SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-19703
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FARREL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2689245
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
25 Main Street, Ansonia, Connecticut 06401
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (203) 736-5500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value NASDAQ
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998 was $17,159,191.
The number of shares outstanding of the registrant's common stock as of March
20, 1998 was 5,942,582 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 20, 1998,
are incorporated by reference into Part III.
Exhibit Index Appears on Pages 40 - 41
Page 1 of 45
<PAGE>
PART I
Item 1 - Business
General
Farrel Corporation (the "Company") designs, manufactures, sells and
services machinery and associated equipment for the rubber and plastics
industries. The Company's principal products are batch and continuous mixers,
single and twin-screw extruders, pelletizers, gear pumps, calenders and mills.
In conjunction with sales of capital equipment, the Company provides process
engineering, process design and related services for rubber and plastics
processing installations. The Company's aftermarket business consists of repair,
refurbishment and equipment upgrade services, spare parts sales and field
services. The Company also provides laboratory services and facilities for
product demonstrations and for the development and testing of rubber and
plastics equipment and processes.
The Company's rubber processing equipment is primarily sold to tire
manufacturers and manufacturers of rubber goods, such as sheet products, molded
products, automotive components, footwear and wire and cable. In the plastics
processing industry, the Company's equipment is primarily sold to commodity
plastics producers and compounders of plastics. The Company markets its products
through its strategically located domestic and international sales and service
organization.
Company Strategy
The Company's business objectives are to increase market share of a
relatively constant sized market by broadening its product range, to continue
strengthening its market position, particularly in Asia, and to solidify its
position as a low cost producer by manufacturing proprietary components in its
U.K. plant and assembling machines in its U.S. and U.K. facilities. The Company
continues to pursue manufacturing cost reductions by continually reevaluating
its current operating practices and by purchasing, rather than manufacturing, a
significant number of equipment components and maintaining overhead and manpower
levels in line with prevailing economic conditions. The Company has taken
measures in the recent past to achieve these objectives.
During 1996 the Company ceased component manufacturing operations in
its Derby, Connecticut facility and consolidated all component manufacturing
activities in its Rochdale, England facility. During 1997, the Company completed
the consolidation of its domestic assembly, repair and spare parts operations in
Ansonia, Connecticut and improvements to its repair facility in Texas.
During 1996 the Company also reorganized its domestic marketing, sales
and engineering efforts along the lines of the two major industries served by
the Company's products, rubber and plastic. Management considers this
realignment of resources to have enabled the Company to better concentrate its
efforts on each industry. The enhanced focus on customer needs in each industry
allows the Company's personnel to specialize in the applications of the
Company's machines needed for each industry and to better service the needs of
the Company's customers.
In continuing the Company's strategy to expand its markets, on
December 19, 1997, the Company acquired selected assets of the Francis Shaw
Rubber Machinery ("Shaw") business in England for the production of INTERMIX
[registered trademark] internal mixers with intermeshing rotors, extruders and
related equipment. The products serve principally the technical rubber goods
manufacturers and the tire industry. The internal mixers produced by Shaw are
essentially similar to the Company's BANBURY [registered trademark] internal
mixers, differing only in the configuration of the mixing rotors. The combined
complimentary product lines provide the Company with global access to all rubber
products manufacturers, thereby increasing market share. The acquisition
included a backlog of $6 million all of which is expected to ship during 1998.
Page 2 of 45
<PAGE>
The operations of Shaw are currently conducted in manufacturing and
office facilities located in Manchester, England. The Company intends to
consolidate the operations of Shaw into manufacturing and administrative
facilities in Rochdale, England. The Company intends to shift from highly
integrated manufacturing processes, to increased outsourcing consistent with
current Company operations. The current Rochdale facilities are believed to be
sufficient to absorb the anticipated volume without major disruption.
The Company has developed a preliminary plan to transition and
integrate Shaw operations. The asset purchase agreement provides for an
operating and lease agreement for a two year period ending December 19, 1999 to
complete the transition. The Company is evaluating the impact on production
techniques, physical facilities, employee base, sales force, sales methods,
customer base and terms of the purchase agreement in adopting a plan to
integrate Shaw operations. It is intended that the consolidation will be
accomplished in the first half of 1999. Significant to the purchase price and
short term operations is a guarantee from the Seller that the acquired assets
will generate a pre-tax profit (as defined in the agreement) of at least
[Pounds] 1.0 million for fiscal 1998. The asset purchase agreement provides that
any shortfall in this amount will be paid to the Company by the Seller and
represent a reduction in the purchase price. See Note 2 to the Consolidated
Financial Statements.
Industry Overview
The Company's products are used primarily by manufacturers of rubber
and plastic materials and products. The rubber and plastics processing
industries are global in nature and intensely competitive. Both industries are
cyclical in nature, with capital equipment purchases characterized by long lead
times between orders and shipments.
In the rubber industry, the major users of the Company's machinery are
tire manufacturers and manufacturers of rubber goods such as sheet products,
molded products, automotive components, footwear and wire and cable. There are
approximately 50 tire manufacturers in the world, six of which account for a
majority of total worldwide tire production. Demand in the tire and rubber
industry is influenced by, among other things, general economic conditions and
growth in sales of automobiles and trucks as well as overall truck tonnage and
mileage driven. The industry trend is to shift production capacities into low
cost and emerging regions, creating potential opportunities in the future.
In the plastics industry, the Company serves two primary groups of
customers: commodity plastics producers (typically large petrochemical
companies) and value-added compounders of plastics. The commodity plastics
processed by machinery manufactured by the Company are primarily polyethylene,
polypropylene, polyvinyl chloride and polystyrene. A large portion of the market
is controlled by a few major producers who license their technologies to other
producers worldwide. These licensees are potential customers for the Company's
products and services. Industry performance is related to, among other things,
consumer spending and general economic conditions. The plastics compounding
market consists of those companies that mix large volumes of plastics in a
relatively small number of formulations, companies which perform specialty
mixing for end users, and end users that mix largely for their internal use.
Many manufacturers in the industries and markets served by the
Company's products and services have been adversely impacted by political and
economic difficulties in Eastern Europe and the Middle East. In 1997, the
Company has been adversely affected by the financial insecurity in the Asia
Pacific Region. Many of the Company's customers have suspended projects for
increased capacity and growth until the region resumes a level of financial
stability. Taiwan and the People's Republic of China continue to experience
growth, albeit at a slower level than in recent months. Business potential in
the Peoples' Republic of China will be extremely competitive and restricted by
credit availability.
New capital and marketing expenditures in the Company's markets depend,
in large part, on an increase in market demand creating the need for additional
capacity.
Page 3 of 45
<PAGE>
Products and Services
The Company's products are used to mix and process materials produced
by the Company's rubber and plastics producing customers. The Company's
principal capital equipment product lines are batch and continuous mixers,
single and twin-screw extruders, pelletizers, gear pumps, calenders and mills.
The Company also provides process engineering, pre-installation and
post-installation services for its equipment. The Company's customer service
division repairs, refurbishes and provides upgrade services and spare parts for
the Company's installed base of machines worldwide.
The following table illustrates the percentage breakdown of the
Company's sales between new machines/related services and aftermarket business
(spare parts, repairs and rebuild) in the last three fiscal years:
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
New Machines/Related Services........... 57.1% 53.3% 56.5%
Aftermarket............................. 42.9% 46.7 43.5
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Total................................... 100.0% 100.0% 100.0%
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The Company does not publish a standard price list. Prices for the
Company's new equipment are based upon a customer's specifications and/or
production requirements. Unit prices for the Company's new equipment products
range from approximately $50,000 to more than $4 million.
Customers and Marketing
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastic materials. The Company's customers often
purchase equipment in significant quantities for new plants, plant expansion or
plant modernization. Purchases by any single customer typically vary
significantly from year to year according to each customer's capital equipment
needs. As a result, the composition of the Company's customers may vary from one
year to the next. Sales, operating results and export sales by geographic area
for fiscal 1997, 1996 and 1995 are reported in Note 15 to the Consolidated
Financial Statements.
The Company's products are sold primarily by its direct sales and
support staff. The Company's sales organization is headquartered in Ansonia,
Connecticut; Rochdale, England and Singapore. The Company has additional sales
and service offices strategically located in the United States, Europe and
Taiwan. In certain geographic areas outside the United States, sales are
facilitated by independent representatives who are assisted and supported by
employees of the Company.
Process Laboratory Services
The Company maintains its primary process laboratory in Ansonia,
Connecticut and a second laboratory in Rochdale, England. The Company entered
into an agreement with a research and development organization in Taiwan to use
and demonstrate the Company's technology. This contractual arrangement provides
the Company with laboratory facilities in Asia and serves to introduce the
Company's technology to potential customers. An additional process laboratory
exists at the recently acquired leased facilities in Manchester, England. The
equipment located there will ultimately be consolidated into the Company's
laboratories at Rochdale, England and Ansonia, Connecticut. This will enhance
the demonstration capabilities of both laboratories significantly, thereby more
aggressively supporting the sales effort. The Company uses its laboratories to
demonstrate recent developments in processing equipment and to provide customers
with production-size equipment in order to experiment with new processing
techniques and formulations. The
Page 4 of 45
<PAGE>
Company considers its process laboratories to be vital contributors to its
continuing technology development and customer service efforts and, as a result,
routinely modernizes its process laboratories and related equipment. The Company
has experienced an increased trend to test its plastics processing machinery,
such as the CP-SERIES II [trademark], twin screw and large pelletizing systems,
as more new materials are developed by the Company's customers which require
testing to determine processing procedures and machine design parameters.
In 1998, demonstration and laboratory capabilities will be increased
further with the installation of the Farrel Twin Screw Extruder (FTX) in two
University laboratories: Akron University, Akron, Ohio, USA and University of
Paderborn, Paderborn, Germany. The Company expects to benefit from the
installation and operation of these machines by providing exposure of Farrel
machinery and technology to new graduates and access to process application
development.
Competition
The Company's products are sold in highly competitive worldwide
markets. A number of companies compete directly with the Company in both the
rubber and plastics processing markets. Numerous competitors of varying sizes
compete with the Company in one or more of its product lines. A number of the
Company's competitors are divisions or subsidiaries of larger companies with
financial and other resources greater than those of the Company. The Company has
historically faced, and will continue to face, considerable competitive
pressures, particularly price competition. The Company believes that the
principal competitive factors affecting its business are price, performance,
technology, breadth of product line, product availability, reputation and
customer service.
The Company also faces strong competition in the markets for its spare
parts and repair, refurbishment and equipment upgrade services from regional
service firms that take advantage of low barriers to entry and geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service. The Company believes that it generally has a competitive
advantage in these markets due to the superior quality of its products and
services.
Backlog
The Company's backlog of orders considered firm by management at
December 31, 1997, 1996 and 1995 was approximately $47 million, $50 million and
$30 million, respectively. Substantially all of the orders included in the
December 31, 1997 backlog have contractual ship dates in fiscal 1998. Firm
backlog at March 20, 1998 and 1997 was $59 million and $56 million,
respectively.
Manufacturing
The Company's manufacturing facility in Rochdale, England provides the
Company with fully integrated manufacturing processes including a complete range
of machining and fabrication equipment used to produce proprietary components.
Final assembly, product testing and quality control activities are performed by
Company personnel in both the U.S. and U.K.. The Company also owns repair and
rebuild facilities in Ansonia, Connecticut, Deer Park, Texas, and Rochdale,
England and contracts for such services in Australia and Singapore.
Early in 1997 the Company announced the consolidation of its domestic
assembly, repair and spare parts operations, performed in its Derby and Ansonia,
Connecticut facilities into available space in Ansonia to reduce annual
operating costs and enhance operating efficiencies. The consolidation was
substantially completed during 1997.
Page 5 of 45
<PAGE>
In 1997, the Company acquired assets and leased facilities to produce
INTERMIX [registered trademark] internal mixers and extruders as well as repair
and fabrication facilities in Manchester, England. The Company intends to
consolidate these manufacturing and repair operations with facilities in
Rochdale, England.
Management considers these facilities as giving the Company the
flexibility needed to service its customers.
Components and Raw Materials
The Company purchases most of the components used in manufacturing
its machines from reliable domestic and international suppliers. The basic raw
materials used by the Company are steel plates, bars, castings, forgings and
hard-surfacing alloys. Principal components and raw materials are available from
a number of sources. The Company is not dependent on any supplier that cannot be
replaced in the normal course of business.
Research and Development and Engineering
The Company's research and development and engineering staffs are
located in Ansonia, Connecticut and Rochdale and Manchester, England. Their
major activities are: application engineering for specific customer orders;
standardization of existing machinery as part of the Company's ongoing cost
reduction measures; and development of new products and product features. The
Company's new twin screw sheeter is an example of the collaborative success of
the research and development and product engineering staffs working together to
produce a new product as well as the recent development of a new longer, higher
powered melt pump discharge continuous mixer. Current development activities are
in the batch mixing process. The acquisition of the INTERMIX [registered
trademark] intermeshing technology and rotor design development provides
opportunities to strengthen our business with batch mixer customers. A summary
of research and development and engineering expenditures incurred during the
last three fiscal years is as follows:
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
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(Dollars in thousands)
Research and development expense
pertaining to new products or
significant improvements to
existing products $1,567 $1,993 $2,101
All other product development and
engineering expenditures related
to ongoing refinements, improvements
of existing products, and custom
engineering 2,874 3,329 3,444
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Total $4,441 $5,322 $5,545
====== ====== ======
Percent of net sales 5.2% 7.0% 6.9%
Patents and Trademarks
The Company possesses rights under a number of domestic and foreign
patents and trademarks relating to its products and business. The Company holds
approximately 200 patents which cover technology utilized in its products and
currently has 42 patent applications pending. The Company's patents have
expiration dates ranging from 1998 through 2015. Although the Company believes
that its patents provide some competitive advantage, the Company also depends
upon trade secrets, unpatented proprietary know-how and continuing technological
innovation to develop and maintain its competitive advantage.
Page 6 of 45
<PAGE>
The Company considers the following trademarks to be material to its
business: FARREL [registered trademark]; BANBURY[registered trademark];
INTERMIX[registered trademark]; ST[trademark]; MVX[trademark]; CP-SERIES
II[trademark], FTX[trademark], and TSS[trademark].
Environmental
The Company's operations are subject to normal environmental protection
regulations. Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, is not expected to
have a material effect upon the capital expenditures, earnings or the
competitive position of the Company. However, environmental requirements are
constantly changing, and it is difficult to predict the effect of future
requirements on the Company.
As described in Part I, Item 3, Legal Proceedings, the Company and The
Black & Decker Corporation entered into a Settlement Agreement pursuant to which
Black & Decker agreed to assume full responsibility for the investigation and
remediation of any pre-May, 1986 environmental contamination at the Company's
Ansonia and Derby facilities as required by the Connecticut Department of
Environmental Protection (DEP). A preliminary environmental assessment of the
Company's properties in Ansonia and Derby, Connecticut has been conducted by The
Black & Decker Corporation. Although this assessment is still being evaluated by
the DEP, on the basis of the preliminary data now available there is no reason
to believe that any activities which might be required as a result of the
findings of the assessment will have a material effect upon the capital
expenditures, earnings or the competitive position of the Company.
Employees
As of December 31, 1997, the Company had 606 full-time employees
(including 218 employees at the acquired Shaw operations) compared to 397 at
December 31, 1996. The Company has collective bargaining agreements in the U.S.
and the U.K. which cover approximately 237 employees (including 121 at the
acquired Shaw operations). The U.S. agreement was renegotiated during fiscal
1997 and expires on June 15, 2000. The Company has three agreements in the U.K.
which expire at various dates from June 1, 1998 through March 31, 1999.
Item 2 - Properties
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company except for
the Manchester, England facilities which are leased.
Approx.
Location Principal Use Sq. Ft.
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Ansonia, Connecticut................ Office, research, laboratory, 520,000
repair, rebuild, assembly and
storage
Deer Park, Texas.................... Repair and rebuild 22,000
Rochdale, England................... Office, research, laboratory, 210,000
manufacturing, repair and
rebuild, and storage
Manchester, England (Corbett St.) Office, research, laboratory, 99,000
manufacturing, repair
and rebuild, and storage
Manchester, England (Vaughan St.) Office, fabrication 13,000
Derby, Connecticut Available for sale/lease 225,000
Early in 1997 the Company announced the relocation of its domestic
assembly and storage operations from its Derby, Connecticut facility to
available space in its Ansonia, Connecticut facility to reduce operating costs
and to enhance efficiency. This consolidation was substantially complete at
December 31,
Page 7 of 45
<PAGE>
1997. The Company's Derby, Connecticut facility is available for sale or lease.
Subsequent to December 31, 1997, the Company signed a conditional letter of
intent to sell the property in Derby, CT. Final assembly, product testing and
quality control activities are performed by Company personnel at both the
Ansonia and Rochdale England facilities.
The Corbett Street facilities are subject to a lease which expires
December 19, 1999. The lease of these facilities was acquired in connection with
the purchase of assets of the Francis Shaw Rubber Machinery business. The lease
effectively provides the Company a two year period of transition in which to
consolidate these operations with the facilities in Rochdale, England. The
Vaughan Street facilities are subject to a lease through March, 2005.
The Company believes that the facilities used in its operations are in
satisfactory condition and adequate for its present and anticipated future
operations. In addition to the facilities listed above, the Company leases space
in various domestic and international locations, primarily for use as sales
offices.
Item 3 - Legal Proceedings
In February 1995, the Company and The Black & Decker Corporation
settled litigation as to the environmental conditions at the Ansonia and Derby
facilities at the time of the Company's purchase of them from USM in May 1986.
Under the Settlement Agreement, Black & Decker has assumed full responsibility
for all investigation and any remediation of pre-May, 1986 contamination at the
Company's Ansonia and Derby facilities in accordance with a Consent Decree
entered into between Black & Decker and the Connecticut Department of
Environmental Protection. In accordance with the Settlement Agreement, a
Withdrawal and Joint Stipulation of and Motion for Dismissal was filed with the
Court. The Court which originally heard this matter has continuing jurisdiction
over it, but no issues are now pending with the court.
As of the date hereof, the Company is not aware of any contamination,
other than any pre-May, 1986 contamination, at any of its facilities which would
require material remediation costs.
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company. While the outcome of lawsuits or other
proceedings against the Company cannot be predicted with any certainty, the
Company does not expect that these matters will have a material adverse effect
on the Company's financial position or results of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Page 8 of 45
<PAGE>
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder
Matters.
(a) Price Range of Common Stock and Dividends
The Company's Common Stock is traded over the counter and quoted on
the NASDAQ National Market System under the symbol "FARL". The following chart
sets forth the high and low prices for the Common Stock and dividends declared
for the last two fiscal years:
Fiscal 1997 High Low Dividend
- ----------- ---- --- --------
First Quarter $3.88 $2.38 $0.16
Second Quarter $4.00 $2.63 $0.16
Third Quarter $4.38 $2.63 $0.16
Fourth Quarter $6.00 $3.00 $0.16
Fiscal 1996 High Low Dividend
- ----------- ---- --- --------
First Quarter $4.38 $2.88 $0.06
Second Quarter $4.50 $3.00 --
Third Quarter $4.38 $2.75 --
Fourth Quarter $3.63 $2.38 --
(b) As of March 20, 1998 the approximate number of record holders of
the Company's common stock was 742.
(c) Dividends
The Company intends, from time to time, to pay cash dividends on its
Common Stock, as the Board of Directors, after consideration of the Company's
operating results, financial condition, cash requirements, general business
conditions, compliance with covenants in the credit facility (see Management's
Discussion and Analysis of Liquidity and Capital Resources) and such other
factors as the Board of Directors deems relevant.
(d) There were no sales or issuances of the Company's equity shares
that were not registered under the Securities Act.
Page 9 of 45
<PAGE>
Item 6 - Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Year Year Year Year
ended ended ended ended ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
-------- -------- -------- -------- --------
Statement of Operations Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net Sales $85,382 $75,836 $80,067 $75,501 $75,750
======= ======= ======= ======= =======
Gross margin $17,711 $18,123 $19,760 $20,008 $20,189
======= ======= ======= ======= =======
As a percent of net sales 20.7% 23.9% 24.7% 26.5% 26.7%
======= ======= ======= ======= =======
Operating income $1,635 $654 $1,591 $2,601 $1,853
Other income (expense), net (2) 449 (174) (135) 1,436 (136)
------- ------- ------- ------- -------
Income before income taxes 2,084 480 1,456 4,037 1,717
Provision for income taxes 727 154 554 1,531 508
------- ------- ------- ------- -------
Net income $1,357 $326 $902 $2,506 $1,209
======= ======= ======= ======= =======
Net income per share - Basic and diluted (1) $0.23 $0.05 $0.15 $0.41 $0.20
======= ======= ======= ======= =======
Dividends per share of Common Stock $0.64 $0.06 $0.20 $0.04 $0.16
======= ======= ======= ======= =======
Weighted Average Shares Outstanding - Basic (000's) (1) 5,950 5,970 6,027 6,076 6,127
======= ======= ======= ======= =======
Weighted Average Shares outstanding - Diluted (000's) (1) 5,951 5,972 6,030 6,097 6,138
======= ======= ======= ======= =======
Balance Sheet Data:
Current Assets $37,104 $40,187 $41,991 $37,697 $40,675
Current Liabilities $23,286 $19,841 $22,878 $16,613 $20,179
Working Capital Ratio 1.6 2.0 1.8 2.3 2.0
Total assets $56,381 $50,731 $53,412 $47,979 $50,227
Long-term debt $5,283 $214 $388 $587 $740
Stockholders' equity $25,782 $28,553 $27,814 $28,726 $26,362
Other Data:
Backlog $46,554 $50,225 $29,745 $39,123 $32,960
</TABLE>
(1) Restated to reflect the adoption of statement of Financial Accounting
Standards No. 128, "Earnings per Share".
(2) Other income in 1994 includes $1.3 million as a result of a curtailment of
postretirement benefits accounted for under Financial Accounting Standards No.
88. "Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."
Page 10 of 45
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fiscal 1997 Compared to Fiscal 1996:
Net sales in 1997 and 1996 were $85.3 million and $75.8 million,
respectively. A substantial portion of the 1997 shipments reflects orders
received in 1996 when the dollar value of the Company's order intake was higher
than that experienced in prior years. Management still considers the markets
served by the Company's products to be extremely competitive and, to some
extent, affected by continuing uncertainty in Eastern Europe and the Middle
East. Additionally, Far Eastern markets are particularly competitive and
volatile at this time. Certain Southeast Asian countries are experiencing
currency instability which contributes to uncertainty in the region. Many rubber
manufacturers also continue to operate at less than full capacity. Management
anticipates that the markets served by the Company's products will remain
extremely competitive and that those markets characterized by economic and
political uncertainty will likely continue to be affected by such conditions.
The Company received approximately $77 million in orders during 1997
compared to $96 million in 1996 when the Company received several individually
large orders. In the case of major equipment orders, up to 12 months are
required to complete the manufacturing process. Accordingly, revenues reported
in the statement of operations may represent orders received in the current or
previous fiscal periods. In addition, the cyclical nature of industry demand
and, therefore, order intake, may affect the Company's results of operations.
The Company's ability to maintain and increase net sales depends upon a
strengthening and stability in the Company's traditional markets.
Gross margin in 1997 and 1996 was $17.7 million and $18.1 million,
respectively, representing a decrease in the gross margin percentage to 21.0%
from 24.0%. This decline is largely due to the mix of products sold in the two
periods and to continued stiff competition. The 1997 shipments also include a
higher relative proportion of new machine sales than in 1996 which generate
lower margins than the Company's more profitable spare parts, rebuild and repair
business. The 1997 margin also reflects the impact of a $.5 million increase in
commissions on shipments to markets in the world where the Company must use
outside representatives in addition to its sales force to conduct business.
Market conditions continue to exert significant pressure on margins, a trend
which is expected to continue in the foreseeable future.
Operating expenses were reduced $1.5 million to $16 million in 1997
compared to 1996. The decline in administrative costs is largely due to reduced
investment banking fees. The increase in selling expenses of $.2 million to $7
million in 1997 as compared to 1996 is largely attributed to increased marketing
programs including costs to attend the premier plastic industry convention in
the United States, which occurs every three years. Research and development
expenses declined primarily as a result of reduced headcount. Lastly, the
reduction in operating costs is also due to continuing efforts to strictly
control expenses.
Page 11 of 45
<PAGE>
During 1997 the Company substantially completed the consolidation of
its domestic assembly, repair and spare parts operations, from two facilities,
(Derby and Ansonia) in Connecticut, to available space in the Ansonia facility,
to reduce operating costs and enhance efficiencies. The cost of this project
through December 31, 1997 was approximately $1.0 million, which included
capitalized costs of approximately $.8 million for improvements to facilities
and equipment in 1997. While the Company expects cost savings to result from
this consolidation, the size of such savings cannot be predicted with any
certainty.
As a result of this consolidation, the Company's Derby facility is held
as available for sale or lease. The Company has transferred the remaining book
value of this facility and any remaining assets no longer anticipated to be used
from Property, Plant, and Equipment to Other Assets at the end of 1996.
Subsequent to December 31, 1997, the Company signed a conditional letter of
intent to sell the Derby property. The letter of intent is subject to various
terms and conditions, some of which may affect the net proceeds or consummation
of the sale. No loss on the disposal of the assets is anticipated at this time,
and, as a result, no provision for loss has been made. It is possible that
proceeds realized from the disposal of these assets may be less than the
remaining book value. The recoverability of these assets will be evaluated
periodically as required by FAS 121, "Accounting For the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed Of."
Other income, net of other expense, includes approximately $.7 million
from the disposal of machinery and equipment the Company will no longer use
which results from consolidating its two Connecticut facilities into one single
facility. The consolidation has been substantially completed.
The effective income tax rates in 1997 and 1996 were 34.9% and 32.1%,
respectively. The Company provides for income taxes in the jurisdictions in
which it pays income taxes at the statutory rates in effect in each jurisdiction
adjusted for differences in providing for income taxes for financial reporting
and income tax purposes.
