<PAGE> 1
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-2299
----------
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0117420
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Applied Plaza, Cleveland, Ohio 44115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 426-4000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Shares of common stock outstanding on April 30, 1998 22,067,009
---------------------------------------
(No par value)
<PAGE> 2
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
-------------------------------------
INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Page No.
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1: Financial Statements
Statements of Consolidated Income - 2
Three Months and Nine Months
Ended March 31, 1998 and 1997
Consolidated Balance Sheets - 3
March 31, 1998 and June 30, 1997
Statements of Consolidated Cash Flows 4
Nine Months Ended March 31, 1998 and 1997
Statements of Consolidated Shareholders' Equity - 5
Nine Months Ended March 31, 1998 and
Year Ended June 30, 1997
Notes to Consolidated Financial Statements 6 - 9
Item 2: Management's Discussion and Analysis of 10 - 15
Financial Condition and Results of Operations
Part II: OTHER INFORMATION 16
Item 1: Legal Proceedings 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: Financial Statements
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands, except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31 March 31
1998 1997 1998 1997
---------------------- ----------------------------
<S> <C> <C> <C> <C>
Net Sales $393,871 $297,190 $1,107,220 $854,431
-------- -------- ---------- ---------
Cost and Expenses
Cost of sales 291,380 221,991 821,379 630,791
Selling, distribution and
administrative 85,088 62,752 244,365 188,766
-------- -------- ---------- ---------
376,468 284,743 1,065,744 819,557
-------- -------- ---------- ---------
Operating Income 17,403 12,447 41,476 34,874
-------- -------- ---------- ---------
Interest
Interest expense 2,408 1,673 7,238 4,829
Interest income (182) (124) (660) (695)
-------- -------- ---------- ---------
2,226 1,549 6,578 4,134
-------- -------- ---------- ---------
Income Before Income Taxes 15,177 10,898 34,898 30,740
-------- -------- ---------- ---------
Income Taxes
Federal 5,601 3,379 12,098 10,338
State and local 461 764 1,474 2,239
-------- -------- ---------- ---------
6,062 4,143 13,572 12,577
--------- --------- ----------- ---------
Net Income $ 9,115 $ 6,755 $ 21,326 $ 18,163
======== ======== ========== =========
Net Income per share - Basic $ 0.42 $ 0.37 $ 1.00 $ 0.98
======== ======== ========== =========
Net Income per share - Diluted $ 0.41 $ 0.36 $ 0.98 $ 0.97
======== ======== ========== =========
Cash dividends per common
share $ 0.12 $ 0.11 $ 0.35 $ 0.31
======== ======== ========== =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31 June 30
1998 1997
--------- ---------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash and temporary investments $ 17,698 $ 22,405
Accounts receivable, less allowance
of $3,299 and $2,400 195,363 153,080
Inventories (at LIFO) 190,195 103,069
Other current assets 5,666 6,905
--------- ---------
Total current assets 408,922 285,459
--------- ---------
Property - at cost
Land 12,685 12,281
Buildings 73,577 66,157
Equipment 87,575 81,132
--------- ---------
173,837 159,570
Less accumulated depreciation 63,329 68,809
--------- ---------
Property - net 110,508 90,761
--------- ---------
Goodwill 54,932 5,604
Other assets 17,185 12,290
--------- ---------
TOTAL ASSETS $ 591,547 $ 394,114
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable $ 21,132 $ 25,415
Current portion of long-term debt 19,429 11,429
Accounts payable 96,840 49,469
Compensation and related benefits 22,854 19,025
Other accrued liabilities 22,276 15,398
--------- ---------
Total current liabilities 182,531 120,736
Long-term debt 95,714 51,428
Other liabilities 28,427 14,366
--------- ---------
TOTAL LIABILITIES 306,672 186,530
--------- ---------
Shareholders' Equity
Preferred Stock - no par value; 2,500
shares authorized; none issued or
outstanding
Common stock - no par value; 50,000
shares authorized; 24,095 and 20,931 shares issued 10,000 10,000
Additional paid-in capital 81,412 10,311
Income retained for use in the business 230,340 216,642
Less 2,051 and 2,310 treasury shares -
at cost (25,036) (22,983)
Less shares held in trust for
deferred compensation plans (6,853) (5,436)
Less unearned restricted common
stock compensation (4,988) (950)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 284,875 207,584
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 591,547 $ 394,114
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31
----------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 21,326 $ 18,163
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation 11,798 10,178
Amortization of goodwill and restricted common
stock compensation 3,345 606
Provision for losses on accounts receivable 1,465 599
Gain on sale of property (574) (399)
Treasury shares contributed to employee
benefit plans 3,261 2,502
Changes in current assets and liabilities, net of
effects from acquisition and disposal of
businesses:
Accounts receivable 20 (426)
Inventories (32,686) 3,765
Other current assets 4,815 (4,792)
Accounts payable and accrued expenses (1,067) (3,637)
Other - net 650 938
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash provided by Operating Activities 12,353 27,497
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Property purchases (26,126) (10,855)
Proceeds from property sales 6,536 3,068
Net cash paid for acquisition of businesses (31,328)
Proceeds from sale of Aircraft Division 9,090
Deposits and other 9,193 1,976
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash (used in) provided by Investing Activities (41,725) 3,279
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net repayments under Line-of-credit
agreements (4,283) (9,159)
Long-term debt borrowings 50,000
Long-term debt repayments (6,361) (5,714)
Exercise of stock options 938 510
Dividends paid (7,628) (5,701)
Purchase of treasury shares (8,001) (4,434)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) Financing Activities 24,665 (24,498)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease ) in cash and temporary
investments (4,707) 6,278
Cash and temporary investments
at beginning of period 22,405 9,243
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Temporary Investments
at End of Period $ 17,698 $ 15,521
==============================================================================================================================
Supplemental Cash Flow Information Cash paid during the period for:
Income taxes $ 10,997 $ 16,740
Interest $ 7,171 $ 5,161
Significant noncash investing activity:
Issuance of common stock for the acquisition of Invetech Company $ 63,374
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Nine Months Ended March 31, 1998 (Unaudited)
and Year Ended June 30, 1997
(Thousands, except per share amounts )
<TABLE>
<CAPTION>
Income
Shares of Additional Retained Treasury
Common Stock Common Paid-in for Use in Shares
Outstanding Stock Capital the Business -at Cost
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996 18,566 $ 10,000 $ 7,528 $ 197,232 $ (21,260)
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchase of common stock
for treasury (249) (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 164 1,809 1,568
Exercise of stock options 78 342 747
Deferred compensation plans 53 532 463
Restricted common stock awards 9 68 67
Amortization of restricted common
stock compensation 32
Increase in fair value of shares
held in trust
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 18,621 10,000 10,311 216,642 (22,983)
Net income 21,326
Cash dividends - $.35 per share (7,628)
Purchase of common stock
for treasury (284) (8,001)
Issuance of common stock for the
acquisition of Invetech Company 3,165 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 113 1,970 1,291
Exercise of stock options 81 22 916
Deferred compensation plans 24 405 245
Restricted common stock awards 201 3,560 2,005
Acquisition of Associated Bearings 123 1,770 1,491
Amortization of restricted common
stock compensation
Increase in fair value of shares
held in trust
- -----------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 22,044 $ 10,000 $ 81,412 $ 230,340 $ (25,036)
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Shares Held in Unearned
Trust for Restricted Total
Deferred Common Stock Shareholders'
Compensation Plans Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at July 1, 1996 $ (3,008) $ (1,200) $ 189,292
Net income 27,092
Cash dividends - $.41 per share (7,682)
Purchase of common stock
for treasury (4,568)
Treasury shares issued for:
Retirement Savings Plan contributions 3,377
Exercise of stock options 1,089
Deferred compensation plans (995)
Restricted common stock awards (135)
Amortization of restricted common
stock compensation 385 417
Increase in fair value of shares
held in trust (1,433) (1,433)
- ------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 (5,436) (950) 207,584
Net income 21,326
Cash dividends - $.35 per share (7,628)
Purchase of common stock
for treasury (8,001)
Issuance of common stock for the
acquisition of Invetech Company 63,374
Treasury shares issued for:
Retirement Savings Plan contributions 3,261
Exercise of stock options 938
Deferred compensation plans (650)
Restricted common stock awards (5,565)
Acquisition of Associated Bearings 3,261
Amortization of restricted common
stock compensation 1,527 1,527
Increase in fair value of shares
held in trust (767) (767)
- ------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ (6,853) $ (4,988) $ 284,875
========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of March 31, 1998 and June 30, 1997, and the results of
operations for the three months and nine months ended March 31, 1998
and 1997, and cash flows for the nine months ended March 31, 1998 and
1997.
The results of operations for the three and nine month periods ended
March 31, 1998 are not necessarily indicative of the results to be
expected for the fiscal year.
Cost of sales for interim financial statements are computed using
estimated gross profit percentages which are adjusted throughout the
year based upon available information. Adjustments to actual cost are
made based on the annual physical inventory and the effect of year-end
inventory quantities on LIFO costs.
2. NET INCOME PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. All prior amounts
have been restated to conform to the basic and diluted presentation.
The impact to previously reported earnings per share amounts is not
significant.
All share and per share data have also been restated to reflect a three
for two stock split effective September 15, 1997.
6
<PAGE> 8
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
The following is a computation of the basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1998 1997 1998 1997
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Income
- ----------
Net income as reported in statements of
consolidated income $9,115 $6,755 $21,326 $18,163
=====================================================
Average Shares Outstanding
- --------------------------
Weighted average common shares outstanding for basic
computation 21,776 18,412 21,343 18,467
Dilutive effect of:
Stock options 297 251 325 227
Performance Accelerated
Restricted Stock (PARS) 41 53 54 53
-----------------------------------------------------
Adjusted average common shares outstanding for
diluted computation 22,114 18,716 21,722 18,747
=====================================================
Net Income Per Share
- --------------------
Net income per common share - basic $0.42 $0.37 $1.00 $0.98
=====================================================
Net income per common share - diluted $0.41 $0.36 $0.98 $0.97
=====================================================
</TABLE>
7
<PAGE> 9
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts) (Unaudited)
- --------------------------------------------------------------------------------
3. BUSINESS COMBINATIONS
Effective August 1, 1997, the Company completed the acquisition of
Invetech Company (Invetech), a distributor of bearings, mechanical and
electrical drive system products, industrial rubber products and
specialty maintenance and repair products. The aggregate purchase price
including the issuance of 2,110 shares of Company common stock, was
$93,900. The cash portion of the purchase price of $23,400 was financed
through available short-term lines of credit.
The Company accounted for the acquisition as a purchase and has
included Invetech's results of operations from the effective date of
the acquisition. The Company incurred a pre-tax nonrecurring charge of
$4,000 in the quarter ending September 30, 1997 for consolidation
expenses and costs associated with disposal of duplicative property and
other assets. The purchase price was allocated based on estimated fair
values at the date of acquisition. Goodwill representing the excess of
the purchase price over assets acquired of $35,840 is being amortized
on a straight-line basis over 30 years.
The following table summarizes the unaudited consolidated pro forma
results of operations, as if the acquisition had occurred at the
beginning of the following periods:
<TABLE>
<CAPTION>
Nine Months Ended March 31
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Net sales $1,132,359 $1,092,405
Income before income taxes 33,983 32,968
Net income 20,777 19,904
Net income per share-basic .96 .92
Net income per share-diluted .94 .90
</TABLE>
The unaudited pro forma amounts include the pre-tax nonrecurring charge
of $4,000 for the nine months ended March 31, 1998.
This pro forma information is not necessarily indicative of the results
that actually would have been attained if the operations had been
combined during the periods presented and is not intended to be a
projection of future results.
8
<PAGE> 10
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands) (Unaudited)
- --------------------------------------------------------------------------------
During the nine months ended March 31, 1998 the Company acquired
certain assets of a rubber fabrication and repair shop, the stock of
two distributors of fluid power products, and a distributor of
bearings, power transmission products and industrial supplies for a
total of 123 shares of Company stock and $12,278 in cash. The
acquisitions of these businesses were accounted for as purchases and
their results of operations are included in the accompanying
consolidated financial statements from their respective acquisition
dates. Results of operations for these acquisitions are not material
for all periods presented. Goodwill recognized in connection with these
combinations is being amortized over 15 years.
4. LONG-TERM DEBT
In connection with the Invetech acquisition, the Company assumed an
$8,000 bank term loan, at an interest rate of 5.97%, payable in
December 1998.
In January 1998 the Company borrowed $50,000 of long-term debt under a
shelf facility agreement with The Prudential Insurance Company of
America. Proceeds from these 6.6% Senior Unsecured Term Notes were used
to repay short-term debt. Interest is payable quarterly. The principal
amount is to be paid in December 2007.
5. SHAREHOLDER RIGHTS PLAN
On January 15, 1998 the Company's Board of Directors adopted a
Shareholder Rights Plan and declared a dividend distribution of one
preferred share purchase right for each outstanding share of Company
common stock held of record as of February 2, 1998. The rights become
exercisable only if a person or group acquires beneficial ownership of
20% or more of the Company's common stock or commences a tender or
exchange offer for 20% or more of the Company's common stock, unless
the tender or exchange offer is for all outstanding shares of the
Company upon terms determined by the Company's continuing directors to
be in the best interests of the Company and its shareholders. When
exercisable, the Rights would entitle the holders (other than the
acquirer) to buy shares of the Company's common stock having a market
value equal to two times the right's exercise price or, in certain
circumstances, to buy shares of the acquiring company having a market
value equal to two times the right's exercise price.
9
<PAGE> 11
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's: (1) financial condition at March 31,
1998 and June 30, 1997, and (2) results of operations and cash flows during the
periods included in the accompanying statements of Consolidated Income and
Consolidated Cash Flows.
FINANCIAL CONDITION
Liquidity and Working Capital
- -----------------------------
Cash provided by operating activities was $12.3 million in the nine months ended
March 31, 1998. This compares to $27.5 million provided by operating activities
in the same period a year ago.
Cash flow from operations depends primarily upon generating operating income,
controlling the investment in inventories and receivables, and managing the
timing of payments to suppliers. The Company has continuing programs to monitor
and control these investments. During the six month period ended December 31,
1997 inventories (excluding inventories purchased in the Invetech transaction
and other acquisitions) increased approximately $35.5 million due to timing of
purchases relating to the calendar year end. Inventories declined approximately
$3.0 million from December 1997 through March 1998 and are expected to continue
to decline through the remainder of the fiscal year. Accounts receivable,
exclusive of receivables acquired in the Invetech transaction and other
acquisitions, remained constant.
Investments in property totaled $26.1 million and $10.9 million in the nine
months ended March 31, 1998 and 1997 respectively. The increases in capital
expenditures were primarily made for integrating and improving facilities, data
processing equipment and vehicles related to Invetech and other acquisitions.
The Company entered into an agreement to build a new 160,000 square foot
distribution center in the city of Corona, California, in the greater Los
Angeles area. Construction is expected to begin in the fourth quarter and be
completed by the third quarter of fiscal 1999. This build-to-suit facility will
be leased by the Company under a 10 year lease which is expected to be accounted
for as an operating lease. The Company is planning to move out of its current
Corona Distribution Center and into the new facility upon expiration of its
current lease.
Working capital at March 31, 1998 was $226.4 million compared to $164.7 million
at June 30, 1997. This increase is primarily due to the acquisition of Invetech
and other companies, the increase in inventories and the refinancing of short
term borrowings to long term debt.
10
<PAGE> 12
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Capital Resources
- -----------------
Capital resources are obtained from income retained in the business,
indebtedness under the Company's lines of credit and long-term debt agreements,
and operating lease arrangements. Average combined short-term and long-term
borrowing was $121.2 and $90.7 million for the nine months ended March 31, 1998
and 1997, respectively. The average effective interest rate on the short-term
borrowings for the nine months ended March 31, 1998 decreased to 6.0% from an
average rate of 6.5% for the nine months ended March 31, 1997 due to lower
interest rates on short-term debt. The Company has $160 million of short-term
lines of credit with commercial banks that provide for payment of interest at
various interest rate options, none of which are in excess of the banks' prime
rate. The Company had $21.1 million of borrowings outstanding under short-term
bank lines of credit on March 31, 1998. Unused lines of credit totaling $138.9
million are available for future short-term financing needs.
In January 1998 the Company borrowed $50 million at a 6.6% interest rate with a
ten-year term under a previously unused $50 million shelf facility agreement in
place with The Prudential Insurance Company of America. Proceeds from these
notes were used to repay short term debt.
The Board of Directors has authorized an ongoing program to purchase shares of
the Company's common stock to fund employee benefit programs and stock option
and award programs. These purchases are made in open market and negotiated
transactions, from time to time, depending upon market conditions. The Company
acquired 284,000 shares of its common stock for $8.0 million during the nine
months ended March 31, 1998.
Management expects that capital resources provided from operations, available
lines of credit and long-term debt and operating leases will be sufficient to
finance normal working capital needs, business acquisitions, enhancement of
facilities and equipment and the purchase of additional Company common stock.
Management also believes that additional long-term debt and line of credit
financing could be obtained if desired.
11
<PAGE> 13
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year 2000 Issue
- ---------------
The Company's plan for assessment, remediation and replacement of those of its
internal computer systems affected by the Year 2000 issue is on schedule. The
Company expects all internal systems to be fully tested and compliant by the end
of calendar year 1999. In addition, the Company is seeking assurances from its
product and service suppliers and major customers as to their Year 2000
compliance plans. The Company's progress in completing its Year 2000 activities
is overseen by an executive task force made up of representatives from all key
management areas. Additionally, the Company has retained an outside Year 2000
consultant to provide an independent assessment of the Company's Year 2000
efforts. The Company expects that the actions described above will significantly
reduce the likelihood that Year 2000 issues would have a material adverse effect
on the Company's business, financial condition or results of operations.
Based on currently available information, the total cost of the Company's Year
2000 activities is not expected to be material to its financial condition or
results of operations. If the requisite changes to the Company's systems are not
made or are not completed in a timely manner, or if the Company's suppliers and
customers fail to achieve Year 2000 compliance in a timely manner, then the Year
2000 issue could have a material adverse effect on the Company.
12
<PAGE> 14
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in principal items included in the
statements of consolidated income follows:
<TABLE>
<CAPTION>
Increase (Decrease)
(Dollars in Thousands Except per Share Amounts)
Three Months Ended Nine Months Ended
March 31 March 31
1998 and 1997 1998 and 1997
Amount Change Amount Change
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $96,681 32.5% $252,789 29.6%
Cost of sales 69,389 31.3% 190,588 30.2%
Selling,distribution and
administrative expenses 22,336 35.6% 55,599 29.5%
Operating income 4,956 39.8% 6,602 18.9%
Interest expense - net 677 43.7% 2,444 59.1%
Income before income taxes 4,279 39.3% 4,158 13.5%
Income taxes 1,919 46.3% 995 7.9%
Net income 2,360 34.9% 3,163 17.4%
Net income per share - diluted .05 13.9% .01 1.0%
</TABLE>
13
<PAGE> 15
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three Months Ended March 31, 1998 and 1997
- ------------------------------------------
The increase in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to the operations
of Invetech. Gross profit as a percentage of sales increased to 26.0% from
25.3%. This increase primarily relates to a reduction in estimated year to date
costs used to determine cost of sales offset by higher freight costs and changes
in the product mix due to the Invetech acquisition.
