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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-Q
-----------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period ended July 3, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
-----------------------
Commission file number 0-4723
FARR COMPANY
Incorporated pursuant to the Laws of Delaware State
-----------------------
Internal Revenue SService -- Employer Identification Number 95-1288401
2201 Park Place, El Segundo, CA 90245
(310) 727-6300
-----------------------
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 ( )
Number of shares of registrants common stock outstanding as of close of the
period covered by this report: 8,885,904.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
FARR COMPANY AND SUBSIDIARIES
INDEX TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
Part I - Financial Information
Introduction
Condensed Consolidated Financial Statements
Balance Sheets - July 3, 1999 and January 2, 1999
Income Statements for the three months ended July 3, 1999 and
July 4, 1998 and for the six months ended July 3, 1999 and
July 4, 1998
Statements of Cash Flows for the six months ended July 3, 1999
and July 4, 1998
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis
Part II - Other Information
Item 4.a. Submission of Matters to a Vote of Security Holders
Item 6.a. Exhibits
<PAGE>
FARR COMPANY AND SUBSIDIARIES
INTRODUCTION TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
The Condensed Consolidated Financial Statements included herein have
been prepared by the Company without audit, and include all adjustments
which are, in the opinion of management, necessary for a fair presentation
of the financial position as of July 3, 1999 and the results of operations
for the three and six months ended July 3, 1999 and July 4, 1998 pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures are adequate
to make the information presented not misleading. These condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's latest annual report
on Form 10-K.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Assets July 3, 1999 Jan. 2, 1999
-------------- --------------
(Unaudited) (Audited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................. $ 2,279,000 $ 6,083,000
Accounts receivable, less allowance of $391,000
in 1999 and $370,000 in 1998 ........................... 18,294,000 19,433,000
Inventories
Raw materials .......................................... 3,571,000 4,629,000
Work in process ........................................ 4,088,000 3,413,000
Finished goods ......................................... 2,550,000 2,774,000
------------ ------------
10,209,000 10,816,000
Prepaid expenses ........................................... 777,000 688,000
Income taxes receivable .................................... 849,000 849,000
Deferred tax benefit ....................................... 1,221,000 1,221,000
------------ ------------
Total current assets ..................................... 33,629,000 39,090,000
------------ ------------
Property, Plant and Equipment, at Cost
Land ....................................................... 2,263,000 2,246,000
Buildings and improvements ................................. 18,526,000 18,468,000
Machinery and equipment .................................... 36,580,000 36,340,000
------------ ------------
57,369,000 57,054,000
Less-accumulated depreciation and amortization ............. 39,883,000 39,027,000
------------ ------------
17,486,000 18,027,000
Other ........................................................... 3,030,000 2,784,000
------------ ------------
$ 54,145,000 $ 59,901,000
============ ============
Liabilities & Stockholders' Investment ......................... July 3, 1999 Jan. 2, 1999
-------------- --------------
(Unaudited) (Audited)
Current Liabilities:
Notes/overdraft payable to banks .......................... $ 0 $ 145,000
Accounts payable .......................................... 5,081,000 6,061,000
Accrued liabilities ....................................... 6,621,000 7,072,000
Income taxes payable and deferred taxes ................... 833,000 1,287,000
------------ ------------
Total current liabilities .............................. 12,535,000 14,565,000
------------ ------------
Deferred Income Taxes .......................................... 1,773,000 1,773,000
Other Non-current Liabilites ................................... 1,787,000 1,509,000
Commitments and Contingencies
Stockholders' Investment:
Common stock, $.10 par value--Authorized 20,000,000
shares Issued and outstanding--8,885,904 shares at
July 3, 1999 and 8,874,468 shares at January 2, 1999 ..... 734,000 813,000
Additional paid-in capital ................................... 8,948,000 11,421,000
Cumulative translation adjustments ........................... (2,191,000) (2,405,000)
Retained earnings:
Balance beginning of year .................................. 32,225,000 27,644,000
Net income for the period .................................. 3,334,000 7,205,000
Other ...................................................... (5,000,000) (2,624,000)
------------ ------------
Balance at end of period ................................... 30,559,000 32,225,000
------------ ------------
Total stockholders' investment ........................... 38,050,000 42,054,000
------------ ------------
$ 54,145,000 $ 59,901,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Sales ........................................ $ 29,464,000 $ 30,434,000 $ 59,207,000 $ 62,423,000
Cost of Sales .................................... 21,679,000 22,534,000 43,680,000 46,317,000
------------ ------------ ------------ ------------