Fiscal 1996 Compared to Fiscal 1995:
Net sales were $75.8 million in fiscal 1996 compared to $80.1 million
in fiscal 1995. Management believes the Company operates in markets which are
extremely competitive, and to some extent, affected by continuing after-effects
of recessions in the capital goods markets in Western Europe, as well as ongoing
political and economic uncertainty in Eastern Europe and the Middle East. Far
Eastern markets remain particularly competitive and difficult to penetrate. Many
rubber and plastic manufacturers also continue to operate at less than full
capacity. The timing of receipt of customer orders will also impact the relative
level of shipments in any financial reporting period. Management is encouraged
by the recent improvement in the level of order intake and backlog, as discussed
later. It does, however, anticipate that the markets served by the Company's
products will remain extremely competitive and that those markets characterized
by economic and political uncertainty will likely continue to be affected by
such conditions.
Gross margin was $18.1 million in 1996 compared to the $19.8 million
generated in 1995. The percentage also declined in 1996 to 23.9 percent from
24.7 percent in 1995. The year to year comparison is attributed to the mix of
products sold, which can differ significantly from one period to the next, and
to continued stiff competition. In addition, management has elected to pursue
certain machinery rebuild markets more aggressively to increase market share,
and has accepted lower margins in the near term to do so. The market conditions
discussed above continue to exert significant pressure on the level of margin
percentage achieved, a trend which is expected to continue in the foreseeable
future.
In an effort to compensate for the significant pressure on margins,
management has taken several measures to aggressively control costs in recent
years including the consolidation of component manufacturing into the Company's
U.K. plant during 1996. The Company's U.K. plant was selected for this
cost-effective consolidation into a single facility due to its more modern
equipment and its greater supply of readily available skilled labor. Assembly
operations continue to be performed in both the United States and the United
Kingdom
Page 12 of 45
<PAGE>
Total operating expenses were reduced approximately $.7 million to
$17.5 million in 1996 compared to $18.2 million in 1995. Savings were generated
in all three categories of operating costs largely due to the elimination of
selected executive and staff positions worldwide. The reduction in selling
expenses also reflects the consolidation of the Company's marketing offices in
Continental Europe to England. Administrative costs in 1996 included $.8 million
of third party costs which were deferred in prior years in connection with
efforts, ultimately unsuccessful, to identify, negotiate, and contract with
several acquisition candidates, primarily outside the United States. This
non-recurring write-off of previously deferred costs has largely offset the
other savings previously discussed. No further costs were deferred during 1996.
The 1996 income tax rate, as a percentage of pre-tax income, was 32.1%
compared to 38.0% in 1995. The relatively low 1996 rate is attributed to the
combination of the pre-tax loss in the United States and taxable income in the
United Kingdom. The Company provides for income taxes in the jurisdictions in
which it pays income taxes at the statutory rates in effect in each jurisdiction
adjusted for differences in providing for income taxes between financial
reporting and income tax purposes.
Material Contingencies
As described in Part 1, Item 3, the Company and Black & Decker entered
into a Settlement Agreement pursuant to which Black & Decker agreed to assume
full responsibility for the investigation and remediation of any pre-May, 1986
environmental contamination at the Company's Ansonia and Derby facilities as
required by the Connecticut Department of Environmental Protection (DEP). As
part of the settlement, the Company transferred by quit claim deed a vacant
surfaced parking lot to the City of Ansonia. As required by the Settlement
Agreement, a preliminary environmental assessment of the Company's properties in
Ansonia and Derby, Connecticut has been conducted by Black & Decker. On the
basis of the preliminary data now available there is no reason to believe that
any remediation activities which might be required as a result of the findings
of the assessment will have a material effect upon the capital expenditures,
earnings or the competitive position of the Company. This forward looking
statement could, however, be influenced by the results of any further
investigation which the DEP might require, by DEP's conclusions and requirements
based upon its review of complete information when such is available,
unanticipated discoveries, the possibility that new or different environmental
laws might be adopted and the possibility that further regulatory review or
litigation might become necessary or appropriate.
Orders and Backlog
Orders received by the Company during 1997 decreased $19 million, or
roughly 20%, to approximately $77 million compared to $96 million in fiscal 1996
and $71 million in fiscal 1995. The 1997 decrease in orders compared to 1996 is
distributed across product lines and geographically around the world with the
largest regional decrease occurring in the Far East, due to the uncertain
economic environment at this time.
In the case of major equipment orders, up to twelve months are required
to complete the manufacturing process. Accordingly, revenues reported in the
statement of operations may represent orders received in the current or previous
periods during which economic conditions had been severely depressed in various
geographic markets of the world. Further, the cyclical nature of industry demand
and, therefore, the timing of order intake may effect the Company's quarterly
results in the current and future fiscal quarters. The Company's ability to
maintain and increase net sales depends upon a strengthening and stability in
the Company's traditional markets. There can be no assurance that the level of
orders experienced in 1997 will continue, or that improvements in the Company's
traditional markets will lead to increased orders for the Company's products.
The level of backlog considered firm by management at December 31, 1997
is $47 million and is largely attributed to the decrease in orders in 1997
compared to 1996. Backlog at December 31, 1996 was $50 million. The contractual
ship dates for substantially all of the December 31, 1997 backlog are in 1998.
The backlog at March 20, 1998 and 1997 was $59 million and $56 million,
respectively.
Page 13 of 45
<PAGE>
Liquidity and Capital Resources; Capital Expenditures
Working capital and the working capital ratio at December 31, 1997 were
$13.8 million and 1.6 to 1, respectively, compared to $20.3 million and 2.0 to 1
at December 31, 1996, respectively. The decrease in the working capital ratio at
December 31, 1997 is attributed to the purchase of selected assets the Francis
Shaw Rubber Machinery Business on December 19, 1997. The net assets acquired
(see Note 2 to the Consolidated Financial Statements) included current liability
provisions of $2.1 million for the consolidation of the acquired assets into the
operations of the Company's Rochdale, England facilities. During the year ended
December 31, 1997 the Company paid dividends of $0.48 per share. The Company has
also declared a dividend of $0.16 per share which was paid January 7, 1998. The
Company's ability to pay dividends in the future is limited under the credit
facility described below to the aggregate of (a) 25% of net income during the
most recently completed four fiscal quarters after deducting distributions
previously made and (b) purchases by the Company of its common stock during the
same period. The Company received a waiver from its bank with respect to
dividends declared during 1997. No assurance can be given that the level of
dividends declared in 1997 will continue in 1998.
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, accounts receivable and/or inventory may be at high
levels from time to time resulting in a temporary decline in cash provided from
operating activities. Historically, the Company has not experienced significant
problems regarding the collection of accounts receivable. The Company has
historically financed its operations with cash generated by operations, with
customer progress payments and borrowings under its bank credit facilities.
At December 31, 1997, the Company had a worldwide multi-currency credit
facility with a major U.S. bank in an amount of $20.0 million for direct
borrowings and letters of credit and up to (pound)3.0 million for foreign
exchange contracts. Interest varies based upon prevailing market interest rates.
The facility contains limits on direct borrowings and letters of credit combined
based upon stipulated levels of accounts receivable, inventory and backlog. The
facility also contains covenants specifying minimum and maximum thresholds for
operating results and selected financial ratios. At December 31, 1997, there was
$7.1 million in direct borrowings under this facility. There were no direct
borrowings outstanding under this facility at December 31, 1996. There were $6.0
million and $8.1 million in letters of credit outstanding at December 31, 1997
and 1996, respectively.
On January 23, 1998, the credit facility was amended and restated. The
amended and restated facility provides for total borrowings of $25,000,000,
consisting of an $18.5 million revolving credit facility and a five year term
loan for up to $6.5 million. Concurrently with the execution of the amended
credit agreement, the Company converted [Pounds] 4.0 million of the outstanding
balance under the previous credit facility to a term note. The term loan is
payable in equal quarterly payments over a five year period. At December 31,
1997, [Pounds] 3.2 million is classified as long term. The amended credit
facility contains limits in direct borrowings and letters of credit combined
based upon stipulated levels of accounts receivable, inventory and backlog. It
also contains covenants specifying minimum and maximum thresholds for operating
results and selected financial ratios and the same restrictions on the payment
of dividends as contained in the previous agreement as described above.
Management anticipates that its cash balances, operating cash
flows and available credit line will be adequate to fund its anticipated capital
commitments and working capital requirements for at least the next twelve months
including integration of the Shaw asset acquisition. The Company made capital
expenditures of approximately $1.9 million and $1.3 million, during fiscal 1997
and 1996, respectively. The increase in capital expenditures in 1997 is largely
attributed to certain improvements related to the Company's domestic assembly
and storage facilities.
Page 14 of 45
<PAGE>
The Company manufactures its products in the United Kingdom and sells
its products in the United States, United Kingdom and other foreign markets. The
Company's financial position and results are affected by changes in foreign
currency exchange rates in the foreign markets in which its operates. When the
value of the U.S. dollar or U.K. sterling strengthens against other currencies,
the value of the transaction in the foreign currency decreases. The Company
regularly enters into foreign exchange forward and option contracts to hedge
foreign currency transactions. Foreign currency transactions generally are for
short periods of no more than six months. In addition, the Company maintains
foreign currency bank accounts in other currencies in which it regularly
transacts business.
The Company's interest income and expense are sensitive to changes in
the market level of interest rates. The changes in interest rates earned on the
Company's cash equivalents and short term investments as well as interest paid
on its debt are variable and are adjusted to market conditions.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company's year 2000 project is comprised of three
components-business applications, product applications and equipment
applications. The business applications component consists of the Company's
business computer systems, as well as the computer systems of third-party
suppliers or customers whose Year 2000 problems could potentially impact the
Company. Product applications exposure consist of micro processors within the
control equipment sold by the Company. Equipment exposures consist of the
micro-processors within operating equipment such as pumps, compressors, and
furnaces.
The majority of the Company's business applications are third party
purchased applications. The Company expended $.5 million during 1997 and
anticipates spending $.3 million during 1998 as part of the Company's policy to
utilize current information technology in its business applications. The Company
has begun the implementation of the vendor's current upgrade which is year 2000
compliant.
The Company is assembling a task force of internal resources from
various disciplines, including operations, facility management, product
engineering, management information systems and finance to evaluate the year
2000 readiness with respect to product and equipment applications. Work plans
detailing product control systems readiness including evaluating customer and
vendor readiness, and a comprehensive inventory of monitoring and control
devices for plants, safety systems and other similar operating systems and the
resources required are expected to be in place by the end of 1998 with
completion in the first quarter of 1999.
Safe Harbor Statements under Private Securities Litigation Reform Act of 1995
Certain statements contained in the Company's public documents,
including in this report and in particular, in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" may be forward
looking and may be subject to a variety of risks and uncertainties. Various
factors that could cause actual results to differ materially from these
statements, include, but are not limited to, pricing pressures from competitors
and/or customers; continued economic and political uncertainty in certain of the
Company's markets; the Company's ability to maintain and increase gross margin
levels; the Company's ability to generate positive cash; changes in business
conditions, in general, and, in particular, in the businesses of the Company's
customers and competitors; and other factors which might be described from time
to time in the Company's filings with the Securities and Exchange Commission.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk - Not
Applicable
Page 15 of 45
<PAGE>
Item 8 - Financial Statements and Supplementary Data
FARREL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors................................................17
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and 1996....................................................18
Consolidated Statements of Income for the years
ended December 31, 1997, 1996, and 1995 ......................................19
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995..........................20
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995........................................21
Notes to Consolidated Financial Statements.................................22-36
Page 16 of 45
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Farrel Corporation
We have audited the accompanying consolidated balance sheets of Farrel
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion. the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farrel
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Stamford, Connecticut
March 19, 1998
Page 17 of 45
<PAGE>
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
12/31/97 12/31/96
-------- --------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $1,447 $3,832
Accounts receivable, net of allowance for
doubtful accounts of $179 and $464,
respectively 14,423 19,189
Inventory (Notes 1 and 5) 18,277 14,187
Other current assets (Notes 2 and 12) 2,957 2,979
------------ -----------
Total current assets 37,104 40,187
Property, plant and equipment, net of accumulated
depreciation of $9,786 and $8,357, respectively
(Notes 1 and 6) 12,416 9,555
Goodwill (Note 2) 5,295
Other assets (Notes 1, 3 and 11) 1,566 989
------------ -----------
Total assets $56,381 $50,731
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,317 $11,058
Accrued expenses and taxes (Notes 2 and 7) 4,753 2,344
Advances from customers (Note 1) 6,412 4,865
Accrued installation and warranty costs
(Note 1) 1,326 1,360
Dividends payable 951
Short-term debt (Note 8) 1,527 214
------------ -----------
Total current liabilities 23,286 19,841
Long-term debt (Note 8) 5,283 214
Postretirement benefit obligation (Note 11) 1,213 1,277
Other long-term obligations (Note 11) 592 522
Deferred income taxes (Notes 1 and 12) 225 324
Commitments and contingencies (Note 9) --- ---
------------ -----------
Total liabilities 30,599 22,178
----------- -----------
Stockholders' equity (Note 10):
Preferred stock, par value $100, 1,000,000 shares
authorized, no shares issued --- ---
Common stock, par value $.01, 10,000,000 shares
authorized, 6,142,106 shares issued 61 61
Paid in capital 19,295 19,295
Cumulative translation adjustment (Note 1) (63) 232
Treasury stock, 199,524 and 200,261 shares
at December 31, 1997 and 1996, respectively,
at cost (984) (987)
Retained earnings 7,776 10,228
Minimum pension liability (303) (276)
------------ -----------
Total stockholders' equity 25,782 28,553
------------ -----------
Total liabilities and stockholders' equity $56,381 $50,731
============ ===========
See Notes to Consolidated Financial Statements
Page 18 of 45
<PAGE>
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
----------------------------------
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Net sales $85,382 $75,836 $80,067
Cost of sales 67,671 57,713 60,307
---------- --------- --------
Gross margin 17,711 18,123 19,760
Operating expenses:
Selling 7,076 6,792 7,940
General and administrative (Note 4) 7,433 8,684 8,128
Research and development 1,567 1,993 2,101
---------- --------- --------
Total operating expenses 16,076 17,469 18,169
Operating income 1,635 654 1,591
Interest income 291 203 345
Interest expense (71) (145) (86)
Other (expense)/income, net (Note 14) 229 (232) (394)
---------- --------- --------
Income before income taxes 2,084 480 1,456
Provision/(benefit) for income taxes
(Notes 1 and 12):
Current 811 (7) 654
Deferred (84) 161 (100)
---------- --------- --------
Total 727 154 554
---------- --------- --------
Net income $1,357 $326 $902
========== ========= ========
Per share data: (Note 13)
Basic and diluted net income per share $0.23 $0.05 $0.15
========== ========= ========
Average shares outstanding (000's):
Basic 5,950 5,970 6,027
========== ========= ========
Diluted 5,951 5,972 6,030
========== ========= ========
See Notes to Consolidated Financial Statements
Page 19 of 45
<PAGE>
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Paid Cumulative Minimum Total
Common stock in Treasury translation Retained Pension Stockholders'
Shares Amount capital stock adjustment earnings Liability equity
--------- -------- ------- -------- --------- -------- --------- ----------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 6,142,106 61 19,295 (497) (597) 10,594 ($ 130) 28,726
--------- --------- --------- --------- --------- --------- --------- ---------
Foreign currency translation -- -- -- -- (49) -- -- (49)
Net income -- -- -- -- -- 902 -- 902
Treasury stock transactions -- -- -- (340) -- -- -- (340)
Cash dividend declared
at $.20 per common share -- -- -- -- -- (1,209) -- (1,209)
Minimum pension liability -- -- -- -- -- -- (216) (216)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 6,142,106 61 19,295 (837) (646) 10,287 (346) 27,814
--------- --------- --------- --------- --------- --------- --------- ---------
Foreign currency translation -- -- -- -- 878 -- -- 878
Net income -- -- -- -- -- 326 -- 326
Treasury stock transactions -- -- -- (150) -- (25) -- (175)
Cash dividend declared
at $.06 per common share -- -- -- -- -- (360) -- (360)
Minimum pension liability -- -- -- -- -- -- 70 70
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 6,142,106 $ 61 $ 19,295 ($ 987) $ 232 $ 10,228 ($ 276) $ 28,553
--------- --------- --------- --------- --------- --------- --------- ---------
Foreign currency translation -- -- -- -- ($ 295) -- -- (295)
Net income -- -- -- -- -- 1,357 -- 1,357
Treasury stock transactions -- -- -- 3 -- (3) -- 0
Cash dividend declared
at $.64 per common share -- -- -- -- -- (3,806) -- (3,806)
Minimum pension liability -- -- -- -- -- -- (27) (27)
========= ========= ========= ========= ========= ========= ========= =========
Balance, December 31, 1997 6,142,106 $ 61 $ 19,295 ($ 984) ($ 63) $ 7,776 ($ 303) $ 25,782
========= ========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements
</TABLE>
Page 20 of 45
<PAGE>
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
Cash flows from operating activities:
Net income $1,357 $326 $902
Adjustments to reconcile net income
to net cash used in/provided by
operating activities:
(Gain)/loss on disposal of fixed
assets (746) --- 100
Depreciation and amortization 1,667 1,699 1,609
Decrease /(increase) in accounts
receivable 4,471 5,104 (3,860)
Decrease/(increase) in inventory 261 (915) (5,759)
(Decrease)/increase in accounts payable (2,514) (3,732) 7,030
Increase in advances from customers 608 795 777
Increase/(decrease) in accrued
expenses and taxes 1,075 (1,767) (139)
Decrease in accrued installation
and warranty costs (4) (344) (281)
Decrease/(increase) in long-term
employee benefit obligations 6 (171) (38)
Other (500) 787 (424)
------- ------- -------
Total adjustments 4,324 1,456 (985)
------- ------- -------
Net cash provided by /(used in)
operating activities 5,681 1,782 (83)
------- ------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 1,027 15 50
Purchases of property, plant and
equipment (1,878) (1,321) (2,490)
Purchase of technology license agreement --- --- (22)
Acquisition of Shaw assets (10,855) --- ---
------- ------- -------
Net cash (used in) investing activities (11,706) (1,306) (2,462)
Cash flows from financing activities:
Repayment of short term borrowings --- --- (1,057)
Proceeds from long term borrowings 6,680 --- ---
Repayment of long term borrowings (196) (200) (197)
Issuance (purchase) of treasury stock 3 (175) (340)
Used for dividends paid (2,856) (360) (1,209)
------- ------- -------
Net cash provided by (used in)
financing activities 3,631 (735) (2,803)
Effect of foreign currency exchange
rate changes on cash 9 25 30
------- ------- -------
Net decrease in cash and cash equivalents (2,385) (234) (5,318)
Cash and cash equivalents--
Beginning of period $3,832 $4,066 9,384
------- ------- -------
End of period $1,447 $3,832 $4,066
======= ======= =======
Income taxes paid $746 $756 $1,175
======= ======= =======
Interest paid $76 $55 $93
======= ======= =======
See Notes to Consolidated Financial Statements
Page 21 of 45
<PAGE>
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Principles of Consolidation and Significant Accounting Policies
The accompanying consolidated financial statements include the accounts
of Farrel Corporation and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
The Company designs, manufactures, sells and services machinery to
customer specifications for the rubber and plastics industry. The Company's
principal products are batch and continuous mixers, extruders, pelletizers,
calenders and mills. The Company also provides process engineering services,
process design and related services for rubber and plastics processing
installations in conjunction with its sales of capital equipment. The Company's
new machinery and related services generally represents slightly more than half
of its revenues. The Company's aftermarket business consists of contractual
repair, refurbishment and equipment upgrade services, spare parts sales and
field services.
The company's principal customers are domestic and foreign
manufacturers of rubber and plastics. Foreign customers are primarily located
throughout Eastern and Western Europe, Asia and the Middle East.
Due to the nature of the Company's products, which can individually
cost up to $4.0 million, the relative importance of any product line can change
significantly from year to year. However, the more significant products are the
Company's batch and continuous mixers.
(a) Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand, amounts due from banks,
and any other highly liquid investments purchased with a maturity of three
months or less. The carrying amount approximates fair value because of the short
maturity of those instruments.
(b) Other Financial Instruments:
The carrying amount of the Company's trade receivable and payables
approximates fair value because of the short maturity of these instruments. The
carrying value of long term debt approximates fair value. The interest rate on
the long term debt is variable and approximates current market rates.
(c) Inventory:
Inventory is valued at the lower of cost or market.
Inventory is accounted for on the last-in, first-out (LIFO) basis in the U.S.
and on an average cost basis in the U.K.
(d) Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Improvements are
capitalized and expenditures for normal maintenance and repairs are charged to
expense. Depreciation is computed on a straight line basis based on the
estimated useful lives of the related assets which range from 5 to 40 years.
Assets no longer anticipated to be used are segregated from Property, Plant and
Equipment and included in Other Assets. See Note 3 to these financial
statements.
(e) Goodwill
On December 19, 1997, the Company acquired certain assets of the
Francis Shaw Rubber Machinery operations (see Note 2). The transaction was
accounted for as a purchase. Goodwill represents the excess purchase price over
the estimated fair value of the assets acquired and is being amortized on a
straight line basis over 20 years.
Page 22 of 45
<PAGE>
(f) Patents and Acquired Technology
Other assets includes acquired patents and technical know-how and a
technology license agreement which represents the cost of licensed and purchased
technology, know how, and trade secrets including technology which is patented
or for which a patent has been applied for. Such costs are amortized over
periods from 5 to 7 years.
(g) Revenue Recognition:
Revenue on new machine sales is recognized upon completion of the
customer contract, which generally coincides with the shipment. Revenue on
repair and refurbishment of customer owned machines is recognized when the
contractual work is completed. Spare parts revenue is recognized upon shipment.
The Company requires advances from customers upon entering a contract
and progress payments during the manufacturing process. Generally, letters of
credit are required on contracts with export customers to minimize credit and
currency risk.
(h) Product Installation and Warranty Obligations:
Estimated costs to be incurred under product installation and warranty
obligations relating to products which have been sold are provided for at the
time of sale.
(i) Income Taxes:
Deferred income taxes are provided on temporary differences
between the financial statement and tax basis of the Company's assets and
liabilities in accordance with the liability method of accounting for income
taxes. Provision has not been made for U.S. income taxes or additional foreign
taxes on approximately $9.6 million of undistributed earnings of foreign
subsidiaries because it is expected that those earnings will be reinvested
indefinitely.
(j) Earnings Per Share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of stock options (see
Note 10). Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements. (See Note 13 to the financial statements.)
(k) Foreign Currency Translation:
Assets and liabilities denominated in foreign currencies are translated
into United States dollars at current exchange rates. Income and expense
accounts are translated at average rates of exchange prevailing during the year.
Adjustments resulting from the translation are included in the
cumulative translation adjustment in stockholders' equity. Transaction gains and
losses are included in earnings. The Company experienced a foreign currency
transaction loss of $131,000 in 1997 and $89,000 in fiscal 1995, respectively.
The transaction gain or loss in 1996 was not significant.
The Company enters into foreign exchange contracts for non-trading
purposes, exclusively to minimize its exposure to currency fluctuations on trade
receivables and payables. As a result, changes in the values of foreign currency
contracts offset changes in the values of the underlying assets and liabilities
due to changes in foreign exchange rates, effectively deferring gains and losses
on trade receivables and payables and the related hedges until the date the
transactions are settled in cash. At December 31, 1997, the Company has entered
into $.9 million of forward exchange contracts for transactions related to
amounts to be paid for purchase commitments. A loss of approximately $24,000 has
been deferred on these transactions to be offset against the exchange earnings
to be recognized on the hedged transaction. The Company is exposed to loss in
Page 23 of 45
<PAGE>
the event of nonperformance by the Company's bank, the other party to the
foreign exchange contracts. However, the Company does not anticipate
nonperformance by its bank.
(l) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates.
(m) Reclassifications:
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation. These
reclassifications had no impact on previously reported results of operations.
Note 2 - Asset Purchase
On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of
the Company, acquired certain assets of the Francis Shaw Rubber Machinery
operations from EIS Group PLC of the UK. The purchase price was [Pounds] 6.5
million (approximately $10.9 million), subject to further reduction as described
below.
The Asset Purchase Agreement provides for a reduction in the purchase
price to the extent the value of inventory on hand at the closing date is less
than [Pounds] 3.0 million. In addition, the Seller has guaranteed that the
acquired assets will generate a pre-tax profit (as defined) of, at least,
[Pounds] 1.0 million for fiscal 1998. Any shortfall in this amount will be paid
to the Company representing a reduction in the purchase price.
The results of operations from December 19, 1997 through December 31,
1997, are included in the consolidated results of the Company. The agreement
provides for an operating and lease agreement during the transition of the
operations from the Seller to the Company. The agreement contains provisions for
the completion of sales orders in process retained by the seller and lease of
facilities housing the operations which will be relocated and consolidated with
existing facilities in the U.K.
The acquired assets are recorded at estimated fair value and
include machinery and equipment, inventory and intangible assets as follows:
Machinery & equipment $ 2,805
Inventory stock, net of customer deposits
of $1,009 3,512
Patents/technical know how 835
Other assets 1,598
Goodwill 5,295
-----
Total $ 14,045
======
The above preliminary purchase price allocation is based upon
Management's judgment considering information currently available. The final
purchase price and allocation is subject to revisions as described above,
agreement by the Seller and terms of the Asset Purchase Agreement. The Company
has objected to the closing date inventory valuation and has put the Seller on
notice that it will request a substantial refund.
The Seller did not maintain and the Company was not provided historical
financial information for the Shaw operations. Based on the limited information
available, the Company estimates that the pro forma revenues and net income
would not vary materially from the historical amounts reported in the
Consolidated Statements of Income.
Page 24 of 45
<PAGE>
Included in the purchase price allocation, the Company has recorded
current liabilities of $2.1 million for the costs of consolidating the acquired
operations with current facilities in Rochdale, England. The costs include
employee separation, moving and other costs.
Note 3 - Other Assets
12/31/97 12/31/96
-------- --------
(In thousands)
Technology license................................ $334 $501
Assets held for disposal.......................... 209 389
Notes receivable.................................. -- 38
Acquired patents and technical know how........... 835
Other............................................. 188 61
-------- --------
Total........................................... $1,566 $989
====== ======
Assets held for disposal represent the remaining book value of the
Company's Derby, Connecticut manufacturing facility and its remaining machinery
and equipment no longer expected to be used. Subsequent to December 31, 1997,
the Company signed a conditional letter of intent to sell the Derby property.
