Commitment or any Loan to another bank or other entity which is not a competitor of the Borrower or its Subsidiaries, in which event (i) in the case of an assignment, upon notice thereof by the Bank to the Borrower, the assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights, benefits and obligations as it would have if it were the Bank hereunder; and (ii) in the case of a participation, the participant shall have no rights under the Facility Documents. The agreement executed by the Bank in favor of the participant shall not give the participant the right to require the Bank to take or omit to take any action hereunder except action directly relating to (i) the extension of a payment date with respect to any portion of the principal of or interest on any amount outstanding hereunder allocated to such participant, (ii) the reduction of the principal amount outstanding hereunder or (iii) the reduction of the rate of interest payable on such amount or any amount of fees payable hereunder to a rate or amount, as the case may be, below that which the participant is entitled to receive under its agreement with the Bank. The Bank may furnish any information concerning the Borrower in the possession of the Bank from time to time to assignees and participants (including prospective assignees and participants); (b) In addition to the assignments and participations permitted under paragraph (a) above, the Bank may assign and pledge all or any portion of its Loans and Note to (i) any affiliate of the Bank or (ii) any Federal Reserve Bank as collateral security 63 pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the Bank from its obligations hereunder. Section 9.06. NOTICES. Unless the party to be notified otherwise notifies the other party in writing as provided in this Section, and except as otherwise provided in this Agreement, notices shall be given to the Bank and to the Borrower by ordinary mail or telex addressed to such party at its address on the signature page of this Agreement. Notices shall be effective: (a) if given by mail, 72 hours after deposit in the mails with first class postage prepaid, addressed as aforesaid; and (b) if given by telex, when the telex is transmitted to the telex number as aforesaid; provided that notices to the Bank shall be effective upon receipt. Section 9.07. SETOFF. The Borrower agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim the Bank may otherwise have, the Bank shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final) held by it or any of its Affiliates for the account of the Borrower at any of the Bank's or any of its Affiliates offices, in Dollars or in any other currency, against any amount payable by the Borrower under this Agreement or the Note which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower thereof; provided that the Bank's failure to give such notice shall not affect the validity thereof. SECTION 9.08. JURISDICTION; IMMUNITIES. (A) THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NASSAU OR SUFFOLK COUNTIES OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTE, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE BORROWER AT ITS ADDRESS SPECIFIED IN SECTION 9.06. THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER 64 PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. THE BORROWER FURTHER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT AGAINST THE BANK SHALL BE BROUGHT ONLY IN NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NASSAU OR SUFFOLK COUNTIES. EACH OF THE PARTIES HERETO WAIVE ANY RIGHT IT MAY HAVE TO JURY TRIAL. (b) Nothing in this Section 9.08 shall affect the right of the Bank to serve legal process in any other manner permitted by law or affect the right of the Bank to bring any action or proceeding against the Borrower or its property in the courts of any other jurisdictions. (c) To the extent that the Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether from service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Borrower hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the Note. Section 9.09. TABLE OF CONTENTS; HEADINGS. Any table of contents and the headings and captions hereunder are for convenience only and shall not affect the interpretation or construction of this Agreement. Section 9.10. SEVERABILITY. The provisions of this Agreement are intended to be severable. If for any reason any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. Section 9.11. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. Section 9.12. INTEGRATION. The Facility Documents set forth the entire agreement between the parties hereto relating to the 65 transactions contemplated thereby and supersede any prior oral or written statements or agreements with respect to such transactions. SECTION 9.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. ALLIED DEVICES CORPORATION By:_____________________________________ Mark Hopkinson, Chairman of the Board Address for Notices: 2365 Milburn Avenue Baldwin, New York 11510 66 THE CHASE MANHATTAN BANK By:_____________________________________ Stephen M. Zajac, Assistant Vice President Lending Office and Address for Notices: The Chase Manhattan Bank 395 North Service Road Melville, New York 11747 STATE OF NEW YORK) SS.: COUNTY OF SUFFOLK) On this 4th day of September, 1996, before me personally came Mark Hopkinson, to me known, who being by me duly sworn, did depose and say that he resides at 340 East 57th Street, Apt 3b, New York, New York 10022; that he is the Chairman of the Board of ALLIED DEVICES CORPORATION, the corporation described in and which executed the foregoing instrument; that by Order of the Board of Directors of said corporation, he signed his name thereto. __________________________ Notary Public STATE OF NEW YORK) ) SS. COUNTY OF SUFFOLK) On this 4th day of September, 1996, before me personally came Stephen M. Zajac, to me known , who being by me duly sworn did depose and say that he resides at 395 North Service Road, Melville, New York; that he is the Assistant Vice President of THE CHASE MANHATTAN BANK, the corporation described in and which executed the foregoing instrument; that he signed his name thereto by order of the Board of Directors of said corporation. _____________________________ Notary Public 67 EXHIBIT A PROMISSORY NOTE $4,000,000.00 Melville, New York September 4, 1996 For value received, ALLIED DEVICES CORPORATION, a corporation organized under the laws of the State of Nevada (the "Borrower"), having an office at 2365 Milburn Avenue, Baldwin, New York 11510 hereby promises to pay to the order of THE CHASE MANHATTAN BANK (the "Bank") at the office of the Bank, at 395 North Service Road, Melville, New York 11747, for the account of the Lending Office of the Bank, the principal sum of Four Million and 00/100 Dollars---$4,000,000.00 or, if less, the amount loaned by the Bank to the Borrower pursuant to the Revolving Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the date(s) and in the manner provided in said Revolving Credit Agreement. The Borrower also promises to pay interest on the unpaid principal balance hereof, for the period such balance is outstanding, at said principal office for the account of said Lending Office, in like money, at the rates of interest as provided in the Revolving Credit Agreement referred to below, on the date(s) and in the manner provided in said Revolving Credit Agreement. This Note shall mature on the Revolving Credit Termination Date. The date and amount of each type of Loan made by the Bank to the Borrower under the Revolving Credit Agreement referred to below, and each payment of principal thereof, shall be recorded by the Bank on its books and, prior to any transfer of this Note (or, at the discretion of the Bank, at any other time), endorsed by the Bank on the schedule attached hereto or any continuation thereof, provided however that failure of the Bank to set forth such Revolving Credit Loans, payments or other information on the attached schedule shall not in any manner affect the liability of the Borrower to repay the Revolving Credit Loans made by the Bank in accordance with this Note. This is the Note referred to in that certain Revolving Credit Agreement (as amended from time to time the "Revolving Credit 68 Agreement") dated as of September 4, 1996 between the Borrower and the Bank and evidences the Loans made by the Bank thereunder. All terms not defined herein shall have the meanings given to them in the Revolving Credit Agreement. The Revolving Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain Events of Default and for prepayments on the terms and conditions specified therein. The Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Note. This Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York. ALLIED DEVICES CORPORATION By:_____________________________________ Mark Hopkinson, Chairman of the Board STATE OF NEW YORK) SS.: COUNTY OF SUFFOLK) On this 4th day of September, 1996, before me personally came Mark Hopkinson, to me known, who being by me duly sworn, did depose and say that he resides at 340 East 57th Street, Apt 3b, New York, New York 10022; that he is the Chairman of the Board of ALLIED DEVICES CORPORATION, the corporation described in and which executed the foregoing instrument; that by Order of the Board of Directors of said corporation, he signed his name thereto. __________________________ Notary Public 69
Type Type Amount of of Maturity Amount of Balance Date of Loan Loan Interest Date Payment Outstanding Notation by - ---- ------- ---- -------- ---- ------- ----------- -----------