Gross Margin ..................................... 7,785,000 7,900,000 15,527,000 16,106,000
Selling, general and administrative .......... 5,275,000 5,056,000 10,329,000 10,338,000
Interest expense ............................. 17,000 28,000 41,000 64,000
Interest income .............................. (46,000) (62,000) (110,000) (130,000)
------------ ------------ ------------ ------------
Total Expenses ................................... 5,246,000 5,022,000 10,260,000 10,272,000
------------ ------------ ------------ ------------
Income Before Income Taxes ....................... 2,539,000 2,878,000 5,267,000 5,834,000
Income Taxes ..................................... 927,000 1,002,000 1,933,000 2,040,000
------------ ------------ ------------ ------------
Net Income ....................................... $ 1,612,000 $ 1,876,000 $ 3,334,000 $ 3,794,000
============ ============ ============ ============
Diluted Earnings per Common Share ................ $ 0.21 $ 0.22 $ 0.42 $ 0.45
============ ============ ============ ============
Shares outstanding for diluted earnings .......... 7,735,902 8,500,624 7,951,549 8,488,368
============ ============ ============ ============
Basic Earnings per Common Share .................. $ 0.21 $ 0.23 $ 0.43 $ 0.46
============ ============ ============ ============
Shares outstanding for basic earnings ............ 7,550,007 8,318,971 7,775,755 8,296,475
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
FARR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Year-to-Date
July 3, 1999 July 4, 1998
------------ ------------
Cash Provided by ( Used in ) :
Operating Activities:
<S> <C> <C>
Net Income ............................................. $ 3,334,000 $ 3,794,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 1,243,000 1,203,000
Provision for loss on accounts receivable ........... 79,000 80,000
Equity in loss of affiliate ......................... 40,000 9,000
Benefit retirement trust ............................ 370,000 525,000
Change in deferred income taxes ..................... (35,000) (1,000)
Exchange gain (loss) ................................ 9,000 (52,000)
Net (gain) loss on sale/retirement of P,P & E ....... (10,000) 3,000
Changes in assets and liabilities
Inventories ...................................... 649,000 (304,000)
Receivables and prepaid expenses ................. 1,136,000 (1,372,000)
Accounts payable & accrued expenses .............. (1,329,000) (2,930,000)
Net change in current income taxes payable ....... (454,000) 484,000
----------- -----------
Net cash provided by operating activities .......... 5,032,000 1,439,000
----------- -----------
Investing Activities:
Purchases of property, plant and equipment ............. (747,000) (1,344,000)
Redemptions of short term investments .................. 0 2,031,000
Note receivable - affiliate ............................ 0 (106,000)
Purchase of asset held for sale ........................ (176,000) 0
Proceeds from sale of property, plant and equipment .... 10,000 0
Purchase of investments, benefits trust ................ (370,000) (525,000)
----------- -----------
Net cash used in investing activities .............. (1,283,000) 56,000
----------- -----------
Financing Activities:
Principal payments on revolving line of credit
and long-term debt borrowings & overdrafts ............ (142,000) (81,000)
Treasury stock acquired ................................ (7,624,000) (318,000)
Proceeds from sale of stock, stock option plans ........ 39,000 463,000
Other .................................................. 88,000 7,000
----------- -----------
Net cash used in financing activities ............... (7,639,000) 71,000
----------- -----------
Effect of Exchange Rate Changes on Cash .................... 86,000 (57,000)
----------- -----------
(Decrease) Increase in Cash and Cash Equivalents ........... (3,804,000) 1,509,000
Cash and Cash Equivalents at Beginning of Period ........... 6,083,000 5,109,000
----------- -----------
Cash and Cash Equivalents at End of Period ............. $ 2,279,000 $ 6,618,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FARR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(Unaudited)
1. There have been no significant changes in the Company's policies,
practices or position from that described in the notes to the
Consolidated Financial Statements included in the 1998 Annual Report to
Stockholders which was incorporated by reference in the Annual Report
on Form 10-K for the year ended January 2, 1999.
2. Common Stock
On February 16, 1999 and May 4, 1999, the Board of Directors authorized
purchases of 500,000 shares and 1,000,000 shares, respectively, in
addition to the original 500,000 shares under the stock repurchase plan
approved on June 26, 1998. Under the plan, the Company may purchase
from time to time a cumulative total of 2,000,000 shares of its common
stock either on the open market or through negotiated transactions. No
time limit has been set for completion of this stock repurchase
program. Shares purchased are planned to be made with existing cash on
hand. During the second quarter of 1999, 437,500 shares were acquired
under the repurchase program, bringing the total purchases to 1,158,050
shares.
As of July 3, 1999 and January 2, 1999 the Company held in treasury
1,541,726 and 743,944 shares of its common stock at a cost of
$12,919,000 and $5,295,000, respectively.
For the current period, a change in the method of presenting the
treasury stock was used. Common stock, additional paid-in capital and
retained earnings amounts are reported net of treasury stock costs.
Certain reclassifications have been made to the prior year's
Stockholders' Equity to conform with the current year's presentation.