The letter of intent is subject to various terms and conditions, some of which
may affect the net proceeds or consummation of the sale. Currently, the estimate
of the discounted fair value of the assets exceeds the remaining book value and,
therefore, no provision for loss has been made at this time. The recoverability
of these assets will be evaluated periodically as required by FAS 121,
"Accounting For the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of." It is possible that the proceeds to be received from the sale
of these assets may prove to be less than the remaining book value, at which
point in time the appropriate provision for loss will be made.
Note 4 - Related Party Transactions
The Company is a party to an agreement with First Funding Corporation
(the "Financial Services Agreement"), pursuant to which the Company retains
First Funding as its exclusive investment adviser. Charles S. Jones, a director
of the Company and owner of over 5% of the Company's outstanding Common Stock,
is an executive officer of First Funding. The Financial Services Agreement may
be terminated by either party upon twelve months written notice or by the
Company in the event that Mr. Jones is no longer an officer or employee of First
Funding.
Under the Financial Services Agreement, the Company pays First Funding
an annual retainer of $450,000 for Mr. Jones' services. The Company also pays
for advisory services provided by other First Funding employees on an hourly
basis and out-of-pocket expenses. The Company also pays transaction fees in the
event of certain successful transactions. The Company paid First Funding
$894,000, $687,000 and $718,000 in fiscal 1997, 1996 and 1995, respectively. In
addition, the Company also reimbursed First Funding $319,000, $211,000 and
$285,000 for out-of-pocket costs during the same three periods, respectively.
The fiscal 1997 amount included $460,000 for services related to the asset
purchase (see Note 2) and amended credit facility (see Note 8) . The fiscal 1995
amount included services regarding the extension of the Company's worldwide
credit facility.
Page 25 of 45
<PAGE>
Note 5 - Inventory
Inventory is comprised of the following:
12/31/97 12/31/96
-------- --------
(In thousands)
Stock and raw materials........... $9,459 $5,905
Work-in-process................... 8,818 8,282
-------- --------
Total............................. $18,277 $14,187
======= =======
Of the above inventories at December 31, 1997 and 1996, $9 million are
valued using the LIFO method. Current replacement costs of those inventories as
of these dates were greater than the LIFO carrying amounts by approximately $.5
million at December 31, 1997 and 1996.
Note 6 - Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
12/31/97 12/31/96
-------- --------
(In thousands)
Land and buildings........................... $3,927 $3,024
Machinery, equipment and other............... 18,163 14,700
Construction in progress..................... 112 188
-------- --------
22,202 17,912
Accumulated depreciation................... (9,786) (8,357)
------- -------
Property, plant and equipment, net......... $12,416 $9,555
======= ======
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 5-10
years. The amounts indicated here exclude the assets held for resale which are
included in Other Assets. See Note 3 to these financial statements.
Note 7 - Accrued Expenses and Taxes
Accrued expenses and taxes includes accrued wages and benefits of
approximately $1.0 million and $.8 million at December 31, 1997 and 1996,
respectively. Also included are income taxes payable of $1.0 million, at
December 31, 1997 and 1996.
Note 8 - Bank Credit Arrangements
At December 31,1997, the Company had a worldwide multi-currency credit
facility with a major U.S. bank in the amount of $20.0 million for direct
borrowings and letters of credit and up to [Pounds] 3.0 million for foreign
exchange contracts. Interest varies based upon prevailing market interest rates
(8.75% and 7.25% at December 31, 1997 and 1996, respectively). The facility
contains limits on direct borrowings and letters of credit combined based upon
stipulated percentages of accounts receivable, inventory and backlog. The
facility also contains covenants specifying minimum and maximum operating
thresholds for operating results and selected financial ratios. The agreement
contains certain restrictions on the making of investments, on borrowings and on
the sale of assets. The Company's ability to pay dividends is limited to (a) 25%
of the Company's cumulative net income during the most recently completed four
fiscal quarters after deducting distributions previously made and (b) purchases
by the Company of its common stock during the same period. At December 31, 1997,
there was $7.1 million in direct borrowings under this facility. There were no
direct borrowings outstanding under this facility at December 31 1996. The
weighted averaged interest rate incurred on short-term borrowings was 8.18%,
7.68 % and 7.75% in fiscal 1997, 1996 and 1995, respectively. There
Page 26 of 45
<PAGE>
were $6.0 million and $8.1 million of letters of credit outstanding at December
31, 1997 and 1996, respectively.
The Company has a loan in the amount of [Pounds] 125,000 ($205,000) and
[Pounds] 250,000 ($428,000) at December 31, 1997 and 1996, respectively, from a
U.K. bank which is collateralized by the Company's facility in Rochdale,
England. The loan matures in January 1999 for which semi-annual principal
payments of approximately [Pounds] 62,500 began in 1995. Approximately [Pounds]
125,000 ($205,000 and $214,000) at December 31, 1997 and 1996, respectively, is
classified as payable currently and [Pounds] 125,000 ($214,000) was classified
as long term at December 31, 1996. The interest rate on this loan is 10 percent
per annum.
On January 23, 1998, the credit facility was amended. The amended
facility provides for total borrowings of $25 million, consisting of an $18.5
million revolving credit facility and a five year term loan for up to $6.5
million. Concurrently with the execution of the amended credit agreement, the
Company converted [Pounds] 4 million (approximately $6.5 million) of the
outstanding balance under the previous credit facility to a term note. The term
loan is payable in equal quarterly payments over a five year period. At December
31, 1997, [Pounds] 3.2 million (approximately $5.3 million) is classified as
long term. The amended credit facility contains limits in direct borrowings and
letters of credit combined based upon stipulated levels of accounts receivable,
inventory and backlog. It also contains covenants specifying minimum and maximum
thresholds for operating results and selected financial ratios.
Note 9 - Commitments and Contingencies
(a) Commitments:
Aggregate future lease commitments under operating leases, principally
for office space, equipment and vehicles, are as follows:
Year ending December 31, (In thousands)
- ------------------------ --------------
1998 495
1999 361
2000 123
2001 93
2002 134
Thereafter 71
-----
$1,277
======
Rental expense for the year ended December 31, 1997, 1996 and 1995
was $332,000, $374,000, $452,000, respectively.
(b) Contingencies:
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company. While the outcome of lawsuits or other
proceedings against the Company cannot be predicted with certainty, the Company
does not expect that these matters will have a material adverse effect on the
Company's financial position or results of operation.
Note 10 - Stock Plans
The Company sponsors a Stock Option Plan and an Employees' Stock
Purchase Plan, both established in 1997.
Page 27 of 45
<PAGE>
The 1997 Omnibus Stock Incentive Plan authorizes the granting of
incentive stock options and non-qualified stock options to purchase up to
500,000 shares of common stock. Option awards may be granted by the Compensation
Committee of the Board of Directors through May 23, 2007 to eligible employees.
The terms (exercise price, exercise period and expirations) of each option award
are at the discretion of the Compensation Committee subject to the following
limitations. The exercise price of an Incentive Stock Option may not be less
than the fair market value as of the date of the grant (or 110% in the case of
an incentive stock option granted to a 10% stockholder). The exercise period may
not exceed 10 years from the date of the grant. There were no stock options
granted during 1997.
In prior years, the Company granted stock options under a previously
sponsored plan to eligible employees and directors of the Company. At December
31, 1997, options to purchase 459,000 shares remain outstanding under the plan.
The Company has elected to continue to account for stock options under
Accounting Principles Board Opinion No. 25 , "Accounting for Stock Issued to
Employees" (APB 25) and not the fair value method as provided by FAS 123,
"Accounting and Disclosure of Stock -Based Compensation." The Company's Stock
Option Plan requires options to be granted at the market price of the Company's
common stock on the date the options are granted, and as a result, under APB 25
no compensation expense is recognized.
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
-------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 459 $5.86 296 $6.96 286 $7.04
Granted - - 375 4.38 72 5.28
Exercised - - - - - -
Forfeited - - 212 4.76 62 5.42
-------------------- --------------------- --------------------
Outstanding, end of year 459 5.86 459 $5.86 296 $6.96
-------------------- --------------------- --------------------
Exercisable, end of year 374 6.32 279 $7.05 213 $7.58
Weighted-average fair value of options
granted during the year - $1.75 $2.20 --
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Options Contractual Life Price Options Price
- -------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
$3.75 - $5.50 278,000 7.0 years $4.51 193,250 $4.79
5.51 - 8.50 95,000 5.5 6.32 95,000 6.32
8.51 - 10.00 86,000 4.0 9.73 86,000 9.73
- --------------------------------------------------------------------------- -----------------------------
$3.75 - $10.00 459,000 6.2 $5.86 374,250 $6.32
</TABLE>
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of FAS 123. The fair
value for these options granted under the Stock Option Plan was estimated at the
Page 28 of 45
<PAGE>
date of grant using the Black-Scholes option pricing model, one of the allowable
valuation models under FAS 123, with the following assumptions for 1996:
1996
Risk free interest rate 6.0%
Dividend yields 2.0%
Expected volatility factor of the expected
market price of the Company's common stock .458
Weighted average expected life of each option 8 Yrs
The weighted average fair value of options granted during 1996 was
$1.75. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restriction
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
judgment, applying the provisions of FAS 123 does not necessarily provide a
reliable single measure of the fair value of its stock options. It is also not
likely that the current pro forma net income will be representative of pro forma
net income in future years.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting period. The
Company's pro forma information is as follows:
Year ended
----------
12/31/97 12/31/96
-------- --------
(In thousands, except
per share data)
Pro Forma Net Income $1,331 $258
Pro Forma earnings per share - basic and diluted .22 .04
During 1997, the Company adopted the 1997 Employee's Stock Purchase Plan
as a successor to the 1992 Employees Stock Purchase Plan.
The 1997 Stock Purchase Plan gives each eligible employee of the Company
the right to purchase, in each of the years 1997 through 2001, shares of common
stock equivalent in value to not more than 5% of the employee's annual
compensation, up to a maximum of $25,000 per year. Each May, employees must
designate the amount to be withheld during the next 24 month purchase period.
The purchase price is the lower of 85% of the fair market value of the common
stock on the date of offering or 85% of the fair market value on the date the
applicable purchase period ends. Not more than an aggregate of 500,000 shares of
common stock may be purchased under the stock purchase plan. Any employee who,
after the purchase, would hold 5% or more of the common stock is ineligible.
Under the stock purchase plans in July 1997 and May 1996, employees
elected to purchase approximately 9,000 and 3,000 shares, respectively, of the
Company's common stock through these plans. During 1997 and 1996, approximately
13,000 and 9,000 shares, respectively, were distributed to employees under this
plan. The 1997 distribution includes 647 shares from the Company's treasury
account, for which retained earnings was adjusted. At December 31, 1997, there
were approximately 13,000 shares subscribed to under these plans.
Page 29 of 45
<PAGE>
The Company may reaquire up to $2,250,000 of its common stock under its
discretionary open market stock repurchase plan. During fiscal 1996 the Company
reacquired 54,150 shares of common stock, under this plan for approximately
$175,000, which are included in treasury stock. There were no shares repurchased
during 1997.
Note 11 - Benefit Plans
The accounting for pensions and retiree health benefits, which will be
paid out over an extended period of time in the future, requires the use of
significant estimates concerning uncertainties about employee turnover, future
pay scales, interest rates, rates of return on investments and future medical
costs. The estimates of these future employee costs are allocated in a
systematic manner to the years when service is rendered to the Company by the
employee. The annual cost is comprised of the service cost component related to
current employee service, an interest cost related to the increase in the
benefit obligations due to the passage of time (the benefit obligations are
stated at a present value which increases each year as the discount period
decreases), less the earnings achieved on assets invested in the employee
benefit plan. Differences between the estimates and actual experience are
deferred and amortized to expense over a period of time.
Pension Plans
The Company has retirement plans covering portions of domestic and
foreign employees. The Company funds the domestic plan in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plans in
accordance with appropriate governmental regulations in the United Kingdom.
Pension expense is actuarially determined in accordance with generally accepted
accounting principles and differs from amounts funded annually.
The Company has a domestic defined benefit pension plan for hourly
employees which provides benefits based on employees' years of service. Plan
assets are invested in short-term securities, equity securities and real estate.
The Company has two foreign defined benefit pension plans covering substantially
all employees which provide stipulated amounts at retirement based on years of
service and earnings. Plan assets are invested in securities, real estate and
cash. The following table summarizes the components of domestic and foreign
pension expense:
Year ended
----------
12/31/97 12/31/96 12/31/95
-------- -------- --------
Domestic pension expense: (In thousands)
Service cost-benefits earned during the period.. $62 $65 $82
Interest cost on projected benefit obligation... 124 122 110
Actual return on plan assets.................... (171) (31) (174)
Amortization of deferred items.................. 84 (52) 113
----- ----- -----
Net domestic pension expense $99 $104 $131
===== ===== =====
Foreign pension expense:
Service cost-benefits earned during the period.. $258 $226 $220
Interest cost on projected benefit obligation... 728 648 598
Actual return on plan assets.................... (802) (743) (931)
Amortization of deferred items.................. (159) (122) 116
----- ----- -----
Net foreign pension expense $25 $9 $ 3
===== ===== =====
Page 30 of 45
<PAGE>
Over the long run, the Company's funding policy is designed to
accumulate sufficient assets in the benefit plans to meet obligations for
retirement benefits. Because at any point in time there will be differences
between the estimates used in establishing pension cost and funding amounts and
actual experience, there will always be an amount by which the Company is over
or under-funded. The domestic plan was under-funded by $211,000 and $202,000 at
December 31, 1997 and 1996, respectively, which the Company expects to reduce
through contributions to the pension plan in the future.
The following table sets forth the funded status of the domestic and
foreign defined benefit plans and amounts recognized in the balance sheets:
<TABLE>
<CAPTION>
Domestic Foreign
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligations $1,884 $1,694 $9,984 $8,828
====== ====== ====== ======
Accumulated benefit obligation $1,991 $1,755 $9,984 $8,828
====== ====== ====== ======
Plan assets at fair value $1,780 $1,553 $9,800 $9,289
Actuarial present value of projected benefit
obligation for service rendered to date 1,991 1,755 10,252 9,063
Projected benefit obligation (in excess of)/
less than plan assets (211) (202) (452) 226
Unrecognized actuarial variances 504 461 699 223
Unamortized net transition liability/(asset) 9 16 (198) (372)
Unamortized prior service costs 79 45 --- ---
Additional minimum liability (592) (522) --- ---
------ ------ ------ ------
Accrued pension (cost)/benefit ($211) ($202) $49 $77
====== ====== ====== ======
Plans assumptions:
Discount rate 7.00% 7.25% 7.50% 8.50%
Rate of increase in future compensation levels N/A N/A 4.50% 5.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 9.00% 9.00%
</TABLE>
The Company changed the discount rate in 1997 in response to the lower
current and projected interest rates. The Company changed the expected long term
rate of return on plan assets in 1996 due to the fact the Company retained the
services of a professional investment advisor to manage the assets of the Plan.
As a result, investment returns are anticipated to improve. The Company recorded
a minimum liability of $592,000 and $522,000 at December 31, 1997 and 1996,
respectively. The Company has also recorded intangible assets of $88,000 and
$61,000, the amounts allowable under FAS 87, at December 31, 1997 and 1996,
respectively, which are included in Other Assets. The minimum liability in
excess of the intangible asset has been recorded as a reduction of stockholders'
equity, net of applicable income taxes.
During 1996 the Company reduced the workforce of employees covered
by the domestic defined benefit plan, and as a result, experienced a
curtailment of the pension obligation. The Company accounted for this
curtailment under FAS 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
The impact on 1996 operations was a minor gain.
Page 31 of 45
<PAGE>
The Company has a domestic 401(k) retirement plan for salaried employees
which includes matching and discretionary non-matching contributions by the
Company. Approximately $119,000, $113,000 and $147,000 of such contributions
were expensed in fiscal 1997, 1996 and 1995, respectively. No discretionary
contributions were made by the Company during fiscal 1997, 1996 or 1995.
Postemployment Benefits Other Than Pensions
The Company generally provided health care benefits to eligible domestic
union retired employees and their dependents through age 65. The Company is
self-insured for claims prior to age 65 and pays these as incurred. Retired
employees and their dependents were entitled to select Supplemental Medicare
Coverage A and B only at age 65. The Company pays 75% of the monthly Medicare
premiums for most of these individuals. Eligibility for these retiree health
care benefits was attained upon reaching age 60 and completing 10 years of
service.
During 1994 the Company renegotiated its contract with domestic union
employees in which postemployment medical benefits were eliminated for future
retirees. Employees who retired prior to the signing of the new contract
maintain the postemployment medical benefits granted under prior contracts. The
elimination of these benefits reduced the obligation by approximately $1.3
million ($.8 million net of approximately $.5 million of deferred income taxes)
from that which was previously recorded by the Company when it adopted FAS 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions". The
Company accounted for the elimination of these benefits under the provisions of
FAS 106. The following table summarizes the Company's expense for postemployment
benefits other than pensions.
Year ended
----------
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Service cost- benefits earned during
the period --- --- ---
Interest cost on accumulated postretirement
benefit obligation $90 $90 $111
---- ---- ----
Net periodic postretirement benefit costs $90 $90 $111
==== ==== ====
The Company's non-pension postretirement benefit plans are not funded. The
status of the plans are as follows:
12/31/97 12/31/96
-------- --------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees and dependents $1,221 $1,219
Fully eligible plan participants --- 28
Other active plan participants --- ---
------ ------
1,221 1,247
Unrecognized net gain (loss) from experience
differences and change in assumptions (8) 30
------ ------
Postretirement benefit obligation $1,213 $1,277
====== ======
Page 32 of 45
<PAGE>
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% and 7.25% at December 31, 1997 and
1996, respectively. The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 9.0% at December 31, 1997
and declines .5% per year to 5.5% by the year 2005 and remains at that level
thereafter. The change in assumptions did not have a material impact on the
obligation or net periodic postretirement benefit cost. The accumulated benefit
obligation as of December 31, 1997 and net periodic postretirement health care
cost for fiscal 1997 would increase approximately 8.1% and 8.5%, respectively,
with an annual one percentage point increase in the assumed health care cost
rate.
Note 12 - Provision for Income Taxes
Pre-tax income/(loss) and income taxes for the years ended December 31,
1997, 1996 and 1995 are as follows:
Year ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
The domestic and foreign components
of (In thousands) income/(loss)before
income taxes are:
Domestic $89 ($1,544) $971
United Kingdom 1,995 2,024 485
------ ------- ------
$2,084 $480 $1,456
====== ======= ======
The provision/(benefit) for income taxes is:
Current:
United States 101 ($646) $437
United Kingdom 658 664 88
State taxes 52 (25) 129
-- --- ----
811 (7) 654
Deferred:
United States (50) $232 $(117)
United Kingdom 7 41 53
State taxes (41) (112) (36)
------ ------- ------
(84) 161 (100)
------ ------- ------
$727 $154 $554
====== ======= ======
T
Deferred tax liabilities/(assets) result from the following differences between
financial reporting and tax accounting.
12/31/97 12/31/96
-------- --------
(In thousands)
Deferred tax liabilities:
-------------------------
Depreciation $1,054 $1,128
Inventory valuation 258 186
Other - 46
------- --------
Total deferred tax liabilities 1,312 1,360
------- -------
Deferred tax assets:
--------------------
Non pension postretirement benefits (485) (511)
Installation and warranty cost accruals (324) (220)
Vacation reserve (94) (154)
Bad debt reserve (51) (57)
Minimum pension liability (202) (184)
State tax loss carryforwards (197) (180)
Other (30) ---
-------- --------
Total deferred tax assets (1,383) (1,306)
-------- --------
Net deferred tax liability/(asset) $ (71) $ 54
======== ========
Page 33 of 45
<PAGE>
Other current assets includes $296,000 and $274,000 of deferred tax
assets at December 31, 1997 and 1996, respectively. Other current assets also
includes prepaid income taxes of $665,000 at December 31, 1996. The state tax
loss carryforwards expire in the year 2011.
A reconciliation from statutory U.S. federal income taxes to the actual income
taxes is as follows:
Year ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Statutory provision 709 $163 $495
U.S.--U.K. rate differential (57) 17 (5)
State income taxes, net of
federal benefit 7 (90) 62
Permanent differences 98 30 39
Other (30) 34 (37)
----- ----- -----
Actual provision $727 $154 $554
===== ===== =====
Note 13 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands, except share data)
Net income applicable to
common stockholders $1,357 $326 $902
========= ========= =========
Weighted average number of common
shares outstanding - Basic earnings
per Share 5,950,240 5,969,708 6,026,942
Effect of dilutive stock and
purchase options 1,403 2,393 3,364
--------- --------- ----------
Weighted average number of
common shares outstanding -
Diluted earnings per share 5,951,643 5,972,101 6,030,307
========= ========= =========
Net income per share-basic $0.23 $0.05 $0.15
========= ========= =========
Net income per share-diluted $0.23 $0.05 $0.15
========= ========= =========
Page 34 of 45
<PAGE>
Note 14 - Other income/(expense), net
For the year ended December 31, 1997, other income/expense includes a
gain of approximately $.7 million from the disposal of machinery and equipment
no longer used. There were no individually significant items of other income or
expense in 1996.
Note 15 - Foreign Operations, Export Sales and Major Customers
The Company operates a global business with interdependent operations
and employs a global management approach. In consideration of certain economic
factors, the distribution of customer orders and associated revenues and
expenses between the U.S. or U.K. is at the discretion of management. As such,
the chart below should not be construed as indicative of U.S. and U.K. operating
results were the Company not to operate in such a manner.
Net sales to unaffiliated customers, operating income and assets of the
U.S. and U.K. operations for the years ended December 31, 1997, 1996, and 1995
are as follows: United United States Kingdom Consolidated (In thousands)
United United
States Kingdom Consolidated
-----------------------------------
(In thousands)
Year ended 12/31/97
Sales to unaffiliated Customers $60,594 $24,788 $85,382
Operating income $(310) $1,945 $1,635
Assets $29,867 $26,514 $56,381
Year ended 12/31/96:
Sales to unaffiliated Customers $50,811 $25,025 $75,836
Operating income ($1,501) $2,155 $654
Assets $31,011 $19,720 $50,731
Year ended 12/31/95:
Sales to unaffiliated customers $58,957 $21,110 $80,067
Operating income $1,169 $422 $1,591
Assets $36,390 $17,022 $53,412
The breakdown of U.S. sales to foreign countries grouped by geographic
area is as follows:
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Korea $14,051 $2,053 $675
Asia 4,307 $3,452 $9,243
North America, other than the U.S. 1,452 3,975 9,232
Middle East 74 119 3,142
All other 1,414 797 699
------- ------- ------=
$21,298 $10,396 $22,991
======= ======= =======
Sales to Korea in 1997 includes $13 million to one customer.
Page 35 of 45
<PAGE>
Note 16 - Quarterly Financial Data (unaudited):
Summarized quarterly financial data for fiscal 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands except per share data)
Quarter
-----------------------------------------------
First Second Third Fourth
---------- ---------- -------- ----------
Fiscal 1997
<S> <C> <C> <C> <C>
Net Sales $16,123 $26,183 $21,955 $21,121
========== ========== ======== ==========
Gross Margin $3,338 $5,344 $5,429 $3,600
========== ========== ======== ==========
Other Income (expense) net $300 $167 $20 ($38)
========== ========== ======== ==========
Net income/(loss) ($106) $870 $712 ($119)
========== ========== ======== ==========
Basic and diluted net income/(loss) per common share ($0.02) $0.15 $0.12 ($0.02)
========== ========== ======== ==========
Basic weighted average shares outstanding (000's) 5,942 5,942 5,949 5,946
========== ========== ======== ==========
Diluted weighted average shares outstanding (000's) 5,942 5,943 5,955 5,953
========== ========== ======== ==========
Quarter
-----------------------------------------------
First Second Third Fourth
---------- ---------- -------- ----------
Fiscal 1996
Net Sales $17,865 $13,196 $18,081 $26,694
========== ========== ======== ==========
Gross Margin $4,359 $2,818 $4,141 $6,805
========== ========== ======== ==========
Other Income/(expense) ($48) $64 ($93) ($97)
========== ========== ======== ==========
Net income/(loss) $181 ($1,170) ($25) $1,340
========== ========== ======== ==========
Basic and diluted net income/(loss) per common share $0.03 ($0.20) $0.00 $0.22
========== ========== ======== ==========
Basic weighted average shares outstanding (000's) 5,985 5,973 5,963 5,836
========== ========== ======== ==========
Diluted weighted average shares outstanding (000's) 5,987 5,973 5,963 5,837
========== ========== ======== ==========
</TABLE>
Page 36 of 45
<PAGE>
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 37 of 45
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998.
Item 11 - Executive Compensation
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998.
Item 13 - Certain Relationships and Related Transactions
The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed with the Securities and
Exchange Commission not later than 120 days after the year ended December 31,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998. See also Notes to Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.
Page 38 of 45
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) Documents Filed as Part of Form 10-K
Page
1. Financial Statements
Report of Independent Auditors.......................................17
Consolidated Balance Sheets as of
December 31, 1997 and, 1996.........................................18
Consolidated Statements of Income for
the years ended December 31, 1997, 1996, and 1995...................19
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997,
1996 and 1995.......................................................20
Consolidated Statements of Cash Flows for years
ended December 31, 1997, 1996 and 1995..............................21
Notes to Consolidated Financial Statements........................22-36
2. Financial Statement Schedule
Report of Independent Auditors on Financial
Statement Schedule..................................................44
Schedule II - Valuation and Qualifying Accounts......................45
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Page 39 of 45
<PAGE>
3. Exhibits Page
Exhibits
- --------
Exhibit 2(1) Sale and purchase agreement of
the Francis Shaw Rubber Machinery
Business dated December 4,1997, between
Francis Shaw Rubber Machinery Limited,
PRC Fabrications Limited, EIS Group PLC,
Farrel Bridge Limited and Farrel
Limited. Filed as an exhibit to the
Registrant's Report on Form 8K dated
December 19, 1997 and incorporated
herein by reference. N/A
Exhibit 3(a) Articles of Incorporation - Filed as an
exhibit to the Registrant's Registration
Statement as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 3(b) By-laws - Filed as an exhibit to the
Registrant's Registration Statement as
Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
Exhibit 4 Amendment and Restatement of the Credit
Agreement between Farrel Corporation
Chase Manhattan Bank of Connecticut,
N.A. and Chase Manhattan Bank N.A.