Selling, distribution and administrative expenses as a percent of sales,
increased to 21.6% from 21.1%. The increase was primarily from higher goodwill
amortization, hospitalization and temporary employment expenses as a percent of
sales.
Interest expense-net for the quarter increased by 43.7% as compared to the prior
year primarily as a result of an increase in average borrowings related to
Invetech and other acquisitions.
Income tax expense as a percentage of income before taxes was 39.9% in the
quarter ended March 31, 1998 and 38.0% in the quarter ended March 31, 1997.
Prior year amounts were lowered due to a year to date adjustment recorded in the
quarter ended March 31, 1997, which lowered the effective state and local income
tax rates in the prior year.
As a result of the above factors, net income increased by 34.9% compared to the
same quarter of last year.
Net income per share - diluted increased by 13.9% due to the impact of increased
net income partly offset by an increase in the number of shares outstanding
primarily in connection with the acquisition of Invetech in August 1997.
Nine Months Ended March 31, 1998 and 1997
- -----------------------------------------
The Company acquired Invetech effective August 1, 1997. Invetech's operations
were consolidated with those of the Company beginning as of the acquisition
date. The increases in net sales, cost of sales and selling, distribution and
administrative expenses from the prior year relate primarily to the operations
of Invetech. During the period ended March 31, 1998, the Company incurred a
pre-tax nonrecurring charge of $4,000 included in selling, distribution and
administrative expenses for consolidation expenses and costs associated with
disposal of duplicative property and other assets related to the Invetech
acquisition.
Gross profit as a percent of sales was 25.8% compared to 26.2%. This decrease
primarily relates to higher freight costs, lower purchase allowances and changes
in the product mix due to the Invetech acquisition.
14
<PAGE> 16
APPLIED INDUSTRIAL TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------------------------------------------
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Selling, distribution and administrative expenses, as a percent of sales,
remained constant at 22.1%. Increases in selling, distribution and
administrative expenses resulted primarily from the $4.0 million nonrecurring
charge as well as other nonrecurring expenses and were offset primarily from the
benefits of the consolidation of certain Invetech administrative functions.
Interest expense-net for the period increased by 59.1% as compared to the prior
year primarily as a result of an increase in average borrowings related to the
Invetech acquisition.
Income tax expense as a percentage of income before taxes was 38.9% in the nine
months ended March 31, 1998 and 40.9% in the nine months ended March 31, 1997.
The decrease is primarily attributed to tax savings from lower effective state
and local income tax rates and adjustments to the tax liability accounts from a
change in estimate.
As a result of the above factors, net income increased by 17.4% compared to the
same period last year.
Net income per share - diluted increased by 1.0% due to the impact of the
increase in net income partly offset by the issuance of 3.2 million shares for
the acquisition of Invetech in August 1997.
CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
- -------------------------------------------------------------------
Management's discussion and analysis contains statements that are
forward-looking, as that term is defined by the Private Securities Litigation
Reform Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. The Company intends that such forward-looking
statements be subject to the safe harbors created thereby. All forward-looking
statements are based on current expectations regarding important risk factors.
Accordingly, actual results may differ materially from those expressed in the
forward-looking statements, and the making of such statements should not be
regarded as a representation by the Company or any other person that the results
expressed therein will be achieved.
Important risk factors include, but are not limited to, the following: changes
in the economy or in specific customer industry sectors; changes in customer
procurement policies and practices; changes in product manufacturer sales
policies and practices; the availability of product; changes in operating
expenses; the effect of price increases; the variability and timing of business
opportunities including acquisitions, customer agreements, supplier
authorizations and other business strategies; the Company's ability to realize
the anticipated benefits of acquisitions and other business opportunities; the
Company's ability to complete, in a timely manner and within cost estimates, its
Year 2000 project; changes in accounting policies and practices; the effect of
organizational changes within the Company; adverse results in significant
litigation matters; adverse state and federal regulation and legislation; and
the occurrence of extraordinary events (including prolonged labor disputes,
natural events and acts of God, fires, floods and accidents).
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
(a) The Company incorporates by reference herein the description of the
case captioned KING BEARING, INC. V. CARYL EDMUND ORANGES, ET AL.,
Superior Court of the State of California, County of Orange, Case No.
53-42-31 found in Item 3 "Pending Legal Proceedings" contained in the
Company's Form 10-K for the fiscal year ended June 30, 1997. The
Company believes that this case will have no material adverse effect on
its business or financial condition.
(b) Applied Industrial Technologies, Inc. and/or one of its subsidiaries is
a defendant in several product-related lawsuits. Based on circumstances
presently known, the Company believes that these cases are not material
to its business or financial condition.
ITEM 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
---------
Exhibit No. Description
----------- -----------
4(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on
November 5, 1997 (filed as Exhibit
4(a) to the Company's Form 10-Q for
the quarter ending December 31,
1997, SEC File No. 1-2299, and
incorporated here by reference).
4(b) Code of Regulations of Applied
Industrial Technologies, Inc.
adopted September 6, 1988 (filed as
Exhibit 3(b) to the Company's
Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(c) Certificate of Merger of the Company
and Bearings, Inc. (Delaware) filed
with the Ohio Secretary of State on
October 18, 1988, including an
Agreement and Plan of Reorganization
dated September 6, 1988 (filed as
Exhibit 4(a) to the Company's
Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
16
<PAGE> 18
4(d) $80,000,000 Maximum Aggregate
Principal Amount Note Purchase and
Private Shelf Facility dated October
31, 1992 between the Company and The
Prudential Insurance Company of
America (filed as Exhibit 4(b) to
the Company's Registration Statement
on Form S-4 filed May 23, 1997,
Registration No. 333-27801, and
incorporated here by reference).
4(e) Amendment to $80,000,000 Maximum
Aggregate Principal Amount Note
Purchase and Private Shelf Facility
dated October 31, 1992 between the
Company and The Prudential Insurance
Company of America (filed as Exhibit
4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996,
SEC File No. 1-2299, and
incorporated here by reference).
4(f) $50,000,000 Private Shelf Agreement
dated as of November 27, 1996, as
amended on January 30, 1998, between
the Company and The Prudential
Insurance Company of America.
10(a) Non-Qualified Deferred Compensation
Agreement between the Company and
J. Michael Moore.
10(b) Amended and Restated Change in
Control Agreements between the
Company and each of its executive
officers.
27 Financial Data Schedule.
(b) The Company did not file, nor was it required to file, a Report on Form
8-K with the Securities and Exchange Commission during the quarter
ended March 31, 1998.
17
<PAGE> 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
(Company)
Date: May 15, 1998 By: /s/ Mark O. Eisele
-----------------------------------------------
Mark O. Eisele
Vice President & Controller
Date: May 15, 1998 By: /s/ Robert C. Stinson
-----------------------------------------------
Robert C. Stinson
Vice President
18
<PAGE> 20
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
4(a) Amended and Restated Articles of
Incorporation of Applied Industrial
Technologies, Inc., as amended on November
5, 1997 (filed as Exhibit 4(a) to the
Company's Form 10-Q for the quarter ending
December 31, 1997, SEC File No. 1-2299, and
incorporated here by reference).
4(b) Code of Regulations of Applied Industrial
Technologies, Inc., adopted September 6,
1988 (filed as Exhibit 3(b) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(c) Certificate of Merger of the Company and
Bearings, Inc. (Delaware) filed with the
Ohio Secretary of State on October 18, 1988,
including an Agreement and Plan of
Reorganization dated September 6, 1988
(filed as Exhibit 4(a) to the Company's
Registration Statement on Form S-4 filed May
23, 1997, Registration No. 333-27801, and
incorporated here by reference).
4(d) $80,000,000 Maximum Aggregate Principal
Amount Note Purchase and Private Shelf
Facility dated October 31, 1992 between the
Company and The Prudential Insurance Company
of America (filed as Exhibit 4(b) to the
Company's Registration Statement on Form S-4
filed May 23, 1997, Registration No.
333-27801, and incorporated here by
reference).
4(e) Amendment to $80,000,000 Maximum Aggregate
Principal Amount Note Purchase
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
<S> <C> <C>
and Private Shelf Facility dated October 31,
1992 between the Company and The Prudential
Insurance Company of America (filed as
Exhibit 4(g) to the Company's Form 10-Q for
the quarter ended March 31, 1996, SEC File
No. 1-2299, and incorporated here by
reference).
4(f) $50,000,000 Private Shelf Agreement dated as Attached
Attached of November 27, 1996, as amended on
January 30, 1998, between the Company and
The Prudential Insurance Company of America.
10(a) Non-Qualified Deferred Compensation Attached
Agreement between the Company and
J. Michael Moore.
10(b) Amended and Restated Change in Control Attached
Agreements between the Company and
each of its executive officers.
27 Financial Data Schedule. Attached
</TABLE>
<PAGE> 1
Exhibit 4(f)
BEARINGS, INC.
3600 Euclid Avenue
Cleveland, Ohio 44115-2515
As of November 27, 1996
The Prudential Insurance Company
of America (herein called "PRUDENTIAL")
Each Prudential Affiliate which becomes
bound by this Agreement as hereinafter
provided (together with Prudential, the
"PURCHASERS")
c/o Prudential Capital Group
Two Prudential Plaza
Suite 5600
Chicago, Illinois 60601
Gentlemen:
The undersigned, BEARINGS, INC., an Ohio corporation (herein called the
"COMPANY"), hereby agrees with you as set forth below. Reference is made to
paragraph 10 hereof for definitions of capitalized terms used herein and not
otherwise defined herein.
1. AUTHORIZATION OF ISSUE OF PRIVATE SHELF NOTES. The Company will
authorize the issue of its senior promissory notes (herein called the "PRIVATE
SHELF NOTES") in the aggregate principal amount of $50,000,000, to be dated the
date of issue thereof, to mature, in the case of each Private Shelf Note so
issued, no less than seven (7) years and no more than twenty (20) years after
the issuance thereof, to bear interest on the unpaid balance thereof from the
date thereof at the rate per annum (and to have such other particular terms
consistent with the terms of this Agreement) as shall be set forth in the
Confirmation of Acceptance with respect to such Private Shelf Note delivered
pursuant to paragraph 2E, and to be substantially in the form of EXHIBIT A
attached hereto. The terms "Private Shelf Note" and "Private Shelf Notes" as
used herein shall include each Private Shelf Note delivered pursuant to any
provision of this Agreement and each Private Shelf Note delivered in
substitution or exchange for any such Private Shelf Note pursuant to any such
provision. The terms "NOTE" or "NOTES" as used herein shall include each Private
Shelf Note (whether designated a Series A Note, Series B Note or Series C Note,
etc.) delivered pursuant to any provision of this Agreement and each Note
delivered in substitution or exchange for any such Note pursuant to any such
provision. Notes which have (i) the same final maturity, (ii) the same principal
prepayment dates, (iii) the same principal prepayment amounts (as a percentage
of the original principal amount of each Note), (iv) the same interest rate, (v)
the same interest payment periods, and (vi) which are otherwise designated a
"Series" hereunder or in the Confirmation of Acceptance whether or not the
foregoing conditions are satisfied, are herein called a "SERIES" of Notes.
1
<PAGE> 2
2. PURCHASE AND SALE OF NOTES.
2A. FACILITY. Subject to the terms and conditions of this Agreement and
in reliance upon the representations and warranties set forth herein, Prudential
is willing to consider, in its sole discretion and within limits which may be
authorized for purchase by Prudential and Prudential Affiliates from time to
time, the purchase of Private Shelf Notes pursuant to this Agreement. The
willingness of Prudential to consider such purchase of Private Shelf Notes is
herein called the "FACILITY". At any time, $50,000,000, minus the aggregate
principal amount of Private Shelf Notes purchased and sold pursuant to this
Agreement prior to such time, minus the aggregate principal amount of "ACCEPTED
NOTES" (as hereinafter defined) which have not yet been purchased and sold
hereunder prior to such time, is herein called the "AVAILABLE FACILITY AMOUNT"
at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER
PURCHASES OF PRIVATE SHELF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS
UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE
OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE PRIVATE SHELF NOTES, OR TO QUOTE
RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF PRIVATE
SHELF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY
PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE.
2B. ISSUANCE PERIOD. Private Shelf Notes may be issued and sold
pursuant to this Agreement until the earlier of (i) June 25, 1999 and (ii) the
thirtieth day after Prudential shall have given to the Company, or the Company
shall have given to Prudential, a written notice stating that it elects to
terminate the Facility. The period during which Private Shelf Notes may be
issued and sold pursuant to this Agreement is herein called the "ISSUANCE
PERIOD".
2C. REQUEST FOR PURCHASE. The Company may from time to time during the
Issuance Period make requests for purchases of Private Shelf Notes (each such
request being herein called a "REQUEST FOR PURCHASE"). Each Request for Purchase
shall be made to Prudential by telecopier and confirmed by nationwide overnight
delivery service, and shall (i) specify the aggregate principal amount of
Private Shelf Notes covered thereby, which shall not be less than $5,000,000 and
shall not be greater than the Available Facility Amount at the time such Request
for Purchase is made, (ii) specify the principal amounts, final maturities,
principal prepayment dates and amounts and interest payment periods (quarterly
in arrears) of the Private Shelf Notes covered thereby, (iii) specify the use of
proceeds of such Private Shelf Notes, (iv) specify the proposed day for the
closing of the purchase and sale of such Private Shelf Notes, which shall be a
Business Day during the Issuance Period not more than thirty (30) days after the
making of such Request for Purchase and in any event not less than three (3)
days after any Acceptance with respect to such Request for Purchase under
paragraph 2E, (v) specify the number of the account and the name and address of
the depository institution to which the purchase prices of such Private Shelf
Notes are to be transferred on the Private Shelf Closing Day for such purchase
and sale, (vi) certify that the representations and warranties contained in
paragraph 8 hereof are true on and as of the date of such Request for Purchase
except to the extent of changes caused by the transactions herein contemplated
and that there exists on the date of such Request for Purchase no Event of
Default or Default (and that no Event of Default or Default shall arise as the
result of
2
<PAGE> 3
the purchase and sale of such Private Shelf Notes), and (vii) be substantially
in the form of EXHIBIT B attached hereto. Each Request for Purchase shall be in
writing and shall be deemed made when received by Prudential.
2D. RATE QUOTES. As soon as practicable and in any event not later than
five (5) Business Days after the Company shall have given Prudential a Request
for Purchase pursuant to paragraph 2C, Prudential may, but shall be under no
obligation to, provide (by telephone and promptly thereafter confirmed by
telecopier, in each case no earlier than 9:30 A.M. and no later than 1:30 P.M.
New York City local time) interest rate quotes for the several principal
amounts, maturities, prepayment schedules and interest payment periods of
Private Shelf Notes specified in such Request for Purchase. Each quote shall
represent the interest rate per annum payable on the outstanding principal
balance of such Private Shelf Notes until such balance shall have become due and
payable, at which Prudential or a Prudential Affiliate would be willing to
purchase such Private Shelf Notes at 100% of the principal amount thereof. Such
rate quotes shall be made and determined by Prudential in accordance with the
internal methods and procedures then used by Prudential to price comparable
transactions with companies similarly situated with similar credit risks.
2E. ACCEPTANCE. Within the Acceptance Window, the Company may, subject
to the terms of paragraph 2F, elect to accept such interest rate quotes as to
not less than $5,000,000 aggregate principal amount of the Private Shelf Notes
specified in the applicable Request for Purchase. Such election shall be made by
an Authorized Officer of the Company notifying Prudential by telephone or
telecopier within the Acceptance Window (but not earlier than 9:30 A.M. or later
than 2:00 P.M., New York City local time) that the Company elects to accept such
interest rate quotes, specifying the Private Shelf Notes (each such Private
Shelf Note being herein called an "ACCEPTED NOTE") as to which such acceptance
(herein called an "ACCEPTANCE") relates. The day the Company notifies Prudential
of an Acceptance with respect to any Accepted Notes is herein called the
"ACCEPTANCE DAY" for such Accepted Notes. Any interest rate quotes as to which
Prudential does not receive an Acceptance within the Acceptance Window shall
expire, and no purchase or sale of Private Shelf Notes hereunder shall be made
based on such expired interest rate quotes. In the event the closing with
respect to any Accepted Notes fails to occur within ten (10) days of the
Acceptance Day for any reason (other than Prudential's failure to fund the
purchase price of the Private Shelf Notes after all conditions to closing
specified in paragraph 3A have been satisfied on or before 11:30 A.M. New York
City local time on the last Business Day preceding the end of such ten day
period), the interest rate applicable to such Accepted Notes may increase based
upon the costs of the delayed closing to Prudential as reasonably determined by
Prudential. Subject to paragraph 2F and the other terms and conditions hereof,
the Company agrees to sell to Prudential or a Prudential Affiliate, and
Prudential agrees to purchase, or to cause the purchase by a Prudential
Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes.
As soon as practicable following the Acceptance Day, the Company, Prudential and
each Prudential Affiliate which is to purchase any such Accepted Notes will
execute a confirmation of such Acceptance substantially in the form of EXHIBIT C
attached hereto (herein called a "CONFIRMATION OF ACCEPTANCE"). If the Company
should fail to execute and return the applicable Confirmation of Acceptance to
Prudential within three Business Days following receipt of a Confirmation of
Acceptance with respect to any Accepted Notes, Prudential may at its election at
any time prior to its receipt thereof cancel the closing with
3
<PAGE> 4
respect to such Accepted Notes by so notifying the Company in writing.
2F. MARKET DISRUPTION. Notwithstanding the provisions of paragraph 2E,
if Prudential shall have provided interest rate quotes pursuant to paragraph 2E
and thereafter, prior to the time an Acceptance with respect to such quotes
shall have been notified to Prudential in accordance with paragraph 2E, the
domestic market for U.S. Treasury securities or derivatives shall have closed or
there shall occur a general suspension, material limitation, or significant
disruption of trading in securities generally on the New York Stock Exchange or
in the domestic market for U.S. Treasury securities, then such interest rate
quotes shall expire, and no purchase or sale of Private Shelf Notes hereunder
shall be made based on such expired interest rate quotes. If the Company
thereafter notifies Prudential of the Acceptance of any such interest rate
quotes, such Acceptance shall be ineffective for all purposes of this Agreement,
and Prudential shall promptly notify the Company that the provisions of this
paragraph 2F are applicable with respect to such Acceptance.