70 EXHIBIT B GUARANTY OF PAYMENT Melville, New York September 4, 1996 WHEREAS, Allied Devices Corporation, a Nevada Corporation having an office at 2365 Milburn Avenue, Baldwin, New York 11510 (the "BORROWER"), has applied to THE CHASE MANHATTAN BANK, a New York banking corporation having an office at 395 North Service Road, Melville, New York 11747 (together with any of its subsidiaries and/or affiliates and wherever located the "BANK") for loans in the maximum principal sum of $4,000,000.00 (the "LOAN"), which Loan will be evidenced by the Note, and advanced pursuant to the Revolving Credit Agreement, all as described and defined in Exhibit A attached hereto; WHEREAS, Bank is willing to make the Loan to the Borrower only if the undersigned executes and delivers this Guaranty and guarantees payment to Bank of the Debt (as herein defined) in the manner hereinafter provided; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, and in order to induce Bank to make the Loan to the Borrower, the undersigned hereby acknowledges, agrees and confirms that all of the above recitals are true, correct and complete and hereby covenants and agrees with Bank as follows: 1. The undersigned guarantees jointly and severally, absolutely, irrevocably and unconditionally, to Bank the performance and observance of every agreement and condition contained in the Loan Documents (hereinafter defined) and the full and punctual payment when due of all the Debt notwithstanding that advances of the Loan have been, or may be, made in the face of a default under the Loan Documents or otherwise not in compliance with the lending criteria set forth in the Loan Agreement. The term ``DEBT'' as used in this Guaranty shall mean all liabilities of the Borrower to Bank of whatever nature, whether now existing or 71 hereafter incurred, whether created directly or acquired by Bank, by assignment or otherwise, whether matured or unmatured and whether absolute or contingent, all principal, interest, additional interest (including specifically all interest accruing from and after the commencement of any case, proceeding or action under any existing or future laws relating to bankruptcy, insolvency or similar matters with respect to the Borrower) and other sums of any nature whatsoever which may or shall become due and payable pursuant to the provisions, including but not limited to, of the Note, the Revolving Credit Agreement or any other document or instrument now or hereafter executed and/or delivered in connection therewith or otherwise with respect to the Loan (said Note, Revolving Credit Agreement and other documents and instruments, collectively, the ``LOAN DOCUMENTS'') (all of the above unaffected by modification thereof in any bankruptcy or insolvency proceeding), and even though Bank may not have an allowed claim for the same against the Borrower as a result of any bankruptcy or insolvency proceeding. 2. The undersigned agrees that the undersigned shall indemnify and hold Bank harmless and defend Bank at the undersigned's sole cost and expense against any loss or liability, cost or expense (including, but not limited to, reasonable attorneys' fees and disbursements of Bank's counsel, whether in-house staff, retained firms or otherwise), and all claims, actions, procedures and suits arising out of or in connection with: (a) any ongoing matters arising out of the transaction contemplated hereby, this Guaranty, the Debt, the Note, the Revolving Credit Agreement or any other Loan Document; (b) any amendment to, or restructuring of, this Guaranty, the Debt, the Note, the Revolving Credit Agreement or any of the other Loan Documents; and (c) any and all lawful action that may be taken by Bank in connection with the enforcement of the provisions of this Guaranty, the Note, the Revolving Credit Agreement or any of the other Loan Documents, whether or not suit is filed in connection with the same, or in connection with the undersigned, the Borrower and/or any Subsidiary or Affiliate (as defined in the Revolving Credit Agreement) of any thereof becoming a party to a voluntary or 72 involuntary federal or state bankruptcy, insolvency or similar proceeding. All sums expended by Bank shall be payable on demand and, until reimbursed by the Borrower or by the undersigned pursuant hereto, shall bear interest at the Default Rate, as set forth in the Revolving Credit Agreement. 3. The undersigned hereby represents and warrants that all representations and warranties contained in the Loan Documents are true and correct, that there has occurred no event of default under the Loan Documents, that all financial statements of the undersigned heretofore delivered to Bank by or on behalf of the undersigned are true and correct in all material respects and fairly present the financial condition of the undersigned as of the respective dates thereof, and no material adverse change has occurred in the financial conditions reflected therein since the respective dates thereof. In addition, the undersigned covenants that so long as any portion of the Debt remains outstanding and unpaid, the undersigned will, unless otherwise consented to in writing by Bank: (a) furnish to Bank, as soon as available, but in any event within one hundred twenty (120) days next following the end of each fiscal year of the undersigned, executed tax returns, including all supporting schedules, for such fiscal year and containing a fully itemized statement of profit and loss and of surplus and a balance sheet, which financial statements shall be in form and substance reasonably satisfactory to Bank, such statement accompanied by a certificate signed by the undersigned certifying on the date thereof that: (i) such financial statement is true, correct and complete and (ii) either that no default nor event which upon notice or lapse of time or both would constitute a default has occurred hereunder or, if such default exists, the nature thereof and the period of time it has existed (a ``CERTIFICATION''); and (b) furnish to Bank, within ten (10) days after request, such further detailed financial and other information (including, but not limited to, financial statements) as may be reasonably requested by Bank with respect to the undersigned, or any affiliate of, or entity controlled by the undersigned, as of a date not earlier than that specified by Bank in such request, together with a Certification with respect thereto. 73 4. In addition to any right available to Bank under applicable law or any other agreement, the undersigned hereby gives to Bank a continuing lien on, security interest in and right of set-off against all moneys, securities and other property of the undersigned and the proceeds thereof, now on deposit or now or hereafter delivered, remaining with or in transit in any manner to Bank, its correspondents, participants or its agents from or for the undersigned, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into possession of Bank in any way, and also, any balance of any deposit account and credits of the undersigned with, and any and all claims of the undersigned against, Bank at any time existing, as collateral security for the payment of the Debt and all of the other obligations of the undersigned under this Guaranty, including fees, contracted with or acquired by Bank, whether joint, several, absolute, contingent, secured, matured or unmatured (for the purposes of this paragraph 4 and paragraphs 6, 8 and 16 below, collectively, the "LIABILITIES") , hereby authorizing Bank at any time or times, without prior notice, to apply such balances, credits or claims, or any part thereof, to such Liabilities in such amounts as it may select, whether contingent, unmatured or otherwise and whether any collateral security therefore is deemed adequate or not. The collateral security described herein shall be in addition to any collateral security described in any separate agreement executed by the undersigned. Bank, in addition to any right available to it under applicable law or any other agreement, shall have the right, at its option, to immediately set off against any Liabilities all monies owed by Bank in any capacity to the undersigned, whether or not due, and Bank shall, at its option, be deemed to have exercised such right to set off and to have made a charge against any such money immediately upon the occurrence of any events of default set forth below, even though such charge is made or entered on the books of Bank subsequent to those events. 5. All moneys available to Bank for application in payment or reduction of the Debt may be applied by Bank in such manner and in such amounts and at such time or times and in such order, priority and proportions as Bank may see fit to the payment or reduction of such portion of the Debt as Bank may elect. 6. The undersigned hereby expressly agrees that this Guaranty is independent of, and in addition to, all collateral granted, pledged or assigned under the Loan Documents, and the 74 undersigned hereby consents that from time to time, before or after any default by the Borrower, with or without further notice to or assent from the undersigned: (a) any security at any time held by or available to Bank for any obligation of the Borrower, or any security at any time held by or available to Bank for any obligation of any other person or party primarily, secondarily or otherwise liable for all or any portion of the Debt, any other Liabilities and/or any other obligations of the Borrower or any other person or party, other than Bank, under any of the Loan Documents (``OTHER OBLIGATIONS''), including any guarantor of the Debt and/or any of such Other Obligations, may be accelerated, settled, exchanged, surrendered or released and Bank may fail to set off and may release, in whole or in part, any balance of any deposit account or credit on its books in favor of the Borrower, or of any such other person or party; (b) any obligation of the Borrower, or of any such other person or party, may be changed, altered, renewed, extended, continued, accelerated, surrendered, compromised, settled, waived or released in whole or in part, or any default with respect thereto waived; and (c) Bank may extend further credit in any manner whatsoever to the Borrower, and generally deal with the Borrower or any of the abovementioned security, deposit account, credit on its books or other person or party as Bank may see fit; and the undersigned shall remain bound in all respects under this Guaranty, without any loss of any rights by Bank and without affecting the liability of the undersigned, notwithstanding any such exchange, surrender, release, change, alteration, renewal, extension, continuance, compromise, waiver, inaction, extension of further credit or other dealing. In addition, all moneys available to Bank for application in payment or reduction of the Debt and/or any Other Obligations may be applied by Bank in such manner and in such amounts and at such time or times and in such order, priority and proportions as Bank may see fit. 7. The undersigned hereby waives: (a) notice of acceptance of this Guaranty and of the making of the Loan or any advance thereof by Bank to the Borrower; 75 (b) presentment and demand for payment of the Debt or any portion thereof; (c) protest and notice of dishonor or default to the undersigned or to any other person or party with respect to the Debt or any portion thereof; (d) all other notices to which the undersigned might otherwise be entitled; and (e) any demand under this Guaranty. 