3. Earnings per Share Calculation
As a result of the 3-for-2 stock split distributed on May 29, 1998, per
share amounts for 1998 have been restated to reflect the weighted
average number of shares of common stock outstanding. The per share
amounts are calculated as though the stock split occurred in the first
day of the year.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE CALCULATION
Earnings:
---------
<S> <C> <C> <C> <C>
Net Income $1,612,000 $1,876,000 $3,334,000 $3,794,000
========== ========== ========== ==========
Shares:
-------
Weighted average number of common
shares outstanding 7,550,007 8,318,971 7,775,755 8,318,971
========= ========= ========= =========
Net Income Per Common Share $ 0.21 $ 0.23 $ 0.43 $ 0.46
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE CALCULATION
Earnings:
---------
Net Income $1,612,000 $1,876,000 $3,334,000 $3,794,000
========== ========== ========== ==========
Shares:
-------
Weighted average number of common
shares outstanding 7,550,007 8,318,971 7,775,755 8,318,971
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such options 185,895 181,653 175,794 181,653
---------- ---------- ---------- ---------
Weighted average number of common
shares and dilutive common share
equivalents outstanding 7,735,902 8,500,624 7,951,549 8,500,624
========= ========= ========= =========
Net Income Per Common Share $ 0.21 $ 0.22 $ 0.42 $ 0.45
========== ========== ========== ==========
</TABLE>
4. Comprehensive income for the current quarter and year-to-date, and
comparable prior year's quarter and year-to-date, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3, 1999 July 4, 1998 July 3, 1999 July 4, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Income $1,612,000 $1,876,000 $3,334,000 $3,794,000
Other Comprehensive income, net of tax
Foreign currency translation
adjustments gain (loss) 133,000 (339,000) 247,000 (104,000)
------- --------- ------- ---------
Comprehensive Income $1,745,000 $1,537,000 $3,581,000 $3,690,000
========== ========== ========== ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
FINANCIAL CONDITION
As of July 3, 1999, working capital was $21,094,000 compared to $24,525,000 at
the end of 1998, representing a $3,431,000 decrease in total working capital for
the first six months of 1999. The primary components of the change in working
capital during the first half were decreases in accounts payable and accrued
liabilities ($1,576,000), decreases in accounts receivable ($1,139,000) and a
net decrease in cash and cash equivalents ($3,804,000).
The decreases in accounts payable and accrued liabilities primarily reflected
large accounts payable payments against open capital expenditure payables at
year-end and payments related to accrued employee benefit expenses. The decrease
in cash and cash equivalents reflects the Company's stock repurchase activity.
As of July 3, 1999, borrowing availability under the Company's domestic
revolving credit facility was $10,000,000 and no borrowings were outstanding.
This credit facility was amended May 13, 1999 to extend the maturity date of the
facility to June 2001 with the same credit terms and borrowing limit.
Operating capital requirements of the Company are anticipated to be provided
through cash flows generated from operating activities and borrowing
availability under the Company's domestic revolving credit facility.
During the second quarter, the Company acquired 437,500 shares of its common
stock at a cost of $4,326,250 under its stock repurchase program. As of July 3,
1999, a cumulative total of 1,158,050 shares have been purchased under the stock
repurchase program.
The Company's cash flow generated from operating activities combined with
current cash balances are anticipated to generate adequate cash flow to meet
planned operating needs, provide for capital spending, fund stock repurchase
program activity and meet current debt service requirements.
CASH FLOW
Cash flow generated from operating activities during the first six months
totaled $5,032,000 compared to $1,439,000 for the same period a year ago. The
increase in cash flow from operating activities was primarily related to the
decrease in working capital associated with decreases in accounts receivable,
inventory, accounts payable and accrued liabilities as compared to an increase
in working capital for the same period last year.
Capital expenditures for the first half decreased to $747,000 from $1,344,000
for the same period a year ago. Capital expenditures decreased from 1998 levels
as 1998 expenditures included the Company's new headquarters facility that did
not reoccur in 1999.
<PAGE>
Results of Operations
- ---------------------
For the second quarter of 1999, the Company's sales of $29,464,000 were down
$970,000 or 3 percent from 1998 second quarter sales of $30,434,000. First half
1999 sales of $59,207,000 were behind last year's first half sales of
$62,423,000 by 5.2 percent. Both the second quarter and first half sales results
reflected softness across all of the Company's markets with Gas Turbine and
Custom OEM products accounting for most of the sales decreases. In addition,
weakening Canadian foreign currency exchange rates, as compared to last year's
level, reduced our comparable reported first half sales for 1999 by
approximately $340,000.
Foreign subsidiary 1999 first half sales were behind last year's first half
sales by 8 percent due to weak foreign currency exchange rates as compared to
the prior year and weak economic conditions in the United Kingdom that have
unfavorably impacted sales of our UK subsidiary.
Second quarter 1999 net income totaled $1,612,000, down $264,000 or 14.1 percent
from $1,876,000 in the second quarter last year. First half 1999 net income was
$3,334,000, representing a decrease of 12.1 percent from last year's first half
net income of $3,794,000. The decrease in second quarter income was attributable
to lower overall sales volume and higher selling expenses partially offset by
improved gross margin percentage improvements as gross margin as a percent of
sales during the second quarter increased to 26.4 percent as compared to 26
percent in the second quarter of 1998.