2G. PRIVATE SHELF CLOSING. Not later than 11:30 A.M. (New York City
local time) on the Private Shelf Closing Day for any Accepted Notes, the Company
will deliver to each Purchaser listed in the Confirmation of Acceptance relating
thereto at the offices of Prudential Capital Group, Two Prudential Plaza, Suite
5600, Chicago, Illinois 60601, Attention: Law Department, the Private Shelf
Notes to be purchased by such Purchaser in the form of a single Accepted Note
for the Accepted Notes which have exactly the same terms (or such greater number
of Notes in authorized denominations as such Purchaser may request) dated the
Private Shelf Closing Day and registered in such Purchaser's name (or in the
name of its nominee), against payment of the purchase price thereof by transfer
of immediately available funds for credit to the Company's account specified in
the Request for Purchase of such Private Shelf Notes. If the Company fails to
tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on
the scheduled Private Shelf Closing Day for such Accepted Notes as provided
above in this paragraph 2G, or any of the conditions specified in paragraph 3A
shall not have been fulfilled by the time required on such scheduled Private
Shelf Closing Day, the Company shall, prior to 1:00 P.M., New York City local
time, on such scheduled Private Shelf Closing Day notify such Purchaser in
writing whether (x) such closing is to be rescheduled (such rescheduled date to
be a Business Day during the Issuance Period not less than one Business Day and
not more than 30 Business Days after such scheduled Private Shelf Closing Day
(the "RESCHEDULED CLOSING DAY")) and certify to such Purchaser that the Company
reasonably believes that it will be able to comply with the conditions set forth
in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the
Delayed Delivery Fee, if any, in accordance with paragraph 2H(2) or (y) such
closing is to be cancelled as provided in paragraph 2H(3). In the event that the
Company shall fail to give such notice referred to in the preceding sentence,
such Purchaser may at its election, at any time after 1:00 P.M., New York City
local time, on such scheduled Private Shelf Closing Day, notify the Company in
writing that such closing is to be cancelled as provided in paragraph 2H(3).
Notwithstanding anything to the contrary contained in this Agreement, the
Company may not elect to reschedule a closing with respect to any given Accepted
Notes on more than one occasion, unless Prudential shall have otherwise
consented in writing which consent shall not be unreasonably denied.
4
<PAGE> 5
2H. FEES.
2H(1). ISSUANCE FEE. On each Private Shelf Closing Day which occurs
after the first anniversary date of this Agreement, the Company agrees to pay
Prudential in immediately available funds a fee (the "ISSUANCE FEE") in an
amount equal to 0.15% of the aggregate principal amount of Notes sold on such
Private Shelf Closing Day.
2H(2). DELAYED DELIVERY FEE. If the closing of the purchase and sale of
any Accepted Note is delayed for any reason (other than Prudential's failure to
fund the purchase price of the Accepted Notes after all conditions to closing
specified in paragraph 3A have been satisfied on or before 11:30 A.M. New York
City local time on the last Business Day preceding the 31st day after the
Acceptance Day) beyond the original Private Shelf Closing Day for such Accepted
Note, the Company will pay to Prudential on the last Business Day of each
calendar month, commencing with the first such day to occur more than 30 days
after the Acceptance Day for such Accepted Note and ending with the last such
day to occur prior to the Cancellation Date or the actual closing date of such
purchase and sale, and on the Cancellation Date or actual closing date of such
purchase and sale (if such Cancellation Date or closing date occurs more than 30
days after the Acceptance Day for such Accepted Note), a fee (herein called the
"DELAYED DELIVERY FEE") calculated as follows:
(BEY - MMY) X DTS/360 X Full Price
where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per
annum of such Accepted Note; "MMY" means Money Market Yield, i.e., the yield per
annum on a commercial paper investment of the highest quality selected by
Prudential on the date Prudential receives notice of the delay in the closing
for such Accepted Notes having a maturity date or dates the same as, or closest
to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative
investment being selected by Prudential each time such closing is delayed);
"DTS" means Days to Settlement, i.e., the number of actual days elapsed from and
including the thirty-first day after the Acceptance Day of such Accepted Note
(in the case of the first such payment with respect to such Accepted Note) or
from and including the date of the immediately preceding payment (in the case of
any subsequent delayed delivery fee payment with respect to such Accepted Note)
to but excluding the date of such payment; and "FULL PRICE" means the principal
amount, i.e., the principal amount of the Accepted Note for which such
calculation is being made. If the Delayed Delivery Fee is zero or negative,
there will be no Delayed Delivery Fee. Nothing contained herein shall obligate
any Purchaser to purchase any Accepted Note on any day other than the Private
Shelf Closing Day for such Accepted Note, as the same may be rescheduled from
time to time in compliance with paragraph 2G.
2H(3). CANCELLATION FEE. If the Company at any time notifies Prudential
in writing that the Company is canceling the closing of the purchase and sale of
any Accepted Note, or if Prudential notifies the Company in writing under the
circumstances set forth in the last sentence of paragraph 2E or the penultimate
sentence of paragraph 2G that the closing of the purchase and sale of such
Accepted Note is to be canceled, or if the closing of the purchase and sale of
such Accepted Note is not consummated on or prior to the last day of the
Issuance Period (the date of any such notification, or the last day of the
Issuance Period, as the case may be, being herein
5
<PAGE> 6
called the "CANCELLATION DATE"), the Company will pay Prudential in immediately
available funds an amount (the "CANCELLATION FEE") calculated as follows:
PI X Full Price
where "PI" means Price Increase, i.e., the quotient (expressed in decimals)
obtained by dividing (a) the excess of the ask price (as determined by
Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid
price (as determined by Prudential) of the Hedge Treasury Note(s) on the
Acceptance Day for such Accepted Note by (b) such bid price; and "FULL PRICE"
has the meaning set forth in paragraph 2H(2), above. The foregoing bid and ask
prices shall be as reported by Telerate Systems, Inc. (or, if such data for any
reason ceases to be available through Telerate Systems, Inc., any publicly
available source of similar market data selected by Prudential). Each price
shall be based on a U.S. Treasury security having a par value of $100.00 and
shall be rounded to the second decimal place. If the Price Increase is zero or
negative, there will be no Cancellation Fee.
2H(4). STRUCTURING FEE. In consideration for the time, effort and
expense involved in the preparation, negotiation and execution of this Agreement
and the amendment of the Existing Agreement, the Company agrees to pay
Prudential on the date of the execution of this Agreement in immediately
available funds a fee (the "STRUCTURING FEE") in the amount of $10,000.
3. CONDITIONS OF CLOSING. Prudential's and any Purchaser's obligation
to purchase and pay for any Private Shelf Notes, is subject in each case to the
satisfaction, on or before the applicable Closing Day for such Notes, of the
conditions set forth in paragraph 3A.
3A(1). OPINION OF COMPANY'S COUNSEL. On the Initial Closing Day,
Prudential shall have received from Robert C. Stinson, Esq., general counsel of
the Company, a favorable opinion satisfactory to Prudential and substantially in
the form of EXHIBIT D-1 attached hereto.
3A(2). OPINION OF COMPANY'S COUNSEL. On each Private Shelf Closing Day,
each Purchaser shall have received from Robert C. Stinson, Esq., general counsel
of the Company (or other counsel reasonably acceptable to the Purchasers), a
favorable opinion satisfactory to the Purchasers and substantially in the form
of EXHIBIT D-2 attached hereto.
3A(3). REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The representations
and warranties contained in paragraph 8 hereof shall be true on and as of the
applicable Closing Day, except to the extent of changes caused by the
transactions herein contemplated; there shall exist on the applicable Closing
Day no Event of Default or Default; and the Company shall have delivered to each
Purchaser an Officer's Certificate, dated the applicable Closing Day, to both
such effects.
3A(4). FEES. On or before the Initial Closing Day, the Company shall
have paid in full to Prudential the Structuring Fee required by paragraph 2H(4).
On or before each Private Shelf Closing Day, the Company shall have paid in full
to Prudential any Issuance Fee required by paragraph 2H(1) and to the Purchasers
any Delayed Delivery Fee or Cancellation Fee required by paragraph 2H(2) or
2H(3).
6
<PAGE> 7
3A(5). PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and
payment for the Notes to be purchased on the applicable Private Shelf Closing
Day on the terms and conditions herein provided (including the use of the
proceeds of such Notes by the Company) shall not violate any applicable law or
governmental regulation (including, without limitation, Section 5 of the
Securities Act or Regulation G of the Board of Governors of the Federal Reserve
System) and shall not subject any Purchaser to any material tax (other than
ordinary income taxes), material penalty, material liability or other onerous
condition under or pursuant to any applicable law or governmental regulation,
and such Purchaser shall have received such certificates or other evidence as
such Purchaser may have requested no less than 5 days before any scheduled
closing to establish compliance with this condition.
3A(6). LEGAL MATTERS. Counsel for the Purchasers shall be satisfied as
to all legal matters in all material respects relating to such purchase and
sale.
3A(7). PROCEEDINGS. All corporate and other proceedings taken or to be
taken in connection with the transactions contemplated hereby and all documents
incident thereto shall be reasonably satisfactory in substance and form to each
Purchaser, and each Purchaser shall have received all such counterpart originals
or certified or other copies of such documents as it may reasonably request.
3A(8). SALE OF NOTES OF SAME SERIES TO OTHER PURCHASERS. The Company
shall have tendered to the other Purchasers (if any) the Notes of the same
Series to be purchased by them at the closing.
4. PREPAYMENTS. The Notes shall be subject to prepayment with respect
to the required prepayments specified in paragraph 4A and under the
circumstances specified in paragraphs 4B and 4E.
4A. REQUIRED PREPAYMENT OF PRIVATE SHELF NOTES. Until each respective
Series of Private Shelf Notes shall be paid in full, each respective Series of
Private Shelf Notes shall be subject to such required prepayments, if any, as
are specified for such Series of Private Shelf Notes in accordance with the
provisions of paragraph 2C hereof. Any prepayment made by the Company pursuant
to any other provision of this paragraph 4 shall not reduce or otherwise affect
its obligation to make any prepayment as specified in the respective Series of
Private Shelf Notes.
4B. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT. Subject to the
limitations set forth below, the Notes shall be subject to prepayment, in whole
at any time or from time to time in part (in $100,000 increments and not less
than $2,000,000 per occurrence), at the option of the Company, at 100% of the
principal amount so prepaid plus interest thereon to the prepayment date and the
Yield-Maintenance Amount, if any, with respect to each Note so prepaid. Any
partial prepayment of the Notes pursuant to this paragraph 4B shall be applied
in satisfaction of required payments of principal in the inverse order of their
scheduled due dates.
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4C. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give to the holder
of each Note of a Series irrevocable written notice of any optional prepayment
pursuant to paragraph 4B with respect to such Series not less than 30 days prior
to the prepayment date, specifying (i) such prepayment date, (ii) the aggregate
principal amount of the Notes of such Series to be prepaid on such date, (iii)
the principal amount of the Notes of such holder to be prepaid on that date, and
(iv) stating that such optional prepayment is to be made pursuant to paragraph
4B. Notice of optional prepayment having been given as aforesaid, the principal
amount of the Notes specified in such notice, together with interest thereon to
the prepayment date and together with the Yield-Maintenance Amount, if any, with
respect thereto, shall become due and payable on such prepayment date.
4D. PARTIAL PAYMENTS PRO RATA. In the case of each prepayment pursuant
to paragraphs 4A or 4B of less than the entire unpaid principal amount of all
outstanding Notes of any Series, the amount to be prepaid shall be applied pro
rata to all outstanding Notes of such Series (including, for the purpose of this
paragraph 4D only, all Notes of such Series prepaid or otherwise retired or
purchased or otherwise acquired by the Company or any of its Subsidiaries or
Affiliates other than by prepayment pursuant to paragraphs 4A or 4B) according
to the respective unpaid principal amounts thereof.
4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit
any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or
in part prior to their stated final maturity (other than (i) by prepayment
pursuant to paragraphs 4A or 4B or (ii) upon acceleration of such final maturity
pursuant to paragraph 7A), or purchase or otherwise acquire, directly or
indirectly, Notes held by any holder unless the Company or such Subsidiary or
Affiliate shall have offered to prepay or otherwise retire or purchase or
otherwise acquire, as the case may be, the same proportion of the aggregate
principal amount of Notes held by each other holder of Notes at the time
outstanding upon the same terms and conditions. Any Notes so prepaid or
otherwise retired or purchased or otherwise acquired by the Company or any of
its Subsidiaries or Affiliates shall not be deemed to be outstanding for any
purpose under this Agreement, except as provided in paragraph 4D. In the event
that (i) the Company at any time requests in writing the approval by the holders
of the Notes of a merger, acquisition, recapitalization or reorganization, the
consummation of which would result in an Event of Default or Default hereunder,
and (ii) the Required Holders shall have failed to grant such approval within
ninety (90) days of the date of such written request, then the Company may,
subject to the terms of the first sentence of this paragraph 4E and
simultaneously with the consummation of such prohibited transaction, prepay the
Notes of the nonconsenting holders at 100% of the principal amount so prepaid
plus interest thereon to the prepayment date and the Yield-Maintenance Amount,
if any, with respect to such Note within one hundred fifty (150) days of the
date of the written request.
5. AFFIRMATIVE COVENANTS.
5A. FINANCIAL STATEMENTS. The Company covenants that it will deliver to
each Significant Holder in triplicate:
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(i) as soon as practicable and in any event within 60 days
after the end of each quarterly period (other than the last quarterly
period) in each fiscal year, consolidated statements of income,
stockholders' equity and cash flows of the Company and its Subsidiaries
for the period from the beginning of the current fiscal year to the end
of such quarterly period, and a consolidated balance sheet of the
Company and its Subsidiaries as at the end of such quarterly period,
setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year, all in reasonable
detail and certified by an authorized financial officer of the Company,
subject to changes resulting from year-end adjustments; PROVIDED,
HOWEVER, that delivery pursuant to clause (iii) below of copies of the
Quarterly Report on Form lO-Q of the Company for such quarterly period
filed with the Securities and Exchange Commission shall be deemed to
satisfy the requirements of this clause (i);
(ii) as soon as practicable and in any event within 120
days after the end of each fiscal year, consolidated statements of
income, stockholders' equity, and cash flows of the Company and its
Subsidiaries for such year, and a consolidated balance sheet of the
Company and its Subsidiaries as at the end of such year, setting forth
in each case in comparative form corresponding consolidated figures
from the preceding annual audit, all in reasonable detail and
satisfactory in form to the Required Holder(s) and, reported on by
independent public accountants of recognized national standing selected
by the Company whose report shall be without limitation as to scope of
the audit and satisfactory in substance to the Required Holder(s);
PROVIDED, HOWEVER, that delivery pursuant to clause (iii) below of
copies of the Annual Report on Form 10-K of the Company for such fiscal
year filed with the Securities and Exchange Commission shall be deemed
to satisfy the requirements of this clause (ii);
(iii) promptly upon transmission thereof, copies of all
such financial statements, proxy statements, notices and reports as it
shall send to its public stockholders and copies of all registration
statements (without exhibits) and all reports which it files with the
Securities and Exchange Commission (or any governmental body or agency
succeeding to the functions of the Securities and Exchange Commission),
excluding registration statements on Form S-8;
(iv) promptly upon receipt thereof, a copy of each other
report submitted to the Company or any Subsidiary by independent
accountants in connection with any annual, interim or special audit
made by them of the books of the Company or any Subsidiary; and
(v) with reasonable promptness, such other financial data
as such Significant Holder may reasonably request.
Together with each delivery of financial statements required by clauses (i) and
(ii) above, the Company will deliver to each Significant Holder an Officer's
Certificate demonstrating (with computations in reasonable detail) compliance by
the Company and its Subsidiaries with the
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provisions of paragraph 6 and stating that, to the best of their knowledge based
upon reasonable inquiry, there exists no Event of Default or Default, or, if any
Event of Default or Default exists, specifying the nature and period of
existence thereof and what action the Company proposes to take with respect
thereto. Together with each delivery of financial statements required by clause
(ii) above, the Company will deliver to each Significant Holder a report of such
accountants stating that, in making the audit necessary for their report on such
financial statements, they have obtained no knowledge of any Event of Default or
Default, or, if they have obtained knowledge of any Event of Default or Default,
specifying the nature and period of existence thereof. Such accountants,
however, shall not be liable to anyone by reason of their failure to obtain
knowledge of any Event of Default or Default which would not be disclosed in the
course of an audit conducted in accordance with generally accepted auditing
standards.
The Company also covenants that immediately after any Responsible
Officer obtains knowledge of an Event of Default or Default, it will deliver to
each Significant Holder an Officer's Certificate specifying the nature and
period of existence thereof and what action the Company proposes to take with
respect thereto.
5B. INFORMATION REQUIRED BY RULE 144A. The Company covenants that it
will, upon the request of the holder of any Note, provide such holder, and any
qualified institutional buyer designated by such holder, such financial and
other information as such holder may reasonably determine to be necessary in
order to permit compliance with the information requirements of Rule 144A under
the Securities Act in connection with the resale of Notes, except at such times
as the Company is subject to the reporting requirements of section 13 or 15(d)
of the Exchange Act. For the purpose of this paragraph 5B, the term "qualified
institutional buyer" shall have the meaning specified in Rule 144A under the
Securities Act.
5C. INSPECTION OF PROPERTY. The Company covenants that it will permit
any Person designated by any Significant Holder in writing, at such Significant
Holder's expense, to visit and inspect any of the properties of the Company and
its Subsidiaries, to discuss the affairs, finances and accounts of any of such
corporations with the principal officers of the Company and its independent
public accountants and, if a Default or Event of Default shall be continuing, to
examine the corporate books and financial records of the Company and its
Subsidiaries and obtain copies thereof or extracts therefrom, all at such
reasonable times as the Company and such Significant Holder shall agree but in
any event within three Business Days from request of any Purchaser and during
normal business hours.
5D. COVENANT TO SECURE NOTES EQUALLY. The Company covenants that, if it
or any Subsidiary shall create or assume any Lien upon any of its property or
assets, whether now owned or hereafter acquired, other than Liens permitted by
the provisions of paragraph 6B(1) (unless the prior written consent to the
creation or assumption thereof shall have been obtained pursuant to paragraph
11C), it will make or cause to be made effective provision whereby the Notes
will be secured by such Lien equally and ratably with any and all other Debt
thereby secured so long as any such other Debt shall be so secured.
5E. MAINTENANCE OF INSURANCE. The Company covenants that it and each
Subsidiary shall maintain, with financially sound and reputable insurers,
insurance in such
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amounts and against such liabilities and hazards as is ordinarily carried by
companies similarly situated in the same or similar lines of business.
6. NEGATIVE COVENANTS. Unless the Required Holders shall otherwise
consent in writing, the Company agrees to observe and perform each of the
negative covenants set forth below so long as any Note shall remain outstanding.
6A(1). LIQUIDITY. The Company covenants that it will not permit
Consolidated Current Assets less Consolidated Current Liabilities determined at
the end of any fiscal quarter to fall below an amount equal to $125,000,000.
6A(2). CURRENT RATIO. The Company covenants that it will not permit the
ratio (expressed as a percentage) of Consolidated Current Assets to Consolidated
Current Liabilities determined at the end of any fiscal quarter to fall below
150%.
