<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
Date of Report (Date of earliest event reported): June 30, 1999
The Monarch Machine Tool Company
--------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 1-1997 34-4307810
---- ------ ----------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)
2600 Kettering Tower, Dayton, OH 45423
-------------------------------- -----
(Address of principal executive offices) (Zip code)
937-910-9300
------------
(Registrant's telephone number including area code)
Not applicable
--------------
(Former name and former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 13, 1999, The Monarch Machine Tool Company (the "Company") and the
stockholders ("Sellers") of Precision Industrial Corporation ("Precision"), a
Delaware corporation, which is the parent of Herr-Voss Industries, Inc. and its
subsidiary Herr-Voss Corporation ("Herr-Voss"), entered into a Stock Purchase
Agreement (the "Agreement"). A copy of the Agreement is Exhibit 2.1 to this
Report.
Pursuant to the Agreement, on June 30, 1999, the Company purchased all of the
outstanding capital stock of Precision from Sellers. For the Precision stock,
the Company paid the following: (i) $39,295,000 paid in cash to Sellers at the
closing of the transaction on June 30, 1999 (the "Closing"); (ii) 500,000 common
shares of Monarch were issued to Sellers at the Closing; and (iii) Monarch's 12%
Junior Subordinated Note in the principal amount of $15,000,000 due in full on
December 31, 2007 (the "12% Subordinated Note") and its 8% Special Junior
Subordinated Note in the principal amount of $840,000 due June 30, 2002 (the
"Special Subordinated Note") were issued to Sellers. The purchase price of the
stock is also subject to a possible adjustment based on the final balance
sheet of Precision at the close of business on June 30, 1999.
As additional consideration to Sellers for accepting Monarch's 12% Subordinated
Note, Monarch issued Sellers at the Closing warrants to purchase 100,000 common
shares of Monarch at a warrant exercise price of $7.75 per share, subject to
adjustment. The Warrants are not exercisable before June 30, 2000 and expire on
June 30, 2009. In addition, Monarch agreed that if the 12% Subordinated Note is
not paid off by June 30, 2000, it will issue to Sellers warrants to purchase an
additional 150,000 Monarch common shares at the lower of $7.75 or the market
price of such shares on June 30, 2000. Warrants to purchase an additional 50,000
shares will be issued on a similar basis on each of October 2, 2000, January 2,
2001, April 2, 2001, July 2, 2001, and October 1, 2001 if the 12% Subordinated
Note continues to be outstanding as of those dates. If the 12% Subordinated Note
is not paid off by September 28, 1999, Sellers have the option of nominating two
persons to serve on Monarch's Board of Directors.
Herr-Voss and its subsidiaries, with annual sales of $81 million for their
fiscal year ended March 31, 1999, design and manufacture metal coil processing
lines, leveling rolls and components, and also provide a full range of roll
reconditioning services to the flat rolled metal industry. The Company intends
to continue to operate this business.
In connection with the purchase, the Company entered into the Credit Agreement,
dated June 30, 1999 (the "Credit Agreement"), among the Company, the lenders
which are parties to the Credit Agreement and ING (U.S.) Capital LLC, as
administrative agent for the Lenders and as issuing lender. The Credit Agreement
provides for a seven-year, $50,000,000 term loan, a seven and a half-year term
loan of $20,000,000, and a seven-year revolving credit facility of $30,000,000.
On the Closing date, Monarch used all of the proceeds of the term loans and
$16,000,000 borrowed under the revolving credit facility as follows: $39,295,000
to fund the cash portion of the purchase price of the Precision stock;
$25,450,000 to pay off all of Precision's and its subsidiaries indebtedness for
borrowed money; and $18,200,000 to pay all of Monarch's then existing
indebtedness for borrowed money; and $3,055,000 to pay for costs associated
with the
1
<PAGE> 3
purchase of Precision and obtaining the Credit Agreement. The Credit Agreement
is filed as Exhibit 4.1 to this Report and reference is made to such amendment
for additional information.
There is no material relationship between the Sellers and the Company or any
affiliate, director, or officer of the Company or any associate of any director
or officer of the Company
2
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired.
Following are the audited consolidated financial statements and
related notes thereto of Precision for the years ended March 31,
1999 and 1998 and Salem Group, Inc. (the former name of Precision)
for the three months ended March 31, 1997 and December 31, 1996.
Precision Industrial Corporation and Subsidiaries
-------------------------------------------------
(1) Report of Independent Public Accountants, dated May 20, 1999.
(2) Consolidated Balance Sheets at March 31, 1999 and 1998.
(3) Consolidated Statements of Income for the years ended March
31, 1999 and 1998.
(4) Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1999 and 1998.
(5) Consolidated Statements of Cash Flows for the years ended
March 31, 1999 and 1998.
(6) Notes to the Consolidated Financial Statements.
Salem Group, Inc.
-----------------
(7) Report of Independent Public Accountants, dated June 27, 1997.
(8) Consolidated Balance Sheets at March 31, 1997 and December 31,
1996.
(9) Consolidated Statements of Income for the three months ended
March 31, 1997 and December 31, 1996.
(10) Consolidated Statements of Shareholders' Equity for the three
months ended March 31, 1997 and December 31, 1996.
(11) Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and December 31, 1996.
(12) Notes to the Consolidated Financial Statements.
(13) Report of Independent Public Accountants, dated July 13, 1999.
3
<PAGE> 5
(b) Pro forma financial information (unaudited)
The following pro forma financial information is
prepared in connection with the acquisition of
Precision Industrial Corporation and Subsidiaries
("Precision") by The Monarch Machine Tool Company
("Monarch") as of June 30, 1999. At December 31,
1998, Monarch acquired GFG Corporation ("GFG") (refer
to Form 8-K filed by Monarch on January 14, 1999 and
Form 8-K/A filed by Monarch on March 16, 1999).
The Pro Forma Condensed Balance Sheet as of March 31,
1999 includes the unaudited accounts of Monarch and
the audited accounts of Precision as of that date.
The Pro Forma Condensed Consolidated Statement of
Earnings for the three months ended March 31, 1999
includes the unaudited results for both Monarch and
Precision for that three month period.
The Pro Forma Condensed Consolidated Statement of
Earnings for the year ended December 31, 1998
includes the reported results of Monarch, the
unaudited results of GFG for the year ended December
31, 1998 and the audited results of Precision for the
year ended March 31, 1999.
(1) Pro Forma Condensed Consolidated Balance
Sheet at March 31, 1999.
(2) Pro Forma Condensed Consolidated Statement
of Earnings for the three months ended March
31, 1999.
(3) Notes to the Pro Forma Condensed
Consolidated Financial Information as of and
for the three months ended March 31, 1999.
(4) Pro Forma Condensed Consolidated Statement
of Earnings for the year ended December 31,
1998.
(5) Notes to the Pro Forma Condensed
Consolidated Financial Information for the
year ended December 31, 1998.
(c) Exhibits - See Index to Exhibits.
4
<PAGE> 6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MONARCH MACHINE TOOL COMPANY
Date: July 15, 1999
--------------
By: /s/ Karl A. Frydryk
------------------------------------------
Karl A. Frydryk
Vice President and Chief Financial Officer
5
<PAGE> 7
INDEX TO EXHIBITS
-----------------
(1) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION:
2.1 Stock Purchase Agreement dated May 13, 1999 between The Monarch
Machine Tool Company and the Stockholders of Precision Industrial
Corporation.
(2) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
DEBENTURES:
4.1 Credit Agreement among The Monarch Machine Tool Company and ING
(U.S.) Capital LLC, dated as of June 30, 1999.
4.2 Agreement dated June 30, 1999 between The Monarch Machine Tool
Company and the Stockholders of Precision Industrial Corporation
identified in the Stock Purchase Agreement dated May 13, 1999 and
listed on Exhibit 2.1, above.
4.2.1 $15,000,000 12% Special Junior Subordinated Note due
December 31, 2007 of the Monarch Machine Tool Company.
4.2.2 Form of Warrant issued pursuant to the Agreement listed as
Exhibit 4.2 above.
6
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Precision Industrial Corporation:
We have audited the accompanying consolidated balance sheets of Precision
Industrial Corporation (a Delaware corporation) and Subsidiaries as of March 31,
1999 and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Precision Industrial
Corporation and Subsidiaries as of March 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -------------------------
Pittsburgh, Pennsylvania
May 20, 1999
<PAGE> 9
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999, and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,616 $ 1,742
Cash held in escrow 2,000 2,000
Receivables 10,252 10,044
Contracts-in-progress, net 4,117 5,244
Inventories 5,197 3,833
Income tax benefit 924 1,769
Income tax receivable 1,261 761
Prepaid expenses 2,433 2,178
-------- --------
Total current assets 28,800 27,571
PROPERTY PLANT AND EQUIPMENT, net 16,548 11,193
OTHER ASSETS:
Investments in affiliated companies, at equity 1,514 1,314
Income tax benefit 1,566 2,921
Goodwill, net 8,879 6,678
Other assets 214 199
-------- --------
Total assets $ 57,521 $ 49,876
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,250 $ 2,420
Accounts payable (including outstanding checks
of $291 and $1,233, respectively) 7,728 6,909
Advance billings on contracts, net 6,951 5,129
Accrued payroll and employee benefits 3,091 3,116
Other accrued liabilities 2,986 3,950
Reserves for warranty expense 1,014 1,974
-------- --------
Total current liabilities 23,020 23,498
-------- --------
LONG-TERM DEBT 23,750 20,705
OTHER NONCURRENT LIABILITIES 2,899 2,995
SHAREHOLDERS' EQUITY
Redeemable preferred stock, par $.01; 90,000 shares authorized -- --
Common stock, $.01 par value;
Voting 554,605 shares authorized, 551,818 shares outstanding 6 6
Nonvoting 1,465,395 shares authorized, 1,144,142 and
1,075,582 shares outstanding, respectively 11 10
Paid-in surplus 6,247 2,133
Retained earnings 4,677 1,982
Unearned deferred compensation (1,989) (260)
Cumulative translation adjustment (1,100) (1,193)
-------- --------
Total shareholders' equity 7,852 2,678
-------- --------
Total liabilities and shareholders' equity $ 57,521 $ 49,876
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 10
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CONTRACT REVENUES AND ROYALTIES $ 81,212 $ 84,128
COST OF REVENUES 57,792 63,751
-------- --------
Gross Margin 23,420 20,377
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,596 12,427
STOCK GRANT COMPENSATION EXPENSE 3,289 214
NON-RECURRING CHARGES 100 2,210
-------- --------
Operating income 7,435 5,526
OTHER INCOME (EXPENSE)
Interest income 114 408
Interest expense (2,446) (2,610)
Equity in net earnings (losses) of affiliates 120 (247)
Other income, net 128 474
-------- --------
Total other expense (2,084) (1,975)
-------- --------
Income from continuing operations before taxes 5,351 3,551
PROVISION FOR INCOME TAXES 2,773 1,512
-------- --------
Income from continuing operations 2,578 2,039
Extraordinary loss, net of taxes of $184 (264) --
Income from discontinued operations, net of taxes of $320 -- 451
Gain on disposal of discontinued operations,
net of taxes of $214 and $1,348 in 1999 and 1998 381 416
-------- --------
NET INCOME $ 2,695 $ 2,906
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 11
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
COMMON STOCK UNEARNED CUMULATIVE
---------------- PAID-IN RETAINED DEFERRED TRANSLATION
VOTING NONVOTING SURPLUS EARNINGS COMPENSATION ADJUSTMENT TOTAL
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ 6 $ 10 $ 1,950 ($ 924) ($ 600) ($ 944) ($ 502)
Comprehensive income
Net Income -- -- -- 2,906 -- -- 2,906
Foreign currency adjustments -- -- -- -- -- (249) (249)
Comprehensive income 2,657
Issuance of stock grants -- 1 592 -- -- -- 593
Repurchase of shares -- (1) (440) -- -- -- (441)
Share price appreciation, net -- -- 31 -- (31) -- --
Amortization of unearned --
deferred compensation -- -- -- -- 371 -- 371
------- ------- ------- ------- ------- ------- -------
Balance at March 31, 1998 $ 6 $ 10 $ 2,133 $ 1,982 ($ 260) ($1,193) $ 2,678
Comprehensive income
Net Income -- -- -- 2,695 -- -- 2,695
Foreign currency adjustments -- -- -- -- -- 93 93
Comprehensive income 2,788
Issuance of stock grants -- 1 816 -- (601) -- 216
Repurchase of shares -- -- (963) -- 65 -- (898)
Share price appreciation, net -- -- 4,261 -- (1,582) -- 2,679
Amortization of unearned
deferred compensation -- -- -- -- 389 -- 389
------- ------- ------- ------- ------- ------- -------
Balance at March 31, 1999 $ 6 $ 11 $ 6,247 $ 4,677 ($1,989) ($1,100) $ 7,852
======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 12
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 2,695 $ 2,906
Extraordinary loss, net of tax effect 264 --
Adjustments for noncash items:
Depreciation and amortization 1,839 2,078
Deferred income taxes 2,169 (903)
(Gain) on sale of property and equipment (14) (63)
Equity in (earnings)/losses of affiliates, net (120) 247
Stock grant compensation expense 3,289 592
Gain on sale of subsidiaries, net of tax effect (381) (416)
Income from discontinued operations, net of tax effect -- (451)
Changes in balance sheet accounts (net of effect of acquisitions,
discontinued operations and extraordinary items):
Receivables 85 (223)
Inventories 61 (1,964)
Prepaid expenses and other assets (722) (960)
Advance billings 1,842 (2,603)
Accounts payable and other accrued liabilities (1,625) 1,628
------- -------
Net cash flows provided by (used for) operating activities 9,382 (132)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,478) (2,967)
Proceeds from sale of property, plant and equipment 101 481
Purchase of subsidiary, net of cash acquired (4,967) --
Proceeds from sale of subsidiaries, net of cash held in escrow -- 8,491
Change in other assets (114) 1,097
------- -------
Net cash flows (used for) provided by investing activities (9,458) 7,102
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facility (2,300) (6,100)
Proceeds from additional term loan borrowings 6,000 2,000
Principal payments under capital leases (24) (26)
Term loan debt repayments (1,800) (1,200)
Repurchase of common stock (903) (180)
------- -------
Net cash flows provided by (used for) financing activities 973 (5,506)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (23) (13)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 874 1,451
CASH AND CASH EQUIVALENTS, Beginning of year 1,742 291
------- -------
CASH AND CASH EQUIVALENTS, End of year $ 2,616 $ 1,742
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,642 $ 2,486
======= =======
Income taxes paid, net $ 1,908 $ 2,038
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 13
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
1. ORGANIZATION AND OPERATIONS:
---------------------------
Precision Industrial Corporation (a Delaware corporation), is the parent
company of Herr-Voss Industries, Inc., a Pennsylvania corporation.
Herr-Voss Industries, Inc. is the parent company of Herr-Voss Corporation,
H-V Mill Roll Services, Inc., H-V Roll Center, Inc., H-V Asset Management
Corp., H-V Equipment Company, H-V Foreign Sales Corp., Herr-Voss Limited,
Salem Engineering Company Limited and until July 24, 1997 Salem Furnace
Co.
Precision Industrial Corporation and its subsidiaries (the Company) are in
the business of designing, engineering, manufacturing, and installing
heavy industrial equipment primarily for the metals industry. The Company
presently operates in one business segment: metal processing equipment.
The revenues of the Company's business are derived primarily from
long-term contracts, which are negotiated by sales engineers employed by
the Company. For the year ended March 31, 1999, one customer accounted for
more than 10% of revenues. For the year ended March 31, 1998, no single
customer accounted for more than 10% of contract revenues.
Export sales may bear additional credit risk beyond normal credit risks
and are usually secured by letters of credit or other forms of credit
insurance. As a multinational corporation, the Company manages its foreign
currency risk through the purchase of forward contracts for the limited
number of contracts denominated in foreign currencies. The Company manages
its exposure to translation gains and losses by borrowing in local
currencies, which reduces such exposure. The Company does not engage in
the trading of, or speculation in, derivative instruments.
As described in Note 13, the Company sold its Minerals Processing Group on
April 4, 1997 for approximately $2.1 million. This transaction was
accounted for as discontinued operations as of March 31, 1997. For tax
purposes, this transaction was recognized in fiscal 1998. In addition, on
June 11, 1997, the Company entered into a stock purchase agreement to sell
all of the issued and outstanding capital stock of Salem Furnace Co. for
$8.8 million. Also, on September 20, 1997, the Company sold Essex
Insurance Co., Ltd. (Essex) for $10,000. The financial results of Salem
Furnace Co. and Essex have been accounted for as discontinued operations
under APB No. 30 in the accompanying financial statements.
On July 24, 1998, H-V Roll Center, Inc., a newly formed subsidiary of
Herr-Voss Industries, Inc., acquired certain assets and assumed certain
liabilities of Roll Center, Inc. for $5.0 million, excluding cash
acquired. The assets acquired consisted primarily of property, plant and
equipment and accounts receivable. The fair value of property, plant and
equipment acquired was estimated internally based on the Company's
experience and knowledge of the industry. No independent appraisal was
performed. In management's opinion, any difference between the estimated
value of property, plant and equipment acquired and the fair value as of
the acquisition date would not have a material impact on the financial
statements. The excess of the purchase price over the estimated fair
values of the net assets acquired was approximately $2.3 million. This
amount is included with goodwill in the accompanying consolidated balance
sheet and is being amortized over a period of 40 years.
As described in Note 17, the shareholders of the Company have entered into
a definitive agreement to sell the Company.
<PAGE> 14
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
The significant accounting policies applied in preparing the accompanying
consolidated financial statements are summarized below:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation. Investments in other than
wholly owned and majority owned subsidiaries include two 50%-owned
subsidiaries in Japan, both of which are carried at equity.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS: Cash equivalents, which consist primarily of time
deposits, are stated at cost, which approximates fair value. For
purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with maturities of three
months or less at the date of acquisition to be cash equivalents.
SHORT-TERM INVESTMENTS: Short-term, interest-bearing investments are
those with maturities of one year or less but greater than three
months when purchased. These investments are readily convertible to
cash and are stated at cost, which approximates fair value.
CONTRACT ACCOUNTING: The Company and its subsidiaries account for
contracts on the percentage-of-completion method. Based upon the
nature of the contract, the Company determines the stage of
completion using the relationship of total costs incurred to total
estimated costs at completion. Contract costs, as reflected in the
consolidated statements of income, include all direct contract costs
and overhead, including all related engineering costs. Changes in
contract performance, estimated profitability and final contract
settlements may result in revisions to costs and revenues which are
recognized in the period in which the revisions are determined. If a
loss is projected on any contract-in-progress, the entire estimated
loss is recognized currently. Warranty reserves are provided during
the course of contract performance for costs which may be incurred
after completion based on a formula and specific identification
basis.
INVENTORIES: Inventories are valued at the lower of cost (determined
by the first-in, first-out method) or market and consist primarily of
raw materials.
OPERATING CYCLE: The operating cycles of contracts vary and in some
cases are more than one year. In accordance with industry practices,
all contract-related accounts are included in current assets and
liabilities.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are
carried at cost. Major additions and betterments are capitalized,
while maintenance and repairs, which do not significantly improve or
extend the lives of the respective assets, are expensed in the year
incurred. Property disposed of is removed from the asset and
accumulated depreciation accounts, with the gain or loss credited or
charged to current income.
<PAGE> 15
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
------------------------------------------
DEPRECIATION AND AMORTIZATION: The Company provides for depreciation
over the estimated useful lives of the plant and equipment, employing
the straight-line method. License agreements and other purchased
technology are amortized on the straight-line method over the
remaining years expected to be benefited.
GOODWILL: Goodwill (excess of cost over net assets acquired) is being
amortized on a straight-line basis over a 40-year period.
DEVELOPMENT COSTS: Development costs related to continuing operations
are charged to operations as incurred and amounted to $289,000 and
$407,000 for the year ended March 31, 1999 and 1998, respectively.
INCOME TAXES: The Company, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
computes deferred tax assets or liabilities based on the difference
between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax
expense or credit is based on the changes in the assets and
liabilities from period to period. See Note 7 for further information
concerning income taxes.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS: The financial
statements of foreign subsidiaries are translated using the standards
established by SFAS No. 52, "Foreign Currency Translation."
Accordingly, all assets and liabilities of foreign subsidiaries are
translated at year-end exchange rates; revenues and expense accounts
are translated at the average exchange rates during the year. Net
unrealized translation gains or losses are reflected in the
cumulative translation adjustment and are not included in net income.
3. RECEIVABLES:
-----------
Receivables at March 31, 1999 and 1998 are net of allowances for doubtful
accounts of $102,000 and $83,000, respectively.
In accordance with the provision of long-term contracts, certain
percentages of billings or amounts are withheld by customers until
completion and acceptance of the project. At March 31, 1999 and 1998,
these contract retentions amounted to approximately $197,000 and $929,000,
respectively. Retentions due are included in current receivables. Based
upon prior experience with similar contracts, retentions are expected to
be collected within one year.
4. INVESTMENTS IN AFFILIATED COMPANIES:
-----------------------------------
NIPPON HERR CO., LTD.
---------------------
The Company owns 48,000 shares of capital stock of Nippon Herr Co., Ltd.,
representing a 50% interest of Nippon Herr's outstanding common stock.
Nippon Herr's principal business is the engineering and installation of
metal can forming equipment. The Company's equity in net earnings of
Nippon Herr was recorded through February 28, 1999 and 1998 based on
financial statements at
<PAGE> 16
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
4. INVESTMENTS IN AFFILIATED COMPANIES: (CONTINUED)
-----------------------------------
that date. The Company accounts for its investment in Nippon Herr using
the equity method. The Company recognized $80,000 and ($48,000) relating
to its share of the net income (loss) of Nippon Herr for the years ended
March 31, 1999 and 1998, respectively. Nippon Herr's total assets were
$10.6 million and $7.5 million with stockholder's equity of $2.6 million
and $2.3 million, respectively, at February 28, 1999 and 1998.
DAIDO HERR ENGINEERING CO., LTD.
--------------------------------
The Company owns 400 shares of capital stock of Daido Herr Engineering
Co., Ltd., representing a 50% interest of Daido Herr's outstanding common
stock. Daido Herr's principal business is the engineering and installation
of metal strip processing equipment. The Company's equity in net earnings
of Daido Herr was recorded through February 28, 1999 and 1998 based on
financial statements at that date. The Company accounts for its investment
in Daido Herr using the equity method. The Company recognized $40,000 and
($199,000) relating to its share of the net income (loss) of Daido Herr
for the years ended March 31, 1999 and 1998, respectively. Daido Herr's
total assets were $11.4 million and $4.7 million with stockholder's equity
of $290,000 and $165,000, respectively, at February 28, 1999 and 1998.
5. CONTRACTS-IN-PROGRESS:
---------------------
Amounts reflected in the balance sheets as contracts-in-progress consist
of costs incurred on contracts-in-progress, plus estimated earnings
thereon, less progress billings. Where progress billings exceed costs and
earnings, that amount is reflected as advance billings on contracts. At
March 31, 1999 and 1998 these amounts were as follows:
(Dollars in Thousands)
---------------------
1999 1998
-------- --------
Costs incurred plus estimated earnings $ 45,513 $ 64,594
Less: Progress billings (48,347) (64,479)
-------- --------
$ (2,834) $ 115
======== ========
Presentation in balance sheet:
Contracts-in-progress $ 4,117 $ 5,244
Advance billings on contracts (6,951) (5,129)
-------- --------
$ (2,834) $ 115
======== ========
<PAGE> 17
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
6. PROPERTY, PLANT AND EQUIPMENT:
-----------------------------
Property, plant and equipment consists of the following at March 31, 1999
and 1998:
(Dollars in Thousands)
---------------------
1999 1998
-------- --------
Land $ 301 $ 301
Buildings 7,208 5,216
Equipment, furniture and fixtures 18,405 13,849
-------- --------
25,914 19,366
Less: Accumulated depreciation (9,366) (8,173)
-------- --------
Property, plant and equipment, net $ 16,548 $ 11,193
======== ========
Property, plant and equipment increased during 1999 primarily due to the
acquisition of Roll Center, Inc. (see Note 1) and the construction of an
addition to a building at one of the Company's facilities.
7. INCOME TAXES:
------------
The Company and all of its domestic subsidiaries file a consolidated
federal income tax return. The parent company and its domestic
subsidiaries each report current income tax expense as allocated under a
consolidated tax allocation agreement. Generally, this allocation results
in profitable companies recognizing a tax provision as if the individual
company filed a separate return, and loss companies recognizing benefits
to the extent their losses contribute to reduced consolidated taxes.
Deferred income taxes are established and segregated for each member of
the consolidated group. Similar procedures are followed by the United
Kingdom subsidiaries, which file tax returns under available group relief
provisions.
Income from continuing operations before taxes as shown in the
accompanying consolidated statements of income includes the following
components:
(Dollars in Thousands)
1999 1998
------- -------
Domestic - United States $ 5,366 $ 3,575
Foreign - non U.S., primarily U.K (15) (24)
------- -------
Income from continuing operations
before taxes $ 5,351 $ 3,551
======= =======
<PAGE> 18
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
7. INCOME TAXES: (CONTINUED)
------------
A reconciliation of the United States federal statutory income tax rate to
the effective income tax rate for continuing operations follows:
1999 1998
------ ------
United States federal statutory rate 34.0% 34.0%
State and foreign taxes, net of federal benefit 3.4 6.4
Amortization of goodwill and increases in stock
grant compensation expense 19.6 6.2
Valuation allowance 0.2 (1.8)
Benefit of Foreign Sales Corporation (1.0) (1.4)
Effect of change in deferred tax rate and other, net (4.5) (0.8)
------ ------
Effective book income tax rate 51.7% 42.6%
====== ======
Taxes on income from continuing operations, as shown in the accompanying
consolidated statements of income, includes the following components:
(Dollars in Thousands)
1999 1998
------- -------
Currrent provision:
Federal $ 444 $ 2,061
State 160 450
Foreign -- (96)
------- -------
Total current tax provision 604 2,415
------- -------
Deferred provision:
Federal 1,993 (748)
State 176 (155)
------- -------
Total deferred tax provision 2,169 (903)
------- -------
Provision for income taxes $ 2,773 $ 1,512
======= =======
<PAGE> 19
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
7. INCOME TAXES: (CONTINUED)
------------
The components of the deferred tax assets and liabilities recorded in the
accompanying balance sheets at March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------------------
Deferred
March 31, Expense/ March 31,
1999 (Credit) 1998
<S> <C> <C> <C>
Deferred Tax Assets from Continuing Operations:
Reserves recorded for:
Accruals/reserves not currently deductible $ 3,393 $ 1,118 $ 4,511
Foreign tax credit and net operating /
capital loss carryforwards 391 974 1,365
------- ------- -------
Total deferred tax assets from continuing operations 3,784 2,092 5,876
------- ------- -------
Deferred Tax Liabilities for Continuing Operations:
Excess of book basis over tax basis
of plant and equipment (874) 192 (682)
------- ------- -------
Other (189) (115) (304)
------- ------- -------
Total deferred tax liabilities from continuing operations (1,063) 77 (986)
Net deferred tax assets from continuing operations 2,721 2,169 4,890
Net deferred tax asset from extraordinary loss 184 (184) --
Net deferred tax liability from discontinued operations (415) 215 (200)
------- ------- -------
Net deferred tax assets $ 2,490 $ 2,200 $ 4,690
</TABLE>
The Company's federal income tax returns for the years 1996 through 1998,
inclusive, are subject to examination by the Internal Revenue Service.
Management believes that adequate tax accruals have been provided for these
and subsequent years.
Undistributed earnings of non-U.S. subsidiaries amounting to $2.1 million at
March 31, 1999 and 1998 were considered by management to be permanent
business requirements of these subsidiaries under present circumstances and
no provision has been made for the additional U.S. income taxes which might
result if these undistributed earnings were remitted to the parent company.
Except for the effects of the reversal of net deductible temporary
differences, the Company is not aware of any factors which would cause any
significant differences between book and taxable income in future years.
Although there can be no assurances that the Company will generate any
earnings or specific level of continuing earnings in any jurisdiction,
management believes that it is more likely than not that the net deductible
differences will reverse during periods when the Company generates
sufficient net taxable income, and that sufficient taxable income will be
generated in foreign
<PAGE> 20
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
7. INCOME TAXES: (CONTINUED)
------------
jurisdictions to permit utilization of related credit carryforwards to
the extent recorded at March 31, 1999. The Company has $78,000 of
foreign tax credit carryforwards which expire from 2000 to 2003. The
Company has established a valuation allowance of $52,000 at March 31,
1999 for a portion of its foreign tax credit carryforwards available
against U.S. income taxes.
In addition, the Company has generated a tax benefit of $884,000 from
net operating loss carryforwards as a result of operating losses
incurred during the fiscal year ended March 31, 1998 and the
three-month period ended March 31, 1997. Due to the Internal Revenue
Service limitation on "short-period" losses, a net operating loss
carryforward of $312,000, related to the three month period ended March
31, 1997, is reflected in deferred tax assets and is expected to be
recognized in full over its remaining four year period. The remaining
tax benefit of $572,000 related to the net operating loss carryforward
for the fiscal year ended March 31, 1998 was recognized in full in the
current year.
8. CREDIT AND BORROWING ARRANGEMENTS:
---------------------------------
Long-term debt consists of the following at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands)
----------------------
1999 1998
------- -------
<S> <C> <C>
Term loan (with maturity dates from November 1999 through
May 2005) $15,000 $10,800
Subordinated notes (with maturity dates through September 29,
2005 and fixed interest rate of 12%) 10,000 10,000
Revolving credit facility (with a maturity date of June 29, 2003 and
a variable rate of 7.75% and 8.50% at March 31, 1999 and 1998) -- 2,300
Capital lease obligations -- 25
------- -------
25,000 23,125
Less current maturities 1,250 2,420
------- -------
Long-term debt $23,750 $20,705
======= =======
</TABLE>
Maturities of long-term debt during the five years ending March 31,
2004 and the years thereafter are as follows: 2000 - $1,250,000; 2001 -
$2,500,000; 2002 - $2,500,000; 2003 - $2,500,000; 2004 - $2,500,000;
and thereafter $13,750,000.
The Company and its subsidiaries entered into a credit agreement on
September 27, 1996 with a U.S. bank wherein such bank provided a term
loan of $15.0 million and a revolving credit facility of $15.0 million
for borrowing and the issuance of letters of credit and under which the
Company and its subsidiaries were subject to certain restrictions and
covenants including, among other provisions, financial requirements
related to fixed charge coverage, debt to cash flow coverage and net
worth. On October 9, 1998, the Company amended and restated this credit
agreement with the amount available under the agreement being increased
to $20.0 million in term loans and $20.0 million in a revolving credit
facility for borrowing and the issuance of letters of credit. The
Company has pledged the capital stock of substantially all of its
subsidiaries as collateral against the revolving credit facility and
term
<PAGE> 21
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
8. CREDIT AND BORROWING ARRANGEMENTS: (CONTINUED)
---------------------------------
loan. Interest on the term loan and revolver is variable based on prime
and/or LIBOR rates plus add on margin rates, as defined. The Company is
required to pay a commitment fee of 0.25% quarterly on the unused
portion of the revolving credit facility. Of the term loan outstanding
at March 31, 1999, $2.5 million was subject to interest based on a then
current prime rate of 7.75% with $8.5 million subject to interest based
on a 3-month LIBOR rate of 6.75% and $4.0 million was subject to a
1-month LIBOR rate of 6.69%. The March 31, 1998 term loan balance was
subject to interest at the then current prime rate of 8.50%. As of
March 31, 1999, the Company had borrowed $15.0 million of its term loan
facility while its full revolving credit facility of $20.0 million was
available. As of March 31, 1998, the Company had fully utilized its
$15.0 million term loan facility and had borrowed $2.3 million under
its revolving credit facility. As of March 31, 1999 and 1998, The
Company had outstanding letters of credit of $1.8 million and $1.7
million, leaving $18.2 million and $11.0 million of its revolving
credit facility available on such dates.
In June 1997, the Company refinanced its related party subordinated
debt with subordinated debt from another financial institution. The
subordinated debt now bears interest at 12% per annum, interest
payments are due monthly, with the principal due on September 29, 2005.
In connection with this debt agreement, a portion of the Company's
stock has been pledged as collateral for the amount outstanding.
The Company, in connection with its October 1998 amendment and
restatement of its credit agreement, refinanced its existing bank debt
and wrote off $264,000 of deferred financing costs (net of taxes of
$184,000) which is reflected as an extraordinary loss in the
accompanying consolidated statements of income.
At March 31, 1999 and 1998, the Company's United Kingdom subsidiaries
had outstanding bank guarantees of $105,000 and $138,000 issued by a
major bank. All of the amounts utilized have been for guarantees issued
to customers of the Company for assuring contract performance related
to the operations of its United Kingdom subsidiaries and which are
collateralized by standby letters of credit issued by the Company's
U.S. bank.
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company, through one U.S. bank, has provided letters of credit
totaling $1.8 million at March 31, 1999, all of which are provided
under the Company's revolving credit facility, as described in Note 8.
The standby letters of credit represent collateral for the following at
March 31, 1999: performance and advances on long-term contracts -
$750,000; documentary letters of credit - $300,000; and commercial
insurance policies - $750,000. The Company purchases surety bonds on an
as needed basis. At March 31, 1999, there were $58,000 of such surety
bonds outstanding.
In accordance with an Agreement and Plan of Merger (the "Agreement")
dated June 28, 1996, the Company purchased all outstanding shares of
common stock of Salem Corporation. As of March 31, 1999 and 1998,
16,628 and 19,409 shares were still outstanding and have not been
tendered by shareholders. The liability for these shares is
approximately $416,000 and $485,000, and has been recorded in the
Company's consolidated balance sheets.
<PAGE> 22
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
-----------------------------
The Company is engaged in ordinary litigation incidental to its business.
The Company does not believe that this litigation will have a material
adverse effect on its consolidated financial position or results of
operations.
10. EMPLOYEE RETIREMENT BENEFITS:
----------------------------
The Company maintains a retirement savings plan, qualified under Section
401(k) of the Internal Revenue Code, for its salaried employees. The Company
and its subsidiaries make mandatory contributions to this plan of 3% of base
compensation for eligible employees.
One of the Company's U.S. subsidiaries has two noncontributory defined
benefit pension plans covering certain of their collective bargaining
employees. Pension benefits are determined by a fixed benefit formula and
number of years of service. Company contributions are computed using the
projected unit credit method of funding.
The funded status for the fiscal years ended March 31, 1999 and 1998 was as
follows:
(Dollars in Thousands)
1999 1998
------- -------
Benefit obligation $ 3,453 $ 3,262
Fair value of plan assets 3,524 3,367
------- -------
Funded status $ 71 $ 105
======= =======
(Accrued) benefit cost recognized
in the consolidated balance sheets $ (264) $ (188)
======= =======
The following table sets forth weighted-average assumptions as of March 31,
1999 and 1998:
1999 1998
------ ------
Weighted-average assumptions
Discount rate 7.00% 7.00%
Expected return on plan assets 7.75% 7.75%
<PAGE> 23
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
10. EMPLOYEE RETIREMENT BENEFITS: (CONTINUED)
----------------------------
The following table summarizes the plan activity:
(Dollars in Thousands)
1999 1998
-------- --------
Benefit cost $ 76 $ 77
Employer contributions -- 316
Plan participants' contributions -- --
Benefits paid 168 118
Plan assets were invested primarily in common stocks (45%), bonds and
mortgages (25%), investment funds (25%) and real estate (5%).
The Company's United Kingdom subsidiaries have a contributory defined
benefit retirement plan covering substantially all salaried employees.
Pension benefits are based primarily on years of service and the employee's
average compensation during the three highest consecutive years in the last
ten years preceding the date of normal retirement. In addition, employees
contribute either 3.0% or 5.0% of their salary, depending upon their
position in the Company. The Company contributions are computed using the
projected unit credit method of funding, taking into account future salary
increases. Plan assets are invested in a pooled collective investment fund
comprised of publicly traded stocks and bonds. Based upon the latest
actuarial valuation, management estimates that the net periodic pension cost
and accrued pension liability are not significant.
11. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
----------------------------------------------------
The Company provides certain retiree health care benefits covering
substantially all domestic salaried employees and certain retiree life
insurance covering a portion of its collective bargaining employees.
Employees are generally eligible for benefits upon retirement with the
Company and completion of ten years of service. The Company does not
currently pre-fund these benefits and retains the right to modify or
terminate certain of these benefits in the future.
<PAGE> 24
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
11. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
----------------------------------------------------
The following table illustrates the Company's postretirement benefit funded
status as of March 31, 1999 and 1998:
(Dollars in Thousands)
1999 1998
------- -------
Benefit obligation $ 1,359 $ 1,257
Fair value of plan assets -- --
------- -------
Funded status $(1,359) $(1,257)
======= =======
(Accrued) benefit cost recognized
in the consolidated balance sheets $(1,382) $(1,289)
======= =======
Benefit cost $ 126 $ 170
======= =======
Future benefit costs were estimated assuming medical costs would increase at
7.8% per year, decreasing by 0.56% over each of the next five years and
remaining at 5.0% per year thereafter. A 1.0% increase in this annual trend
rate would have increased the accumulated postretirement benefit obligation
at March 31, 1999 by approximately $94,000 and increased the postretirement
benefit expense for the year then ended by approximately $17,000. The
weighted average discount rate used to estimate the accumulated
postretirement benefit obligation at March 31, 1999 and 1998 was 7.0%. The
Company continues to evaluate ways in which it can better manage these
benefits and control costs. Any changes in the plan or revisions to
assumptions that affect the amount of expected future benefits may have a
significant effect on the amount of the reported obligation and annual
expense.
12. NON-RECURRING CHARGES:
---------------------
During the fiscal year ended March 31, 1999, the Company recorded $100,000
of non-recurring charges primarily related to executive search fees and
relocation costs net of a reversal of a prior year accrual for non-recurring
charges. During the fiscal year ended March 31, 1998, the Company recorded
severance charges of $1.1 million. In addition, non-recurring charges
amounting to $1.1 million were recognized during the year ended March 31,
1998, which primarily related to expenses incurred for the disposal and
liquidation of various subsidiaries.