London dated January 23, 1998.
Exhibit 10(b) Employment Agreement between Rolf K.
Liebergesell and the Registrant, dated
November 1, 1991 Filed as an exhibit to
the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 10(d) Standard Corporate Financial Services
contract between First Funding
Corporation and the Registrant, dated
June 17, 1986, as amended by a Letter
Agreement dated November 1, 1991. Filed
as an exhibit to the Registrant's
Registration Statement as Form S-1 (No.
33-43539) and incorporated herein by
reference. N/A
Exhibit 10(e) 1997 OMNIBUS Stock incentive Plan -
Filed as an exhibit to the Registrant's
definitive Proxy Statement re: Annual
Meeting on May 23, 1997 and incorporated
herein by reference. N/A
Exhibit 10(f) 1997 Employee's Stock Purchase Plan -
Filed on the Registrant's registration
Statement as Form S-8 (No. 333-30735) and
incorporated herein by reference. N/A
Exhibit 10(g) Environmental Agreement between USM
Corporation and the Registrant dated as
of May 12, 1986. Filed as an exhibit to
the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Page 40 of 45
<PAGE>
Exhibit 10(h) Form of Director Indemnification
Agreement. Filed as an exhibit to the
Registrant's Registration Statement as
Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
Exhibit 10 (I) Environmental Settlement Agreement
between The Black & Decker Corporation
and the Registrant dated February 17,
1995. Filed as an exhibit to the
Registrant's Form 10-K for the year
ended December 31, 1994. N/A
Exhibit 10 (j) Secondment Agreement between Karl N.
Svensson and the Registrant, dated March
3, 1995. Filed as an exhibit to the
Registrant's Form 10-Q for the quarter
ended June 30, 1996 N/A
Exhibit 11 Statement re: Computation of per share
earnings. See Note 13 to the Company's
Consolidated Financial Statments included
herewith.
Exhibit 21 Subsidiaries - Filed as an exhibit to
the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 23 Consent of Ernst & Young LLP
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8K.
The following report on Form 8-K was filed by the registrant during the quarter
ended December 31, 1997.
Item 2 December 19, 1997 The registrant completes
acquisition of selected assets
of the Francis Shaw Rubber
Machinery Business
Page 41 of 45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Farrel Corporation
/s/Rolf K. Liebergesell
-----------------------------------
Rolf K. Liebergesell
Chief Executive Officer
President and Chairman of the Board
March 30, 1998
---------------
Date
Page 42 of 45
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Rolf K. Liebergesell
- ------------------------- Chief Executive Officer,
Rolf K. Liebergesell President and chairman 3/30/98
of the Board ---------------
/s/ Catherine M. Boisvert
- ------------------------- Vice President and Controller, 3/30/98
Catherine M. Boisvert (Chief Accounting Officer) ---------------
/s/ Charles S. Jones 3/31/98
- ------------------------- Director ---------------
Charles S. Jones
- ------------------------- Director ---------------
James A. Purdy
- ------------------------- Director ---------------
Howard J. Aibel
/s/ Glenn Angiolillo 3/27/98
- ------------------------- Director ---------------
Glenn Angiolillo
/s/ Alberto Shaio 3/30/98
- ------------------------- Director ---------------
Alberto Shaio
Page 43 of 45
<PAGE>
Report of Independent Auditors on Consolidated
Financial Statement Schedule
The Board of Directors and Stockholders
Farrel Corporation
We have audited the consolidated financial statements of Farrel Corporation as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated March 19, 1998
included elsewhere in this Annual Report on Form 10-K. Our audits also included
the financial statement schedule for the years ended December 31, 1997, 1996 and
1995 listed in Item 14(a) of this Form 10-K. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Stamford, Connecticut
March 19, 1998
Page 44 of 45
<PAGE>
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------- ---------------- ----------------------------- ------------------ ---------------
Charged
Balance at Charged to (credited)
beginning costs and to other Balance at
Name of Debtor of period expenses accounts (1) Deductions (2) end of period
- --------------------------------------- ---------------- -------------- -------------- ------------------ ---------------
Year ended 12/31/95
- -------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
receivables 499 (323) 0 (74) 102
Reserve for excess and obsolete
inventory items 2,131 598 (1) (1,686) 1,042
Accrued installation and warranty
costs 1,915 864 (10) (1,145) 1,624
Year ended 12/31/96
- -------------------
Allowance for doubtful
receivables 102 362 10 (10) 464
Reserve for excess and obsolete
inventory items 1,042 119 67 (137) 1,091
Accrued installation and warranty
costs 1,624 1,840 92 (2,196) 1,360
Year ended 12/31/97
- -------------------
Allowance for doubtful
receivables 464 (50) (8) (227) 179
Reserve for excess and obsolete
inventory items 1,091 208 (23) (525) 751
Accrued installation and warranty
costs 1,360 2,182 (25) (2,191) 1,326
</TABLE>
(1) Represents foreign currency translation adjustments charged or credited
to stockholders' equity.
(2) Represents accounts receivable written off, obsolete inventory items
written off, reductions in accrued installation and warranty costs and
restructuring reserve to reflect expenditures incurred.
The allowances for doubtful receivables and reserves for excess and
obsolete inventory items have been deducted in the balance sheets from the
assets to which they apply. The accrued installation and warranty costs
are shown as liabilities in the balance sheet
Page 45 of 45
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of January 23, 1998
among
FARREL CORPORATION,
FARREL LIMITED,
FARREL SHAW LIMITED
AND
THE CHASE MANHATTAN BANK
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT dated as of January 23, 1998
among FARREL CORPORATION, a corporation organized under the laws of Delaware
(the "U.S. Company"), FARREL LIMITED, a corporation organized under the laws of
England and Wales ("Farrel Limited") and FARREL SHAW LIMITED, a corporation
organized under the laws of England and Wales ("Farrel Shaw" and together with
Farrel Limited, the "U.K. Companies") (each a "Borrower" and, collectively, the
"Borrowers") and THE CHASE MANHATTAN BANK, a New York banking corporation (the
"Bank").
WHEREAS, the U.S. Company, Farrel Limited and the Bank have entered
into that certain Credit Agreement dated as of March 20, 1993, as amended (the
"Existing Credit Agreement") pursuant to which the Bank has extended credit to
such Borrowers evidenced as by certain promissory notes issued by such Borrowers
to the Bank (the "Existing Notes"); and
WHEREAS, this Agreement amends and restates in its entirety the
Existing Credit Agreement in order to, among other things, increase the amount
available for borrowing, provide for the issuance of a Term Loan, and add Farrel
Shaw as a Borrower hereunder.
NOW THEREFORE, the Borrowers and the Bank agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS
Section 1.01. Definitions. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa):
"Accounting Month" means each fiscal month of the Borrowers, it being
understood that each fiscal year of the Borrowers is divided into four fiscal
quarters of 13 weeks each, and each such fiscal quarter is divided approximately
into two four-week months and one five-week month.
"Acquisition" means the acquisition by Farrel Shaw of the Francis Shaw
Rubber Machinery business owned by Francis Shaw, FSRM and PRC, pursuant to the
terms of the Acquisition Documents.
"Acquisition Documents" mean that certain Agreement dated December 4,
1997, among Francis Shaw, FSRM, PRC, Farrel Shaw, Farrel Limited and EIS Group
plc, and all other agreements, instruments or documents entered into in
connection therewith or delivered pursuant thereto.
-1-
<PAGE>
"Additional Costs" has the meaning assigned to such term in Section
3.01.
"Affiliate" means any Person: (a) which directly or indirectly
controls, or is controlled by, or is under common control with, any Borrower or
any of their Subsidiaries; (b) which directly or indirectly beneficially owns or
holds five percent or more of any class of voting stock of any Borrower or any
such Subsidiary; (c) five percent or more of the voting stock of which is
directly or indirectly beneficially owned or held by any Borrower or any such
Subsidiary; or (d) which is a partnership in which any Borrower or any of their
Subsidiaries is a general partner. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract, or otherwise.
"Agency Fee" has the meaning assigned to such term in Section 2.11(b).
"Aggregate Outstandings" means the sum of, without duplication, (A) the
aggregate principal amount of Loans outstanding at such time, plus (B) the L/C
Obligations.
"Agreement" means this Amended and Restated Credit Agreement, as
amended or supplemented from time to time. References to Articles, Sections,
Exhibits, Schedules and the like refer to the Articles, Sections, Exhibits,
Schedules and the like of this Agreement unless otherwise indicated.
"Alternative Currency" means any currency other than Dollars or Pounds
Sterling which is freely transferrable and convertible into Dollars, and for
which Chase London quotes a per annum interest rate for the offering to leading
banks in the London interbank market of deposits.
"Application" means an application in such form as the Bank may specify
from time to time, requesting the Bank to open a Letter of Credit.
"Backlog Certificate" means each certificate delivered by the Borrowers
substantially in the form of Exhibit B-2.
"Banking Day" means any day on which commercial banks are not
authorized or required to close in New York City, and whenever such day relates
to a Fixed Rate Loan or notice with respect to any Fixed Rate Loan, a day on
which dealings in Dollar deposits are also carried out in the London interbank
market.
"Borrowing Base" means at any date of determination thereof, the sum of
(i) 85% of Eligible U.S. Receivables at such date plus (ii) 50% of Eligible U.S.
Inventory at such date plus (iii) 85% of
-2-
<PAGE>
Eligible U.K. Receivables at such date plus (iv) 50% of Eligible U.K. Inventory
at such date; the Borrowing Base shall be determined by the Bank monthly based
upon a Borrowing Base Certificate submitted by the Borrowers to the Bank and
certified as accurate and complete by the senior financial officer of the U.S.
Company.
"Borrowing Base (U.S.)" means at the date of determination thereof, the
sum of (i) 85% of Eligible U.S. Receivables at such date plus (ii) 50% of
Eligible U.S. Inventory at such date; the Borrowing Base (U.S.) shall be
determined by the Bank monthly based upon a Borrowing Base Certificate submitted
by the Borrowers to the Bank and certified as accurate and complete by the
senior financial officer of the U.S. Company.
"Borrowing Base Certificate" means each certificate delivered by the
Borrowers substantially in the form of Exhibit B-1.
"Capital Expenditure" means, with respect to any Person, any
expenditure made or obligation incurred by such Person to purchase, acquire or
construct fixed assets, plant and equipment (including renewals, improvements,
replacements and incurrence of obligations under Capital Leases) less cash
revenues received by such Person from the sale of fixed assets, plant and
equipment.
"Capital Lease" means any lease which has been or should be capitalized
on the books of the lessee in accordance with GAAP.
"Chase London" means the London branch of the Bank.
"Closing Date" means the date this Agreement has been executed by each
of the Borrowers and the Bank.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commitments" mean the Revolving Credit Commitment and the Term Loan
Commitment.
"Commitment Fee" has the meaning assigned to such term in Section
2.11(a).
"Consolidated Subsidiary" means any Subsidiary whose accounts are or
are required to be consolidated with the accounts of any Borrower in accordance
with GAAP.
"Consolidated Tangible Net Worth" means Tangible Net Worth of the
Borrowers and their Consolidated Subsidiaries, as determined on a consolidated
basis in accordance with GAAP.
"Current Assets" means all assets of the Borrowers treated as current
assets in accordance with GAAP, excluding prepaid expenses.
-3-
<PAGE>
"Current Liabilities" means all liabilities of the Borrowers treated as
current liabilities in accordance with GAAP, including without limitation (a)
all obligations payable on demand or within one year after the date on which the
determination is made (but not including the obligations under this Agreement in
the one year period prior to the Termination Date) and (b) installment and
sinking fund payments required to be made within one year after the date on
which the determination is made, but excluding all such liabilities or
obligations which are renewable or extendable at the option of the Borrowers to
a date more than one year from the date of determination.
"Debt" means, with respect to any Person: (a) indebtedness of such
Person for borrowed money; (b) indebtedness for the deferred purchase price of
property or services (except trade payables in the ordinary course of business);
(c) Unfunded Benefit Liabilities of such Person (if such Person is not a
Borrower, determined in a manner analogous to that of determining Unfunded
Benefit Liabilities of the Borrowers); (d) the face amount of any outstanding
letters of credit issued for the account of such Person; (e) obligations arising
under acceptance facilities; (f) guaranties, endorsements (other than for
collection in the ordinary course of business) and other contingent obligations
to purchase, to provide funds for payment, to supply funds to invest in any
Person, or otherwise to assure a creditor against loss; (g) obligations secured
by any Lien on property of such Person; and (h) obligations of such Person as
lessee under Capital Leases.
"Debt Service Charges" means, for any fiscal year, the sum of (i) all
scheduled payments of principal during such period on or with respect to Debt of
the Borrowers or their Consolidated Subsidiaries (including without limitation
imputed principal on Capital Leases), plus (ii) Interest Expense during such
period.
"Default" means any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
"Default Rate" means, with respect to the principal of any Loan and, to
the extent permitted by law, any other amount payable by the Borrowers under
this Agreement, the Notes, the Letters of Credit or the Facility Documents that
is not paid when due (whether at stated maturity, by acceleration or otherwise),
a rate per annum during the period from and including the due date, to, but
excluding the date on which such amount is paid in full equal to two percent
above the Variable Rate as in effect from time to time plus the Margin (if any)
provided that, if the amount so in default is principal of a Fixed Rate Loan and
the due date thereof is a day other than the last day of the Interest Period
therefor, the "Default Rate" for such principal shall be, for the period from
and including the due date and to but excluding the last day of the Interest
Period therefor, two percent above the interest rate for
-4-
<PAGE>
such Loan as provided in Section 2.10 hereof and, thereafter, the rate provided
for above in this definition.
"Direct Borrowing Sublimit" means the amount of the lesser of (i)
$10,000,000 plus 50% of the amount of ---- backlog of the Borrowers in excess of
$40,000,000 or (ii) $15,000,000.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBIT" means, for any fiscal year, (i) the consolidated net income of
the Borrowers and their Consolidated Subsidiaries plus (ii) all taxes accrued
with respect to such fiscal year which are calculated and charged upon the
profits of the Borrowers and their Consolidated Subsidiaries plus (iii) all
Interest Expense accrued with respect to such fiscal year.
"EBITDA" means, for any fiscal year, (i) EBIT for such period, plus
(ii) the aggregate amounts of depreciation and amortization to the extent that
such amounts were deducted in the computation of EBIT for such period.
"Eligible Receivables" of a Borrower means the gross amount of the
accounts receivable of such Borrower that arose in the ordinary course of
business of such Borrower and are free and clear of any and all Liens and claims
of others, less any re-bills and chargebacks (but excluding chargebacks of
previously disputed items which have been subsequently agreed to by the
customer) of any nature (whether issued, owing, granted, or outstanding), less
customary reserves for: slow paying accounts (which shall be defined as any and
all accounts the payment of which is due and owing for a period of 90 or more
days from the due date of the invoice in respect thereof); credit balances which
are over 90 days past due; that portion of any account which is less than 90
days past due if more than one-half of the total amount in respect of such
account is more than 90 days past due; sales to the other Borrowers, to any
Subsidiary of the Borrowers or sales to any entity affiliated with the Borrowers
in any way; sales to financially unsound customers; dilution (which is a reserve
for such Borrower's normal pattern of returns, discounts, claims, credits,
allowances and other reductions in the Borrowers' receivables).
"Eligible U.K. Inventory" means the net amount of the inventory of the
Borrowers located in the United Kingdom that is owned by such Borrowers free and
clear of any and all Liens or claims of others, including raw materials and
work-in-process, but less any packaging materials and supplies, damaged or
unsalable goods returned or rejected by such Borrower?s customers, goods to be
returned to the Borrowers? suppliers, goods in transit to third parties (other
than the Borrowers? agents or warehouses and goods out at contractors), and less
any reserves required for special
-5-
<PAGE>
order goods (unless built for a specific order), and market value declines.
"Eligible U.S. Inventory" means the net amount of the inventory of the
Borrowers located in the United States of America that is owned by such
Borrowers free and clear of any and all Liens or claims of others, including raw
materials and work-in-process, but less any packaging materials and supplies,
damaged or unsalable goods returned or rejected by such Borrower's customers,
goods to be returned to the Borrowers' suppliers, goods in transit to third
parties (other than the Borrowers' agents or warehouses) and goods out at
contractors, and less any reserves required for special order goods (unless
built for a specific order), and market value declines.
"Eligible U.K. Receivables" means Eligible Receivables of the U.K.
Companies.
"Eligible U.S. Receivables" means Eligible Receivables of the U.S.
Company.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any corporation or trade or business which is a
member of any group of organizations (i) described in section 414(b) or (c) of
the Code of which any Borrower is a member, or (ii) solely for purposes of
potential liability under section 302(c)(11) of ERISA and section 412(c)(11) of
the Code and the lien created under section 302(f) of ERISA and section 412(n)
of the Code, described in section 414(m) or (o) of the Code of which any
Borrower is a member.
"ERISA Event" means (i) a "reportable event" described in section 4043
of ERISA and the regulations thereunder with respect to any Title IV Plan (other
than a reportable event not subject to the provision for 30-day notice to the
PBGC under such regulations); (ii) the filing of a notice of intent to terminate
a
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<PAGE>
Title IV Plan under section 4041 of ERISA; (iii) the institution of proceedings
to terminate a Title IV Plan by the PBGC; (iv) any other event or condition that
might reasonably be expected to constitute grounds under section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Title
IV Plan or the imposition of any material liability under Title IV of ERISA; (v)
an event requiring notification under section 4041(c)(3)(c) of ERISA with
respect to a Title IV Plan; (vi) the withdrawal, as described in ERISA section
4063, of any ERISA Affiliate from a Title IV Plan during a plan year in which it
was a "substantial employer" (as defined in section 4001(a)(2) of ERISA); (vii)
with respect to any Title IV Plan, the cessation of operations at a facility in
the circumstances described in section 4068(f) of ERISA; (viii) the adoption of
an amendment to a Title IV Plan requiring the provision of security to such plan
pursuant to section 307 of ERISA; (ix) with respect to any ERISA Affiliate, the
failure to make a payment required under section 412 of the Code or section 302
of ERISA which failure has not been cured within thirty (30) days; (x) a Pension
Plan having an "accumulated funding deficiency" (as defined in section 412 of
the Code and section 302 of ERISA) whether or not waived; (xi) the application
for, or receipt of, a funding waiver from the Internal Revenue Service with
respect to any Pension Plan; (xii) the adoption of an amendment to any Pension
Plan that pursuant to section 401(a)(29) of the Code or section 307 of ERISA
would result in the loss of tax-exempt status of the trust of which such plan is
a part if either Borrower or an ERISA Affiliate fails to timely provide security
to the Plan in accordance with the provisions thereof or such sections; or
(xiii) a Pension Plan intended to be qualified under section 401(a) of the Code
ceases to be so qualified or its related trust ceases to be exempt under section
501(a) of the Code.
"Event of Default" has the meaning given such term in Section 9.01.
"Facility Documents" means this Agreement, the Notes, the Letters of
Credit, and any Interest Rate Protection Agreement to which the Bank is a party,
as each may be amended or supplemented from time to time.
"Facility Fee" has the meaning assigned to such term in Section
2.11(b).
"Federal Funds Rate" means, for any day, the rate per annum (expressed
on a 365/366 day basis of calculation if the rate on the Variable Rate Loans is
so calculated) equal to the weighted average of the rates on overnight federal
funds transactions as published by the Federal Reserve Bank of New York for such
day (or for any day that is not a Banking Day, for the immediately preceding
Banking Day).
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"Fixed Base Rate" means with respect to any Interest Period for a Fixed
Rate Loan: the rate per annum (rounded upwards, if necessary, to the nearest
1/16 of one percent) quoted at approximately 11:00 a.m. London time by Chase
London two Banking Days prior to the first day of such Interest Period for the
offering to leading banks in the London interbank market of Dollar deposits,
Pound Sterling deposits or deposits of an Alternative Currency, as the case may
be, in immediately available funds, for a period, and in an amount, comparable
to the Interest Period and principal amount of the related Fixed Rate Loan which
shall be made by the Bank and outstanding during such Interest Period.
"Fixed Rate" means, for any Fixed Rate Loan for any Interest Period
therefor, a rate per annum (rounded upwards, if necessary, to the nearest 1/100
of one percent) determined by the Bank to be equal to the quotient of (i) the
Fixed Base Rate for such Loan for such Interest Period, divided by (ii) one
minus the Reserve Requirement for such Loan for such Interest Period.
"Fixed Rate Loan" means any Loan when and to the extent the interest
rate therefor is determined on the basis of the definition "Fixed Base Rate."
"Foreign Exchange Contract" means a contract pursuant to which any
Borrower purchases or sells foreign currency for a fixed Pounds Sterling or
Dollar amount at a future date.
"Forfeiture Proceeding" means any action, proceeding or investigation
affecting any Borrower or any of their Subsidiaries or Affiliates before any
court, governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or the receipt of notice by any such party
that any of them is a suspect in or a target of any governmental inquiry or
investigation, which is reasonably likely to result in an indictment of any of
them or the seizure or forfeiture of any of their property.
"Francis Shaw" means Francis Shaw & Company (Manchester) Limited, a
corporation organized under the laws of England and Wales.
"FSRM" means Francis Shaw Rubber Machinery Limited, a corporation
organized under the laws of England and Wales.
"Funded Debt" means, with respect to any Person, all Debt of such
Person for money borrowed which by its terms matures more than one year from the
date as of which such Funded Debt is incurred, and any Debt of such Person for
money borrowed maturing within one year from such date which is renewable or
extendable at the option of the obligor to a date beyond one year from such date
(whether or not theretofore renewed or extended), including any such
indebtedness renewable or extendable at the option of the obligor
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under, or payable from the proceeds of other indebtedness which may be incurred
pursuant to, the provisions of any revolving credit agreement or other similar
agreement.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect, applied on a basis consistent with those used in
the preparation of the financial statements referred to in Section 5.05 (except
for changes concurred with by the Borrowers' independent public accountants).
"Hazardous Materials" means any substance regulated under Environmental
Laws and includes, without limitation, any hazardous or toxic waste, substance
or material; asbestos or PCBs; petroleum products including gasoline, fuel oil,
crude oil, diesel oil and various constituents of such products; and any other
chemicals, materials or substances which are regulated under Environmental Laws.
"Interest Expense" means all payments made by the Borrowers and their
Subsidiaries of interest, finance charges, the portion of capital lease payments
attributable to the time value of money and other fees, charges and expenses
extracted in exchange for the forbearance from the collection of money.
"Interest Period" means, with respect to any Fixed Rate Loan, the
period commencing on the date such Loan is made, converted from a Variable Rate
Loan or renewed, as the case may be, and ending, as the respective Borrower may
select pursuant to Section 2.06, on the numerically corresponding day in the
first, second or third calendar month thereafter, provided that in the case of
the Term Loan, the initial interest period will commence on the Closing Date and
shall end on March 31, 1998 and for each subsequent interest period thereafter
the respective Borrower may only select as an ending date, the numerically
corresponding date in the third month after commencement and provided further
that each such Interest Period which commences on the last Banking Day of a
calendar month (or on any day for which there is no numerically corresponding
day in the appropriate subsequent calendar month) shall end on the last Banking
Day of the appropriate calendar month.
"Interest Rate Protection Agreements" means any interest rate swap,
cap, collar agreement or similar arrangement between any Borrower and the Bank
providing for the transfer or mitigation of interest risks either generally or
under specific contingencies.
"Issuing Bank" means the Bank or Chase London, as the case may be, in
its capacity as issuer of any Letter of Credit.
"L/C Fee Payment Date" means the date of issuance of each L/C and each
three month anniversary thereof.
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"L/C Obligations" means at any time, an amount equal to the sum of (a)
the aggregate then undrawn and unexpired amount of the then outstanding Letters
of Credit and (b) the aggregate amount of drawings under Letters of Credit which
have not then been reimbursed pursuant to subsection 2.01(e)(iv).
"Letters of Credit" means standby, trade and documentary letters of
credit and bank guarantees and performance bonds issued under Section
2.01(e)(i).
"Lending Office" means, for each type of Loan, the lending office of
the Bank designated as such for such type of Loan on its signature page hereof
or such other office of the Bank (or of an affiliate of the Bank) as the Bank
may from time to time specify to the Borrowers as the office by which like Loans
are to be made and maintained.
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, charge, conditional sale, title
retention agreement, financing lease or other encumbrance or similar right of
others, or any agreement to give any of the foregoing.
"Loans" mean the Revolving Credit Loans and the Term Loan made by the
Bank pursuant to Section 2.01.
"Margin" means, (a) for a Variable Rate Loan, 0% and (b) for a Fixed
Rate Loan, 1.25% if such Loan is a Revolving Credit Loan and 1.75% if such Loan
is a Term Loan.
"Multiemployer Plan" means a Plan defined as such in section 3(37) of
ERISA to which contributions have been made by either of the Borrowers or any
ERISA Affiliate, or as to which either of the Borrowers or any ERISA Affiliate
has any direct or indirect fixed or contingent liability.
"Notes" means the Revolving Credit Note and the Term Note.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Pension Plan" means a Plan (including, but not limited to, a Title IV
Plan) that is an "employee benefit pension plan" as defined in section 3(2) of
ERISA.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by any of the
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Borrowers or any ERISA Affiliate, or as to which any of the Borrowers or any
ERISA Affiliate has any direct or indirect fixed or contingent liability,
excluding any Multiemployer Plan.
"Pounds Sterling" and the sign "?" mean lawful money of the United
Kingdom.
"Principal Office" means the principal office of the Bank, presently
located at 270 Park Avenue, New York, New York 10017.