6A(3). CONSOLIDATED TANGIBLE NET WORTH. The Company covenants that it
will not permit Consolidated Tangible Net Worth determined at the end of any
fiscal quarter to fall below $115,000,000 PLUS an amount equal to 30% of annual
Consolidated Net Income (less 0% in the event of a loss), applied at the end of
each fiscal year commencing with the fiscal year ending June 30, 1996.
6B. CREDIT AND OTHER RESTRICTIONS. The Company covenants that it will
not and will not permit any Subsidiary to:
6B(1). LIEN RESTRICTIONS. Create, incur, assume or suffer to exist any
Lien upon any of its property or assets, whether now owned or hereafter acquired
(whether or not provision is made for the equal and ratable securing of Notes in
accordance with the provisions of paragraph 5D hereof), except:
(i) Liens for taxes or other governmental charges not yet
due or which are being actively contested in good faith by appropriate
proceedings;
(ii) Liens incidental to the conduct of its business or
the ordinary operation or use of its property which were not incurred
in connection with the borrowing of money or obtaining credit or
advances;
(iii) Liens on property or assets of a Subsidiary to
secure obligations of such Subsidiary to the Company or another
Subsidiary;
(iv) Liens identified on EXHIBIT G to the Existing
Agreement a copy of which is attached hereto;
(v) Liens relating to the ledger balances, consignments,
and other similar arrangements and other Liens (including Liens
consisting of Capitalized Lease Obligations and/or purchase money
security interests) to secure Debt,
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provided that (x) the Debt to which the Lien relates is permitted by
paragraph 6B(2) and (y) the aggregate amount of Debt (plus, without
duplication, the aggregate amount of such ledger balances, consignments
and other similar arrangements) secured by such Liens does not exceed
at any time 20% of Consolidated Tangible Net Worth; and
(vi) Liens consisting of survey exceptions, minor
encumbrances, easements and rights of way, or zoning or other
restrictions as to the use of real properties; PROVIDED, HOWEVER, that
such Liens in the aggregate do not materially impair the usefulness of
such property in the business of the Company and its Subsidiaries,
taken as a whole.
6B(2). DEBT RESTRICTION. Create, incur, assume or suffer to exist any
Debt, except:
(i) Debt in existence on March 28, 1996;
(ii) Debt of any Subsidiary to the Company or to any other
Subsidiary; and
(iii) additional Debt of the Company and/or any Subsidiary
subject to the proviso set forth below;
PROVIDED, HOWEVER, (x) that the aggregate principal amount of consolidated Debt
of the Company and its Subsidiaries shall not exceed at any time an amount equal
to 58% of Consolidated Capitalization and (y) Priority Debt shall not exceed at
any time an amount equal to 20% of Consolidated Tangible Net Worth.
6B(3). LOANS, ADVANCES AND INVESTMENTS. Make or permit to remain
outstanding loans or advances to, or own, purchase or acquire any stock
obligations or securities of, or any other interest in, or make any capital
contributions to, any Person (collectively, "INVESTMENTS"), except that the
Company or any Subsidiary may:
(i) make or permit to remain outstanding loans or
advances to any Subsidiary;
(ii) own, purchase or acquire stock, obligations or
securities of a Subsidiary or of a corporation which immediately after
such purchase or acquisition will be a Subsidiary;
(iii) acquire and own (a) stock of the Company so long as
no Default or Event of Default exists after giving effect to the
acquisition thereof and (b) stock, obligations or securities received
in settlement of debts (created in the ordinary course of business)
owing to the Company or any Subsidiary;
(iv) own, purchase or acquire prime commercial paper,
banker's acceptances and certificates of deposit in the United States
and Canadian
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commercial banks (having capital resources in excess of $100 million
U.S.), repurchase agreements with respect to the foregoing, in each
case due within one year from the date of purchase and payable in the
United States in United States dollars, obligations of the United
States Government or any agency thereof, and obligations guaranteed by
the United States Government;
(v) make or permit to remain outstanding relocation,
travel and other like advances to officers and employees in the
ordinary course of business;
(vi) permit to remain outstanding Investments existing on
March 28, 1996; and
(vii) make other Investments not in excess of 15% of
Consolidated Tangible Net Worth.
6B(4). DISPOSITION OF CERTAIN ASSETS. Sell, lease, transfer or
otherwise dispose of any assets of the Company or any Subsidiary other than in
an Excluded Transfer, unless the net book value of the assets sold, leased,
transferred or otherwise disposed of outside of the ordinary course of business
in the then most recent 24 month period together with the net book value of any
assets then proposed to be sold, leased, transferred or otherwise disposed of
outside of the ordinary course of business do not exceed 30% of Consolidated
Tangible Net Worth. For purposes of this paragraph and paragraph 6B(2), a sale
of the Company's or its Subsidiaries' receivables in connection with financing
of the Company or any of its Subsidiaries under a securitization program shall
be deemed to constitute Debt of the Company or any such Subsidiary and not a
sale of assets.
6B(5). SALE OF STOCK AND DEBT OF SUBSIDIARIES. Sell or otherwise
dispose of, or part with control of, any shares of stock or debt of any
Subsidiary, except to the Company or any Subsidiary, and except that all shares
of stock and debt of any Subsidiary at the time owned by or owed to the Company
and all Subsidiaries may by sold as an entirety for fair market value (as
determined in good faith by the Board of Directors of the Company) provided that
the net book value of the assets of such Subsidiary, together with the net book
value of the assets of the Company and any other Subsidiaries sold during the
then most recent 24 month period do not exceed 30% of Consolidated Tangible Net
Worth.
6B(6). MERGER AND CONSOLIDATION. Merge with or consolidate into any
other company, except (i) Subsidiaries may be merged into the Company, (ii) the
Company may merge with another entity provided that the Company is the surviving
corporation and no Default or Event of Default under this Agreement would exist
after giving effect to the merger or as a result thereof, (iii) any Subsidiary
may be merged with or into another corporation provided that the surviving
corporation is a Subsidiary (in the case of a merger that does not involve the
Company) or the Company and no Default or Event of Default would exist after
giving effect to the merger or as a result thereof, or (iv) the Company may be
merged into a Subsidiary or a newly created entity organized under the laws of
any state of the United States which has conducted no previous business and at
the time of such merger shall have no liabilities, if, in either case, the
surviving corporation assumes the obligations of the Company under the Notes in
a manner
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reasonably satisfactory to the Required Holders of the Notes and no Default or
Event of Default shall exist after giving effect to the merger or as a result
thereof.
6B(7). SALE OR DISCOUNT OF RECEIVABLES. Sell with recourse, discount or
pledge any of its notes receivable or accounts receivable other than receivables
sold constituting Debt under clause (vii) of the definition thereof provided
that (i) the aggregate face amount of all such receivables sold shall not exceed
$70,000,000, and (ii) after giving effect to such sale, the Company is in
compliance with paragraph 6B(2).
6B(8). LEASE OBLIGATIONS. Lease real property or personal property
(excluding data processing equipment, vehicles, and other equipment leased in
the ordinary course of business) for terms exceeding three years if after giving
effect thereto the aggregate amount of all payments in any fiscal year payable
by the Company and its Subsidiaries would exceed an aggregate of 15% of
Consolidated Tangible Net Worth.
6B(9). RESTRICTED TRANSACTIONS. Deal directly or indirectly with an
Affiliate, any Person related by blood, adoption, or marriage to any Affiliate
or any Person owning 5% or more of the Company's stock, provided that (i) the
Company may deal with such Persons in the ordinary course of business at arm's
length, (ii) the Company may make loans or advances to officers permitted by
paragraph 6B(3) and (iii) in addition to the foregoing, so long as the stock of
the Company is publicly held, the Company may deal with such Persons so long as
the aggregate amount of such transactions does not exceed $1,000,000 in any
fiscal year.
7. EVENTS OF DEFAULT.
7A. ACCELERATION. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
(i) the Company defaults in the payment of any principal
of, or Yield-Maintenance Amount payable with respect to, any Note when
the same shall become due, either by the terms thereof or otherwise as
herein provided; or
(ii) the Company defaults in the payment of any interest
on any Note for more than five (5) days after the date due; or
(iii) (A) (1) the Company or any Subsidiary defaults
(whether as primary obligor or as guarantor or other surety) in any
payment of principal of or interest on any other obligation for money
borrowed (including any obligation under a conditional sale or other
title retention agreement entered into as a means of acquiring the
subject property, any obligation issued or assumed as full or partial
payment for property if secured by a purchase money mortgage or any
obligation under notes payable or drafts accepted representing
extensions of credit) beyond any period of grace provided with respect
thereto, or (2) the Company or any Subsidiary fails to perform or
observe any other agreement, term or condition contained in any
agreement under which any of the foregoing
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obligations are issued or created (or if any other event thereunder or
under any such agreement shall occur and be continuing), and the effect
of such default under clause (1) above or failure or event under clause
(2) above is to cause, or to permit the holder or holders of such
obligation (or a trustee on behalf of such holder or holders) to cause,
such obligation to become due (or to be repurchased by the Company or
any Subsidiary) prior to any stated maturity, provided that the
aggregate amount of all obligations as to which such a payment default
shall occur and be continuing or such a failure or other event causing
or permitting acceleration (or resale to the Company or any Subsidiary)
shall occur and be continuing exceeds $5,000,000; or (B) the Company or
any Subsidiary fails to perform or observe any term or condition of any
agreement or lease (other than those specified in clause (A) of this
paragraph 7A(iii)) beyond any applicable grace period with respect
thereto (or if any other event thereunder shall occur and be continuing
beyond any applicable grace period), if the effect of such failure or
event is to cause, or permit the holder or holders of such obligation
(or trustee on behalf of such holder or holders) to cause, such
obligation to become due prior to any stated maturity or require the
repurchase, redemption or defeasance of such obligation, provided that
the aggregate amount of all obligations as to which such failure or
other event causing or permitting acceleration or requiring the
repurchase, redemption or defeasance shall exceed $10,000,000; or
(iv) any representation or warranty made by the Company
herein or by the Company or any of its officers in any writing
furnished in connection with or pursuant to this Agreement shall be
false in any material respect on the date as of which made; or
(v) the Company fails to perform or observe any agreement
contained in paragraph 6; or
(vi) the Company fails to perform or observe any other
agreement, term or condition contained herein and such failure shall
not be remedied within 30 days after any Responsible Officer obtains
actual knowledge thereof; or
(vii) the Company or any Subsidiary makes an assignment
for the benefit of creditors or is generally not paying its debts as
such debts become due; or
(viii) any decree or order for relief in respect of the
Company or any Subsidiary is entered under any bankruptcy,
reorganization, compromise, arrangement, insolvency, readjustment of
debt, dissolution or liquidation or similar law, whether now or
hereafter in effect (herein called the "Bankruptcy Law"), of any
jurisdiction; or
(ix) the Company or any Subsidiary petitions or applies to
any tribunal for, or consents to, the appointment of, or taking
possession by, a trustee, receiver, custodian, liquidator or similar
official of the Company or any Subsidiary, or of
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any substantial part of the assets of the Company or any Subsidiary, or
commences a voluntary case under the Bankruptcy Law of the United
States or any proceedings (other than proceedings for the voluntary
liquidation and dissolution of a Subsidiary) relating to the Company or
any Subsidiary under the Bankruptcy Law of any other jurisdiction; or
(x) any such petition or application is filed, or any such
proceedings are commenced, against the Company or any Subsidiary and
the Company or such Subsidiary by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment
or decree is entered appointing any such trustee, receiver, custodian,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree remains unstayed and in
effect for more than 30 days; or
(xi) any order, judgment or decree is entered in any
proceedings against the Company decreeing the dissolution of the
Company and such order, judgment or decree remains unstayed and in
effect for more than 60 days; or
(xii) any one or more unpaid or unsatisfied judgments or
decrees in excess of $5,000,000 in the aggregate at any one time
outstanding is entered against the Company and/or its Subsidiaries,
excluding those judgments or decrees (A) that shall have been stayed,
vacated or bonded, (B) which are not final and non-appealable, provided
that the Company or such Subsidiary is contesting any such judgment or
decree in good faith and by appropriate proceedings diligently pursued,
(C) for and to the extent the Company or any Subsidiary is insured and
with respect to which the insurer specifically has assumed
responsibility in writing therefor, (D) for and to the extent the
Company or any Subsidiary are otherwise indemnified if the terms of
such indemnification are satisfactory to the Required Holders or (E)
that have been outstanding for less than 60 days;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 7A, the holder of any Note (other than the Company or any of its
Subsidiaries or Affiliates) may at its option, by notice in writing to the
Company, declare such Note to be, and such Note shall thereupon be and become,
immediately due and payable at par together with interest accrued thereon,
without presentment, demand, protest or notice of any kind, all of which are
hereby waived by the Company, (b) if such event is an Event of Default specified
in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company,
all of the Notes at the time outstanding shall automatically become immediately
due and payable at par together with interest accrued thereon, without
presentment, demand, protest or notice of any kind, all of which are hereby
waived by the Company, and (c) if such event is not an Event of Default
specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the
Company, the Required Holder(s) of any Series of Notes may at its or their
option, by notice in writing to the Company, declare all of the Notes of such
Series to be, and all of the Notes of such Series shall thereupon be and become,
immediately due and payable together with interest accrued thereon and together
with the Yield-Maintenance Amount, if any, with respect to each Note of such
Series, without presentment,
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demand, protest or other notice of any kind, all of which are hereby waived by
the Company, provided that the Yield-Maintenance Amount, if any, with respect to
each Note of such Series shall be due and payable upon such declaration only if
(x) such event is an Event of Default specified in any of clauses (i) to (vi),
inclusive, or (xi) or (xii) of this paragraph 7A, (y) the Required Holders of
such Series shall have given to the Company, at least 10 Business Days before
such declaration, written notice stating its or their intention so to declare
the Notes of such Series to be immediately due and payable and identifying one
or more such Events of Default whose occurrence on or before the date of such
notice permits such declaration, and (z) one or more of the Events of Default so
identified shall be continuing at the time of such declaration.
7B. RESCISSION OF ACCELERATION. At any time after any or all of the
Notes of a Series shall have been declared immediately due and payable pursuant
to paragraph 7A, the Required Holder(s) of such Series may, by notice in writing
to the Company, rescind and annul such declaration and its consequences if (i)
the Company shall have paid all overdue interest on the Notes of such Series,
the principal of and Yield-Maintenance Amount, if any, payable with respect to
any Notes of such Series which have become due otherwise than by reason of such
declaration, and interest on such overdue interest and overdue principal and
Yield-Maintenance Amount at the rate specified in the Notes of such Series, (ii)
the Company shall not have paid any amounts which have become due solely by
reason of such declaration, (iii) all Events of Default and Defaults, other than
non-payment of amounts which have become due solely by reason of such
declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv)
no judgment or decree shall have been entered for the payment of any amounts due
pursuant to the Notes of such Series or this Agreement (as this Agreement
pertains to the Notes of such Series). No such rescission or annulment shall
extend to or affect any subsequent Event of Default or Default or impair any
right arising therefrom.
7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be
declared immediately due and payable pursuant to paragraph 7A or any such
declaration shall be rescinded and annulled pursuant to paragraph 7B, the
Company shall forthwith give written notice thereof to the holder of each Note
at the time outstanding.
7D. OTHER REMEDIES. If any Event of Default or Default shall occur and
be continuing, the holder of any Note may proceed to protect and enforce its
rights under this Agreement and such Note by exercising such remedies as are
available to such holder in respect thereof under applicable law, either by suit
in equity or by action at law, or both, whether for specific performance of any
covenant or other agreement contained in this Agreement or in aid of the
exercise of any power granted in this Agreement. No remedy conferred in this
Agreement upon the holder of any Note is intended to be exclusive of any other
remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or now or hereafter existing at
law or in equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents,
covenants and warrants as follows:
8A. ORGANIZATION. The Company is a corporation duly organized and
existing in good standing under the laws of the State of Ohio, each Subsidiary
is a corporation existing and
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in good standing under the laws of the jurisdiction in which it is incorporated,
and the Company has and each Subsidiary has the corporate power to own its
respective property and to carry on its respective business as now being
conducted. The names and jurisdictions of incorporation of each Subsidiary are
set forth on EXHIBIT F attached hereto.
8B. FINANCIAL STATEMENTS. The Company has furnished Prudential and each
Purchaser of any Accepted Notes with the following financial statements,
identified by a principal financial officer of the Company: (i) a consolidated
balance sheet of the Company and its Subsidiaries as of the last day in each of
the five fiscal years of the Company most recently completed prior to the date
as of which this representation is made or repeated to such Purchaser (other
than fiscal years completed within 120 days prior to such date for which audited
financial statements have not been released) and a consolidated statement of
income, stockholders' equity and statement of cash flows of the Company and its
Subsidiaries for each such year, all certified by Deloitte & Touche LLP (or such
other independent public accountants of recognized national standing selected by
the Company or other accounting firm as may be reasonably acceptable to such
Purchaser); and (ii) a consolidated balance sheet of the Company and its
Subsidiaries as at the end of the quarterly period (if any) most recently
completed prior to such date and after the end of such fiscal year (other than
quarterly periods completed within 60 days prior to such date for which
financial statements have not been released) and the comparable quarterly period
in the preceding fiscal year and consolidated statements of income,
stockholders' equity and cash flows of the Company and its Subsidiaries for the
periods from the beginning of the fiscal years in which such quarterly periods
are included to the end of such quarterly periods, prepared by the Company. Such
financial statements (including any related schedules and/or notes) are true and
correct in all material respects (subject, as to interim statements, to changes
resulting from audits and year-end adjustments), have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods involved and show all liabilities, direct and contingent,
of the Company and its Subsidiaries required to be shown in accordance with such
principles. The balance sheets fairly present the condition of the Company and
its Subsidiaries as at the dates thereof, and the statements of income and
statements of cash flows fairly present the results of the operations of the
Company and its Subsidiaries for the periods indicated. There has been no
material adverse change in the business, condition (financial or otherwise) or
operations of the Company and its Subsidiaries taken as a whole since the end of
the most recent fiscal year for which such audited financial statements have
been furnished.
8C. ACTIONS PENDING. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any Subsidiary or any properties or rights of the Company or any
Subsidiary, by or before any court, arbitrator or administrative or governmental
body which could be reasonably expected to result in any material adverse change
in the business, condition (financial or otherwise) or operations of the Company
and its Subsidiaries taken as a whole.
8D. OUTSTANDING DEBT. Neither the Company nor any Subsidiary has any
Debt outstanding except as permitted by paragraph 6B(2). There exists no payment
default or other default in any material respect under the provisions of any
instrument evidencing such Debt or of any agreement relating thereto.
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8E. TITLE TO PROPERTIES. To the best knowledge of the Responsible
Officers based upon reasonable inquiry, the Company has, and each Subsidiary
has, good and indefeasible title to its respective real properties (other than
properties which it leases) and good title to all of its other properties and
assets, including the properties and assets reflected in the most recent audited
balance sheet referred to in paragraph 8B (other than properties and assets
disposed of in the ordinary course of business), subject to no Lien of any kind
except Liens permitted by paragraph 6B(1). The Company and each Subsidiary
enjoys peaceful and undisturbed possession of all leases necessary in any
material respect for the conduct of their respective businesses, none of which
contains any unusual or burdensome provisions which could be reasonably expected
to materially affect or impair the operation of such businesses. All such leases
are valid and subsisting and are in full force and effect.