8. If any of the following events should occur: (a) default under any of the Loan Documents and its continuance beyond any applicable notice and/or grace periods therein contained; (b) the undersigned violates any provision of this Guaranty; (c) default under the Declaration of Restrictions made by the undersigned to the Bank dated the date hereof("DECLARATION OF RESTRICTION"); (d) the undersigned commences any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeks to have an order for relief entered with respect to it, or seeks to be adjudicated a bankrupt or insolvent, or seeks reorganization, arrangement, adjustment, liquidation, dissolution, composition or other relief with respect to it or its debts, or seeks the appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; (e) the undersigned makes a general assignment for the benefit of creditors; (f) there is commenced against the undersigned, any case, proceeding or other action of a nature referred to in subparagraph (d) above or seeking the issuance of a warrant of attachment, execution, distraint or similar process against all or 76 any substantial part of its property, which case, proceeding or other action results in the entry of an order for relief or remains undismissed, undischarged or unbonded for a period of 60 days; (g) the undersigned takes any action indicating its consent to, approval of, or acquiescence in, or in furtherance of, any of the acts set forth in subparagraphs (d) and (f) above; (h) the undersigned admits in writing its inability to pay its debts as they mature; or (i) the undersigned terminates or dissolves or suspends its usual business activities or conveys, sells, leases, transfers or otherwise disposes of all or a substantial part of its property, business or assets other than in the ordinary course of business; then, and in such event, Bank may declare the Liabilities to be, and the same shall become, immediately due and payable. 9. This is a guaranty of payment and performance and not of collection and the undersigned further waives any right to require that any action be brought against the Borrower or any other person or party or to require that resort be had to any security or to any balance of any deposit account or credit on the books of Bank in favor of the Borrower or any other person or party. Any payment on account of or reacknowledgment of the Debt by the Borrower, or any other party liable therefor, shall be deemed to be made on behalf of the undersigned and shall serve to start anew the statutory period of limitations applicable to the Debt. 10. Each reference herein to Bank shall be deemed to include its successors and assigns, in whose favor the provisions of this Guaranty shall also inure. Each reference herein to the undersigned shall be deemed to include the successors and assigns of the undersigned, all of whom shall be bound by the provisions of this Guaranty, provided, however, that the undersigned shall in no event nor under any circumstance have the right, without obtaining the prior written consent of Bank, to assign or transfer the undersigned's obligations and liabilities under this Guaranty, in whole or in part, to any other person, party or entity. 11. The term ``UNDERSIGNED'' as used herein shall, if this Guaranty is signed by more than one party, unless otherwise stated 77 herein, mean the ``undersigned and each of them'' and each undertaking herein contained shall be their joint and several undertaking. Bank may proceed against none, one or more of the undersigned at one time or from time to time as it sees fit in its sole and absolute discretion. If any party hereto shall be a partnership, the agreements and obligations on the part of the undersigned herein contained shall remain in force and application notwithstanding any changes in the individuals composing the partnership and the term ``undersigned'' shall include any altered or successive partnerships, but the predecessor partnerships and their partners shall not thereby be released from any obligations or liability hereunder. If any party hereto shall be a corporation, the agreements and obligations on the part of the undersigned herein contained shall remain in force and application notwithstanding the merger, consolidation, reorganization or absorption thereof, and the term ``undersigned'' shall include such new entity, but the old entity shall not thereby be released from any obligations or liabilities hereunder. 12. No delay on the part of Bank in exercising any right or remedy under this Guaranty or failure to exercise the same shall operate as a waiver in whole or in part of any such right or remedy. No notice to or demand on the undersigned shall be deemed to be a waiver of the obligations of the undersigned or of the right of Bank to take further action without notice or demand as provided in this Guaranty. No course of dealing between the undersigned and Bank shall change, modify or discharge, in whole or in part, this Guaranty or any obligations of the undersigned hereunder. 13. This Guaranty may only be modified, amended, changed or terminated by an agreement in writing signed by Bank and the undersigned. No waiver of any term, covenant or provision of this Guaranty shall be effective unless given in writing by Bank and if so given by Bank shall only be effective in the specific instance in which given. The execution and delivery hereafter to Bank by the undersigned of a new instrument of guaranty or any reaffirmation of guaranty, of whatever nature, shall not terminate, supersede or cancel this instrument, unless expressly so provided therein, and all rights and remedies of Bank hereunder or under any instrument of guaranty hereafter executed and delivered to Bank by the undersigned shall be cumulative and may be exercised singly or concurrently. 78 14. The undersigned acknowledges that this Guaranty and the undersigned's obligations under this Guaranty are and shall at all times continue to be absolute, irrevocable and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Guaranty and the obligations of the undersigned under this Guaranty or the obligations of any other person or party (including, without limitation, the Borrower) relating to this Guaranty or the obligations of the undersigned hereunder or otherwise with respect to the Debt, including, but not limited to, the realization upon any collateral given, pledged or assigned as security for all or any portion of the Debt, or the filing of a petition under Title 11 of the United States Code with regard to the Borrower or the undersigned, or the commencement of an action or proceeding for the benefit of the creditors of the Borrower or the undersigned, or the obtaining by Bank of title to any collateral given, pledged or assigned as security for the Debt by reason of the foreclosure or enforcement of any pledge or security agreement, the acceptance of a deed or assignment in lieu of foreclosure or sale, or otherwise. This Guaranty sets forth the entire agreement and understanding of Bank and the undersigned with respect to the matters covered by this Guaranty and the undersigned acknowledges that no oral or other agreements, understandings, representations or warranties exist with respect to this Guaranty or with respect to the obligations of the undersigned under this Guaranty, except those specifically set forth in this Guaranty. 15. This Guaranty has been validly authorized, executed and delivered by the undersigned. The undersigned represents and warrants to Bank that it has the corporate power to do so and to perform its obligations under this Guaranty and this Guaranty constitutes the legally binding obligation of the undersigned fully enforceable against the undersigned in accordance with the terms hereof. The undersigned further represents and warrants to Bank that: (a) neither the execution and delivery of this Guaranty nor the consummation of the transactions contemplated hereby nor compliance with the terms and provisions hereof will violate any applicable provision of law or any applicable regulation or other manifestation of governmental action; and 79 (b) all necessary approvals, consents, licenses, registrations and validations of any governmental regulatory body, including, without limitation, approvals required to permit the undersigned to execute and carry out the provisions of this Guaranty, for the validity of the obligations of the undersigned hereunder and for the making of any payment or remittance of any funds required to be made by the undersigned under this Guaranty, have been obtained and are in full force and effect. 16. Notwithstanding any payments made by the undersigned pursuant to the provisions of this Guaranty, the undersigned irrevocably waives all rights to enforce or collect upon any rights which it now has or may acquire against the Borrower either by way of subrogation, indemnity, reimbursement or contribution for any amount paid under this Guaranty or by way of any other obligations whatsoever of the Borrower to the undersigned, nor shall the undersigned file, assert or receive payment on any claim, whether now existing or hereafter arising, against the Borrower in the event of the commencement of a case by or against the Borrower under Title 11 of the United States Code. In the event either a petition is filed under said Title 11 of the United States Code with regard to the Borrower or the commencement of an action or proceeding for the benefit of the creditors of the Borrower, this Guaranty shall at all times thereafter remain effective in regard to any payments or other transfers of assets to Bank received from or on behalf of the Borrower prior to notice of termination of this Guaranty and which are or may be held voidable on the grounds of preference or fraud, whether or not the Debt has been paid in full. The provisions of this paragraph 16 shall survive the term of this Guaranty and the payment in full of the Debt and all other Liabilities and the termination of any commitment to make any further advances of Loan proceeds pursuant to the Revolving Credit Agreement. 