Selling, general and administrative expenses as a percentage of sales during the
quarter increased to 17.9 percent compared to 16.6 percent during the second
quarter of 1998. Second quarter spending totaled $5,275,000 compared to
$5,056,000 for the same period last year, reflecting increases in selling and
marketing related expenses associated with new product introductions and planned
sales force staffing increases.
Changes in interest income generally reflect the Company's lower cash position
as compared to last year's average cash balances.
The effective tax rate during the second quarter increased to 36.5 percent from
34.8 percent last year due to anticipating lower tax benefits being derived from
the Company's Foreign Sales Corporation (FSC) and tax credits realized by the
Company's foreign subsidiaries.
<PAGE>
PART II. - OTHER INFORMATION
Item 4.a. Submission of Matters to a Vote of Security Holders
The following items were submitted for stockholder approval at the Annual
Stockholder Meeting, May 4, 1999:
o Election of three Directors for three year terms:
Votes For Votes Withheld
John C. Johnston 6,314,108 418,553
Richard P. Bermingham 6,314,108 418,553
John A. Sullivan 6,314,108 418,553
o Amend the Company's restated certificate of incorporation to
increase the total number of authorized shares of Common Stock from
10,000,000 to 20,000,000:
Votes For Votes Against Abstain
6,289,616 416,415 26,630
o Amend the 1993 Stock Option Plan for key employees of Farr Company
to approve an increase in the aggregate number of shares of Common
Stock reserved for issuance under such plan from 787,000 to 1,000,000:
Votes For Votes Against Abstain
5,448,362 1,168,830 89,295
Broker non-votes 26,174
Item 6.a. Exhibits
The following are being filed with this Quarterly Report on Form 10-Q.
- - Exhibit 3.1 Certificate of Amendment to Restated Certificate of
Incorporation.
- - Exhibit 4.66 Business Loan Agreement dated May 13, 1999 between Farr
Company, as borrower, and Bank of America National
Trust and Savings Association, as lender.
- - Exhibit 10.43 Second Amendment to the 1993 Stock Option Plan for Key
Employees of Farr Company dated March 23, 1999.
- - Exhibit 27 Financial data schedule.
-------------------
Copies of Exhibits are available, on prepayment of 15 cents per page, by
writing to the Secretary of the Company at the address set forth on the
cover page of this Form 10-Q.
<PAGE>
PART II - OTHER INFORMATION
(Continued)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FARR COMPANY
(Registrant)
August 16, 1999 /s/ Stephen E. Pegg
Stephen E. Pegg
Senior Vice President and
Chief Financial Officer
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
FARR COMPANY
Pursuant to Title 8, Section 242 of the
Delaware General Corporation Law
Stephen E. Pegg hereby certifies as follows:
FIRST: He is the Senior Vice President, Secretary and Chief
Financial Officer of Farr Company, a Delaware corporation (the "Corporation").
SECOND: Article IV of the Restated Certificate of Incorporation of
Farr Company is amended and restated to read in its entirety as follows:
"The total number of shares of stock which the Corporation shall
have authority to issue is 20,000,000 shares of common stock, par value
$.10 per share (the "Common Stock")."
THIRD: The foregoing amendment of the Restated Certificate of
Incorporation of Farr Company has been duly adopted in accordance with the
provisions of Title 8, Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, I have executed this Certificate of Amendment this
9th day of August, 1999.
/s/ Stephen E. Pegg
Stephen E. Pegg
Senior Vice President, Secretary and
Chief Financial Officer
EXHIBIT 4.66
Bank of America
Business Loan Agreement
This Agreement dated as of May 13, 1999 is between Bank of America National
Trust and Savings Association (the "Bank") and Farr Company (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 Line of Credit Amount.
(a) During the availability period described below, the Bank will provide a
line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Ten Million and 00/100 Dollars ($10,000,000.00).
(b) This is a revolving line of credit providing for cash advances and
letters of credit. During the availability period, the Borrower may
repay principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not
yet reimbursed, to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the date
of this Agreement and June 1, 2001 (the "Expiration Date") unless the Borrower
is in default.
1.3 Interest Rate.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Rank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference Rate.
The Reference Rate is set by the Bank based on various factors,
including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for
pricing some loans. The Bank may price loans to its customers at, above,
or below the Reference Rate. Any change in the Reference Rate shall take
effect at the opening of business on the day specified in the public
announcement of a change in the Bank's Reference Rate.
1.4 Repayment Terms.
(a) The Borrower will pay interest on July 1, 1999, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Expiration Date. Any interest period for an optional interest rate (as
described below) shall expire no later than the Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates listed
below during interest periods agreed to by the Bank and the Borrower. The
optional interest rates shall be subject to the terms and conditions described
later in this Agreement. Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "Portion." The following optional
interest rates are available:
(a) the IBOR Rate plus 1.75 percentage points.
1.6 Letters of Credit.
(a) This line of credit may be used for financing:
(i) standby letters of credit with a maximum maturity not to extend
beyond the Expiration Date.