13. DISCONTINUED OPERATIONS:
-----------------------
On April 4, 1997, the Company sold its stock in the Minerals Processing
Group to a group of management employees of such group for $2.1 million. The
loss on disposal of $2.4 million (net of taxes of $1.8 million) was
accounted for as a discontinued operation in the year ended March 31, 1997.
<PAGE> 25
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
13. DISCONTINUED OPERATIONS: (CONTINUED)
-----------------------
On July 29, 1997, the Company sold its stock in Salem Furnace Co. for $8.8
million, of which $2.0 million is maintained in escrow as of March 31, 1999
in accordance with the stock purchase agreement. In April, 1999 an agreement
as to the final distribution of the escrowed funds was reached. The Company,
in May 1999, received $2.2 million, including interest on such funds, which
resulted in a gain in fiscal 1999 of $381,000 (net of taxes of $214,000) on
the disposal of discontinued operations. The July 1997 sale resulted in a
gain in fiscal year 1998 of $570,000 (net of taxes of $2.1 million), which
includes a $3.0 million allocation of goodwill, that is non-deductible for
tax purposes. The goodwill, which resulted from the Agreement and Plan of
Merger of Salem Corporation on September 27, 1996, was allocated one-third
to Salem Furnace Co. based on their historical pro-rata portion of
consolidated earnings before income taxes. Salem Furnace Co. had total
assets and liabilities of $15.4 million and $11.5 million, respectively, at
March 31, 1997. Revenues and net income for the period April 1 to July 31,
1997 amounted to $12.0 million and $661,000, respectively.
In September 1997, Essex was sold at a loss of $313,000 (net of taxes of
$729,000). At March 31, 1997, Essex had total assets and liabilities of $4.7
million and $3.2 million, respectively.
Based upon management's estimates, certain reserves were recorded in fiscal
1998 related to the transactions described above. Such reserves were reduced
in fiscal 1999 to $350,000 to reflect a settlement agreement reached with a
party to one of the above transactions.
14. SHAREHOLDERS' EQUITY:
--------------------
In accordance with an Agreement and Plan of Merger (the "Agreement") dated
June 28, 1996, the Company purchased all outstanding shares of common stock
of Salem Corporation and issued 551,818 shares of Class A Voting Common
Stock, 948,182 shares of Class B Nonvoting Common Stock and 90,000 shares of
Redeemable Preferred Stock. All shares of the Company's stock have a par
value of $0.01 per share. In December 1996, in connection with an Employee
Stockholder Agreement dated September 27, 1996, the Company issued a total
of 99,800 additional shares of Class B Nonvoting Common Stock to various
executives, management employees and other key employees.
Associated with the acquisition, certain executives entered into employment
agreements with the Company which outlined the terms and conditions of
employment. Additionally, the Company entered into employee stockholder
agreements which provide for participation in the Company's stock plan by
certain executives, management employees and other key employees for the
issuance of up to 400,000 of additional future shares of Class B - Nonvoting
Common Stock of the Company.
The additional 400,000 shares were expected to be granted in accordance with
the related agreements as follows:
a. First 100,000 shares - 42,000 granted in five equal amounts and
58,000 granted upon management recommendation and Board of
Directors' approval over the five year period from 1998 to 2001.
During fiscal 1998, 42,000 shares were granted. As a result, the
Company recognized compensation expense based upon the fair market
value at the date of grant.
<PAGE> 26
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
14. SHAREHOLDERS' EQUITY: (CONTINUED)
--------------------
b. Second 100,000 shares -- 100,000 shares granted based upon
management's recommendation and Board of Directors' approval over
the five year period from 1997 to 2001.
c. Third 200,000 shares -- 200,000 shares granted based on
determination by the Board of Directors.
The executives who have entered into employment agreements with the Company
have also entered into put option agreements which provide the right and
option to require the Company to purchase any or all of the securities held
by the optionee during the designated put period commencing on September 27,
1999 and ending on December 31, 1999. Certain other rights including call
rights and provisions related to the discontinuance of employment are also
in place.
The stock grants made to employees of 99,800 shares and the 400,000
additional grants, also include certain provisions related to, among others,
put rights by the employees, call rights by the Company, provisions upon
discontinuance of employment and certain other rights. The put rights
generally become exercisable one year after the stock award is granted and
vested shares may be exercised at a rate of 20% per year over a five-year
period.
The initial stock grant of 99,800 shares was recorded based on an estimated
fair value of $900,000 as unearned deferred compensation as of December 31,
1996. The unearned deferred compensation was to be amortized as expense over
the five-year period between issuance and the private rights exercise
period. To the extent that the future fair value of such stock increases
above the initial value (as set forth below), additional unearned deferred
compensation expense will be recorded for such excess and amortized to
expense over the remaining number of years until the put rights become
exercisable. However, in connection with the sale of the Minerals Processing
Group on April 4, 1997 and Salem Furnace Co. on July 29, 1997, the stock
grants held by the employees of such groups immediately vested. Accordingly,
the related unamortized deferred compensation of approximately $427,000 was
recognized immediately and included in the gain or loss on disposal of
discontinued operations. Unearned compensation expense will be amortized to
expense over the remaining number of years until the put rights become
exercisable. In addition, upon the issuance of additional shares, such
shares will be recorded as unearned deferred compensation, based on their
estimated fair value at the time of issuance, and amortized to expense over
the period beginning one year after issuance and the effective date of the
related put right including the five year vesting period during which the
shares become exercisable (at 20% per year). These shares may also result in
additional future deferred compensation expense to the extent that the
future fair value of the stock increases above the initial value at the time
of issuance.
The value used to establish the price for any shares that the Company is
obligated to repurchase under put rights obligations contained in existing
stockholder agreements is based on a formula of a multiple of five times
earnings before interest, taxes and amortization plus cash minus the total
of the average debt (including capitalized leases) and preferred stock
(including accrued dividends) at the end of each of the preceding twelve
months. However, if other information, such as the pending sale of the
Company as described in Note 17, supports a different value then such
information will be used by the Board of Directors to determine the value to
be used
<PAGE> 27
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
14. SHAREHOLDERS' EQUITY: (CONTINUED)
--------------------
On January 9, 1998, the Company entered into an employment agreement with a
new member of management that provides such person with the option to
purchase 50,000 shares of common stock if certain performance criteria, as
defined, are met. Upon exercise, the Company will record compensation
expense based on the difference between the exercise price and the fair
market value. In addition, the agreement provides for the granting of
100,000 shares of common stock to such person, of which 25,000 shares were
fully vested upon grant and for which the Company recognized compensation
expense of $192,000 based upon the then current fair value. The remaining
75,000 shares granted to such person will vest if certain share values, as
defined, are reached by the Company from December 31, 1998 through December
31, 2002. Compensation expense will be recognized in the future based upon
the share values, if such defined values have been achieved. All shares
issued in connection with the above are subject to an Employee Stockholder
Agreement dated February 20, 1998.
On August 10, 1998, the Company entered into an employment arrangement with
a new member of management that provides such person with the option to
purchase 50,000 shares of common stock if certain performance criteria, as
defined, are met. Upon exercise, the Company will record compensation
expense based on the difference between the exercise price and the fair
market value. Upon exercise, these shares are subject to an Employee
Stockholder Agreement.
In February 1999, several retiring employee shareholders exercised their put
rights with respect to 39,050 shares of Class B Nonvoting Common Stock of
which 510 shares were repurchased by existing employee shareholders with the
remaining 38,540 shares having been redeemed for $963,500 and cancelled by
the Company.
As more fully described in Note 17, the shareholders of Precision Industrial
Corporation have entered into an agreement to sell the Company to Monarch
Machine Tool Company. In connection with such sale, any unvested shares held
by employees will fully vest resulting in the recognition of compensation
expense by the Company of its balance of unearned deferred compensation of
$2.0 million, adjusted by any amounts required to recognize the final per
share selling price in accordance with the Stock Purchase Agreement between
Monarch Machine Tool Company and the Company.
The Company also issued 90,000 shares of redeemable Preferred Stock (par
value of $0.01 per share) for a total of $9.0 million. Such shares have a
liquidation value of $100.00 per share. The Preferred Stock has its own
specific rights as set forth in the related legal documents. On March 31,
1997, the Company redeemed the entire $9.0 million of its Preferred Stock
and paid the accrued dividend on such shares. The funds for such redemption
were provided by additional borrowings of approximately $9.4 million under
the Company's existing credit facility.
15. STOCK PLAN:
----------
Effective April 1, 1998, the Board of Directors approved the Precision
Industrial Corporation Stock Plan (the "Stock Plan") which provides for
restricted stock awards, incentive stock options and non-statutory stock
options of up to a total of 150,000 shares of Class B Nonvoting common
stock. Specifically, the stock plan provides restricted stock grants for
those employees who have been designated to receive 300 shares or less.
These grants will vest over 5 years (20% each year) beginning April 1, 1998.
For those employees who have been designated to receive an award of more
than 300 shares, alternatives will be provided to receive such award as
either a restricted stock grant or
<PAGE> 28
PRECISION INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
March 31, 1999 and 1998
----------
15. STOCK PLAN: (CONTINUED)
----------
a non-statutory stock option. The non-statutory stock option will vest in
the same manner as the restricted stock grant. The option exercise price is
the estimated fair market value and will expire after 5 years, but is
subject to the conditions and restrictions contained in the Employee
Stockholder Agreement dated September 27, 1996 and the Stock Plan. The Board
of Directors, on May 18, 1998, awarded 22,500 shares under the stock plan.
All employees elected to receive the award as a restricted stock grant. The
Company recorded $126,000 in compensation expense related to this stock
grant during the year ended March 31, 1999.
In addition, on May 15, 1998, certain outside Directors purchased 90,000
shares of Class B Nonvoting common stock at a purchase price of $0.67 per
share under the terms associated with such purchases. The purchased shares
were 20% vested on the date of purchase with the remaining shares vesting
ratably over the next four years on each December 31, subject to continued
service and attendance of at least 80% of the Board meetings each year. The
Company will record compensation expense for the difference, if any, between
the purchase price and the fair market value of the shares over the vesting
period. All stock purchased is subject to the terms and conditions of an
Employee Stockholder Agreement dated May 15, 1998.
16. MANAGEMENT INCENTIVE PLAN:
-------------------------
Precision Industrial Corporation maintains a Management Incentive Plan for
its executive officers. The Company expensed $228,000 for this Plan during
the fiscal year ended March 31, 1999.
Herr-Voss Industries, Inc. maintains a Management Incentive Plan for its
executive officers. Amounts previously expensed and unawarded of
approximately $167,000 were reversed in the fiscal year ended March 31,
1999. There were no amounts expensed for this Plan for the fiscal year ended
March 31, 1998.
17. SUBSEQUENT EVENTS:
-----------------
In April, 1999, as a result of the pending sale of the Company, a severance
and release agreement was executed between the Company and its President and
Chief Executive Officer (also a Director of the Company) whereby the Company
agreed to provide such individual with severance pay and benefits through
September, 2000. The total cost of such payments is expected to be
approximately $1.1 million. Additionally, as part of the severance
agreement, the Company vested 15,000 of the 75,000 performance vesting
shares, which are more fully described in Note 14. The Company will
recognize $375,000 of stock grant compensation expense with respect to these
15,000 shares. The remaining 60,000 performance vesting shares were
repurchased by the Company for $1 and were then cancelled.
On May 13, 1999, the Company's owners entered into a definitive agreement to
sell the company to the Monarch Machine Tool Company for approximately $55.0
million in cash, 500,000 Monarch common shares, and the assumption of
approximately $19.0 million of the Company's indebtedness. The Company
expects the acquisition to be completed by late June, 1999.
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Salem Group, Inc.:
We have audited the accompanying consolidated balance sheets of Salem Group,
Inc. (a Delaware corporation) and Subsidiaries as of March 31, 1997, and
December 31, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three-month periods then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Salem Group, Inc. and
Subsidiaries as of March 31, 1997 and December 31, 1996, and the results of
their operations and their cash flows for each of the three-month periods then
ended, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -------------------------
Pittsburgh, Pennsylvania
June 27, 1997
<PAGE> 30
SALEM GROUP, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(DOLLARS IN THOUSANDS)
----------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
A S S E T S 1997 1996
----------- -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (including restricted
cash of $5,872 and $6,034, respectively) $ 7,904 $ 9,853
Restricted short-term investments 750 920
Receivables 16,037 18,677
Contracts-in-progress, net 3,016 6,499
Inventories 4,662 5,007
Income tax benefit 3,184 1,466
Income tax receivable 2,036 1,008
Prepaid expenses 1,476 2,377
Net current assets of discontinued operations 2,074 7,639
-------- --------
Total current assets 41,139 53,446
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 20,484 20,336
Less-Accumulated depreciation 10,310 10,635
-------- --------
Net property, plant and equipment 10,174 9,701
-------- --------
OTHER ASSETS:
Investments in affiliated companies, at equity 1,654 1,820
Income tax benefit 2,452 2,195
Goodwill, net 9,858 9,918
Other assets 471 324
-------- --------
Total assets $ 65,748 $ 77,404
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,300 $ 1,431
Accounts payable (including outstanding checks
of $2,335 and $2,451, respectively) 10,680 13,213
Advance billings on contracts, net 14,677 14,463
Accrued payroll and employee benefits 2,735 3,895
Accrued insurance reserves 1,829 1,759
Other accrued liabilities 2,546 2,695
Reserves for warranty expense 1,614 1,829
-------- --------
Total current liabilities 35,381 39,285
-------- --------
LONG-TERM DEBT 27,275 22,899
OTHER NONCURRENT LIABILITIES 3,074 3,517
MINORITY INTEREST 520 565
SHAREHOLDERS' EQUITY:
Redeemable preferred stock, par $.01;
90,000 shares authorized and outstanding -- 9,000
Common stock, $.01 par value;
Voting 554,605 shares authorized, 551,818 shares outstanding 6 6
Nonvoting 1,465,395 shares authorized, 1,047,982 and
948,182 shares outstanding, respectively 10 10
Paid-in surplus 1,950 1,950
Retained earnings (924) 1,887
Unearned deferred compensation (600) (900)
Cumulative translation adjustment (944) (815)
-------- --------
Total shareholders' equity (502) 11,138
-------- --------
Total liabilities and shareholders' equity $ 65,748 $ 77,404
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 31
SALEM GROUP, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1996
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
CONTRACT REVENUES $ 21,772 $ 26,619
COST OF REVENUES 16,836 19,899
-------- --------
Gross income 4,936 6,720
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,620 3,530
-------- --------
Operating income 1,316 3,190
OTHER INCOME (EXPENSE):
Interest income 112 174
Interest expense (482) (588)
Equity in net earnings of affiliates (68) 39
Other income, net 61 323
-------- --------
Total other expense (377) (52)
-------- --------
Income from continuing operations
before taxes and minority interest 939 3,138
PROVISION FOR INCOME TAXES (412) (1,012)
MINORITY INTEREST, NET 45 (55)
-------- --------
Income from continuing operations 572 2,071
(Loss)/income from discontinued
operations, net of tax (745) 19
Loss on disposal of
discontinued operations, net of tax (2,426) --
-------- --------
NET INCOME $ (2,599) $ 2,090
======== ========
</TABLE>
- --------------
The accompanying notes are an integral part of these statements.
<PAGE> 32
SALEM GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE UNEARNED CUMULATIVE
PREFERRED COMMON STOCK PAID-IN RETAINED DEFERRED TRANSLATION
STOCK VOTING NONVOTING SURPLUS EARNINGS COMPENSATION ADJUSTMENT
----- ------ --------- ------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
September 30, 1996 $ 9,000 $ 6 $ 9 $ 985 $ -- $ -- $ --
Net income -- -- -- -- 2,090 -- --
Dividends declared
($2.25 per preferred share) -- -- -- -- (203) -- --
Aggregate translation
adjustment -- -- -- -- -- -- (814)
Issuance of stock grants -- -- 1 965 -- (900) --
------- ------- ------- ------- ------- ------- -------
BALANCE,
December 31, 1996 $ 9,000 $ 6 $ 10 $ 1,950 $ 1,887 $ (900) $ (814)
======= ======= ======= ======= ======= ======= =======
Net loss -- -- -- -- (2,599) -- --
Aggregate translation
adjustment -- -- -- -- -- -- (130)
Redemption of preferred
stock $(9,000) -- -- -- -- -- --
Dividends declared (212) -- --
Amortization of unearned
deferred compensation -- -- 300 --
------- ------- ------- ------- ------- ------- -------
BALANCE,
March 31, 1997 $ -0- $ 6 $ 10 $ 1,950 $ (924) $ (600) $ (944)
======= ======= ======= ======= ======= ======= =======
</TABLE>
- -----------------
The accompanying notes are an integral part of these statements.
<PAGE> 33
SALEM GROUP, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND DECEMBER 31, 1996
---------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (2,599) $ 2,090
Adjustments for noncash items -
Depreciation and amortization 257 264
Deferred income taxes (246) 1,152
Reserves for warranty expense (215) 27
Earnings of affiliates, net 68 (39)
Minority interest (45) 55
Stock grant compensation expense 40 --
Loss on sale of subsidiaries 2,426 --
Changes in balance sheet accounts -
Receivables 2,500 (3,311)
Contracts-in-progress, net 3,658 2,602
Inventories 345 540
Prepaid expenses 893 426
Income tax receivable (1,028) (1,008)
Accounts payable (2,441) (287)
Accrued income taxes -- (666)
Accrued liabilities (1,228) 1,015
Other noncurrent liabilities (443) 219
Accrued dividends -- (203)
Cumulative translation adjustments 155 106
-------- --------
Net cash flows provided by operating activities 2,097 2,770
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments 170 783
Investment in affiliates 388 47
Purchases of property, plant and equipment (835) (1,615)
Change in net assets of discontinued operations 1,515 106
-------- --------
Net cash flows provided by investing activities 1,238 (679)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (414) --
Redemption of preferred stock (9,000) --
Proceeds from long term debt 11,400 --
Principal payments under capital leases (125) (56)
Debt repayments (7,024) (7,855)
-------- --------
Net cash flows used by financing activities (5,163) (7,911)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (121) (830)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,949) (6,650)
CASH AND CASH EQUIVALENTS, Beginning of year 9,853 16,503
-------- --------
CASH AND CASH EQUIVALENTS, End of year $ 7,904 $ 9,853
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid 244 589
Income taxes paid, net 442 1,668
</TABLE>
- ----------------
The accompanying notes are an integral part of these statements.
<PAGE> 34
SALEM GROUP, INC. AND SUBSIDIARIES
----------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
MARCH 31, 1997
--------------
1. ORGANIZATION AND OPERATIONS:
Salem Group, Inc. (the "Company"), a Delaware corporation, and its wholly-owned
subsidiary, SC Acquisition Corporation, a Pennsylvania corporation, were formed
in 1996 for the purpose of effecting a merger with Salem Corporation in
accordance with the Agreement and Plan of Merger (the "Agreement") dated June
28, 1996. The Agreement resulted in the merger of SC Acquisition Corporation
with and into Salem Corporation on September 27, 1996 and resulted in Salem
Corporation becoming a wholly-owned subsidiary of the Company.
During 1997, the Company changed its fiscal yearend from December 31 to March
31.
The accounting principles for a purchase business transaction, as set forth in
Accounting Principles Board Opinion No. 16 (APB No. 16), were used to account
for the merger. The Company's tangible purchased assets and assumed liabilities
were not adjusted as a result of the acquisition, as management believes that
the carrying values approximate fair market values. As a result, the purchase
price, including merger costs, in excess of the net assets acquired, was
assigned to goodwill. The dispositions of certain subsidiary operations, as
described later, have been included as a component of purchase accounting.
The Company and its subsidiaries are in the business of designing, engineering
and installing heavy industrial equipment primarily for the metals, coal and
other minerals industries. The Company presently operates in two business
segments; metal processing equipment and industrial furnaces.
The revenues of the Company's business are derived primarily from long-term
contracts which are negotiated by sales engineers employed by the Company. For
the three months ended March 31, 1997 and December 31, 1996, no single customer
accounted for more than 10% of consolidated contract revenues. For additional
information with respect to customers see Note 15.
Export sales may bear additional credit risks beyond normal credit risks and are
usually secured by letters of credit or other forms of credit insurance. As a
multinational corporation, the Company manages its foreign currency risk through
the purchase of forward contracts in the limited number of contracts denominated
in foreign currencies. The Company manages its exposure to translation gains and
losses by borrowing in local currencies, which reduces such exposure. The
Company does not engage in the trading of, or speculation in, derivative
instruments.
As described in Note 11, the Company sold the Minerals Processing Group on April
4, 1997, and has accounted for the group's financial results as a discontinued
operation in the accompanying financial statements.
In addition, on June 11, 1997, the Company entered into a stock purchase
agreement to sell all of the issued and outstanding capital stock of Salem
Furnace Company for $8.8 million. The sale will result in an estimated pre-tax
gain of $5.2 which will be recognized in fiscal 1998. Refer to Note 15 for
financial results of Salem Furnace Company.
<PAGE> 35
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries.
All material intercompany accounts and transactions have been eliminated in
consolidation. Investments in other than wholly-owned and majority-owned
subsidiaries include two 50%-owned subsidiaries in Japan and a 40%-owned
subsidiary in India, all of which are carried at equity.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of income and expenses during the reporting period. Actual results may
differ from those estimates.
CASH EQUIVALENTS. Cash equivalents, which consist primarily of time deposits,
are stated at cost, which approximates market. For purposes of the consolidated
statement of cash flows, the Company considers all highly liquid investments
with maturities of three months or less at the date of acquisition to be cash
equivalents.
SHORT-TERM INVESTMENTS. Short-term, interest-bearing investments are those with
maturities of one year or less but greater than three months when purchased.
These investments are readily convertible to cash and are stated at cost, which
approximates fair value.
CONTRACT ACCOUNTING. The Company and its subsidiaries account for contracts on
the percentage-of-completion method. Based upon the nature of the contract, the
Company determines the stage of completion using the relationship of total costs
incurred to total estimated costs at completion. Contract costs, as reflected in
the consolidated statements of income, include all direct contract costs and
overhead, including all related engineering costs. Changes in contract
performance, estimated profitability and final contract settlements may result
in revisions to costs and revenues and are recognized in the period in which the
revisions are determined. If a loss is projected on any contract-in-progress,
provision is made currently for the entire projected loss. Warranty reserves are
provided during the course of contract performance for costs which may be
incurred after completion. For contracts where the Company is also licensing the
technology, royalty income is recognized in accordance with the terms of the
contract.
INVENTORIES. Inventories are valued at the lower of cost (determined by the
first-in, first-out method) or market and consist primarily of raw materials.
OPERATING CYCLE. The operating cycles of contracts vary and in some cases are
more than one year. In accordance with industry practices, all contract-related
accounts are included in current assets and liabilities.
<PAGE> 36
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at
cost. Major additions and betterments are capitalized, while maintenance and
repairs which do not significantly improve or extend the lives of the respective
assets are expensed in the year incurred. Property disposed of is removed from
the asset and accumulated depreciation accounts, with the gain or loss credited
or charged to current income.
DEPRECIATION AND AMORTIZATION. The Company provides for depreciation over the
estimated useful lives of the plant and equipment, employing both straight-line
and accelerated methods. License agreements and other purchased technology are
amortized on the straight-line method over the remaining years expected to be
benefitted.
GOODWILL. Goodwill (excess of cost over net assets acquired) is being amortized
on a straight line basis over a 40 year period.
DEVELOPMENT COSTS. Development costs related to continuing operations are
charged to operations as incurred and amounted to $110,000 and $98,000 for the
three months ended March 31, 1997 and December 31, 1996.
INCOME TAXES. The Company, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" computes deferred tax
assets or liabilities based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expense or credit is based on the changes in the
assets and liabilities from period to period. See Note 6 for further information
concerning income taxes.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS. The financial statements
of foreign subsidiaries are translated using the standards established by the
Financial Accounting Standards Board ("FAS No. 52"). Accordingly, all assets and
liabilities of foreign subsidiaries are translated at year-end exchange rates;
revenue and expense accounts are translated at the average exchange rates during
the year. Net unrealized translation gains or losses are reflected in the
cumulative translation adjustment and are not included in net income.
NEW ACCOUNTING PRONOUNCEMENTS. In 1996, the Company adopted SFAS No. 121
- -"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS No. 121 requires that the carrying value of long-lived
operating assets, when determined to be impaired, be adjusted so as not to
exceed the estimated undiscounted cash flows provided by such assets. Statement
of Financial Accounting Standards No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of in future periods.
The Company also adopted in 1996, SFAS No. 123 "Accounting for Stock Based
Compensation" - which recommends, but does not require, that companies change
their method of accounting for stock-based compensation plans to one that
attributes compensation costs equal to the fair value of a stock-based
compensation arrangement over the period service is rendered that qualifies an
employee to receive such compensation. Companies not electing to change their
method of accounting are required, among other things, to provide additional
disclosures which in effect restate a company's results for comparative periods
as if the new method of accounting had been adopted.
The adoption of these new accounting pronouncements did not have a material
effect on the Company's financial condition or results of its operations.
<PAGE> 37
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The Company has adopted the
provisions of this statement effective March 31, 1997 with no impact on the
Company's operating or financial position.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." The disclosure requirements will have to be adopted by the
Company for fiscal year ending March 31, 1998.
In June 1997, The FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. The Company is required to adopt the
new standards for fiscal year ending March 31, 1999.
3. RECEIVABLES:
Receivables at March 31, 1997 and December 31, 1996 are net of allowances for
doubtful accounts of $91,000 and $140,000, respectively.
In accordance with the provisions of long-term contracts, certain percentages of
billings or amounts are withheld by customers until completion and acceptance of
the project. At March 31, 1997 and December 31, 1996, these contract retentions
amounted to approximately $1.3 million and $986,000, respectively. Retentions
due are included in current receivables. Based upon prior experience with
similar contracts, retentions are expected to be collected within one year.
4. INVESTMENTS IN AFFILIATED COMPANIES:
NIPPON HERR CO., LTD.
The Company owns 48,000 shares of capital stock of Nippon Herr Co., Ltd.,
representing a 50% interest of Nippon Herr's outstanding common stock at March
31, 1997 and December 31, 1996. Nippon Herr's principal business is the
engineering and installation of metal can forming equipment. The Company's
equity in net earnings of Nippon Herr was recorded through February 28, 1997
based on financial statements at that date. The Company accounts for its
investment in Nippon Herr using the equity method. Equity (loss) income of
($32,000) and $40,000 was recognized in the three months ended March 31, 1997
and December 31, 1996, respectively. Nippon Herr's total assets and
stockholder's equity were $8.5 million and $2.4 million, respectively, at
February 28, 1997.
OTHER
Other affiliates consist of Daido Herr Engineering Co., Ltd. and Wesalem Company
Pvt. Ltd. The Company uses the equity method to account for these investments.
These investments and related operations are not material to the Company.
<PAGE> 38
5. CONTRACTS-IN-PROGRESS:
Amounts reflected in the balance sheets as contracts-in-progress consist of
costs incurred on contracts-in-progress plus estimated earnings thereon less
progress billings. Where progress billings exceed costs and earnings, that
amount is reflected as advance billings on contracts. At March 31, 1997 and
December 31, 1996 these amounts were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------
MARCH 31, DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
Costs incurred plus estimated earnings $ 73,831 $ 80,722
Less-Progress billings (85,492) (88,686)
--------- ---------
$ (11,661) $ (7,964)
========= =========
Presentation in balance sheets:
Contracts-in-progress $ 3,016 $ 6,499
Advance billings on contracts 14,677 14,463
--------- ---------
$ (11,661) $ (7,964)
========= =========
</TABLE>
6. INCOME TAXES:
The Company and all of its domestic subsidiaries file a consolidated federal
income tax return. The parent company and its domestic subsidiaries each report
current income tax expense as allocated under a consolidated tax allocation
agreement. Generally, this allocation results in profitable companies
recognizing a tax provision as if the individual company filed a separate
return, and loss companies recognizing benefits to the extent their losses
contribute to reduced consolidated taxes. Deferred income taxes are established
and segregated for each member of the consolidated group. Similar procedures are
followed by the Company's United Kingdom subsidiaries, which file tax returns
under available group relief provisions.
Income for continuing operations before taxes and minority interest as shown in
the accompanying consolidated statement of income include the following
components:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
------------------------
MARCH 31, DECEMBER 31,
1997 1996
----- -------
<S> <C> <C>
Domestic $ (8) $(3,139)
Foreign 947 6,277
----- -------
Income from continuing operations
before taxes and minority interest $ 939 $ 3,138
===== =======
</TABLE>
The above amounts include certain intercompany transactions that are or will be
reflected in separate U.S. and Non-U.S. tax returns. These intercompany
transactions are not taxable in the United Kingdom due to current United Kingdom
tax laws and net operating loss carryforwards. However, the effect of these
transactions are eliminated in the consolidated financial statements.
<PAGE> 39
A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate for continuing operations follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------
MARCH 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
United States federal statutory rate 34.0% 34.0%
State and foreign taxes, net of federal tax 6.2 2.3
Valuation allowance - (1.0)
Loss/(Income) of Bermuda subsidiary upon which
no taxes are imposed 4.6 (1.0)
Benefit of foreign sales corporation (1.8) (1.5)
Other, net (0.8) (0.6)
----- ----
Effective book income tax rate 43.8% 32.2%
===== ====
</TABLE>
Taxes on income from continuing operations, as shown in the accompanying
consolidated statement of income, include the following components:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
------------------------
MARCH 31, DECEMBER 31,
1997 1996
------ -------
<S> <C> <C>
Current provision
Federal $ 198 $ (898)
State 90 115
Foreign 370 1,052
------ -------
Total current tax provision 658 269
------ -------
Deferred provision:
Federal (209) 1,561
State ( 37) 275
Foreign - (1,093)
------ -------
Total deferred tax provision (246) 743
------ -------
Provision for income taxes $ 412 $(1,012)
====== =======
</TABLE>
<PAGE> 40
The components of the deferred tax assets and liabilities recorded in the
accompanying balance sheets at March 31, 1997 and December 31, 1996 and the
change in such accounts for the three month period ended March 31, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
-------------------------------------------
DEFERRED
MARCH 31, EXPENSE/ DECEMBER 31,
1997 (CREDIT) 1996
------- ------ ------
<S> <C> <C> <C>
Deferred Tax Assets:
Reserves recorded for-
Warranty $ 177 $ - $ 177
Cost after shipment 466 71 537
Compensation 387 (152) 235
Liability claims 224 (89) 135
Vacation pay 297 - 297
Investments 408 - 408
Inventory 192 (10) 182
Self-insurance claims 398 25 423
Postemployment benefits 569 28 597
Business insurance 312 4 316
Foreign tax credit and net
operating loss carryforwards 218 - 218
Other 668 (112) 556
Capitalizable merger costs 552 9 561
Valuation allowance (143) - (143)
------- ------ ------
Total deferred tax assets 4,725 (226) 4,499
------- ------ ------
Deferred Tax Liabilities:
Excess of book basis over tax
basis of plant and equipment (670) (12) (682)
Other (148) (8) (156)
------ ------ ------
Total deferred tax liabilities (818) (20) (838)
------ ------ ------
Net deferred taxes $3,907 $(246) $3,661
====== ====== ======
</TABLE>
Salem Corporation has signed consents to extend the time for the Internal
Revenue Service ("IRS") to complete the review of the 1987 through 1992 tax
years. Such consents extend the period during which the IRS may assess tax for
its federal income tax returns until December 31, 1997. Salem Corporation's
federal income tax returns for the years 1987 through 1992, inclusive, are
currently being examined by the IRS. Management believes that adequate tax
accruals have been provided for these and subsequent years.
Undistributed earnings of non-U.S. subsidiaries amounting to $2.3 and $2.1
million at March 31, 1997 and December 31, 1996 were considered by management to
be permanent business requirements of these subsidiaries under present
circumstances and no provision has been made for the additional U.S. income
taxes which might result if these undistributed earnings were remitted to the
parent company. However, any decision to remit such earnings in the future in
the form of dividends is not expected in the aggregate to result in significant
additional income taxes.
<PAGE> 41
The Company has generated book pretax income from continuing operations of
$939,000 and $3.1 million, for the three month period ended March 31, 1997 and
December 31, 1996. Except for the effects of the reversal of net deductible
temporary differences, the Company is not aware of any factors which would cause
any significant differences between book and taxable income in future years.
Although there can be no assurances that the Company will generate any earnings
or specific level of continuing earnings in any jurisdiction, management
believes that it is more likely than not that the net deductible differences
will reverse during periods when the Company generates sufficient net taxable
income, and that sufficient taxable income will be generated in foreign
jurisdictions to permit utilization of related credit carryforwards to the
extent recorded at March 31, 1997 and December 31, 1996. The Company has
$218,000 of foreign tax credit carryforwards which expire from 1998 to 2001. The
Company has established a valuation allowance of $143,000 at March 31, 1997 and
December 31, 1996 for a portion of its foreign tax credit carryforwards
available against U.S. income taxes.
7. CREDIT AND BORROWING ARRANGEMENTS:
Long-term debt for March 31, 1997 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SCHEDULED INTEREST ($ IN THOUSANDS)
MATURITY RATE MARCH 31, DECEMBER 31,
-------------------------------- ------------------------
1997 1996
<S> <C> <C> <C> <C>
Term Loans 1997-2003 7.5%-9.75% $10,000 $10,716
Related party
subordinated notes 2003 10.0% 10,000 10,000
Revolving credit facility 2001 7.093%-8.25% 8,400 3,225
Other debt 1997 5.75%-12.5% - 114
Capital lease obligations 175 275
------- -------
28,575 24,330
Less current maturities 1,300 1,431
------- -------
Long-term debt $27,275 $22,899
======= =======
</TABLE>
Maturities of long-term debt during the five years ending December 31, 2001 and
the years thereafter are as follows: 1998 - $1,300,000; 1999 - $1,275,000; 2000
- - $1,200,000; 2001 - $1,200,000; 2002 - $9,600,000; and years thereafter -
$14,000,000.
In connection with the merger, the Company and its subsidiaries entered into a
credit agreement on September 27, 1996 with a U.S. Bank wherein such bank
provides a term loan of $15.0 million and a revolving credit facility of $15.0
million for borrowing and the issuance of letters of credit and under which the
Company and its subsidiaries are subject to certain restrictions and covenants
including, among other provisions, financial requirements related to fixed
charge coverage, debt to cash flow coverage and net worth. The Company has
pledged the capital stock of substantially all of its subsidiaries as collateral
against the revolving credit facility and term loan. Interest on the term loan
and revolver is variable based on prime and/or LIBOR rates plus add on margin
rates as defined. The Company is required to pay a commitment fee of 0.375%
quarterly on the unused portion of the revolving credit facility. As of March
31, 1997, the Company had borrowed $8.4 million under its revolving credit
facility and had outstanding letters of credit of $5.4 million, leaving $1.2
million available. At December 31, 1996, the Company, under its revolving credit
facility, had borrowed $3.2 million and had outstanding letters of credit of
$5.4 million, leaving $6.4 million available. Also, at March 31, 1997 and
December 31, 1996 the Company had $5.0 million of its term loan
<PAGE> 42
available. At March 31, 1997 and December 31, 1996, the prime rate was 8.25%,
which the Company uses as its base rate.
As part of the merger, the Company borrowed $10.0 million in the form of two
subordinated promissory notes from two major shareholders in order to fund the
acquisition at September 27, 1996. These notes bear interest at 10% per annum,
payable quarterly beginning December 31, 1996, with the principal due in full on
December 31, 2003. The Company has subsequently refinanced this debt with
another financial institution. The new debt bears interest at 12% per annum, due
monthly, with the principal due in two equal payments on June 29, 2001 and 2002.
The Company's United Kingdom subsidiaries have two separate credit facilities
totalling $2.0 million at one major bank consisting of a facility for the
issuance of bank guarantees and an overdraft and loan facility. Interest on
borrowings is charged at 1.25% over the bank's base rate, which was 6% at March
31, 1997 and December 31, 1996. Of the $574,000 facility for the issuance of
bank guarantees, approximately $334,000 is currently utilized. All of the
amounts utilized have been for guarantees issued by the bank to customers of the
Company for assuring contract performance related to the operations of its
United Kingdom subsidiaries. Of the $1.4 million facility for overdrafts and
loans, $354,000 was utilized at March 31, 1997. The agreement for such combined
credit facility requires that a stand-by letter of credit be issued on behalf of
Salem Corporation equal to the total of such facility. This credit line is
subject to periodic review by the bank.
8. COMMITMENTS AND CONTINGENCIES:
The Company is engaged in ordinary litigation incidental to its business. The
Company does not believe that this litigation will have a material adverse
effect on its consolidated financial position or results of operations.
The Company, through two U.S. banks, has provided standby letters of credit
totaling $5.4 million and $5.8 million at March 31, 1997 and December 31, 1996,
respectively. Of this total, $5.1 million was provided under the Company's
revolving credit facility as described in Note 7; the remaining $317,000 was
issued by another U.S. bank.
<TABLE>
<CAPTION>
REQUIRED
STANDBY LETTERS
AMOUNT OF CREDIT AS
FACILITY UTILIZED COLLATERAL
-------- -------- ----------
<S> <C> <C> <C>
Surety facility $10,000 $ 168 $ 500
Surety facility 1,400 1,400 2,000
Performance and advances
on long-term contracts N/A N/A 2,900
</TABLE>
See also Note 12 for additional commitments of the Company.
<PAGE> 43
9. EMPLOYEE RETIREMENT BENEFITS:
The Company maintains a retirement savings plan, qualified under Section 401(k)
of the Internal Revenue Code, for its salaried employees. The Company and its
subsidiaries make mandatory contributions of 3% of base compensation for
eligible employees to this plan.
Two of the Company's U.S. subsidiaries have noncontributory defined benefit
pension plans covering certain of their collective bargaining employees. Pension
benefits are determined by a fixed benefit formula and number of years of
service. Company contributions are computed using the projected unit credit
method of funding.