17. Any notice, request or demand given or made under this Guaranty shall be in writing and shall be hand delivered or sent by postage prepaid registered or certified mail, return receipt requested, and shall be deemed given three (3) business days after being postmarked and addressed as follows if sent by registered or certified mail, return receipt requested: If to Bank: 80 The Chase Manhattan Bank 395 North Service Road Melville, New York 11747 Attn: Stephen M. Zajac, Assistant Vice President If to the undersigned: Empire - Tyler Corporation 603 Tyler Joplin, Missouri 64801 Attention: Mark Hopkinson, President Each party to this Guaranty may designate a change of address by notice given, as herein provided, to the other party fifteen (15) days prior to the date such change of address is to become effective. 18. This Guaranty is, and shall be deemed to be, a contract entered into under and pursuant to the laws of the State of New York and shall be in all respects governed, construed, applied and enforced in accordance with the laws of the State of New York without regard to principles of conflicts of laws. The undersigned acknowledges and agrees that this Guaranty is, and is intended to be, an instrument for the payment of money only, as such phrase is used in Section 3213 of the Civil Practice Law and Rules of the State of New York, and the undersigned has been fully advised by its counsel of Bank's rights and remedies pursuant to said Section 3213. 19. The undersigned agrees to submit to personal jurisdiction in the State of New York in any action or proceeding arising out of this Guaranty. In furtherance of such agreement, the undersigned hereby agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over the undersigned in any such action or proceeding may be obtained within or without the jurisdiction of any court located in New York and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon the undersigned by registered or certified mail to, or by personal service at, the last known address of the undersigned, whether such address be within or without the jurisdiction of any such court. The undersigned hereby further agrees that the venue of any 81 litigation arising in connection with the Debt or in respect of any of the obligations of the undersigned under this Guaranty, shall, to the extent permitted by law, be in Nassau or Suffolk Counties. 20. The undersigned absolutely, unconditionally and irrevocably waives any and all right to assert or interpose any defense (other than the final and indefeasible payment in full of the Debt), setoff, counterclaim or crossclaim of any nature whatsoever with respect to this Guaranty or the obligations of the undersigned under this Guaranty, or the obligations of any other person or party (including without limitation, the Borrower) relating to this Guaranty, or the obligations of the undersigned hereunder or otherwise with respect to the Loan in any action or proceeding brought by Bank to collect the Debt, or any portion thereof, or to enforce the obligations of the undersigned under this Guaranty (provided, however, that the foregoing shall not be deemed a waiver of the right of the undersigned to assert any compulsory counterclaim maintained in a court of the United States, or of the State of New York if such counterclaim is compelled under local law or rule of procedure, nor shall the foregoing be deemed a waiver of the right of the undersigned to assert any claim which would constitute a defense, setoff, counterclaim or crossclaim of any nature whatsoever against Bank in any separate action or proceeding). The undersigned hereby undertakes and agrees that this Guaranty shall remain in full force and effect for all of the obligations and liabilities of the undersigned hereunder, notwithstanding the maturity of the Loan, whether by acceleration, scheduled maturity or otherwise. 21. No exculpatory provisions which may be contained in the Note, the Revolving Credit Agreement or in any other Loan Document shall in any event or under any circumstances be deemed or construed to modify, qualify, or affect in any manner whatsoever the obligations and liabilities of the undersigned under this Guaranty. 22. The obligations and liabilities of the undersigned under this Guaranty are in addition to the obligations and liabilities of the undersigned under the Other Guaranties (as hereinafter defined). The discharge of any or all of the undersigned's obligations and liabilities under any one or more of the Other Guaranties by the undersigned or by reason of operation of law or 82 otherwise shall in no event or under any circumstance constitute or be deemed to constitute a discharge, in whole or in part, of the undersigned's obligations and liabilities under this Guaranty. Conversely, the discharge of any or all of the undersigned's obligations and liabilities under this Guaranty by the undersigned or by reason of operation of law or otherwise shall in no event or under any circumstance constitute or be deemed to constitute a discharge, in whole or in part, of the undersigned's obligations and liabilities under any of the Other Guaranties. The term ``OTHER GUARANTIES'' as used herein shall mean any other guaranty of payment, guaranty of performance, indemnification agreement or other guaranty or instrument creating any obligation or undertaking of any nature whatsoever (other than this Guaranty) now or hereafter executed and delivered by the undersigned to Bank in connection with the Loan. 23. This Guaranty may be executed in one or more counterparts by some or all of the parties hereto, each of which counterparts shall be an original and all of which together shall constitute a single agreement of guaranty. The failure of any party listed below to execute this Guaranty, or any counterpart hereof, or the ineffectiveness for any reason of any such execution, shall not relieve the other signatories from their obligations hereunder . 24. The undersigned hereby irrevocably and unconditionally waives, and Bank by its acceptance of this Guaranty irrevocably and unconditionally waives, any and all right to trial by jury in any action, suit or counterclaim arising in connection with, out of or otherwise relating to this Guaranty. IN WITNESS WHEREOF, the undersigned has/have duly executed this Guaranty the day and year first above set forth. Empire-Tyler Corporation, a Missouri Corporation By:___________________________ Name: Mark Hopkinson Title: President 83 STATE OF NEW YORK) ) SS.: COUNTY OF SUFFOLK) On the 4th day of September, 1996, before me personally came Mark Hopkinson, to me known, who, being by me duly sworn, did depose and say that he resides at 340 East 57th Street, Apt 3b, New York, New York 10022; that he is President of Empire - Tyler Corporation, the corporation described in and which executed the above instrument; and that he signed his name thereto by authority of the Board of Directors of said corporation. _____________________________ Notary Public 84 EXHIBIT A NOTE: The term "NOTE" as used in this Guaranty shall mean a certain Promissory Note dated September 4, 1996, in the maximum principal sum of $4,000,000.00 to be given by the Borrower to Bank. REVOLVING CREDIT AGREEMENT : The term "REVOLVING CREDIT AGREEMENT" as used in this Guaranty shall mean a certain Revolving Credit Agreement dated as of September 4, 1996, entered into between Bank and the Borrower. 85 EXHIBIT C SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Security Agreement") is made this 4th day of September, 1996, by and between: ALLIED DEVICES CORPORATION, a Nevada corporation authorized to do business under the laws of the State of New York, having an office at 2365 Milburn Avenue, Baldwin, New York 11510 (hereinafter referred to as the "Debtor"), and THE CHASE MANHATTAN BANK, a banking corporation organized under the laws of the State of New York, having an office at 395 North Service Road, Melville, New York 11747 (together with any of its subsidiaries and/or affiliates and wherever located hereinafter referred to as the "Secured Party"). W I T N E S S E T H WHEREAS, the Secured Party and the Debtor have entered into a Revolving Credit Agreement dated as of September 4, 1996 (as it may hereafter be amended or otherwise modified from time to time, being the "Agreement") pursuant to which the Secured Party may lend to the Debtor the aggregate principal amount set forth therein, upon and subject to the terms and conditions thereof; WHEREAS, it is a condition precedent to the obligation of the Secured Party to extend credit to the Debtor provided for in the Agreement that the Debtor shall execute and deliver this Security Agreement; and WHEREAS, all capitalized terms used herein without definition shall have the respective meanings ascribed thereto in the Agreement. NOW, THEREFORE, in consideration of the Collateral, hereinafter defined, and in order to induce the Secured Party to continue to extend credit to the Debtor, the Debtor agrees with the Secured Party as follows: 1. SECURITY INTEREST. 