8F. TAXES. To the best knowledge of the Responsible Officers based upon
reasonable inquiry, the Company has, and each Subsidiary has, filed all Federal,
State and other income tax returns which are required to be filed, and each has
paid all taxes as shown on such returns and on all assessments received by it to
the extent that such taxes have become due, except such taxes as are being
contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with generally accepted accounting
principles.
8G. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution nor
delivery of this Agreement or the Notes, nor the offering, issuance and sale of
the Notes, nor fulfillment of nor compliance with the terms and provisions
hereof and of the Notes will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in any
violation of, or result in the creation of any Lien upon any of the properties
or assets of the Company or any of its Subsidiaries (other than Liens permitted
by this Agreement) pursuant to, the charter or code of regulations of the
Company or any of its Subsidiaries, any award of any arbitrator or any agreement
(including any agreement with stockholders), nor to the best of the Responsible
Officers' knowledge based upon reasonable inquiry, any instrument, order,
judgment, decree, statute, law, rule or regulation to which the Company or any
of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries
is a party to, or otherwise subject to any provision contained in, any
instrument evidencing indebtedness of the Company or any of its Subsidiaries,
any agreement relating thereto or any other contract or agreement (including its
charter) which limits the amount of, or otherwise imposes restrictions on the
incurring of, indebtedness of the Company of the type to be evidenced by the
Notes except as set forth in the agreements listed in EXHIBIT E attached hereto
(as such EXHIBIT E may have been modified from time to time by written
supplements thereto delivered by the Company and accepted in writing by
Prudential).
8H. OFFERING OF NOTES. Neither the Company nor any agent acting on its
behalf has, directly or indirectly, offered the Notes or any similar security of
the Company for sale to, or solicited any offers to buy the Notes or any similar
security of the Company from, or otherwise approached or negotiated with respect
thereto with, any Person other than Institutional Investors, and neither the
Company nor any agent acting on its behalf has taken or will take any action
which would subject the issuance or sale of the Notes to the provisions of
Section 5 of the
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Securities Act or to the registration provisions of any securities or
Blue Sky law of any applicable jurisdiction.
8I. REGULATION G, ETC. The proceeds of the sale of any Private Shelf
Notes will be used for the purposes stated in the relevant Request for Purchase.
None of such proceeds will be used, directly or indirectly, for the purpose,
whether immediate, incidental or ultimate, of purchasing or carrying any "margin
stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of
the Federal Reserve System (herein called "margin stock") or for the purpose of
maintaining, reducing or retiring any indebtedness which was originally incurred
to purchase or carry any stock that is then currently a margin stock or for any
other purpose which might constitute the purchase of such Notes transaction a
"purpose credit" within the meaning of such Regulation G, unless the Company
shall have delivered to the Purchaser which is purchasing such Notes, on the
Private Shelf Closing Day for such Notes an opinion of counsel satisfactory to
such Purchaser stating that the purchase of such Notes does not constitute a
violation of such Regulation G. Neither the Company nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
Notes to violate Regulation G of the Board of Governors of the Federal Reserve
System or to violate the Securities Exchange Act of 1934, as amended, in each
case as in effect now or as the same may hereafter be in effect.
8J. ERISA. No accumulated funding deficiency (as defined in section 302
of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan (other than a Multiemployer Plan). No liability to the
Pension Benefit Guaranty Corporation has been or is expected by the Company or
any ERISA Affiliate to be incurred with respect to any Plan (other than a
Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which
is or would be materially adverse to the business, condition (financial or
otherwise) or operations of the Company and its Subsidiaries taken as a whole.
Neither the Company, any Subsidiary or any ERISA Affiliate has incurred or
presently expects to incur any withdrawal liability under Title IV of ERISA with
respect to any Multiemployer Plan which is or would be materially adverse to the
Company and its Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the issuance and sale of the Notes will be exempt from, or
will not involve any transaction which is subject to the prohibitions of,
section 406 of ERISA and will not involve any transaction in connection with
which a penalty could be imposed under section 502(i) of ERISA or a tax could be
imposed pursuant to section 4975 of the Code. The representation by the Company
in the next preceding sentence is made in reliance upon and subject to the
accuracy of each Purchaser's representation in paragraph 9B.
8K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any
Subsidiary, nor any of their respective businesses or properties, nor any
relationship between the Company or any Subsidiary and any other Person, nor any
circumstance in connection with the offering, issuance, sale or delivery of the
Notes is such as to require any authorization, consent, approval, exemption or
other action by or notice to or filing with any court or administrative or
governmental body (other than routine filings after the date of closing with the
Securities and Exchange Commission and/or state Blue Sky authorities) in
connection with the execution and delivery of this Agreement, the offering,
issuance, sale or delivery of the Notes or fulfillment of or compliance with the
terms and provisions of this Agreement.
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<PAGE> 21
8L. ENVIRONMENTAL COMPLIANCE. To the best knowledge of the Responsible
Officers based upon reasonable inquiry, the Company and its Subsidiaries and all
of their respective properties and facilities have complied at all times and in
all respects with all applicable federal, state, local and regional statutes,
laws, ordinances and judicial or administrative orders, judgments, rulings and
regulations relating to protection of the environment except, in any such case,
where failure to comply would not result in a material adverse effect on the
business, condition (financial or otherwise) or operations of the Company and
its Subsidiaries taken as a whole or the ability of the Company to perform its
obligations under this Agreement.
8M. HOSTILE TENDER OFFERS. None of the proceeds of the sale of any
Notes will be used to finance a Hostile Tender Offer.
8N. DISCLOSURE. Neither this Agreement nor any other document,
certificate or statement furnished to any Purchaser by or on behalf of the
Company in connection herewith contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading. There is no fact peculiar to the
Company or any of its Subsidiaries which materially adversely affects or in the
future can be reasonably expected to (so far as the Company can now reasonably
foresee) materially adversely affect the business, property or assets, or
financial condition of the Company and its Subsidiaries taken as a whole and
which has not been set forth in this Agreement or in the other documents,
certificates and statements furnished to the Purchasers by the Company prior to
the date hereof in connection with the transactions contemplated hereby.
8O. SECTION 144A. The Notes are not of the same class as securities, if
any, of the Company listed on a national securities exchange registered under
Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer
quotation system.
9. REPRESENTATIONS OF THE PURCHASERS.
Each Purchaser represents as follows:
9A. NATURE OF PURCHASE. Such Purchaser is not acquiring the Notes to be
purchased by it hereunder with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act, provided that the
disposition of such Purchaser's property shall at all times be and remain within
its control.
9B. SOURCE OF FUNDS. The source of the funds being used by such
Purchaser to pay the purchase price of the Notes being purchased by such
Purchaser hereunder constitutes assets allocated to: (i) the "insurance company
general account" of such Purchaser (as such term is defined under Section V of
the United States Department of Labor's Prohibited Transaction Class Exemption
("PTCE") 95-60), and as of the date of the purchase of the Notes such Purchaser
satisfies all of the applicable requirements for relief under Section I and IV
of PTCE 95-60 or (ii) a separate account maintained by such Purchaser in which
no employee benefit plan, other than employee benefit plans identified on a list
which has been furnished by such Purchaser
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to the Company, participates to the extent of 10% or more. For the purpose of
this paragraph 9B, the terms "SEPARATE ACCOUNT" and "EMPLOYEE BENEFIT PLAN"
shall have the respective meanings specified in section 3 of ERISA.
10. DEFINITIONS. For the purpose of this Agreement, the terms defined
in paragraphs 1 and 2 shall have the respective meanings specified therein, and
the following terms shall have the meanings specified with respect thereto
below:
10A. YIELD-MAINTENANCE TERMS.
"CALLED PRINCIPAL" shall mean, with respect to any Note, the principal
of such Note that is to be prepaid pursuant to paragraph 4B or is declared to be
immediately due and payable pursuant to paragraph 7A, as the context requires.
"DISCOUNTED VALUE" shall mean, with respect to the Called Principal of
any Note, the amount obtained by discounting all Remaining Scheduled Payments
with respect to such Called Principal from their respective scheduled due dates
to the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (as converted to reflect
the periodic basis on which interest on such Note is payable, if payable other
than on a semi-annual basis) equal to the Reinvestment Yield with respect to
such Called Principal.
"REINVESTMENT YIELD" shall mean, with respect to the Called Principal
of any Note, the yield to maturity implied by (i) the yields reported, as of
10:00 A.M. (New York City local time) on the Business Day next preceding the
Settlement Date with respect to such Called Principal, on the display designated
as "Page 678" on the Telerate Service (or such other display as may replace Page
678 on the Telerate Service) for actively traded U.S. Treasury securities having
a maturity equal to the Remaining Average Life of such Called Principal as of
such Settlement Date, or if such yields shall not be reported as of such time or
the yields reported as of such time shall not be ascertainable, (ii) the
Treasury Constant Maturity Series yields reported, for the latest day for which
such yields shall have been so reported as of the Business Day next preceding
the Settlement Date with respect to such Called Principal, in Federal Reserve
Statistical Release H.15 (519) (or any comparable successor publication) for
actively traded U.S. Treasury securities having a constant maturity equal to the
Remaining Average Life of such Called Principal as of such Settlement Date. Such
implied yield shall be determined, if necessary, by (a) converting U.S. Treasury
bill quotations to bond-equivalent yields in accordance with accepted financial
practice and (b) interpolating linearly between yields reported for various
maturities.
"REMAINING AVERAGE LIFE" shall mean, with respect to the Called
Principal of any Note, the number of years (calculated to the nearest
one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the
sum of the products obtained by multiplying (a) each Remaining Scheduled Payment
of such Called Principal (but not of interest thereon) by (b) the number of
years (calculated to the nearest one-twelfth year) which will elapse between the
Settlement Date with respect to such Called Principal and the scheduled due date
of such Remaining Scheduled Payment.
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<PAGE> 23
"REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due on or after the Settlement Date with respect to such
Called Principal if no payment of such Called Principal were made prior to its
scheduled due date.
"SETTLEMENT DATE" shall mean, with respect to the Called Principal of
any Note, the date on which such Called Principal is to be prepaid pursuant to
paragraph 4B or is declared to be immediately due and payable pursuant to
paragraph 7A, as the context requires.
"YIELD-MAINTENANCE AMOUNT" shall mean, with respect to any Note, an
amount equal to the excess, if any, of the Discounted Value of the Called
Principal of such Note over the sum of (i) such Called Principal plus (ii)
interest accrued thereon as of (including interest due on) the Settlement Date
with respect to such Called Principal. The Yield-Maintenance Amount shall in no
event be less than zero.
10B. OTHER TERMS.
"ACCEPTANCE" shall have the meaning specified in paragraph 2E.
"ACCEPTANCE DAY" shall have the meaning specified in paragraph 2E.
"ACCEPTANCE WINDOW" shall mean, with respect to any interest rate quote
made by Prudential pursuant to paragraph 2D, the time period designated by
Prudential during which the Company may elect to accept such interest rate quote
as to not less than $5,000,000 in aggregate principal amount of Private Shelf
Note specified in the Request for Purchase.
"ACCEPTED NOTE" shall have the meaning specified in paragraph 2E.
"AFFILIATE" shall mean any Person directly or indirectly controlling,
controlled by, or under direct or indirect common control with, the Company,
except a Subsidiary. A Person shall be deemed to control a corporation if such
Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities, by contract or otherwise.
"AUTHORIZED OFFICER" shall mean (i) in the case of the Company, its
chief executive officer, its chief operating officer, its chief financial
officer, its corporate secretary, and any vice president of the Company
designated as an "Authorized Officer" of the Company for the purpose of this
Agreement in an Officer's Certificate executed by the Company's chief executive
officer or chief financial officer and delivered to Prudential, and (ii) in the
case of Prudential, Allen Weaver, Managing Director, Matt Chanin, Senior
Managing Director, P. Scott von Fischer, Senior Vice President, Mark
Hoffmeister, Senior Vice President, Marie Fioramonti, Senior Vice President and
any officer of Prudential designated as its "Authorized Officer" for the purpose
of this Agreement in a certificate executed by one of its Authorized Officers or
a member of its Law Department. Any action taken under this Agreement on behalf
of the Company by any individual who on or after the date of this Agreement
shall have been an Authorized Officer of the
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<PAGE> 24
Company and whom Prudential in good faith believes to be an Authorized Officer
of the Company at the time of such action shall be binding on the Company even
though such individual shall have ceased to be an Authorized Officer of the
Company, and any action taken under this Agreement on behalf of Prudential by
any individual who on or after the date of this Agreement shall have been an
Authorized Officer of Prudential and whom the Company in good faith believes to
be an Authorized Officer of Prudential at the time of such action shall be
binding on Prudential even though such individual shall have ceased to be an
Authorized Officer of Prudential.
"AVAILABLE FACILITY AMOUNT" shall have the meaning specified in
paragraph 2A.
"BANKRUPTCY LAW" shall have the meaning specified in clause (viii) of
paragraph 7A.
"BUSINESS DAY" shall mean any day other than (i) a Saturday or a
Sunday, (ii) a day on which commercial banks in New York City are required or
authorized to be closed and (iii) for purposes of paragraph 2C hereof only, a
day on which The Prudential Insurance Company of America is not open for
business.
"CANCELLATION DATE" shall have the meaning specified in paragraph
2H(3).
"CANCELLATION FEE" shall have the meaning specified in paragraph 2H(3).
"CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which,
under generally accepted accounting principles, is or will be required to be
capitalized on the books of the Company or any Subsidiary, taken at the amount
thereof accounted for as indebtedness (net of interest expenses) in accordance
with such principles.
"CLOSING DAY" shall mean the Initial Closing Day or a Private Shelf
Closing Day, as the case may be.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONFIRMATION OF ACCEPTANCE" shall have the meaning specified in
paragraph 2E.
"CONSOLIDATED CAPITALIZATION" shall mean Consolidated Tangible Net
Worth of the Company and its Subsidiaries plus Debt.
"CONSOLIDATED CURRENT ASSETS" and "CONSOLIDATED CURRENT LIABILITIES"
shall mean the consolidated current assets and consolidated current liabilities
of the Company and its Subsidiaries each determined in accordance with generally
accepted accounting principles, provided that inventory shall be valued at
current cost. The current portion of Funded Debt shall not be included in the
calculation of Consolidated Current Liabilities.
"CONSOLIDATED NET INCOME" shall mean consolidated net income of the
Company and its Subsidiaries as determined in accordance with generally accepted
accounting principles.
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"CONSOLIDATED TANGIBLE NET WORTH" shall mean the sum of (i) the par
value (or value stated on the books of the Company) of the capital stock of all
classes of the Company, plus (or minus in the case of a surplus deficit) (ii)
the amount of the consolidated surplus, whether capital or earned, of the
Company and its Subsidiaries, plus (iii) the amount of paid in capital, less the
sum of treasury stock, unamortized debt discount and expense, goodwill,
trademarks, trade names, patents, non-current deferred charges and other
intangible assets and any write-up of the value of any asset, all determined on
a consolidated basis for the Company and all Subsidiaries in accordance with
generally accepted accounting principles.
"COUNTY BONDS GUARANTY" shall have the meaning assigned to such term in
the Inducement Agreement.
"DEBT" shall mean and include, (i) any obligation payable for borrowed
money (including capitalized lease obligations but excluding reserves for
deferred income taxes and other reserves to the extent that such reserves do not
constitute an obligation); (ii) indebtedness payable which is secured by any
lien on property owned by the Company or any Subsidiary; (iii) guarantees,
endorsements (other than endorsements of negotiable instruments for collection
in the ordinary course of business) and other contingent liabilities (whether
direct or indirect) in connection with the obligation, stock or dividends of any
Person (other than under the Project Bonds Guaranty and the County Bonds
Guaranty); (iv) obligations under any contract providing for the making of
loans, advances or capital contributions to any Person, in each case in order to
enable such Person primarily to maintain working capital, net worth or any other
balance sheet condition or to pay debts, dividends or expenses; (v) ledger
balances, consignments and other similar arrangements but only to the extent
required to be shown as debt on the consolidated balance sheet of the Company in
accordance with generally accepted accounting principles; (vi) obligations under
any other contract which, in economic effect, is substantially equivalent to a
guarantee; (vii) the face amount of receivables sold to any Person for the
purpose of enabling such Person to incur Debt or sell interests in such
receivables to finance the purchase price of such receivables, and (viii)
guaranteed purchase contracts which are required to be shown as debt on the
Company's consolidated balance sheet in accordance with generally accepted
accounting principles (but not including guaranteed purchase contracts to the
extent that the obligations thereunder are not required to be shown as debt on
the Company's consolidated balance sheet in accordance with generally accepted
accounting principles); all as determined in accordance with generally accepted
accounting principles. The term Debt shall not include (a) obligations under the
Company's compensation or benefit plans in effect from time to time to the
extent not required to be shown as debt on the consolidated balance sheet of the
Company prepared in accordance with generally accepted accounting principles and
(b) trade payables incurred in the ordinary course of business (including ledger
balances, consignments and other similar arrangements) to the extent such trade
payables (including ledger balances, consignments and other similar
arrangements) are not required to be shown as debt on the consolidated balance
sheet of the Company prepared in accordance with generally accepted accounting
principles.
"DELAYED DELIVERY FEE" shall have the meaning specified in paragraph
2H(2).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
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"ERISA AFFILIATE" shall mean any corporation which is a member of the
same controlled group of corporations as the Company within the meaning of
section 414(b) of the Code, or any trade or business which is under common
control with the Company within the meaning of section 414(c) of the Code.
"EVENT OF DEFAULT" shall mean any of the events specified in paragraph
7A, provided that there has been satisfied any requirement in connection with
such event for the giving of notice, or the lapse of time, or the happening of
any further condition, event or act, and "DEFAULT" shall mean any of such
events, whether or not any such requirement has been satisfied.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXCLUDED TRANSFER" shall mean any sell, lease, transfer or other
disposition of any assets of the Company or any Subsidiary which is either (i)
made in the ordinary course of business or (ii) made to the Company or any
Subsidiary and after giving effect to such transaction the Company's ultimate
percentage ownership of the assets sold, leased, transferred or other disposed
of has not been reduced (giving the Company appropriate credit for indirect
ownership of assets by virtue of ownership through any Subsidiary but only to
the extent of the Company's percentage ownership of such Subsidiary).
"EXISTING AGREEMENT" shall mean that certain Note Purchase and Private
Shelf Agreement dated as of October 31, 1992 between the Company and Prudential.
"FACILITY" shall have the meaning specified in paragraph 2A.
"FUNDED DEBT" shall mean with respect to any Person, all Debt of such
Person which by its terms or by the terms of any instrument or agreement
relating thereto matures, or which is otherwise payable, more than one year
from, or is directly or indirectly renewable or extendible at the option of the
debtor to a date more than one year (including an option of the debtor under a
revolving credit or similar agreement obligating the lender or lenders to extend
credit over a period of more than one year) from, the date on which Funded Debt
is to be determined.