(ii) The amount of the letters of credit outstanding at any one time
(including amounts drawn on the letter of credit and not yet
reimbursed) may not exceed One Million and 0O/iOO Dollars
($1,000,000.00).
(b) The Borrower agrees:
- 1 -
<PAGE>
(i) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately
prepay and make the Bank whole for any outstanding letters of
credit.
(iii) the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval and
must be in form and content satisfactory to the Bank and in
favor of a beneficiary acceptable to the Bank. Without limiting
the foregoing, no letter of credit may be issued to support any
obligation of the Borrower in connection with worker's
compensation laws or that contains a provision providing that
the maturity date will be automatically extended each year for
an additional year unless the Bank gives written notice to the
contrary.
(iv) to sign the Bank's form Application and Agreement for Standby
Letter of Credit.
(v) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of
credit for the Borrower.
(vi) to allow the Bank to automatically charge its checking account
for applicable fees, discounts, and other charges.
2. OPTIONAL INTERE8T RATES
2.1 Optional Rates. Each optional interest rate is a rate per year. Interest
will be paid on the last day of each interest period, and on the first day of
each month during the interest period. At the end of any interest period, the
interest rate will revert to the rate based on the Reference Rate, unless the
Borrower has designated another optional interest rate for the Portion. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs.
2.2 Offshore Rate. The election of Offshore Rates shall be subject to the
following terms and requirements:
(a) The "Offshore Rate" means the interest rate the Bank and the Borrower
agree will apply to the Portion during the applicable interest period.
(b) The interest period during which the Offshore Rate will be in effect
will be no shorter than 30 days and no longer than one year. The last
day of the interest period will be determined by the Bank using the
practices of the offshore dollar inter-bank market.
(c) Each Offshore Rate Portion will be for an amount not less than the
following:
(i) for interest periods of 91 days or longer, Five Hundred Thousand
Dollars ($500,000).
(ii) for interest periods of between 30 days and 90 days, One Million
Dollars ($1,000,000).
(d) An Offshore Rate may be elected only for the entire principal amount
outstanding under this Agreement.
(e) Each prepayment of an Offshore Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount
of accrued interest on the amount prepaid, and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement. The prepayment fee shall be equal to the amount (if any)
by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market, or
other appropriate money market selected by the Bank for a period
starting on the date on which it was prepaid and ending on the
last day of the interest period for such Portion (or the
scheduled payment date for the amount prepaid, if earlier).
(f) The Bank will have no obligation to accept an election for an Offshore
Rate Portion if any of the following described events has occurred and
is continuing:
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(i) Dollar deposits in the principal amount, and for periods equal
to the interest period, of an Offshore Rate Portion are not
available in the offshore dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost of an
Offshore Rate Portion.
3. FEES AND EXPENSES
3.1 Fees.
(a) Waiver Fee. If the Bank, at its discretion, agrees to waive or amend any
terms of this Agreement, the Borrower will, at the Bank's option, pay
the Bank a fee for each waiver or amendment in an amount advised by the
Bank at the time the Borrower requests the waiver or amendment. Nothing
in this paragraph shall imply that the Bank is obligated to agree to any
waiver or amendment requested by the Borrower. The Bank may impose
additional requirements as a condition to any waiver or amendment.
3.2 Expenses. The Borrower agrees to immediately repay the Bank for expenses
that include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees and documentation fees.
3.3 Reimbursement Costs.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's
in-house counsel.
4. DISBUR8EMENTS, PAYMENTS AND COSTS
4.1 Requests for Credit. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
4.2 Disbursements and Payments. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds,or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
4.3 Telephone and Telefax Authorization.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates and telefax
requests for the issuance of letters of credit given by any one of the
individuals authorized to sign loan agreements on behalf of the
Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14576-50027, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone or telefax instructions the Bank
reasonably believes are made by any individual authorized by the
Borrower to give such instructions. This indemnity and excuse will
survive this Agreement's termination.
4.4 Direct Debit.
(a) The Borrower agrees that interest and principal payments and any fees
will be deducted automatically on the due date from the Borrowers
account number 14576-50027, or such other of the Borrower's accounts
with the Bank as designated in writing by the Borrower.
(b) The Bank will debit the account on the dates the payments become due. If
a due date does not fall on a banking day, the Bank will debit the
account on the first banking day following the due date.
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(c) The Borrower will maintain sufficient funds in the account on the dates
the Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
4.5 Banking Days. Unless otherwise provided in this Agreement a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an offshore rate (if
any), a banking day is a day other than a Saturday or a Sunday on which the Bank
is open for business in California and dealing in offshore dollars. All payments
and disbursements which would be due on a day which is not a banking day will be
due on the next banking day. All payments received on a day which is not a
banking day will be applied to the credit on the next banking day.
4.6 Taxes. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrower will not deduct any foreign taxes from
any payments it makes to the Bank. If any such taxes are imposed on any payments
made by the Borrower (including payments under this paragraph), the Borrower
will pay the taxes and will also pay to the Bank, at the time interest is paid,
any additional amount which the Bank specifies as necessary to preserve the
after-tax yield the Bank would have received if such taxes had not been imposed.