"PRC" means PRC Fabrications Limited, a corporation organized under the
laws of the England and Wales.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulatory Change" means any change after the date of this Agreement
in United States federal, state, municipal or United Kingdom or other foreign
laws or regulations (including without limitation Regulation D) or the adoption
or making after such date of any interpretations, directives or requests
applying to a class of banks including the Banks of or under any United States
federal, state, municipal or United Kingdom or other foreign laws or regulations
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration thereof.
"Reimbursement Obligation" means the obligation of the Borrowers to
reimburse the Bank pursuant to subsection 2.01(e)(iv) for amounts drawn under
the Letters of Credit.
"Reserve Requirement" means, for any Fixed Rate Loan for any Interest
Period therefor, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding $1,000,000,000 against
"Eurocurrency liabilities" (as such term is used in Regulation D). Without
limiting the effect of the foregoing, the Reserve Requirement shall reflect any
other reserves required to be maintained by such member banks by reason of any
Regulatory Change against (i) any category of liabilities which includes
deposits by reference to which the Fixed Base Rate is to be determined as
provided in the definition of "Fixed Base Rate" in this Section 1.01 or (ii) any
category of extensions of credit or other assets which include Fixed Rate Loans.
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"Retiree Welfare Plan" means a Welfare Plan that provides for
continuing benefits or coverage for any participant or any beneficiary of a
participant after such participant's termination of employment, other than as
may be required by COBRA at the expense of the participant or the beneficiary of
the participant.
"Retiree Welfare Plan Liability" means with respect to a Retiree
Welfare Plan the total value as of the determination date of all expected
postretirement benefit obligations determined in accordance with the Financial
Accounting Standard No. 106, determined without regard to the effective date of
the standards set forth in the Financial Accounting Standard No. 106.
"Revolving Credit Commitment" means the obligation of the Bank to make
Revolving Credit Loans under this Agreement in the aggregate principal amount of
$18,500,000 or an equivalent amount denominated in Pounds Sterling, or an
Alternative Currency, as such amount may be reduced or otherwise modified from
time to time.
"Revolving Credit Loan" has the meaning assigned to such term in
Section 2.01(a) hereof.
"Revolving Credit Note" means the promissory note issued by the
Borrowers in the form of Exhibit A-1 hereto evidencing the Revolving Credit
Loans made by the Bank hereunder and all promissory notes delivered in
substitution or exchange therefor, as amended or supplemented from time to time.
"Revolving Credit Termination Date" means December 31, 1999; provided
that if such date is not a Banking Day, the Revolving Credit Termination Date
shall be the next succeeding Banking Day (or, if such next succeeding Banking
Day falls in the next calendar month, the next preceding Banking Day); and
provided further that the Bank may extend the Revolving Credit Termination Date
by providing written notice to the Borrowers.
"SEC" means the Securities and Exchange Commission.
"SEC Filings" means the U.S. Company's Registration Statement on Form
S-1, File No. 33-43539 as filed with the SEC on January 13, 1992, pursuant to
the Securities Act of 1933, as amended, and any subsequent report on Form 10-Q
and on Form 10-K.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which at least a majority of the securities or other ownership
interests having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by such Person.
"Tangible Net Worth" means, at any date of determination thereof,
consolidated stockholders equity of the Borrowers,
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determined in accordance with GAAP, eliminating the effect of accumulated
foreign currency translation adjustments therefrom and adding thereto (a)
subordinated debt which is subordinated to all obligations owed to the Bank on
terms and conditions acceptable to the Bank and (b) an amount equal to any
reserve or charge, if any, in an amount not in excess of $700,000 resulting from
FASB 106.
"Term Loan" has the meaning assigned to such term in Section 2.01(b)
hereof.
"Term Loan Commitment" means the obligation of the Bank to make the
Term Loan under this Agreement, in the aggregate principal amount of $6,500,000
or an equivalent amount in Pounds Sterling.
"Term Note" means the promissory note issued by Farrel Shaw in the form
of Exhibit A-2 hereto evidencing the Term Loan made by the Bank hereunder and
all promissory notes delivered in substitution or exchange therefor, as amended
or supplemented from time to time.
"Term Note Termination Date" means December 31, 2002; provided that if
such date is not a Banking Day, the Termination Date shall be the next
succeeding Banking Day (or, if such next succeeding Banking Day falls in the
next calendar month, the next preceding Banking Day); and provided further that
the Bank may extend the Termination Date by providing written notice to the
Borrowers.
"Title IV Plan" means a Plan covered by Title IV of ERISA.
"Transaction Fee" has the meaning assigned to such term in Section
2.11(c).
"U.K. Base Rate" means that rate of interest from time to time
announced by Chase London at its principal office in the United Kingdom as its
base rate.
"Unfunded Benefit Liabilities" means, with respect to any Plan, the
amount (if any) by which the present value of all benefit liabilities (within
the meaning of section 4001(a)(16) of ERISA) under the Plan exceeds the fair
market value of all Plan assets allocable to such benefit liabilities, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of either
Borrower or any ERISA Affiliate under Title IV of ERISA.
"Uniform Customs" means the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, as the same may be amended from time to time.
"U.S. Prime Rate" means that rate of interest from time to time
announced by the Bank at the Principal Office as its prime commercial lending
rate.
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"Variable Rate" means, for any day, (a) in the case of Dollar
borrowing, the higher of (i) the Federal Funds Rate for such day plus 1/4 of one
percent and (ii) the U.S. Prime Rate for such day, and (b) in the case of Pounds
Sterling borrowings, the U.K. Base Rate plus one and 1/4 percent.
"Variable Rate Loan" means any Loan when and to the extent the interest
rate for such Loan is determined in relation to the Variable Rate.
"Welfare Plan" means a Plan that is an "employee welfare benefit plan"
within the meaning of section 3(1) of ERISA.
Section 1.2. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP.
ARTICLE 2. THE CREDIT
Section 2.01. The Loans. (a) Subject to the terms and conditions of
this Agreement, the Bank agrees to make revolving credit loans (the "Revolving
Credit Loans") to any Borrower from time to time from and including the date
hereof to and including the Revolving Credit Termination Date
(i) in the case of each of the U.K. Companies, up to but not
exceeding in the aggregate principal amount at any one time
outstanding, the amount of the lesser of
(A) the Revolving Credit Commitment less L/C
Obligations less the aggregate principal amount of Revolving
Credit Loans outstanding from the Bank to the U.S. Company and
the other U.K. Company;
(B) the Borrowing Base less L/C Obligations less the
aggregate principal amount of Revolving Credit Loans
outstanding from the Bank to the U.S. Company and the other
U.K. Company less the principal amount of the Term Loan
outstanding; or
(C) the Direct Borrowing Sublimit less the aggregate
principal amount of Revolving Credit Loans outstanding from
the Bank to the U.S. Company and the other U.K. Company; and
(ii) in the case of the U.S. Company, up to but not exceeding
in the aggregate principal amount at any one time outstanding, the
amount of the lesser of
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(A) the Revolving Credit Commitment less L/C
Obligations less the principal amount of Revolving Credit
Loans outstanding from the Bank to the U.K. Companies;
(B) the Borrowing Base (U.S.) less L/C Obligations
issued by the Bank for the benefit of the U.S. Company less
the excess, if any, of (x) the Aggregate Outstandings from the
Bank to or for the benefit of the U.K. Companies over (y) the
sum of 85% of the Eligible U.K. Receivables plus 50% of
Eligible U.K. Inventory less the principal amount of the Term
Loan outstanding; or
(C) the excess, if any, of the Direct Borrowing
Sublimit over the principal amount of Revolving Credit Loans
outstanding from the Bank to the U.K. Companies.
The Revolving Credit Loans shall be due and payable on the Revolving Credit
Termination Date.
(b) Subject to the terms and conditions of this Agreement, the Bank
agrees to make a term loan (the "Term Loan") to Farrel Shaw on the Closing Date,
in an amount equal to the amount of its Term Loan Commitment. The Term Loan
shall be repaid in twenty quarterly equal installments of principle each such
installment to be payable on the last day of each March, June, September and
December beginning on March 31, 1998 and ending on the Term Loan Termination
Date.
(c) The Loans may be made in Dollars, Pounds Sterling or an Alternative
Currency as follows: (i) any Loan made pursuant to Subsection 2.01(f) shall be
made in Pounds Sterling; (ii) any other Variable Rate Loan shall be made in
Dollars; (iii) the Term Loan shall be made in Pounds Sterling; and (iv) any
Fixed Rate Loan shall be made in the currency specified by the respective
Borrower in the notice of borrowing received by the Bank in accordance with
Section 2.08.
(d) The Loans may be outstanding as Variable Rate Loans or Fixed Rate
Loans (each a "type" of Loan) as follows: (i) any Loan outstanding pursuant to
subsection 2.01(f) shall be a Variable Rate Loan; (ii) any Loan outstanding in
an Alternative Currency shall be a Fixed Rate Loan; and (iii) any other Loan
outstanding shall be the type of Loan specified by the respective Borrower in
the notice of such borrowing or conversion thereof received by the Bank in
accordance with Section 2.08.
(e) (i) Subject to the terms and conditions hereof, the Bank agrees to
issue Letters of Credit for the account of any Borrower on any Banking Day prior
to the Revolving Credit Termination Date in such form as may be approved from
time to time by the Bank; provided that the Bank shall have no obligation to
issue any Letter of Credit.
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(A) for the benefit of any U.K. Company if, after giving
effect to such issuance, the Aggregate Outstandings from the Bank to or
for the benefit of the U.K. Companies (other than the principal amount
of the Term Loan outstanding) would exceed the lesser of
(1) the Revolving Credit Commitment less the
Aggregate Outstandings from the Bank to or for the benefit of
the U.S. Company; or
(2) the Borrowing Base less the Aggregate
Outstandings from the Bank to or for the benefit of the U.S.
Company; or
(B) for the benefit of the U.S. Company if, after giving
effect to such issuance, the Aggregate Outstandings from the Bank to or
for the benefit of the U.S. Company would exceed the lesser of
(1) the Revolving Credit Commitment less the
Aggregate Outstandings from the Banks to or for the benefit of
the U.K. Companies (other than the principal amount of the
Term Loan outstanding); or
(2) the Borrowing Base (U.S.) less the excess, if
any, of (x) the Aggregate Outstandings from the Bank to or for
the benefit of the U.K. Companies over (y) the sum of 85% of
the Eligible U.K. Receivables plus 50% of Eligible U.K.
Inventory, less the principal amount of the Term Loan
outstanding.
Each Letter of Credit shall be denominated in Dollars, Pounds Sterling
or an Alternative Currency. On the Revolving Credit Termination Date each
Borrower for whose benefit a Letter of Credit has been issued must (i) deposit
in accounts maintained at the Issuing Bank(s) cash reserves for the benefit of
the Issuing Bank(s) in the amount of all L/C Obligations for any Letters of
Credit of such Issuing Bank(s) to remain outstanding for the benefit of such
Borrower after the Revolving Credit Termination Date including reasonable
estimated commissions, out-of-pocket charges and handling fees, or (ii)
otherwise provide for a financial institution acceptable to the Bank to
indemnify the Issuing Bank(s) against loss in connection with such outstanding
L/C Obligations issued for the benefit of such Borrower pursuant to
indemnification documentation in form and substance satisfactory to the Bank.
(ii) Any Borrower may from time to time request that the Bank
issue a Letter of Credit by delivering to the Bank at its address for notices
specified herein an Application therefor, completed to the satisfaction of the
respective Issuing Bank, and such other certificates, documents and other papers
and information
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as the Issuing Bank may reasonably request. Upon receipt of any Application, the
Issuing Bank will process such Application and the certificates, documents and
other papers and information delivered to it in connection therewith in
accordance with its customary procedures and shall promptly issue the Letter of
Credit in such customized form as may reasonably be requested by the Borrower
(but in no event shall the Issuing Bank issue any Letter of Credit later than
five Banking Days after receipt of the Application therefor and all such other
certificates, documents and other papers and information relating thereto) by
issuing the original of such Letter of Credit to the beneficiary thereof or as
otherwise may be agreed by the Issuing Bank and the respective Borrower. The
Issuing Bank shall furnish a copy of such Letter of Credit to the respective
Borrower promptly following the issuance thereof.
(iii) (A) The Borrowers shall pay to the Issuing Bank a letter
of credit commission with respect to each Letter of Credit, payable in the same
currency as that in which such Letter of Credit is denominated, computed at the
rate per annum equal to 7/8 of one percent, calculated on the basis of a year of
360 days for the actual days elapsed, of the aggregate undrawn amount under such
Letter of Credit on the date on which such fee is calculated. Such commissions
shall be payable quarterly in advance on each L/C Fee Payment Date to occur
after the issuance of a Letter of Credit and shall be nonrefundable.
(B) In the case of an assignment of all or any part of
the Loans or Commitments pursuant to Section 11.05 of this Agreement, the letter
of credit commission referred to in Clause (A) above shall be paid to the
Issuing Bank for the account of the participating banks, pro rata according
to their respective commitments.
(iv) The Borrowers agree to reimburse the Issuing Bank for
each draft presented under any Letter of Credit and paid by the Issuing Bank for
the amount of (a) such draft so paid and (b) any taxes (other than income
taxes), fees, charges or other costs or expenses incurred by the Issuing Bank in
connection with such payment. Each such payment shall be made to the Issuing
Bank at its address for notices specified herein in the same currency as that in
which such Letter of Credit is denominated and in immediately available funds on
the date that such draft is paid. It is expressly understood and agreed that (a)
the reimbursement obligations and fees with respect to the Letters of Credit
issued for the benefit of the U.S. Company hereunder are solely the obligation
of the U.S. Company and that the U.K. Companies shall have no liability with
respect to such obligations and (b) all other obligations of the Borrowers
pursuant to Section 2.01(e) are the joint and several obligations of the
Borrowers.
(v) The Borrowers' obligations under this subsection shall be
absolute and unconditional under any and all circumstances
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and irrespective of any set-off, counterclaim or defense to payment which the
Borrowers may have or have had against the Bank or any beneficiary of a Letter
of Credit. The Borrowers also agree with the Bank that the Bank shall not be
responsible for, and the Borrowers' Reimbursement Obligations under subsection
(iv) shall not be affected by, among other things, the validity or genuineness
of documents or of any endorsements thereon, even though such documents shall in
fact prove to be invalid, fraudulent or forged, or any dispute between or among
the Borrowers and any beneficiary of any Letter of Credit or any other party to
which such Letter of Credit may be transferred or any claims whatsoever of the
Borrowers against any beneficiary of such Letter of Credit or any such
transferee. The Bank shall not be liable for any error, omission, interruption
or delay in transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit, except for errors or
omissions caused by the Issuing Bank's gross negligence or willful misconduct.
The Borrowers agree that any action taken or omitted by the Bank under or in
connection with any Letter of Credit or the related drafts or documents, if done
in the absence of gross negligence or willful misconduct and in accordance with
the standards of care specified in the Uniform Customs, shall be binding on the
Borrowers and shall not result in any liability of the Bank to the Borrowers.
(vi) If any draft shall be presented for payment under any
Letter of Credit, the Issuing Bank shall promptly notify the Borrowers of the
date and amount thereof. The responsibility of the Issuing Bank to the Borrowers
in connection with any draft presented for payment under the Letter of Credit
shall, in addition to any payment obligation expressly provided for in such
Letter of Credit, be limited to determining that the documents (including each
draft) delivered under such Letter of Credit in connection with such presentment
are in conformity with such Letter of Credit.
(vii) To the extent that any provision of any Application
related to any Letter of Credit is inconsistent with the provisions of this
Section 2.01(e), the provisions of this Section 2.01(e) shall apply.
(f) Subject to the terms and conditions hereof, the Bank shall
automatically advance as Revolving Credit Loans hereunder, without the
requirement of a formal borrowing notice from the Borrowers, up to an aggregate
amount of ?1,000,000 to the U.K. Companies? demand deposit accounts maintained
at Chase London from time to time in order to provide sufficient available funds
to honor checks and drafts drawn on such accounts. Each such check and draft
requiring any advance under this subsection 2.01(f) shall constitute a request
by the Borrowers to the Bank for the borrowing of a Variable Rate Loan in the
amount of such advance on the date of such check or draft.
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Section 2.02. The Note. The Revolving Credit Loans shall be evidenced
by a single promissory note in favor of the Bank, substantially in the form of
Exhibit A-1, dated the Closing Date , duly completed and executed. The Term Loan
shall be evidenced by a single promissory note in favor of the Bank,
substantially in the form of Exhibit A-2, dated the Closing Date, duly completed
and executed.
Section 2.03. Purpose. Farrel Shaw shall use the proceeds of the Term
Loan and the Revolving Credit Loans borrowed by it to repay the funds borrowed
from Farrel Limited to finance the Acquisition and for general corporate
purposes and the other Borrowers shall use the proceeds of the Revolving Credit
Loans for general corporate purposes. Such proceeds shall not be used for the
purpose, whether immediate, incidental or ultimate, of buying or carrying
"margin stock" within the meaning of Regulation U.
Section 2.04. Borrowing Procedures. Any Borrower which intends to
effect a borrowing shall give the Bank notice of each borrowing to be made
hereunder as provided in Section 2.08. Not later than 12:00 noon New York City
time on the date of such borrowing in the case of a borrowing of a Variable Rate
Loan or 12:00 noon New York City time on the Banking Day three Banking Days
prior to the date of such borrowing in the case of a Fixed Rate Loan, the Bank
shall through the appropriate Lending Office and subject to the conditions of
this Agreement, make the amount of the Loan to be made on such day available to
such Borrower, in immediately available funds, by the Bank crediting an account
of such Borrower designated by such Borrower and maintained at the appropriate
Lending Office.
Section 2.05. Prepayments and Conversions. The Borrowers shall have the
right to make prepayments of principal, or to convert one type of Loan into
another type of Loan, at any time or from time to time; provided that: (a) the
respective Borrower shall give the Bank notice of each such prepayment or
conversion as provided in Section 2.08; (b) Fixed Rate Loans may be prepaid or
converted only on the last day of an Interest Period for such Loans unless the
Borrowers concurrently with any such prepayment or conversion shall pay to the
Banks any compensation called for under Section 3.04. In the case of the Term
Loan, all prepayments shall be applied to the principal installments of the Term
Loan in the inverse order of their maturities.
Section 2.06. Interest Periods; Renewals. (a) In the case of each Fixed
Rate Loan, the respective Borrower shall select an Interest Period of any
duration in accordance with the definition of Interest Period in Section 1.01,
subject to the following limitation: (i) no Interest Period may extend beyond
the Revolving Credit Termination Date (in the case of a Revolving Credit Loan)
or the Term Loan Termination Date (in the case of the Term Loan); (ii)
notwithstanding clause (i) above, no Interest Period shall have a
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duration less than one month, and if any such proposed Interest Period would
otherwise be for a shorter period, such Interest Period shall not be available;
(iii) if an Interest Period would end on a day which is not a Banking Day, such
Interest Period shall be extended to the next Banking Day, unless such Banking
Day would fall in the next calendar month in which event such Interest Period
shall end on the immediately preceding Banking Day; and (iv) no more than five
Interest Periods may be outstanding at any one time.
(b) Upon notice to the Banks as provided in Section 2.08, the
respective Borrower may renew any Fixed Rate Loan on the last day of the
Interest Period therefor as the same type of Loan with an Interest Period of the
same or different duration in accordance with the limitations provided above. If
such Borrower shall fail to give notice to the Bank of such a renewal, such
Fixed Rate Loan shall automatically become a Variable Rate Loan at the then
applicable Dollar equivalent on the last day of the current Interest Period;
provided that the foregoing shall not prevent the conversion of any type of Loan
into another type of Loan in accordance with Section 2.05.
Section 2.07. Changes of Commitment. Immediately following the making
of the Term Loan, the Term Loan Commitment shall be terminated on the Closing
Date and shall not be reinstated. The Borrowers shall have the right to reduce
or terminate the amount of unused Revolving Credit Commitment at any time or
from time to time, provided that: (a) the Borrowers shall each give notice of
each such reduction or termination to the Bank as provided in Section 2.08; and
(b) each partial reduction shall be in an aggregate amount at least equal to
$1,000,000. The Revolving Credit Commitment once reduced or terminated may not
be reinstated.
Section 2.08. Certain Notices. Notices by the respective Borrower to
the Bank of each borrowing pursuant to Section 2.04, and each prepayment or
conversion pursuant to Section 2.05, each renewal pursuant to Section 2.06(b),
and each reduction or termination of the Revolving Credit Commitment pursuant to
Section 2.07 shall be irrevocable and shall be effective only if received by the
Bank not later than 12:00 noon New York City time, and (a) in the case of
borrowings and prepayments of, conversions into and (in the case of Fixed Rate
Loans) renewals of (i) Variable Rate Loans, given on the Banking Day therefor;
(ii) Fixed Rate Loans, given three Banking Days prior thereto; (b) in the case
of reductions or termination of the Revolving Credit Commitment, given three
Banking Days prior thereto. Each such notice shall specify the Loans to be
borrowed, prepaid, converted or renewed and the amount (subject to Section 2.09)
and type of the Loan to be borrowed or converted, or prepaid or renewed (and, in
the case of a conversion, the type of Loans to result from such conversion, the
currency in which such Loan is to be made and, in the case of a Fixed Rate Loan,
the Interest Period therefor) and the date of the borrowing or prepayment, or
conversion or renewal (which shall be
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a Banking Day). Each such notice of reduction or termination shall specify the
amount of the Revolving Credit Commitment to be reduced or terminated.
Section 2.09. Minimum Amounts. Except for (i) Loans made pursuant to
Section 2.01(f), and (ii) Variable Rate Loans which exhaust the full remaining
amount of the Revolving Credit Commitment, prepayments or conversions which
result in the prepayment or conversion of all Loans of a particular type or the
entire Term Loan, each borrowing, prepayment, conversion and renewal of
principal of Loans of a particular type shall be in an amount at least equal to
(i) $100,000 in the case of Variable Rate Loans and (ii) $1,000,000 or larger
amounts in increments of $100,000 or the respective Alternative Currency
equivalent, in the case of Fixed Rate Loans made in Dollars or such Alternative
Currency, and ?500,000 or larger amounts in increments of ?100,000 in the case
of Fixed Rate Loans made in Pounds Sterling (borrowings, prepayments,
conversions or renewals of or into Loans of different types or, in the case of
Fixed Rate Loans, having different Interest Periods at the same time hereunder
to be deemed separate borrowings, prepayments, conversions and renewals for the
purposes of the foregoing, one for each type of Interest Period). Anything in
this Agreement to the contrary notwithstanding, the aggregate principal amount
of Fixed Rate Loans having concurrent Interest Periods shall be at least equal
to $1,000,000, $500,000 or such amounts in any Alternative Currency as shall be
determined by the Bank in the case of Fixed Rate Loans made in Dollars, Pounds
Sterling or an Alternative Currency, respectively. The Bank may in its sole
discretion agree to advance Fixed Rate Loans in smaller denominations upon the
request of the Borrowers.
Section 2.10. Interest. (a) Interest shall accrue on the outstanding
and unpaid principal amount of each Loan for the period from and including the
date of such Loan to but excluding the date such Loan is due at the following
rates per annum: (i) for a Variable Rate Loan, at a variable rate per annum
equal to the Variable Rate plus the Margin and (ii) for a Fixed Rate Loan, at a
fixed rate equal to the Fixed Rate plus the Margin. If the principal amount of
any Loan and any other amount payable by the Borrowers hereunder including
Letters of Credit reimbursement obligations or under the Notes shall not be paid
when due (at stated maturity, by acceleration or otherwise), interest shall
accrue on such amount to the fullest extent permitted by law from and including
such due date to but excluding the date such amount is paid in full at the
Default Rate.
(b) The interest rate on each Variable Rate Loan shall change when the
Variable Rate changes and interest on each such Loan shall be calculated on the
basis of a year of 360 days for the actual number of days elapsed. Interest on
each Fixed Rate Loan shall be calculated on the basis of a year of 360 days for
the actual number of days elapsed.
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(c) Accrued interest shall be due and payable in arrears upon any
payment of principal or conversion and (i) for each Variable Rate Loan, on the
last day of each March, June, September and December, commencing the first such
date after such Loan; (ii) for each Fixed Rate Loan, on the last day of the
Interest Period with respect thereto; provided that interest accruing at the
Default Rate shall be due and payable from time to time on demand of the Bank.
(d) Interest shall be payable in the currency which is applicable to
each respective loan.
Section 2.11. Fees. (a) The Borrowers shall pay to the Bank a
commitment fee (the "Commitment Fee") in Dollars on the daily average of the
lesser of (i) the Direct Borrowing Sublimit less the amount of the Revolving
Credit Loans outstanding and (ii) the Revolving Credit Commitment less the
Aggregate Outstandings (excluding the Term Loan) for the period from and
including the Closing Date to the earlier of the date the Revolving Credit
Commitment is terminated or the Revolving Credit Termination Date at a rate
equal to 3/8 of one percent per annum, calculated on the basis of a year of 360
days for the actual number of days elapsed. The accrued Commitment Fee shall be
due and payable in arrears upon any termination of the Revolving Credit
Commitment and on the last day of each March, June, September and December,
commencing on the first such date after the Closing Date.
(b) Agency Fee; Facility Fee. The Borrowers shall pay to the Bank an
agency fee (the "Agency Fee") of $25,000 per annum which shall be due and
payable in arrears on March 31 of each year commencing March 31, 1998 and on the
termination date of the Revolving Credit Commitment for the pro rata portion of
the year to such date.
(c) Transaction Fee. The Borrowers shall pay to the Bank a transaction
fee (the "Transaction Fee") equal to $50,000 on the Closing Date.
(d) Advisory Fee. Upon the parties? execution of this Agreement and the
closing of the transactions contemplated hereby, the Bank shall be deemed to
have earned the balance of the $80,000 advisory fee set forth in the Fifth
Amendment to the Existing Credit Agreement, which amount was previously paid by
the U.S. Company, and thereupon the Letter Agreement dated October 30, 1995
shall be deemed terminated and of no further force or effect.