86 (a) GRANT OF SECURITY. As security for the Obligations (as defined in Section l(b) hereof), the Debtor hereby assigns and pledges to the Secured Party, and hereby grants to the Secured Party a first priority security interest in, all of the Debtor's right, title and interest, whether now existing or hereafter arising or acquired, in and to the following (collectively, the "Collateral"): All personal property, inventory, fixtures and equipment of Debtor wherever located and whether now owned or in existence or hereafter acquired or created of every kind and description, tangible or intangible, including goods, documents, instruments, general intangibles, chattel paper, accounts and contract rights, such terms having the meanings ascribed by the UCC. The term "accounts" shall mean, without limiting the generality of the foregoing, any and all now existing or hereafter arising rights to payment held by the Debtor, whether in the form of accounts receivable, notes, drafts, acceptance or other forms of obligations and receivables now or hereafter received by or belonging to the Debtor for (A) inventory sold or leased by it, (B) services rendered by it, or (C) advances or loans made by it to customers, together with all guarantees and security therefore and all proceeds thereof, whether cash proceeds or otherwise, including, without limitation, all right, title and interest of the Debtor in the inventory which gave rise to any such accounts, including, without limitation, the right to stoppage in transit and all returned, rejected, rerouted or repossessed inventory. (b) SECURITY FOR OBLIGATIONS. This Security Agreement secures the payment of all obligations of Debtor to the Secured Party, now or hereafter existing under the Agreement, under any promissory notes or other documents evidencing indebtedness under or related to or contemplated by the Agreement or under or in connection with a guaranty dated the date hereof and executed by the Debtor in favor of the Secured Party or any other document or instrument executed in connection therewith, whether for principal, interest, fees, expenses or otherwise, together with all costs of collection or enforcement, including, without limitation, reasonable attorneys' fees incurred in any collection efforts or in any judicial proceeding (including, without limitation, bankruptcy or reorganization) (all such obligations being the "Obligations"). 87 (c) DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (i) the Debtor shall remain liable to perform all of its duties and obligations under the transactions giving rise to the Collateral to the same extent as if this Security Agreement had not been executed, (ii) the exercise by the Secured Party of any of the rights hereunder shall not release the Debtor from any of its duties or obligations under the transactions giving rise to the Collateral, which shall remain unchanged as if this Security Agreement had not been executed, and (iii) the Secured Party shall have no obligation or liability under the transactions giving rise to the Collateral by reason of this Security Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. (d) CONTINUING AGREEMENT. This Security Agreement shall create a continuing security interest in the Collateral and shall remain in full force and effect until the indefeasible payment in full of the Obligations and until the Agreement shall no longer be in effect. Upon the indefeasible payment in full of the Obligations and when the Agreement shall no longer be in effect, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Debtor. 2. DEBTOR'S TITLE; LIENS AND ENCUMBRANCES. The Debtor represents and warrants that the Debtor is, or to the extent that this Security Agreement states that the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral, having good and marketable title thereto, free from any and all liens, security interests, encumbrances and claims, except as permitted by the Agreement. The Debtor will not create or assume or permit to exist any such lien, security interest, encumbrance or claim on or against the Collateral except as created by this Security Agreement or as permitted by the Agreement, and the Debtor will promptly notify the Secured Party of any such other claim, lien, security interest or other encumbrance made or asserted against the Collateral and will defend the Collateral against any such claim, lien, security interest or other encumbrance. 3. REPRESENTATIONS AND WARRANTIES; LOCATION OF COLLATERAL AND RECORDS; BUSINESS AND TRADE NAMES OF DEBTOR. 88 (a) The Debtor represents and warrants that it has no place of business, offices where Debtor's books of account and records are kept, or places where the Collateral is used, stored or located, except as set forth on Schedule I annexed hereto, and covenants that the Debtor will promptly notify the Secured Party of any change in the foregoing representation. The Debtor shall at all times maintain its records as to the Collateral at its chief place of business at the address referred to on Schedule I and at none other. The Debtor further covenants that except for Collateral delivered to the Secured Party or an agent for the Secured Party, the Debtor will not store, use or locate any of the Collateral at any place other than as listed on Schedule I annexed hereto; provided that the Debtor may change any such address upon at least 30 days prior written notice to the Secured Party. (b) The Debtor represents and warrants that it currently uses, and during the last five years has used, no business or trade names, except as set forth on Schedule I annexed hereto, and covenants that the Debtor will promptly notify the Bank, in sufficient detail, of any changes in, additions to, or deletions from the business or trade names used by the Debtor for billing purposes. (c) The Debtor represents and warrants that it has complied and is in compliance with the provisions of the Fair Labor Standards Act, including, without limitation, the minimum wage and overtime rules of that Act, and covenants that the Debtor will continue to comply with the provisions of such Act. 4. PERFECTION OF SECURITY INTEREST. The Debtor will execute all such financing statements pursuant to the Uniform Commercial Code or other notices appropriate under applicable law, as Secured Party may require, each in form satisfactory to the Secured Party and will pay all filing or recording costs with respect thereto, and all costs of filing or recording this Security Agreement or any other instrument, agreement or document executed and delivered pursuant hereto or to the Agreement (including the cost of all federal, state or local mortgage, documentary, stamp or other taxes), in each case, in all public offices where filing or recording is reasonably deemed by the Secured Party to be necessary or desirable. The Debtor hereby authorizes the Secured Party to take all action (including, without 89 limitation, the filing of any Uniform Commercial Code financing statements or amendments thereto without the signature of the Debtor or by signing of the Debtor's name to any such financing statements as its attorney-in-fact) which the Secured Party may deem reasonably necessary or desirable to perfect or otherwise protect the liens and security interests created hereunder and to obtain the benefits of this Security Agreement. 5. GENERAL COVENANTS. The Debtor shall: (a) furnish the Secured Party from time to time at the Secured Party's request written statements and schedules further identifying and describing the Collateral in such detail as the Secured Party may reasonably require; (b) advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein; (c) comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or of fiscal authority applicable to the Collateral or any part thereof or to the operation of the Debtor's business except where the failure to comply (a) is non-material and (b) has no effect on the value of the Collateral or on the ability of the Secured Party to exercise its rights and remedies hereunder; provided, however, that the Debtor may contest any acts, rules, regulations, orders and directions of such bodies or officials in any reasonable manner which will not, in the Secured Party's opinion, adversely affect the Secured Party's rights or the priority of its security interests in the Collateral; (d) perform and observe all covenants, restrictions and conditions contained in the Agreement providing for payment of taxes, maintenance of insurance and otherwise relating to the Collateral, as though such covenants, restrictions and conditions were fully set forth in this Security Agreement; 90 (e) promptly notify the Secured Party of all disputes with account debtors involving amounts in excess of $100,000; (f) promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time in its sole discretion deem necessary to perfect, protect or enforce the Secured Party's security interests in the Collateral or otherwise to effect the intent of this Security Agreement and the Agreement; (g) keep or cause to be kept the Collateral in good working order, repair, running and marketable condition, ordinary wear and tear excepted, at the Debtor's own cost and expense; and (h) not assign, sell, mortgage, lease, transfer, pledge, grant a security interest in or lien upon, encumber or otherwise dispose of or abandon, any part or all of the Collateral, without the express prior written consent of the Secured Party, except (i) for the sale from time to time in the ordinary course of business of the Debtor of such items of Collateral as may constitute part of the business inventory of the Debtor; and (ii) as otherwise expressly provided in the Agreement. 6. ASSIGNMENT OF INSURANCE. At or prior to the date hereof, the Debtor shall deliver to Secured Party copies of, or certificates of the issuing companies with respect to, endorsements of any and all policies of insurance owned by the Debtor covering or in any manner relating to the Collateral, in form and substance satisfactory to the Secured Party naming the Secured Party as additional insured party as its interests may appear with respect to liability coverage and as loss payee with respect to property and extended insurance coverage, and indicating that no such policy will be terminated, or reduced in coverage or amount, without at least thirty (30) days prior written notice from the insurer to the Secured Party. As further security for the due payment and performance of the Obligations, the Debtor hereby assigns to the Secured Party all sums, including returned or unearned premiums, which may become payable under or in respect of any policy of insurance owned by the Debtor covering or in any manner relating to the Collateral, and the Debtor hereby directs each insurance company issuing any such policy to make payment of 91 sums directly to the Secured Party. The Debtor hereby appoints the Secured Party as the Debtor's attorney-in-fact and authorizes the Secured Party in the Debtor's or in the Secured Party's name to endorse any check or draft representing any such payment and to execute any proof of claim, subrogation receipt and any other document required by such insurance company as a condition to or otherwise in connection with such payment, and, upon the occurrence of any Event of Default, to cancel, assign or surrender any such policies. All such sums received by the Secured Party shall be applied by the Secured Party to satisfaction of the Obligations or, to the extent that such sums represent unearned premiums in respect of any policy of insurance on the Collateral refunded by reason of cancellation, toward payment for similar insurance protecting the respective interests of the Debtor and the Secured Party, or as otherwise required by applicable law. 7. FIXTURES. It is the intent of the Debtor and the Secured Party that none of the Collateral is or shall be regarded as fixtures, as that term is used or defined in Article 9 of the Uniform Commercial Code, and the Debtor represents and warrants that it has not made and is not bound by any lease or other agreement which is inconsistent with such intent. Nevertheless, if the Collateral or any part thereof is or is to become attached or affixed to any real estate, the Debtor will, upon request, furnish the Secured Party with a disclaimer or subordination in form satisfactory to the Secured Party of the holder of any interest in the real estate to which the Collateral is attached or affixed, together with the names and addresses of the record owners of, and all other persons having interest in, and a general description of, such real estate. 