The Borrower will confirm that it has paid the taxes by giving the Bank official
tax receipts (or notarized copies) within 30 days after the due date.
4.7 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
4.8 Default Rate. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this Agreement
will at the option of the Bank bear interest at a rate which is 2 percentage
point(s) higher than the rate of interest otherwise provided under this
Agreement. This will not constitute a waiver of any default.
4.9 Interest Compounding. At the Bank's sole option in each instance, any
interest, fees or costs which are not paid when due under this Agreement shall
bear interest from the due date at the Bank's Reference Rate plus 1 percentage
points. This may result in compounding of interest.
5. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
5.1 Authorizations. Evidence that the execution, delivery and performance by
the Borrower of this Agreement and any instrument or agreement required under
this Agreement have been duly authorized.
5.2 Governing Documents. A copy of the Borrower's articles of incorporation.
5.3 Other Items. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
6.1 Organization of Borrower. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
6.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
6.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 Good Standing. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
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6.5 No Conflicts. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
6.6 Cooperation. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
6.7 Financial Information. All financial and other information that has been
or will be supplied to the Bank, including the Borrower's financial statement
dated as of December 31, 1998, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition, including all
material contingent liabilities.
(b) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrower (or any guarantor).
6.8 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
6.9 Permits, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
6.10 Other Obligations. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
6.11 Income Tax Matters. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year, except as have been
disclosed in writing to the Bank.
6.12 No Event of Default. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
6.13 ERISA Plans.
(a) Each Plan (other than a multiempioyer plan) is in compliance in all
material respects with the applicable provisions of ERISA, the Code and
other federal or state law. Each Plan has received a favorable
determination letter from the IRS and to the best knowledge of the
Borrower, nothing has occurred which would cause the loss of such
qualification. The Borrower has fulfilled its obligations, if any, under
the minimum funding standards of ERISA and the Code with respect to each
Plan, and has not incurred any liability with respect to any Plan under
Title IV of ERISA.
(b) There are no claims, lawsuits or actions (including by any governmental
authority), and there has been no prohibited transaction or violation of
the fiduciary responsibility rules, with respect to any Plan which has
resulted or could reasonably be expected to result in a material adverse
effect.
(c) With respect to any Plan subject to Title IV of ERISA:
(i) No reportable event has occurred under Section 4043(c) of ERISA
for which the PBGC requires 30 day notice.
(ii) No action by the Borrower or any ERISA Affiliate to terminate or
withdraw from any Plan has been taken and no notice of intent to
terminate a Plan has been filed under Section 4041 of ERISA.
(iii) No termination proceeding has been commenced with respect to a
Plan under Section 4042 of ERISA, and no event has occurred or
condition exists which might constitute grounds for the
commencement of such a proceeding.
(d) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
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(iii) "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Borrower within the
meaning of Section 414(b) or (c) of the Code.
(iv) "PBGC" means the Pension Benefit Guaranty Corporation.
(v) "Plan" means a pension, profit-sharing, or stock bonus plan
intended to qualify under Section 401(a) of the Code, maintained
or contributed to by the Borrower or any ERISA Affiliate,
including any multiemployer plan within the meaning of Section
4001(a)(3) of ERISA.
6.14 Location of Borrower. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
6.15 Year 2000 Compliance. The Borrower has developed and budgeted for a
comprehensive program to address the "year 2000 problem" (that is, the inability
of computers, as well as embedded microchips in non-computing devices, to
properly perform date-sensitive functions with respect to certain dates prior to
and after December 31, 1999). The Borrower has implemented that program
substantially in accordance with its timetable and budget and reasonably
anticipates that it will substantially avoid the year 2000 problem as to all
computers, as well as embedded microchips in non-computing devices, that are
material to the Borrower's business, properties or operations. The Borrower has
developed adequate contingency plans to ensure uninterrupted and unimpaired
business operation in the event of a failure of its own or a third party's
systems or equipment due to the year 2000 problem, including those of vendors,
customers, and suppliers, as well as a general failure of or interruption in its
communications and delivery infrastructure.
7. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
7.1 Use of Proceeds. To use the proceeds of the credit only for general
corporate purposes.
7.2 Financial Information. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 120 days of the Borrowers fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited by a
Certified Public Accountant ("CPA") acceptable to the Bank.
(b) Within 30 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated and consolidating basis.
(c) Copies of the Borrower's Form 10-K Annual Report, Form 10-Q Quarterly
Report and Form 8-K Current Report within 15 days after the date of
filing with the Securities and Exchange Commission.
(d) Within 120 days of the Borrower's fiscal year end, the Borrower's annual
revised three year strategic forecast.
7.3 Quick Ratio. To maintain on a consolidated basis a ratio of quick
assets to the sum of current liabilities plus the principal outstanding of the
line of credit under this Agreement of at least 0.70:1.0, to be measured
quarterly.
"Quick assets" means cash, short-term cash investments, net trade receivables,
marketable securities not classified as long-term investments".