Section 2.12. Payments Generally. All payments under this Agreement or
the Notes shall be made in Dollars, Pounds Sterling or in the respective
Alternative Currency, as appropriate, in immediately available funds not later
than 1:00 p.m. New York City time on the relevant dates specified above (each
such payment made after such time on such due date to be deemed to have been
made on
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the next succeeding Banking Day) at the applicable Lending Office. The Bank may
(but shall not be obligated to) debit the amount of any such payment which is
not made by such time to any ordinary deposit account of any Borrower with the
Bank. The Borrowers shall, at the time of making each payment under this
Agreement, the Notes, the Letters of Credit or any other Facility Document,
specify to the Bank the principal, other amount payable by the Borrowers under
this Agreement, the Notes, the Letters of Credit or such other Facility Document
to which such payment is to be applied (and in the event that it fails to so
specify, or if a Default or Event of Default has occurred and is continuing, the
Bank may apply such payment as it may elect in its sole discretion). If the due
date of any payment under this Agreement, the Notes, the Letters of Credit or
any other Facility Document would otherwise fall on a day which is not a Banking
Day, such date shall be extended to the next succeeding Banking Day and interest
shall be payable for any principal so extended for the period of such extension.
Section 2.13. No Withholding; Gross-Up. All payments on account of
principal of an interest on the Notes and all other amounts payable under this
Agreement, the Notes, the Letters of Credit or the other Facility Documents
shall be made without withholding for or on account of any present or future
taxes imposed by any Governmental Authority. If any such withholding is so
required, each Borrower shall make the withholding and pay the amount withheld
to the appropriate Governmental Authority before penalties attach thereto or
interest accrues thereon.
Section 2.14. Currency Equivalent. For purposes of the provisions of
this Article 2, (a) the equivalent in Dollars of Pounds Sterling or any
Alternative Currency shall be determined each month on the earlier of (i) the
tenth day of such month or (ii) the date the Borrowers deliver to the Bank a
Borrowing Base Certificate and a Backlog Certificate pursuant to Section
6.08(c), by using the quoted spot rate at which the Bank offers to exchange
Dollars for such currency at 11:00 A.M. (New York City time) on such date and
shall remain in effect until determined in the next subsequent month and (b) the
equivalent in any Pounds Sterling or any Alternative Currency of Dollars shall
be determined each month on the earlier of (i) the tenth day of such month or
(ii) on the date the Borrowers deliver to the Bank a Borrowing Base Certificate
and a Backlog Certificate pursuant to Section 6.08(c) by using the quoted spot
rate at which the Bank offers to exchange such currency for Dollars at 11:00
A.M. (New York time) on such date and shall remain in effect until determined in
the next subsequent month.
Section 2.15. Foreign Exchange. Upon request of any Borrower the Bank
will, subject to market conditions and availability, enter into Foreign Exchange
Contracts for the account of the Borrowers in amounts up to ?3,000,000. Such
Foreign Exchange Contracts shall be subject to the Bank's normal policies and
procedures for such transactions, including its underwriting
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requirements and the payment by the Borrowers of the Bank's customary fees and
charges for such transactions, and shall be accomplished pursuant to
documentation satisfactory in all respects to the Bank. Any such documentation
shall be deemed to be Facility Documents hereunder and under the terms and
provisions of the other Facility Documents.
ARTICLE 3. YIELD PROTECTION; ILLEGALITY; ETC.
Section 3.01. Additional Costs. (a) The Borrowers shall pay to the Bank
from time to time on demand such amounts as the Bank may reasonably determine to
be necessary to compensate it for any costs which the Bank reasonably determines
are attributable to the making or maintaining any Fixed Rate Loans under this
Agreement or the Notes or the obligation to make any such Loans hereunder, or
any reduction in any amount receivable by the Bank hereunder in respect of any
such Loans or such obligation (such increases in costs and reductions in amounts
receivable being herein called "Additional Costs"), resulting from any
Regulatory Change which: (i) changes the basis of taxation of any amounts
payable to the Bank under this Agreement or the Notes in respect of any of such
Loans (other than taxes imposed on the overall net income of the Bank or of any
Lending Office for any of such Loans by the jurisdiction in which the Principal
Office, the principal office of Chase London or such Lending Office is located);
or (ii) imposes or modifies any reserve, special deposit, deposit insurance or
assessment, minimum capital, capital ratio or similar requirements relating to
any extensions of credit or other assets of, or any deposits with or other
liabilities of, the Bank (including any of such Loans or any deposits referred
to in the definition of "Fixed Base Rate" in Section 1.01); or (iii) imposes any
other condition affecting this Agreement or the Notes (or any of such extensions
of credit or liabilities). The Bank will notify the Borrowers of any event
occurring after the date of this Agreement which will entitle the Bank to
compensation pursuant to this Section 3.01(a) as promptly as practicable after
it obtains knowledge thereof and determine to request such compensation.
(b) Without limiting the effect of the foregoing provisions of this
Section 3.01, in the event that, by reason of any Regulatory Change, the Bank
either (i) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
the Bank which includes deposits by reference to which the interest rate on
Fixed Rate Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of the Bank which includes Fixed Rate Loans
or (ii) becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if the Bank so elects by notice
to the Borrowers, the obligation of the Bank to make or renew, and to convert
Loans of any other type into, Loans of such type hereunder shall be
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suspended until the date such Regulatory Change ceases to be in effect, and the
Borrowers shall on the last day(s) of the then current Interest Period(s) for
the outstanding Loans of such type, either prepay such Loans or convert such
Loans into another type of Loan in accordance with Section 2.05.
(c) Without limiting the effect of the foregoing provisions of this
Section 3.01 (but without duplication), the Borrowers shall pay to the Bank from
time to time on request such amounts as the Bank may reasonably determine to be
necessary to compensate the Bank for any costs which it reasonably determines
are attributable to the maintenance by it or any of its affiliates pursuant to
any law or regulation of any jurisdiction or any interpretation, directive or
request (whether or not having the force of law and whether in effect on the
date of this Agreement or thereafter) of any court or governmental or monetary
authority of capital in respect of its Loans hereunder or its obligation to make
Loans hereunder (such compensation to include, without limitation, an amount
equal to any reduction in return on assets or equity of the Bank to a level
below that which it could have achieved but for such law, regulation,
interpretation, directive or request). The Bank will notify the Borrowers if it
is entitled to compensation pursuant to this Section 3.01(c) as promptly as
practicable after it determines to request such compensation.
(d) Determinations and allocations by the Bank for purposes of this
Section 3.01 of the effect of any Regulatory Change pursuant to subsections (a)
or (b), or of the effect of capital maintained pursuant to subsection (c), on
the costs of making or maintaining Loans or the obligation to make Loans, or on
amounts receivable by, or the rate of return to, the Bank in respect of Loans or
such obligation, and of the additional amounts required to compensate the Bank
under this Section 3.01, shall be conclusive, provided that such determinations
and allocations are made on a reasonable basis.
Section 3.02. Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if the Bank reasonably determines (which determination
shall be conclusive) that:
(a) quotations of interest rates for the relevant deposits referred to
in the definition of "Fixed Base Rate" in Section 1.01 are not being provided in
the relevant amounts or for the relevant maturities for purposes of determining
the rate of interest for any type of Fixed Rate Loans as provided in this
Agreement; or
(b) the relevant rates of interest referred to in the definition of
"Fixed Base Rate" in Section 1.01 upon the basis of which the rate of interest
for any type of Fixed Rate Loans is to be determined do not adequately cover the
cost to the Bank of making or maintaining such Loans; then the Bank shall give
the Borrowers prompt notice thereof, and so long as such condition
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remains in effect, the Bank shall be under no obligation to make or renew Loans
of such type or to convert Loans of any other type into Loans of such type and
the Borrowers shall, on the last day(s) of the then current Interest Period(s)
for the outstanding Loans of the affected type, either prepay such Loans or
convert such Loans into another type of Loans in accordance with Section 2.05.
Section 3.03. Illegality. Notwithstanding any other provision in this
Agreement, in the event that it becomes unlawful for the Bank or any Lending
Office to (a) honor its obligation to make or renew Fixed Rate Loans hereunder
or convert Loans of any type into Loans of such type, or (b) maintain Fixed Rate
Loans hereunder, then the Bank shall promptly notify the Borrowers thereof and
the Bank's obligation to make or renew Fixed Rate Loans and to convert other
types of Loans into Loans of such type hereunder shall be suspended until such
time as the Bank may again make, renew or convert and maintain such affected
Loans and the Borrowers shall, on the last day(s) of the then current Interest
Period for the outstanding Fixed Rate Loans, as the case may be (or on such
earlier date as the Bank may specify to the Borrowers and, if the Bank shall
require such prepayment, the Borrowers shall not be liable to pay the
compensation otherwise due pursuant to Section 3.04), either prepay such Loans
or convert such Loans into another type of Loans in accordance with Section
2.05.
Section 3.04. Certain Compensation. The Borrowers shall pay to the
Bank, upon the request of the Bank, such amount or amounts as shall be
sufficient (in the reasonable opinion of the Bank) to compensate the Bank for
any loss, cost or expense which the Bank reasonably determines is attributable
to:
(a) any payment, prepayment, conversion or renewal of a Fixed Rate Loan
on a date other than the last day of an Interest Period for such Loan (whether
by reason of acceleration or otherwise); or
(b) any failure by the Borrowers to borrow, convert into or renew a
Fixed Rate Loan to be made, converted into or renewed by the Bank on the date
specified therefor in the relevant notice under Section 2.04, 2.05 or 2.06, as
the case may be.
Without limiting the foregoing, such compensation shall include an
amount equal to the excess, if any, of: (i) the amount of interest which
otherwise would have accrued on the principal amount so paid, prepaid, converted
or renewed or not borrowed, converted or renewed for the period from and
including the date of such payment, prepayment or conversion or failure to
borrow, convert or renew to but excluding the last day of the then current
Interest Period for such Loan (or, in the case of a failure to borrow, convert
or renew, to but excluding the last day of the Interest Period for such Loan
which would have commenced on the date specified therefor in the relevant
notice) at the applicable rate of interest for such Loan provided for herein;
over (ii) the
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amount of interest (as reasonably determined by the Bank) the Bank would have
bid in the London interbank market (if such Loan is a Fixed Rate Loan) for
deposits in Dollars, Pounds Sterling or any applicable Alternative Currency, as
the case may be, for amounts comparable to such principal amount and maturities
comparable to such period. A determination of the Bank as to the amounts payable
pursuant to this Section 3.04 shall be conclusive absent manifest error.
ARTICLE 4. CONDITIONS PRECEDENT
Section 4.01. Documentary Conditions Precedent to Initial Borrowing.
The obligation of the Bank to make the Loans constituting the initial borrowing
or to issue any Letters of Credit is subject to the condition precedent that the
Bank shall have received on or before the Closing Date each of the following, in
form and substance satisfactory to the Bank and its counsel:
(a) counterparts of this Agreement duly executed by the Borrowers;
(b) the Notes duly executed by the Borrowers;
(c) certificates of the Secretary or Assistant Secretary of each of the
Borrowers, dated the Closing Date, attesting to the Certificate of Incorporation
(or Charter), the Bylaws and all corporate action taken by the Borrowers,
including resolutions of its Board of Directors authorizing the execution,
delivery and performance of the Facility Documents to which it is a party and
each other document to be delivered pursuant to this Agreement;
(d) certificates of the Secretary or Assistant Secretary of each of the
Borrowers, dated the Closing Date, certifying the names and true signatures of
the officers of such Borrower authorized to sign the Facility Documents to which
it is a party and the other documents to be delivered by such Borrower under
this Agreement;
(e) certificates of a duly authorized officer of each of the Borrowers,
dated the Closing Date, stating that the representations and warranties in
Article 5 are true and correct on such date as though made on and as of such
date, all agreements and conditions required to be complied with by such date
have been performed and complied with and that no event has occurred and is
continuing which constitutes a Default or Event of Default;
(f) good standing certificates and certified copies of all charter
documents with respect to each of the Borrowers certified by the secretary of
state of its jurisdiction of incorporation in the case of the U.S. Company and
the Registrar of Companies in the case of the U.K. Companies, and evidence that
each of the Borrowers is qualified as a foreign corporation in good standing in
every other jurisdiction in which the nature of its business so requires, except
where failure to be so qualified and in good standing does not, in any one case
or in the aggregate, materially adversely
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affect the financial condition, operations, properties or business of the
Borrowers, taken as a whole, or the ability of the Borrowers to perform their
obligations under the Facility Documents.;
(g) favorable opinions of Cummings & Lockwood, U.S. counsel for the
Borrowers and McFarlanes, U.K. counsel for the Borrowers, dated the Closing
Date, in substantially the forms contained in Exhibits C-1 and C-2, respectively
and as to such other matters as the Bank may reasonably request;
(h) evidence that the Acquisition shall have been consummated in
accordance with the Acquisition Documents;
(i) a certificate of a duly authorized officer of Farrel Shaw, dated
the Closing Date, attaching true and correct copies of (i) all material consents
under any indenture, agreement, lease or instrument obtained in connection with
the Acquisition and (ii) all consents and authorizations required or advisable
in connection with the Acquisition under any law, rule or regulation;
(j) certified complete and correct copies of the Acquisition Documents
(including all exhibits, schedules and disclosure letters referred to therein or
delivered pursuant thereto, if any);
(k) certified complete and correct copies of each of the financial
statements referred to in Section 5.05;
(l) an initial borrowing notice of the Borrowers relating to the Loans
to be made and the Letters of Credit to be issued on the Closing Date together
with a letter from the Borrowers containing wire transfer instructions and
account information relating to the funds to be made available by the Bank to
the Borrowers on the Closing Date; and
(m) a Borrowing Base Certificate calculated as of a date not more than
30 days prior to the Closing Date.
Section 4.02. Additional Conditions Precedent. The obligation of the
Bank to make the Loans pursuant to a borrowing which increases the amount
outstanding hereunder (including the initial borrowing) or to issue any Letters
of Credit shall be subject to the further conditions precedent that on the date
of such Loan:
(a) the following statements shall be true:
(i) the representations and warranties contained in Article 5
hereof and in the other Facility Documents are true and correct in all material
respects on and as of the date of such Loan or the issuance of such Letter of
Credit as though made on and as of such date; and
(ii) no Default or Event of Default has occurred and is continuing,
or would result from such Loan or the issuance of such Letter of Credit; and
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(b) the Bank shall have received such approvals, opinions or documents
as the Bank may reasonably request.
Section 4.03. Deemed Representations. Each notice of borrowing or
request for the issuance of a Letter of Credit hereunder and acceptance by any
Borrower of the proceeds of such borrowing or the benefit of such Letter of
Credit shall constitute a representation and warranty that the statements
contained in Section 4.02(a) are true and correct both on the date of such
notice or request and, unless the Borrowers otherwise notify the Bank prior to
such borrowing or such issuance, as of the date of such borrowing or such
issuance.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES
The Borrowers hereby jointly and severally represent and warrant, that
(after giving effect to the Acquisition):
Section 5.01. Incorporation, Good Standing and Due Qualification. Each
of the Borrowers and each of their Subsidiaries is duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its assets and to
transact the business in which it is now engaged or proposed to be engaged, and
is duly qualified as a foreign corporation and in good standing under the laws
of each other jurisdiction in which such qualification is required, except where
failure to be so qualified and in good standing does not, in any one case or in
the aggregate, materially adversely affect the financial condition, operations,
properties or business of the Borrowers or any such Subsidiary, taken as a
whole, or the ability of the Borrowers to perform their obligations under the
Facility Documents.
Section 5.02. Corporate Power and Authority; No Conflicts. The
execution, delivery and performance by each of the Borrowers of the Facility
Documents to which it is a party have been duly authorized by all necessary
corporate action and do not and will not: (a) require any consent or approval of
its stockholders that has not been obtained; (b) contravene its charter or
by-laws; (c) violate any provision of, or require any filing, registration,
consent or approval under, any law, rule, regulation (including, without
limitation, Regulation U), order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the Borrowers
or any of their Subsidiaries or Affiliates; (d) result in a breach of or
constitute a default or require any consent under any material indenture, loan
or credit agreement or any other material agreement, lease or instrument to
which any Borrower is a party or by which it or its properties may be bound or
affected; (e) result in, or require, the creation or imposition of any Lien upon
or with respect to any of the properties now owned or hereafter acquired by any
Borrower; or (f) cause any Borrower (or any Subsidiary or Affiliate of such
Borrower, as the case may be) to be in default under any such law, rule,
regulation, order, writ, judgment, injunction, decree,
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determination or award or any such indenture, agreement, lease or instrument.
Section 5.03. Legally Enforceable Agreements. Each Facility Document
to which any of the Borrowers is a party is, or when delivered under this
Agreement will be, a legal, valid and binding obligation of such Borrower
enforceable against such Borrower in accordance with its material terms, except
to the extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights generally.
Section 5.04. Litigation. As of the Closing Date, there are no
actions, suits or proceedings pending or, to the knowledge of the Borrowers,
threatened, against or affecting the Borrowers or any of their Subsidiaries
before any court, governmental agency or arbitrator, which are reasonably likely
to, in any one case or in the aggregate, materially adversely affect the
financial condition, operations, properties or business of the Borrowers or any
such Subsidiary, taken as a whole, or the ability of the Borrowers to perform
their obligations under the Facility Documents, except for such matters as are
disclosed in the U.S. Company's SEC Filings.
Section 5.05. Financial Statements.
(a) The consolidated and consolidating balance sheet of the Borrowers
and their Consolidated Subsidiaries (other than Farrel Shaw) as at December 31,
1996, and the related consolidated and consolidating income statement and
statements of cash flows and changes in stockholders' equity of such Borrowers
and Consolidated Subsidiaries for the fiscal year then ended, and the
accompanying footnotes, together with the opinion thereon, of the U.S. Company?s
independent certified public accountants, copies of which have been furnished to
the Bank, and the interim consolidated and consolidating balance sheet of the
Borrowers and their Consolidated Subsidiaries other than Farrel Shaw as at
September 30, 1997 and the related consolidated and consolidating income
statement and statements of cash flows and changes in stockholders? equity of
such Borrowers and Consolidated Subsidiaries for the nine-month period then
ended, copies of which have been furnished to the Bank, are complete and correct
in all material respects and fairly present the financial condition of the
Borrowers and their Consolidated Subsidiaries as at such dates and the results
of the operations of such Borrowers and Consolidated Subsidiaries for the
periods covered by such statements, all in accordance with GAAP consistently
applied (subject to year-end adjustments in the case of the interim financial
statements). There are no liabilities of the Borrowers or any of their
Consolidated Subsidiaries (other than Farrel Shaw), fixed or contingent, which
are material and which should have been but are not reflected in the financial
statements or in the notes thereto, other than liabilities arising in the
ordinary course of business since December 31, 1996. No information, exhibit or
report furnished by the Borrowers to the Bank in connection with the Existing
Credit Agreement at the time such material was provided to the Bank contained
any material misstatement of fact or omitted to state a material fact or any
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fact necessary to make the statement contained therein not materially
misleading. Since December 31, 1996, there has been no material adverse change
in the condition (financial or otherwise), business, operations or prospects of
the Borrowers or any of their Subsidiaries, taken as a whole.
(b) The opening balance sheet of Farrel Shaw as at the closing of the
Acquisition, a copy of which has been furnished to the Bank, is complete and
correct in all material respects and fairly presents the financial condition of
Farrel Shaw as of such date.
Section 5.06. Taxes. Each of the Borrowers and their Subsidiaries has
filed all tax returns (federal, state and local) required to be filed and has
paid all material taxes, assessments and governmental charges and levies thereon
to be due, including interests and penalties. The federal income tax liability
of the Borrowers and their Subsidiaries has been audited by the Internal Revenue
Service and has been finally determined and satisfied for all taxable years up
to and including the taxable year ended April, 1994.
Section 5.07. ERISA. (a) Each Plan is in compliance in all material
respects with, and has been administered in all material respects in compliance
with, the applicable provisions of ERISA, the Code and any other applicable
federal or state law, and, other than events or conditions for which the
Borrowers have furnished a report to the Bank, no event or condition is
occurring or exists concerning which the Borrowers would be under an obligation
to furnish a report to the Bank in accordance with Section 6.08(h) hereof.
(b) As of December 31, 1996, the amount of all Unfunded Benefit
Liabilities under all Title IV Plans does not exceed approximately $400,000. As
of the date these representations are made with respect to any Loan under this
Agreement, the Unfunded Benefit Liabilities of all Title IV Plans have not
increased in an amount that is material (as specified in Section 6.08(h)(ii)
hereof.
(c) Retiree Welfare Plan Liability of the Borrower with respect to all
the Retiree Welfare Benefit Plans does not exceed $3,500,000. As of the date
these representations are made with respect to any Loan under this Agreement,
the Retiree Welfare benefit Plan Liability with respect to all the Retiree
Welfare benefit Plans have not increased in an amount that is material (as
specified in Section 6.08(h)(ii)).
(d) With respect to each Pension Plan:
(i) if the plan is intended to be tax-qualified under
section 401(a) of the Code, it is so qualified, its related trust is
tax-exempt under section 501 of the Code, and either the plan and
trust have been determined by the Internal Revenue Service to be
qualified and exempt from tax under
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sections 401 and 501 of the Code or application for such
determinations has been or will be filed with the Internal Revenue
Service and responses regarding the same have not been received; and
(ii) there has been no ERISA Event and there is no
outstanding material liability with respect to any termination of such
Pension Plan.
(e) With respect to each Pension Plan or Welfare Plan:
(i) Except as set forth in Schedule III, there are no claims
(other than claims for benefits in the normal course), actions or
lawsuits asserted or instituted against any Plan, or to the knowledge
of the Borrowers, any Multiemployer Plan; and the Borrowers have no
knowledge of any threatened litigation or claims against the assets of
any Plan or against any fiduciary thereof with respect to the
operation of any such plan that in the aggregate could have a material
adverse effect on the financial condition or prospects of the
Borrowers or any ERISA Affiliate or the ability of the Borrowers to
perform their obligations hereunder.
(ii) All reports with respect to any Plan required under
ERISA, the Code or any other applicable law to be filed, the failure
of which to file that is reasonably likely to, in the aggregate,
result in liability of any of the Borrowers in a material amount, have
been filed, and all such reports are true and correct in all material
respects as of the date given.
(iii) The Borrowers have not engaged in a "prohibited
transaction" as defined in section 4975 of the Code and Title I of
ERISA or participated in a breach of fiduciary responsibility (as
described in section 502(1) of ERISA) that would subject any of them
(after giving effect to any exemption) to the tax or penalty on
prohibited transactions imposed by section 4975 of the Code or section
502 of ERISA, or any other liability, the amount of which is material.
(iv) Any bond required under ERISA to be obtained by any
Person with respect to any Plan has been obtained and is in full force
and effect, except where the failure of which is not reasonably likely
to result in liability to the Borrowers and their ERISA Affiliates in
an amount in excess of $20,000.
(f) Each Welfare Plan has complied with the notice, continuation of
coverage, and other applicable requirements under section 4980B of the Code in
all material respects.
(g) No Plan is a Multiemployer Plan.
Section 5.08. Subsidiaries and Ownership of Stock. Schedule I is a
complete and accurate list of the Subsidiaries of the Borrowers as of the
Closing Date, showing the jurisdiction of
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incorporation or organization of each such Subsidiary and showing the percentage
of the Borrowers' ownership of the outstanding stock or other interest of each
such Subsidiary as of the Closing Date. All of the outstanding capital stock or
other interest of each such Subsidiary has been validly issued, is fully paid
and nonassessable and is owned by the Borrowers free and clear of all Liens.
Section 5.09. Credit Arrangements. Schedule II is a complete and
correct list as of the Closing Date of all credit agreements and indentures, and
all material guaranties and Capital Leases presently in effect providing for or
relating to the borrowing of money (including agreements and arrangements for
the issuance of letters of credit or for acceptance financing) in respect of
which the Borrowers or any of their Subsidiaries is in any manner directly or
contingently obligated as of the Closing Date; and the maximum principal or face
amounts of the credit in question, outstanding and which can be outstanding, are
correctly stated.
Section 5.10. Operation of Business. Each of the Borrowers and their
Subsidiaries possesses all licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto, to conduct its business
substantially as now conducted and as presently proposed to be conducted, except
where failure of such possession will not, in any one case or in the aggregate,
materially adversely affect the financial condition, operations, properties or
business of the Borrowers or any such Subsidiary, taken as a whole, or the
ability of the Borrowers to perform their obligations under the Facility
Documents.
Section 5.11. Hazardous Materials. The Borrowers and each of their
Subsidiaries have obtained all material permits, licenses and other
authorizations which are required on the Closing Date under all Environmental
Laws which are applicable to the ongoing business operations of the Borrowers.
The Borrowers and each of their Subsidiaries are in material compliance with the
terms and conditions of all such material permits, licenses and authorizations,
and with respect to the ongoing business operations of the Borrowers are also in
material compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in any applicable Environmental Law or in any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except as disclosed in Schedule IV. To the
extent the Borrowers or any of their Subsidiaries has failed to so comply, such
failure will not have a material adverse effect on the consolidated financial
condition, operations, business or prospects of the Borrowers and their
Consolidated Subsidiaries.
In addition, except as set forth in Schedule IV hereto:
(a) To the best of the Borrowers' knowledge, no notice, notification,
demand, request for information, citation, summons or order has been issued, no
complaint has been filed, no penalty has been assessed and no investigation or
review is pending or
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threatened by any governmental or other entity with respect to any alleged
failure by the Borrowers or any of their Subsidiaries to have any permit,
license or authorization required in connection with the conduct of the business
of the Borrowers or any of their Subsidiaries or with respect to any generation,
treatment, storage, recycling, transportation, release or disposal, or any
release as defined in 42 U.S.C. ?9601(22) ("Release"), of any Hazardous
Materials generated by the Borrowers or any of their Subsidiaries, except as
disclosed in Schedule IV.
(b) Except as disclosed in Schedule IV, neither the Borrowers nor any
of their Subsidiaries has handled any Hazardous Material, on any property now
owned or leased by the Borrowers or any of their Subsidiaries to an extent that
it has, or may reasonably be expected to have, a material adverse effect on the
consolidated financial condition, operations, business or prospects taken as a
whole of the Borrowers and their Consolidated Subsidiaries.