"HEDGE TREASURY NOTE(S)" shall mean, with respect to any Accepted Note,
the United States Treasury Note or Notes whose duration (as determined by
Prudential) most closely matches the duration of such Accepted Note.
"HOSTILE TENDER OFFER" shall mean, with respect to the use of proceeds
of any Note, any offer to purchase, or any purchase of, shares of capital stock
of any corporation or equity interests in any other entity, or securities
convertible into or representing the beneficial ownership of, or rights to
acquire, any such shares or equity interests, if such shares, equity interests,
securities or rights are of a class which is publicly traded on any securities
exchange or in any over-the-counter market, other than purchases of such shares,
equity interests, securities or rights representing less than 5% of the equity
interests or beneficial ownership of such corporation or other entity for
portfolio investment purposes, and such offer or purchase has not been duly
approved by the board of directors of such corporation or the equivalent
governing body of such
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other entity prior to the date on which the Company makes the Request for
Purchase of such Note.
"INDUCEMENT AGREEMENT" shall mean that certain Inducement Agreement
dated as of March 1, 1996 between the Company and Prudential, a copy of which is
attached hereto as EXHIBIT H.
"INITIAL CLOSING DAY" shall mean November 27, 1996.
"INSTITUTIONAL INVESTOR" shall mean Prudential, any Prudential
Affiliate or any bank, bank affiliate, financial institution, insurance company,
pension fund, endowment or other organization which regularly acquires debt
instruments for investment.
"ISSUANCE FEE" shall have the meaning specified in paragraph 2H(1).
"ISSUANCE PERIOD" shall have the meaning specified in paragraph 2A.
"LIEN" shall mean any mortgage, pledge, security interest, encumbrance,
lien (statutory or otherwise) or charge of any kind (including any agreement to
give any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature thereof, and the filing of or agreement to
give any financing statement under the Uniform Commercial Code of any
jurisdiction) or any other type of preferential arrangement for the purpose, or
having the effect, of protecting a creditor against loss or securing the payment
or performance of an obligation.
"MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).
"NOTES" shall have the meaning specified in paragraph 1.
"OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of
the Company by an Authorized Officer of the Company.
"PERSON" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a government
or any department or agency thereof.
"PLAN" shall mean any "employee pension benefit plan" (as such term is
defined in section 3 of ERISA) which is or has been established or maintained,
or to which contributions are or have been made, by the Company or any ERISA
Affiliate.
"PRIORITY DEBT" shall mean, as of any time of determination thereof,
the aggregate amount of (i) obligations of the Company secured by Liens
permitted by clauses (iv) or (v) of paragraph 6B(1) and (ii) Debt of
Subsidiaries.
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"PRIVATE SHELF CLOSING DAY" for any Accepted Note shall mean the
Business Day specified for the closing of the purchase and sale of such Private
Shelf Note in the Request for Purchase of such Private Shelf Note, provided that
if the closing of the purchase and sale of such Accepted Note is rescheduled
pursuant to paragraph 2G, the Private Shelf Closing Day for such Accepted Note,
for all purposes of this Agreement except paragraph 2H(3), shall mean the
Rescheduled Closing Day with respect to such Closing.
"PRIVATE SHELF NOTE" and "PRIVATE SHELF NOTES" shall have the meanings
specified in paragraph 1.
"PROJECT BOND GUARANTY" shall have the meaning assigned to such term in
the Inducement Agreement.
"PRUDENTIAL" shall mean The Prudential Insurance Company of America.
"PRUDENTIAL AFFILIATE" shall mean any corporation or other entity all
of the Voting Stock (or equivalent voting securities or interests) of which is
owned by Prudential either directly or through Prudential Affiliates.
"PURCHASERS" shall mean, with respect to any Accepted Notes the
Persons, either Prudential or a Prudential Affiliate, who is purchasing such
Accepted Notes.
"REQUEST FOR PURCHASE" shall have the meaning specified in paragraph
2C.
"REQUIRED HOLDER(S)" shall mean, with respect to the Notes of any
series, at any time, the holder or holders of at least 50.01% of the aggregate
principal amount of the Notes of such series outstanding at such time.
"RESCHEDULED CLOSING DAY" shall have the meaning specified in paragraph
2G.
"RESPONSIBLE OFFICER" shall mean the chief executive officer, chief
operating officer, chief financial officer or chief accounting officer of the
Company or any other officer of the Company involved principally in its
financial administration or its controllership function.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SERIES" shall have the meaning specified in paragraph 1.
"SIGNIFICANT HOLDER" shall mean (i) Prudential or any Prudential
Affiliate, so long as Prudential or any Prudential Affiliate shall hold any Note
or any amount remains available under the Facility or (ii) any other holder of
at least 10% of the aggregate principal amount of any Series of Notes from time
to time outstanding. To the extent that any notice or document is required to be
delivered to the Significant Holders under this Agreement, such requirement
shall be satisfied with respect to Prudential and all Prudential Affiliates by
giving notice, or delivery of
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<PAGE> 29
a copy of any such document, to Prudential (addressed to Prudential and each
such Prudential Affiliate).
"SUBSIDIARY" shall mean any corporation, association, partnership,
limited partnership, limited liability company, joint venture or other business
entity of which more than 80% of the Voting Stock, membership interests or other
equity interests is owned or controlled directly or indirectly by the Company,
or one or more of the Subsidiaries of the Company, or a combination thereof.
"TRANSFEREE" shall mean any direct or indirect transferee of all or any
part of any Note purchased by any Purchaser under this Agreement.
"VOTING STOCK" shall mean, with respect to any corporation, any shares
of stock of such corporation whose holders are entitled under ordinary
circumstances to vote for the election of directors of such corporation
(irrespective of whether at the time stock of any other class or classes shall
have or might have voting power by reason of the happening of any contingency).
10C. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in
this Agreement to "general accepted accounting principles" shall be deemed to
refer to generally accepted accounting principles in effect in the United States
at the time of application thereof. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all determinations with
respect to accounting matters hereunder shall be made, and all unaudited
financial statements and certificates and reports as to financial matters
required to be furnished hereunder shall be prepared, in accordance with
generally accepted accounting principles. Notwithstanding the foregoing, if any
change in generally accepted accounting principles from those applied in the
preparation of the financial statements referred to in paragraph 8B is
occasioned by the promulgation of rules, regulations, pronouncements and
opinions by or required by the Financial Accounting Standards Board or the
American Institute of Certified Public Accountants (or successors thereto or
agencies with similar functions), the initial application of which change is
made after the date of this Agreement, and any such change results in a change
in the method of calculation of financial covenants, standards or terms found in
this Agreement, the parties hereto agree that until such time as the parties
hereto agree upon an amendment to this Agreement addressing such change, such
financial covenants, standards and terms shall be construed and calculated as
though such change had not taken place. The parties hereto agree to enter into
good faith negotiations in order to amend the affected provisions so as to
reflect such accounting changes with the desired result that the criteria for
evaluating the Company's financial condition shall be the same after such
changes as if such changes had not been made. When used herein, the term
"financial statement" shall include the notes and schedules thereto.
11. MISCELLANEOUS.
11A. NOTE PAYMENTS. The Company agrees that, so long as any Purchaser
shall hold any Note, it will make payments of principal of, interest on and any
Yield-Maintenance Amount payable with respect to such Note, which comply with
the terms of this Agreement, by wire transfer of immediately available funds for
credit (not later than 12:00 Noon, New York
29
<PAGE> 30
City local time, on the date due) to (i) the account or accounts specified in
the applicable Confirmation of Acceptance (in the case of any Private Shelf
Note) or (ii) such other account or accounts in the United States as such
Purchaser may designate in writing, notwithstanding any contrary provision
herein or in any Note with respect to the place of payment. Each Purchaser
agrees that, before disposing of any Note, such Purchaser will make a notation
thereon (or on a schedule attached thereto) of all principal payments previously
made thereon and of the date to which interest thereon has been paid. The
Company agrees to afford the benefits of this paragraph 11A to any Transferee
which shall have made the same agreement as each Purchaser has made in this
paragraph 11A.
11B. EXPENSES. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save Prudential, each
Purchaser and any Transferee harmless against liability for the payment of, all
reasonable out-of-pocket expenses arising in connection with such transactions,
including (i) all document production and duplication charges and the fees and
expenses of any special counsel engaged by the Purchasers or any Transferee in
connection with this Agreement (other than with respect to the legal fees and
expenses incurred in connection with the Initial Closing Day or any draw under
the Facility), the transactions contemplated hereby and any subsequent Company
proposed modification of, or Company proposed consent under, this Agreement,
whether or not such Company proposed modification shall be effected or Company
proposed consent granted, and (ii) the costs and expenses, including attorneys'
fees, incurred by any Purchaser or any Transferee in enforcing (or determining
whether or how to enforce) any rights under this Agreement or the Notes or in
responding to any subpoena or other legal process or informal investigative
demand issued in connection with this Agreement or the transactions contemplated
hereby or by reason of any Purchaser's or any Transferee's having acquired any
Note, including without limitation costs and expenses incurred in any bankruptcy
case. The obligations of the Company under this paragraph 11B shall survive the
transfer of any Note or portion thereof or interest therein by any Purchaser or
any Transferee and the payment of any Note.
11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the Company shall obtain the written consent
to such amendment, action or omission to act, of the Required Holder(s) of the
Notes of each Series except that, (i) with the written consent of the holders of
all Notes of a particular Series, and if an Event of Default shall have occurred
and be continuing, of the holders of all Notes of all Series, at the time
outstanding (and not without such written consents), the Notes of such Series
may be amended or the provisions thereof waived to change the maturity thereof,
to change or affect the principal thereof, or to change or affect the rate or
time of payment of interest on or any Yield-Maintenance Amount payable with
respect to the Notes of such Series, (ii) without the written consent of the
holder or holders of all Notes at the time outstanding, no amendment to or
waiver of the provisions of this Agreement shall change or affect the provisions
of paragraph 7A or this paragraph 11C insofar as such provisions relate to
proportions of the principal amount of the Notes of any Series, or the rights of
any individual holder of Notes, required with respect to any declaration of
Notes to be due and payable or with respect to any consent, amendment, waiver or
declaration, (iii) with the written consent of Prudential (and not without the
written consent of Prudential) the provisions of paragraph 2 may be amended or
waived (except insofar as any such
30
<PAGE> 31
amendment or waiver would affect any rights or obligations with respect to the
purchase and sale of Notes which shall have become Accepted Notes prior to such
amendment or waiver), and (iv) with the written consent of all of the Purchasers
which shall have become obligated to purchase Accepted Notes of any Series (and
not without the written consent of all such Purchasers), any of the provisions
of paragraphs 2 and 3 may be amended or waived insofar as such amendment or
waiver would affect only rights or obligations with respect to the purchase and
sale of the Accepted Notes of such Series or the terms and provisions of such
Accepted Notes. Each holder of any Note at the time or thereafter outstanding
shall be bound by any consent authorized by this paragraph 11C, whether or not
such Note shall have been marked to indicate such consent, but any Notes issued
thereafter may bear a notation referring to any such consent. No course of
dealing between the Company and the holder of any Note nor any delay in
exercising any rights hereunder or under any Note shall operate as a waiver of
any rights of any holder of such Note. As used herein and in the Notes, the term
"this Agreement" and references thereto shall mean this Agreement as it may from
time to time be amended or supplemented.
11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES.
The Notes are issuable as registered notes without coupons in denominations of
at least $1,000,000 except as may be necessary to reflect any amount not evenly
divisible by $1,000,000; provided, however, that no such minimum denomination
shall apply to Notes issued to, or issued upon transfer by any holder of the
Notes to, Prudential or one or more Prudential Affiliates or accounts managed by
Prudential or Prudential Affiliates or to any other entity or group of
affiliates with respect to which the Notes so issued or transferred shall be
managed by a single entity. The Company shall keep at its principal office a
register in which the Company shall provide for the registration of Notes and of
transfers of Notes. Upon surrender for registration of transfer of any Note at
the principal office of the Company, the Company shall, at its expense, execute
and deliver one or more new Notes of like tenor and of a like aggregate
principal amount, registered in the name of such transferee or transferees. At
the option of the holder of any Note, such Note may be exchanged for other Notes
of like tenor and of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Note to be exchanged at the principal office of
the Company. Whenever any Notes are so surrendered for exchange, the Company
shall, at its expense, execute and deliver the Notes which the holder making the
exchange is entitled to receive. Each installment of principal payable on each
installment date upon each new Note issued upon any such transfer or exchange
shall be in the same proportion to the unpaid principal amount of such new Note
as the installment of principal payable on such date on the Note surrendered for
registration of transfer or exchange bore to the unpaid principal amount of such
Note. No reference need be made in any such new Note to any installment or
installments of principal previously due and paid upon the Note surrendered for
registration of transfer or exchange. Every Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer duly executed, by the holder of such Note or such
holder's attorney duly authorized in writing. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, so that neither gain nor loss of interest shall result from any
such transfer or exchange. Upon receipt of written notice from the holder of any
Note of the loss, theft, destruction or mutilation of such Note and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of
31
<PAGE> 32
such Note, the Company will make and deliver a new Note, of like tenor, in lieu
of the lost, stolen, destroyed or mutilated Note.
11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment
for registration of transfer, the Company may treat the Person in whose name any
Note is registered as the owner and holder of such Note for the purpose of
receiving payment of principal of and interest on, and any Yield-Maintenance
Amount payable with respect to, such Note and for all other purposes whatsoever,
whether or not such Note shall be overdue, and the Company shall not be affected
by notice to the contrary. Subject to the preceding sentence, the holder of any
Note may from time to time grant participations in all or any part of such Note
to any Person on such terms and conditions as may be determined by such holder
in its sole and absolute discretion.
11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All
representations and warranties contained herein or made in writing by or on
behalf of the Company in connection herewith shall survive the execution and
delivery of this Agreement and the Notes, the transfer by any Purchaser of any
Note or portion thereof or interest therein and the payment of any Note, and may
be relied upon by any Transferee, regardless of any investigation made at any
time by or on behalf of any Purchaser or any Transferee. Subject to the
preceding sentence, this Agreement and the Notes embody the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and understandings relating to such
subject matter.
11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this
Agreement contained by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee) whether so expressed or
not. The Company shall not assign its rights under paragraph 2.
11H. DISCLOSURE TO OTHER PERSONS. The Company acknowledges that
Prudential, each Purchaser and each holder of any Note may deliver copies of any
financial statements and other documents delivered to it, and disclose any other
information disclosed to it, by or on behalf of the Company or any Subsidiary in
connection with or pursuant to this Agreement to (i) its directors, officers,
employees, agents and professional consultants, (ii) any Purchaser or holder of
any Note, (iii) any Institutional Investor to which it offers to sell any Note
or any part thereof other than a Competitor, (iv) any Institutional Investor to
which it sells or offers to sell a participation in all or any part of any Note
other than a Competitor, (v) any Institutional Investor from which it offers to
purchase any security of the Company, (vi) any federal or state regulatory
authority having jurisdiction over it, (vii) the National Association of
Insurance Commissioners or any similar organization, or (viii) any other Person
to which such delivery or disclosure may be necessary (a) in compliance with any
law, rule, regulation or order applicable to it, (b) in response to any subpoena
or other legal process or informal investigative demand, (c) in connection with
any litigation to which it is a party or (d) in order to enforce its rights
under this Agreement. Subject to the disclosure permitted in the first sentence
of this paragraph, Prudential, each such Purchaser, each such holder and any
Person designated by any of the foregoing Persons under paragraph 5C each agree
to use their best efforts to hold in confidence and not to
32
<PAGE> 33
disclose or use (other than for internal purposes which shall not include any
usage that would subject the Company or its officers to any fine or penalty
under any securities laws or regulations) any Confidential Information.
"Confidential Information" shall mean financial statements and reports delivered
pursuant to paragraph 5A and other non-public information regarding the Company
which was obtained pursuant to paragraph 5B or paragraph 5C; PROVIDED, HOWEVER,
that such term shall not include information (x) which was publicly known, or
otherwise known to you at the time of disclosure, (y) which subsequently becomes
publicly known through no act or omission by you or any of your agents or (z)
which otherwise becomes known to you other than through disclosure by the
Company to you. For purposes of this paragraph, "Competitors" shall mean any
Person which has (1) any of the following Standard Industrial Classification
Codes ("SIC Codes"): 5084, 5085, and 5063, or (2) a pension or benefit plan
maintained by a Person which has any of the foregoing SIC Codes. Prudential and
each Purchaser shall be entitled to rely on a certificate from a Person that it
is not a "Competitor" of the Company. The Company shall be entitled to modify or
supplement in writing the foregoing SIC Codes with the consent of the Required
Holders which consent shall not be unreasonably denied.
11I. NOTICES. All written communications provided for hereunder (other
than communications provided for under paragraph 2) shall be sent by first class
mail or nationwide overnight delivery service (with charges prepaid) or by hand
delivery or telecopy and (i) if to Prudential, addressed to Prudential at the
address specified for such communications in the Purchaser Schedule attached
hereto or to such other address as Prudential shall have specified in writing to
the Company, (ii) if to any Purchaser (other than Prudential), addressed to such
Purchaser at the address specified in the Confirmation of Acceptance (in the
case of any Private Shelf Notes), or at such other address as any Purchaser
shall have specified in writing to the Company, and (iii) if to any other holder
of any Note, addressed to such other holder at such address as such other holder
shall have specified in writing to the Company or, if any such other holder
shall not have so specified an address to the Company, then addressed to such
other holder in care of the last holder of such Note which shall have so
specified an address to the Company, and (iv) if to the Company, addressed to it
at Bearings, Inc., 3600 Euclid Avenue, Cleveland, Ohio 44115, Attention: John R.
Whitten, Vice President-Finance and Treasurer, or at such other address as the
Company shall have specified to the holder of each Note in writing; provided,
however, that any such communication to the Company may also, at the option of
the Person sending such communication, be delivered by any other means either to
the Company at its address specified above or to any officer of the Company.
11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or
the Notes to the contrary notwithstanding, any payment of principal of or
interest on, or Yield-Maintenance Amount payable with respect to, any Note that
is due on a date other than a Business Day shall be made on the next succeeding
Business Day. If the date for any payment is extended to the next succeeding
Business Day by reason of the preceding sentence, the period of such extension
shall be included in the computation of the interest payable on such Business
Day.
11K. SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such
33
<PAGE> 34
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other jurisdiction.
11L. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
11M. SATISFACTION REQUIREMENT. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to any Purchaser, to any holder of Notes or to the
Required Holder(s), the determination of such satisfaction shall be made by such
Purchaser, such holder or the Required Holder(s), as the case may be, in the
reasonable judgment (exercised in good faith) of the Person or Persons making
such determination.
11N. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF
THE STATE OF ILLINOIS.