Net periodic pension cost for the Company's collective bargaining plans for the
three months ended March 31, 1997 was as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
----------------
<S> <C>
Current service cost $26
Interest cost on projected
benefit obligation 53
Return on assets (55)
---
Net periodic pension cost $24
===
</TABLE>
The following table sets forth the funded status of these plans as of November
1, 1996 (date of latest actuarial valuation):
<TABLE>
<CAPTION>
($ IN THOUSANDS)
----------------
<S> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $2,815
======
Accumulated benefit obligation 3,121
======
Projected benefit obligation 3,121
Plan assets at fair value 2,735
------
Projected benefit obligation in
excess of plan assets 386
======
Net periodic pension expense
recognized from November 1, 1996
through March 31, 1997 40
------
Accrued pension liability in the
consolidated balance sheet $ 426
======
Actuarial assumptions used in developing this data were:
Discount rate 7.00%
Long-term rate of return on assets 7.75%
</TABLE>
Plan assets were invested primarily in common stocks, bonds, mortgages and
government securities.
<PAGE> 44
The Company's United Kingdom subsidiaries have a contributory defined benefit
retirement plan covering substantially all salaried employees. Pension benefits
are based primarily on years of service and the employee's average compensation
during the three highest consecutive years in the last ten years preceding the
date of normal retirement. In addition, employees contribute either 3.0% or 5.0%
of their salary, depending upon their position in the Company. The Company
contributions are computed using the projected unit credit method of funding,
taking into account future salary increases at 5.5% per year.
Net periodic pension cost for these plans for the three months ended March 31,
1997 was as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
----------------
<S> <C>
Current service cost $17
Interest cost on projected
benefit obligation 23
Return on assets (26)
---
Net periodic pension cost $14
===
</TABLE>
The following table sets forth the funded status of these plans as of October
28, 1996 (date of the latest actuarial valuation):
<TABLE>
<CAPTION>
($ IN THOUSANDS)
----------------
<S> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $1,034
======
Accumulated benefit obligation 1,152
======
Projected benefit obligation 1,203
Plan assets at fair value 1,210
------
Plan assets in excess of the
projected benefit obligation 7
======
Net periodic pension expense
recognized from October 28, 1996
to March 31, 1997 22
------
Accrued pension liability in the
consolidated balance sheet $ 15
======
Actuarial assumptions used in developing this data in 1996 were:
Discount rate 8.0%
Long-term rate of return on assets 8.5%
</TABLE>
Plan assets were invested in a pooled collective investment fund comprised of
publicly traded stocks and bonds.
Several of the Company's subsidiaries participate in multiemployer pension
plans, primarily the United Mine Workers of America (UMWA) Pension Plan, as a
result of collective bargaining agreements. In addition to the pension
contributions, the Company's subsidiaries also contribute to a UMWA fund for
retiree health care benefits.
<PAGE> 45
10. EMPLOYEE POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company provides certain retiree health care benefits covering substantially
all domestic salaried employees. Employees are generally eligible for benefits
upon retirement with the Company and completion of ten years of service. The
Company does not currently pre-fund these benefits and retains the right to
modify or terminate certain of these benefits in the future. The Company's
postretirement benefit expense for the three month period ended March 31, 1997
and December 31, 1996 was as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
March 31, December 31,
1997 1996
-----------------------
<S> <C> <C>
Current service cost of benefits
earned during the period $18 $22
Interest cost on accumulated
postretirement benefit obligation 31 34
--- ---
Net periodic postretirement benefit cost $49 $56
=== ===
</TABLE>
The accumulated postretirement benefit obligation which is reflected in the
accompanying balance sheets, is comprised of the following at March 31, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
March 31, December 31,
1997 1996
-----------------------
<S> <C> <C>
Retirees $ 491 $ 500
Fully eligible active plan participants 422 417
Other active plan participants 519 496
------ ------
Accrued postretirement benefit cost $1,432 $1,413
====== ======
</TABLE>
Future benefit costs were estimated assuming medical costs would increase by
8.5% per year, decreasing by .7% over each of the next five years and remaining
at 5.0% per year thereafter. A 1% increase in this annual trend rate would have
increased the accumulated postretirement benefit obligation at March 31, 1997
and December 31, 1996 by approximately $89,000 and $80,000 respectively and
increased the postretirement benefit expense for the three month period ended
March 31, 1997 and December 31, 1996 by approximately $3,200 and $4,000,
respectively. The weighted average discount rate used to estimate the
accumulated postretirement benefit obligation at March 31, 1997 and December 31,
1996 was 7.5%.
The Company continues to evaluate ways in which it can better manage these
benefits and control costs. Any changes in the plan or revisions to assumptions
that affect the amount of expected future benefits may have a significant effect
on the amount of the reported obligation and annual expense.
<PAGE> 46
11. DISCONTINUED OPERATIONS:
On April 4, 1997, the Company sold its Minerals Processing Group to a group of
management employees of such group for $2.1 million. The estimated loss on
disposal is $2,426,000 (net of taxes of $1,830,000). The following table
illustrates the financial position and results of operations of the Minerals
Processing Group for each of the periods presented:
<TABLE>
<CAPTION>
($ in Thousands)
-------------------------------
March 31, December 31,
1997 1996
-------------------------------
<S> <C> <C>
Total Assets 11,275 13,236
Total Liabilities 5,151 5,597
Revenues 8,110 11,026
Net (loss)/income (745) 19
</TABLE>
12. TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES:
Effective July 1, 1995, Salem Corporation renewed its coverage for domestic
workers' compensation, general liability and automobile insurance. This program
provides a $2.0 million primary and a $10.0 million umbrella coverage with
deductibles of $250,000 for automobile and workers' compensation claims and
$350,000 for general liability claims. Additionally, there is a combined
aggregate $3.0 million cap on deductibles. This program resulted in a
discontinuance of Essex Insurance Co. Ltd. ("Essex"), Salem Corporation's
65%-owned Bermuda insurance corporation, as a reinsurer. The Company has not
written any new policies during the year. Essex continues to provide reinsurance
coverage for claims incurred prior to July 1, 1995. At March 31, 1997 and
December 31, 1996, cash and cash equivalents of $4.6 million and $4.8 million
respectively, has been restricted under facultative reinsurance agreements for
the payment of insurance claims. The Company maintains insurance reserves of
$1.8 million as of March 31, 1997 and December 31, 1996.
See also Notes 7, 14 and 15 for additional related party transactions.
13. DISPOSITIONS:
In December 1996, the Company sold substantially all of the assets and
liabilities of its United Kingdom subsidiary Salem Automation Limited for cash
of $919,000 and a note receivable for approximately $1.0 million which was
collected in fiscal year 1997. Salem Automation Limited's net assets exceeded
the sale price by approximately $270,000, net of certain intercompany balances.
Additionally, in January 1997, the Company liquidated Salem Engineering (UK)
Limited. The Company recognized a gain of approximately $250,000 upon
liquidation of this subsidiary. The gains and losses related to these
dispositions and the related reserves for future losses were accounted for as
part of the purchase accounting for the September 27, 1996 purchase transaction.
The Company believes that adequate reserves have been established for these
transactions; however, future events such as claims, if any, that might be made
during the UK liquidation process could result in the need to adjust such
reserves. The related reserves totaled $500,000 and $1.0 million as of March 31,
1997 and December 31, 1996, respectively.
<PAGE> 47
14. SHAREHOLDERS EQUITY:
In accordance with the Agreement and Plan of Merger (the "Agreement") dated June
28, 1996, the Company purchased all outstanding shares of common stock of Salem
Corporation and issued 551,818 shares of Class A Voting Common Stock, 948,182
shares of Class B Non-voting Common Stock and 90,000 shares of Redeemable
Preferred Stock. All shares of the Company's stock have a par value of $.01 per
share.
In December 1996, in connection with the Employee Stockholder Agreements and Put
Option Agreements dated September 27, 1996, the Company issued a total of 99,800
additional shares of Class B Nonvoting Common Stock to various management
employees and certain key executives.
Associated with the acquisition, certain executives entered into employment
agreements with the Company which outline the terms and conditions of
employment. Additionally, the Company entered into employee stockholder
agreements which provide for participation in the Company's stock plan by
certain management employees for the issuance of up to 400,000 of additional
future shares of Common Stock of the Company.
The additional 400,000 shares will be granted in accordance with the related
agreements as follows:
a. First 100,000 shares -- 42,000 granted in five equal amounts and
58,000 granted upon management's recommendation and Board of
Directors' approval over the five year period from 1997 to 2001.
b. Second 100,000 shares -- 100,000 granted based upon management's
recommendation and Board of Directors' approval over the five year
period from 1997 to 2001.
c. Third 200,000 shares -- 200,000 granted based on determination by
the Board of Directors.
The executives who have entered into employment agreements with the Company have
also entered into put option agreements which provide the right and option to
require the Company to purchase any or all of the securities held by the
optionee during the designated put period commencing on September 27, 1999 and
ending on December 31, 1999. Certain other rights including call rights and
provisions related to the discontinuance of employment are also in place.
The stock grants made to employees of 99,800 shares and the 400,000 additional
grants to be made in the future, also include certain provisions related to,
among others, put rights by the employees, call rights by the Company,
provisions upon discontinuance of employment and certain other rights. The put
rights generally become exercisable one year after the stock award is granted
and granted shares may be exercised at a rate of 20% per year over a five year
period.
<PAGE> 48
The initial stock grant of 99,800 shares has been recorded based on an estimated
fair value of approximately $9.00 per share as unearned deferred compensation as
of December 31, 1996. As of March 31, 1997, the estimated fair value of the
stock grants remained at approximately $9.00 per share. The initial $900,000 of
unearned deferred compensation is to be amortized evenly to expense over the
five-year period between issuance and the private rights exercised period.
However, in connection with the sale of the Minerals Processing Group on April
4, 1997, the stock grants held by the employees of such group immediately
vested. Accordingly, the related unamortized deferred compensation of
approximately $260,000 was recognized and included in the loss on disposal of
discontinued operations. To the extent that the future fair value of such stock
increases above this $9.00 per share (as set forth below), additional unearned
compensation expense will be recorded for such excess and amortized to expense
over the remaining number of years until the put rights become exercisable.
In addition, upon issuance of the additional 400,000 shares, they will be
recorded as unearned deferred compensation, based on their estimated fair value
at time of issuance, and amortized to expense over the period between issuance
and the effective date of the related put right including the five year vesting
period during which the shares become exercisable (at 20% per year).
The value that will be used to establish the price for any shares that the
Company is obligated to repurchase under the above described put rights
obligation is based on a formula of a multiple of five times earnings before
interest, taxes and amortization plus cash minus the total of the average total
debt (including capitalized leases) and preferred stock (including accrued
dividends) at the end of each of the preceding twelve months. The Company also
issued 90,000 shares of redeemable Preferred Stock (par value of $.01 per share)
for a total of $9.0 million. Such shares have a liquidation value of $100.00 per
share. The Preferred Stock has its own specific rights as set forth in the
related legal documents. On March 31, 1997, the Company redeemed the entire $9.0
million of its Preferred Stock and paid the accrued dividend on such shares. The
funds used were provided by additional borrowings of approximately $9.4 million
under the Company's existing credit facility.
15. BUSINESS SEGMENTS:
The Company considers its business to consist primarily of designing,
engineering and installing heavy industrial equipment within three segments
based upon the markets and industries to which the Company's services and
products are sold. These two business segments are; (a) metal processing
equipment and (b) industrial furnaces.
Summary business segment data for continuing operations for the three months
ended March 31, 1997 and December 31, 1996 by industry and geographic segments
are as follows:
<PAGE> 49
INDUSTRY SEGMENT
- ----------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------
METAL
PROCESSING INDUSTRIAL
EQUIPMENT FURNACES CORPORATE CONSOLIDATED
--------- -------- --------- ------------
1997
- ----
<S> <C> <C> <C> <C>
Gross revenues $14,912 $ 6,860 $ - $21,772
Operating
income/(loss) 1,659 762 (1,105) 1,316
Identifiable
Assets 29,491 15,383 20,874 65,748
Capital
Expenditures 864 28 3 895
Depreciation and
Amortization 207 38 12 257
1996
Gross revenues $17,431 $ 9,188 $ - $26,619
Operating
income/(loss) 2,376 1,551 (737) 3,190
Identifiable
assets 31,633 15,626 30,145 77,404
Capital
expenditures 1,621 69 - 1,690
Depreciation and
amortization 189 31 118 338
</TABLE>
GEOGRAPHIC SEGMENTS
- -------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------
UNITED
STATES EUROPE INTERNATIONAL CONSOLIDATED
1997
- ----
<S> <C> <C> <C> <C>
Gross Revenues 19,404 1,170 1,198 21,772
Operating income (loss) 1,201 57 58 1,316
Identifiable assets 56,786 3,435 5,527 65,748
1996
- ----
Gross revenues $17,746 $4,086 $4,787 $26,619
Operating income (loss) 3,996 (827) 21 3,190
Identifiable assets 65,815 5,956 5,633 77,404
</TABLE>
Export sales for the three months ended March 31, 1997 and December 31, 1996
were approximately $1.3 and $4.8 million, respectively.
<PAGE> 50
16. MANAGEMENT INCENTIVE PLAN:
Salem Corporation maintains a Management Incentive Plan ("Plan") for its
executive officers. The amount expensed for this Plan for the three months ended
March 31, 1997 and December 31, 1996 was $85,000 and $413,000, respectively.
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation in
this Form 8-K of our report dated May 20, 1999, relating to the March 31, 1999
and 1998 Consolidated Financial Statements of Precision Industrial Corporation
and Subsidiaries and our report dated June 27, 1997, relating to the March 31,
1997 and December 31, 1996 Consolidated Financial Statements of Salem Group,
Inc. It should be noted that we have not audited any financial statements of
Precision Industrial Corporation and Subsidiaries or Salem Group, Inc.
subsequent to March 31, 1999, of performed any audit procedures subsequent to
May 20, 1999.
/s/ Arthur Anderson LLP
- -----------------------
Pittsburgh, Pennsylvania
July 13, 1999
<PAGE> 52
MONARCH MACHINE TOOL CO. AND SUBSIDIARIES ("MONARCH")
PRECISION INDUSTRIAL CORP. AND SUBSIDIARIES ("PRECISION")
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Pro-forma
Monarch Precision Adjustments Pro-forma
------- --------- ----------- ---------
(1)
<S> <C> <C> <C> <C>
ASSETS
- -------------
CURRENT ASSETS:
Cash $ 2,514 $ 4,616 $ $ 7,130
Accounts receivable 21,945 10,252 32,197
Inventories 9,323 5,197 14,520
Costs and estimated earnings in
excess of billings on uncompleted
contracts 5,828 4,117 9,945
Prepaid expenses and other current assets 661 2,433 3,094
Deferred income taxes 1,933 2,185 4,118
--------- ---------- ---------- -----------
Current Assets 42,204 28,800 71,004
PROPERTY, PLANT, & EQUIPMENT 10,778 16,548 27,326
PREPAID PENSION COSTS 19,391 19,391
DEFERRED INCOME TAXES 1,242 1,566 2,808
GOODWILL 9,658 8,879 51,783 a 70,320
OTHER ASSETS 4,711 1,728 2,725 b 9,164
--------- ---------- ---------- -----------
Total Assets $87,984 $57,521 $ 54,508 $ 200,013
========= ========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------
CURRENT LIABILITIES:
Short-term debt $ $ 1,250 $ 2,950 c $ 4,200
Accounts payable 6,265 7,728 13,993
Accrued liabilities 10,317 7,091 500 d 17,908
Billings in excess of costs and estimated
earnings on uncompleted contracts 9,764 6,951 16,715
--------- ---------- ---------- -----------
Current Liabilities 26,346 23,020 3,450 52,816
LONG-TERM DEBT 16,497 23,750 55,160 c 95,407
POSTRETIRE & OTHER ACCRUED LIABILITIES 2,110 2,899 5,009
SHAREHOLDERS' EQUITY:
Preferred stock 14 14
Common stock 5,880 17 3,733 e 9,630
Unearned compensation, restricted stock (29) (1,989) 1,989 f (29)
Additional paid-in capital 6,247 (6,247)f
Retained earnings 37,435 4,677 (4,677)f 37,435
Accumulated other comprehensive income (269) (1,100) 1,100 f (269)
--------- ---------- ---------- -----------
Total shareholders' equity 43,031 7,852 (4,102) 46,781
--------- ---------- ---------- -----------
Total liabilities and shareholders' equity $87,984 $57,521 $ 54,508 $ 200,013
========= ========== ========== ===========
</TABLE>
1- SEE ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION
<PAGE> 53
MONARCH MACHINE TOOL CO. AND SUBSIDIARIES ("MONARCH")
PRECISION INDUSTRIAL CORP. AND SUBSIDIARIES ("PRECISION")
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE
MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro-forma
Monarch Precision Adjustments Pro-forma
------- --------- ----------- ---------
(1)
<S> <C> <C> <C> <C>
NET SALES $ 23,009 $ 24,852 $ $ 47,861
COST OF SALES 18,296 18,646 36,942
SELLING, GENERAL AND ADMINISTRATIVE 4,681 3,890 (565)g 8,006
----------- --------- ---------- -----------
TOTAL COSTS AND OPERATING EXPENSES 22,977 22,536 (565) 44,948
----------- --------- ---------- -----------
OPERATING INCOME (LOSS) 32 2,316 565 2,913
OTHER INCOME (EXPENSE):
INTEREST EXPENSE, NET (290) (580) (1,295)h (2,165)
OTHER INCOME (EXPENSE), NET 1,175 93 1,268
----------- --------- ---------- -----------
917 1,829 (730) 2,016
INCOME TAX PROVISION (BENEFIT) 329 465 241 i 1,035
----------- --------- ---------- -----------
NET INCOME (LOSS) $ 588 $ 1,364 $ (971) $ 981
=========== ========= ========== ===========
EARNINGS PER COMMON SHARE,
BASIC AND DILUTED $ 0.16 $ 0.23
=========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 3,776,000 500,000 4,276,000
DILUTED 3,776,000 500,000 4,276,000
</TABLE>
1- SEE ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION
<PAGE> 54
MARCH 31, 1999 PRO-FORMA ADJUSTMENTS
ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION
1. The following reflects the purchase price and acquisition
costs for the acquisition of Precision on June 30, 1999.
<TABLE>
<CAPTION>
<S> <C>
a. Purchase price:
Cash paid to Seller $ 39,295
Value of Monarch Stock (500,000 at $7.00) 3,500b
Seller Subordinated Note 15,000
Seller Junior Subordinated Note 840
Acquisition Costs 1,000
--------
Net debt incurred (2.c.) $ 59,635
========
</TABLE>
b. The shares issued in connection with the acquisition have
been discounted by 10% to estimate the fair market value
of the shares issued, giving effect to the number of
shares issued, restrictions on resale and other conditions
associated with the issuance.
<PAGE> 55
MARCH 31, 1999 PRO-FORMA ADJUSTMENTS
ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION
2. The pro-forma balance sheet and statement of earnings have been adjusted to
reflect:
a. The recording of the excess of the purchase price and acquisition costs
($59,635) over the estimated fair value of assets acquired ($7,852). (See
note 1 also). The Company is in the process of obtaining an appraisal of
the fair market value of the assets of Precision as of June 30, 1999. To
the extent that the appraised value is different than the carrying basis
of the assets at June 30, 1999, the Company may record a reallocation of
the excess of the purchase price over net assets acquired (goodwill),
presently reflected on the pro-forma balance sheet, to the carrying basis
of the assets.
b. Other assets represent $2,475 for costs related to obtaining the new
Credit Agreement and $250 as an estimate of the value of the warrants
issued in connection with the seller financing received at the transaction
date.
c. Funds borrowed under the Company's Credit Agreement, dated June 30, 1999.
In addition, all short-term and long-term debt of Monarch and Precision
was repaid by using funds borrowed under the same Credit Agreement.
d. The accrual represents $300 of estimated costs related to the acquisition
and $200 of estimated costs related to obtaining the new Credit Agreement.
e. The elimination of Precision's common stock ($17), the issuance of Monarch
common stock ($3,500) related to the acquisition, and the estimate of the
value of the warrants ($250) issued in connection with the seller
financing received at the transaction date.
f. The elimination of Precision's shareholders' equity.
g. The adjustments to selling, general and administrative expense are related
to the impact of goodwill, debt discount amortization, new financing cost
amortization, Precision management costs not expected to be incurred
subsequent to the acquisition, and elimination of existing Precision
goodwill amortization. Precision management costs include salaries and
officer expenses, directors' fees, stock grant compensation, and
amortization of financing fees.
Goodwill amortization (25 year amortization period) $ 620
Debt discount amortization (8.5 year amortization period) 7
New financing cost amortization (7 year amortization period) 88
Precision management costs eliminated (1,242)
Existing goodwill amortization (38)
------
Pro-forma adjustment (1) $ (565)
======
h. Borrowings under the Credit Agreement dated June 30, 1999, were for the
acquisition of Precision and the refinancing of all borrowings of Monarch
and Precision. The amount borrowed for the acquisition of Precision was
assumed to have occurred on January 1, 1999. The pro-forma adjustment to
interest is based on a rate of 8.25% for $82,311 borrowed under the Credit
Agreement, 12% for $15,000 borrowed under a seller provided subordinated
note, and 8% for $840 borrowed under a seller provided subordinated note.
Amounts borrowed under the Credit Agreement bear interest at a variable
rate equal to a premium over LIBOR or Prime Rate. The 8.25% rate used in
the calculation is an estimate of the average borrowings rate for the
period presented.
i. Elimination of existing interest expense, net $ 870
ii. Interest on average outstanding borrowings under
the Credit Agreement at 8.25% (1,698)
iii. Interest on the seller subordinated note at 12% (450)
iv. Interest on the seller subordinated note at 8% (17)
--------
Pro-forma adjustment (1) $ (1,295)
========
<PAGE> 56
i. Adjustments reflect the impact of taxes at an estimated rate of 38%
(combined federal and state rates) on the pro-forma adjustments. The
effective tax provision rate is higher than the statutory rate on income
before tax due to the created goodwill being permanently non-deductible
for tax purposes.
<PAGE> 57
<TABLE>
<CAPTION>
MONARCH MACHINE TOOL CO. AND SUBSIDIARIES ("MONARCH")
GFG CORP. AND SUBSIDIARIES ("GFG")
PRECISION INDUSTRIAL CORP. AND SUBSIDIARIES ("PRECISION")
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro-forma
Monarch GFG Precision Adjustments Pro-forma
---------- -------- --------- ----------------------- ----------
(4) (3)
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 79,066 $ 20,737 $ 81,212 $ $ $ 181,015
COST OF SALES 63,113 16,428 57,792 183 d 137,516
SELLING, GENERAL AND ADMINISTRATIVE 12,625 3,138 15,985 (14) e (2,408) a 29,326
---------- -------- -------- ------ -------- ----------
TOTAL COSTS AND OPERATING EXPENSES 75,738 19,566 73,777 169 (2,408) 166,842
---------- -------- -------- ------ -------- ----------
OPERATING INCOME (LOSS) 3,328 1,171 7,435 (169) 2,408 14,173
OTHER INCOME (EXPENSE):
INTEREST EXPENSE, NET (207) (679) (2,332) (266) f (5,015) b (8,499)
OTHER INCOME (EXPENSE), NET 62 (213) 248 250 g 347
---------- -------- -------- ------ -------- ----------
3,183 279 5,351 (185) (2,607) 6,021
INCOME TAX PROVISION (BENEFIT) 1,100 41 2,773 62 h (613) c 3,363
---------- -------- -------- ------ -------- ----------
NET INCOME (LOSS) $ 2,083 $ 238 $ 2,578 $ (247) $ (1,994) $ 2,658
========== ======== ======== ====== ======== ==========
EARNINGS PER COMMON SHARE,
BASIC AND DILUTED $ 0.55 $ 0.62
========== ==========
AVERAGE SHARES OUTSTANDING:
BASIC 3,768,480 500,000 4,268,480
DILUTED 3,768,480 500,000 4,268,480
</TABLE>
3- SEE ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION
4- SEE ACCOMPANYING NOTES RELATED TO THE GFG ACQUISITION
<PAGE> 58
DECEMBER 31, 1998 PRO-FORMA ADJUSTMENTS
ACCOMPANYING NOTES RELATED TO THE PRECISION ACQUISITION
- -------------------------------------------------------
3. The pro-forma statement of earnings has been adjusted to reflect:
a. The adjustments to selling, general and administrative expense
are related to the impact of goodwill, debt discount
amortization, new financing cost amortization, Precision
management costs not expected to be incurred subsequent to the
acquisition, and elimination of existing Precision goodwill
amortization. Precision management costs include salaries and
officer expenses, directors' fees, stock grant compensation, and
amortization of financing fees.
<TABLE>
<S> <C>
Goodwill amortization (25 year amortization period) $ 2,466
Debt discount amortization (8.5 year amortization period) 29
New financing cost amortization (7 year amortization period) 354
Precision management costs eliminated (4,969)
Existing goodwill amortization (288)
-------
Pro-forma adjustment (3) $(2,408)
=======
</TABLE>
b. Borrowings under the Credit Agreement dated June 30, 1999, were
for the acquisition of Precision and the refinancing of all
borrowings of Monarch and Precision. The amount borrowed for the
acquisition of Precision was assumed to have occurred on January
1, 1999. The pro-forma adjustment to interest is based on a rate
of 8.25% for $80,387 borrowed under the Credit Agreement, 12% for
$15,000 borrowed under a seller provided subordinated note, and
8% for $840 borrowed under a seller provided subordinated note.
Amounts borrowed under the Credit Agreement bear interest at a
variable rate equal to a premium plus LIBOR or Prime Rate. The
8.25% rate used in the calculation is an estimate of the average
borrowing rate for the period presented.
<TABLE>
<S> <C>
i. Elimination of existing interest expense, net $ 3,484
ii. Interest on average outstanding borrowings under
the Credit Agreement at 8.25% (6,632)
iii. Interest on the seller subordinated note at 12% (1,800)
iv. Interest on the seller subordinated note at 8% (67)
-------
Pro-forma adjustment (3) $(5,015)
=======
</TABLE>
c. Adjustments reflect the impact of taxes at an estimated rate of
38% (combined federal and state rates) on the pro-forma
adjustments. The effective tax provision rate is higher than the
statutory rate on income before tax due to the created goodwill
being permanently non-deductible for tax purposes.
ACCOMPANYING NOTES RELATED TO THE GFG ACQUISITION
- -------------------------------------------------
4. The pro-forma statement of earnings has been adjusted to reflect:
d. The adjustment to cost of sales is related to the write-up of
work-in-process inventory and its subsequent charge ($183) to
cost of sales as the inventory written-up is sold during the
year.
e. The adjustments to selling, general and administrative expense
are related to the impact of goodwill and the elimination of a
deferred compensation plan of a GFG officer:
<PAGE> 59
<TABLE>
<S> <C>
i. Estimated incremental amortization expense relating to
the excess of purchase price resulting from the
acquisition (amortized over a 25 year life) $ 166
ii. Elimination of the officer's deferred
compensation plan. (180)
-----
Pro-forma adjustment (4) $ (14)
=====
</TABLE>
f. The borrowing of $13,497 for the acquisition was assumed to have
occurred on January 1, 1998. The pro-forma adjustment to interest
is based on a rate of 7.00% (estimated LIBOR base rate of 5.625%
for the period plus 1.375%). The existing interest related to
cash paid to Derlan Industries Inc. by GFG for interest expense
on long-term debt to the parent. This long-term debt was assumed
by Derlan Industries Inc. prior to the acquisition. The interest
income being eliminated is related to the cash balance (assumed
by Derlan Industries Inc. prior to the acquisition) that was
allocated to GFG by Derlan Industries Inc.
<TABLE>
<S> <C>
i. Elimination of interest expense, net $ 679
ii. New interest expense (945)
-----
Pro-forma adjustment(4) $(266)
=====
</TABLE>
g. The adjustments to other income (expense) consist of the
elimination of the corporate fee of $250 paid by GFG to Derlan
Industries Inc.
h. Adjustments reflect the impact of taxes at an estimated rate of
38% (combined federal and state rates) on the pro-forma
adjustments. The effective tax provision rate is higher than the
statutory rate on income before tax due to the created goodwill
being permanently non-deductible for tax purposes.
<PAGE> 1
Exhibit 2.1
STOCK PURCHASE AGREEMENT
DATED
MAY 13, 1999
BETWEEN
THE MONARCH MACHINE TOOL COMPANY
AND
THE STOCKHOLDERS OF
PRECISION INDUSTRIAL CORPORATION
REGARDING THE STOCK OF
PRECISION INDUSTRIAL CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I PURCHASE OF SHARES......................................................................1
1.1. Purchase of Shares....................................................................1
1.2. Purchase Price........................................................................1
ARTICLE II THE CLOSING AND THE STOCK ISSUANCE......................................................3
2.1. Time and Place of Closing.............................................................3
2.2. Selling Stockholders' Actions at Closing..............................................3
2.3. Buyer's Actions at Closing............................................................4
ARTICLE III REPRESENTATIONS AND WARRANTIES..........................................................6
3.1. Selling Stockholders' Individual Representations and Warranties.......................6
3.2. Selling Stockholders' Joint Representations and Warranties............................7
3.3. Buyer's Representations and Warranties...............................................19
3.4. Remedy for Breaches of Representations and Warranties................................22
ARTICLE IV ACTIONS PRIOR TO THE CLOSING...........................................................23
4.1. Activities Until Closing Date........................................................23
4.2. Financing............................................................................25
4.3. HSR Act Filings......................................................................25
4.4. No Interference with Employee Relationships..........................................26
4.5. Selling Stockholders' Efforts to Fulfill Conditions..................................26
4.6. Buyer's Efforts to Fulfill Conditions................................................26
ARTICLE V CONDITIONS PRECEDENT TO CLOSING........................................................26
5.1. Conditions to Buyer's Obligations....................................................26
5.2. Conditions to Selling Stockholders' Obligations......................................29
ARTICLE VI TERMINATION............................................................................31
6.1. Right to Terminate...................................................................31
6.2. Effect of Termination................................................................34
ARTICLE VII INDEMNIFICATION........................................................................35
7.1. Indemnification Against Loss Due to Inaccuracies in Selling
Stockholders' Representations and Warranties.........................................35
7.2. Indemnification Against Loss Due to Inaccuracies in Buyer's
Representations and Warranties.......................................................35
7.3. Indemnification Against Liabilities with Regard to Previously Sold
Companies............................................................................36
7.4. Tax Indemnification..................................................................36
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
7.5. Limitation on Liabilities of Selling Stockholders....................................38
7.6. Indemnification Sole Remedy..........................................................38
7.7. Computation of Loss..................................................................39
7.9. Procedure Regarding Third Party Claims...............................................40
7.10. Buyer's Right to Withhold Stock Consideration........................................41
7.11. Apportionment of Liability Among Selling Stockholders................................42
ARTICLE VIII ABSENCE OF BROKERS.....................................................................43
8.1. Representations and Warranties Regarding Brokers and Others..........................43
ARTICLE IX STOCKHOLDERS REPRESENTATIVE............................................................44
9.1. Appointment of Stockholders Representative...........................................44
ARTICLE X GENERAL................................................................................45
10.1. Expenses.............................................................................45
10.2. Access to Properties, Books and Records..............................................45
10.3. Press Releases.......................................................................48
10.4. Entire Agreement.....................................................................48
10.5. Captions.............................................................................49
10.6. Assignments..........................................................................49
10.7. Notices and Other Communications.....................................................49
10.8. Governing Law........................................................................50
10.9. Amendments...........................................................................50
10.10. Counterparts.........................................................................50
</TABLE>
-ii-
<PAGE> 4
An extra section break has been inserted above this paragraph. Do not
delete this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
<PAGE> 5
STOCK PURCHASE AGREEMENT
This is an agreement dated May 13, 1999 between The Monarch Machine
Tool Company (the "Buyer"), an Ohio corporation, and the persons listed on A
(the "Selling Stockholders") relating to the purchase by the Buyer from the
Selling Stockholders of all the outstanding capital stock of Precision
Industrial Corporation (the "Company"), a Delaware corporation, which capital
stock is comprised of (giving effect to exercise of currently outstanding
options) a total of 551,818 shares of Class A Voting Common Stock, par value
$.01 per share, and 1,173,282 shares of Class B Non-Voting Common Stock, par
value $.01 per share (collectively, the "Shares"):
ARTICLE I
PURCHASE OF SHARES
1.1. Purchase of Shares. At the Closing described in Paragraph 2.1, the
Buyer will purchase from each Selling Stockholder the number of Shares of each
class shown opposite the name of that Selling Stockholder in Exhibit A, and each
Selling Stockholder will sell those Shares to the Buyer, free and clear of any
liens, encumbrances or claims of other persons, other than liens or encumbrances
imposed by reason of acts of the Buyer.
1.2. Purchase Price. (a) The purchase price (the "Purchase Price") to
be paid by the Buyer for all the Shares will be (i) (t) $54,900,000 plus (u)
$19,000,000, minus (v) the indebtedness of the Company for borrowed money at the
Closing Date (the "Closing Date Indebtedness"), plus (w) the cash on hand at the
Closing Date, minus (x) any of the cash on hand at the Closing Date which is
subject to a trust to fund a deferred compensation arrangement, minus (y) any of
the cash on hand which is held in escrow in connection with the sale of Salem
Furnace Company, minus (z) any amount by which the consolidated working capital
of the Company and its subsidiaries at the Closing Date, calculated as provided
in subparagraph (c), (the "Closing Date Working Capital") is less than
$3,500,000 (together, the "Cash Portion" of the Purchase Price), plus (ii)
500,000 shares (the "Stock Consideration") of common stock, no par value, of the
Buyer ("Buyer Common Stock"), plus (iii) the Special Subordinated Note described
in subparagraph (b).
(b) To the extent that by the Closing Date, the Company has not
sold the assets or received the payments listed on Exhibit 1.2-B(1) (the
"Non-Operating Assets"), at the Closing, the Buyer will issue to the Selling
Stockholders a senior subordinated note (the "Special Subordinated Note")
substantially in the form of Exhibit 1.2-B(2) in a principal amount equal to the
values shown on Exhibit 1.2-B(1) for the Non-Operating Assets which have not
been sold or received.
(c) For the purposes of this Paragraph, the consolidated working
capital of the Company and its subsidiaries at the Closing Date will be their
consolidated current assets (excluding cash on hand, other than cash on hand
held in escrow to fund a deferred compensation arrangement, and excluding
Non-Operating Assets), minus their consolidated current liabilities (other than
(u) short term borrowings, (v) the current portion of long term debt, (w) any
liabilities which are payable with funds held in escrow, or any liabilities
which are secured by a $350,000 letter of credit, in connection with the sale of
Salem Furnace Co., (y) any accruals for severance compensation to Anthony Castor
III ("Castor") and (z) any accruals for
1
<PAGE> 6
expenses as a result of the transactions which are the subject of this
Agreement), calculated in accordance with generally accepted accounting
principles ("GAAP") applied in the same manner the Company applies them in
preparing its financial statements, as shown on a consolidated balance sheet of
the Company and its subsidiaries at the Closing Date certified by the chief
financial officer of the Company to have been prepared in accordance with GAAP
and to present fairly the consolidated financial position (including the
consolidated working capital, calculated as provided above) of the Company and
its subsidiaries at the Closing Date (the "Closing Date Balance Sheet"). The
Buyer will cause the Company's chief financial officer to prepare the Closing
Date Balance Sheet and deliver copies to the Stockholders Representative
described in Paragraph 9.1 and to the Buyer as soon as practicable after the
Closing Date. For the purpose of determining the cash payment to be made at the
Closing, 48 hours before the Closing, the chief financial officer of the Company
will deliver to the Buyer and the Stockholders Representative an estimate of
what the consolidated working capital of the Company and its subsidiaries shown
on the Closing Date Balance Sheet (calculated as provided above) will be, and
what the amount of the wire transfer described in Paragraph 2.3(a) will be based
upon an assumption that the consolidated working capital shown on the Closing
Date Balance Sheet will be 90% of the sum shown on the estimate. Promptly after
the Closing Date Balance Sheet is delivered to the Stockholders Representative,
the Buyer will pay any additional cash amount (or the Selling Stockholders will
refund any excess cash amount) due because the consolidated working capital
shown on the Closing Date Balance Sheet is different from 90% of the sum shown
on the estimate, plus interest on the amount paid at 10% per annum from the
Closing Date to the payment date.
ARTICLE II
THE CLOSING AND THE STOCK ISSUANCE
2.1. Time and Place of Closing. The closing (the "Closing") of the
purchase of the Shares will take place at the offices of Rogers & Wells, 200
Park Avenue, New York, New York, at 10:00 A.M. New York City time, on the day
(the "Closing Date") which is the last to occur of (i) July 1, 1999, (ii) the
first day on which all the conditions in Paragraphs 5.1 and 5.2, other than
conditions relating to occurrences which are to take place on the Closing Date,
have been fulfilled and (iii) the third business day after the day on which all
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act") expire or are terminated.
2.2. Selling Stockholders' Actions at Closing. At the Closing, the
Selling Stockholders will deliver to the Buyer the following:
(a) The certificates representing all the Shares, endorsed or
accompanied by documents of assignment which comply with the requirements of
Section 8-401 of the Uniform Commercial Code as in effect in Delaware (but
without any requirement of signature guarantees).
2
<PAGE> 7
(b) A document by which each Selling Stockholder acknowledges that
he, she or it is aware that the Buyer Common Stock included in the Stock
Consideration (i) has not been registered under the Securities Act of 1933, as
amended (the "Securities Act") and may not be sold or transferred other than in
a transaction which is registered under that Act or is exempt from the
registration requirements of that Act and (ii) is subject to the Agreement
Regarding Shares described in Paragraph 2.3(d) and may not be sold or
transferred other than as provided in the Agreement Regarding Shares.
2.3. Buyer's Actions at Closing. At the Closing, the Buyer will deliver
to the Stockholders Representative described in Paragraph 9.1 the following:
(a) Evidence of a wire transfer of immediately available funds in
an amount equal to the Cash Portion of the Purchase Price, calculated as
provided in Paragraph 1.2, to an account specified at least 48 hours before the
Closing by the Stockholders Representative.
(b) A letter acknowledging that the Buyer will be acquiring the
Shares for investment, and not with a view to their resale or distribution.
(c) A certificate representing the 500,000 shares of Stock
Consideration, registered in the name of the Stockholders Representative, or
such other name as the Stockholders Representative may specify to the Buyer at
least 48 hours before the Closing. That certificate may bear legends to the
effect that the shares it represents (i) have not been registered under the
Securities Act and may not be sold or transferred other than in a transaction
which is registered under that Act or is exempt from the registration
requirements of that Act, and (ii) are subject to the Agreement Regarding Shares
described in subparagraph (d) and may not be sold or transferred other than as
provided in the Agreement Regarding Shares.