(c) As of the Closing Date no oral or written notification of a
Release of a Hazardous Material has been filed by or on behalf of the Borrowers
or any of their Subsidiaries, except as disclosed in Schedule IV, and no
property now owned or leased by the Borrowers or any of their Subsidiaries is
listed or proposed for listing on the National Priority List promulgated
pursuant to CERCLA.
(d) As of the Closing Date there are no Liens of record arising under
or pursuant to any Environmental Laws on any of the real property or properties
owned or leased by the Borrowers or any of their Subsidiaries, and the Borrowers
have no knowledge of government actions which have been taken or are in process
which could subject any of such properties to such Liens and neither the
Borrowers nor any of their Subsidiaries would be required to place any notice or
restriction relating to the presence of Hazardous Materials at any property
owned by it in any deed to such property.
(e) As of the Closing Date there have been no environmental
investigations, studies, audits, tests, reviews or other analyses conducted by
or which are in the possession of the Borrowers or any of their Subsidiaries in
relation to any property or facility now owned or leased by the Borrowers or any
of their Subsidiaries which have not been made available to the Bank.
Section 5.12. No Default on Outstanding Judgments or Orders. As of the
Closing Date, each of the Borrowers and their Subsidiaries has satisfied all
judgments that have been in effect for any period of 30 consecutive days, and
neither the Borrowers nor any of their Subsidiaries is in default with respect
to any judgment, writ, injunction, decree, or material rule or regulation of any
court, arbitrator or federal, state, municipal or other Governmental Authority,
commission, board, bureau, agency or instrumentality, domestic or foreign as of
the date hereof.
Section 5.13. No Defaults on Other Agreements. Neither the Borrowers
nor any of their Subsidiaries is a party to any indenture, loan or credit
agreement or any lease or other agreement
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or instrument or subject to any charter or corporate restriction which is
reasonably likely to have a material adverse effect on the business, properties,
assets, operations or conditions, financial or otherwise, of the Borrowers or
any of their Subsidiaries, taken as a whole, or the ability of the Borrowers to
carry out their obligations under the Facility Documents to which they are a
party.
Section 5.14. Labor Disputes and Acts of God. As of the Closing Date,
neither the business nor the properties of any Borrower or of any of their
Subsidiaries are affected by any fire, explosion, accident, strike, lockout or
other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of
the public enemy or other casualty (whether or not covered by insurance),
materially and adversely affecting such business or properties or the operation
of such Borrower or any such Subsidiary.
Section 5.15. Governmental Regulation. Neither Borrower nor any of
their Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce
Act, the Federal Power Act or any statute or regulation limiting its ability to
incur indebtedness for money borrowed as contemplated hereby.
Section 5.16. No Forfeiture. No Forfeiture Proceeding against any
Borrower is pending or threatened.
Section 5.17. Solvency.
(a) The present fair salable value of the assets of the Borrowers after
giving effect to all the transactions contemplated by the Facility Documents and
the funding of all Commitments and the issuance of the Letters of Credit
hereunder exceeds the amount that will be required to be paid on or in respect
of the existing debts and other liabilities (including contingent liabilities)
of the Borrowers and their Subsidiaries as they mature.
(b) The property of each Borrower does not constitute unreasonably
small capital for such Borrower to carry out its business as now conducted and
as proposed to be conducted, including the capital needs of each Borrower.
(c) No Borrower intends to, nor does any Borrower believe that it will,
incur debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be received by the respective
Borrower, and of amounts to be payable on or in respect of debt of such
Borrower). The cash available to each Borrower, after taking into account all
other anticipated uses of the cash of such Borrower, is anticipated to be
sufficient to pay all such amounts on or in respect of debt of such Borrower
when such amounts are required to be paid.
(d) No Borrower believes that final judgments against it in actions for
money damages will be rendered at a time when, or in an amount such that, such
Borrower will be unable to satisfy any such
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judgments promptly in accordance with their terms (taking into account the
maximum reasonable amount of such judgments in any such actions and the earliest
reasonable time at which such judgments might be rendered). The cash available
to each Borrower after taking into account all other anticipated uses of the
cash of such Borrower (including the payments on or in respect of debt referred
to in paragraph (c) of this Section 5.17), is anticipated to be sufficient to
pay all such judgments promptly in accordance with their terms.
Section 5.18. Representations and Warranties in the Acquisition
Documents. The Bank has received a complete and correct copy of the Acquisition
Documents (including all exhibits, schedules and disclosure letters referred to
therein or delivered pursuant thereto, if any) and all amendments thereto,
waivers relating thereto and other side letters or agreements affecting the
terms thereof. The Acquisition Documents have been duly executed and delivered
by the Borrowers who are parties thereto and are in full force and effect with
respect to such Borrowers. Each of the representations and warranties set forth
in each of the Acquisition Documents of any Borrowers party thereto, and to the
knowledge of the Borrowers, of each other Person party thereto, were true and
correct in all material respects on and as of the date made (except for
representations and warranties specifically relating to a time period other than
the date of execution of the Acquisition Documents or the date of closing of the
transactions contemplated by the Acquisition Documents). Each Acquisition
Document is a legal, valid and binding obligation of the Borrowers party
thereto, enforceable against such Persons in accordance with its terms, except
to the extent that such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws affecting
creditors? rights generally and general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in equity).
All transactions contemplated by the Acquisition Documents to be consummated on
or prior to the Closing Date have been consummated without amendment, waiver or
modification of the terms thereof.
ARTICLE 6. AFFIRMATIVE COVENANTS
So long as the Notes shall remain unpaid, any Letters of Credit shall
remain outstanding or the Bank shall have any Commitment under this Agreement,
each Borrower shall:
Section 6.01. Maintenance of Existence. Preserve and maintain, and
cause each of its material Subsidiaries to preserve and maintain, its corporate
existence and good standing in the jurisdiction of its incorporation, and
qualify and remain qualified, and cause each of its material Subsidiaries to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which such qualification is required, except where failure to do so shall not
have a material adverse effect on the financial condition or prospects of the
Borrowers and their Subsidiaries, taken as a whole, or the ability of the
Borrowers to perform their obligations hereunder.
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Section 6.02. Conduct of Business. Continue, and cause each of its
Subsidiaries to continue, to engage in a business of substantially the same type
as conducted by it on the date of this Agreement.
Section 6.03. Maintenance of Properties. Maintain, keep and preserve,
and cause each of its Subsidiaries to maintain, keep and preserve, all of its
properties (tangible and intangible), necessary in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
Section 6.04. Maintenance of Records. Keep, and cause each of its
Subsidiaries to keep, adequate records and books of account, in which complete
entries will be made in accordance with GAAP, reflecting all financial
transactions of the Borrowers and their Subsidiaries.
Section 6.05. Maintenance of Insurance. Maintain, and cause each of
its Subsidiaries to maintain, insurance with financially sound and reputable
insurance companies or associations in such amounts and covering such risks as
are usually carried by companies engaged in the same or similar business and
similarly situated, which insurance may provide for reasonable deductibility
from coverage thereof.
Section 6.06. Compliance with Laws. Comply, and cause each of its
Subsidiaries to comply, in all respects with all applicable laws, rules,
regulations and orders, such compliance to include, without limitation, paying
before the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property, except to the extent in good faith
duly contested in accordance with all applicable laws, rules, regulations and
procedures and for which adequate reserves are provided, as reasonably
determined by the Bank, and except where failure to do so shall not have a
material adverse effect on the financial condition or prospects of the Borrowers
and their Subsidiaries, taken as a whole, or the ability of the Borrowers to
perform their obligations hereunder.
Section 6.07. Right of Inspection. At any reasonable time and from
time to time upon advance notice, permit the Bank or any agent or representative
thereof, to examine and make copies and abstracts from the records and books of
account of, and visit the properties of, such Borrower and any of its
Subsidiaries, and to discuss the affairs, finances and accounts of such Borrower
and any such Subsidiary with any of their respective officers and directors and
such Borrower's independent accountants.
Section 6.08. Reporting Requirements. Furnish to the Bank:
(a) as soon as available and in any event within 90 days after the end
of each fiscal year of the Borrowers, a consolidated and consolidating balance
sheet of the Borrowers and their Consolidated Subsidiaries as of the end of such
fiscal year and a consolidated and consolidating income statement and
consolidated
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statements of cash flows and changes in stockholders' equity of the Borrowers
and their Consolidated Subsidiaries for such fiscal year, all in reasonable
detail and, if required by the SEC, stating in comparative form the respective
consolidated and consolidating figures for the corresponding date and period in
the prior fiscal year and all prepared in accordance with GAAP and as to the
consolidated statements accompanied by an opinion thereon acceptable to the Bank
by Ernst & Young, L.L.P. or other independent accountants of national standing
selected by the Borrowers;
(b) as soon as available and in any event within 45 days after the end
of each of the first three quarters of each fiscal year of the Borrowers, a
consolidated and consolidating balance statement of the Borrowers and their
Consolidated Subsidiaries as of the end of such quarter and a consolidated and
consolidating income statement and consolidated statements of cash flows and
changes in stockholders' equity, of the Borrowers and their Consolidated
Subsidiaries for the period commencing at the end of the previous fiscal year
and ending with the end of such quarter, all in reasonable detail and, if
required by the SEC, stating in comparative form the respective consolidated and
consolidating figures for the corresponding date and period in the previous
fiscal year and all prepared in accordance with GAAP and certified by senior
financial officers of each of the Borrowers (subject to changes resulting from
audit and year-end adjustments);
(c) as soon as practicable and in any event within 10 days after the
end of each Accounting Month, a Borrowing Base Certificate and a Backlog
Certificate.
(d) promptly upon receipt thereof, copies of any management letters
submitted to the Borrowers or any of their Subsidiaries by independent certified
public accountants in connection with examination of the financial statements of
the Borrowers or any such Subsidiary made by such accountants;
(e) simultaneously with the delivery of the financial statements
referred to above, a certificate of the senior financial officer of each of the
Borrowers (i) certifying that to the best of their knowledge no Default or Event
of Default has occurred and is continuing or, if a Default or Event of Default
has occurred and is continuing, a statement as to the nature thereof and the
action which is proposed to be taken with respect thereto, and (ii) with
computations demonstrating compliance with the covenants contained in Article 8;
(f) promptly after the commencement thereof, notice of all actions,
suits and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, affecting the
Borrowers or any of their Subsidiaries which, if determined adversely to such
Borrower or such Subsidiary, could have a material adverse effect on the
financial condition, properties or operations of such Borrower or such
Subsidiary, taken as a whole;
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(g) as soon as possible and in any event within ten days after
becoming aware of the occurrence of each Default or Event of Default a written
notice setting forth the details of such Default or Event of Default and the
action which is proposed to be taken by the Borrowers with respect thereto;
(h) as soon as possible, and in any event within 15 days after any
Borrower knows or has reason to know that any of the events or conditions
specified below with respect to any Plan shall have occurred or exist, a
statement signed by a senior financial officer of such Borrower setting forth
details respecting such event or condition and the action, if any, which such
Borrower or its ERISA Affiliate proposes to take with respect thereto (and a
copy of any report or notice required to be filed with or given to PBGC by such
Borrower or an ERISA Affiliate with respect to such event or condition):
(i) ERISA Event with respect to a Plan; and
(ii) an increase in the Unfunded Benefit Liabilities of one
or more Pension Plans after the date of this Agreement in an amount
which is material in relation to the financial condition of the
Borrowers and their Subsidiaries, on a consolidated basis; provided,
however, that such increase shall not be deemed to be material so long
as it does not exceed during any consecutive 3-year period $500,000.
(i) promptly after the request of the Bank, copies of each annual
report filed pursuant to section 104 or Section 4065 of ERISA with respect to
each Plan (including, to the extent required by ERISA, the related financial and
actuarial statements and supporting statements);
(j) promptly after the furnishing thereof, copies of any statement or
report furnished to any other party pursuant to the terms of any indenture, loan
or credit or similar agreement involving an amount in any one case or in the
aggregate in excess of $500,000 and not otherwise required to be furnished to
the Bank pursuant to any other clause of this Section 6.08;
(k) within 10 days after the sending or filing thereof, copies of all
proxy statements, financial statements and reports which any Borrower or any of
their Subsidiaries sends to its stockholders, and copies of all regular,
periodic and special reports, and all registration statements which any Borrower
or any such Subsidiary files with the SEC or any Governmental Authority which
may be substituted therefor, or with any national securities exchange;
(l) promptly after the commencement thereof or promptly after any
Borrower knows of the commencement or threat thereof, notice of any Forfeiture
Proceeding; and
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(m) such other information respecting the condition or operations,
financial or otherwise, of any Borrower or any of their Subsidiaries as the Bank
may from time to time reasonably request.
Section 6.09. Environmental Indemnification. It is understood and
agreed among the Borrowers, Subsidiaries and the Bank that the Borrowers and
each of their Subsidiaries shall be solely responsible for all environmental
liabilities, as described below, and the Borrowers and each of their
Subsidiaries agree to release, defend, indemnify and hold harmless the Bank, and
their present and future officers, directors, employees, agents, shareholders,
attorneys and all of their respective heirs, representatives, successors and
assigns from and against all losses, liabilities, suits, obligations, demands,
fines, damages, judgments, injuries, administrative orders, consent agreements
and orders, penalties, actions, causes of actions, changes, costs and expenses
(including reasonable attorneys' fees and consultants' fees), claims, including
but not limited to claims arising out of loss of life, injury to persons,
property or business, or damages to natural resources, whether based on strict
liability, tort, contract, implied or expressed warranty, statute, regulation,
common law, or other Environmental Law, arising in connection with or the result
of (i) any past, present or future existence, use, handling, storage,
transportation, manufacture, release or disposal of any Hazardous Materials in,
on, or under the Borrowers' or such Subsidiaries past, present or future
properties, buildings or assets, or in connection with the Borrowers' or such
Subsidiaries business operations, whether foreseeable or unforeseeable,
regardless of the source, time of occurrence or the time of discovery; or (ii)
any past, present or future violation (or alleged violation) of an Environmental
Law in connection with the ownership, operation or control of the Borrowers' or
such Subsidiaries properties, buildings, assets or business operations. The
foregoing indemnification includes, without limitation, indemnification against
all costs in law or in equity, of removal, response, investigation or
remediation of any kind, and the disposal of any Hazardous Materials, and all
costs of determining whether the Borrowers or such Subsidiaries are in
compliance with all applicable Environmental Laws. Notwithstanding the
foregoing, if any such liability shall arise solely as a consequence of the
affirmative actions of the Bank or as a consequence of the gross negligence of
the Bank, the Borrowers shall not be liable for the indemnity contemplated
hereby.
ARTICLE 7. NEGATIVE COVENANTS
So long as the Notes shall remain unpaid, any Letter of Credit shall
remain outstanding or the Bank shall have any Commitment under this Agreement,
the Borrowers shall not:
Section 7.01. Debt. Create, incur, assume or suffer to exist, or permit
any of its Subsidiaries to create, incur, assume or suffer to exist Debt,
except:
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(a) Debt of the Borrowers under this Agreement, the Notes, the Letters
of Credit or the other Facility Documents;
(b) Debt described in Schedule II, and any renewals, extensions or
refinancings thereof;
(c) Debt of any Borrower to any other Borrower or to any Subsidiary or
of any such Subsidiary to any Borrower or another such Subsidiary;
(d) Debt in an aggregate amount not in excess of $500,000 and which is
secured by purchase money liens meeting the requirements of subsection 7.03(i);
(e) Other Debt in an aggregate amount not in excess of $1,000,000 on a
consolidated basis;
(f) Subordinated Debt, which is subordinated to the Borrowers'
obligations to the Bank on terms and conditions acceptable to the Bank; and
(g) Debt of the Borrowers evidenced by the Facility Loan Letter, dated
December 3, 1990, relating to a loan of ?500,000 from National Westminster Bank,
PLC in favor of Farrel Limited (the ?NatWest Facility?).
Section 7.02. Guaranties, Etc. Assume, guaranty, endorse or otherwise
be or become directly or contingently responsible or liable, or permit any of
its Subsidiaries to assume, guarantee, endorse or otherwise be or become
directly or indirectly responsible or liable (including, but not limited to, an
agreement to purchase any obligation, stock, assets, goods or services or to
supply or advance any funds, assets, goods or services, or an agreement to
maintain or cause such Person to maintain a minimum working capital or net worth
or otherwise to assure the creditors of any Person against loss) for the
obligations of any Person, except guaranties of Debt permitted under Section
7.01, and guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business.
Section 7.03. Liens. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired, except:
(a) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or if due and payable if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained;
(b) Liens imposed by law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than 30 days, or which are
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being contested in good faith by appropriate proceedings and for which
appropriate reserves have been established;
(c) Liens under workers' compensation, unemployment insurance, social
security or similar legislation (other than ERISA);
(d) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(e) Judgment and other similar Liens arising in connection with court
proceedings; provided that the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings;
(f) Easements, rights-of-way, restrictions and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use and enjoyment by such Borrower or any such Subsidiary of the
property or assets encumbered thereby in the normal course of its business or
materially impair the value of the property subject thereto;
(g) Liens securing obligations of any such Subsidiary to any Borrower
or another such Subsidiary;
(h) Purchase money Liens on any property hereafter acquired or the
assumption of any Lien on property existing at the time of such acquisition, or
a Lien incurred in connection with any conditional sale or other title retention
agreement or a Capital Lease; provided that:
(i) any property subject to any of the foregoing is acquired by
such Borrower or any such Subsidiary in the ordinary course of its
business and the Lien on any such property is created
contemporaneously with such acquisition;
(ii) the obligation secured by any Lien so created, assumed or
existing shall not exceed the cost as of the time of acquisition of the
property covered thereby to such Borrower or such Subsidiary acquiring
the same;
(iii) each such Lien shall attach only to the property so acquired
and fixed improvements thereon; and
(iv) the obligations secured by such Lien are permitted by the
provisions of Section 7.01; and
(i) a Lien securing the NatWest Facility.
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Section 7.04. Leases. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property,
except: (a) leases existing on the date of this Agreement and any extensions or
renewals thereof; (b) leases (other than Capital Leases) which do not in the
aggregate require the Borrowers and their Subsidiaries on a consolidated basis
to make payments (including taxes, insurance, maintenance and similar expense
which any Borrower or any such Subsidiary is required to pay under the terms of
any such lease) in any fiscal year of the Borrowers in excess of $1,000,000; (c)
leases between any Borrower and any such Subsidiary or between any such
Subsidiaries; (d) Capital Leases permitted by Section 7.03 and which do not in
the aggregate require the Borrowers and their Subsidiaries on a consolidated
basis to make payments (including taxes, insurance, maintenance and similar
expense which any Borrower or any such Subsidiary is required to pay under the
terms of any such Capital Lease) in any fiscal year of the Borrowers in excess
of $1,000,000.
Section 7.05. Investments. Make, or permit any of its Subsidiaries to
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to, or
otherwise invest in, or acquire any interest in, any Person, including, without
limitation, Farrel Rockstedt GmbH or any other Subsidiary which is not a
Borrower and, further expressly provided, that the U.S. Company will make no
such investment in the U.K. Companies except: (a) direct obligations of the
United States of America or any agency thereof with maturities of one year or
less from the date of acquisition; (b) commercial paper of a domestic issuer
rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's
Investors Service, Inc.; (c) certificates of deposit with maturities of one year
or less from the date of acquisition issued by the Bank or an affiliate of the
Bank, or any commercial bank operating within the United States of America
having capital and surplus in excess of $500,000,000; (d) for stock, obligations
or securities received in settlement of debts (created in the ordinary course of
business) owing to such Borrower or any such Subsidiary; and (e), in the case of
the U.S. Company, the repurchase of its own issued and outstanding common stock
for a purchase price in any one case or in the aggregate not in excess of
$350,000 in any fiscal year.
Section 7.06. Dividends. Declare or pay any dividends, purchase,
redeem, retire or otherwise acquire for value any of its capital stock now or
hereafter outstanding, or make any distribution of assets to its stockholders as
such whether in cash, assets or in obligations of such Borrower, or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on,
or for the purchase, redemption or retirement of any shares of its capital
stock, or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock or permit any of its Subsidiaries to
purchase or otherwise acquire
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for value any stock of any Borrower or another such Subsidiary, except that: (a)
any Borrower may declare and deliver dividends and make distributions payable
solely in common stock of such Borrower; (b) any Borrower may purchase or
otherwise acquire shares of its capital stock by exchange for or out of the
proceeds received from a substantially concurrent issue of new shares of its
capital stock; and (c) the U.S. Company may pay cash dividends in any fiscal
quarter in amounts in any one case or in the aggregate not in excess of (i) the
amount spent to repurchase such company?s issued and outstanding capital stock
in accordance with Section 7.05(e) hereof during such four fiscal quarters and
(ii) 25% of the cumulative consolidated net income after taxes during the most
recently completed four fiscal quarters, less the cumulative total amount of
dividends paid in respect of its capital stock during such four fiscal quarters.
Notwithstanding the foregoing, the Bank acknowledges and agrees that from April
23, 1997 through June 30, 1998, the U.S. Company may pay cash dividends in
respect of its capital stock in an aggregate amount of not more than four
million ($4,000,000) and that the taking of such action by the U.S. Company
shall not constitute a breach or violation of this Section 7.06; provided,
however, that at the time such action is to be taken by the U.S. Company, if at
all, the Borrowers shall not otherwise be in default of this Section 7.06 as
regards or as a result of any other action or transaction and shall not be in
default of any other terms or conditions of this Agreement.
Section 7.07. Sale of Assets. Sell, lease, assign, transfer or
otherwise dispose of, or permit any of its Subsidiaries to sell, lease, assign,
transfer or otherwise dispose of, any of its now owned or hereafter acquired
assets (including, without limitation, shares of stock and indebtedness of such
Subsidiaries, receivables and leasehold interests) except (a) if, after giving
effect to such transaction, the aggregate amount of the greater, in each
instance, of (x) the net book value, or (y) the fair market value, of all such
properties and assets so disposed of in any fiscal year is less than the lesser
of $2,000,000 or 5% of Consolidated Tangible Net Worth as of the beginning of
such fiscal year, (b) for inventory disposed of in the ordinary course of
business; (c) the sale or other disposition of assets no longer used or useful
in the conduct of its business; (d) if all proceeds thereof (after payment of
reasonable expenses of the transaction) shall promptly be applied either (i) to
the acquisition by the Borrowers or such Subsidiaries of other assets which are
necessary or useful in its business or (ii) to the prepayment of an equal
principal amount of the Loans in accordance with the terms of this Agreement;
and (e) that any such Subsidiary may sell, lease, assign or otherwise transfer
its assets to any Borrower.
Section 7.08. Stock of Subsidiaries, Etc. Sell or otherwise dispose of
any shares of capital stock of any of its Subsidiaries, except in connection
with a transaction permitted under Section 7.10, or permit any such Subsidiary
to issue any additional shares of its capital stock, except directors'
qualifying shares.
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Section 7.09. Transactions with Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service, with any Affiliate or permit any of its Subsidiaries
to enter into any transaction, including, without limitation, the purchase, sale
or exchange of property or the rendering of any service, with any Affiliate,
except (a) in the ordinary course of and pursuant to the reasonable requirements
of such Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to such Borrower or such Subsidiary than it would obtain
in a comparable arm's length transaction with a Person not an Affiliate, (b)
transactions between Borrowers, and (c) transactions entered into prior to the
Closing Date between Affiliates as disclosed on the U.S. Company's SEC Filings,
whether or not at arm's length.
Section 7.10. Mergers, Etc. Merge or consolidate with, or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of its Subsidiaries to do so except that: (a) any
such Subsidiary may merge into or transfer assets to such Borrower; or (b) any
such Subsidiary may merge into or consolidate with or transfer assets to any
other such Subsidiary
Section 7.11. No Activities Leading to Forfeiture. Engage in or cause
or suffer any of its Subsidiaries or Affiliates to engage in or propose to be
engaged in the conduct of any business or activity which are reasonably likely
to result in a Forfeiture Proceeding.
Section 7.12. ERISA Compliance. Take or omit to take any action, or
permit any ERISA Affiliate to take or omit to take any action, that constitutes
or would result in a liability of any Borrower or an ERISA Affiliate in an
amount in excess of $500,000 with respect to (i) an ERISA Event, (ii) failure to
comply with the requirements of COBRA by any Welfare Plan, (iii) failure to
comply with the requirements of ERISA, the Code or any other applicable law by,
or with respect to, any Pension or Welfare Plan, (iv) increase in Unfunded
Benefit Liability with respect to a Pension Plan, (v) liability with respect to
any Welfare Plan other than a Retiree Welfare Plan, or (vi) liability of the
Borrowers or any ERISA Affiliate with respect to any Retiree Welfare Plan in
excess of $3,500,000.
ARTICLE 8. FINANCIAL COVENANTS
So long as the Notes shall remain unpaid, any Letter of Credit shall
remain outstanding or the Bank shall have any Commitment under this Agreement:
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Section 8.01. Minimum Tangible Net Worth. The Borrowers shall maintain
at all times a Consolidated Tangible Net Worth of not less than $23,000,000.
Section 8.02. Leverage RatioSection. The Borrowers shall maintain at
all times a ratio of consolidated total liabilities plus L/C Obligations to
Consolidated Tangible Net Worth of not greater than 1.75 to 1.
Section 8.03. Interest Coverage. The Borrowers shall maintain for each
fiscal year a ratio of EBIT to Interest Expense of not less than 3 to 1.
Section 8.04. Current Ratio. The Borrowers shall maintain at all times
Current Assets in an amount equal to not less than 1.5 times Current
Liabilities.
Section 8.05. Debt Service Coverage. The Borrowers shall maintain for
each fiscal year a ratio of (a) EBITDA minus Capital Expenditures to (b) Debt
Service Charges of not less than 1.25 to 1.