11O. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
11P. BINDING AGREEMENT. When this Agreement is executed and delivered
by the Company and Prudential, it shall become a binding agreement between the
Company and Prudential. This Agreement shall also inure to the benefit of each
Purchaser which shall have executed and delivered a Confirmation of Acceptance,
and each such Purchaser shall be bound by this Agreement to the extent provided
in such Confirmation of Acceptance.
11Q. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given
independent effect so that if a particular action or condition is prohibited by
any one of such covenants, the fact that it would be permitted by an exception
to, or otherwise be in compliance within the limitations of, another covenant
shall not avoid (i) the occurrence of a Default or Event of Default if such
action is taken or such condition exists or (ii) in any way prejudice an attempt
by the holder of any Note to prohibit through equitable action or otherwise the
taking of any action by the Company or any Subsidiary which would result in a
Default or Event of Default.
11R. AMENDMENT OF CERTAIN AGREEMENTS. Upon the execution of this
Agreement by the Company and Prudential, paragraph 5 and 6 of the Existing
Agreement are hereby amended in their entirety so as to read as set forth,
respectively, in paragraphs 5 and 6 of this Agreement and defined terms and
cross references used in paragraphs 5 and 6 of the Existing Agreement, as
amended hereby, shall be deemed to have the respective meanings ascribed thereto
in, and refer to paragraphs in, this Agreement; PROVIDED, HOWEVER, that any
reference to a "Note" or "Notes" in the Existing Agreement, as amended hereby,
shall mean the notes issued under and pursuant to the Existing Agreement. No
termination of this Agreement in whole or in part or any modification hereof,
shall affect the continued applicability of this paragraph and the
34
<PAGE> 35
covenants referred to herein to the Existing Agreement. In addition, upon the
execution of this Agreement by the Company and Prudential (i) the amounts
"$1,000,000" and "$5,000,000" appearing in paragraph 7A(iii) of the Existing
Agreement are hereby deleted and the amounts "$5,000,000 and "$10,000,000" are
hereby respectively substituted therefor and (ii) paragraphs 7A(xii) and 10C of
the Existing Agreement and paragraphs 3(xi) and 5B of the Inducement Agreement
are amended and restated in their entirety so as to read as set forth in
paragraph 7A(xii) of this Agreement (in the case of paragraphs 7A(xii) of the
Existing Agreement and 3(xi)of the Inducement Agreement) and 10C of this
Agreement (in the case of paragraph 10C of the Existing Agreement and paragraph
5B of the Inducement Agreement).
Very truly yours,
BEARINGS, INC.
By:
-------------------------------------
John R. Whitten
Vice President and Treasurer
The foregoing Agreement is
hereby accepted as of the
date first above written.
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:
---------------------------------
Vice President
35
<PAGE> 36
January 30, 1998
Applied Industrial Technologies, Inc.
One Applied Plaza
Cleveland, Ohio 44115
Attention: John R. Whitten
Vice President-Finance
Ladies and Gentlemen:
Reference is made to that certain Private Shelf Agreement dated as of
November 27, 1996 (as amended from time to time, the "NOTE AGREEMENT") between
Applied Industrial Technologies, Inc., an Ohio corporation formerly known as
Bearings, Inc. (the "COMPANY"), and The Prudential Insurance Company of America
("PRUDENTIAL"), pursuant to which the Company proposes to issue and sell and
Prudential proposes to purchase the Company's 6.60% Series B Notes in the
original aggregate principal amount of $50,000,000, due December 8, 2007.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Note Agreement.
Pursuant to the request of the Company and in accordance with the
provisions of paragraph 11C of the Note Agreement, the parties hereto agree as
follows:
SECTION 1. Amendment. From and after the date this letter becomes
effective in accordance with its terms, the Note Agreement is amended as
follows:
1.1 Paragraph 10A of the Note Agreement is hereby amended to delete in
its entirety the definition of "Reinvestment Yield" appearing therein and to
substitute therefor the following:
"REINVESTMENT YIELD" shall mean, with respect to the Called
Principal of any Note, the Designated Spread over the yield to maturity implied
by (i) the yields reported, as of 10:00 A.M. (New York City local time) on the
Business Day next preceding the Settlement Date with respect to such Called
Principal, on the display designated as "Page 678" on the Telerate Service (or
such other display as may replace page 678 on the Telerate Service) for actively
traded U.S. Treasury securities having a maturity equal to the Remaining Average
Life of such Called Principal as of such Settlement Date, or if such yields
shall not be reported as of such time or the yields reported as of such time
shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields
reported, for the latest day for which such yields shall have been so reported
as of the Business Day next preceding the Settlement Date with respect to such
Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any
comparable successor publication) for actively traded U.S. Treasury securities
having a
<PAGE> 37
Applied Industrial Technologies, Inc.
January 30, 1998
Page 2
constant maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date. Such implied yield shall be determined, if
necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent
yields in accordance with accepted financial practice and (b) interpolating
linearly between yields reported for various maturities.
1.2 Paragraph 10A of the Note Agreement is hereby further amended to
add thereto the following definition in appropriate alphabetical order:
"DESIGNATED SPREAD" shall mean (i) 0% with respect to the
Series A Notes, (ii) 0.50% for the Series B Notes and (iii) unless otherwise
specified in the Confirmation of Acceptance with respect thereto, 0% for any
other Series of Notes.
1.3 Paragraph 10B of the Note Agreement is hereby amended to add
thereto the following definitions in appropriate alphabetical order:
"SERIES A NOTES" shall mean the 7.82% Series A Notes executed
by the Company pursuant to the Existing Agreement in the original aggregate
principal amount of $80,000,000 and due December 8, 2002.
"SERIES B NOTES" shall mean the 6.60% Series B Notes executed
by the Company pursuant to this Agreement in the original aggregate principal
amount of $50,000,000 and due December 8, 2007.
1.4 The Note Agreement is hereby amended to delete in its entirety
EXHIBIT F attached thereto and to substitute therefor Exhibit F attached hereto.
SECTION 2. CONDITIONS PRECEDENT. This letter shall become effective as
of the date first above written upon the return by the Company to Prudential of
a counterpart hereof duly executed by the Company and Prudential. The letter
should be returned to: Prudential Capital Group, Two Prudential Plaza, Suite
5600, Chicago, Illinois 60601, Attention: Wiley S. Adams.
SECTION 3. REFERENCE TO AND EFFECT ON NOTE AGREEMENT. Upon the
effectiveness of this letter, each reference to the Note Agreement in any other
document, instrument or agreement shall mean and be a reference to the Note
Agreement as modified by this letter. Except as specifically set forth in
Section 1 hereof, the Note Agreement shall remain in full force and effect and
is hereby ratified and confirmed in all respects.
SECTION 4. GOVERNING LAW. THIS LETTER SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE.
<PAGE> 38
Applied Industrial Technologies, Inc.
January 30, 1998
Page 3
SECTION 5. COUNTERPARTS; SECTION TITLES. This letter may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument. The section titles contained in this letter are and shall be
without substance, meaning or content of any kind whatsoever and are not a part
of the agreement between the parties hereto.
Very truly yours,
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/ P. Scott von Fischer
---------------------------------
Vice President
AGREED AND ACCEPTED:
APPLIED INDUSTRIAL
TECHNOLOGIES, INC.
By: /s/ John R. Whitten
--------------------------------------
Title: Vice President
-----------------------------------
And by: /s/ Mark O. Eisele
----------------------------------
Title: Vice President & Controller
-----------------------------------
F:\WORD\APPLIED TECH\SERIES B\1-30-98 MOD(3).DOC
<PAGE> 1
Exhibit 10(a)
NON-QUALIFIED DEFERRED COMPENSATION AGREEMENT
---------------------------------------------
THIS NON-QUALIFIED DEFERRED COMPENSATION AGREEMENT (the
"Agreement") is made effective as of December 31, 1997, by and between APPLIED
INDUSTRIAL TECHNOLOGIES, INC., an Ohio corporation (hereinafter referred to as
the "Company"), and J. Michael Moore (hereinafter referred to as "Moore").
W I T N E S S E T H:
WHEREAS, the Company acquired INVETECH Company, a Michigan
corporation (hereinafter referred to as "INVETECH") on July 31, 1997; and
WHEREAS, pursuant to the terms of a certain Consulting,
Noncompetition and Confidentiality Agreement dated July 31, 1997 (hereinafter
referred to as the "Consulting Agreement") between the Company, Moore, and Oak
Grove Consulting Group, Inc., the Company and Moore agreed to amend a certain
salary continuation agreement between Moore and INVETECH dated March 28, 1991
(hereinafter referred to as the "Salary Continuation Agreement") to provide that
payments thereunder shall be equal to the amount accrued on the Closing Balance
Sheet of INVETECH with respect to said Salary Continuation Agreement plus
$500,000, adjusted for commencement at age 60 using an interest rate of 7.7% for
services previously rendered by Moore; and
WHEREAS, the Company and Moore desire to restate the Salary
Continuation Agreement in its entirety;
NOW, THEREFORE, effective as of December 31, 1997, the Company
and Moore in consideration for, and pursuant to, the terms of the Consulting
Agreement hereby agree to amend and restate the Salary Continuation Agreement as
the Non-Qualified Deferred Compensation Agreement hereinafter set forth.
1. PRIOR SALARY CONTINUATION AGREEMENT. The terms and
provisions of the Salary Continuation Agreement between Moore and INVETECH dated
March 28, 1991, are hereby superseded and replaced in their entirety by the
terms and provisions of this Agreement.
<PAGE> 2
2. DEFERRED COMPENSATION BENEFITS.
(a) DEFINITION OF RETIREMENT DATE. For purposes of
this Agreement, the term "Retirement Date" shall mean January
1, 2003.
(b) BENEFITS FOLLOWING MOORE'S RETIREMENT DATE.
Commencing on Moore's Retirement Date, the Company shall pay
to Moore or to the trustee or trustees under any revocable
living trust agreement executed by Moore as grantor under
which Moore is the beneficiary during his lifetime, a monthly
amount equal to $18,383.00. Such monthly amount shall be
payable on the first business day of each calendar month
beginning on Moore's Retirement Date and continuing thereafter
until a total of 180 monthly payments have been made. In the
event that Moore shall die prior to receiving 180 such monthly
payments, the Company shall continue to make such payments to
the trustee or trustees under any revocable living trust
agreement executed by Moore as grantor or any other
beneficiary designated by Moore in writing to the Company
until a total of 180 such monthly payments have been made.
(c) BENEFITS FOLLOWING DEATH PRIOR TO RETIREMENT
DATE. In the event that Moore dies prior to reaching his
Retirement Date, the Company agrees to pay to the trustee or
trustees under any revocable living trust agreement executed
by Moore as grantor or to any other beneficiary designated by
Moore in writing to the Company a monthly amount equal to the
amount generated by $1,295,576.00 (which is the sum of
$795,576.00, the amount accrued on the Closing Balance Sheet
of INVETECH for the J.M. Moore Salary Continuation Agreement,
plus $500,000.00) plus interest at the rate of 7.7% annually,
compounded monthly, beginning July 1, 1997 to date of death,
paid over a 180-month period using an annual interest rate of
7.7%, compounded monthly. Such monthly amount shall be payable
upon the first business day of each calendar month commencing
with the first business day of the month following the month
in which Moore dies and shall
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<PAGE> 3
continue until a total of 180 payments have been made.
3. RESTRICTIVE COVENANT. During any period in which Moore
receives payments pursuant to this Agreement, Moore shall not directly compete
with the Company or any of its affiliates nor shall Moore consult with or be
employed by a direct competitor of the Company or any of its affiliates which
does business in any state in which the Company or any of its affiliates is
qualified to do business.
4. FORFEITURE OF PAYMENTS. In the event that Moore violates
the condition set forth in Section 3 of this Agreement, and such violation
remains uncured for 15 days following receipt by Moore of notice of such
violation from the Board of Directors of the Company, then such violation shall
constitute a breach of this Agreement, and no further payments shall be due or
payable by the Company thereafter and the Company shall have no further
liability whatsoever under this Agreement.
5. TREATMENT OF NON-QUALIFIED DEFERRED COMPENSATION BENEFITS.
It is the intention of the parties hereto that the non-qualified deferred
compensation benefits payable under this Agreement will be subject to taxation
under Section 3121(v)(2) of the Internal Revenue Code of 1986, as amended, as of
December 31, 1997 in the amount of $1,337,679.27.
6. ENTIRE AGREEMENT. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes all other agreements, written or otherwise. This Agreement may not be
changed or extended (including additions and deletions) orally or otherwise,
except by an agreement or consent in writing signed by both parties hereto.
7. NOTICE. For all purposes of this Agreement, all
communications including without limitation notices, consents, requests or
approvals, provided for herein shall be in writing and shall be deemed to have
been duly given when delivered or five business days after having been mailed by
United States registered or certified mail, return receipt requested, postage
prepaid, addressed to the Company (to the attention of the Secretary of the
Company) at its principal executive office and to Moore at Moore's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of
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<PAGE> 4
change of address shall be effective only upon receipt.
8. GOVERNING LAW. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
Ohio, without giving effect to the principles of conflict of laws of such State.
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
/s/ J. Michael Moore By: /s/ Mark O. Eisele
- ------------------------------- -------------------------------
J. Michael Moore Title: Vice President
Date: March 16, 1998 Date:
-------------------------- -----------------------------
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<PAGE> 1
Exhibit 10(b)
AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT
------------------------------------------------
Applied Industrial Technologies, Inc.
One Applied Plaza
Cleveland, Ohio 44115
January 15, 1998
Dear ________:
Applied Industrial Technologies, Inc. (the "Company") considers it
essential to the best interest of the Company and its shareholders that its
management be encouraged to remain with the Company and to continue to devote
full attention to the Company's business. In this connection, the Company
recognizes that the possibility of a change in control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its shareholders. Accordingly, the Company's
Board of Directors (the "Board") has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of key
members of the Company's management, including yourself, to their assigned
duties without distraction in the face of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company.
In order to induce you to remain in the employ of the Company
until the termination of your employment in conjunction with a "change in
control of the Company" (as defined in Section 2 hereof), this letter agreement
("Agreement") amends and restates the severance benefits which this Company
agrees will be provided to you in the event your employment with the Company is
terminated within the three year period immediately following any change in
control of the Company either by you for "Good Reason" or by the Company
"Without Cause" (both as defined in Section 3 hereof). In the event that a
change in control of the Company does not occur, your severance benefits, if
any, shall be determined without regard to this Agreement.
Nothing herein shall be construed so as to prevent either you or
the Company from terminating your employment at any time, for cause or
otherwise, subject only to the specific payment and other provisions hereinafter
provided for under certain circumstances in the event a change in control of the
Company shall have occurred prior to the date your termination becomes
effective. In addition, this agreement shall be deemed terminated, and of no
further force and effect, in the event that you cease to be a Board-elected
officer or an appointed officer of the Company prior to a change in control. You
hereby specifically acknowledge that your employment by the Company is
employment-at-will, subject to termination by you, or by the Company, at any
time with or without cause. You also acknowledge that such employment-at-will
status cannot be modified except in a specific writing which has been authorized
or ratified by the Board of Directors of the Company.
1. CONTINUED EMPLOYMENT. This confirms that you have advised the
Company that, in consideration of, among other things, the Company's entering
into this amended and restated Agreement with you, it is your present intention
to remain in the employ of the Company unless and until there occurs a change in
control of the Company.
2. CHANGE IN CONTROL. No benefits shall be payable hereunder
unless a change in control of the Company occurs and your employment with the
Company is terminated within three
<PAGE> 2
years thereafter either by you for Good Reason or by the Company Without Cause.
This Agreement is not intended to apply to termination of your employment by
reason of Death, Disability or Retirement (as defined in Section 3 hereof). For
purposes of this Agreement, a "change in control of the Company" shall mean:
(a) The Company is merged, consolidated or reorganized into or
with another entity and, immediately after such merger,
consolidation or reorganization, the holders of Company
voting stock immediately prior to the transaction hold, in
the aggregate, less than a majority of the combined voting
power of the then outstanding securities of the new entity;
(b) The Company sells substantially all of its assets to
another entity and, immediately after such sale, the
holders of Company voting stock immediately prior to the
sale hold, in the aggregate, less than a majority of the
combined voting power of the then outstanding securities of
the purchaser;
(c) A report is filed, or is required to be filed, on Schedule
13D or Schedule 14D-1 (or any successor form) disclosing
that any "person" has become a "beneficial owner" (as those
terms are defined by the Securities Exchange Act of 1934)
of Company securities representing 20% or more of the
combined voting power of then outstanding securities of the
Company;
(d) The Company files, or is required to file, a report or
proxy statement with the Securities and Exchange Commission
disclosing in response to Form 8-K or Schedule 14A (or any
successor form) that a change in control of the Company has
or may have occurred, or will or may occur in the future,
pursuant to a then-existing contract or transaction; or
(e) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to
constitute at least three-fourths of the Board, provided,
however, that any individual becoming a director subsequent
to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a
vote of at least two-thirds of the directors comprising the
Incumbent Board shall be considered a member of the
Incumbent Board, but excluding for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with
respect to the election or removal of directors or other
actual or threatened solicitation of proxies by or on
behalf of a person other than the Board.
Notwithstanding events set forth in subparagraphs (c) and (d)
above, unless otherwise determined by a majority vote of the
Board, a change in control shall not be deemed to have occurred
solely because (i) the Company, (ii) an entity of which the
Company directly or indirectly beneficially owns 50% or more of
the entity's voting stock, or (iii) any employee stock ownership
plan or any other employee benefit plan sponsored by the Company,
either files or becomes obligated to file a report or proxy
statement in response to Schedules 13D, 14D-1 or 14A, or Form 8-K
(or any successor form), disclosing beneficial ownership by it of
voting stock, whether in excess of 20% or otherwise, or because
the Company reports that a change of control of the Company has or
may have occurred, or will or may occur in the future, by reason
of such beneficial ownership.
The first date upon which a change in control as defined above
takes place shall be known as the "Effective Date." Anything in this Agreement
to the contrary notwithstanding, if a change in control occurs and if your
employment with the Company is terminated prior to the date on which the change
in control occurs, and if it is reasonably demonstrated by you that such
termination (i) was at
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<PAGE> 3
the request of a third party who had taken steps reasonably calculated to effect
a change in control or (ii) was by the Company and arose with or in anticipation
of a change in control, then for all purposes of this Agreement your employment
shall be deemed to have been terminated by the Company Without Cause under
Section 3(f) of this Agreement and the "Effective Date" shall mean the date
immediately prior to the Date of Termination (as defined in Section 3 hereof).
3. TERMINATION OF EMPLOYMENT. Your employment with the Company
shall or may be terminated, as the case may be, for any of the following
reasons:
(a) DEATH. Termination of your employment with the Company
due to your death;
(b) RETIREMENT. Termination of your employment with the
Company at or after the attainment of age sixty-five (65);
(c) DISABILITY. Termination of your employment with the
Company either by you or the Company after you are physically or mentally
incapacitated for a period of one hundred eighty (180) consecutive days such
that you cannot substantially perform your duties of employment with the Company
on a full-time basis;
(d) CAUSE. Termination of your employment with the Company
at any time for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure by you to perform
substantially your duties with the Company or one
of its affiliates (other than for Disability or
Good Reason), after a written demand for
substantial performance is delivered to you by the
Board or the Chief Executive Officer of the Company
which specifically identifies the manner in which
the Board or Chief Executive Officer believes that
you have not substantially performed your duties,
or
(ii) the willful engagement by you in illegal conduct or
gross misconduct involving moral turpitude that is
materially and demonstrably injurious to the
Company.