8. COLLECTIONS. (a) The Debtor may collect all checks, drafts, cash or other remittances (i) in payment of any of its accounts, contract rights or general intangibles constituting part of the Collateral, (ii) in payment of any Collateral sold, transferred, leased or otherwise disposed of, or (iii) in payment of or in account of its accounts, contracts, contract rights, notes, drafts, acceptances, general intangibles, chooses in action and all other forms of obligations relating to any of the Collateral so sold, transferred, or leased or otherwise disposed of, and all of the foregoing amounts so 92 collected after the occurrence and during the continuance of an Event of Default shall be held in trust by the Debtor for, and as the property of, the Secured Party and shall not be commingled with other funds, money or property of the Debtor. (b) After the occurrence and during the continuance of an Event of Default, the Debtor will immediately upon receipt of all such checks, drafts, cash or other remittances in payment of any of its accounts, contract rights or general intangibles constituting part of the Collateral, deliver any such items to the Secured Party accompanied by a remittance report in form supplied or approved by the Secured Party, such items to be delivered to the Secured Party in the same form received, endorsed or otherwise assigned by the Debtor where necessary to permit collection of such items and, regardless of the form of such endorsement, the Debtor hereby waives presentment, demand, notice of dishonor, protest, notice of protest and all other notices with respect thereto. (c) After the occurrence and during the continuance of an Event of Default, the Debtor will immediately upon receipt of all such checks, drafts, cash or other remittances in payment for any Collateral sold, transferred, leased or otherwise disposed of, or in payment or on account of its accounts, contracts, contract rights, notes, drafts, acceptances, general intangibles, choses in action and all other forms of obligations relating to any of the Collateral so sold, transferred, leased or otherwise disposed of, deliver any such items to the Secured Party accompanied by a remittance report in form supplied or approved by the Secured Party, such items to be delivered to the Secured Party in the same form received, endorsed or otherwise assigned by the Debtor where necessary to permit collection of such items and, regardless of the form of such endorsement, the Debtor hereby waives presentment, demand, notice of dishonor, protest, notice of protest and all other notices with respect hereto. (d) After the occurrence and during the continuance of an Event of Default, the Debtor will promptly notify the Secured Party in writing of the return or rejection of any goods represented by any accounts, contract rights or general intangibles and the Debtor shall forthwith account therefore to the Secured Party in cash without demand or notice and until such payment has been received by the Secured Party the Debtor will receive and hold all such goods separate and apart, in trust for and subject to the security 93 interest in favor of the Secured Party, and the Secured Party is authorized to sell, for the Debtor's account and at the Debtor's sole risk, all or any part of such goods. (e) All of the foregoing remittances shall be applied and credited by the Secured Party first to satisfaction of the Obligations or as otherwise required by applicable law, and to the extent not so credited or applied, shall be paid over to the Debtor. 9. RIGHTS AND REMEDIES. In the event of the occurrence and continuance of any Event of Default, the Secured Party shall at any time thereafter have the right, with or without (to the extent permitted by applicable law) notice to the Debtor, as to any or all of the Collateral, by any available judicial procedure or without judicial process, to take possession of the Collateral and without purpose of taking possession of or removing the Collateral, and, generally, to exercise any and all rights afforded to a secured party under the Uniform Commercial Code or other applicable law. Without limiting the generality of the foregoing, the Debtor agrees that the Secured Party shall have the right to sell, lease, or otherwise dispose of all or any part of the Collateral, whether in its then condition or after further preparation or processing, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such terms and conditions, all as the Secured Party in its sole discretion may deem advisable, and it shall have the right to purchase at any such sale; and, if any Collateral shall require rebuilding, repairing, maintenance, preparation, or is in process or other unfinished state, the Secured Party shall have the right, at its sole option and discretion, to do such rebuilding, repairing, preparation, processing or completion of manufacturing, for the purpose of putting the Collateral in such saleable or disposable form as it shall deem appropriate. At the Secured Party's request, the Debtor shall assemble the Collateral and make it available to the Secured at places which the Secured Party shall select, whether at the Debtor's premises or elsewhere, and make available to the Secured Party, without rent, all of the Debtor's premises and facilities for the purpose of the Secured Party's taking possession of, removing or putting the Collateral in saleable or disposable form. The proceeds of any such sale, lease 94 or other disposition of the Collateral shall be applied first to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like, and to the attorneys' fees and legal expenses incurred by the Secured Party, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall account to the Debtor for any surplus proceeds. If, upon the sale, lease or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Debtor will be liable for the deficiency, together with interest thereon, at the rate prescribed in the Agreement, and the fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral. 10. COSTS AND EXPENSES. Any and all fees, costs and expenses, of whatever kind or nature, including the reasonable attorneys' fees and legal expenses incurred by the Secured Party, in connection with the preparation of this Security Agreement and all other documents relating hereto and the consummation of this transaction, the filing or recording of financing statements and other documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, insurance premiums, encumbrances or otherwise protecting, maintaining or preserving the Collateral and the Secured Party's security interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions or proceedings arising out of or related to the transaction to which this Security Agreement relates, shall be borne and paid by the Debtor on demand by the Secured Party and until so paid shall be added to the principal amount of the Obligations and shall bear interest at the rate prescribed in the Agreement. 11. POWER OF ATTORNEY. The Debtor authorizes the Secured Party and does hereby make, constitute and appoint the Secured Party, and any officer or agent of the Secured Party, with full power of substitution, as the Debtor's true and lawful attorney-in-fact, with power, in its own name or in the name of the Debtor, upon the occurrence and 95 continuance of an Event of Default: (a) to endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party; (b) to sign and endorse any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to Collateral; (c) to pay or discharge any taxes, liens, security interest or other encumbrances at any time levied or placed on or threatened against the Collateral; (d) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; (e) to receive, open and dispose of all mail addressed to the Debtor and to notify the Post Office authorities to change the address for delivery of mail addressed to the Debtor to such address as the Secured Party may designate; and (f) generally to do, at the Secured Party's option and at the Debtor's expense, at any time, or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve and realize upon the Collateral and the Secured Party's security interest therein in order to effect the intent of this Security Agreement and the Agreement, all as fully and effectually as the Debtor might or could do; and the Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. All acts of said attorney or designee are hereby ratified and approved and said attorney or designee shall not be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law except for its own gross negligence or willful misconduct. This power of attorney shall be irrevocable for the term of this Security Agreement and thereafter as long as any of the Obligations shall be outstanding. 12. NOTICES. Unless the party to be notified otherwise notifies the other party in writing as provided in this Section, notices shall be given hereunder by certified or registered mail or by recognized overnight delivery services to any party at its address on the signature page of this Security Agreement. Notices shall be effective (a) if given by registered or certified mail, on the third day after deposit in the mails with postage prepaid, addressed as aforesaid or (b) if given by recognized overnight delivery service, on the business day following deposit with such 96 service, addressed as aforesaid; provided that all notices to the Secured Party shall be effective on receipt. 