ARTICLE 9. EVENTS OF DEFAULT
Section 9.01. Events of Default. Any of the following events shall be
an "Event of Default":
(a) the Borrowers shall: (i) fail to pay the principal of the Notes or
any Reimbursement Obligations as and when due and payable; or (ii) fail to pay
interest on the Notes or any fee or other amount due hereunder within five days
of when due and payable;
(b) any representation or warranty made or deemed made by any Borrower
in this Agreement or in any other Facility Document to which it is a party or
which is contained in any material certificate, document, opinion, financial or
other statement furnished at any time under or in connection with any Facility
Document shall prove to have been incorrect in any material respect on or as of
the date made or deemed made;
(c) the Borrowers shall: (i) fail to perform or observe any term,
covenant or agreement contained in Section 2.03 or Article 8; or (ii) fail to
perform or observe any term, covenant or agreement on its part to be performed
or observed (other than the obligations specifically referred to elsewhere in
this Section 9.01) in any Facility Document and such failure shall continue for
30 consecutive days after written notice received from the Bank;
(d) any Borrower or any of their respective Subsidiaries shall: (i)
fail to pay any indebtedness in an amount in excess of $500,000, including but
not limited to indebtedness for borrowed money (other than the payment
obligations described in (a) above), of such Borrower or such Subsidiary, as the
case may be, or any
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interest or premium thereon, when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise); or (ii) fail to perform or
observe any term, covenant or condition on its part to be performed or observed
under any agreement or instrument relating to any such indebtedness, when
required to be performed or observed, if the effect of such failure to perform
or observe is to accelerate, or to permit the acceleration of, after the giving
of notice or passage of time, or both, the maturity of such indebtedness,
whether or not such failure to perform or observe shall be waived by the holder
of such indebtedness; or any such indebtedness shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof; and, in either event such
failure or default shall continue for 30 consecutive days after written notice
received from the Bank;
(e) any Borrower or any of their respective Subsidiaries: (A) (i) shall
generally not, or be unable to, or shall admit in writing its inability to, pay
its debts as such debts become due; or (ii) shall make an assignment for the
benefit of creditors, petition or apply to any tribunal for the appointment of a
custodian, receiver or trustee for it or a substantial part of its assets; or
(iii) shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or (iv) shall have had any
such petition or application filed or any such proceeding shall have been
commenced against it, in which an adjudication or appointment is made or order
for relief is entered, or which petition, application or proceeding remains
undismissed for a period of 30 days or more; or shall be the subject of any
proceeding under which its assets may be subject to seizure, forfeiture or
divestiture (other than a proceeding in respect of a Lien permitted under
Section 7.03(b)); or (v) by any act or omission shall indicate its consent to,
approval of or acquiescence in any such petition, application or proceeding or
order for relief or the appointment of a custodian, receiver or trustee for all
or any substantial part of its property; or (vi) shall suffer any such
custodianship, receivership or trusteeship to continue undischarged for a period
of 30 days or more or (B) (i) without prejudice to any other provision of
Article 9 the following events in relation to the U.K. Companies shall also be
Event of Default:
(i) the passing by either U.K. Company of a resolution for the
liquidation of such U.K. Company other than for the purpose of a bona
fide amalgamation or reconstruction on terms previously approved in
writing by the Bank;
(ii) the presentation for a tribunal for the making of an
administration order in respect of either U.K. Company;
(iii) the making of a proposal under Part I of the United
Kingdom Insolvency Act 1986 or under any statutory re-enactment or
modification thereof for a composition in
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satisfaction of either U.K. Company's debts or a scheme of arrangement
of its affairs;
(iv) the appointment of any person as an administrative
receiver of either U.K. Company; and
(v) the appointment of a manager of either U.K. Company's
property or any substantial part thereof.
(f) one or more judgments, decrees or orders for the payment of money
in excess of $500,000 in the aggregate shall be rendered against any Borrower or
any of their respective Subsidiaries and such judgments, decrees or orders shall
continue unsatisfied and in effect for a period of 30 consecutive days without
being vacated, discharged, satisfied or stayed or bonded pending appeal;
(g) any event or condition shall occur or exist with respect to any
Plan concerning which any Borrower is under an obligation to furnish a report to
the Bank in accordance with Section 6.08(h) hereof and as a result of such event
or condition, together with all other such events or conditions, such Borrower
or any ERISA Affiliate has incurred or in the opinion of the Bank is reasonably
likely to incur a liability with respect to a Title IV Plan, the PBGC or a
section 4042 Trustee (or any combination of the foregoing) that is in excess of
$500,000;
(h) the Unfunded Benefit Liabilities of one or more Pension Plans have
increased after the date of this Agreement in an amount that is material (as
specified in Section 6.08(h)(ii) hereof);
(i) during any period of 12 consecutive months, commencing before or
after the date of this Agreement, individuals who at the beginning of such
12-month period were directors of Farrel Corporation cease for any reason to
constitute a majority of the board of directors of the U.S. Company; or
(j) any Forfeiture Proceeding shall have been commenced or any Borrower
shall have given the Bank written notice of the commencement of any Forfeiture
Proceeding as provided in Section 6.08(l).
Section 9.02. Remedies. If any Event of Default shall occur and be
continuing, the Bank may, by notice to the Borrowers, (a) declare the
Commitments to be terminated, whereupon the same shall forthwith terminate and
so shall the obligations of the Issuing Bank to issue and Letters of Credit, and
(b) declare the outstanding principal of the Notes, all interest thereon and all
other amounts payable under this Agreement, the Notes, the Letters of Credit and
the other Facility Documents to be forthwith due and payable, whereupon the
Notes, all such interest and all such amounts shall become and be forthwith due
and payable, without presentment, demand, protest or further notice of any kind,
all of which are hereby expressly waived by the Borrowers; provided that, in the
case of an Event of Default referred to in Section 9.01(e) above, the
Commitments shall be immediately terminated, and the
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Notes, all interest thereon, all Reimbursement Obligations and all other amounts
payable under this Agreement, the Letters of Credit or the other Facility
Documents shall be immediately due and payable without notice, presentment,
demand, protest or other formalities of any kind, all of which are hereby
expressly waived by the Borrowers.
ARTICLE 10. UNCONDITIONAL GUARANTY.
Section 10.01. Guarantied Obligations. Each of the U.S. Company and
Farrel Limited (each of the foregoing entities in such capacity individually a
"Guarantor" and collectively the "Guarantors"), jointly and severally, in
consideration of the execution and delivery of this Agreement by the Bank,
hereby irrevocably and unconditionally guarantees to the Bank, as and for such
Guarantor's own debt, until final payment has been made the due and punctual
payment in full in cash in the applicable currency of all obligations of Farrel
Shaw with respect to the Term Loan (the ?Guarantied Obligations?), in each case
when and as the same shall become due and payable, whether at maturity, pursuant
to mandatory or optional prepayment, by acceleration or otherwise, all in
accordance with the terms and provisions of this Agreement, the Term Note and
the other Facility Documents, it being the intent of the Guarantors that the
guaranty set forth in this Section 10.01 (the "Unconditional Guaranty") shall be
a guaranty of payment and not a guaranty of collection.
Section 10.02. Performance Under This Agreement. In the event Farrel
Shaw fails to make, on or before the due date thereof, any payment of the
principal of, or interest on, the Term Note, or if Farrel Shaw shall fail to
perform, keep, observe, or fulfill any other obligation referred to in Section
10.01 hereof in the manner provided in this Agreement, the Term Note or the
other Facility Documents, and any such failure shall remain uncured at the
expiration of any applicable cure period provided herein or in the other
Facility Documents, the Guarantors shall cause forthwith to be paid the moneys,
or to be performed, kept, observed, or fulfilled each of such obligations, in
respect of which such failure has occurred.
Section 10.03. Waivers. To the fullest extent permitted by law, each
Guarantor does hereby waive:
(a) notice of acceptance of the Unconditional Guaranty;
(b) notice of any borrowings under this Agreement by Farrel Shaw;
(c) notice of the amount of the Guarantied Obligations, subject to each
Guarantor's right to make inquiry of the Bank to ascertain the amount of the
Guarantied Obligations at any reasonable time;
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(d) notice of adverse change in the financial condition of Farrel Shaw,
or any other guarantor or any other fact that might increase each Guarantor's
risk hereunder;
(e) notice of presentment for payment, demand, protest, and notice
thereof as to the Term Note or any other Facility Document;
(f) notice of any Default or Event of Default by Farrel Shaw;
(g) all other notices and demands to which each Guarantor might
otherwise be entitled (except if such notice or demand is specifically otherwise
required to be given to each Guarantor hereunder or under the other Facility
Documents);
(h) the right by statute or otherwise to require the Bank to institute
suit against Farrel Shaw or any other guarantor or to exhaust the rights and
remedies of the Bank against Farrel Shaw or any other guarantor, each Guarantor
being bound to the payment of each and all Guarantied Obligations, whether now
existing or hereafter accruing, as fully as if such Guarantied Obligations were
directly owing to the Bank by each Guarantor;
(i) any defense arising by reason of any disability or other defense
(other than the defense that the Guarantied Obligations shall have been fully
and finally performed and indefeasibly paid) of Farrel Shaw or by reason of the
cessation from any cause whatsoever of the liability of Farrel Shaw in respect
thereof; and
(j) any stay (except in connection with a pending appeal), valuation,
appraisal, redemption or extension law now or at any time hereafter in force
which, but for this waiver, might be applicable to any sale of property of each
Guarantor made under any judgment, order or decree based on this Agreement, and
each Guarantor covenants that it will not at any time insist upon or plead, or
in any manner claim or take the benefit or advantage of such law.
Until all of the Guarantied Obligations shall have been paid in full, each of
the Guarantors hereby agrees to completely subordinate any right of subrogation,
reimbursement, or indemnity whatsoever in respect thereof and any right of
recourse to or with respect to any property of Farrel Shaw. Nothing shall
discharge or satisfy the obligations of any Guarantor hereunder except the full
and final performance and indefeasible payment in cash in the applicable
currency of the Guarantied Obligations by such Guarantor, upon which the Bank
agrees to transfer and assign its interest in the Term Note to such Guarantor
without recourse, representation or warranty of any kind (other than that the
Bank owns the Term Note and that the Term Note is free of Liens created by the
Bank). All of the Guarantied Obligations shall in the manner and subject to the
limitations provided herein for the acceleration thereof forthwith become due
and payable without notice.
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Section 10.04. Releases. Each of the Guarantors consents and agrees
that, without notice to or by such Guarantor and without affecting or impairing
the obligations of such Guarantor hereunder, the Bank, in the manner provided
herein, by action or inaction, may:
(a) compromise or settle, extend the period of duration or the time for
the payment, or discharge the performance of, or may refuse to, or otherwise
not, enforce, or may, by action or inaction, release all or any one or more
parties to, the Term Note;
(b) grant other indulgences to Farrel Shaw in respect thereof;
(c) amend or modify in any manner and at any time (or from time to
time) the Term Note in accordance with Section 11.01 or otherwise;
(d) release or substitute any one or more of the endorsers or
guarantors of the Guarantied Obligations whether parties hereto or not; and
(e) exchange, enforce, waive, or release, by action or inaction, any
security for the Guarantied Obligations (including, without limitation, any of
the collateral therefor) or any other guaranty of any of the Guarantied
Obligations.
Section 10.05. Marshaling. Each of the Guarantors consents and agrees
that:
(a) the Bank shall be under no obligation to marshal any assets in
favor of each Guarantor or against or in payment of any or all of the Guarantied
Obligations; and
(b) to the extent Farrel Shaw or any other guarantor makes a payment or
payments to the Bank, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
or required, for any of the foregoing reasons or for any other reason, to be
repaid or paid over to a custodian, trustee, receiver, or any other party under
any bankruptcy law, common law, or equitable cause, then to the extent of such
payment or repayment, the Guarantied Obligations or part thereof intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made and such Guarantor shall remain
liable for such Guarantied Obligation.
Section 10.06. Liability. Each of the Guarantors agrees that the
liability of such Guarantor in respect of this Article 10 shall not be
contingent upon the exercise or enforcement by the Bank of whatever remedies the
Bank may have against Farrel Shaw or any other guarantor or the enforcement of
any Lien or realization upon any security the Bank may at any time possess.
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Section 10.07. Unconditional Obligation. The Unconditional Guaranty set
forth in this Article 10 is an absolute, unconditional, continuing and
irrevocable guaranty of payment and performance and shall remain in full force
and effect until the full and final payment of the Guarantied Obligations
without respect to future changes in conditions, including change of law or any
invalidity or irregularity with respect to the issuance or assumption of any
obligations (including, without limitation, the Term Note) of or by Farrel Shaw
or any other guarantor, or with respect to the execution and delivery of any
agreement (including, without limitation, the Term Note and the other Facility
Documents) of Farrel Shaw or any other guarantor.
Section 10.08. Election to Perform Obligations. Any election by any of
the Guarantors to pay or otherwise perform any of the Guarantied Obligations,
whether pursuant to this Article 10 or otherwise, shall not release such
Guarantor from any of its other obligations under the Notes, the Letters of
Credit or any of the other Facility Documents.
Section 10.09. No Election. The Bank shall have the right to seek
recourse against any one or more of the Guarantors to the fullest extent
provided for herein for such Guarantor's obligations under this Agreement
(including, without limitation, this Article 10) in respect of the Guarantied
Obligations. No election to proceed in one form of action or proceeding, or
against any party, or on any obligation, shall constitute a waiver of the Bank?s
right to proceed in any other form of action or proceeding or against other
parties unless the Bank has expressly waived such right in writing.
Specifically, but without limiting the generality of the foregoing, no action or
proceeding by the Bank against Farrel Shaw or any Guarantor under any document
or instrument evidencing Guarantied Obligations shall serve to diminish the
liability of any of the Guarantors under this Agreement (including, without
limitation, this Article 10) except to the extent that the Bank finally and
unconditionally shall have realized payment by such action or proceeding,
notwithstanding the effect of any such action or proceeding upon such
Guarantor's right of subrogation against Farrel Shaw.
Section 10.10. Other Enforcement Rights. The Bank may proceed, as
provided in Article 10 hereof, to protect and enforce the Unconditional Guaranty
by suit or suits or proceedings in equity, at law or in bankruptcy, and whether
for the specific performance of any covenant or agreement contained herein
(including, without limitation, in this Article 10) or in execution or aid of
any power herein granted; or for the recovery of judgment for the obligations
hereby guarantied or for the enforcement of any other proper, legal or equitable
remedy available under applicable law.
Section 10.11. Delay or Omission; No Waiver. No course of dealing on
the part of the Bank and no delay or failure on the part of the Bank to exercise
any right hereunder (including, without limitation, this Article 10) shall
impair such right or operate as
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a waiver of such right or otherwise prejudice the Bank's rights, powers and
remedies hereunder. Every right and remedy given by the Unconditional Guaranty
or by law to the Bank may be exercised from time to time as often as may be
deemed expedient by the Bank.
Section 10.12. Restoration of Rights and Remedies. If the Bank shall
have instituted any proceeding to enforce any right or remedy under the
Unconditional Guaranty, or under the Term Note, and such proceeding shall have
been discontinued or abandoned for any reason, or shall have been determined
adversely to the Bank, then and in every such case, the Bank, Farrel Shaw and
the Guarantors shall, except as may be limited or affected by any determination
in such proceeding, be restored severally and respectively to their respective
former positions hereunder and thereunder, and thereafter, subject as aforesaid,
the rights and remedies of the Bank shall continue as though no such proceeding
had been instituted.
Section 10.13. Cumulative Remedies. No remedy under this Agreement
(including, without limitation, this Article 10), the Notes, or any of the other
Facility Documents is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other remedy
given under this Agreement (including, without limitation, this Article 10), the
Notes, or any of the other Facility Documents.
Section 10.14. Survival. The obligations of the Guarantors under this
Article 10 shall survive the transfer and payment of any Guarantied Obligation
until the indefeasible payment in full of all the Guarantied Obligations.
Section 10.15. No Withholding; Gross-Up. Each payment by a Guarantor
shall be made without withholding for or on account of any present or future
taxes imposed by any Governmental Authority. If any such withholding is so
required, such Guarantor shall make the withholding and pay the amount withheld
to the appropriate Governmental Authority before penalties attach thereto or
interest accrues thereon.
Section 10.16. Payment in Applicable Currency. Any payment of a
Guarantied Obligation required to be made pursuant to this Agreement shall be
made in the currency in which such Guarantied Obligation is required to be made
pursuant to this Agreement, the Term Note or any other Facility Document.
ARTICLE 11. MISCELLANEOUS
Section 11.01. Amendments and Waivers. Except as otherwise expressly
provided in this Agreement, any provision of this Agreement may be amended or
modified only by an instrument in writing signed by the Borrowers and the Bank,
and any provision of this Agreement may be waived by the Borrowers and the Bank.
No failure on the part of the Bank to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof
-53-
<PAGE>
or preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
Section 11.02. Usury. Anything herein to the contrary notwithstanding,
the obligations of the Borrowers under this Agreement and the Notes shall be
subject to the limitation that payments of interest shall not be required to the
extent that receipt thereof would be contrary to provisions of law applicable to
the Bank limiting rates of interest which may be charged or collected by the
Bank.
Section 11.03. Expenses. The Borrowers shall reimburse the Bank on
demand for all out-of-pocket costs, expenses and charges (including, without
limitation, fees and charges of external legal counsel for the Bank) incurred by
the Bank in connection with the preparation, performance or enforcement of this
Agreement, the Notes or the other Facility Documents. The Borrowers agree to
indemnify the Bank and its directors, officers, employees and agents from, and
hold each of them harmless against, any and all losses, liabilities, claims,
damages or expenses incurred by any of them arising out of or by reason of any
investigation or litigation or other proceedings (including any threatened
investigation or litigation or other proceedings) relating to any actual or
proposed use by any Borrower or any of its Subsidiaries of the proceeds of the
Loans, including, without limitation, the reasonable fees and disbursements of
counsel incurred in connection with any such investigation or litigation or
other proceedings (but excluding any such losses, liabilities, claims, damages
or expenses incurred by reason of the gross negligence or willful misconduct of
the Person to be indemnified).
Section 11.04. Survival. The obligations of the Borrowers under
Sections 3.01, 3.04 and 11.03 shall survive the repayment of the Loans and the
termination of the Commitments.
Section 11.05. Assignment; Participations. This Agreement shall be
binding upon, and shall inure to the benefit of, the Borrowers, the Bank and
their respective successors and assigns, except that the Borrowers may not
assign or transfer their rights or obligations hereunder. The Bank shall, at the
request of the Borrowers, from time to time, assign all or any part of any Loans
or Commitments to any other bank or other entity as the Borrowers may designate
and, in connection therewith, the Bank shall agree to amend the Credit Agreement
in a manner customary for a multi-lender credit facility, under which the Bank
shall act as agent bank so long as the Bank is a party to this Agreement;
provided, however, the Bank shall have no obligation to agree to an assignment
which will result in the Commitments of the Bank being less than 50% of the
aggregate amount of the Commitments of all banks unless the Borrowers arrange
(by assignment, termination or otherwise) to reduce the Commitments of the Bank
to zero. Additionally, the Bank may, with the prior written consent of the
Borrowers, which consent shall not be unreasonably withheld, assign or sell
participations in, all or any part of any Loans or Commitments to another bank
or
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<PAGE>
other entity. In the case of an assignment, the assignee shall have, to the
extent of such assignment (unless otherwise provided therein), the same rights,
benefits and obligations as it would have if it were the Bank hereunder. In the
case of a participation, the participant shall have no rights under the Facility
Documents and all amounts payable by the Borrowers under Article 3 shall be
determined as if the Bank had not sold such participation. The agreement
executed by the Bank in favor of the participant shall not give the participant
the right to require the Bank to take or omit to take any action hereunder
except action directly relating to (i) the extension of a payment date with
respect to any portion of the principal of or interest on any amount outstanding
hereunder allocated to such participant, (ii) the reduction of the principal
amount outstanding hereunder or (iii) the reduction of the rate of interest
payable on such amount or any amount of fees payable hereunder to a rate or
amount, as the case may be, below that which the participant is entitled to
receive under its agreement with the Bank. The Bank may furnish any information
concerning the Borrowers in the possession of the Bank from time to time to
assignees and participants (including prospective assignees and participants);
provided that the Bank shall require any such prospective assignee or such
participant (prospective or otherwise) to agree in writing to maintain the
confidentiality of such information.
Section 11.06. Notices. Unless the party to be notified otherwise
notifies the other party in writing as provided in this Section, and except as
otherwise provided in this Agreement, notices shall be given to the Bank and to
the Borrowers by ordinary mail or telex addressed to such party at its address
on the signature page(s) of this Agreement. Notices shall be effective: (a) if
given by mail, 72 hours after deposit in the mails with first-class postage
prepaid, addressed as aforesaid; and (b) if given by telex, when the telex is
transmitted to the telex number as aforesaid; provided that notices to the Bank
shall be effective upon receipt.
Section 11.07. Waiver of Setoff Rights. The Bank hereby expressly
waives any right of setoff, recoupment, banker?s liens or counterclaim it may
now or hereafter have with regard to any of the Borrowers and any right to which
it may now or hereafter be entitled to offset balances held by the Bank for the
account of any of the Borrowers against any obligations of the Borrowers now or
hereafter owed to the Bank.
Section 11.08. Jurisdiction; Immunities. (a) EACH BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CONNECTICUT STATE OR UNITED
STATES FEDERAL COURT SITTING IN CONNECTICUT COUNTY OVER ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES, AND EACH BORROWER
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH CONNECTICUT STATE OR FEDERAL
COURT. EACH BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS
IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO THE
BORROWER AT ITS ADDRESS SPECIFIED IN SECTION
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<PAGE>
11.06. EACH BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY
SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. EACH BORROWER
FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN
ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. EACH
BORROWER FURTHER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT AGAINST THE BANK
SHALL BE BROUGHT ONLY IN CONNECTICUT STATE OR UNITED STATES FEDERAL COURT
SITTING IN CONNECTICUT COUNTY. EACH BORROWER WAIVES ANY RIGHT IT MAY HAVE TO
JURY TRIAL.
(b) Nothing in this Section 11.07 shall affect the right of the Bank
to serve legal process in any other manner permitted by law or affect the right
of the Bank to bring any action or proceeding against the Borrowers or their
property in the courts of any other jurisdictions.
(c) To the extent that any Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether from
service or notice, attachment prior to judgment, attachment in aid of execution,
execution or otherwise) with respect to itself or its property, such Borrower
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement, the Notes, the Letters of Credit and the other Facility Documents.
Section 11.09. Table of Contents; Headings. Any table of contents and
the headings and captions hereunder are for convenience only and shall not
affect the interpretation or construction of this Agreement.
Section 11.10. Severability. The provisions of this Agreement are
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 11.11. Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Agreement by signing any
such counterpart.
Section 11.12. Integration. The Facility Documents set forth the
entire agreement between the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
Section 11.13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
CONNECTICUT.
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<PAGE>
Section 11.14. Confidentiality. The Bank agree (on behalf of itself
and each of its affiliates, directors, officers, employees and representatives)
to use reasonable precautions to keep confidential, in accordance with safe and
sound banking practices, any nonpublic information supplied to it by the
Borrowers pursuant to this Agreement which is identified by the Borrowers as
being confidential at the time the same is delivered to the Bank, provided that
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statute, rule, regulation or judicial process, (ii) to
counsel for the Bank, (iii) to bank examiners, auditors or accountants, (iv) in
connection with any litigation to which the Bank is a party or (v) to any
assignee or participant (or prospective assignee or participant) so long as such
assignee or participant (or prospective assignee or participant) first executes
and delivers to the Bank a Confidentiality Agreement in substantially the form
of Exhibit D hereto; and provided finally that in no event shall the Bank be
obligated or required to return any materials furnished by the Borrower.
Section 11.15. Treatment of Certain Information Each Borrower (a)
acknowledges that services may be offered or provided to it (in connection with
this Agreement or otherwise) by the Bank or by one or more of its subsidiaries
or affiliates and (b) acknowledges that information delivered to the Bank by the
Borrowers may be provided to each such subsidiary and affiliate.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
FARREL CORPORATION
By:/s/ Rolf Karl Liebergesell
---------------------------
Name: Rolf Karl Liebergesell
Title: Chairman,CEO and President
Address for Notices:
25 Main Street
Ansonia, Connecticut 06401
Attn: President
Fax No.: (203) 736-2836
with a copy to:
Attn: Senior Financial Officer
Fax No.: (203) 735-6267
FARREL LIMITED
By:/s/ Rolf Karl Liebergesell
--------------------------
Name: Rolf Karl Liebergesell
Title: Chairman,CEO and President
Address for Notices:
25 Main Street
Ansonia, Connecticut 06401
Attn: President
Fax No.: (203) 736-2836
with a copy to:
Attn: Senior Financial Officer
Fax No.: (203) 735-6267
-58-
<PAGE>
FARREL SHAW LIMITED
By:/s/ Rolf Karl Liebergesell
--------------------------
Name: Rolf Karl Liebergesell
Title: Director
Address for Notices:
25 Main Street
Ansonia, Connecticut 06401
Attn: President
Fax No.: (203) 736-2836
with a copy to:
Attn: Senior Financial Officer
Fax No.: (203) 735-6267
THE CHASE MANHATTAN BANK
By:/s/ Thomas D. McCormick
-----------------------
Name: Thomas D. McCormick
Title: Vice President
Address for Notices:
999 Broad Street
Bridgeport, Connecticut 06604
Attn: Thomas D. McCormick
Fax No: (203) 382-5302
-59-
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-30735) pertaining to the Farrel Corporation 1997 Employees' Stock
Purchase Plan of our reports dated March 19, 1998 with respect to the
consolidated financial statements and schedule of Farrel Corporation included in
the Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Stamford, Connecticut
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FARREL CORPORATION AS OF DECEMBER 31, 1997 AND FOR THE
YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,447
<SECURITIES> 0
<RECEIVABLES> 14,602
<ALLOWANCES> 179
<INVENTORY> 18,277
<CURRENT-ASSETS> 37,104
<PP&E> 22,202
<DEPRECIATION> 9,786
<TOTAL-ASSETS> 56,381
<CURRENT-LIABILITIES> 23,286
<BONDS> 6
0
0
<COMMON> 61
<OTHER-SE> 25,721
<TOTAL-LIABILITY-AND-EQUITY> 56,381
<SALES> 85,382
<TOTAL-REVENUES> 85,382
<CGS> 67,671
<TOTAL-COSTS> 67,671
<OTHER-EXPENSES> 15,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 2,084
<INCOME-TAX> 727
<INCOME-CONTINUING> 1,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,357
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