7.4 Total Liabilities to Tangible Net Worth. To maintain on an
unconsolidated basis a ratio of total liabilities to tangible net worth not
exceeding 1.25:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, capitalized or deferred
research and development costs, deterred marketing expenses, deferred
receivables and other like intangibles), less total liabilities, including but
not limited to accrued and deferred income taxes, and any reserves against
assets.
7.5 Net Domestic Shareholder Equity. To maintain on a consolidated basis a
net domestic shareholder equity of at least Twenty Million Dollars
($20,000,000), to be measured quarterly.
"Net Domestic Shareholder Equity" means the domestic shareholder equity less
investments in subsidiaries and less accounts receivable from subsidiaries.
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7.6 Limitation on Losses. Not to incur on an unconsolidated basis a net loss
before taxes and extraordinary items in excess of One Dollar ($1) in any 2
consecutive quarterly accounting periods.
7.7 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank), or become liable for the liabilities
of others, without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank.
(e) Debts for insurance premiums in an aggregate amount at any one time
outstanding not to exceed Eight Hundred Thousand Dollars ($800,000).
(f) Debts to acquire fixed or capital in amount not to exceed Seven Hundred
Fifty Thousand Dollars ($750,000) in any single fiscal year.
(g) Debts (other than those permitted under subsections (a) through (f)
above) in an aggregate principal amount at any onetime outstanding not
to exceed One Hundred Thousand Dollars ($100,000).
7.8 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank as of Borrower's financial statement dated December 31, 1998.
7.9 Out of Debt Period. Not to have more than Five Million Dollars
($5,000,000) outstanding, and not to draw any additional advances on its
revolving line of credit, for a period of at least 30 consecutive days in each
line-year. "Line-year" means the period between the date of this Agreement and
June 1, 2000, and each subsequent one year period (if any). For the purposes of
this Paragraph, "advances" does not include undrawn amounts of outstanding
letters of credit.
7.10 Notices to Bank. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower
(or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's)
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
7.11 Books and Records. To maintain adequate books and records.
7.12 Audits. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
7.13 Compliance with Laws. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
7.14 Preservation of Rights. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
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7.15 Maintenance of Properties. To make any repairs, renewals,or replacements
to keep the Borrower's properties in good working condition.
7.16 Cooperation. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
7.17 General Business Insurance. To maintain insurance as is usual for the
business it is in.
7.18 Additional Negative Covenants. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a
limited liability company in an aggregate amount that will exceed Five
Million Dollars ($5,000,000) in any single fiscal year and provided the
Borrower is not in default under the Agreement.
(d) lease, or dispose of all ore substantial part of the Borrower's business
of the Borrower's assets.
(e) acquire or purchase a business or its assets for a consideration,
including assumption of debt, if the business or the assets to be
acquired are for a business which is not in the same line of business as
the Borrower;
(f) sell or otherwise dispose of any assets for less than fair market value,
or enter into any sale and leaseback agreement covering any of its fixed
or capital assets.
7.19 ERISA Plans. With respect to a Plan subject to Title IV of ERISA, to
give prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(c) of ERISA
for which the PBGC requires 30 day notice.
(b) Any action by the Borrower or any ERISA Affiliate to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate
under Section 4041 of ERISA.
(c) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
8. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply whether
the hazardous substance is on, under or about the Borrower's property or
operations or property leased to the Borrower. The indemnity includes but is not
limited to attorneys' fees (including the reasonable estimate of the allocated
cost of in-house counsel and staff). The indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys and assigns. "Hazardous substances" means any substance,
material or waste that is or becomes designated or regulated as "toxic,"
"hazardous," "pollutant," or "contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrower's obligations to the Bank.
9. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
9.1 Failure to Pay. The Borrower fails to make a payment under this
Agreement when due.
9.2 False Information. The Borrower (or any guarantor) has given the Bank
false or misleading information or representations.
9.3 Bankruptcy. The Borrower (or any guarantor) files a bankruptcy petition,
a bankruptcy petition is filed against the Borrower (or any guarantor) or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
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9.4 Receivers. A receiver or similar official is appointed for the
Borrower's (or any guarantor's) business, or the business is terminated.
9.5 Lawsuits. Any lawsuit or lawsuits are filed against the Borrower (or any
guarantor) in an aggregate amount of One Million Dollars ($1,000,000) or more in
excess of any insurance coverage.
9.6 Judgements. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of One Million Dollars ($1,000,000) or more in excess of any
insurance coverage.
9.7 Government Action. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
9.8 Material Adverse Change. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
9.9 Cross-Default. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) or any of the Borrower's related
entities or affiliates has obtained from anyone else or which the Borrower (or
any guarantor) or any of the Borrower's related entitles or affiliates has
guaranteed.
9.10 Default under Related Documents. Any guaranty, subordination agreement,
security agreement, deed of trust, or other document required by this Agreement
is violated or no longer in effect.