(d) An agreement (the "Agreement Regarding Shares"), executed by
the Buyer, in which the Buyer agrees that: (i) At the request of the
Stockholders Representative made on or after the first anniversary of the
Closing Date, the Buyer will issue, in exchange for the certificate registered
in the name of the Stockholders Representative described in subparagraph (c) or
the replacement certificate described in Paragraph 7.10, separate certificates,
registered in the names of the respective Selling Stockholders, with the number
of shares represented by the certificate registered in the name of each Selling
Stockholder being (x) the total number of shares represented by the certificate
the Stockholders Representative presents for exchange, divided by (y) 1,725,100,
times (z) the number of Shares the Selling Stockholder sold to the Buyer as
shown on Exhibit A (with cash in lieu of fractional shares based on the Fair
Value of the Buyer Common Stock (calculated as provided in Paragraph 7.10) on
the first anniversary of the Closing Date.
(ii) When shares of Buyer Common Stock are delivered as
described in subparagraph (i), resales of that Buyer Common Stock by the Selling
Stockholders will have been registered under the Securities Act, and the
registration statement relating to those resales will be effective.
3
<PAGE> 8
(iii) The Buyer will keep the registration statement described
in subparagraph (ii) effective and available with regard to resales of Buyer
Common Stock by the Selling Stockholders until at least the second anniversary
of the Closing Date, or until such earlier time as all the Buyer Common Stock
delivered to Selling Stockholders under this Agreement has been sold or counsel
to the Company has delivered to the Stockholders Representative an opinion that
all the Buyer Common Stock which is still owned by Selling Stockholders may be
sold without registration under the Securities Act, and the Buyer will do all
other things which are required so the Selling Stockholders will at all times be
able to resell the Buyer Common Stock they receive without violating the
Securities Act.
(e) If applicable, the Special Subordinated Note.
(f) If applicable, the Seller Subordinated Notes and Warrants
described in Paragraph 6.1(e).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
ARTICLE IV
4.1. Selling Stockholders' Individual Representations and Warranties.
Each Selling Stockholder represents and warrants to the Buyer, as to himself,
herself or itself, but not as to any other Selling Stockholder, as follows:
(a) The Selling Stockholder has all power and authority necessary
to enable him, her or it to enter into this Agreement and carry out the
transactions contemplated by this Agreement. Any corporate, partnership or other
actions necessary to authorize the Selling Stockholder to enter into this
Agreement and carry out the transactions contemplated by it have been taken.
This Agreement has been duly executed by the Selling Stockholder and is a valid
and binding agreement of the Selling Stockholder, enforceable against the
Selling Stockholder in accordance with its terms.
(b) Neither the execution or delivery of this Agreement or of any
document to be delivered in accordance with this Agreement nor the consummation
of the transactions contemplated by this Agreement or by any document to be
delivered in accordance with this Agreement will violate, result in a breach of,
or constitute a default (or an event which, with notice or lapse of time or both
would constitute a default) under, the Certificate of Incorporation, by-laws,
partnership agreement or other organizational or governing documents of the
Selling Stockholder, if any, any agreement or instrument to which the Selling
Stockholder or any subsidiary of the Selling Stockholder is a party or by which
any of them is bound, any law, or any order, rule or regulation of any court or
governmental agency or other regulatory organization having jurisdiction over
the Selling Stockholder or any of its subsidiaries.
(c) The Selling Stockholder owns all the Shares he, she or it will
be selling to the Buyer as shown on Exhibit A, free and clear of any liens,
encumbrances or claims of other persons (except that 50,000 shares to be sold by
Vernon E. Collins ("Collins") are the subject of options which have not been
exercised at the date of this Agreement, but will be exercised at or before the
Closing), and the Selling Stockholder has full authority to sell those Shares as
contemplated by this Agreement. Except for the Stockholder Agreements listed on
Exhibit 3.1-
4
<PAGE> 9
C, the Selling Stockholder has not granted any option or right, and is not a
party to any other agreement, which requires, or upon the passage of time, the
payment of money, or the occurrence of any other event, may require the Selling
Stockholder to transfer any of those Shares to anyone other than the Buyer. When
the Buyer acquires Shares from the Selling Stockholder as contemplated by this
Agreement, the Buyer will become the owner of those Shares, free and clear of
any liens, encumbrances or claims of other persons, other than liens or
encumbrances imposed by reason of acts of the Buyer.
4.2. Selling Stockholders' Joint Representation and Warranties. The
Selling Stockholders, jointly and severally, represent and warrant to the Buyer
as follows:
(a) The Company and each of its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. Copies of the Certificate of Incorporation and all
amendments, and of the by-laws, of the Company, as currently in effect, are
attached as Exhibit 3.2-A(1). The Company and each of its subsidiaries is
qualified to do business as a foreign corporation in each state in which it is
required to be qualified, except states in which the failure to qualify, in the
aggregate, would not have a material adverse effect upon the Company and it
subsidiaries, taken as a whole. Exhibit 3.2-A(2) is a list of all the
jurisdictions in which the Company and each of its subsidiaries is qualified to
do business as a foreign corporation on the date of this Agreement. Whenever any
representation or warranty of the Selling Stockholders (other than the
representation and warranty in subparagraph (g)) contains an exception or
limitation relating to "materiality," "material adverse" events or omissions,
"material adverse effects" or similar concepts (collectively, "Materiality
Tests"), the Materiality Tests will be deemed to have been met (i.e., the event
or omission will be deemed to be "material," "materially adverse," have a
"material adverse effect" or otherwise meet a similar test), and the
representation or warranty will be deemed to have been breached, if the event or
omission results in an adverse impact with respect to the Company's assets of
$200,000 or more or an adverse impact with respect to the Company's consolidated
earnings of $200,000 or more; and (ii) whenever any representation or warranty
of the Buyer contains a Materiality Test, that representation or warranty will
be deemed to have been breached if the event or omission which is the subject of
the representation or warranty results in an adverse impact with respect to the
Selling Stockholders of $200,000 or more.
(b) If the consents listed on Exhibit 3.2-B are obtained, neither
the execution or delivery of this Agreement or of any document to be delivered
in accordance with this Agreement nor the consummation of the transactions
contemplated by this Agreement or by any document to be delivered in accordance
with this Agreement will violate, result in a breach of, or constitute a default
(or an event which, with notice or lapse of time or both would constitute a
default) under, the Certificate of Incorporation or by-laws of the Company or
any of its subsidiaries, any agreement or instrument to which the Company or any
subsidiary of the Company is a party or by which any of them is bound, any law,
or any order, rule or regulation of any court or governmental agency or other
regulatory organization having jurisdiction over the Company or any of its
subsidiaries.
5
<PAGE> 10
(c) The only authorized stock of the Company consists of 554,605
shares of Class A Voting Common Stock, par value $.01 per share, 1,465,395
shares of Class B Non-Voting Common Stock, par value $.01 per share, and 90,000
shares of Preferred Stock, par value $.01 per share, of which 551,818, shares,
1,173,282 shares and no shares, respectively are issued and outstanding
(including 50,000 shares which are the subject of options which have not yet
been exercised, but will be exercised by the Closing Date and are included in
the Shares listed on Exhibit A). On the Closing Date, the Shares will constitute
100% of the outstanding stock of the Company. Each of the Shares has been duly
authorized and issued and is fully paid and nonassessable. Except as shown on
Exhibit 3.2-C, the Company has not issued any options, warrants or convertible
or exchangeable securities, and is not a party to any other agreements, which
require, or upon the passage of time, the payment of money or the occurrence of
any other event may require, the Company to sell or issue any of its stock.
(d) No governmental filings, authorizations, approvals or
consents, or other governmental action with regard to the Company or any of its
subsidiaries, other than the termination or expiration of waiting periods under
the HSR Act, are required to permit the Selling Stockholders to fulfill all
their obligations under this Agreement.
(e) Exhibit 3.2-E is a complete list of all the corporations and
other entities of which the Company owns directly or indirectly 50% or more of
the equity (each corporation or other entity of which the Company owns directly
or indirectly 50% or more of the equity being a "subsidiary" of the Company) and
all corporations and other entities of which the Company owns directly or
indirectly an equity interest of between 20% and 50%. Except as shown on Exhibit
3.2-E, the Company owns all the outstanding shares of, or other equity interests
in, each of its subsidiaries. Each of the shares owned by the Company of each of
its subsidiaries which is a corporation has been duly authorized and validly
issued and is fully paid and nonassessable. Neither the Company nor any of its
subsidiaries has issued any options, warrants or convertible or exchangeable
securities, or is a party to any other agreements, which require, or upon the
passage of time, the payment of money or the occurrence of any other event may
require, the Company or any subsidiary to transfer to anyone or issue any stock
of, or other equity interest in, any subsidiary.
(f) The consolidated financial statements of the Company and its
subsidiaries at December 31, 1996, March 31, 1997 and March 31, 1998, and for
the three month, three month and one year periods ended on those dates, and
unaudited consolidated financial statements at March 31, 1999 and for the year
ended on that date, copies of which are included in Exhibit 3.2-F, were prepared
in accordance with GAAP applied on a consistent basis and present fairly the
consolidated financial condition and results of operations of the Company and
its subsidiaries at the dates, and for the periods, to which they relate (except
that the financial statements at March 31, 1999 and for the year ended on that
date are without footnotes and are subject to year end adjustments). The Balance
Sheet at March 31, 1999 included in Exhibit 3.2-F is referred to in this
Agreement as the "Balance Sheet."
(g) Since March 31, 1999 (i) there has not been any material
adverse change in the consolidated financial condition or results of operations
of the Company and its subsidiaries compared with the consolidated financial
condition of the Company and its subsidiaries at March 31, 1999, or the
consolidated results of operations of the Company and its subsidiaries for the
comparable period of the prior year, (ii) the Company and its subsidiaries have
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<PAGE> 11
conducted their businesses in the ordinary course and in the same manner in
which they were being conducted on March 31, 1999, and (iii) there has not been
any material adverse change, or any event of which any of the persons listed on
Exhibit 3.2-G (each a "Management Person") is aware which could reasonably be
expected to cause a material adverse change, in the business, operations,
properties, prospects or condition (financial or other) of the Company and its
subsidiaries taken as a whole.
(h) The assets of the Company and its subsidiaries are sufficient
to enable them to operate their businesses after the Closing substantially as
they are being operated on the date of this Agreement.
(i) The Company and its subsidiaries have all licenses and permits
from all governmental authorities which are necessary or useful to permit the
Company and its subsidiaries to conduct their businesses as those businesses are
being conducted at the date of this Agreement, other than licenses and permits
from governmental authorities the lack of which would not in aggregate have a
Material Adverse Effect. Exhibit 3.2-I is a complete list of all licenses and
permits which the Company or any of its subsidiaries holds at the date of this
Agreement. The Company and its subsidiaries have at all times operated their
businesses in accordance with applicable law in all material respects.
(j) Exhibit 3.2-J is a list of all real property, including office
space, owned or leased (including subleased) by the Company or by any of its
subsidiaries, showing as to each property whether it is owned or leased, by whom
it is owned or leased and, if it is leased, the identity of the lessor and the
date of the lease. All that real property is being used by the Company or the
applicable subsidiary in conformance in all material respects with all zoning,
environmental and other laws and regulations, deed restrictions, covenants and
lease provisions applicable to it. As to real property which is owned, the
Company or the applicable subsidiary owns fee title to the real property, free
and clear of any liens or other encumbrances, except (i) the liens and
encumbrances shown on Exhibit 3.2-J, (ii) liens securing indebtedness reflected
on the Balance Sheet and (iii) easements or similar encumbrances which do not
interfere with the use of the real property as it currently is being used and as
the Company or a subsidiary currently anticipates using it. As to real property
which is leased, the Company or the subsidiary which is the lessee under each of
the leases (including subleases) has complied in all material respects with the
terms of the lease, and no officer of the Company or any subsidiary has been
informed by the lessor under any of the leases, or has any other reason to
believe, that the lessor has taken, or intends to take, action to terminate the
lease. No Management Person is aware of any obligation of the Company or any of
its subsidiaries which would require the Company or a subsidiary to expend more
than $100,000 on termination of a lease, assuming no deterioration in the
condition of any leased property from its condition at the date of this
Agreement. The transactions contemplated by this Agreement will not be a basis
for any party to any lease (including sublease) listed on Exhibit 3.2-J to
terminate that lease.
(k) On the Closing Date, the Company and each of its subsidiaries
will own all its assets free and clear of any liens or encumbrances other than
(i) the lien of taxes not yet due or other statutory liens relating to
governmental obligations which are not yet due, (ii) liens securing indebtedness
reflected on the Balance Sheet which do not interfere with the use of the assets
to which they relate for the purposes for which those assets were acquired, and
(iii) liens
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<PAGE> 12
disclosed on Exhibit 3.2-J or 3.2-K, all of which secure obligations arising out
of, or otherwise relating to, the businesses of the Company and its
subsidiaries.
(l) Exhibit 3.2-L is a complete list of each agreement to which
the Company or any of its subsidiaries is a party which will require the Company
or any of its subsidiaries to make payments, or under which the Company expects
it or its subsidiaries to receive revenues, of more than $200,000 after the
Closing Date over the remaining term of the agreement and cannot be cancelled by
the Company or the subsidiary, as the case may be, without payment of a penalty
in excess of $50,000, other than (i) customer purchase orders entered into in
the ordinary course of business and (ii) purchase orders to suppliers (other
than purchase orders having a remaining term of more than twelve months or
involving the purchase of fixed assets having a purchase price in excess of
$250,000) entered into in the ordinary course of business ordering materials
which are available from at least several suppliers in quantities consistent
with the customary purchasing practices of the Company or the applicable
subsidiary and with the customary purchasing practices in the industries in
which the Company or the applicable subsidiary participates. The Company and
each of its subsidiaries has fulfilled in all material respects all its
obligations under all the agreements listed on Exhibit 3.2-L to which it is a
party, no Management Person has been informed by any other party to any of those
agreements that the Company or any subsidiary is in default in its obligations
under any of those agreements and no Management Person has any other reason to
believe that another party to any of those agreements intends to terminate the
agreement before its stated termination date. Except as shown on Exhibit 3.2-L,
the transactions contemplated by this Agreement will not be a basis for any
party to any agreement listed on Exhibit 3.2-L to terminate that agreement or
alter the basis on which it will being doing business with the Company or with
any of its subsidiaries, as the case may be, under that agreement.
(m) Exhibit 3.2-M is a complete list of all patents, patent
applications, patent licenses, trademarks, trademark licenses, trade names and
service marks which are material to the businesses of Company and its
subsidiaries taken as a whole. The Company and each subsidiary is entitled to
use all the patents, trademarks, trade names and service marks which it uses in
connection with its businesses, other than patents, trademarks, trade names and
service marks which the Company and the subsidiaries could stop using without
there being a Material Adverse Effect. Except as described on Exhibit 3.2-M, no
Management Person has been informed of any claim, or is aware, that the Company
or any of its subsidiaries is violating any patent, trademark or service mark,
or unlawfully using any trade secret or other intellectual property, owned by
any other person or that any of them is using any name which is confusingly
similar to that of any other person. The transactions which are the subject of
this Agreement will not result in the termination of, or otherwise require the
consent of any party to, any patent license or trademark license listed on
Exhibit 3.2-M.
(n) The Company and each of its subsidiaries has filed when due
all Tax Returns (as defined below) which it has been required to file and has
paid all Taxes (as defined below) shown on those returns to be due. Those Tax
Returns accurately reflect the Taxes required to have been paid, except to the
extent of items which may be disputed by applicable taxing authorities but for
which there is substantial authority to support the position taken by the
Company or the subsidiary and which have been adequately reserved against on the
Balance Sheet. Except as shown on Exhibit 3.2-N, (i) no extension of time given
by the Company or any of its subsidiaries for completion of the audit of any of
its Tax Returns is in effect, (ii) no tax lien has been filed by any taxing
authority against the Company or any of its subsidiaries or any of
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<PAGE> 13
their assets, (iii) no Federal, state or local audits or other administrative
proceedings or court proceedings with regard to Taxes are presently pending with
regard to the Company or any of its subsidiaries, (iv) neither the Company nor
any subsidiary is a party to any agreement providing for the allocation or
sharing of Taxes, (v) neither the Company nor any subsidiary has participated in
or cooperated with an international boycott as that term is used in Section 999
of the Internal Revenue Code of 1986, as amended (the "Code") and (vi) neither
the Company nor any subsidiary has filed a consent pursuant to Section 341(f) of
the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a Subsection (f) asset (as that term is defined in Section
341(f)(4) of the Code) owned by the Company or any subsidiary. For the purposes
of this Agreement, the term "Tax" or "Taxes" means all taxes, charges, fees,
levies or other assessments imposed by any Federal, state, local, or foreign
taxing authority, including without limitation, income, excise, property, sales,
use, transfer, payroll, license, employment, production, gross receipts,
windfall profits, severance, tariffs, withholding and franchise taxes (including
any interest, penalties or additions attributable to or imposed on or with
respect to any such assessment); and any amounts that could be charged against
the Company or any of its subsidiaries under a tax sharing agreement. "Tax
Return" means any return, report, information return, or other document
(including any related or supporting information) filed or required to be filed
with any Federal, state, local, or foreign governmental entity or other
authority in connection with the determination, assessment or collection of any
Taxes or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
(o) Except as shown on Exhibit 3.2-O, neither the Company nor any
subsidiary is a party to any suit or proceeding in any court, or by or before
any governmental agency, nor has any Management Person been notified that any
suit or proceeding is threatened against any of those entities, other than suits
or proceedings in each of which the other party seeks only money damages of less
than $200,000, nor is any Management Person aware of any circumstances with
regard to which there is a reasonable possibility that a suit or proceeding will
be brought against the Company or a subsidiary which would result in a payment
by the Company or a subsidiary to the other party, not covered by insurance, of
more than $500,000.
(p) Exhibit 3.2-P(1) is a complete list of all unions which
represent any employees of the Company or any of its subsidiaries. No union is
attempting to organize or otherwise become the bargaining representative for any
employees of the Company or any of the subsidiaries. Exhibit 3.2-P(2) is a
complete list of (i) all written agreements and plans, including written
employment ,severance, deferred compensation and bonus agreements (other than
employment agreements calling for salaries of less than $100,000 per year with
terms of not more than 2 years) and including "employee benefit plans," as that
term is defined in the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or other written employee benefit arrangements, to which the
Company or any of its subsidiaries is a party under which it is providing
compensation, retirement benefits or other benefits to employees, and (ii) all
agreements or other commitments by the Company or any of its subsidiaries to
provide post-retirement medical benefits or other post-employment benefits to
employees or former employees. Except as shown on Exhibit 3.2-P(2), (v) each
employee benefit plan or arrangement listed on Exhibit 3.2-P(2) which is
intended to be qualified under Section 401 of the Code is qualified under that
Section, (w) each employee benefit plan listed on Exhibit 3.2-P(2) has been
maintained in all material respects in accordance with its terms and any
applicable provisions of ERISA or the Code and any other applicable laws, (x) no
plan listed on Exhibit 3.2-P(2) is a "defined benefit plan," as that term is
defined in ERISA, (y) neither the Company nor any subsidiary is an "employer" or
part of a "single employer," as those terms are used in
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<PAGE> 14
ERISA or the Code, with regard to any benefit plan and (z) no plan shown on
Exhibit 3.2-P(2) has an unfunded benefit liability as that term is used in
ERISA.
(q)(i) Except as shown on Exhibit 3.2-Q, the Company and its
subsidiaries are in compliance with all applicable Environmental Laws, other
than failures to comply which would not, in the aggregate, have a Material
Adverse Effect.
(i) The Company and its subsidiaries hold all
Environmental Permits necessary to enable them to conduct their
respective operations as they are currently conducted without
violating any Environmental Laws. No Management Person has any
reason to believe that any such Environmental Permits (A) will not
be renewed, or (B) will be renewed under terms that are reasonably
likely to have a Material Adverse Effect.
(ii) No Materials of Environmental Concern are present
at, have been released from, or since September 30, 1996 have been
removed from, any property currently or formerly owned, leased or
otherwise operated by the Company or any subsidiary, that are
reasonably likely to be in violation, in a material respect of, or
otherwise to give rise to material liability of the Company or any
subsidiary under, any Environmental Law.
(iii) Except as shown on Exhibit 3.2-Q, neither the
Company nor any of its subsidiaries has during the past five years
been required to make any reports to any governmental authorities
pursuant to any Environmental Laws concerning spills or other
releases at or from any property currently or formerly owned, leased
or otherwise operated by the Company or any subsidiary, for which
spills or other releases the Company or a subsidiary may be liable
under any Environmental Law. True and complete copies of all written
reports concerning such spills and other releases have been made
available to the Buyer.
(iv) None of the following is or, insofar as any
Management Person is aware, has been, on, under, in or at any
property currently or formerly owned, leased or otherwise operated
by the Company or any subsidiary at any time while or before the
Company or its subsidiary owned, leased or otherwise operated the
property: (A) underground or aboveground storage tanks containing
any Materials of Environmental Concern, (B) polychlorinated
biphenyls, (C) asbestos or asbestos-containing materials, (D) septic
tanks, septic fields, dry-wells, or similar structures, (E) lagoons,
impoundments, or other bodies of water into which Materials of
Environmental Concern have been discharged, (F) landfills, dumping
areas, or similar locations where Materials of Environmental Concern
have been placed.
(v) Neither the Company nor any subsidiary has received
any Environmental Claim, and, insofar as any Management Person is
aware, no Environmental Claim against the Company or any subsidiary
is threatened.
(vi) Except as shown on Exhibit 3.2-Q, neither the
Company nor any subsidiary has entered into or agreed to, nor is the
Company or any subsidiary otherwise subject to, any judgment,
decree, order or similar requirement under any
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<PAGE> 15
Environmental Law, nor is the Company or any subsidiary negotiating
any such judgment, decree, order or requirement.
(vii) Neither the Company nor any subsidiary has assumed
or retained, contractually or by operation of law, any material
liabilities or obligations, contingent or otherwise, in connection
with any Environmental Law (other than as part of a Sold Company
Indemnity described in Paragraph 7.3);
(viii) There are no past or present actions, activities,
events, conditions or circumstances known to any Management Person,
including without limitation, the release, threatened release,
emission, discharge, generation, treatment, storage or disposal of
Materials of Environmental Concern, that give rise to any material
liability or obligation of the Company or any subsidiary under any
Environmental Laws.
(ix) The Company has made available to the Buyer copies
of each of the Phase I studies of properties owned by the Company
listed on Exhibit 3.2-Q. No Management Person is aware of any
condition on any of the properties which is the subject of any of
those Phase I studies which (i) is not shown on the applicable Phase
I study, but (ii) violates any applicable Federal, state or local
environmental laws or regulations.
(x) As used in this Agreement the following terms have
the following meanings:
"Environmental Claim" means a written notice by any
governmental authority alleging potential liability arising out of,
based on or resulting from (a) the presence, or release into the
environment, of any Material of Environmental Concern or (b)
circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law.
"Environmental Law" means law, rule, regulation,
guideline, code or other legally enforceable requirement of any
governmental authority regulating, relating to or imposing liability
or standards of conduct concerning protection of the environment or
environmental conditions effecting human health or safety.
"Environmental Permit" means any permit, authorization,
license, approval or filing required under any Environmental Law.
"Materials of Environmental Concern" means gasoline,
petroleum or petroleum products, polychlorinated biphenyls,
urea-formaldehyde insulation, asbestos, pollutants, contaminants,
radioactive materials, and any other substances or forces defined as
hazardous or toxic under any Environmental Law, or that is regulated
pursuant to or could give rise to liability under any Environmental
Law.
(r) There are no contracts, agreements or other arrangements which
could result in the payment by the Company or by any subsidiary of an "Excess
Parachute Payment" as that term is used in Section 280G of the Code.
(s) The Company has made available to the Buyer a report dated April 1,
1999 of Arthur Andersen LLP (the "Y2K Report") relating to the extent to which
computer software and hardware and other equipment used by the Company and its
subsidiaries in the conduct of their
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<PAGE> 16
business is capable of recognizing that dates in the year 2000 are subsequent to
December 31, 1999 and is otherwise able to operate without being adversely
affected by the change from the twentieth to the twenty-first century. No
Management Person is aware of any facts which make anything in the Y2K Report
incorrect in any material respect.
4.3. Buyer's Representations and Warranties. The Buyer represents and
warrants to each of the Selling Stockholders as follows:
(a) The Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Ohio.
(b) The Buyer has all corporate power and authority necessary to
enable it to enter into this Agreement and carry out the transactions
contemplated by this Agreement. All corporate actions necessary to authorize the
Buyer to enter into this Agreement and carry out the transactions contemplated
by it have been taken. This Agreement has been duly executed by the Buyer and is
a valid and binding agreement of the Buyer, enforceable against the Buyer in
accordance with its terms.
(c) Neither the execution and delivery of this Agreement or of any
document to be delivered in accordance with this Agreement nor the consummation
of the transactions contemplated by this Agreement or by any document to be
delivered in accordance with this Agreement will violate, result in a breach of,
Ior constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, the Articles of Incorporation or
Regulations of the Buyer, any agreement or instrument to which the Buyer or any
subsidiary is a party or by which it is bound, any law, or any order, rule or
regulation of any court or governmental agency or other regulatory organization
having jurisdiction over the Buyer or any of its subsidiaries.
(d) No governmental filings, authorizations, approvals or
consents, or other governmental action, other than termination or expiration of
the waiting periods under the HSR Act, are required to permit the Buyer to
fulfill all its obligations under this Agreement.
(e) The Buyer has all funds which the Buyer will require, in
addition to the Purchase Financing described in Paragraph 4.2, to carry out the
transactions which are the subject of this Agreement.
(f) The only authorized stock of the Buyer consists of 12,000,000
shares of Buyer Common Stock and 500,000 shares of preferred stock, no par
value, of which 3,782,817 shares of Common Stock and 14,642 shares of preferred
stock are issued and outstanding. Except as shown on Exhibit 3.3-F, the Buyer
has not issued any options, warrants, or convertible or exchangeable securities,
and is not party to any other agreements, which require, or upon passage of
time, the payment of money or the occurrence of any other event may require, the
Company to sell or issue any of its stocks.
(g) When the Buyer issues the Stock Consideration as contemplated
by this Agreement, all the shares of the Buyer Common Stock included in the
Stock Consideration will be duly authorized and issued, fully paid and
nonassessable, and the Selling Stockholders will become the owners of the shares
of Stock being issued to them, free and clear of any liens or encumbrances other
than liens or encumbrances created by the Selling Stockholders.
(h) The Buyer's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 10-K"), filed with the Securities and Exchange
Commission contained all the information required to be included in that Report
and did not contain a misstatement of material fact or a omit to state any fact
necessary to make statements made in it not misleading.
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<PAGE> 17
(i) Without limiting anything which is stated in subparagraph (h),
the consolidated financial statements of Buyer and its subsidiaries at December
31, 1997 and 1998 and for the two years ended on those dates included in the
1998 10-K were prepared in accordance with GAAP applied on a consistent basis
and present fairly the consolidated financial condition and results of
operations of the Buyer and its subsidiaries at the dates, and for the periods
to which they relate.
(j) Since December 1998 (i) there has not been any material
adverse change in the consolidated financial condition or results of operations
of the Buyer and its subsidiaries compared with the consolidated financial
condition of the Buyer and its subsidiaries at December 31, 1998 reflected on
the balance sheet at that date included in the 1998 10-K, or the consolidated
results of operations of Buyer and its subsidiaries for the comparable period of
the prior year, other than a decline in the results of operations of its Machine
Tool Division for the quarter ended March 31, 1999, when compared with the
comparable period of the prior year, (ii) the Buyer and its subsidiaries have
conducted their businesses in the ordinary course and in the same manner in
which they were being conducted on December 31, 1998, and (iii) there has not
been any material adverse change, or any event of which any executive officer of
the Buyer is aware which could reasonably be expected to cause a material
adverse change, in the business, operations, properties, prospects, or condition
(financial or other) of the Buyer and its subsidiaries taken as a whole, other
than the matters related to the Buyer's Machine Tool Division in referred to in
clause (i). Since December 31, 1998, there has been no occurrence which the
Buyer was required to report on a Form 8-K to be filed with the Securities and
Exchange Commission, except that the Buyer was required to file, and did file, a
Form 8-K relating to the Buyer's acquisition of GFP Corporation.
(k) If the Buyer issues either or both of the Special Subordinated
Note or the Seller Notes described in Paragraph 6.1(e), when they are issued,
they will be valid and binding debt instruments of the Buyer, enforceable
against the Buyer in accordance with their respective terms, (ii) if the Buyer
issues Warrants as described in Paragraph 6.1(e) and Exhibit 6.1-E, when they
are issued, they will be valid and binding obligations of the Buyer, enforceable
against the Buyer in accordance with their terms and (iii) if the Buyer issues
shares of Buyer Common Stock on exercise of Warrants or conversion of the Seller
Notes, when those shares are issued, they will be duly authorized and issued,
fully paid and nonassessable.
(l) The issuance of the Stock Consideration, and the issuances of
shares of Buyer Common Stock on exercise of Warrants, or conversion of the
Seller Notes, described in Paragraph 6.1(e) and Exhibit 6.1-E, have been
approved by the Board of Directors of the Buyer, and therefore Chapter 1704 of
the Ohio General Corporation Law will not apply to the acquisition of the Stock
Consideration by the Selling Stockholders (or by the Stockholders Representative
on their behalf) or to the acquisition of Buyer Common Stock (or other
securities) upon exercise of Warrants or conversion of Seller Notes.
4.4. Remedy for Breaches of Representations and Warranties. The
indemnification in Paragraphs 7.1 and 7.2 will be the only remedies available to
the Buyer or the Selling Stockholders for breaches of representations and
warranties contained in Paragraph 3.1, 3.2 or 3.3. Any claim for that
indemnification must be made as provided in Paragraph 7.6. The only remedy
available to the Buyer or to any Selling Stockholder prior to the Closing for
breaches of representations and warranties contained in Paragraph 3.1, 3.2 or
3.3 will be to terminate this Agreement to the extent permitted by Paragraph 6.1
or 6.2 and, if applicable, seek remedies because the Selling Stockholders or the
Buyer failed to fulfill their or its obligations under this Agreement, as
provided in Section 6.2.
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ARTICLE V
ACTIONS PRIOR TO THE CLOSING
5.1. Activities Until Closing Date. From the date of this Agreement
until the Closing Date, the Selling Stockholders will ensure that the Company
and its subsidiaries will, except with the written consent of the Buyer:
(a) Operate their respective businesses in the ordinary course and
in a manner consistent with the manner in which they are being operated at the
date of this Agreement.
(b) Take all reasonable steps available to them to maintain the
goodwill of their businesses and, except as otherwise requested by the Buyer,
the continued employment of their executives and other employees.
(c) At their expense, maintain all their assets in good repair and
condition, except to the extent of reasonable wear and use and damage by fire or
other unavoidable casualty.
(d) Not make any borrowings other than borrowings in the ordinary
course of business under working capital lines which are disclosed or reflected
on the Balance Sheet.
(e) Not enter into any contractual commitments involving capital
expenditures, loans or advances, and not voluntarily incur any contingent
liabilities, except in each case in the ordinary course of business.
(f) Not pay any dividends, or make any other distributions,
payments or repayments of debt to stockholders other than (i) dividends paid by
subsidiaries to the Company or to wholly owned subsidiaries of the Company and
(ii) reimbursement of travel and other expenses incurred in the ordinary course
by stockholders who are officers or directors of the Company.
(g) Not make any loans or advances (other than advances for travel
and other normal business expenses) to stockholders, directors, officers or
employees.
(h) Maintain their books of account and records in the usual
manner, in accordance with GAAP applied on a consistent basis, subject to normal
year-end adjustments and accruals.
(i) Comply in all material respects with all applicable laws and
regulations of governmental agencies.
(j) Not sell, dispose of or encumber any property or assets, or
engage in any activities or transactions, except in each case in the ordinary
course of business (with all sales of fixed assets being deemed not to be
transactions in the ordinary course of business).
(k) Not make any change or amendment to, or repeal, its charter or
bylaws or comparable governing instruments.
(l) Not issue or sell shares of its capital stock or any other
equity securities (other than the Company's issuance of stock on exercise of
options which are outstanding at the date of this Agreement), of any of them or
issue any securities convertible into or exchangeable for, or rights to purchase
relating to, or enter into any contract, commitment or arrangement with respect
to the issuance of, any shares of capital stock or any other equity securities
of any of them, or adjust, split, combine or reclassify any of their capital
stock or other equity securities, or otherwise make any other changes in their
capital structures.
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(m) Not (i) adopt or amend any bonus, profit sharing,
compensation, severance, stock option, pension, retirement or other employee
benefit agreement, trust, plan or arrangement for the benefit or welfare of any
present or former director, officer or employee of any of them or (ii) increase
the compensation or fringe benefits of any present or former director, officer
or employee (except that, in the case of employees who are not officers,
individual merit increases and promotional increases, not to exceed 5% of
salary, in accordance with past practices may be granted, but no across-the
board or generally applicable increases may be granted), or pay any bonus,
compensation or benefit not required by any existing Plan, or hire any employee
at an annual rate of compensation (including anticipated incentive compensation,
if any) in excess of $100,000, or enter into any contract, agreement, commitment
or arrangement to do any of the foregoing.
(n) Not adopt, or become an employer with regard to, any employee
compensation, employee benefit or post-employment benefit plan.
5.2. Financing. The Buyer will do all things it is reasonably able to
do, including to the extent necessary paying reasonable commitment fees and
agreeing to pay or reimburse expenses, to arrange for the commitment letters
described in Paragraph 6.1(e) to be delivered to the Stockholders Representative
by May 31, 1999 (or such later date as is the same number of days after May 31,
1999 that the day on which the Company delivers the Audited 1999 Financial
Statements to the Buyer is after May 20, 1999) and for lenders to make the Loan,
and purchasers to purchase the Subordinated Notes, on or before July 1, 1999.
5.3. HSR Act Filings. The Company and the Buyer will each make as
promptly as practicable the filing it is required to make under the HSR Act with
regard to the transactions which are the subject of this Agreement and each of
them will take all reasonable steps within its control (including providing
information to the Federal Trade Commission and the Department of Justice) to
cause the waiting periods required by the HSR Act to be terminated or to expire
as promptly as practicable. The Company and the Buyer will each provide
information and cooperate in all other respects to assist the other of them in
making its filing under the HSR Act.
5.4. No Interference with Employee Relationships. Neither the Buyer nor
anyone else acting on behalf of the Buyer will, without the prior written
consent of the Stockholders Representative, discuss or make any arrangement with
any officer or other member of the operating management of the Company, other
than Collins regarding whether, or on what terms (including what terms as to
compensation), that person will be employed by the Company, its subsidiaries or
the Buyer after the Closing.
5.5. Selling Stockholders' Efforts to Fulfill Conditions. Each of the
Selling Stockholders will use his, her or its best efforts to cause all the
conditions contained in Paragraph 5.1 to be fulfilled, insofar as fulfillment of
those conditions involves any action by the Selling Stockholder, anything else
over which the Selling Stockholder has control, or anything which requires
approval of the Company's stockholders (as to which the Selling Stockholder will
vote all the stock of the Company which the Selling Stockholder owns or
otherwise is entitled to vote in favor of the required approval).
5.6. Buyer's Efforts to Fulfill Conditions. The Buyer will use its best
efforts to cause all the conditions contained in Paragraph 5.2 to be fulfilled
prior to or at the Closing.
ARTICLE VI
CONDITIONS PRECEDENT TO CLOSING
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6.1. Conditions to Buyer's Obligations. The obligations of the Buyer at
the Closing are subject to satisfaction of the following conditions (any or all
of which may be waived by the Buyer):
(a) The representations and warranties of the Selling Stockholders
contained in this Agreement will, except as contemplated by this Agreement, be
true and correct in all material respects at the Closing Date with the same
effect as though made on that date, and each of the Selling Stockholders will
have delivered to the Buyer a certificate dated that date and signed by the
Selling Stockholder; or an officer, general partner or other person authorized
to sign on behalf of the Selling Stockholder, to that effect. For the purposes
of this subparagraph, materiality will be as defined in Paragraph 3.2(a), but
with the figure $1,000,000 substituted for the figure $200,000.
(b) Each of the Selling Stockholders will have fulfilled in all
material respects all his, her or its obligations under this Agreement required
to have been fulfilled prior to or at the Closing.
(c) No order will have been entered by any court or governmental
authority and be in force which invalidates this Agreement or restrains the
Buyer from completing the transactions which are the subject of this Agreement
and no action will be pending against the Buyer or the Company relating to the
transactions which are the subject of this Agreement which presents a reasonable
likelihood of resulting in an award of damages against the Buyer or the Company
which would be material to the Buyer and its subsidiaries taken as a whole, or
to the Company and its subsidiaries taken as a whole.
(d) The consents described in Exhibit 3.2-B will have been
obtained.
(e) The Buyer will have received an opinion from Rogers & Wells
LLP, counsel to the Selling Stockholders, to the effect that (i) the Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware; (ii) all the Shares have been duly authorized and
issued and are fully paid and nonassessable; (iii) insofar as that counsel is
aware, each Selling Stockholder has all power and authority necessary to enable
him, her or it to enter into this Agreement and carry out the transactions
contemplated by this Agreement; (iv) this Agreement has been duly executed by
each of the Selling Stockholders, and is a valid and binding agreement each of
the Selling Stockholders, enforceable against each of them in accordance with
its terms, except to the extent enforceability may be affected by bankruptcy,
reorganization or similar laws affecting the rights of creditors generally or by
equitable principles of general application relating to the availability of
remedies (whether in an action at law or a proceeding in equity); (v) neither
the execution and delivery of this Agreement or of any document to be delivered
in accordance with this Agreement nor the consummation of the transactions
contemplated by this Agreement or by any document to be delivered in accordance
with this Agreement will violate, result in a breach of, or constitute a default
(or an event which, with notice or lapse of time or both would constitute a
default) under, the Certificate of Incorporation or by-laws of the Company, any
agreement or instrument of which that counsel is aware to which the Company or
any subsidiary of the Company or any Selling Stockholder is a party or by which
any of them is bound, any law or rule or regulation of any governmental
authority applicable to the Company or any of its subsidiaries or, insofar as
that counsel is aware, applicable to any Selling Stockholder, or any order of
which that counsel is aware of any court or governmental agency having
jurisdiction over the Company or any of its subsidiaries or any Selling
Stockholder; and (vi) no governmental filings, authorizations, approvals or
consents, or other governmental actions, with regard to the Company or, insofar
as that counsel is aware with regard to any Selling Stockholder, other than the
termination or expiration of the waiting periods under the HSR Act (which has
occurred), are required to permit the Selling
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Stockholders to fulfill all their obligations under this Agreement. The letter
containing that opinion will state that in instances in which the opinion is
limited to matters of which counsel is aware (x) with regard to the Company, the
opinion is given after reasonable investigation, (y) with regard to Selling
Stockholders, the opinion is given after inquiry of each of the Selling
Stockholders, but without any other investigation, and (z) awareness of counsel
refers to awareness of the attorneys in the firm who are working on the
transactions which are the subject of this Agreement.