13. OTHER SECURITY. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, then the Secured Party shall have the right in its sole discretion to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder. 14. DEPOSITS. Any and all deposits or other sums at any time credited by or due from the Secured Party to the Debtor, whether in regular or special depository accounts or otherwise, shall at all times constitute additional Collateral for the Obligations, and may be set-off by the Secured Party against any Obligations that are then due and payable (after expiration of any applicable cure period) at any time, whether or not other collateral held by the Secured Party is considered to be adequate. No provision of this Section 14 shall permit the Secured Party to set-off balances on accounts established by the Debtor as trust accounts for third parties. 15. MISCELLANEOUS. (a) Beyond the safe custody thereof, the Secured Party shall as to the Debtor have no duty as to the collection of any Collateral in its possession or control or in the possession or control of any agent or nominee of the Secured Party, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. (b) No course of dealing between the Debtor and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 97 (c) All of the Secured Party's rights and remedies with respect to the Collateral, whether established hereby or by the Agreement, or by any other agreements, instruments or documents or by law, shall be cumulative and may be exercised singly or concurrently. (d) The provisions of this Security Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Security Agreement in any jurisdiction. (e) This Security Agreement (including this subsection) is subject to modification only by a writing signed by all of the parties hereto. (f) The benefits and burdens of this Security Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto; provided, however, that the rights and obligations of the Debtor under this Security Agreement shall not be assigned or delegated without the prior written consent of the Secured Party (exercisable in its sole discretion), and any purported assignment or delegation without such consent shall be void. 16. TERM OF AGREEMENT. The term of this Security Agreement shall commence on the date hereof and shall continue in full force and effect, and be binding upon the Debtor, until all of the Obligations have been fully paid and performed and such payment and performance have been acknowledged in writing by the Secured Party, whereupon this Security Agreement shall terminate. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year first written above. ALLIED DEVICES CORPORATION, as Debtor 98 By: ______________________________________ Name: Mark Hopkinson Title: Chairman of the Board Address for Notices: 2365 Milburn Avenue Baldwin, New York 11510 99 THE CHASE MANHATTAN BANK, as Secured Party By: ______________________________________ Name: Stephen M. Zajac Title: Assistant Vice President Address for Notices: 395 North Service Road Melville, New York 11747 100 SCHEDULE I TO SECURITY AGREEMENT Offices Where Records Are Kept 2365 Milburn Avenue Baldwin, New York 11510 Other Locations Where Collateral Is Stored, Used or Located: 603 Tyler Joplin, Missouri 64801 393 South Main Street Freeport, New York 11520 32 Johns Place Freeport, New York 11520 2115 9th Avenue Ronkonkoma, New York 11779 Business and Trade Names Used by Debtor: ADCO Devices Company Stroba Manufacturing Company Astro Instrument Company Absolute Precision Company 101 SCHEDULE A TO UCC-1 FINANCING STATEMENT NAMING ALLIED DEVICES CORPORATION, AS DEBTOR, AND THE CHASE MANHATTAN BANK, AS SECURED PARTY All of the Debtor's right, title and interest, whether now existing or hereafter arising, in and to the following: (a) All personal property, inventory, fixtures and equipment of Debtor wherever located and whether now owned or in existence or hereafter acquired or created of any kind and description, tangible or intangible, including goods, documents, instruments, general intangibles, chattel paper, accounts and contract rights, such terms having the meanings ascribed by the UCC. The term "accounts" shall mean, without limiting the generality of the foregoing, any and all now existing or hereafter arising rights to payment held by the Debtor, whether in the form of accounts receivable, notes, drafts, acceptances or other forms of obligations and receivables now or hereafter received by or belonging to the Debtor for (A) inventory sold or leased by it, (B) services rendered by it, or (C) advances or loans made by it to customers, together with all guarantees and security therefor and all proceeds thereof, whether cash proceeds or otherwise, including, without limitation, all right, title and interest of the Debtor in the inventory which gave rise to any such accounts, including, without limitation, the right to stoppage in transit and all returned, rejected, rerouted or repossessed inventory. (b) All sums, including returned or unearned premiums, which may become payable under or in respect of any policy of insurance owned by the Debtor covering or in any manner relating to the Collateral. (c) Any and all deposits or other sums at any time credited by or due from the Secured Party to the Debtor whether in regular or special depository accounts or otherwise. 102 EXHIBIT "D" DECLARATION OF RESTRICTIONS DECLARATION OF RESTRICTIONS made this 4th day of September, 1996 by EMPIRE-TYLER CORPORATION, having an office at 603 Tyler, Joplin, Missouri 64801 (the "DECLARANT"). W I T N E S S E T H: WHEREAS, the Declarant is the owner of the fee interest in the premises commonly known as 603 Tyler, Joplin, Missouri 64801 as more particularly described in Exhibit A attached hereto and made a part hereof (the "PREMISES"). WHEREAS, the Declarant wishes to set forth herein a declaration of its intention with respect to encumbrances affecting the Premises. NOW, THEREFORE, the Declarant hereby declares as follows: 1. Allied Devices Corporation (the "Borrower") has executed and delivered to The Chase Manhattan Bank (the "Bank") this date a promissory note (the "Note") and a Revolving Credit Loan Agreement (the "Agreement") each made between the Borrower and the Bank. To further secure the obligations of Borrower arising out of the Note and Agreement, the Declarant has executed and delivered to the Bank its guaranty (the "Guaranty") dated the date hereof. 2. The Declarant agrees not to transfer, assign or otherwise further encumber the interest of the Declarant in the Premises without the consent of the Bank, in its sole discretion, nor shall the Declarant, in any manner, amend this Declaration so long as: (i) any indebtedness is owed by the Borrower to Bank under the terms of the Note and Agreement; or (ii) if the Bank has any obligation to make loans under the Note or Agreement; or (iii) if Declarant has obligations to the Bank under the Guaranty, the Note or Agreement. 3. If the indebtedness owed by the Borrower to Bank is not repaid in full in accordance with the terms of the Note and/or Agreement the Declarant shall execute any and all documentation 103 deemed necessary by Bank to provide Bank with security interest in the Premises, including, but not limited to a mortgage, collateral assignment of leases and rents and UCC-1 financing statements, all in form and substance satisfactory to Bank. The Declarant also agrees to reimburse Bank for any and all expenses, including, but not limited to attorneys' fees, recording fees, title charges and mortgage recording taxes, incurred by Bank with respect to the granting by the Declarant to Bank of the aforementioned security interest. 4. This Declaration shall be binding upon the successors and assigns of the Declarant. 5. This Declaration may not be changed or modified orally. 6. This Declaration shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Declarant has executed this Declaration at Melville, New York this 4th day of September, 1996. EMPIRE-TYLER CORPORATION By:_______________________________ Name: Mark Hopkinson Title: President Witness: _________________________ STATE OF NEW YORK) ) ss: COUNTY OF SUFFOLK) On the 4th day of September, 1996, before me personally came Mark Hopkinson, to me known, who, being by me duly sworn, did depose and say that he resides at 340 East 57th Street, Apt 3b, New York, New York 10022; that he is President of EMPIRE-TYLER CORPORATION, the corporation described in and which executed the 104 above instrument; and that he signed his name thereto by authority of the Board of Directors of said corporation. __________________________________ Notary Public 105 EXHIBIT A (Description of Premises) The land referred to in this Declaration of Restriction is situated in the County of Jasper, State of Missouri, and described as follows: All of Lots Numbered Eleven (11), Twelve (12), Thirteen (13), Fourteen (14), Fifteen (15), Sixteen (16), Seventeen (17), Eighteen (18), Nineteen (19), and Twenty (20) in SALZER'S FIRST ADDITION to the City of Joplin, Jasper County, Missouri, according to the recorded plat thereof, and all that portion of the vacated alley lying between Lots 11 through 15 both inclusive, and 16 through 20 both inclusive, and all of the vacated South one-half of Sixth Street lying North of the adjoining Lots 11 through 15 both inclusive. Said premises being more commonly known as 603 Tyler Avenue, Joplin, Missouri 64801. 