9.11 Other Bank Agreements. The Borrower (or any guarantor) fails to meet the
conditions of, or falls to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
9.12 ERISA Plans. Any one or more of the following events occurs with respect
to a Plan of the Borrower subject to Title IV of ERISA, provided such event or
events could reasonably be expected, in the judgment of the Bank, to subject the
Borrower to any tax, penalty or liability (or any combination of the foregoing)
which, in the aggregate, could have a material adverse effect on the financial
condition of the Borrower:
(a) A reportable event shall occur under Section 4043(c) of ERISA with
respect to a Plan.
(b) Any Plan termination (or commencement of proceedings to terminate a
Plan) or the full or partial withdrawal from a Plan by the Borrower or
any ERISA Affiliate.
9.13 Other Breach Under Agreement. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
10. ENFORCING THIS AGRIEEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
10.2 California Law. This Agreement is governed by California law.
10.3 Successors and Assigns. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
10.4 Arbitration.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or modifica-
tions of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
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(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business in terests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent of
the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute of
limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations
and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case both the Borrower and the Bank must
consent to submission of the claim or controversy to arbitration. If
both parties do not consent to arbitration, the controversy or claim
will be settled as follows:
(i) The Borrower and the Rank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California
Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank, including
the suing party, to submit the controversy or claim to arbitration if
the other party contests the lawsuit. However, if the controversy or
claim arises from or relates to an obligation to the Bank which is
secured by real property located in California at the time of the
proposed submission to arbitration, this right is limited according to
the provision above requiring the consent of both the Borrower and the
Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
10.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
- 10 -
<PAGE>
10.6 Administration Costs. The Borrower shall pay the Bank for ail reasonable
costs incurred by the Bank in connection with administering this Agreement.
10.7 Attorneys' Fees. The Borrower shall reimburse the Bank for any reason-
able costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees mourned in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of the Bank's in-house counsel.
10.8 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank
and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
10.9 Notices. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
10.10 Headings. Article an paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.
10.11 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
This Agreement is executed as of the date stated at the top of the first page.
Bank of America
National Trust end Savings Association
/s/ William R. Cave
By: William R. Cave, Vice President
Address where notices to the Bank are to be sent:
Long Beach Regional Commercial Banking Office #01457
150 Long Beach Blvd. 3rd Floor
Long Beach, CA 90802
Farr Company
/s/ H. Jack Meany
By: H. Jack Meany, Chairman of the Board
Address for Notices:
P0 Box 92187, AIRPORT STATION
LOS ANGELES, CA 90009
- 11 -
EXHIBIT 10.43
SECOND AMENDMENT TO
THE 1993 STOCK OPITON PLAN FOR
KEY EMPLOYEES OF FARR COMPANY
This Second Amendment (the "Amendment") to The 1993 Stock Option
Plan for Key Employees of Farr Company (the "Plan") is hereby adopted as of the
23rd day of March, 1999.
1. Section 2.1 of the Plan is hereby amended and restated in its
entirety as follows:
"The shares of stock subject to Options shall be shares of the
Company's $.10 par value Common Stock. The aggregate number of
such shares which may be issued upon exercise of Options shall
not exceed 1,100,000. Furthermore, the maximum number of such
shares which may be subject to Options granted under the Plan
to any individual in any calendar year shall not exceed
250,000 and the method of counting such shares shall conform
to any requirements applicable to performance-based
compensation under Section 162(m) of the Code."
2. The words "disinterested person" in Section 6.1 of the Plan are
hereby deleted and replaced with the words "non-employee director."
3. The foregoing amendments to the Plan will be submitted to the
stockholders of the Company for their approval at the Annual Meeting of the
Stockholders to be held on May 4,1999. Only the amendment set forth in Section 1
above requires the approval of the stockholders, so in the absence of approval,
the amendment set forth in Section 2 will be effected.
IN WITNESS WHEREOF, I have executed this Second Amendment to the Plan as of
the 23rd day of March, 1999.
/s/ Stephen E. Pegg
Stephen E. Pegg
Senior Vice President, Secretary and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 2,279,000
<SECURITIES> 0
<RECEIVABLES> 18,294,000
<ALLOWANCES> 391,000
<INVENTORY> 10,209,000
<CURRENT-ASSETS> 33,629,000
<PP&E> 57,369,000
<DEPRECIATION> 39,883,000
<TOTAL-ASSETS> 54,145,000
<CURRENT-LIABILITIES> 12,535,000
<BONDS> 0
0
0
<COMMON> 734,000
<OTHER-SE> 37,316,000
<TOTAL-LIABILITY-AND-EQUITY> 54,145,000
<SALES> 59,207,000
<TOTAL-REVENUES> 59,207,000
<CGS> 43,680,000
<TOTAL-COSTS> 43,680,000
<OTHER-EXPENSES> 10,219,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,000
<INCOME-PRETAX> 5,267,000
<INCOME-TAX> 1,933,000
<INCOME-CONTINUING> 3,334,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,334,000
<EPS-BASIC> 0.43
<EPS-DILUTED> 0.42
</TABLE>