(f) The Closing Date will be not later than August 31, 1999.
6.2. Conditions to Selling Stockholders' Obligations. The obligations
of the Selling Stockholders at the Closing are subject to the following
conditions (any or all of which may be waived by the Stockholders
Representative):
(a) The representations and warranties of the Buyer contained in
this Agreement will, except as contemplated by this Agreement, be true and
correct in all material respects at the Closing Date with the same effect as
though made on that date, and the Buyer will have delivered to the Stockholders
Representative a certificate dated that date and signed by the President or a
Vice President of the Buyer to that effect. For the purposes of this
subparagraph, materiality will be as defined in Paragraph 3.2(a), but with the
figure $1,000,000 substituted for the figure $200,000.
(b) The Buyer will have fulfilled in all material respects all its
obligations under this Agreement required to have been fulfilled prior to or at
the Closing.
(c) No order will have been entered by any court or governmental
authority and be in force which invalidates this Agreement or restrains any
Selling Stockholder from completing the transactions which are the subject of
this Agreement and no action will be pending against any Selling Stockholder
relating to the transactions which are the subject of this Agreement which
presents a reasonable likelihood of resulting in an award of damages against
that Selling Stockholder which would be material to that Selling Stockholder and
its subsidiaries taken as a whole.
(d) The Stockholders Representative will have received an opinion from Thompson
Hine & Flory LLP, counsel to the Buyer, to the effect that (i) the Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Ohio, (ii) the Buyer has all corporate power and authority
necessary to enable it to enter into this Agreement and carry out the
transactions contemplated by this Agreement; (iii) all corporate actions
necessary to authorize the Buyer to enter into this Agreement and carry out the
transactions contemplated by it have been taken; (iv) this Agreement and the
Agreement Regarding Shares each has been duly executed by the Buyer and each of
them is a valid and binding agreement of the Buyer, enforceable against the
Buyer in accordance with its terms, except to the extent enforceability may be
affected by bankruptcy, reorganization or similar laws affecting the rights of
creditors generally or by equitable principles of general application relating
to the availability of remedies (whether in an action at law or a proceeding in
equity); (v) neither the execution and delivery of this Agreement or of any
document to be delivered in accordance with this Agreement (including the
Agreement Regarding Shares) nor the consummation of the transactions
contemplated by this Agreement or by any document to be delivered in accordance
with this Agreement will violate, result in a breach of, or constitute a default
(or an event which, with notice or lapse of time or both would constitute a
default) under, the Articles of Incorporation or Regulations of the Buyer, any
agreement or instrument of which that counsel is aware, after a reasonable
investigation, to which the Buyer or any subsidiary of the Buyer is a party or
by which any of them is bound, any law or rule or regulation of any governmental
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authority, or any order of which that counsel is aware, after a reasonable
investigation, of any court or governmental agency having jurisdiction over the
Buyer or any of its subsidiaries; and (vii) no governmental filings,
authorizations, approvals or consents, or other governmental actions, other than
the termination or expiration of the waiting periods under the HSR Act (which
has occurred), are required to permit the Buyer to fulfill all its obligations
under this Agreement, (viii) when issued as contemplated by this Agreement, all
the shares of Buyer Common Stock issued as the Stock Consideration will be duly
authorized and issued, fully paid and nonassessable, (ix) if either or both of
the Special Subordinated Note or the Seller Notes are issued, when they are
issued, they will be valid and binding debt obligations of the Buyer,
enforceable against the Buyer in accordance with their respective terms, except
to the extent enforceability may be affected by bankruptcy, reorganization or
similar laws affecting the rights of creditors generally or by equitable
principles of general application relating to the availability of remedies
(whether in an action of law or a proceeding in equity); (x) if Warrants are
issued as described in Paragraph 6.1(e) and Exhibit 6.1-E, when they are issued,
those Warrants will be valid and binding obligations of the Buyer enforceable
against the Buyer in accordance with their terms, except to the extent
enforceability may be affected by bankruptcy, reorganization or similar laws
affecting the rights of creditors generally or by equitable principles of
general application relating to the availability of remedies (whether in an
action at law or a proceeding in equity); and (xi) if shares of Buyer Common
Stock are issued upon exercise of Warrants or conversion of the Seller Notes,
when they are issued, those shares of Buyer Common Stock will be duly authorized
and issued, fully paid and nonassessable shares of Buyer Common Stock. The
letter containing the opinion will state that in instances in which an opinion
is limited to matters of which counsel is aware, the opinion is given after
reasonable investigation and may state that awareness of counsel refers to
awareness of the attorneys in the firm who are working on the transactions which
are the subject of this agreement.
(e) The Closing Date will be not later than August 31, 1999.
ARTICLE VII
TERMINATION
7.1. Right to Terminate. This Agreement may be terminated at any time
prior to the Closing:
(a) By mutual consent of the Buyer and the Stockholders
Representative.
(b) By either the Buyer or the Stockholders Representative if,
without fault of the terminating party, the Closing does not occur on or before
the applicable date specified in Paragraph 5.1(f) or 5.2(e).
(c) By the Buyer if (i) (x) it is determined that any of the
representations or warranties of any Selling Stockholder contained in this
Agreement was not complete and accurate in all material respects on the date of
this Agreement (with materiality being as defined in Paragraph 3.2(a), but with
the figure $1,000,000 substituted for the figure $200,000), (y) the Buyer has
notified the Stockholders Representative of the condition which was different
from that which was represented or warranted, and (z) that condition has
continued for more than 15 days after the notice (or until the Closing Date, if
that is earlier), or (ii) any of the conditions in Paragraph 5.1 is not
satisfied or waived by the Buyer prior to or on the Closing Date.
(d) By the Stockholders Representative if (i) (x) it is determined
that any of the representations or warranties of the Buyer contained in this
Agreement was not complete and accurate in all material respects on the date of
this Agreement (with materiality being as defined
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in Paragraph 3.2(a), but with the figure $1,000,000 substituted for the figure
$200,000), (y) the Stockholders Representative has notified the Buyer of the
condition which was different from that represented or warranted, and (z) that
condition has continued for more than 15 days after the notice (or until the
Closing Date, if that is earlier), or (ii) any of the conditions in Paragraph
5.2 is not satisfied or waived by the Stockholders Representative prior to or on
the Closing Date.
(e) By the Stockholders Representative if the Buyer does not by
May 31, 1999, or such later date as is the same number of days after May 31,
1999 that the day on which the Audited 1999 Financial Statements are delivered
to the Buyer is after May 20, 1999, deliver to the Stockholders Representative
binding commitments, in form reasonably satisfactory to the Stockholders
Representative, from a lender or lenders to make a loan (the "Loan") to the
Buyer, and of purchasers to purchase subordinated notes of the Buyer
("Subordinated Notes"), with proceeds totaling not less than $90,000,000, which
commitments will not be subject to any conditions other than absence of
subsequent material adverse change in the financial condition, results of
operations, business or prospects of the Company and its subsidiaries taken as a
whole, and completion of customary documentation, except that if the total
proceeds the Buyer will receive from the Loan and the Subordinated Notes is more
than $75,000,000 but less than $95,000,000 the Stockholders Representative may
not terminate this Agreement under this Paragraph if the Buyer, by a notice
given to the Stockholders Representative not later than May 31, 1999, or such
later date as is the same number of days after May 31, 1999 that the day on
which the Audited 1999 Financial Statements are delivered to the Buyer is after
May 20, 1999, requires the Selling Stockholders to purchase for $15 million
subordinated notes ("Seller Subordinated Notes") and warrants ("Warrants")
having the terms set forth on Exhibit 6.1-E. If the Buyer elects to require the
Selling Stockholders to purchase the Seller Subordinated Notes and the Warrants,
promptly after the Buyer notifies the Stockholders Representative of the Buyer's
election to require the Selling Stockholders to purchase the Seller Subordinated
Notes and Warrants, the Stockholders Representative, on behalf of the Selling
Stockholders, and the Buyer will enter into an agreement under which (i) the
Selling Stockholders agree to purchase from the Buyer, and the Buyer agrees to
sell to the Selling Stockholders, Seller Subordinated Notes and Warrants
(including the right under some circumstances to receive additional Warrants in
the future) at the Closing for $15,000,000, with the obligations of the Selling
Stockholders being subject to (i) all the conditions set forth in Paragraph 5.2,
(ii) the Buyer's delivering to the Stockholders Representative at the Closing
the Seller Subordinated Notes and the Warrants which are to be issued
simultaneously with the issuance of the Seller Subordinated Notes and (iii) the
Buyer's purchasing all the Shares from the Selling Stockholders. The term
"Audited 1999 Financial Statements" means consolidated financial statements of
the Company and its subsidiaries at March 31, 1999 and for the year ended on
that date, which have been audited by Arthur Andersen LLP and are accompanied by
a report of that firm containing its unqualified opinion.
(f) By the Buyer, by a notice given to the Stockholders
Representative not later than the tenth day after the day on which the Audited
1999 Financial Statements are delivered to the Buyer, if (i) the consolidated
net worth of the Company and its subsidiaries show on the balance sheet included
in the Audited 1999 Financial Statements is less than $7,188,000 or (ii) the
consolidated EBITDA of the Company and its subsidiaries, based upon the results
of operations of the Company and its subsidiaries for the year ended March 31,
1999, reflected on the Audited 1999 Financial Statements, is less than
$12,183,000. For the purposes of this Paragraph, the consolidated EBITDA of the
Company and its subsidiaries for the year ended March 31, 1999 will be their
consolidated (A) earnings before interest and taxes, plus (B) any expense for
severance compensation to Castor, plus (C) any expense relating either to the
proposed sale of the Company to a group of which Castor was a participant or to
the
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transactions which are the subject of this Agreement, plus (D) any other
non-recurring charges, plus (E) compensation expense resulting from issuances of
stock or grants of stock options, plus (F) depreciation and amortization, all as
reflected on the Audited 1999 Financial Statements (all as illustrated on
Exhibit 6.1-F).
7.2. Effect of Termination. If this Agreement is terminated pursuant to
Paragraph 6.1, after this Agreement is terminated, no party will have any
further rights or obligations under this Agreement, except that if this
Agreement is terminated pursuant to subparagraph (e), within five days after the
Stockholders Representative notifies the Buyer of the termination of this
Agreement under that subparagraph, the Buyer will pay the Selling Stockholders,
by wire transfer to an account specified by the Stockholders Representative, the
sum of $250,000 to reimburse the Selling Stockholders for expenses incurred and
opportunities lost because of the negotiation and execution of this Agreement.
Nothing contained in this Paragraph will, however, relieve any party of
liability for any breach of this Agreement which occurs before this Agreement is
terminated.
ARTICLE VIII
INDEMNIFICATION
8.1. Indemnification Against Loss Due to Inaccuracies in Selling
Stockholders' Representations and Warranties. Subject to the limitations in
Paragraph 7.5, (a) each Selling Stockholder indemnifies the Buyer against, and
agrees to hold the Buyer harmless from, all losses, liabilities and expenses
(including, but not limited to, as to claims by third persons, reasonable fees
and expenses of counsel and accountants and expenses of investigation) incurred
directly or indirectly because (i) any matter which is the subject of a
representation and warranty by that Selling Stockholder contained in Paragraph
3.1 was not as represented or warranted, or (ii) the Selling Stockholder fails
to fulfill in any respect any of its obligations under this Agreement or under
any document delivered in accordance with this Agreement which is required to be
fulfilled after the Closing and (b) the Selling Stockholders jointly and
severally indemnify the Buyer against, and agree to hold the Buyer harmless
from, all losses, liabilities and expenses (including, but not limited to, as to
claims by third persons, reasonable fees and expenses of counsel and expenses of
investigation) because any matter which is the subject of a representation and
warranty in Paragraph 3.2 is not as represented and warranted.
8.2. Indemnification Against Loss Due to Inaccuracies in Buyer's
Representations and Warranties. The Buyer indemnifies and each of the Selling
Stockholders against, and agrees to hold and each of the Selling Stockholders
harmless from, all losses, liabilities and expenses (including, but not limited
to, reasonable fees and expenses of counsel and accountants and expenses of
investigation) incurred directly or indirectly because (i) any matter which is
the subject of a representation or warranty contained in Paragraph 3.3 is not as
represented or warranted, or (ii) the Buyer fails to fulfill in any respect any
of its obligations under this Agreement or under any document delivered in
accordance with this Agreement which is required to be fulfilled after the
Closing.
8.3. Indemnification Against Liabilities with Regard to Previously Sold
Companies. The Selling Stockholders jointly and severally indemnify the Company
against, and agree to hold the Company harmless from, any liabilities under any
indemnification provision of any of the agreements listed on Exhibit 7.3 or
because of a breach of a representation, warranty or covenant in any such
agreement ("Sold Company Indemnities") and all legal fees and other out of
pocket expenses reasonably incurred by the Company in defending against claims
for Sold Company Indemnities. If any claim is made against the Company after the
Closing for any Sold Company Indemnity, that claim will be subject to Paragraph
7.9. The indemnification in this Paragraph 7.3 will extend to the Buyer and to
subsidiaries of the Company to the extent, but
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only to the extent, that a claim is made against the Buyer or a subsidiary of
the Company that it is contractually obligated to the claimant under an
indemnification provision of an agreement listed on Exhibit 7.3. If such a claim
is made against the Buyer or a subsidiary, all the provisions of this Paragraph
relating to the Company will apply to the Buyer or the subsidiary.
8.4. Tax Indemnification. Without limiting the obligations of the
Selling Stockholders under Paragraph 7.1, the Selling Stockholders agree to pay,
and jointly and severally indemnify the Company and its subsidiaries against,
and agree to hold the Company and its subsidiaries harmless from, any liability
for Taxes which relate to a period which ends on or before the Closing Date,
whether or not the Taxes were required to be paid on or before the Closing Date,
except that the Selling Stockholders will not be required to pay, or indemnify
the Company or any subsidiaries against, any Taxes for which an accrual is
reflected on the Balance Sheet or which are attributable to operations of the
Company or any of its subsidiaries after March 31, 1999. The Company will permit
the Stockholders Representative or persons designated by the Stockholders
Representative to oversee the preparation of all Tax Returns prepared after the
Closing with regard to periods which end on or before the Closing Date and to
control all decisions as to elections which may be made on, or after
discretionary decisions (including interpretations of requirements of applicable
Tax laws or regulations) with regard to, those Tax Returns. The Buyer will cause
the Company to cooperate with the Stockholders Representative in all reasonable
ways in the preparation of Tax Returns relating periods ending on or before the
Closing Date. The Company will bear the costs of preparing those Tax Returns,
but the Stockholders Representative will pay the costs of all persons it
designates to assist in overseeing the preparation of those Tax Returns. If the
Company or any subsidiary is notified that any governmental authority intends to
begin an audit or an administrative or judicial proceeding relating to Taxes for
which the Company or the subsidiary intends to seek indemnification under this
Paragraph, the Company or the subsidiary will promptly notify the Stockholders
Representative that the audit or the administrative or judicial proceeding is
going to take place and the Stockholders Representative may, if it elects to do
so, control the audit, or the defense of the administrative or judicial
proceeding, on behalf of the Company or the subsidiary. If, because the Company
or a subsidiary makes any Tax payment for which it is indemnified under this
Paragraph, the Company or a subsidiary becomes entitled to a refund or reduction
of Taxes with regard to any other period (whether before or after the Closing),
any other type of Tax, or any Tax in any other jurisdiction, the liability of
the Selling Stockholders under this Paragraph will be limited to the amount by
which the Taxes for which the Company or subsidiary is entitled to be
indemnified under this Paragraph exceed the amount of the refunds or reductions
in Taxes to which the Company or a subsidiary become, or will become, entitled
because of the payment of Taxes for which the Company or a subsidiary is
entitled to be indemnified under this Paragraph. If the amounts of refunds or
reductions in Taxes cannot be determined with reasonable certainty, they will be
estimated, based on the highest rate of Federal corporate income tax at the time
the indemnification payment is due.
8.5. Limitation on Liabilities of Selling Stockholders Except in
instances of knowing, intentional fraud, neither the Selling Stockholders
together, nor any individual Selling Stockholder, will be liable under Paragraph
7.1, or any other provision of this Agreement, because matters which are the
subject of representations or warranties contained in Paragraph 3.2 (other than
Paragraph 3.2(c)) are not as represented or warranted, to the extent the losses,
liabilities and expenses incurred by the Buyer for which the Buyer is entitled
to indemnification under clause (b) of Paragraph 7.1, or for which any Selling
Stockholder would, except for this Paragraph, otherwise be liable, are in total
less than $500,000 or exceed in total $ 4,500,000. The liability of an
individual Selling Stockholder under Paragraph 7.1 or otherwise because
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matters which are the subject of representations and warranties contained in
Paragraph 3.2 (other than Paragraph 3.2(c)) are not as represented or warranted
will under no circumstances exceed (x) $4,000,000 times (y) the percentage of
all the Shares which that Selling Stockholder is selling to the Buyer.
8.6. Indemnification Sole Remedy. The indemnification in Paragraph 7.1
and 7.2, as the case may be, will be the sole remedy of the Buyer or any Selling
Stockholder because any matter which is the subject of a representation or
warranty contained in Paragraph 3.1, 3.2 or 3.3 is not as represented or
warranted. Any claim for that indemnification, other than a claim for
indemnification with regard to Paragraph 3.1(c) or the last sentence of
Paragraph 3.2(c), must be made not later than December 31, 2000 in a written
notification to the party from which indemnification is sought which describes
in reasonable detail the claim and the facts on which it is based. A claim for
indemnification with regard to Paragraph 3.1(c) or the last sentence of
Paragraph 3.2(c) may be made at any time in a written notification containing
the information described in the preceding sentence. None of the Selling
Stockholders or the Buyer will have any liability because any matter which is
the subject of a representation or warranty contained in Paragraph 3.1, 3.2 or
3.3 is not as represented or warranted, unless it is described in a notification
given as (including within the time) provided in this Paragraph.
8.7. Computation of Loss.
(a) The Buyer's loss because any matter which is the subject of a
representation or warranty in Paragraph 3.1 or 3.2 is not as represented or
warranted will be (i) the amount by which the value of the Shares on the Closing
Date is less because that matter was not as represented or warranted than it
would have been if the matter had been as represented or warranted (taking
account, among other things, of any insurance proceeds or other sums received by
the Company with regard to the matter) plus (ii) the amount of any losses,
liability or expenses incurred directly by the Buyer because the matter was not
as represented or warranted.
(b) Whenever the Buyer or any Selling Stockholder (the
"Indemnifying Party") is required by Paragraph 7.1 or 7.2, or any other
provision of this Article VII, to indemnify any other of them (the "Indemnified
Party") against, and hold the Indemnified Party harmless from, any item of loss,
liability or expense, the Indemnifying Party will pay the Indemnified Party the
sum which, after payment by the Indemnified Party of all Federal (but not state
or local) income or gains taxes, or similar Taxes, resulting from the payment,
minus all tax savings because of deductions or credits available to the
Indemnified Party because of the loss, liability or expense, will equal the
amount of the loss, liability or expense.
8.8. Indemnification Against Pending Litigation and Directors and
Officers Claims. The Selling Stockholders jointly and severally indemnify the
Company against, and agree to hold the Company harmless from, the following:
(a) Any loss, liability or expense (other than fees and expenses
of counsel shared with other defendants) in any of the actions listed on Exhibit
7. 8 The Stockholders Representative may, if it chooses to do so, assume control
of the defense of any or all of those actions, but if the Stockholders
Representative causes the Company to be represented by separate counsel in any
of those actions, the Selling Stockholders will pay the costs of that separate
counsel. The Selling Stockholders will not be responsible for the costs of any
settlement of any of the actions listed on Exhibit 7.8, unless the Stockholders
Representative consents to that settlement.
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(b) Any sums the Company or any subsidiary is required to pay to
persons who were directors or officers of the Company or any subsidiary before
the Closing Date as indemnification under the Company's or its subsidiary's
by-laws or otherwise, because of acts or omissions by them on or before the
Closing Date in their capacities as directors or officers of the Company or a
subsidiary, to the extent the Company's or its subsidiary's indemnification
obligation is not covered by insurance.
8.9. Procedure Regarding Third Party Claims. If a third party makes a
claim or demand against an indemnified party as to which the indemnified party
intends to seek indemnification under this Article VII (other than under
Paragraph 7.8) with regard to the claim or demand, the indemnified party will
promptly, and in any event within 30 days after receipt of notice of the claim
or demand, notify the indemnifying party (or, as to notice to the Selling
Stockholders, notify the Stockholders Representative) of the claim or demand,
provided that failure to notify the indemnifying party of a claim or demand will
not relieve the indemnifying party from any obligations it may have to the
indemnified party, except to the extent that the defense against the claim or
demand, or the cost of that defense, is prejudice by the failure to give notice.
If a demand for indemnification is made under the Article VII with regard to a
claim or demand of a third party, the indemnifying party will be entitled to
participate in the defense of the claim or demand, and if it wishes to do so to
assume and control the defense against the claim or demand with counsel of its
choice. If the indemnifying party assumes the defense against a claim or demand,
(a) the indemnified party will be entitled to participate in the defense, but
only at the indemnified party's cost and expense and without any right to be
reimbursed by the indemnifying party for that expense, and (b) no settlement or
compromise of the subject matter of the claim or demand may be effected by the
indemnified party without the consent of the indemnifying party. If the
indemnifying party does not assume the defense against a claim or demand, no
compromise or settlement with regard to that claim or demand maybe effected at
the expense of the indemnifying party without the consent of the indemnifying
party, which consent will not be unreasonably with held or delayed. In any
event, the indemnified party will cooperate with indemnifying party in the
defense against any claim or demand for which the indemnified party is entitled
to be indemnified.
8.10. Buyer's Right to Withhold Stock Consideration.
(a) If, at least 10 days before the first anniversary of Closing
Date, the Buyer notifies the Stockholders Representative that the Buyer wishes
to apply Stock Consideration to satisfy a sum due from the Selling Stockholders
to the Buyer under this Article VII which the Buyer had requested at least 30
days before the first anniversary of Closing Date, the Stockholders
Representative will return to the Buyer, and the Buyer will apply against the
sum which has been unpaid for at least 30 days, a number of shares of Buyer
Common Stock, valued at their Fair Value on the day which is 10 days before the
first anniversary of the Closing Date, with a value equal to the sum which has
been unpaid for at least 30 days. As used in this Agreement, the Fair Value of a
share of Buyer Common Stock on a day will be the average of the last sale price
of the Buyer Common Stock reported on the New York Stock Exchange Composite Tape
(or in such other market as may be the principal market for the Buyer Common
Stock) on each of the twenty trading days immediately preceding (but not
including) the day on which the Fair Value is determined.
(b) If the Stockholders Representative is required by subparagraph
(a) to return Buyer Common Stock to the Buyer, prior to the fist anniversary of
the Closing Date, the Stockholders Representative will deliver to the Buyer the
certificate delivered to the
23
<PAGE> 28
Stockholders Representative at the Closing, and the Buyer will issue in exchange
a stock certificate representing the number of shares of Buyer Common Stock, net
of the shares applied against the sum due to the Buyer, to which the Selling
Stockholders are entitled.
(c) If the reason a sum has been unpaid for more than 30 days is
that the Stockholders Representative has contested an assertion by the Buyer
that the Selling Stockholders are required to pay that sum, the Stockholders
Representative will not return Buyer Common Stock to the Company with regard to
that sum, but when the Stockholders Representative distributes the Stock
Consideration to the Selling Stockholders, the Stockholders Representative (i)
will retain a number of shares of Buyer Common Stock which has a Fair Value on
the day which is ten days before the first anniversary of the Closing Date equal
to the contested sum, (ii) will promptly sell those shares, and (iii) will hold
the sale proceeds until there is a final determination of whether the Selling
Stockholders are required to pay all or a portion of the contested sum to the
Buyer, at which time the Stockholders Representative will (x) pay to the Buyer
out of the sale proceeds any amount to which it is determined the Buyer is
entitled, and (y) distribute the balance of the sale proceeds, and any interest
earned on the sale proceeds, to the Selling Stockholders. Failure of the Buyer
to request the return of Buyer Common Stock and apply the Buyer Common Stock
against an obligation of the Selling Stockholders under this Article VII,
whether because the Buyer has not yet made the claim which creates that
obligation or otherwise, will not affect the obligation. It will, however, end
the right of the Buyer to apply Stock Consideration against the obligation.
8.11. Apportionment of Liability Among Selling Stockholders. Each
Selling Stockholder will be responsible for a portion of any sums the Selling
Stockholders are required to pay under Paragraph 7.1 equal to the portion of all
the Shares which that Selling Stockholder is selling to the Company. If any
Selling Stockholder is required by any court order to otherwise to pay a greater
portion of any sum the Selling Stockholders are required to pay under Paragraph
7.1 than is provided in the preceding sentence, each of the other Selling
Stockholders will make a payment to that Selling Stockholder so that, after the
payment to that Selling Stockholder (and to any other Selling Stockholder who or
which are required to pay a greater portion of the sum the Selling Stockholders
are required to pay under Paragraph 7.1 than that provided in the preceding
sentence), each of the Selling Stockholders will have paid the portion provided
in the preceding sentence of the total sum the Selling Stockholders are required
to pay under Paragraph 7.1. In any action or proceeding brought against any
Selling Stockholder to recover a sum it is claimed the Selling Stockholders are
required to pay under Paragraph 7.1, that Selling Stockholder may implead the
other Selling Stockholders so that any award can be apportioned among the
Selling Stockholders in the manner provided in the first sentence of this
Paragraph. This Paragraph will not affect the liabilities of the respective
Selling Stockholders to the Buyer, which will be individual or joint and several
as provided in the respective provisions under which the indemnification
obligations arise.
ARTICLE IX
ABSENCE OF BROKERS
9.1. Representations and Warranties Regarding Brokers and Others. The
Buyer, and the Selling Stockholders jointly, each represents and warrants to the
other of them that nobody acted as a broker, a finder or in any similar capacity
in connection with the transactions which
24
<PAGE> 29
are the subject of this Agreement, except that (i) ING Baring Furman Selz
("Furman Selz") as financial advisor to the Buyer and (ii) Salomon Smith Barney,
Inc. ("SSB") acted as financial advisor to the Selling Stockholders. All fees of
Furman Selz will be paid by the Buyer and all fees of SSB will be paid by the
Selling Stockholders. The Buyer, and the Selling Stockholders jointly, each
indemnifies the other of them against, and agrees to hold the other of them
harmless from, all losses, liabilities and expenses (including, but not limited
to, reasonable fees and expenses of counsel and costs of investigation) incurred
because of any claim by anyone for compensation as a broker, a finder or in any
similar capacity by reason of services allegedly rendered to the indemnifying
party in connection with the transactions which are the subject of this
Agreement.
ARTICLE X
STOCKHOLDERS REPRESENTATIVE
10.1. Appointment of Stockholders Representative
(a) Each Selling Stockholder, by executing this Agreement,
irrevocably appoints Three Cities Research, Inc. (the "Stockholders
Representative") to serve as the representative of that Selling Stockholder with
respect to all matters concerning the Selling Stockholders set forth in this
Agreement or in any other agreements entered into by the Selling Stockholders in
accordance with this Agreement. Any action taken by the Stockholders
Representative will bind each Selling Stockholder as fully as though it had been
taken by the Selling Stockholder himself, herself or itself. If, for any reason,
the Stockholders Representative named in this Paragraph becomes unable or
unwilling to serve, the Selling Stockholders will promptly designate a successor
Stockholders Representative, which or who will have all the powers of the
Stockholders Representative described in this Paragraph and elsewhere in this
Agreement.
(b) Without limiting what is said in subparagraph (a), each of the
Selling Stockholders, by executing this Agreement, irrevocably appoints the
Stockholders Representative as the agent, proxy and attorney in fact for that
Selling Stockholder to, among other things, (i) deliver all documents and take
all other actions which are required in order to complete the transactions
contemplated by this Agreement, (ii) receive on behalf of that Selling
Stockholder (for disbursement to that Selling Stockholder) any payments to which
the Selling Stockholder is entitled under this Agreement, (iii) receive on
behalf of that Selling Stockholder (for delivery to that Selling Stockholder)
any document the Selling Stockholder is entitled to receive under this Agreement
and (iv) execute and deliver on behalf of that Selling Stockholder any document
which is required by this Agreement. When any payment is made, or document is
delivered, to the Stockholders Representative as agent of a Selling Stockholder,
that payment or document will be deemed to have been made or delivered to that
Selling Stockholder. The agency and proxy contained in this subparagraph will be
deemed coupled with an interest, and therefore to be irrevocable, and will, to
the fullest extent permitted under applicable law, survive the death,
incapacity, bankruptcy or dissolution of any Selling Stockholder.
(c) Whenever any payment due to the Selling Stockholders is made
to the Stockholders Representative (including the Cash Portion of the Purchase
Price and payments with regard to the Seller Subordinated Notes) or securities
(including Buyer Common Stock or Warrants) are delivered to the Stockholders
Representative, the payment or delivery to the Stockholders Representative will
constitute payment or delivery by the Buyer to the Selling Stockholders, and the
Stockholders Representative will be responsible for distributing the payment or
the securities to the individual Selling Stockholders.
25
<PAGE> 30
ARTICLE XI
GENERAL
11.1. Expenses. The Buyer and the Selling Stockholders will each pay
its or their own expenses in connection with the transactions which are the
subject of this Agreement, including legal fees. The Selling Stockholders will
reimburse the Company for any payments it is required to make (i) to prepay
indebtedness at or before the Closing, (ii) after the Closing Date to reimburse
Castor for expenses relating to his efforts to purchase the Company or (iii)
after the Closing Date to James L. Phillis under a Severance Agreement dated
April 29, 1999, to the extent the payments to James L. Phillis under that
agreement which are made after the Closing Date exceed $28,750.
11.2. Access to Properties, Books and Records.
(a) From the date of this Agreement until the Closing Date, the
Selling Stockholders will cause the Company and each of its subsidiaries to give
representatives of the Buyer full access during normal business hours to all of
their respective properties, books and records to the extent (but only to the
extent) examination of those properties, books and records is, or could be,
relevant to the Buyer's determination whether the representations and warranties
of the Selling Stockholders in Article III are true and correct in all material
respects or whether there is any other reason why the Buyer is not required to
complete the transactions which are the subject of this Agreement. The Buyer
will not include among its representatives who are to be given access to the
properties, books and records of the Company anybody who, on behalf of Buyer, is
involved in decisions as to how products sold by the Buyer which compete with
products sold by the Company are priced or marketed. Until the Closing, the
Buyer will, and will cause its representatives to, hold all information it
receives as a result of its access to the properties, books and records of the
Company or its subsidiaries in confidence and use that information solely in
connection with the transactions which are the subject of this Agreement, except
to the extent that information (i) is or becomes available to the public (other
than through a breach of this Agreement), (ii) becomes available to the Buyer
from a third party which, insofar as the Buyer is aware, is not under an
obligation to the Selling Stockholders, to the Company or to a subsidiary to
keep the information confidential, (iii) was known to the Buyer before it was
made available to the Buyer or its representative by a Selling Stockholder, the
Company or a subsidiary, or (iv) otherwise is independently developed by the
Buyer. If this Agreement is terminated prior to the Closing, the Buyer will, at
the request of the Stockholders Representative, deliver to the Stockholders
Representative all documents and other material obtained by the Buyer from any
Selling Stockholder, the Company or a subsidiary in connection with the
transactions which are the subject of this Agreement or evidence that that
material has been destroyed by the Buyer.
(b) After the Closing, the Buyer will use its best efforts to
cause the Company to provide each Selling Stockholder with access to the books
and records and knowledgeable personnel of the Company and of its subsidiaries
during normal business hours in connection with the preparation of financial
statements by the Selling Stockholder or its affiliates, the preparation of Tax
Returns by the Selling Stockholder or its affiliates or audits of Tax Returns
which were filed by the Selling Stockholder or its affiliates. Each Selling
Stockholder will, and will cause its affiliates and representatives to, hold all
the information the Selling Stockholder receives as a result of access to the
books, records and knowledgeable personnel of the Company and its subsidiaries
in confidence and use that information solely for the purposes
26
<PAGE> 31
described in the preceding sentence, except to the extent that information (i)
is or becomes available to the public (other than through a breach of this
Agreement), (ii) becomes available to the Selling Stockholder from a third party
which, insofar as the Selling Stockholder is aware, is not under an obligation
to the Buyer, to the Company or to a subsidiary to keep the information
confidential, (iii) was known to the Selling Stockholder before it was made
available to the Selling Stockholder or its affiliate or representative by the
Company or a subsidiary, or (iv) otherwise is independently developed by the
Selling Stockholder or by an affiliate or representative of the Selling
Stockholder.
(c) Until the third anniversary of the Closing Date, as to Three
Cities Fund II, L.P. and Three Cities Offshore II C.V. (the "Three Cities
Funds") and until the first anniversary of the Closing Date as to A.A. Fornataro
("Fornataro") (each the "Noncompetition Period" as to the applicable entities or
person), none of the Three Cities Funds or Fornataro will invest in, or engage
directly or indirectly, as an employee, a director or otherwise, in the business
of, any of the companies listed on Exhibit 10.2-C, PROVIDED, HOWEVER, that
nothing in this Paragraph 10.2 will prevent the Three Cities Funds together, or
Fornataro, from owning less than 5% of the outstanding stock of any
publicly-traded corporation. During the applicable Noncompetition Period,
neither of the Three Cities Funds nor Fornataro will, on behalf of any entity
other than the Company or a subsidiary, solicit or otherwise attempt to hire or
retain, in any capacity, any person who is, at that time an employee or officer
of the Company or a subsidiary or attempt to cause any such person to terminate
his or her employment with the Company or a subsidiary. If the final judgment of
a court of competent jurisdiction declares that any term or provision of this
Paragraph is invalid or unenforceable, the parties agree that the court making
the determination of invalidity or unenforceability will have the power to
reduce the scope, duration, or area of the term or provision, to delete specific
words or phrases, or to replace any invalid or unenforceable term or provision
with a term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision, and
this Agreement will be enforceable as so modified after the expiration of the
time within which the judgment may be appealed.
11.3. Press Releases. Neither the Buyer nor the Selling
Stockholders will issue any press release or otherwise make any public statement
regarding this Agreement or the transactions contemplated by it, unless the
press release or public statement has been approved by the Buyer and by the
Stockholders Representative, except that nothing in this Paragraph will prevent
any party from making any statement when and as required by law or by the rules
of any securities exchange or securities quotation system on which securities of
that party or an affiliate are listed or quoted.
11.4. Entire Agreement. This Agreement (including the Exhibits)
and the documents to be delivered in accordance with this Agreement contain the
entire agreement between the Buyer and the Selling Stockholders relating to the
transactions which are the subject of this Agreement and those other documents,
all prior negotiations, understandings and agreements between the Buyer and any
of the Selling Stockholders are superseded by this Agreement and those other
documents, and there are no representations, warranties, understandings or
agreements concerning the transactions which are the subject of this Agreement
or those other documents other than those expressly set forth in this Agreement
or those other documents.
27
<PAGE> 32
11.5. Captions. The captions of the articles and paragraphs of this
Agreement are for reference only, and do not affect the meaning or
interpretation of this Agreement.
11.6. Assignments. Neither this Agreement nor any right of any party
under it may be assigned, except that the Buyer may assign its rights and
obligations under this Agreement to a corporation which is wholly owned by the
Buyer, if the Buyer unconditionally guarantees that the corporation to which the
Buyer's rights and obligations are assigned will perform fully all the
obligations of the Buyer under this Agreement.
11.7. Notices and Other Communications. Any notice or other
communication under or relating to this Agreement must be in writing and will be
deemed given when delivered in person or sent by facsimile (with proof of
receipt at the number to which it is required to be sent), on the business day
after the day on which it is delivered to a major nationwide delivery service
for overnight delivery, or on the third business day after the day on which it
is mailed by first class mail from within the United States of America, to the
following addresses (or such other address as may be specified as provided in
this Agreement after the date of this Agreement by the party to which the notice
or communication is sent):
If to any Selling Stockholder:
Three Cities Research, Inc.
as Stockholders Representative
650 Madison Avenue
New York, New York 10022
Attention: W. Robert Wright II
Facsimile No.: (212) 980-1142
with a copy to:
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
Attention: David W. Bernstein
Facsimile No.: (212) 878-8375
If to the Buyer:
The Monarch Machine Tool Company
2600 Kettering Tower
Dayton, Ohio 45423
Attention: Richard E. Clemens, President
Facsimile No.: (937) 910-9305
with a copy to:
Thompson Hine & Flory LLP
2000 Courthouse Plaza N.E.
Dayton, Ohio 45402
Attention: Joseph M. Rigot
Facsimile No.: (937) 443-6635
28
<PAGE> 33
11.8. Governing Law. This Agreement will be governed by, and construed
under, the substantive laws of the State of Delaware.
11.9. Amendments. This Agreement may be amended only by a document in
writing signed by both the Buyer and the Stockholders Representative.
11.10. Counterparts. This Agreement may be executed in two or more
counterparts, some of which may be signed by fewer than all the parties or may
contain facsimile copies of pages signed by some of the parties. Each of those
counterparts will be deemed to be an original copy of this Agreement, but all of
them together will constitute one and the same agreement.