For purposes of this Section 3(d), no act or failure to act shall
be considered "willful" unless it is done, or omitted to be done,
in bad faith or without your reasonable belief that such action or
omission was in the best interests of the Company. Any act, or
failure to act, based upon authority given you pursuant to a
resolution duly adopted by the Board or upon the instructions of
the Chief Executive Officer or a senior officer of the Company or
based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, in good
faith and in the best interests of the Company. Termination of
your employment with the Company shall not be deemed to be for
Cause unless and until there shall have been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters of the entire membership of the Board at
a meeting of the Board called and held for such purpose (after
reasonable notice is provided to you and you are given an
opportunity, together with counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, you are
guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail;
(e) GOOD REASON. You may terminate your employment with the
Company for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment of any duties inconsistent in any
respect with your position (including status,
offices, titles and reporting requirements),
authority, duties
3
<PAGE> 4
or responsibilities, or any other action by the
Company which results in a diminution in such
position, authority, duties or responsibilities,
excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by
you;
(ii) any failure by the Company to continue to provide
you with an annual base salary, employee benefits
and an opportunity to earn incentive and bonus
compensation equal or greater to that which was
provided to you by the Company immediately prior to
the Effective Date other than an isolated,
insubstantial and inadvertent failure not occurring
in bad faith and which is remedied by the Company
promptly after the receipt of notice thereof given
by you;
(iii) the Company's requiring you to be based at or
generally work from any location other than the
location that you were based at or generally worked
from prior to the Effective Date or the Company's
requiring you to travel on Company business to a
substantially greater extent than required
immediately prior to the Effective Date; or
(iv) any failure by the Company to comply with and
satisfy Section 12 of this Agreement.
For purposes of this Section 3(e), your good faith determination
of "Good Reason" shall be conclusive. Anything in this Agreement
to the contrary notwithstanding, a termination by you for any
reason during the 30-day period immediately following the first
anniversary of the Effective Date shall be deemed to be a
termination for Good Reason for all purposes of this Agreement.
(f) WITHOUT CAUSE. The Company may terminate your employment
with the Company Without Cause. For purposes of this Agreement the term "Without
Cause" shall mean termination of your employment for reasons other than for
Death, Retirement, Disability or Cause.
Except in the case of Retirement or Death, termination of your
employment shall be effective only as of the earliest date (hereinafter referred
to as the "Date of Termination") specified by either you or the Company in a
written notice of termination ("Notice of Termination") to the other party
hereto. Notwithstanding any provision herein to the contrary, if at any time
prior to a change in control of the Company you receive notice from the Company
that you shall be placed in an income continuation status (i.e. where the
Company agrees to (i) continue to pay your then existing salary or a modified
level of salary continuation and/or all or some of your then existing employee
benefits and (ii) relieve you of your obligation to render services to the
Company), your employment, for the purpose of this Agreement only, shall be
deemed terminated as of the date of such notice and no benefits shall be payable
to you hereunder.
4. SEVERANCE PAY. If a change in control of the Company occurs and
within three years thereafter your employment with the Company is terminated
either by you for Good Reason or by the Company Without Cause, then in addition
to all other benefits which you have earned prior to such termination or to
which you are otherwise entitled, the Company shall pay to you as severance pay,
in a lump sum on or before the fifth day following the Date of Termination, the
following amounts:
(a) your full base salary earned through the Date of
Termination at the rate in effect ten days prior to the date Notice of
Termination is given, to the extent not theretofore paid;
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<PAGE> 5
(b) an amount equal to the product of (1) the sum of (i) the
higher of your annual base salary in effect prior to the Effective Date, or your
annual base salary at the highest rate in effect at any time since any change in
control of the Company and (ii) the higher of your Additional Compensation (as
defined hereafter) for the most recently completed fiscal year of the Company,
or the arithmetic average of your Additional Compensation for the most recently
completed three fiscal years of the Company (the sum of such annual base salary
and Additional Compensation shall be referred to as your "Base Compensation")
and (2) the lesser of the number three or a fraction the numerator of which is
the number of months from and including the month in which the Date of
Termination occurs to and including the month in which you would attain the age
sixty-five and the denominator of which is twelve. The term "Additional
Compensation" shall mean your annual (measured by a calendar year) total
incentive compensation, commissions, bonuses, amounts deferred under any
non-qualified deferred compensation program of the Company, and any elective
contributions that are made by or on behalf of you under any plan maintained by
the Company that are not includible in gross income under Section 125 or
402(e)(3) of the Internal Revenue Code of 1986, as amended from time to time,
but excluding moving or educational reimbursement expenses, amounts realized
from the exercise of any stock options, and imputed income attributable to any
fringe benefit.
(c) in lieu of shares of Common Stock of the Company,
without par value ("Company Shares") issuable upon exercise of options
("Options"), if any, granted to you under any Company stock option plan (which
Options shall be deemed canceled upon the making of the payment herein referred
to), you shall receive an amount in cash equal to the aggregate spread between
the exercise prices of all such Options that are outstanding and held by you
(whether or not then fully vested or exercisable) and the higher of (i) the mean
of the high and low trading prices of Company Shares on the New York Stock
Exchange on the Date of Termination or (ii) the highest price per Company Share
actually paid in connection with any change in control of the Company; and
(d) an amount of cash equal to any unvested portion of your
interest in any of the Company's tax-qualified pension plans as of the Date of
Termination.
5. WELFARE BENEFIT PLANS. If a change in control of the Company
occurs and within three years thereafter your employment with the Company is
terminated either by you for Good Reason or by the Company Without Cause, then
the Company shall maintain in full force and effect, for the continued benefit
of you and your dependents for three years after the Date of Termination, all
life insurance, health and accident, disability and other employee benefit
plans, programs and arrangements (excluding, however, any tax-qualified and
nonqualified retirement plan or program of the Company), in which you were
entitled to participate immediately prior to the Date of Termination, provided
that your continued participation is possible under the general terms and
provisions of such welfare plans, programs and arrangements, and provided,
however, that in the event that your life insurance benefit is provided through
a split dollar program, the Company shall cause the policyowner of any life
insurance policy of your life under such program to transfer the ownership of
any such policy (with any cash value related thereto) to you. In the event that
your participation in any such welfare plan, program or arrangement is barred,
or any such plan, program or arrangement is discontinued or the benefits
thereunder materially reduced, the Company shall arrange to provide you with
benefits substantially similar to those which you were entitled to receive under
such plans, programs and arrangements immediately prior to the Date of
Termination. At the end of the period of coverage hereinabove provided for, you
shall have the option to have assigned to you at no cost and with no
apportionment of prepaid premiums, any assignable insurance owned by the Company
and relating specifically to you.
6. OUTPLACEMENT SERVICES. If a change in control of the Company
occurs and within three years thereafter your employment with the Company is
terminated either by you for Good Reason or by the Company Without Cause, then
the Company shall provide you reasonable
5
<PAGE> 6
outplacement services for a period of up to one year of a nature customarily
provided at your executive officer level.
7. NO MITIGATION REQUIRED. You shall not be required to mitigate
the amount of any payment or benefit provided for in Section 4 or 5 by seeking
other employment or otherwise. Notwithstanding the foregoing, benefits otherwise
receivable under Section 5 of this Agreement shall be reduced to the extent that
and for any period during which you receive substantially similar benefits from
another employer.
8. NONCOMPETITION. If a change in control of the Company occurs
and within three years thereafter your employment with the Company is terminated
either by you for Good Reason or by the Company Without Cause, and you are
receiving payments from the Company pursuant to this Agreement, then for a
period of one (1) year from the Date of Termination of your employment you agree
not to, without the written consent of the Company, either directly or
indirectly, engage in, make any investment in, advise, assist or render any
services to any person or entity in competition with the business of the Company
or its subsidiaries. Notwithstanding the foregoing, you may own less than one
(1) percent of the combined voting power of all issued and outstanding voting
securities of any publicly-held corporation whose stock is traded on a major
stock exchange or quoted on NASDAQ.
9. CONFIDENTIAL INFORMATION. You hereby agree that you shall not
at any time (whether employed by the Company or not), either directly or
indirectly, disclose or make known to any person or entity any confidential
information, trade secret, or proprietary information that you acquired during
the course of your employment with the Company which shall not have become
public knowledge (other than by your actions in violation of this Agreement).
You further agree that upon the termination of your employment with the Company
or at any time upon the request of the Company you shall deliver to the Company
any and all literature, documents, correspondence, and other materials and
records furnished to or acquired by you from the Company during the course of
your employment with the Company. In no event shall an asserted violation of the
provisions of this Section 9 constitute a basis for deferring or withholding any
amounts otherwise payable to you under this Agreement
10. ADDITIONAL PAYMENTS.
(a) Anything in this Agreement to the contrary
notwithstanding, in the event it is determined (as hereafter provided) that any
payment or distribution to or for your benefit, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement or similar right (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code (or any successor provision thereto), or
any interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereafter collectively
referred to as the "Excise Tax"), then you shall be entitled to receive an
additional payment or payments (a "Gross-Up Payment") in an amount such that,
after payment by you of all taxes (including federal, state, and local taxes and
any interest or penalties imposed with respect to such taxes and including any
Excise Tax) imposed upon the Gross-Up Payment, you retain (or have withheld and
credited on your behalf for tax purposes) an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 10(e) hereof, all
determinations required to be made under this Section 10, (including whether an
Excise Tax is payable by the Executive, the amount of such Excise Tax, whether a
Gross-Up Payment is required, and the amount of such Gross-Up Payment) shall be
made by a nationally-recognized legal or accounting firm (the "Firm") selected
by you in your sole discretion. You agree to direct the Firm to submit its
determination and detailed supporting calculations to both you and the Company
within 15 calendar days after the Date
6
<PAGE> 7
of Termination, if applicable, or such earlier time or times as may be requested
by you or the Company. If the Firm determines that any Excise Tax is payable by
you and that a Gross-Up Payment is required, the Company shall pay you the
required Gross-Up Payment within five business days after receipt of such
determination and calculations. If the Firm determines that no Excise Tax is
payable by you, it shall, at the same time as it makes such determination,
furnish you with an opinion that you have substantial authority not to report
any Excise Tax on your federal income tax return. Any determination by the Firm
as to the amount of the Gross-Up Payment shall be binding upon you and the
Company. As a result of the uncertainty in the application of Section 4999 of
the Code (or any successor provision thereto) at the time of the initial
determination by the Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies pursuant to
Section 10(e) hereof and you thereafter are required to make a payment of any
Excise Tax, you may direct the Firm to determine the amount of the Underpayment
(if any) that has occurred and to submit its determination and detailed
supporting calculations to both you and the Company as promptly as possible. Any
such Underpayment shall be promptly paid by the Company to you, or for your
benefit, within five business days after receipt of such determination and
calculations.
(c) You and the Company shall each provide the Firm access
to and copies of any books, records and documents in the possession of the
Company or you, as the case may be, reasonably requested by the Firm, and
otherwise cooperate with the Firm in connection with the preparation and
issuance of the determination contemplated by Section 10(b) hereof.
(d) The fees and expenses of the Firm for its services in
connection with the determinations and calculations contemplated by Section
10(b) hereof shall be borne by the Company. If such fees and expenses are
initially paid by you, the Company shall reimburse you the full amount of such
fees and expenses within five business days after receipt from you of a
statement therefor and reasonable evidence of your payment thereof.
(e) You agree to notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of a Gross-Up Payment. Such notification shall be given as
promptly as practicable but no later than ten business days after you actually
receive notice of such claim. You agree to further apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid
(in each case, to the extent known by you). You agree not to pay such claim
prior to the earlier of (i) the expiration of the 30-calendar-day period
following the date on which you give such notice to the Company and (ii) the
date that any payment or amount with respect to such claim is due. If the
Company notifies you in writing at least five business days prior to the
expiration of such period that it desires to contest such claim, you agree to:
(i) provide the Company with any written records or
documents in your possession relating to such claim
reasonably requested by the Company,
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in
writing from time to time, including without
limitation accepting legal representation with
respect to such claim by an attorney competent in
respect of the subject matter and reasonably
selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim,
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<PAGE> 8
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold you harmless, on an after-tax basis, for
and against any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of costs
and expenses. Without limiting the foregoing provisions of this Section 10(e),
the Company shall control all proceedings taken in connection with the contest
of any claim contemplated by this Section 10(e) and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim (provided,
however, that you may participate therein at your own cost and expense) and may,
at its option, either direct you to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and you agree to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs you to pay the tax
claimed and sue for a refund, the Company shall advance the amount of such
payment to you on an interest-free basis and shall indemnify and hold you
harmless, on an after-tax basis, from any Excise Tax or income tax including
interest or penalties with respect thereto, imposed with respect to such
advance; and provided further, however, that any extension of the statute of
limitations relating to payment of taxes for your taxable year with respect to
which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and you shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
(f) If, after the receipt by you of an amount advanced by
the Company pursuant to Section 10(e) hereof, you receive any refund with
respect to such claim, you agree (subject to the Company's complying with the
requirements of Section 10(e) hereof) to promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after any
taxes applicable thereto). If, after your receipt of an amount advanced by the
Company pursuant to Section 10(e) hereof, a determination is made that you are
not entitled to any refund with respect to such claim and the Company does not
notify you in writing of its intent to contest such denial of refund prior to
the expiration of 30 calendar days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid pursuant to this Section 10.
11. SECURITY. To secure payment of the benefits herein provided
for the Company agrees to maintain an irrevocable escrow account (the "Escrow
Account") at Key Trust Company of Ohio, N.A. (the "Bank"), Cleveland, Ohio, and
to keep on deposit in the Escrow Account such amount, if any, as shall at all
times be at least equal to the required security hereinafter provided for. The
maximum amount of required security to be kept on deposit at any time shall be
(A) an amount equal to three (3) times your annualized Base Compensation, with
such amount to be recalculated each November to reflect changes in your
annualized Base Compensation, or (B) if there has been a determination with your
written consent or by a final arbitral award rendered in accordance with this
Agreement that a specific lesser amount fully secures the Company's obligations
under this Agreement, or that the Company has fully performed its obligations
under this Agreement, then such specific lesser amount or, in the case that the
Company has fully performed its obligations under this Agreement, nothing. The
full maximum amount of required security shall be kept on deposit at all times
after there shall have been a change in control of the Company. Unless and until
such a change in control of the Company shall have occurred, however, the
Company shall only be obliged to maintain on deposit in the Escrow Account an
amount at least equal to 50% of the maximum amount of required security. Amounts
deposited in the Escrow Account shall be paid out by the Bank only to you, in
such amounts as you shall certify to the Bank as amounts that the Company is in
default in paying to you under this Agreement, or to the Company, to the extent
that the amount on deposit exceeds the maximum amount of required security as
specified in joint written instructions from you and the Company to the Bank or
in a final settlement or judgment relating to this Agreement.
8
<PAGE> 9
12. SUCCESSORS, BINDING AGREEMENT. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substances satisfactory to you, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle you to compensation from the Company in the same amount and on the
same terms as you would be entitled hereunder if the Company had terminated your
employment after a change in control of the Company occurring at the time of
succession, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this
paragraph 8 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. This Agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amounts would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devises, legates, or
other designee or, if there be no such designee, to your estate.
13. CONTINUED STATUS AS ELECTED OFFICER OR APPOINTED OFFICER.
Notwithstanding anything to the contrary elsewhere contained in this Agreement,
if you cease to be a Board-elected officer or an appointed officer of the
Company prior to a change in control, this Agreement shall be deemed terminated
and of no further force and effect.
14. NOTICE. Notices and all other communications provided for in
this Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth on
the first page of this Agreement, provided that all notices to the Company shall
be directed to the attention of the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
15. MISCELLANEOUS. No provisions of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge is
agreed to in writing signed by you and such officer as may be specifically
designated by the Board, provided, that the Company shall have the right to
terminate its obligations to you under this Agreement by written notice given to
you at any time prior to a change in control of the Company, so long as such
termination is not done in anticipation of or in connection with a change in
control of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. This Agreement constitutes the entire agreement
between the Company and you with respect to the subject matter hereof and,
except to the extent a specific compensation program provides for benefits upon
a change in control relative to that program, which provisions shall remain in
effect, no agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. Without limiting the generality
of the foregoing, this Agreement supersedes and replaces in its entirety any
prior agreement relating to the subject matter hereof. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Ohio.
9
<PAGE> 10
16. VALIDITY. The invalidity or unenforceability of any one or
more provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. JURISDICTION. In the event of any dispute or controversy
arising under or in connection with this Agreement you and the Company hereby
irrevocably consent to the jurisdiction of the Common Pleas Court of the State
of Ohio (Cuyahoga County) or the United States District Court for the Northern
District of Ohio.
19. LEGAL FEES AND EXPENSES. It is the intent of the Company that
you shall not be required to incur the expenses associated with the enforcement
of your rights under this Agreement by arbitration, litigation, other legal
action or negotiation to resolve any disputes because the cost and expenses
thereof would substantially detract from the benefits intended to be extended to
you hereunder. Accordingly, if it should appear to you that the Company has
failed to comply with any of its obligations under this Agreement or in the
event the Company or any other person takes any action to declare this Agreement
void or unenforceable, or institutes any arbitration or litigation designed to
deny, or to recover from, you the benefits intended to be provided to you
hereunder, the Company irrevocably authorizes you from time to time to retain
counsel of your choice, at the expense of the Company, to represent you in
connection with the initiation or defense of any arbitration, litigation, other
legal action or negotiation to resolve any disputes whether by or against the
Company or any director, officer, shareholder or other person affiliated with
the Company, in any jurisdiction. Notwithstanding any existing or prior
attorney-client relationship between the Company and such counsel, the Company
irrevocably consents to your entering into an attorney-client relationship with
such counsel, and in that connection the Company and you agree that a
confidential relationship shall exist between you and such counsel. The Company
shall also pay or cause to be paid and shall be solely responsible for any and
all attorneys' and related fees and expenses incurred by you as a result of the
Company's failure to perform this Agreement or any provision hereof (including
this Section 19) or as a result of the Company or any person contesting the
validly or enforceability of this Agreement or any provision hereof.
10
<PAGE> 11
If this letter correctly sets forth our agreement on the
subject matter hereof, kindly sign and return to the Company the enclosed copy
of the letter which will then constitute our agreement on this subject.
Sincerely,
APPLIED INDUSTRIAL TECHNOLOGIES, INC.
By:
----------------------------------
ACCEPTED AND AGREED TO AS OF JANUARY 15, 1998
- --------------------------------
Name of Officer
11
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