106 EXHIBIT "E" ALLIED DEVICES CORPORATION BORROWING BASE CERTIFICATE DATE:____________________ (000's omitted) 1. Net accounts receivable of ALLIED DEVICES CORPORATION ("Allied") as of:__________ Current $_________ 31-60 days past invoice $_________ 61-90 days past invoice $_________ Over 90 days past invoice $_________ Total net accounts receivable $_________ 2. Computation of Borrowing Base: A. Total accounts receivable of Allied as of:_________ $_________ Less the following deductions: Accounts receivable more than 90 days from invoice date ______________ Foreign accounts receivable* ______________ Account debtor (see Agreement) ______________ Cross-aging (more than 50% are more than 90 days past due) ______________ Credit balances ______________ Government accounts receivable ______________ Consignment sales ______________ Other (per Agreement) ______________ *unless insured with a policy satisfactory to the Bank, naming the Bank as loss payee. B. Total deductions: $_________ C. Eligible Accounts Receivable: (A-B) $_________ D. Accounts Receivable Advance Rate X85% E. Available accounts receivable (C times D) $_________ F. Perpetual inventory of Allied as of __________, 199__ $_________ Less the following deductions: (i) Inventory subject to liens (other than the Bank) ______________ (ii) Inventory held at locations without landlord waiver ______________ (iii) Inventory "obsolete" ** ______________ (iv) Inventory without a sale for more than one year** ______________ (v) Inventory held at locations outside the U.S. ______________ (vi) Work in process** ______________ (vii) Inventory built to customer specifications for which there is no purchase contract specifying delivery within the next 90 days *** ______________ G. Total deductions $_________ **(iii) and (iv) shall be reported to the Bank beginning with the month ended June 30, 1997 and monthly thereafter provided however, that if the Borrower can not input historical data required to report (iii) and (iv) by June 30, 1997, such reporting shall begin with the month ended November 30, 1997. (vi) shall be calculated from the Closing Date until the month ended May 31, 1997 as the higher of (a) 10% of perpetual inventory as reported for the month or (b) the percentage work in process to total inventory reported on the last quarterly financial statement of Allied 107 provided to the Bank under Section 5.08 (a) and (b). For the month ending June 30, 1997 and thereafter, Allied shall provide actual work in process levels. ***All Inventory built to customer specifications shall be included in inventory for the Borrowing Base Certificate prior to 6/30/97. At 6/30/97 or such date thereafter when the Borrower can provide detailed information on such inventory, such inventory shall be included in inventory on the Borrowing Base Certificate, to the extent that F.(vii) shall be completed at such time. H. Eligible (F-G) $________ I. Inventory Advances Rate X30% J. Eligible Inventory times Inventory Advance Rate $________ K. Available inventory (the lower of J or $2,000,000.00) $________ L. Total Borrowing Base (E plus K) $________ M. Aggregate Revolving Credit Loans outstanding at (Date:______) $________ N. Net available equals lesser of L minus M or $4,000,000.00 minus M (if negative, our check for line N amount is attached) $________ O. Amount of loan requested (if any) $________ P. Net available after Loan request [the lesser of L minus (M plus O) or ($4,000,000.00 minus (M plus O) $________ The undersigned hereby represents and warrants to the Bank that all information set forth herein, including, without limitation, the information regarding the status of Allied's accounts receivable and Allied's inventory, are true, complete and accurate. The undersigned further acknowledges that the Bank will rely on the information contained herein in making Loans to the undersigned. The undersigned certifies that (i) no Event of Default or event which upon notice, lapse of time or both constitute an Event of Default has occurred and is continuing under the Agreement, and (ii) the undersigned has performed all agreements and satisfied all conditions under the Agreement required to be performed by it on or prior to the date hereof. Capitalized terms used herein and not defined shall have the meaning set forth in the Agreement dated as of September 4, 1996 among the undersigned and the Bank. ALLIED DEVICES CORPORATION By:_______________________ Title 108 EXHIBIT F WAIVER OF LANDLORD'S LIEN This Agreement made this 4th day of September, 1996, by and among THE CHASE MANHATTAN BANK, a New York banking corporation having an office at 395 North Service Road, Melville, New York 11747 (hereinafter called "Bank"), ALLIED DEVICES CORPORATION, a Nevada corporation having an office at 2365 Milburn Avenue, Baldwin, New York 11510 (hereinafter called "Borrower"), and ____ _____________________________________________ having an office at __________________________________________, (hereinafter called "Landlord"); WHEREAS, Landlord, under a written lease with Borrower, has leased premises at __________________________________________ (hereinafter called the "Premises") to the Borrower; and WHEREAS, the Borrower has requested the loan (hereinafter called the "Loan") from the Bank for the purposes of refinancing existing debt of the Borrower and for general working capital purposes; and WHEREAS, the Bank desires to make the Loan to the Borrower provided the Bank has a first position security interest lien on all of the Borrower's personal property, inventory, fixtures and equipment wherever located and whether now owned or in existence or hereafter acquired or created of every kind and description, tangible or intangible, including goods, documents, instruments, general intangibles, chattel paper, accounts and contract rights, such terms having the meanings ascribed by the UCC (hereinafter called the "Assets"); and WHEREAS, Landlord has the right by virtue of the laws of the State of New York to enforce collection of rent due by distraint on Borrower's property on the Premises and the Landlord has an interest in property placed on the Premises by Borrower which may be regarded as fixtures; NOW, THEREFORE, in consideration of the mutual covenants contained, the parties agree as follows: 109 1. Bank shall make the Loan to the Borrower which Loan shall be secured by a first security interest loan on the Assets. 2. The Assets shall remain personal property of the Borrower even though it may be affixed to the Premises until the Loan has been paid by Borrower to Bank together with all interest thereon or until Borrower defaults in the payment of the Loan. 3. Landlord waives any right, title or interest in the Assets that Landlord may have by reason of said Assets being attached to or resting on the Premises for the duration of Bank's security interest in the Assets which shall exist until Borrower has paid Bank the outstanding balance of the Loan. The Bank shall be entitled to remove the Assets from the Premises at any reasonable time should Borrower default on payment of the Loan under the terms of the documents evidencing the Loan. 4. Bank shall not be responsible for the condition of the Premises after removal of the Assets so long as reasonable care is exercised in the removal. Landlord shall not be responsible for the condition of the Assets while the Assets remains on the Premises and under the control of the Borrower. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the date first above set forth. THE CHASE MANHATTAN BANK - Bank By:_____________________________________ Stephen M. Zajac, Assistant Vice President ALLIED DEVICES CORPORATION - Borrower By:_____________________________________ Mark Hopkinson, Chairman of the Board _____________________ - Landlord By:_____________________________ 110 STATE OF NEW YORK) ) ss.: COUNTY OF SUFFOLK) On this 4th day of September, 1996, before me personally came Stephen M. Zajac to me known, who being by me duly sworn, did depose and say that he resides at 395 North Service Road, Melville, New York 11747; that he is the Assistant Vice President of The Chase Manhattan Bank, the corporation described in and which executed the foregoing instrument; that by order of the Board of Directors of said corporation, he signed his name thereto. _______________________________ Notary Public STATE OF NEW YORK) ) ss.: COUNTY OF SUFFOLK) On this 4th day of September, 1996, before me personally came Mark Hopkinson to me known, who being by me duly sworn, did depose and say that he resides at 340 East 57th Street, Apt 3b, New York, New York 10022; that he is the Chairman of the Board of ALLIED DEVICES CORPORATION, the corporation described in and which executed the foregoing instrument; that by order of the Board of Directors of said corporation, he signed his name thereto. _______________________________ Notary Public STATE OF NEW YORK) ) ss.: COUNTY OF SUFFOLK) On this ____ day of _________, 1996, before me personally came ________________________ to me known, who being by me duly sworn, did depose and say that he resides at ______________________ ____________________; that he is the _________________ of the corporation described in and which executed the foregoing instrument; that by order of the Board of Directors of said corporation, he signed his name thereto. _______________________________ Notary Public 111 SCHEDULE I Subsidiaries of Borrower Jurisdiction Percentage Name and Address of Incorporation of Ownership - ---------------- ---------------- ------------ EMPIRE-TYLER CORPORATION Missouri 100% 603 Tyler Joplin, Missouri 64801 112 SCHEDULE II Credit Arrangements (to be Supplied by Borrower) 113 SCHEDULE III Hazardous Materials -NONE- 114 EX-11.01 3 EXHIBIT 11.01 EPS CALCULATION ALLIED DEVICES CORPORATION AND SUBSIDIARIES EPS CALCULATION - PRIMARY AND FULLY DILUTIVE SEPTEMBER 30, 1996 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR END CALCULATION: WEIGHTED SHARES OUTSTANDING 4,296,842 1,001,029 OPTIONS ---------- WARRANTS WEIGHTING ---------- 7,500 33.33% 2,500 25,000 75.56% 18,889 62,500 75.56% 47,222 10,000 33.33% 3,333 ------------- ------------- 4,368,786 INTEREST EQUIVALENT SHARES ADD BACK ----------------- ---------- 1ST QTR 1,453,646 35,578 2ND QTR 1,450,479 30,388 3RD QTR 1,378,646 28,363 4TH QTR 1,382,423 34,884 ----------------- ---------- 5,665,194 1,416,298 129,213 129,213 ------------ ---------- ---------- 5,785,085 $1,130,242 $0.20 ------------ ---------- ----- ------------ ---------- -----
EXHIBIT 11.01 EX-27 4 FDS
5 12-MOS SEP-30-1996 OCT-01-1995 SEP-30-1996 54,919 0 2,251,686 58,080 5,882,556 8,172,700 6,723,365 4,757,620 10,337,840 1,705,887 2,642,401 0 0 4,402 5,802,962 10,337,840 17,793,072 17,793,072 5,977,801 5,977,801 4,120,136 0 263,568 1,594,097 593,068 1,001,029 0 0 0 1,001,029 0.20 0.20 Selling, general and administrative
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