29
<PAGE> 34
IN WITNESS WHEREOF, the Buyer and the Selling Stockholders have
executed this Agreement, intending to be legally bound by it, on the day shown
on the first page of this Agreement.
THE MONARCH MACHINE TOOL
COMPANY.
By:_______________________________
Title:
THREE CITIES FUND II, L.P. THREE CITIES OFFSHORE II C.V
By TCR Associates, L.P. By: TCR Offshore Associates L.P.
General Partner General Partner
By: THREE CITIES RESEARCH, INC By: THREE CITIES ASSOCIATES N.V.
General Partner General Partner
By:_______________________________ By:_______________________________
Title: Title:
ALLIED CAPITAL CORPORATION ALLIED INVESTMENT CORPORATION
By:_______________________________ By:_______________________________
Title: Title:
WYNNEFIELD PARTNERS SMALL CAP
_______________________________ VALUE, L.P.
Anthony T. Castor III
_______________________________ By:_______________________________
Vernon E. Collins Title:
* *
------------------------------- -------------------------------
Michael H. Bulkin Martin C. Dilner
* *
------------------------------- -------------------------------
J. Murfree Butler M. James Ditallo
* *
------------------------------- -------------------------------
Stephen G. Cerri George A. Douglas
* *
------------------------------- -------------------------------
A.A. Fornataro Audie K. Dunbar
* *
------------------------------- -------------------------------
Michael S. Levin John A. Fischer
30
<PAGE> 35
* *
------------------------------- -------------------------------
Gerald L. Brenneman Thomas M. Fitzwilliams
* *
------------------------------- -------------------------------
William H. Carver George R. Goldner
* *
------------------------------- -------------------------------
Steven B. Chinchi Richard L. Goldner
* *
------------------------------- -------------------------------
Joseph L. Cugini Francis J. Gordon
* *
------------------------------- -------------------------------
Wesley M. Dias Gary D. Hart
* *
------------------------------- -------------------------------
Thomas F. Hazen Mark J. Menego
* *
------------------------------- -------------------------------
Marvin T. Knepp Robert F. Mikesell
* *
------------------------------- -------------------------------
Harry F. Leonard Charles L. Miller
* *
------------------------------- -------------------------------
William A. Lindner Kenneth H. Miller
* *
------------------------------- -------------------------------
Frank S. Ludwiczak Donald J. Mudric
* *
------------------------------- -------------------------------
John A. Marzula Frank W. Petraglia
* *
------------------------------- -------------------------------
Miros J. Maszczak Teresa D. Phillips
* *
------------------------------- -------------------------------
Michael W. McGraw James L. Phillis
* *
------------------------------- -------------------------------
Melinda S. McKee William D. Presutti
* *
------------------------------- -------------------------------
James H. McKenna Michael A. Santillo
* *
------------------------------- -------------------------------
Karl T. Schoeffel Henry E. Theis
* *
------------------------------- -------------------------------
Carl H. Simpson Glyn R. Vaughan
31
<PAGE> 36
* *
------------------------------- -------------------------------
Blake C. Steele William R. Weber
* *
------------------------------- -------------------------------
Richard J. Stock Edward R. Woods
* *
------------------------------- -------------------------------
David D. Struth Lloyd P. Zahn
*
-------------------------------
Mark E. Sutherland
*
-------------------------------
Mark T. Swain
*By_________________________
W. Robert Wright II
Attorney-in-Fact
32
<PAGE> 1
Exhibit 4.1
EXECUTION COPY
================================================================================
CREDIT AGREEMENT
AMONG
THE MONARCH MACHINE TOOL COMPANY,
AS BORROWER,
THE SEVERAL LENDERS
FROM TIME TO TIME PARTIES HERETO,
AND
ING (U.S.) CAPITAL LLC,
AS ADMINISTRATIVE AGENT
DATED AS OF JUNE 30, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. DEFINITIONS.....................................................................................1
1.1 Defined Terms...................................................................................1
1.2 Other Definitional Provisions..................................................................20
SECTION 2. AMOUNT AND TERMS OF TERM LOAN COMMITMENTS......................................................21
2.1 Tranche A Term Loan Commitments................................................................21
2.2 Tranche A Term Notes...........................................................................21
2.3 Tranche B Term Loan Commitments................................................................21
2.4 Tranche B Term Notes...........................................................................22
2.5 Procedure for Term Loan Borrowing..............................................................22
2.6 Commitment Fee.................................................................................23
SECTION 3. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS...............................................23
3.1 Revolving Credit Commitments...................................................................23
3.2 Revolving Credit Notes.........................................................................23
3.3 Procedure for Revolving Credit Borrowing.......................................................24
3.4 Commitment Fee.................................................................................24
3.5 Termination or Reduction of Revolving Credit Commitments.......................................24
SECTION 4. LETTERS OF CREDIT..............................................................................25
4.1 L/C Commitment.................................................................................25
4.2 Procedure for Issuance of Letters of Credit....................................................26
4.3 Fees, Commissions and Other Charges............................................................26
4.4 L/C Participations.............................................................................27
4.5 Reimbursement Obligations of the Borrower......................................................28
4.6 Obligations Absolute...........................................................................28
4.7 Letter of Credit Payments......................................................................29
4.8 Application....................................................................................29
SECTION 5. GENERAL PROVISIONS APPLICABLE TO LOANS.........................................................29
5.1 Interest Rates and Payment Dates...............................................................29
5.2 Conversion and Continuation Options............................................................30
5.3 Minimum Amounts and Maximum Number of Tranches.................................................30
5.4 Optional Prepayments...........................................................................30
(b) Any Lender holding a Tranche B Term Loan may elect, by notice to the Administrative
Agent by telephone (confirmed by telecopy or otherwise in writing) at least one
Business Day prior to the prepayment date, to decline all or any portion of a
prepayment of its Tranche B Term Loan pursuant to this Section 5.4, in which case the
aggregate amount of prepayments that would have been applied to Tranche B Term Loans
but was so declined shall be applied to prepay Tranche A Term Loans and Tranche B Term
Loans of Lenders who accept prepayment of their Tranche B Term Loans pursuant to this
Section, on a pro-rata basis based on their respective then outstanding principal
amounts........................................................................................31
5.5 Mandatory Prepayments..........................................................................31
5.6 Computation of Interest and Fees...............................................................33
5.7 Inability to Determine Interest Rate...........................................................33
5.8 Pro Rata Treatment and Payments................................................................34
</TABLE>
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<TABLE>
<S> <C> <C>
5.9 Illegality.....................................................................................35
5.10 Requirements of Law............................................................................35
5.11 Taxes..........................................................................................36
5.12 Indemnity......................................................................................38
5.13 Lending Offices; Change of Lending Office; Replacement of Lenders..............................38
SECTION 6. REPRESENTATIONS AND WARRANTIES.................................................................39
6.1 Financial Condition............................................................................39
6.2 No Change......................................................................................41
6.3 Existence; Compliance with Law.................................................................41
6.4 Power; Authorization; Enforceable Obligations..................................................41
6.5 No Legal Bar...................................................................................42
6.6 No Material Litigation.........................................................................42
6.7 No Default.....................................................................................42
6.8 Ownership of Property; Liens...................................................................42
6.9 Intellectual Property..........................................................................42
6.10 No Burdensome Restrictions.....................................................................42
6.11 Taxes..........................................................................................42
6.12 Federal Regulations............................................................................43
6.13 ERISA..........................................................................................43
6.14 Investment Company Act; Other Regulations......................................................43
6.15 Subsidiaries...................................................................................43
6.16 Security Documents.............................................................................44
6.17 Accuracy and Completeness of Information.......................................................44
6.18 Labor Relations................................................................................45
6.19 Insurance......................................................................................45
6.20 Solvency.......................................................................................45
6.21 Purpose of Loans...............................................................................46
6.22 Environmental Matters..........................................................................46
6.23 Regulation H...................................................................................47
6.24 Year 2000 Compliance...........................................................................47
SECTION 7. CONDITIONS PRECEDENT...........................................................................47
7.1 Conditions to Initial Loans....................................................................47
7.2 Conditions to Each Loan........................................................................53
SECTION 8. AFFIRMATIVE COVENANTS..........................................................................54
8.1 Financial Statements...........................................................................54
8.2 Certificates; Other Information................................................................55
8.3 Payment of Obligations.........................................................................56
8.4 Conduct of Business and Maintenance of Existence...............................................56
8.5 Maintenance of Property; Insurance.............................................................56
8.6 Inspection of Property; Books and Records; Discussions.........................................56
8.7 Notices........................................................................................56
8.8 Environmental Laws.............................................................................57
8.9 Periodic Audit of Accounts Receivable and Inventory............................................57
8.10 Additional Collateral; Additional Guarantors...................................................58
8.11 Year 2000 Covenants............................................................................58
8.12 Interest Rate Protection Arrangements..........................................................59
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 9. NEGATIVE COVENANTS.............................................................................59
9.1 Financial Condition Covenants..................................................................59
9.2 Limitation on Indebtedness.....................................................................63
9.3 Limitation on Liens............................................................................63
9.4 Limitation on Guarantee Obligations............................................................64
9.5 Limitation on Fundamental Changes..............................................................65
9.6 Limitation on Sale of Assets...................................................................65
9.7 Limitation on Dividends........................................................................66
9.8 Limitation on Capital Expenditures.............................................................66
9.9 Limitation on Investments, Loans and Advances..................................................67
9.10 Limitation on Optional Payments and Modifications of Debt Instruments..........................67
9.11 Limitation on Transactions with Affiliates.....................................................67
9.12 Limitation on Sales and Leasebacks.............................................................68
9.13 Limitation on Changes in Fiscal Year...........................................................68
9.14 Limitation on Negative Pledge Clauses..........................................................68
9.15 Limitation on Lines of Business................................................................68
9.16 Governing Documents............................................................................68
9.17 Limitation on Subsidiary Formation.............................................................68
SECTION 10. EVENTS OF DEFAULT..............................................................................68
SECTION 11. THE ADMINISTRATIVE AGENT.......................................................................72
11.1 Appointment....................................................................................72
11.2 Delegation of Duties...........................................................................72
11.3 Exculpatory Provisions.........................................................................72
11.4 Reliance by Administrative Agent...............................................................72
11.5 Notice of Default..............................................................................73
11.6 Non-Reliance on Administrative Agent and Other Lenders.........................................73
11.7 Indemnification................................................................................74
11.8 Administrative Agent in Its Individual Capacity................................................74
11.9 Successor Administrative Agent.................................................................74
SECTION 12. MISCELLANEOUS..................................................................................75
12.1 Amendments and Waivers.........................................................................75
12.2 Notices........................................................................................75
12.3 No Waiver; Cumulative Remedies.................................................................76
12.4 Survival of Representations and Warranties.....................................................76
12.5 Payment of Expenses and Taxes..................................................................76
12.6 Successors and Assigns; Participations and Assignments.........................................77
12.7 Adjustments; Set-off...........................................................................79
12.8 Counterparts...................................................................................80
12.9 Severability...................................................................................80
12.10 Integration....................................................................................80
12.11 GOVERNING LAW..................................................................................80
12.12 Submission To Jurisdiction; Waivers............................................................80
12.13 Acknowledgements...............................................................................81
12.14 WAIVERS OF JURY TRIAL..........................................................................81
12.15 Confidentiality................................................................................81
</TABLE>
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SCHEDULES:
- ----------
Schedule 1.1 Lenders, Commitments and Lending Offices
Schedule 2.2 Tranche A Term Loan Payments
Schedule 2.4 Tranche B Term Loan Payments
Schedule 6.6 Litigation
Schedule 6.15 Subsidiaries
Schedule 6.16 Filing Jurisdictions; Excluded Collateral
Schedule 6.19 Insurance
Schedule 6.22 Environmental Matters
Schedule 7.1(a)(viii) Mortgage Locations
Schedule 7.1(a)(ix) Leasehold Mortgage Locations
Schedule 9.2 Existing Indebtedness
Schedule 9.3 Existing Liens
Schedule 9.4 Existing Guarantee Obligations
Schedule 9.5 Permitted Restructuring
EXHIBITS:
- ---------
Exhibit A-1 Form of Tranche A Term Note
Exhibit A-2 Form of Tranche B Term Note
Exhibit A-3 Form of Revolving Credit Note
Exhibit B Form of Assignment of Precision Acquisition Documents
Exhibit C Form of Guarantee
Exhibit D Form of Leasehold Mortgage
Exhibit E Form of Mortgage
Exhibit F Form of Pledge Agreement
Exhibit G Form of Security Agreement
Exhibit H Form of Borrowing Request
Exhibit I Form of Non-Bank Status Certificate
Exhibit J Form of Secretary's Certificate
Exhibit K-1 Form of Legal Opinion
Exhibit K-2 Form of Local Counsel Legal Opinion
Exhibit K-3 Form of United Kingdom Legal Opinion
Exhibit L Form of Assignment and Acceptance
-iv-
<PAGE> 6
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of June 30, 1999, among THE MONARCH MACHINE
TOOL COMPANY, an Ohio corporation (the "BORROWER"), the lenders from time to
time parties to this Agreement (the "LENDERS") and ING (U.S.) CAPITAL LLC, as
administrative agent for the Lenders hereunder.
RECITALS
The Borrower has requested that (a) the Lenders make a tranche A term
loan to the Borrower in the aggregate principal amount of $50,000,000, the
proceeds of which would be used to partially finance the acquisition (the
"PRECISION ACQUISITION") of 100% of the issued and outstanding capital stock of
Precision Industrial Corporation, a Delaware corporation ("PRECISION"), to
refinance substantially all indebtedness of the Borrower, Precision and each of
their subsidiaries and to pay fees and expenses incurred in connection herewith
and therewith, (b) the Lenders make a tranche B term loan to the Borrower in the
aggregate principal amount of $20,000,000, the proceeds of which would be used
to partially finance the Precision Acquisition, to refinance substantially all
indebtedness of the Borrower, Precision and each of their subsidiaries and to
pay fees and expenses incurred in connection herewith and therewith, and (c) the
Lenders make available to the Borrower revolving credit loans in an aggregate
principal amount at any one time outstanding not to exceed $30,000,000, the
proceeds of which would be used to partially finance the Precision Acquisition,
to refinance substantially all indebtedness of the Borrower, Precision and each
of their subsidiaries, to finance the working capital requirements of the
Borrower and its subsidiaries in the ordinary course of business and to pay fees
and expenses incurred in connection herewith and therewith. The Lenders are
willing to make such credit available to the Borrower, but only on the terms,
and subject to the conditions, set forth in this Agreement.
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, the following terms shall
have the following meanings:
"ADJUSTED CONSOLIDATED NET INCOME": for any period,
Consolidated Net Income adjusted to give effect to (i) adjustments to
Consolidated Net Worth in the ordinary course of business that are not
otherwise reflected in Consolidated Net Income in accordance with GAAP,
including, without limitation, foreign exchange translation adjustments,
pension related items and adjustments in connection with derivative
securities and (ii) the retirement of any shares of Capital Stock of the
Borrower held as assets of a pension plan in accordance with Section 5.5(b)
hereof.
<PAGE> 7
"ADMINISTRATIVE AGENT": ING (U.S.) Capital LLC, together with its
affiliates, as the arranger of the Commitments and as the Administrative
Agent for the Lenders under this Agreement and the other Loan Documents.
"AFFILIATE": as to any Person, any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled
by, or is under common control with, such Person. For purposes of this
definition, "CONTROL" of a Person (including, with its correlative
meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the power,
directly or indirectly, either to (a) vote 10% or more of the securities
having ordinary voting power in the election of directors of such Person or
(b) direct or cause the direction of the management and policies of such
Person, whether by contract or otherwise.
"AGGREGATE OUTSTANDING RC EXTENSIONS OF CREDIT": as to any Lender at
any time, an amount equal to the sum of (a) the aggregate principal amount
of all Revolving Credit Loans made by such Lender then outstanding and (b)
such Lender's Revolving Credit Commitment Percentage of the L/C Obligations
then outstanding.
"AGREEMENT": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.
"APPLICABLE LENDING OFFICE": for each Lender and for each Type of Loan,
the lending office of such Lender designated for such Type of Loan on
Schedule 1.1 hereto (or any other lending office from time to time notified
to the Administrative Agent by such Lender) as the office at which its
Loans of such Type are to be made and maintained.
"APPLICABLE MARGIN": (a) for any Tranche A Term Loan or any
Revolving Credit Loan of any Type, during the period commencing on the
Closing Date and ending on the date which is six months following the
Closing Date, the rate per annum set forth under the relevant column
heading below:
<TABLE>
<CAPTION>
-----------------------------------------------
Base Rate Loans Eurodollar Loans
-----------------------------------------------
<S> <C>
1.75% 2.75%
-----------------------------------------------
</TABLE>
(b) for any Tranche A Term Loan or Revolving Credit Loan of any Type,
at any time following the date which is six months following the Closing
Date on which the Leverage Ratio, as most recently determined as of the
date the certificate containing such Leverage Ratio is delivered pursuant
to Section 8.2(b), is within any of the ranges set forth below, the rate
per annum set forth under the relevant column heading opposite the
applicable range below:
-2-
<PAGE> 8
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Leverage Ratio Base Rate Loans Eurodollar Loans
-----------------------------------------------------------------
<S> <C> <C>
Greater than or equal 1.75% 2.75%
to 3.5
-----------------------------------------------------------------
Less than 3.5 but 1.375% 2.375%
greater than or equal
to 3.0
-----------------------------------------------------------------
Less than 3.0 but 1.00% 2.00%
greater than or equal
to 2.5
-----------------------------------------------------------------
Less than 2.5 .625% 1.625%
-----------------------------------------------------------------
</TABLE>
PROVIDED, that in the event that the certificate containing the
determination of the Leverage Ratio is not delivered on the date specified
and otherwise in accordance with to Section 8.2(b) hereof, the applicable
margin shall be the highest rate per annum for such Type of Loan set forth
above from the date on which such certificate was required to be delivered
in accordance with Section 8.2(b) until such time as such certificate is
delivered to the Lenders.
(c) for any Tranche B Term Loan of any Type, the rate per annum set
forth under the relevant column heading below:
<TABLE>
----------------------------------------------------
Base Rate Loans Eurodollar Loans
----------------------------------------------------
<S> <C> <C>
2.25% 3.50%
----------------------------------------------------
</TABLE>
"APPLICATION": an application, in such form as the Issuing Lender may
specify from time to time, requesting the Issuing Lender to open a Letter
of Credit.
"ASSIGNEE": as defined in Section 11.6(c).
"ASSIGNMENT AND ACCEPTANCE": as defined in Section 11.6(c).
"ASSIGNMENT OF PRECISION ACQUISITION DOCUMENTS": the assignment of the
Precision Acquisition Documents, in the form of Exhibit B attached hereto.
"AVAILABLE RC COMMITMENT": as to any Lender at any time, an amount
equal to the excess, if any, of (a) the amount of such Lender's Revolving
Credit Commitment at such time OVER (b) the Aggregate Outstanding RC
Extensions of Credit by such Lender at such time.
-3-
<PAGE> 9
"BASE RATE": for any day, the rate per annum (rounded upward, if
necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime
Rate in effect on such day and (b) the Federal Funds Effective Rate in
effect on such day plus 1/2 of 1%. For purposes hereof: "PRIME RATE" shall
mean the average of the prime commercial lending interest rates publicly
announced by The Chase Manhattan Bank (National Association), Citibank,
N.A. and Morgan Guaranty Trust Company of New York, as announced from time
to time at their respective head offices (the prime rate not being intended
to be the lowest rate of interest charged by such banks in connection with
extensions of credit to debtors).
"BASE RATE LOANS": Loans the rate of interest applicable to which is
based upon the Base Rate.
"BORROWER": as defined in the heading to this Agreement.
"BORROWING DATE": any Business Day specified in a notice pursuant to
Section 2.5 or 3.3 as a date on which the Borrower requests the Lenders to
make Loans hereunder.
"BORROWING REQUEST": as defined in Section 3.3.
"BUSINESS": as defined in Section 6.22.
"BUSINESS DAY": a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law
to close, and, if such day relates to a borrowing of, a payment or
prepayment of principal of or interest on, or a Conversion of or into, or
an Interest Period for, a Eurodollar Loan or a notice by the Borrower with
respect to any such borrowing, payment, prepayment, Conversion or Interest
Period, which is also a day on which dealings in Dollar deposits are
carried out in the London interbank market.
"CAPITAL STOCK": any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and
all similar ownership interests in a Person (other than a corporation) and
any and all warrants or options to purchase any of the foregoing.
"CASH EQUIVALENTS": (a) securities with maturities of 90 days or less
from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit
and eurodollar time deposits with maturities of 90 days or less from the
date of acquisition and overnight bank deposits of any Lender or of any
commercial bank having capital and surplus in excess of $500,000,000, (c)
repurchase obligations of any Lender or of any commercial bank satisfying
the requirements of clause (b) of this definition, having a term of not
more than seven days with respect to securities issued or fully guaranteed
or insured by the United States Government, (d) commercial paper of a
domestic issuer rated at least A-1 or the equivalent thereof by Standard
and Poor's Ratings Group ("S&P") or P-1 or
-4-
<PAGE> 10
the equivalent thereof by Moody's Investors Service, Inc. ("MOODY'S") and
in either case maturing within 90 days after the day of acquisition, (e)
securities with maturities of 90 days or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States, by any political subdivision or taxing authority of any such
state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at
least A by S&P or A by Moody's, (f) securities with maturities of 90 days
or less from the date of acquisition backed by standby letters of credit
issued by any Lender or any commercial bank satisfying the requirements of
clause (b) of this definition or (g) shares of money market mutual or
similar funds which invest exclusively in assets satisfying the
requirements of clauses (a) through (f) of this definition.
"CHANGE OF CONTROL": any transaction or event occurring on or after the
date hereof as a direct or indirect result of which (a) any Person or group
shall (i) beneficially own (directly or indirectly) in the aggregate
Capital Stock of the Borrower having 35% or more of the aggregate voting
power of all Capital Stock of the Borrower at the time outstanding or (ii)
have the right or power to appoint a majority of the board of directors of
the Borrower, or (b) during any period of two consecutive years,
individuals who at the beginning of such period constituted the board of
directors of the Borrower (together with any new directors whose election
by such board of directors or whose nomination for election by the
shareholders of the Borrower was approved by a vote of a majority of the
directors of the Borrower then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute at least a
majority of the board of directors of the Borrower then in office. For
purposes of this definition, the terms "beneficially own" and "group" shall
have the respective meanings ascribed to them pursuant to Section 13(d) of
the Securities Exchange Act of 1934, as amended, except that a Person or
group shall be deemed to beneficially own all securities that such Person
or group has the right to acquire, whether such right is exercisable
immediately or only after the passage of time.
"CLOSING DATE": the date on which the conditions precedent set forth in
Section 7.1 shall be satisfied.
"CODE": the Internal Revenue Code of 1986, as amended from time to
time.
"COLLATERAL": all property and interests in property of the Loan
Parties, now owned or hereinafter acquired, upon which a Lien is purported
to be created by any Security Document.
"COMMERCIAL LETTER OF CREDIT": as defined in Section 4.1(b).
"COMMITMENTS": the collective reference to the Revolving Credit
Commitments, the Tranche A Term Loan Commitments and the Tranche B Term
Loan Commitments.
-5-
<PAGE> 11
"COMMONLY CONTROLLED ENTITY": an entity, whether or not incorporated,
which is under common control with the Borrower within the meaning of
Section 4001 of ERISA or is part of a group which includes the Borrower and
which is treated as a single employer under Section 414 of the Code.
"CONSOLIDATED CURRENT ASSETS": at a particular date, all amounts which
would, in conformity with GAAP, be included under current assets on a
consolidated balance sheet of the Borrower and its Subsidiaries as at such
date; PROVIDED, HOWEVER, that such amounts shall not include (a) any
amounts for any Indebtedness owing by an Affiliate of the Borrower, unless
such Indebtedness arose in connection with the sale of goods or other
property in the ordinary course of business and would otherwise constitute
current assets in conformity with GAAP, (b) any shares of stock issued by
an Affiliate of the Borrower, or (c) the cash surrender value of any life
insurance policy.
"CONSOLIDATED CURRENT LIABILITIES": at a particular date, all amounts
which would, in conformity with GAAP, be included under current liabilities
on a consolidated balance sheet of the Borrower and its Subsidiaries as at
such date.
"CONSOLIDATED EBITDA": for any period, the sum for such period of:
(a) Consolidated Net Income for such period,
(b) the sum of provisions for such period for income taxes,
interest expense, and depreciation and amortization expense used in
determining such Consolidated Net Income,
(c) amounts deducted in such period in respect of non-cash
expenses in accordance with GAAP,
(d) the amount of any aggregate net loss (or minus the amount of
any gain) during such period arising from the sale, exchange or other
disposition of capital assets and
(e) non-cash expenses deducted in such period in connection with
any earn-out agreements, stock appreciation rights, "phantom" stock
plans, employment agreements, non-competition agreements, subscription
and stockholders agreements and other incentive and bonus plans and
similar arrangements made in connection with acquisitions of Persons
or businesses by the Borrower or its Subsidiaries or the retention of
executives, officers or employees by the Borrower or its Subsidiaries,
including (but without duplication) any Person that has become a
Subsidiary during such period, on a PRO FORMA basis as if such
acquisition had occurred on the first day of such period;
PROVIDED, that Consolidated EBITDA shall in any event exclude, from and
after the Closing Date:
-6-
<PAGE> 12
(u) the effect of any write-up of any assets,
(v) the effect of any loss recognized on a sale of the Borrower's
machine tool division if completed not later than June 30, 2001,
(w) the amount of any non-cash income recognized during any
period for which Consolidated EBITDA is determined, including, without
limitation, (A) the income (or deficit) of any Person (other than a
Subsidiary) in which the Borrower or any Subsidiary has an ownership
interest, except to the extent that any such income has been actually
received by the Borrower or such Subsidiary in the form of dividends
or similar distributions, (B) the undistributed earnings of any
Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Subsidiary is not at the time
permitted by the terms of any Contractual Obligation, Governing
Document or Requirement of Law applicable to such Subsidiary, (C) any
restoration to income of any contingency reserve, except to the extent
that provision for such reserve was made out of income accrued during
such period or such reserve is an ongoing reserve recorded in the
ordinary course of business and (D) any deferred credit representing
the excess of equity in any Subsidiary at the date of acquisition over
the cost of the investment in such Subsidiary,
(x) any aggregate net gain (but not any aggregate net loss)
during such period arising from the sale, exchange or other
disposition of capital assets (such term to include all fixed assets,
whether tangible or intangible, all inventory sold in conjunction with
the disposition of fixed assets and all securities),
(y) any net gain from the collection of the proceeds of life
insurance policies, and
(z) any gain arising from the acquisition of any securities, or
the extinguishment, under GAAP, of any Indebtedness, of the Borrower
or any Subsidiary;
PROVIDED, FURTHER, that in calculating Consolidated EBITDA, no items shall
be included or excluded more than once.
"CONSOLIDATED FIXED CHARGES": for any period, the sum of (i) the
amounts deducted for the cash portion of Consolidated Interest Expense and
Consolidated Lease Expense in determining Consolidated Net Income for such
period, (ii) the amount of scheduled payments of principal of Indebtedness
during such period, (iii) all amounts of capital expenditures made during
such period (other than capital expenditures in respect of Financing Leases
to the extent the same are included in clauses (i) or (ii) of this
definition); PROVIDED, that such amount shall not exceed $3,500,000 for any
period of four consecutive fiscal quarters (or if less than four
consecutive fiscal quarters have elapsed following the Closing Date,
$3,500,000 times 1/4, 1/2 or 3/4, respectively, for the
-7-
<PAGE> 13
period of one, two or three consecutive fiscal quarters elapsed following
the Closing Date) and (iv) the amount of cash income taxes paid during such
period.
"CONSOLIDATED INDEBTEDNESS": for any period, the sum of (a) the sum of
(i) the aggregate outstanding principal amount of the Term Loans as of the
last day of such period, (ii) the outstanding principal amount of the
Revolving Credit Loans on the last day of such period and (iii) the
outstanding face amount of the Letters of Credit on the last day of such
period and (b) the outstanding principal amount of all other Indebtedness
of the Borrower and its Subsidiaries as of the last day of such period,
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE": for any period, the amount which, in
conformity with GAAP, would be set forth opposite the caption "interest
expense" or any like caption (including without limitation, imputed
interest included in payments under Financing Leases) on a consolidated
income statement of the Borrower and the Subsidiaries for such period
excluding the amortization of any original issue discount.
"CONSOLIDATED LEASE EXPENSE": for any period, the aggregate amount of
fixed or contingent rentals payable by the Borrower and its Subsidiaries,
determined on a consolidated basis in accordance with GAAP, for such period
with respect to leases of real and personal property.
"CONSOLIDATED NET INCOME": for any period, the consolidated net income
(or deficit) of the Borrower and the Subsidiaries for such period (taken as
a cumulative whole), determined in accordance with GAAP; PROVIDED, that
there shall be excluded (a) the income (or deficit) of any Person accrued
prior to the date it becomes a Subsidiary or is merged into or consolidated
with the Borrower or any Subsidiary, and (b) in the case of a successor to
the Borrower by consolidation or merger or as a transferee of its assets,
any earnings of the successor corporation prior to such consolidation,
merger or transfer of assets.
"CONSOLIDATED NET WORTH": as of any date of determination, all items,
which in conformity with GAAP, would be included under shareholders' equity
on a consolidated balance sheet of the Borrower.
"CONSOLIDATED SENIOR INDEBTEDNESS": for any period, the sum of (i) the
aggregate outstanding principal amount of the Term Loans as of the last day
of such period, and (ii) the outstanding principal amount of the Revolving
Credit Loans as of the last day of such period.
"CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the
continuation of a Eurodollar Loan from one Interest Period to the next
Interest Period.
"CONTRACTUAL OBLIGATION": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
-8-
<PAGE> 14
"CONVERT", CONVERSION" and "CONVERTED" shall refer to a conversion of
Base Rate Loans into Eurodollar Loans or of Eurodollar Loans into Base Rate
Loans, which may be accompanied by the transfer by a Lender (at its sole
discretion) of a Loan from one Applicable Lending Office to another.
"CREDIT EXPOSURE": as to any Lender at any time, the sum of (a) its
Revolving Credit Commitment (or, if the Revolving Credit Commitments shall
have expired or been terminated, the sum of (i) the aggregate unpaid
principal amount of its Revolving Credit Loans and (ii) its Revolving
Credit Commitment Percentage of the aggregate outstanding L/C Obligations)
and (b) the unpaid principal amount of its Term Loans.
"CREDIT EXPOSURE PERCENTAGE": as to any Lender at any time, the
fraction (expressed as a percentage), the numerator of which is the Credit
Exposure of such Lender at such time and the denominator of which is the
aggregate Credit Exposures of all of the Lenders at such time.
"DEFAULT": any of the events specified in Section 10, whether or not
any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
"DOLLARS" and "$": dollars in lawful currency of the United States of
America.
"DOMESTIC SUBSIDIARY": any Subsidiary organized under the laws of the
United States or any political subdivision thereof.
"ENVIRONMENTAL LAWS": any and all foreign, Federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements
of Law (including common law) regulating, relating to or imposing liability
or standards of conduct concerning protection of human health or the
environment, as now or may at any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"EUROCURRENCY RESERVE REQUIREMENTS": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on such
day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors of the
Federal Reserve System or other Governmental Authority having jurisdiction
with respect thereto) dealing with reserve requirements prescribed for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities"
in Regulation D of such Board) maintained by a member bank of such System.
"EURODOLLAR BASE RATE": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, the rate per annum equal to the
corresponding
-9-
<PAGE> 15
rate appearing at page 3750 of the Dow Jones Telerate Service at or about
11:00 A.M., London time, two Business Days prior to the beginning of such
Interest Period, or if such rate no longer so appears, the average of the
rates per annum at which each of The Chase Manhattan Bank (National
Association), Citibank, N.A. and Morgan Guaranty Trust Company of New York
is offered Dollar deposits at or about 10:00 a.m., local time, two Business
Days prior to the beginning of such Interest Period in the interbank
eurodollar market where the eurodollar and foreign currency and exchange
operations in respect of its Eurodollar Loans are then being conducted for
delivery on the first day of such Interest Period for the number of days
comprised therein and in an amount comparable to the amount of its
Eurodollar Loan to be outstanding during such Interest Period.
"EURODOLLAR LOANS": Loans the rate of interest applicable to which is
based upon the Eurodollar Rate.
"EURODOLLAR RATE": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, a rate per annum determined for
such day in accordance with the following formula (rounded upward to the
nearest 1/100th of 1%):
EURODOLLAR BASE RATE
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"EVENT OF DEFAULT": any of the events specified in Section 10;
PROVIDED that any requirement for the giving of notice, the lapse of time,
or both, or any other condition, has been satisfied.
"EXCESS CASH FLOW": as to the Borrower and its consolidated
Subsidiaries for each fiscal year:
(a) Consolidated EBITDA for such fiscal year (excluding any portion of
Consolidated EBITDA resulting from a PRO FORMA inclusion of Consolidated
EBITDA of any Person that becomes a Subsidiary of the Borrower during such
fiscal year as if such acquisition had occurred on the first day of such
period);
PLUS (b) the decrease (if any) in the amount of the excess of
Consolidated Current Assets (excluding cash and Cash Equivalents) over
Consolidated Current Liabilities at the end of such fiscal year compared to
the amount of the excess of Consolidated Current Assets (excluding cash and
Cash Equivalents) over Consolidated Current Liabilities at the end of the
immediately preceding fiscal year of the Borrower, excluding such decrease
attributable to the sale of the machine tools division of the Borrower and
attributable to other sales of divisions or other business units by the
Borrower and its Subsidiaries;
MINUS (c) the sum of (i) the amount of (A) all regularly scheduled
payments of principal of the Term Loans actually made during such fiscal
year, (B) any voluntary prepayment of principal of the Term Loans made
during such fiscal year, (C) any
-10-
<PAGE> 16
permanent reduction in the Revolving Credit Commitments made during such
fiscal year to the extent that, before giving effect to such reduction, the
average outstanding principal balance of the Revolving Credit Loans for the
thirty (30) days prior to such reduction exceeds the aggregate Revolving
Credit Commitments after giving effect to such reduction and (D) any
voluntary prepayment of other permitted Indebtedness to the extent not
subject to reborrowing, made during such fiscal year, (ii) the amount of
all interest payments actually made in cash during such fiscal year by the
Borrower and its consolidated Subsidiaries, (iii) the amount of capital
expenditures (other than capital expenditures in respect of Financing
Leases) actually made during such fiscal year by the Loan Parties to the
extent permitted by Section 9.8, (iv) cash income taxes paid by the Loan
Parties during such fiscal year and (v) the increase (if any) in the amount
of the excess of Consolidated Current Assets (excluding cash and Cash
Equivalents) over Consolidated Current Liabilities at the end of such
fiscal year compared to the amount of the excess of Consolidated Current
Assets (excluding cash and Cash Equivalents) over Consolidated Current
Liabilities at the end of the immediately preceding fiscal year of the
Borrower, excluding such increase attributable to the sale of the machine
tools division of the Borrower and attributable to other sales of divisions
or other business units by the Borrower and its Subsidiaries.
"FEDERAL FUNDS EFFECTIVE RATE": for any day, the weighted average of
the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published on
the next succeeding Business Day by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day,
the average of the quotations for the day of such transactions received by
the Administrative Agent from three federal funds brokers of recognized
standing selected by it.
"FEE LETTER": the Fee Letter, dated June 2, 1999, between the
Administrative Agent and the Borrower, as the same may be amended,
supplemented or otherwise modified from time to time.
"FINANCING LEASE": any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance
with GAAP to be capitalized on a balance sheet of the lessee.
"FOREIGN PLEDGE AGREEMENT": with respect to any Foreign Subsidiary
organized under the laws of the United Kingdom, the pledge agreement to be
executed and delivered by the Loan Parties, in form and substance
satisfactory to the Administrative Agent, as the same may be amended,
supplemented or otherwise modified from time to time.
"FOREIGN SUBSIDIARY": any Subsidiary of the Borrower which is
organized under the laws of a jurisdiction outside of the United States.
"GAAP": generally accepted accounting principles in the United States
of America in effect from time to time.
-11-
<PAGE> 17
"GOVERNING DOCUMENTS": as to any Person, its articles or certificate
of incorporation and by-laws, its partnership agreement, its certificate of
formation and operating agreement, and/or the other organizational or
governing documents of such Person.
"GOVERNMENTAL AUTHORITY": any nation or government, any state or other
political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"GUARANTEE": the Guarantee to be executed and delivered by the
Subsidiaries, substantially in the form of Exhibit C, as the same may be
amended, supplemented or otherwise modified from time to time.
"GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"),
any obligation of (a) the guaranteeing person or (b) another Person
(including, without limitation, any bank under any letter of credit) to
induce the creation of which the guaranteeing person has issued a
reimbursement, counterindemnity or similar obligation, in either case
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends
or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person
(the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly,
including, without limitation, any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or
any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such primary
obligation or (2) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; PROVIDED,
HOWEVER, that the term Guarantee Obligation shall not include endorsements
of instruments for deposit or collection in the ordinary course of
business. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have
a correlative meaning. The amount of any Guarantee Obligation of any
guaranteeing person shall be deemed to be the lower of (a) an amount equal
to the stated or determinable amount of the primary obligation in respect
of which such Guarantee Obligation is made and (b) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be
liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum reasonably
anticipated liability in respect thereof as determined by the Borrower in
good faith.
"GUARANTOR": any Person delivering a Guarantee pursuant to this
Agreement.
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"INDEBTEDNESS": of any Person at any date, without duplication, (a)
all indebtedness of such Person for borrowed money (whether by loan or the
issuance and sale of debt securities) or for the deferred purchase price of
property or services (other than current trade liabilities incurred in the
ordinary course of business and payable in accordance with customary
practices), (b) any other indebtedness of such Person which is evidenced by
a note, bond, debenture or similar instrument, (c) all obligations of such
Person under Financing Leases, (d) all obligations of such Person in
respect of letters of credit, acceptances or similar instruments issued or
created for the account of such Person and (e) all liabilities secured by
any Lien on any property owned by such Person even though such Person has
not assumed or otherwise become liable for the payment thereof.
"INSOLVENCY": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"INSOLVENT": pertaining to a condition of Insolvency.
"INTEREST PAYMENT DATE": (a) as to any Base Rate Loan, the last day of
each calendar month, (b) as to any Eurodollar Loan having an Interest
Period of three months or less, the last day of such Interest Period, and
(c) as to any Eurodollar Loan having an Interest Period longer than three
months, (i) each day which is three months or a whole multiple thereof,
after the first day of such Interest Period, and (ii) the last day of such
Interest Period.
"INTEREST PERIOD": with respect to any Eurodollar Loan:
(i) initially, the period commencing on the borrowing or
Conversion date, as the case may be, with respect to such Eurodollar
Loan and ending one, two, three or six months thereafter, as selected
by the Borrower in its notice of borrowing or notice of Conversion, as
the case may be, given with respect thereto; and
(ii) thereafter, each period commencing on the last day of the
next preceding Interest Period applicable to such Eurodollar Loan and
ending one, two, three or six months thereafter, as selected by the
Borrower by irrevocable notice to the Administrative Agent not less
than three Business Days prior to the last day of the then current
Interest Period with respect thereto;
PROVIDED that, all of the foregoing provisions relating to Interest Periods
are subject to the following:
(1) if any Interest Period pertaining to a Eurodollar Loan would
otherwise end on a day that is not a Business Day, such Interest
Period shall be extended to the next succeeding Business Day unless
the result of such extension would be to carry such Interest Period
into another calendar month in which event such Interest Period shall
end on the immediately preceding Business Day;
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(2) any Interest Period that would otherwise extend beyond the
Revolving Credit Termination Date or beyond the date final payment is
due on the Term Loans shall end on the Revolving Credit Termination
Date or such date of final payment, as the case may be;
(3) any Interest Period pertaining to a Eurodollar Loan that
begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month
at the end of such Interest Period) shall end on the last Business Day
of a calendar month; and
(4) the Borrower shall select Interest Periods so as not to
require a payment or prepayment of any Eurodollar Loan during an
Interest Period for such Loan.
"ISSUING LENDER": ING (U.S.) Capital LLC, in its capacity as issuer of
any Letter of Credit, and any other Lender that is designated an Issuing
Lender by the Administrative Agent.
"L/C COMMITMENT": $10,000,000.
"L/C FEE PAYMENT DATE": the last Business Day of each month.
"L/C OBLIGATIONS": at any time, an amount equal to the sum of (a) the
aggregate then undrawn 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.
"L/C PARTICIPANTS": the collective reference to all the Lenders other
than the Issuing Lender.
"LEASEHOLD MORTGAGE": each Leasehold Mortgage to be executed and
delivered by the Loan Parties, substantially in the form of Exhibit D, as
the same may be amended, supplemented or otherwise modified from time to
time.
"LENDERS": as defined in the heading hereto, which shall include in
any event the Issuing Lender.
"LETTERS OF CREDIT": as defined in Section 4.1(a).
"LEVERAGE RATIO": as of any date of determination, for the period of
four consecutive fiscal quarters most recently ended, the ratio of (i)
Consolidated Indebtedness for such period to (ii) Consolidated EBITDA for
such period; PROVIDED that in calculating the Leverage Ratio for the
periods of four fiscal quarters ending September 30, 1999, December 31,
1999 and March 31, 2000, Consolidated EBITDA for the fiscal quarters ending
December 31, 1998, March 31, 1999 and June 30, 1999 shall be deemed to be
$5,250,000, $5,250,000 and $5,250,000, respectively.
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<PAGE> 20
"LIEN": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement
and any Financing Lease having substantially the same economic effect as
any of the foregoing), and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in respect of
any of the foregoing.
"LOAN": any Term Loan or Revolving Credit Loan made by any Lender
pursuant to this Agreement.
"LOAN DOCUMENTS": this Agreement, the Notes, the Guarantee, the
Security Documents and the Fee Letter.
"LOAN PARTIES": the Borrower and each Subsidiary of the Borrower which
is a party to a Loan Document, including, without limitation, from and
after the Closing Date, Precision and each Subsidiary of Precision which is
party to a Loan Document.
"MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole or (b) the
validity or enforceability of this or any of the other Loan Documents or
the rights or remedies of the Administrative Agent or the Lenders hereunder
or thereunder.
"MATERIALS OF ENVIRONMENTAL CONCERN": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes, defined or regulated as
such in or under any Environmental Law, including, without limitation,
asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.
"MORTGAGE": each Mortgage to be executed and delivered by the Loan
Parties, substantially in the form of Exhibit E, as the same may be
amended, supplemented or otherwise modified from time to time.
"MULTIEMPLOYER PLAN": a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) of ERISA.
"NET PROCEEDS": (i) the aggregate cash consideration received by the
Borrower or a Subsidiary in connection with any transaction referred to in
Section 5.5(b) less (ii) the expenses (including out-of-pocket expenses)
incurred by the Borrower or such Subsidiary in connection with such
transaction (including, in the case of any issuance of debt or equity
securities, underwriters' commissions and fees) and the amount of any
federal and state taxes incurred in connection with such transaction, in
each case as certified by a Responsible Officer to the Administrative Agent
at the time of such transaction.
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"NON-BANK STATUS CERTIFICATE": as defined in Section 5.11(b)(i)(B).
"NON-EXCLUDED TAXES": as defined in Section 5.11.
"NOTES": the collective reference to the Revolving Credit Notes, the
Tranche A Term Notes and the Tranche B Term Notes.
"OBLIGATIONS": the unpaid principal amount of, and interest
(including, without limitation, interest accruing after the maturity of the
Loans and interest accruing after the filing of any petition in bankruptcy,
or the commencement of any insolvency, reorganization or like proceeding,
relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding) on the Loans, and all
other obligations and liabilities of the Loan Parties to the Administrative
Agent and the Lenders, whether direct or indirect, absolute or contingent,
due or to become due, or now existing or hereafter incurred, which may
arise under, or out of or in connection with this Agreement, the Notes, the
Guarantees, the Security Documents and any other Loan Documents and any
other document made, delivered or given in connection therewith or
herewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without
limitation, all fees and disbursements of counsel to the Administrative
Agent or to the Lenders that are required to be paid by a Loan Party
pursuant to the terms of the Loan Documents) or otherwise.
"PARTICIPANT": as defined in Section 12.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA.
"PERSON": an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of
whatever nature.
"PLAN": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which the Borrower or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"PLAN TERMINATION": the termination of The Monarch Machine Tool
Company Pension Plan A and The Monarch Machine Tool Company Pension Plan B
effective February 28, 1999, as authorized by the Board of Directors of the
Borrower at a meeting on November 3, 1998, and for which the Borrower made
a Form 5310--Application for Determination for Terminating Plan with the
Internal Revenue Service on March 3, 1999.
"PLEDGE AGREEMENT": the Pledge Agreement to be executed and delivered
by the Loan Parties relating to all Domestic Subsidiaries of the Borrower,
substantially in
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the form of Exhibit F, as the same may be amended, supplemented or
otherwise modified from time to time.
"PRECISION": as defined in the Recitals hereto.
"PRECISION ACQUISITION": as defined in the Recitals hereto.
"PRECISION ACQUISITION AGREEMENT": the Stock Purchase Agreement, dated
May 13, 1999, among the Borrower and the stockholders of Precision, as the
same may be amended, supplemented or otherwise modified from time to time.
"PRECISION ACQUISITION DOCUMENTS": the collective reference to the
Precision Acquisition Agreement and any other documents executed in
connection therewith, as the same may be amended, supplemented or otherwise
modified from time to time.
"PROPERTIES": as defined in Section 6.22.
"REIMBURSEMENT OBLIGATION": the obligation of the Borrower to
reimburse the Issuing Bank pursuant to Section 4.5(a) for amounts drawn
under a Letter of Credit.
"REGISTER": as defined in Section 12.6(d).
"REGULATION U": Regulation U of the Board of Governors of the Federal
Reserve System as in effect from time to time.
"REORGANIZATION": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.
"REPLACEMENT SUBORDINATED DEBT": any subordinated indebtedness of the
Borrower or any of its Subsidiaries incurred after the Closing Date, the
proceeds of which are used to refinance existing Subordinated Debt, which
shall either (a) have a final maturity date no earlier, an average life to
maturity no shorter, and a priority no higher than the existing
Subordinated Debt being refinanced and be in form and substance
satisfactory to the Administrative Agent and the Required Lenders, or (b)
be in form and substance satisfactory to all the Lenders.
"REPORTABLE EVENT": any of the events set forth in Section 4043(c) of
ERISA, other than those events as to which the thirty day notice period is
waived under Sections .21, .22, .23, .26, .27 or .28 of PBGC Reg. ss. 4043.
"REQUIRED LENDERS": at any time, Lenders the Credit Exposure
Percentages of which aggregate at least 66-2/3%.
"REQUIREMENT OF LAW": as to any Person, the certificate of
incorporation and by-laws or other organizational or Governing Documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other
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Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its
property is subject.
"RESPONSIBLE OFFICER": the chief executive officer and the president
of the Borrower or, with respect to financial matters, the chief financial
officer of the Borrower.
"RESTRUCTURING": as defined in Section 9.5(c) hereof.
"REVOLVING CREDIT COMMITMENT": as to any Lender, the obligation of
such Lender to make Revolving Credit Loans to the Borrower pursuant to
Section 3.1 and/or to issue or participate in Letters of Credit issued on
behalf of the Borrower hereunder in an aggregate principal amount at any
one time outstanding not to exceed the amount set forth opposite such
Lender's name on Schedule 1.1 under the caption "Revolving Credit
Commitment" or in an Assignment and Acceptance, as such amount may be
reduced from time to time in accordance with the provisions of this
Agreement.
"REVOLVING CREDIT COMMITMENT PERCENTAGE": as to any Lender at any
time, the percentage which such Lender's Revolving Credit Commitment then
constitutes of the aggregate Revolving Credit Commitments (or, at any time
after the Revolving Credit Commitments shall have expired or terminated,
the percentage which the aggregate principal amount of such Lender's
Revolving Credit Loans then outstanding constitutes of the aggregate
principal amount of the Revolving Credit Loans then outstanding).
"REVOLVING CREDIT COMMITMENT PERIOD": the period from and including
the date hereof to but not including the Revolving Credit Termination Date
or such earlier date on which the Revolving Credit Commitments shall
terminate as provided herein.
"REVOLVING CREDIT LOANS": as defined in Section 3.1.
"REVOLVING CREDIT NOTE": as defined in Section 3.2.
"REVOLVING CREDIT TERMINATION DATE": June 30, 2006.
"SECURITY AGREEMENT": the Security Agreement to be executed and
delivered by the Loan Parties, substantially in the form of Exhibit G, as
the same may be amended, supplemented or otherwise modified from time to
time.
"SECURITY DOCUMENTS": the collective reference to the Assignment of
Precision Acquisition Documents, the Foreign Pledge Agreements, the
Leasehold Mortgages, the Mortgages, the Pledge Agreement, the Security
Agreement and all other security documents hereafter delivered to the
Administrative Agent granting a Lien on any asset or assets of any Person
to secure any of the Obligations or to secure any guarantee of any such
Obligations.
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<PAGE> 24
"SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"SPECIAL SUBORDINATED NOTES": the collective reference to any "Special
Subordinated Notes" issued to the selling holders of Capital Stock of
Precision pursuant to Section 1.2(b) of the Precision Acquisition
Agreement, which shall be in form and substance satisfactory to the
Administrative Agent and the Required Lenders.
"STANDBY LETTER OF CREDIT": as defined in Section 4.1(b).
"SUBORDINATED DEBT": any Special Subordinated Notes, the Three Cities
Subordinated Debt and any Replacement Subordinated Debt.
"SUBORDINATED DEBT DOCUMENTS": the collective reference to any
documents evidencing any Subordinated Debt, together with any other
documents executed in connection therewith, as the same may be amended,
supplemented or otherwise modified from time to time in accordance
herewith.
"SUBSIDIARY": as to any Person, a corporation, partnership or other
entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through
one or more intermediaries, or both, by such Person. Unless otherwise
qualified, all references to a "Subsidiary" or to "Subsidiaries" in this
Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower and
shall included, without limitation, Precision and its Subsidiaries.
"TERM LOAN": any Tranche A Term Loan or Tranche B Term Loan.
"THREE CITIES SUBORDINATED DEBT": the subordinated loans in an
aggregate amount equal to $15,000,000 made by Three Cities Research, Inc.,
a Delaware corporation, or other Persons acceptable to the Administrative
Agent and the Required Lenders to the Borrower, the proceeds of which shall
be used to partially finance the Precision Acquisition, which shall be in
form and substance satisfactory to the Administrative Agent and the
Required Lenders.
"TRANCHE": the collective reference to Eurodollar Loans the then
current Interest Periods with respect to all of which begin on the same
date and end on the same later date (whether or not such Loans shall
originally have been made on the same day); Tranches may be identified as
"EURODOLLAR TRANCHES".
"TRANCHE A TERM LOAN": as defined in Section 2.1.
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"TRANCHE A TERM LOAN COMMITMENT": as to any Lender, its obligation to
make a Tranche A Term Loan to the Borrower pursuant to Section 2.1 in the
amount set forth opposite such Lender's name on Schedule 1.1 under the
caption "Tranche A Term Loan".
"TRANCHE A TERM LOAN COMMITMENT PERCENTAGE": as to any Lender, the
percentage equal to the quotient of such Lender's Tranche A Term Loan
Commitment divided by the aggregate Tranche A Term Loan Commitments.
"TRANCHE A TERM NOTE": as defined in Section 2.2.
"TRANCHE B TERM LOAN": as defined in Section 2.3.
"TRANCHE B TERM LOAN COMMITMENT": as to any Lender, its obligation to
make a Tranche B Term Loan to the Borrower pursuant to Section 2.3 in the
amount set forth opposite such Lender's name on Schedule 1.1 under the
caption "Tranche B Term Loan".
"TRANCHE B TERM LOAN COMMITMENT PERCENTAGE": as to any Lender, the
percentage equal to the quotient of such Lender's Term Loan Commitment
divided by the aggregate Term Loan Commitments.
"TRANCHE B TERM NOTE": as defined in Section 2.4.
"TRANSACTION PARTIES": the Loan Parties and Precision.
"TRANSFEREE": as defined in Section 12.6(f).
"TYPE": as to any Loan, its nature as a Base Rate Loan or a Eurodollar
Loan.
"UNIFORM CUSTOMS": 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.
"YEAR 2000 PROBLEM": the risk that computer applications used by the
Borrower and its Subsidiaries may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to, and any
date on or after, December 31, 1999.
1.2 OTHER DEFINITIONAL PROVISIONS.
(a) Unless otherwise specified therein, all terms defined in this
Agreement shall have the defined meanings when used in any Notes or any
certificate or other document made or delivered pursuant hereto.
(b) As used herein and in any Notes, and any certificate or other
document made or delivered pursuant hereto, accounting terms relating to the
Borrower and its
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Subsidiaries not defined in Section 1.1 and accounting terms partly defined in
Section 1.1, to the extent not defined, shall have the respective meanings given
to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, Schedule and
Exhibit references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF TERM LOAN COMMITMENTS
2.1 TRANCHE A TERM LOAN COMMITMENTS. Subject to the terms and
conditions hereof, each Lender severally agrees to make a term loan (a "TRANCHE
A TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the
amount of the Tranche A Term Loan Commitment of such Lender then in effect;
PROVIDED, that the Term Loan Commitments shall terminate at 3:00 p.m., New York
City time, on August 31, 1999, if the Tranche A Term Loans have not been made
prior to that time. The Tranche A Term Loans may from time to time be (a)
Eurodollar Loans, (b) Base Rate Loans or (c) a combination thereof, as
determined by the Borrower and notified to the Administrative Agent in
accordance with Sections 2.5 and 5.2.
2.2 TRANCHE A TERM NOTES. The Tranche A Term Loan of each Lender shall
be evidenced by a promissory note of the Borrower, substantially in the form of
Exhibit A-1 with appropriate insertions as to payee, date and principal amount
(a "TRANCHE A TERM NOTE"), payable to the order of such Lender and representing
the obligation of the Borrower to pay the amount of the Tranche A Term Loan made
by such Lender. Each Lender is hereby authorized to record the date, Type and
amount of its Tranche A Term Loan and the date and amount of each payment or
prepayment of principal thereof and each Conversion of all or a portion thereof
to another Type and, and in the case of Eurodollar Loans, the Interest Period
with respect thereto, on the schedule annexed to and constituting a part of its
Tranche A Term Note, and any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded; provided, that the
failure of such Lender to make any such recordation shall not impair or
otherwise affect the validity or enforceability of its Tranche A Term Note. Each
Tranche A Term Note shall (a) be dated the Closing Date, (b) be stated to mature
in installments in amounts equal to such Lender's Tranche A Term Loan Commitment
Percentage of the amounts, and payable on the dates, set forth on Schedule 2.2,
and (c) bear interest for the period from the date thereof on the unpaid
principal amount thereof at the applicable interest rates per annum specified in
Section 5.1. Interest on the Tranche A Term Notes shall be payable on the dates
specified in Section 5.1(d).
2.3 TRANCHE B TERM LOAN COMMITMENTS. Subject to the terms and
conditions hereof, each Lender severally agrees to make a term loan (a "TRANCHE
B TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the
amount of the
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Tranche B Term Loan Commitment of such Lender then in effect; provided, that the
Tranche B Term Loan Commitments shall terminate at 3:00 p.m., New York City
time, on August 31, 1999, if the Tranche B Term Loans have not been made prior
to that time. The Tranche B Term Loans may from time to time be (a) Eurodollar
Loans, (b) Base Rate Loans or (c) a combination thereof, as determined by the
Borrower and notified to the Administrative Agent in accordance with Sections
2.5 and 5.2.
2.4 TRANCHE B TERM NOTES. The Tranche B Term Loan of each Lender shall
be evidenced by a promissory note of the Borrower, substantially in the form of
Exhibit A-2 with appropriate insertions as to payee, date and principal amount
(a "TRANCHE B TERM NOTE"), payable to the order of such Lender and representing
the obligation of the Borrower to pay the amount of the Tranche B Term Loan made
by such Lender. Each Lender is hereby authorized to record the date, Type and
amount of its Tranche B Term Loan and the date and amount of each payment or
prepayment of principal thereof and each Conversion of all or a portion thereof
to another Type and, and in the case of Eurodollar Loans, the Interest Period
with respect thereto, on the schedule annexed to and constituting a part of its
Tranche B Term Note, and any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded; provided, that the
failure of such Lender to make any such recordation shall not impair or
otherwise affect the validity or enforceability of its Tranche B Term Note. Each
Tranche B Term Note shall (a) be dated the Closing Date, (b) be stated to mature
in installments in amounts equal to such Lender's Tranche B Term Loan Commitment
Percentage of the amounts, and payable on the dates, set forth on Schedule 2.4,
and (c) bear interest for the period from the date thereof on the unpaid
principal amount thereof at the applicable interest rates per annum specified in
Section 5.1. Interest on the Tranche B Term Notes shall be payable on the dates
specified in Section 5.1(d).
2.5 PROCEDURE FOR TERM LOAN BORROWING. The Borrower shall give the
Administrative Agent irrevocable notice (which notice must be received by the
Administrative Agent prior to 10:00 a.m., New York City time, (a) three Business
Days prior to the Closing Date, if all or any part of the Term Loans are to be
initially Eurodollar Loans, or (b) one Business Day prior to the Closing Date,
otherwise) requesting that the Lenders make the Term Loans on the Closing Date
and specifying (i) the Closing Date, (ii) the amount to be borrowed, (iii)
whether the Term Loans are to be initially Eurodollar Loans, Base Rate Loans or
a combination thereof, and (iv) if the Term Loans are to be entirely or partly
Eurodollar Loans, the respective amounts of each such Type of Loan and the
respective lengths of the initial Interest Periods therefor. Upon receipt of
such notice the Administrative Agent shall promptly notify each Lender thereof.
Not later than 11:00 a.m. on the Closing Date each Lender shall make available
to the Administrative Agent at its office specified in Section 12.2 the amount
of such Lender's pro rata share of such borrowing in immediately available
funds. The Administrative Agent shall on such date credit the account of the
Borrower on the books of such office of the Administrative Agent with the
aggregate of the amounts made available to the Administrative Agent by the
Lenders and in like funds as received by the Administrative Agent.
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2.6 COMMITMENT FEE. The Borrower agrees to pay to the Administrative
Agent for the account of each Lender a commitment fee for the period from and
including the Closing Date to the date on which the Tranche A Term Loan
Commitments and the Tranche B Term Loan Commitments have been fully funded,
computed at the rate of 1/2 of 1% per annum on the aggregate unfunded amount of
the Tranche A Term Loan Commitment and the Tranche B Term Loan Commitment of
such Lender during the period for which payment is made, calculated on the basis
of the actual days elapsed over a 360 day year, payable monthly in arrears on
the last Business Day of each calendar month or such earlier date as the Tranche
A Term Loan Commitments and the Tranche B Term Loan Commitments shall terminate
as provided herein, commencing on the first of such dates to occur after the
date hereof.
SECTION 3. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS
3.1 REVOLVING CREDIT COMMITMENTS.
(a) Subject to the terms and conditions hereof, each Lender severally
agrees to make revolving credit loans ("REVOLVING CREDIT LOANS") to the Borrower
from time to time during the Revolving Credit Commitment Period in an aggregate
principal amount at any one time outstanding not to exceed the amount of such
Lender's Revolving Credit Commitment then in effect; PROVIDED, that the
Revolving Credit Commitments shall terminate at 3:00 p.m., New York City time,
on August 31, 1999, if the Term Loans have not been made prior to that time.
During the Revolving Credit Commitment Period the Borrower may use the Revolving
Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole
or in part, and reborrowing, all in accordance with the terms and conditions
hereof.
(b) The Revolving Credit Loans may from time to time be (i) Eurodollar
Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the
Borrower and notified to the Administrative Agent in accordance with Sections
3.3 and 5.2, PROVIDED, that no Revolving Credit Loan shall be made as a
Eurodollar Loan after the day that is one month prior to the Revolving Credit
Termination Date.
3.2 REVOLVING CREDIT NOTES. The Revolving Credit Loans made by each Lender shall
be evidenced by a promissory note of the Borrower, substantially in the form of
Exhibit A-3 with appropriate insertions as to payee, date and principal amount
(a "REVOLVING CREDIT NOTE"), payable to the order of such Lender and evidencing
the obligation of the Borrower to pay a principal amount equal to the lesser of
(a) the amount of the Revolving Credit Commitment of such Lender and (b) the
aggregate unpaid principal amount of all Revolving Credit Loans made by such
Lender. Each Lender is hereby authorized to record the date, Type and amount of
each Revolving Credit Loan made or Converted by such Lender, the date and amount
of each payment or prepayment of principal thereof, and, in the case of
Eurodollar Loans, the Interest Period with respect thereto, on the schedule
annexed to and constituting a part of its Revolving Credit Note, and any such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded. Each Revolving Credit Note shall (x) be dated the
Closing Date, (y) be stated to mature on the Revolving Credit
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Termination Date and (z) bear interest on the unpaid principal amount thereof
from time to time outstanding at the applicable interest rate per annum
determined as provided in Section 5.1. Interest on each Revolving Credit Note
shall be payable on the dates specified in Section 5.1(d).
3.3 PROCEDURE FOR REVOLVING CREDIT BORROWING. The Borrower may borrow
under the Revolving Credit Commitments during the Revolving Credit Commitment
Period on any Business Day in an aggregate principal amount not exceeding the
aggregate Available RC Commitments then in effect; PROVIDED, that the Borrower
shall give the Administrative Agent irrevocable notice in the form of a
Borrowing Request in the form of Exhibit H hereto (a "BORROWING REQUEST") (which
notice must be received by the Administrative Agent prior to 10:00 a.m., New
York City time, (a) three Business Days prior to the requested Borrowing Date,
if all or any part of the requested Revolving Credit Loans are to be initially
Eurodollar Loans or (b) one Business Day prior to the requested Borrowing Date,
otherwise), specifying (i) the amount to be borrowed, (ii) the requested
Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base
Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely
or partly of Eurodollar Loans, the respective amounts of each such Type of Loan
and the respective lengths of the initial Interest Periods therefor. Each
borrowing under the Revolving Credit Commitments shall be in an amount equal to
(x) in the case of Base Rate Loans, $500,000 or a whole multiple of $100,000 in
excess thereof (or, if the then Available RC Commitments are less than $500,000,
such lesser amount) and (y) in the case of Eurodollar Loans, $3,000,000 or a
whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice
from the Borrower, the Administrative Agent shall promptly notify each Lender
thereof. Each Lender will make the amount of its pro rata share of each
borrowing available to the Administrative Agent for the account of the Borrower
at the office of the Administrative Agent specified in Section 12.2 prior to
11:00 a.m., New York City time, on the Borrowing Date requested by the Borrower
in funds immediately available to the Administrative Agent. Such borrowing will
then be made available to the Borrower by the Administrative Agent crediting the
account of the Borrower on the books of such office with the aggregate of the
amounts made available to the Administrative Agent by the Lenders and in like
funds as received by the Administrative Agent.
3.4 COMMITMENT FEE. The Borrower agrees to pay to the Administrative
Agent for the account of each Lender a commitment fee for the period from and
including the first day of the Revolving Credit Commitment Period to the
Revolving Credit Termination Date, computed at the rate of 1/2 of 1% per annum
on the average daily amount of the Available RC Commitment of such Lender during
the period for which payment is made, calculated on the basis of the actual days
elapsed over a 360 day year, payable monthly in arrears on the last Business Day
of each calendar month and on the Revolving Credit Termination Date or such
earlier date as the Revolving Credit Commitments shall terminate as provided
herein, commencing on the first of such dates to occur after the date hereof.
3.5 TERMINATION OR REDUCTION OF REVOLVING CREDIT COMMITMENTS. The
Borrower shall have the right, upon not less than five Business Days' notice to
the Administrative Agent, to terminate or reduce the Revolving Credit; PROVIDED,
that no such
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termination or reduction shall be permitted if, after giving effect thereto and
to any prepayments of the Revolving Credit Loans made on the effective date
thereof, the Aggregate Outstanding RC Extensions of Credit would exceed the
Revolving Credit Commitments then in effect. Any such reduction shall be in an
amount equal to $1,000,000 or a whole multiple thereof and shall reduce
permanently the Revolving Credit Commitments then in effect.
SECTION 4. LETTERS OF CREDIT
4.1 L/C COMMITMENT.
(a) Subject to the terms and conditions hereof, the Issuing Lender, in
reliance on the agreements of the other Lenders set forth in Section 4.4(a),
agrees to issue letters of credit ("LETTERS OF CREDIT") for the account of the
Borrower on any Business Day during the Revolving Credit Commitment Period in
such form as may be approved from time to time by the Issuing Lender; PROVIDED
that the Issuing Lender shall have no obligation to issue any Letter of Credit
if, after giving effect to such issuance, (1) the L/C Obligations would exceed
the L/C Commitment or (2) the aggregate Available RC Commitments would be less
than zero.
(b) Each Letter of Credit shall:
(1) be denominated in Dollars (or another currency requested by
the Borrower unless the issuance of such a Letter of Credit by the Issuing
Lender at the time of such request is not permitted under applicable law or
is otherwise not acceptable to the Issuing Lender) and shall be either (A)
a standby letter of credit issued to support obligations of the Borrower,
contingent or otherwise, in respect of (u) warranty obligations or
equipment performance assurance obligations, (v) insurance obligations, (w)
obligations to workman's compensation board or similar Governmental
Authority for workman's compensation liabilities of the Borrower or a
Subsidiary, (x) other contractual obligations of the Borrower or a
Subsidiary in respect of which advance payments have been made, (y)
existing letters of credit outstanding as of the Closing Date and listed on
Schedule 9.2 hereof and (z) such other obligations or for such other
purposes as may be approved by the Issuing Lender and the Administrative
Agent (such consent not to be unreasonably withheld) (a "STANDBY LETTER OF
CREDIT"), or (B) a commercial letter of credit issued in respect of the
purchase of goods or services by the Borrower in the ordinary course of
business (a "COMMERCIAL LETTER OF CREDIT"); and
(2) expire no later than the earlier of (i) five Business Days
prior to the Revolving Credit Termination Date and (ii) 364 days from the
date of issuance (subject to renewal).
(c) Each Letter of Credit shall be subject to the Uniform Customs and,
to the extent not inconsistent therewith, the laws of the State of New York.
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(d) The Issuing Lender shall not at any time be obligated to issue any
Letter of Credit hereunder if such issuance would conflict with, or cause the
Issuing Lender or any L/C Participant to exceed any limits imposed by, any
applicable Requirement of Law.
4.2 PROCEDURE FOR ISSUANCE OF LETTERS OF CREDIT. The Borrower may from
time to time request that the Issuing Lender issue a Letter of Credit by
delivering to the Issuing Lender at its address for notices specified herein an
Application therefor, completed to the satisfaction of the Issuing Lender, and
such other certificates, documents and other papers and information as the
Issuing Lender may request. Upon receipt of any Application, the Issuing Lender
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 requested
thereby (but in no event shall the Issuing Lender be required to issue any
Letter of Credit earlier than three Business Days after its 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
Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter
of Credit to the Borrower promptly following the issuance thereof.
4.3 FEES, COMMISSIONS AND OTHER CHARGES.
(a) The Borrower shall pay to the Administrative Agent, for the
account of the Issuing Lender and the L/C Participants, a letter of credit
commission with respect to each Letter of Credit, computed for the period from
the date of such payment to the date upon which the next such payment is due
hereunder at a rate equal to the Applicable Margin for Revolving Credit Loan
which are Eurodollar Loans then in effect, calculated on the basis of the actual
days elapsed over a 360 day year, of the aggregate amount available to be drawn
under such Letter of Credit on the date on which such fee is calculated and
shall be payable to the L/C Participants and the Issuing Lender to be shared
ratably among them in accordance with their respective Revolving Credit
Commitment Percentages. Such commissions shall be payable in arrears on each L/C
Fee Payment Date to occur after the issuance of each Letter of Credit and shall
be nonrefundable. Additionally, the Borrower shall pay to the Administrative
Agent, solely for the account of the Issuing Lender, a per annum fronting fee of
one-quarter of one percent (.25%) of the aggregate amount available to be drawn
under each Letter of Credit. Such fronting fee shall be nonrefundable and shall
be payable in arrears on each L/C Fee Payment Date to occur after the issuance
of each Letter of Credit and upon expiration or draw of such Letter of Credit.
(b) In addition to the foregoing fees and commissions, the Borrower
shall pay or reimburse the Issuing Lender for such normal and customary costs
and expenses as are incurred or charged by the Issuing Lender in issuing,
effecting payment under, amending or otherwise administering any Letter of
Credit.
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(c) The Administrative Agent shall, promptly following its receipt
thereof, distribute to the Issuing Lender and the L/C Participants all fees and
commissions received by the Administrative Agent for their respective accounts
pursuant to this subsection.
4.4 L/C PARTICIPATIONS.
(a) The Issuing Lender irrevocably agrees to grant and hereby grants
to each L/C Participant, and, to induce the Issuing Lender to issue Letters of
Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase
and hereby accepts and purchases from the Issuing Lender, on the terms and
conditions hereinafter stated, for such L/C Participant's own account and risk,
an undivided interest equal to such L/C Participant's Revolving Credit
Commitment Percentage in the Issuing Lender's obligations and rights under each
Letter of Credit issued hereunder and the amount of each draft paid by the
Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably
agrees with the Issuing Lender that, if a draft is paid under any Letter of
Credit for which the Issuing Lender is not reimbursed in full by the Borrower in
accordance with the terms of this Agreement, such L/C Participant shall pay to
the Issuing Lender upon demand at the Issuing Lender's address for notices
specified herein an amount equal to such L/C Participant's Revolving Credit
Commitment Percentage of the amount of such draft, or any part thereof, which is
not so reimbursed.
(b) If any amount required to be paid by any L/C Participant to the
Issuing Lender pursuant to Section 4.4(a) in respect of any unreimbursed portion
of any payment made by the Issuing Lender under any Letter of Credit is paid to
the Issuing Lender within three Business Days after the date such payment is
due, such L/C Participant shall pay to the Issuing Lender on demand an amount
equal to the product of (1) such amount, times (2) the daily average Federal
funds rate, as quoted by the Issuing Lender, during the period from and
including the date such payment is required to the date on which such payment is
immediately available to the Issuing Lender, times (3) a fraction the numerator
of which is the number of days that elapse during such period and the
denominator of which is 360. If any such amount required to be paid by any L/C
Participant pursuant to Section 4.4(a) is not in fact made available to the
Issuing Lender by such L/C Participant within three Business Days after the date
such payment is due, the Issuing Lender shall be entitled to recover from such
L/C Participant, on demand, such amount with interest thereon calculated from
such due date at the rate per annum applicable to Base Rate Loans hereunder. A
certificate of the Issuing Lender submitted to any L/C Participant with respect
to any amounts owing under this Section shall be conclusive in the absence of
manifest error.
(c) Whenever, at any time after the Issuing Lender has made payment
under any Letter of Credit and has received from any L/C Participant its pro
rata share of such payment in accordance with Section 4.4(a), the Issuing Lender
receives any payment related to such Letter of Credit (whether directly from the
Borrower or otherwise, including proceeds of collateral applied thereto by the
Issuing Lender), or any payment of interest on account thereof, the Issuing
Lender will distribute to such L/C Participant its pro rata share thereof;
PROVIDED, HOWEVER, that in the event that any such payment received by the
Issuing Lender
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shall be required to be returned by the Issuing Lender, such L/C Participant
shall return to the Issuing Lender the portion thereof previously distributed by
the Issuing Lender to it.
4.5 REIMBURSEMENT OBLIGATIONS OF THE BORROWER.
(a) The Borrower agrees to reimburse the Issuing Lender on each date
on which the Issuing Lender notifies the Borrower of the date and amount of a
draft presented under any Letter of Credit and paid by the Issuing Lender or, if
later, on each date on which such draft is paid by the Issuing Lender for the
amount of (1) such draft so paid and (2) any taxes and any reasonable fees,
charges or other costs or expenses incurred by the Issuing Lender at its address
for notices specified herein in lawful money of the United States of America and
in immediately available funds.
(b) Interest shall be payable on any and all amounts remaining unpaid
by the Borrower under this Section from the date such amounts become payable
(whether at stated maturity, by acceleration or otherwise) until payment in full
at the rate which would be payable on any outstanding Base Rate Loans which were
then overdue.
(c) Each drawing under any Letter of Credit shall constitute a request
by the Borrower to the Administrative Agent for a borrowing pursuant to Section
4.3 of Base Rate Loans in the amount of such drawing. The Borrowing Date with
respect to such borrowing shall be the date of such drawing.
4.6 OBLIGATIONS ABSOLUTE.
(a) The Borrower's obligations under this Section 4 shall be absolute
and unconditional under any and all circumstances and irrespective of any
set-off, counterclaim or defense to payment which the Borrower may have or have
had against the Issuing Lender or any beneficiary of a Letter of Credit.
(b) The Borrower also agrees with the Issuing Lender that the Issuing
Lender shall not be responsible for, and the Borrower's Reimbursement
Obligations under Section 4.5(a) shall not be affected by, among other things,
(1) 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 (2) any dispute between or among the Borrower and any beneficiary of
any Letter of Credit or any other party to which such Letter of Credit may be
transferred or (3) any claims whatsoever of the Borrower against any beneficiary
of such Letter of Credit or any such transferee.
(c) The Issuing Lender 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 Lender's gross negligence or willful
misconduct.
(d) The Borrower agrees that any action taken or omitted by the
Issuing Lender under or in connection with any Letter of Credit or the related
drafts or documents, if
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done in the absence of gross negligence or willful misconduct and in accordance
with the standards of care specified in the Uniform Commercial Code of the State
of New York (including, without limitation, the honoring of drawings on a Letter
of Credit), shall be binding on the Borrower and shall not result in any
liability of the Issuing Lender to the Borrower.
4.7 LETTER OF CREDIT PAYMENTS. If any draft shall be presented for
payment under any Letter of Credit, the Issuing Lender shall promptly notify the
Borrower of the date and amount thereof. The responsibility of the Issuing
Lender to the Borrower in connection with any draft presented for payment under
any 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.
4.8 APPLICATION. To the extent that any provision of any Application
related to any Letter of Credit is inconsistent with the provisions of this
Section 4, the provisions of this Section 4 shall apply.
SECTION 5. GENERAL PROVISIONS APPLICABLE TO LOANS
5.1 INTEREST RATES AND PAYMENT DATES.
(a) Each Eurodollar Loan shall bear interest for each day during each
Interest Period with respect thereto at a rate per annum equal to the Eurodollar
Rate determined for such day plus the Applicable Margin.
(b) Each Base Rate Loan shall bear interest at a rate per annum equal
to the Base Rate plus the Applicable Margin.
(c) If all or a portion of (i) any principal of any Loan, (ii) any
interest payable thereon, (iii) any commitment fee or (iv) any other amount
payable hereunder shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), the principal of the Loans and any such overdue
interest, commitment fee or other amount shall bear interest at a rate per annum
which is (x) in the case of principal, the rate that would otherwise be
applicable thereto pursuant to the foregoing provisions of this Section plus 2%
or (y) in the case of any such overdue interest, commitment fee or other amount,
the rate described in paragraph (b) of this Section plus 2%, in each case from
the date of such non-payment until such overdue principal, interest, commitment
fee or other amount is paid in full (as well after as before judgment).
(d) Interest shall be payable in arrears on each Interest Payment
Date, provided that interest accruing pursuant to paragraph (c) of this Section
shall be payable from time to time on demand.
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5.2 CONVERSION AND CONTINUATION OPTIONS.
(a) The Borrower may elect from time to time to Convert Eurodollar
Loans to Base Rate Loans by giving the Administrative Agent at least one
Business Day's prior irrevocable notice of such election, PROVIDED, that any
such Conversion of Eurodollar Loans may only be made on the last day of an
Interest Period with respect thereto. The Borrower may elect from time to time
to Convert Base Rate Loans to Eurodollar Loans by giving the Administrative
Agent at least three Business Days' prior irrevocable notice of such election.
Any such notice of Conversion to Eurodollar Loans shall specify the length of
the initial Interest Period or Interest Periods therefor. Upon receipt of any
such notice the Administrative Agent shall promptly notify each Lender thereof.
All or any part of outstanding Eurodollar Loans and Base Rate Loans may be
Converted as provided herein, provided that (i) no Loan may be Converted into a
Eurodollar Loan when any Event of Default has occurred and is continuing and the
Administrative Agent has or the Required Lenders have determined in their sole
discretion that such a Conversion shall not be permitted, (ii) any such
Conversion may only be made if, after giving effect thereto, Section 5.3 shall
not have been contravened, and (iii) no Loan may be converted into a Eurodollar
Loan after the date that is one month prior to the Revolving Credit Termination
Date (in the case of Conversions of Revolving Credit Loans) or the date of the
final installment of principal (in the case of Conversions of Term Loans).
(b) Any Eurodollar Loans may be Continued as such upon the expiration
of the then current Interest Period with respect thereto by the Borrower giving
notice to the Administrative Agent, in accordance with the applicable provisions
of the term "Interest Period" set forth in Section 1.1, of the length of the
next Interest Period to be applicable to such Loans, PROVIDED, that no
Eurodollar Loan may be Continued as such (i) when any Event of Default has
occurred and is continuing and the Administrative Agent has or the Required
Lenders have determined in their sole discretion that such a Continuation shall
not be permitted, (ii) if, after giving effect thereto, Section 5.3 would be
contravened or (iii) after the date that is one month prior to the Revolving
Credit Termination Date (in the case of Continuations of Revolving Credit Loans)
or the date of the final installment of principal (in the case of Continuations
of Term Loans) and PROVIDED, FURTHER, that if the Borrower shall fail to give
such notice or if such Continuation is not permitted such Loans shall be
automatically converted to Base Rate Loans on the last day of such then expiring
Interest Period.
5.3 MINIMUM AMOUNTS AND MAXIMUM NUMBER OF TRANCHES. All borrowings,
conversions and continuations of Loans hereunder and all selections of Interest
Periods hereunder shall be in such amounts and be made pursuant to such
elections so that, after giving effect thereto, the aggregate principal amount
of the Loans comprising each Eurodollar Tranche shall be equal to $3 million or
a whole multiple of $1 million in excess thereof. In no event shall there be
more than six Eurodollar Tranches outstanding at any time.
5.4 OPTIONAL PREPAYMENTS. (a) The Borrower may at any time and from
time to time prepay the Loans, in whole or in part, subject to payments of any
amounts required pursuant to Section 5.12 hereof, without premium or penalty,
upon at least four Business
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Days' irrevocable notice to the Administrative Agent, specifying the date and
amount of prepayment and whether the prepayment is of Eurodollar Loans, Base
Rate Loans or a combination thereof, and, if of a combination thereof, the
amount allocable to each. Upon receipt of any such notice the Administrative
Agent shall promptly notify each Lender thereof. If any such notice is given,
the amount specified in such notice shall be due and payable on the date
specified therein, together with any amounts payable pursuant to Section 5.12
and, in the case of prepayments of the Term Loans only, accrued interest to such
date on the amount prepaid. Partial prepayments of the Term Loans pursuant to
this Section shall be applied to the installments of principal thereof in the
inverse order of their scheduled maturities; PROVIDED, that, other than with
respect to prepayments in full, any Lender holding a Tranche B Term Loan may
elect to reject acceptance of any partial prepayment in respect of its Tranche B
Term Loan by giving notice to such effect to the Administrative Agent prior to
the making of such prepayment by the Borrower, in which case the amount of such
rejected prepayment shall be applied to installments of principal of the Tranche
A Term Loans in the inverse order of their scheduled maturities. Amounts prepaid
on account of the Term Loans may not be reborrowed. Partial prepayments pursuant
to this Section shall be in an aggregate principal amount of $1,000,000 or a
whole multiple thereof.
(b) Any Lender holding a Tranche B Term Loan may elect, by notice to
the Administrative Agent by telephone (confirmed by telecopy or otherwise in
writing) at least one Business Day prior to the prepayment date, to decline all
or any portion of a prepayment of its Tranche B Term Loan pursuant to this
Section 5.4, in which case the aggregate amount of prepayments that would have
been applied to Tranche B Term Loans but was so declined shall be applied to
prepay Tranche A Term Loans and Tranche B Term Loans of Lenders who accept
prepayment of their Tranche B Term Loans pursuant to this Section, on a pro-rata
basis based on their respective then outstanding principal amounts.
5.5 MANDATORY PREPAYMENTS.
(a) Subject to Section 5.12, if on any date the Aggregate Outstanding
Extensions of Credit exceeds the Revolving Credit Commitments, the Borrower
shall immediately prepay the Revolving Credit Loans and/or cash collateralize or
replace Letters of Credit in an amount equal to the amount of such excess.
(b) The Borrower shall prepay the Loans and reduce the Commitments in
an amount equal to (i) 100% of the Net Proceeds from the termination of any
pension plans of the Borrower or any Subsidiary (including, without limitation,
the Plan Termination); PROVIDED, that the Borrower may retain and retire shares
of Capital Stock of the Borrower held as assets of the Plan that is subject of
the Plan Termination to the extent that the Net Proceeds from the Plan
Termination otherwise applied to prepayment of the Loans is at least
$10,000,000, (ii) 100% of the Net Proceeds of
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any sale or issuance of debt securities (other than Replacement Subordinated
Debt), (iii) 100% of the Net Proceeds of any sale or issuance of any equity
securities, in either case by the Borrower or any Subsidiary, whether in a
public offering, a private placement or otherwise (other than issuances of
equity securities pursuant to employee benefit plans issued in the ordinary
course of business) and (iv) 100% of the Net Proceeds of any sale, lease,
assignment, exchange or other disposition for cash of any asset or group of
assets (including, without limitation, but subject to clause (d) of this Section
5.5, insurance proceeds paid as a result of any destruction, casualty or taking
of any property of the Borrower or any Subsidiary), not made in the ordinary
course of business, by the Borrower or any Subsidiary of the Borrower, in any
such case no later than three Business Days following receipt by the Borrower or
such Subsidiary of such proceeds, together with accrued interest to such date on
the amount prepaid; PROVIDED, that, during any fiscal year, no such prepayment
shall be required pursuant to subclause (iv) of this Section 5.5(b) unless the
aggregate amount of such Net Proceeds received by the Borrower and its
Subsidiaries and not previously applied to prepayment of the Term Loans and the
reduction of the Commitments pursuant to Section 5.5(b)(iv) is at least $250,000
for such fiscal year. Amounts prepaid pursuant to this Section 5.5(b) shall be
applied FIRST to installments of principal of the Term Loans until paid in full,
and SECOND to the reduction of the Revolving Credit Commitments and the
prepayment of the Revolving Credit Loans and/or to cash collateralize or replace
Letters of Credit. Prepayments of installments of Term Loans shall be applied in
the inverse order of maturity and such amounts so prepaid may not be reborrowed.
Nothing in this Section 5.5(b) shall be construed to derogate any restriction or
limitation contained in any Loan Document imposed on any transaction of the
types described in this Section 5.5(b), including without limitation the
restrictions set forth in Sections 9.2, 9.5 and 9.6 hereof.
(c) If at the end of a fiscal year of the Borrower the Leverage Ratio
is greater than 3.0 to 1.0, on or before the earlier of the date on which the
financial statements referred to in Section 8.1(a) are required to be delivered
in respect of such fiscal year of the Borrower, beginning with the fiscal year
ending December 31, 2000, and the date on which such financial statements are
actually delivered, the Borrower shall prepay the Term Loans and permanently
reduce the Commitments in the amount of 50% of Excess Cash Flow for such fiscal
year covered by such financial statements, together with accrued interest to
such date on the amount prepaid. Amounts prepaid pursuant to this Section 5.5(c)
shall be applied FIRST to installments of principal of the Term Loans until paid
in full, and SECOND to the reduction of the Revolving Credit Commitments and the
prepayment of the Revolving Credit Loans and/or to cash collateralize or replace
Letters of Credit. Prepayments of installments of Term Loans shall be applied in
the inverse order of maturity and such amounts so prepaid may not be reborrowed.
(d) Net Proceeds received by the Borrower or any Subsidiary as
proceeds of insurance upon any destruction, casualty or taking with respect to
any property of the Borrower or any Subsidiary need not be applied as set forth
in Section 5.5(b) to the extent that such Net Proceeds are committed by the
Borrower or such Subsidiary to the repair, rebuilding or replacement of the
property which was the subject of such destruction, casualty or taking within
120 days after the receipt of such Net Proceeds and applied no later than 360
days following receipt of such Net Proceeds. If required by the Administrative
Agent, such Net Proceeds shall be held in a special collateral account, subject
to the sole dominion and control of the Administrative Agent and in a manner
reasonably satisfactory to the Administrative Agent, as additional Collateral
for the Obligations and the Guarantees, until such time as it is to be applied
to such repair, rebuilding or replacement.
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(e) Any Lender holding a Tranche B Term Loan may elect, by notice to
the Administrative Agent by telephone (confirmed by telecopy or otherwise in
writing) at least one Business Day prior to the prepayment date, to decline all
or any portion of a prepayment of its Tranche B Term Loan pursuant to this
Section 5.5, in which case the aggregate amount of prepayments that would have
been applied to Tranche B Term Loans but was so declined shall be applied to
prepay Tranche A Term Loans and Tranche B Term Loans of Lenders who accept
prepayment of their Tranche B Term Loans pursuant to this Section, on a pro-rata
basis based on their respective then outstanding principal amounts.
5.6 COMPUTATION OF INTEREST AND FEES.
(a) Interest, whenever it is calculated on the basis of the Base Rate,
shall be calculated on the basis of a 365- (or 366-, as the case may be) day
year for the actual days elapsed; and, interest, whenever it is calculated on
the basis of the Eurodollar Rate, and Commitment Fees shall be calculated on the
basis of a 360-day year for the actual days elapsed. The Administrative Agent
shall as soon as practicable notify the Borrower and the Lenders of each
determination of a Eurodollar Rate. Any change in the interest rate on a Loan
resulting from a change in the Base Rate or the Eurocurrency Reserve
Requirements shall become effective as of the opening of business on the day on
which such change becomes effective. The Administrative Agent shall as soon as
practicable notify the Borrower and the Lenders of the effective date and the
amount of each such change in interest rate.
(b) Each determination of an interest rate by the Administrative Agent
pursuant to any provision of this Agreement shall be conclusive and binding on
the Borrower and the Lenders in the absence of manifest error. The
Administrative Agent shall, at the request of the Borrower, deliver to the
Borrower a statement showing the quotations used by the Administrative Agent in
determining any interest rate pursuant to Section 5.1(a) or (b).
5.7 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of
any Interest Period:
(a) the Administrative Agent shall have determined (which
determination shall be conclusive and binding upon the Borrower) that, by reason
of circumstances affecting the relevant market, adequate and reasonable means do
not exist for ascertaining the Eurodollar Rate for such Interest Period, or
(b) the Administrative Agent shall have received notice from Lenders
the Credit Exposure Percentages of which aggregate more than 50% that the
Eurodollar Rate determined or to be determined for such Interest Period will not
adequately and fairly reflect the cost to such Lenders (as conclusively
certified by such Lenders) of making or maintaining their affected Loans during
such Interest Period,
the Administrative Agent shall give telecopy or telephonic notice thereof to the
Borrower and the Lenders as soon as practicable thereafter. If such notice is
given (x) any Eurodollar Loans requested to be made on the first day of such
Interest Period shall be made as Base Rate Loans, (y) any Loans that were to
have been Converted on the first day of such Interest Period to
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Eurodollar Loans shall be Converted to or Continued as Base Rate Loans and (z)
any outstanding Eurodollar Loans shall be Converted, on the first day of such
Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the
Administrative Agent, no further Eurodollar Loans shall be made or Continued as
such, nor shall the Borrower have the right to Convert Loans to Eurodollar
Loans.
5.8 PRO RATA TREATMENT AND PAYMENTS.
(a) Each borrowing by the Borrower from the Lenders hereunder, each
payment by the Borrower on account of any commitment fee hereunder and any
reduction of the Tranche A Term Loan Commitments, Tranche B Term Loan
Commitments or the Revolving Credit Commitments of the Lenders shall be made pro
rata according to the respective Tranche A Term Loan Commitment Percentages,
Tranche B Term Loan Commitment Percentages or Revolving Credit Commitment
Percentages, as applicable, of the Lenders. Each payment (including each
prepayment) by the Borrower on account of principal of and interest on the
Tranche A Term Loans, Tranche B Term Loans or the Revolving Credit Loans shall
be made pro rata according to the respective outstanding principal amounts of
the Tranche A Term Loans, Tranche B Term Loans or the Revolving Credit Loans, as
applicable, then held by the Lenders. All payments (including prepayments) to be
made by the Borrower hereunder, whether on account of principal, interest, fees
or otherwise, shall be made without set-off or counterclaim and shall be made
prior to 12:00 noon, New York City time, on the due date thereof to the
Administrative Agent, for the account of the Lenders, at the Administrative
Agent's office specified in Section 12.2, in Dollars and in immediately
available funds. The Administrative Agent shall distribute such payments to the
Lenders promptly upon receipt in like funds as received. If any payment
hereunder (other than payments on Eurodollar Loans) becomes due and payable on a
day other than a Business Day, such payment shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension. If
any payment on a Eurodollar Loan becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day unless the result of such extension would be to extend such payment
into another calendar month in which event such payment shall be made on the
immediately preceding Business Day.
(b) Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its Tranche A Term Loan Commitment Percentage,
Tranche B Term Loan Commitment Percentage or Revolving Credit Commitment
Percentage, as applicable, of such borrowing available to the Administrative
Agent, the Administrative Agent may assume that such Lender is making such
amount available to the Administrative Agent, and the Administrative Agent may,
in reliance upon such assumption, make available to the Borrower a corresponding
amount. If such amount is not made available to the Administrative Agent by the
required time on the Borrowing Date therefor, such Lender shall pay to the
Administrative Agent, on demand, such amount with interest thereon at a rate
equal to the daily average Federal Funds Effective Rate for the period until
such Lender makes such amount immediately available to the Administrative Agent.
A certificate of the Administrative Agent submitted to
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any Lender with respect to any amounts owing under this Section shall be
conclusive in the absence of manifest error. If such Lender's Tranche A Term
Loan Commitment Percentage, Tranche B Term Loan Commitment Percentage or
Revolving Credit Commitment Percentage, as applicable, of such borrowing is not
made available to the Administrative Agent by such Lender within three Business
Days of such Borrowing Date, the Administrative Agent shall also be entitled to
recover such amount with interest thereon at the rate per annum applicable to
Base Rate Loans hereunder, on demand, from the Borrower.
5.9 ILLEGALITY. Notwithstanding any other provision herein, if the
adoption of or any change in any Requirement of Law or in the interpretation or
application thereof shall make it unlawful for any Lender to make or maintain
Eurodollar Loans as contemplated by this Agreement, (a) the commitment of such
Lender hereunder to make Eurodollar Loans and Continue Eurodollar Loans as such
shall forthwith be cancelled and (b) such Lender's Loans then outstanding as
Eurodollar Loans, if any, shall be Converted automatically to Base Rate Loans on
the respective last days of the then current Interest Periods with respect to
such Loans or within such earlier period as required by law. If any such
Conversion of a Eurodollar Loan occurs on a day which is not the last day of the
then current Interest Period with respect thereto, the Borrower shall pay to
such Lender such amounts, if any, as may be required pursuant to Section 5.12.
5.10 REQUIREMENTS OF LAW.
(a) If the adoption of or any change in any Requirement of Law or in the
interpretation or application thereof or compliance by any Lender with any
request or directive (whether or not having the force of law) from any central
bank or other Governmental Authority made subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind whatsoever with
respect to this Agreement, any Note or any Eurodollar Loan made by it, or
change the basis of taxation of payments to such Lender in respect thereof
(except for Non-Excluded Taxes covered by Section 5.11 and changes in the
rate of tax on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, loans or
other extensions of credit by, or any other acquisition of funds by, any
office of such Lender which is not otherwise included in the determination
of the Eurodollar Rate hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, Converting into,
Continuing or maintaining Eurodollar Loans or to reduce any amount receivable
hereunder in respect thereof, then, in any such case, the Borrower shall
promptly pay such Lender such additional amount
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or amounts as will compensate such Lender for such increased cost or reduced
amount receivable.
(b) If any Lender shall have determined that the adoption of or any
change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which such Lender
or such corporation could have achieved but for such adoption, change or
compliance (taking into consideration such Lender's or such corporation's
policies with respect to capital adequacy) by an amount deemed by such Lender to
be material, then from time to time, the Borrower shall promptly pay to such
Lender such additional amount or amounts as will compensate such Lender for such
reduction.
(c) If any Lender becomes entitled to claim any additional amounts
pursuant to this Section, it shall promptly notify the Borrower (with a copy to
the Administrative Agent) of the event by reason of which it has become so
entitled. A certificate as to any additional amounts payable pursuant to this
Section submitted by such Lender to the Borrower (with a copy to the
Administrative Agent) shall be conclusive in the absence of manifest error. The
agreements in this Section shall survive the termination of this Agreement and
the payment of the Loans and all other amounts payable hereunder.
5.11 TAXES.
(a) All payments made by the Borrower under this Agreement and any
Notes shall be made free and clear of, and without deduction or withholding for
or on account of, any present or future income, stamp or other taxes, levies,
imposts, duties, charges, fees, deductions or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by any Governmental Authority,
excluding net income taxes and franchise taxes (imposed in lieu of net income
taxes) imposed on the Administrative Agent or any Lender as a result of a
present or former connection between the Administrative Agent or such Lender and
the jurisdiction of the Governmental Authority imposing such tax or any
political subdivision or taxing authority thereof or therein (other than any
such connection arising solely from the Administrative Agent or such Lender
having executed, delivered or performed its obligations or received a payment
under, or enforced, this Agreement or any Note). If any such non-excluded taxes,
levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded
Taxes") are required to be withheld from any amounts payable to the
Administrative Agent or any Lender hereunder or under any Note, the amounts so
payable to the Administrative Agent or such Lender shall be increased to the
extent necessary to yield to the Administrative Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Agreement, provided,
however, that the Borrower shall not be required to increase any such amounts
payable to any Lender that is not organized under the laws of the United States
of
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America or a state thereof if such Lender fails to comply with the requirements
of clause (b) of this Section. Whenever any Non-Excluded Taxes are payable by
the Borrower, as promptly as possible thereafter the Borrower shall send to the
Administrative Agent for its own account or for the account of such Lender, as
the case may be, a certified copy of an original official receipt received by
the Borrower showing payment thereof. If the Borrower fails to pay any
Non-Excluded Taxes when due to the appropriate taxing authority or fails to
remit to the Administrative Agent the required receipts or other required
documentary evidence, the Borrower shall indemnify the Administrative Agent and
the Lenders for any incremental taxes, interest or penalties that may become
payable by the Administrative Agent or any Lender as a result of any such
failure. The agreements in this Section shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of the United
States of America or a state thereof shall:
(i) (A) if such Lender is a "bank" within the meaning of Section
881(c)(3)(A) of the Code, deliver to the Borrower and the Administrative
Agent (x) two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224, or successor applicable form, as the case may
be, and (y) an Internal Revenue Service Form W-8 or W-9, or successor
applicable form, as the case may be, or (B) if such Lender is not a "bank"
within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver
either Internal Revenue Service Form 1001 or 4224, deliver (x) a
certificate substantially in the form of Exhibit I (a "NON-BANK STATUS
CERTIFICATE") and (y) two completed and signed copies of Internal Revenue
Service Form W-8 or successor applicable form;
(ii) deliver to the Borrower and the Administrative Agent two further
copies of any such form or certification on or before the date that any
such form or certification expires or becomes obsolete and after the
occurrence of any event requiring a change in the most recent form
previously delivered by it to the Borrower; and
(iii) obtain such extensions of time for filing and complete such
forms or certifications as may reasonably be requested by the Borrower or
the Administrative Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises the Borrower and the
Administrative Agent. Such Lender shall certify (i) in the case of a Form 1001
or 4224, that it is entitled
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to receive payments under this Agreement without deduction or withholding of any
United States federal income taxes, (ii) in the case of a Non-Bank Status
Certificate, that it is not a "bank" as such term is defined in Section
881(c)(3)(A) of the Code, and (iii) in the case of a Form W-8 or W-9, that it is
entitled to an exemption from United States backup withholding tax. Each Person
that shall become a Lender or a Participant pursuant to Section 12.6 shall, upon
the effectiveness of the related transfer, be required to provide all of the
forms and statements required pursuant to this Section, PROVIDED that in the
case of a Participant such Participant shall furnish all such required forms and
statements to the Lender from which the related participation shall have been
purchased.
5.12 INDEMNITY. The Borrower agrees to indemnify each Lender and to
hold each Lender harmless from any loss or expense which such Lender may sustain
or incur as a consequence of (a) default by the Borrower in making a borrowing
of, Conversion into or Continuation of Eurodollar Loans after the Borrower has
given a notice requesting the same in accordance with the provisions of this
Agreement, (b) default by the Borrower in making any prepayment after the
Borrower has given a notice thereof in accordance with the provisions of this
Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which
is not the last day of an Interest Period with respect thereto. Such
indemnification may include an amount equal to the excess, if any, of (i) the
amount of interest which would have accrued on the amount so prepaid, or not so
borrowed, Converted or Continued, for the period from the date of such
prepayment or of such failure to borrow, Convert or Continue to the last day of
such Interest Period (or, in the case of a failure to borrow, Convert or
Continue, the Interest Period that would have commenced on the date of such
failure) in each case at the applicable rate of interest for such Loans provided
for herein (excluding, however, the Applicable Margin included therein, if any)
over (ii) the amount of interest (as reasonably determined by such Lender) which
would have accrued to such Bank on such amount by placing such amount on deposit
for a comparable period with leading banks in the interbank eurodollar market.
This covenant shall survive the termination of this Agreement and the payment of
the Loans and all other amounts payable hereunder.
5.13 LENDING OFFICES; CHANGE OF LENDING OFFICE; REPLACEMENT OF
LENDERS.
(a) Loans of each Type made by any Lender shall be made and maintained
at such Lender's Applicable Lending Office for Loans of such Type.
(b) Each Lender agrees that if it makes any demand for payment under
Section 5.10 or 5.11(a), or if any adoption or change of the type described in
Section 5.9 shall occur with respect to it, it will use reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions and
so long as such efforts would not be disadvantageous to it, as determined in its
sole discretion) to designate a different lending office if the making of such a
designation would reduce or obviate the need for the Borrower to make payments
under Section 5.10 or 5.11(a), or would eliminate or reduce the effect of any
adoption or change described in Section 5.9.
(c) If any Lender requests compensation under Section 5.10, or if the
Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section
5.11(a), then the Borrower may, at its sole expense and effort, upon notice to
such Lender and the Administrative Agent,
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require such Lender to assign all of its interests, rights and obligations to an
assignee who shall assume such obligations; provided that (i) the Borrower shall
have received the prior written consent of the Administrative Agent (and, if a
Revolving Credit Commitment is being assigned, the Issuing Bank), which consent
shall not be unreasonably withheld, (ii) such Lender shall have received payment
of an amount equal to the outstanding principal of its Loans, accrued interest
thereon, accrued fees, and all other amount payable to it hereunder, from the
assignee (to the extent of such outstanding principal and accrued interest and
fees) or the Borrower (in the case of all other amounts owing hereunder) and
(iii) such assignment will result in a material reduction in the amount of
compensation or payment to be made by the Borrower. A Lender shall not be
required to make any such assignment if, prior thereto, as a result of a waiver
by such Lender or otherwise, the circumstances entitling the Borrower to require
such assignment cease to apply.
SECTION 6. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this
Agreement and to make the Loans, the Borrower hereby represents and warrants to
the Administrative Agent and each Lender that:
6.1 FINANCIAL CONDITION.
(a) The consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at December 31, 1998 and the related consolidated
statements of income and of cash flows for the fiscal year ended on such date,
reported on by PricewaterhouseCoopers LLP, copies of which have heretofore been
furnished to each Lender, are complete and correct and present fairly in
accordance with GAAP the consolidated financial condition of the Borrower and
its consolidated Subsidiaries as at such date, and the consolidated results of
their operations and their consolidated cash flows for the fiscal year then
ended. The unaudited consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at March 31, 1999 and the related unaudited
consolidated statements of income and of cash flows for the 3-month period ended
on such date, certified by a Responsible Officer, copies of which have
heretofore been furnished to each Lender, are complete and correct and present
fairly in accordance with GAAP (subject to normal year-end adjustments) the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such date, and the consolidated results of their operations
and their consolidated cash flows for the 3-month period then ended (subject to
normal year-end audit adjustments). All such financial statements, including the
related schedules and notes thereto, have been prepared in accordance with GAAP
applied consistently throughout the periods involved (except as approved by such
accountants or Responsible Officer, as the case may be, and as disclosed
therein). Neither the Borrower nor any of its consolidated Subsidiaries had, at
the date of the most recent balance sheet referred to above, any material
Guarantee Obligation, contingent liability or liability for taxes, or any
long-term lease or unusual forward or long-term commitment, including, without
limitation, any interest rate or foreign currency swap or exchange transaction
or other financial derivative, which is not reflected in the foregoing
statements or in the notes thereto. During the period from December 31, 1998 to
and including the date hereof there has been no sale,
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transfer or other disposition by the Borrower or any of its consolidated
Subsidiaries of any material part of its business or property and no purchase or
other acquisition of any business or property (including any Capital Stock of
any other Person) material in relation to the consolidated financial condition
of the Borrower and its consolidated Subsidiaries at December 31, 1998.
(b) The consolidated balance sheet of Precision and its consolidated
Subsidiaries as at March 31, 1999 and the related consolidated statements of
income and of cash flows for the fiscal year ended on such date, reported on by
Arthur Andersen LLP, copies of which have heretofore been furnished to each
Lender, are complete and correct and present fairly in accordance with GAAP the
consolidated financial condition of Precision and its consolidated Subsidiaries
as at such date, and the consolidated results of their operations and their
consolidated cash flows for the fiscal year then ended. All such financial
statements, including the related schedules and notes thereto, have been
prepared in accordance with GAAP applied consistently throughout the periods
involved (except as approved by such accountants or Responsible Officer, as the
case may be, and as disclosed therein). Neither Precision nor any of its
consolidated Subsidiaries had, at the date of the most recent balance sheet
referred to above, any material Guarantee Obligation, contingent liability or
liability for taxes, or any long-term lease or unusual forward or long-term
commitment, including, without limitation, any interest rate or foreign currency
swap or exchange transaction or other financial derivative, which is not
reflected in the foregoing statements or in the notes thereto. During the period
from March 31, 1999 to and including the date hereof there has been no sale,
transfer or other disposition by Precision or any of its consolidated
Subsidiaries of any material part of its business or property and no purchase or
other acquisition of any business or property (including any Capital Stock of
any other Person) material in relation to the consolidated financial condition
of Precision and its consolidated Subsidiaries at March 31, 1999.
(c) The PRO FORMA consolidated balance sheet of the Borrower and its
consolidated Subsidiaries as at March 31, 1999 certified by a Responsible
Officer of the Borrower (the "PRO FORMA BALANCE SHEET"), a copy of which has
been provided to the Administrative Agent and each Lender, is the unaudited
consolidated balance sheet of the Borrower and its consolidated Subsidiaries
adjusted to give effect (as if such events had occurred on such date) to (i) the
refinancing of any Indebtedness to be made with the proceeds of Loans hereunder,
(ii) the making of the Term Loans, (iii) the making of the Revolving Credit
Loans to be made on the Closing Date, (iv) the Precision Acquisition, (v) the
issuance of all Subordinated Debt to be made on the Closing Date, (vi) the
application of the proceeds of the foregoing in accordance with the terms of the
Loan Documents and (vii) the payment of all fees and expenses related to the
foregoing transactions, as estimated in good faith as of the date of the Pro
Forma Balance Sheet. The Pro Forma Balance Sheet, together with the notes
thereto, presents fairly, on a pro forma basis, the consolidated financial
position of the Borrower and its Subsidiaries as at March 31, 1999, assuming
that the events specified in the preceding sentence had actually occurred on
such date.
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(d) The operating forecast and cash flow projections of the Borrower
and its consolidated Subsidiaries, copies of which have heretofore been
furnished to the Lenders, have been prepared in good faith under the direction
of a Responsible Officer of the Borrower, and in accordance with GAAP. The
Borrower has no reason to believe that as of the date of delivery thereof such
operating forecast and cash flow projections are materially incorrect or
misleading in any material respect, or omit to state any material fact which
would render them misleading in any material respect.
6.2 NO CHANGE. (a) Since December 31, 1998 there has been no
development or event which has had or could reasonably be expected to have a
Material Adverse Effect, and (b) during the period from December 31, 1998 to and
including the date hereof, the Capital Stock of the Borrower has not been
redeemed, retired, purchased or otherwise acquired for value by the Borrower or
any of its Subsidiaries.
6.3 EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower and its
Subsidiaries (a) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (b) has the corporate power
and authority, and the legal right, to own and operate its property, to lease
the property it operates as lessee and to conduct the business in which it is
currently engaged, (c) is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such qualification
and (d) is in compliance with all Requirements of Law, except with respect to
(c) and (d) to the extent that the failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
6.4 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The Borrower has
the corporate power and authority, and the legal right, to make, deliver and
perform the Loan Documents to which it is a party and to borrow hereunder and
has taken all necessary corporate action to authorize the borrowings on the
terms and conditions of this Agreement and any Notes and to authorize the
execution, delivery and performance of the Loan Documents to which it is a
party. No consent or authorization of, filing with, notice to or other act by or
in respect of, any Governmental Authority or any other Person is required in
connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of the Loan Documents to which the
Borrower is a party, other than the filing of UCC Financing Statements and the
recording of Mortgages and Leasehold Mortgages contemplated by Section 6.16
hereof and any other recordings or filings relating to intellectual property or
vehicles of the Borrower as required by the Security Agreement. This Agreement
has been, and each other Loan Document to which it is a party will be, duly
executed and delivered on behalf of the Borrower. This Agreement constitutes,
and each other Loan Document to which it is a party when executed and delivered
will constitute, a legal, valid and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
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6.5 NO LEGAL BAR. The execution, delivery and performance of the Loan
Documents to which the Borrower is a party, the borrowings hereunder and the use
of the proceeds thereof will not violate any Requirement of Law or Contractual
Obligation of the Borrower or of any of its Subsidiaries and will not result in,
or require, the creation or imposition of any Lien on any of its or their
respective properties or revenues pursuant to any such Requirement of Law or
Contractual Obligation (other than Liens created by the Security Documents in
favor of the Administrative Agent).
6.6 NO MATERIAL LITIGATION. Other than as disclosed on Schedule 6.6
hereof, no litigation, investigation or proceeding of or before any arbitrator
or Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of its or their respective properties or revenues (a) with respect to any of the
Loan Documents or any of the transactions contemplated hereby or thereby, or (b)
which could reasonably be expected to have a Material Adverse Effect.
6.7 NO DEFAULT. Neither the Borrower nor any of its Subsidiaries is in
default under or with respect to any of its Contractual Obligations in any
respect which could reasonably be expected to have a Material Adverse Effect. No
Default or Event of Default has occurred and is continuing.
6.8 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and its
Subsidiaries has good record and marketable title in fee simple to, or a valid
leasehold interest in, all its real property, and good title to, or a valid
leasehold interest in, all its other property, and none of such property is
subject to any Lien except as permitted by Section 9.3.
6.9 INTELLECTUAL PROPERTY. The Borrower and each of its Subsidiaries
owns, or is licensed to use, all trademarks, tradenames, copyrights, technology,
know-how and processes necessary for the conduct of its business as currently
conducted except for those the failure to own or license which could not
reasonably be expected to have a Material Adverse Effect (the "INTELLECTUAL
PROPERTY"). No claim has been asserted and is pending by any Person challenging
or questioning the use of any such Intellectual Property or the validity or
effectiveness of any such Intellectual Property, nor does the Borrower know of
any valid basis for any such claim. The use of such Intellectual Property by the
Borrower and its Subsidiaries does not infringe on the rights of any Person,
except for such claims and infringements that, in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
6.10 NO BURDENSOME RESTRICTIONS. No Requirement of Law or Contractual
Obligation of the Borrower or any of its Subsidiaries could reasonably be
expected to have a Material Adverse Effect.
6.11 TAXES. Each of the Borrower and its Subsidiaries has filed or
caused to be filed all tax returns which, to the knowledge of the Borrower, are
required to be filed and has paid all taxes shown to be due and payable on said
returns or on any assessments made against it or any of its property and all
other taxes, fees or other charges imposed on it or any of its property by any
Governmental Authority (other than any the amount or validity of which
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are currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with GAAP have been provided on the
books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has
been filed, and, to the knowledge of the Borrower, no claim is being asserted,
with respect to any such tax, fee or other charge.
6.12 FEDERAL REGULATIONS. No part of the proceeds of any Loans will be
used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect, or for any purpose which violates, or which would be inconsistent
with, the provisions of the regulations of such Board of Governors. If requested
by any Lender or the Administrative Agent, the Borrower will furnish to the
Administrative Agent and each Lender a statement to the foregoing effect in
conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in
said Regulation U.
6.13 ERISA. Neither a Reportable Event nor an "accumulated funding
deficiency" (within the meaning of Section 412 of the Code or Section 302 of
ERISA) has occurred during the five-year period prior to the date on which this
representation is made or deemed made with respect to any Plan, and each Plan
has complied in all material respects with the applicable provisions of ERISA
and the Code. Except for the Plan Termination, no termination of a Single
Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has
arisen, during such five-year period. The present value of all accrued benefits
under each Single Employer Plan (based on those assumptions used to fund such
Plans) did not, as of the last annual valuation date prior to the date on which
this representation is made or deemed made, exceed the value of the assets of
such Plan allocable to such accrued benefits. Neither the Borrower nor any
Commonly Controlled Entity has had a complete or partial withdrawal from any
Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity
would become subject to any liability under ERISA if the Borrower or any such
Commonly Controlled Entity were to withdraw completely from all Multiemployer
Plans as of the valuation date most closely preceding the date on which this
representation is made or deemed made. No such Multiemployer Plan is in
Reorganization or Insolvent.
6.14 INVESTMENT COMPANY ACT; OTHER REGULATIONS. The Borrower is not an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. The
Borrower is not subject to regulation under any Federal or State statute or
regulation (other than Regulation X of the Board of Governors of the Federal
Reserve System) which limits its ability to incur Indebtedness.
6.15 SUBSIDIARIES. Schedule 6.15 sets forth the name of each direct or
indirect Subsidiary of the Borrower, its form of organization, its jurisdiction
of organization, the total number of issued and outstanding shares or other
interests of Capital Stock thereof, the classes and number of issued and
outstanding shares or other interests of Capital Stock of each such class, the
name of each holder of Capital Stock thereof and the number of shares or other
interests of such Capital Stock held by each such holder and the percentage of
all outstanding shares or other interests of such class of Capital Stock held by
such holders.
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6.16 SECURITY DOCUMENTS.
(a) The provisions of each Security Document are effective to create
in favor of the Administrative Agent for the ratable benefit of the Lenders a
legal, valid and enforceable security interest in all right, title and interest
of the Loan Party which is party thereto in the "Collateral" described therein.
(b) (i) When financing statements have been filed in the offices in
the jurisdictions listed in Schedule 6.16 Part A, the Security Agreement
shall each constitute a fully perfected first Lien on, and security
interest in, all right, title and interest of the Borrower in the
"Collateral" described therein, which can be perfected by such filing.
When certificates representing the Pledged Stock (as defined in the
Pledge Agreement) are delivered to the Administrative Agent, together with
stock powers endorsed in blank by a duly authorized officer of the pledgor
thereof, the Pledge Agreement shall constitute a fully perfected first Lien
on, and security interest in, all right, title and interest of the pledgors
parties thereto in the "Collateral" described therein.
(iii) When each Leasehold Mortgage and Mortgage is recorded with the
appropriate jurisdiction listed on Schedule 6.16 Part B, such Leasehold
Mortgage or Mortgage shall constitute a fully perfected first Lien on, and
security interest in, all right, title and interest of the Loan Party which
is party thereto in the "Collateral" described therein.
(c) Neither the Borrower nor any Domestic Subsidiary owns any
property, or has any interest in any property, that is not subject to a fully
perfected first priority Lien on, or security interest in, such property in
favor of the Administrative Agent, other than any such property having an
aggregate fair market value at any one time not exceeding $250,000 and other
than any property listed on Schedule 6.16, Part C.
6.17 ACCURACY AND COMPLETENESS OF INFORMATION.
(a) All factual information, reports and other papers and data with
respect to the Loan Parties (other than projections) furnished, and all factual
statements and representations made, to the Administrative Agent or the Lenders
by a Loan Party, or on behalf of a Loan Party, were, at the time the same were
so furnished or made, when taken together with all such other factual
information, reports and other papers and data previously so furnished and all
such other factual statements and representations previously so made, complete
and correct in all material respects, to the extent necessary to give the
Administrative Agent and the Lenders true and accurate knowledge of the subject
matter thereof in all material respects, and did not, as of the date so
furnished or made, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements contained
therein not misleading in light of the circumstances in which the same were
made.
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(b) All projections with respect to the Loan Parties furnished by or
on behalf of a Loan Party to the Administrative Agent or the Lenders were
prepared and presented in good faith by or on behalf of such Loan Party. No fact
is known to a Loan Party which materially and adversely affects or in the future
is reasonably likely (so far as such Loan Party can reasonably foresee) to have
a Material Adverse Effect which has not been set forth in the financial
statements referred to in Section 6.1 or in such information, reports, papers
and data or otherwise disclosed in writing to the Administrative Agent or the
Lenders prior to the Closing Date.
6.18 LABOR RELATIONS. No Loan Party is engaged in any unfair labor
practice which could reasonably be expected to have a Material Adverse Effect.
There is (a) no unfair labor practice compliant pending or, to the best
knowledge of each Loan Party and each of the Subsidiaries, threatened against a
Loan Party before the National Labor Relations Board which could reasonably be
expected to have a Material Adverse Effect and no grievance or arbitration
proceeding arising out of or under a collective bargaining agreement is so
pending or threatened; (b) no strike, labor dispute, slowdown or stoppage
pending or, to the best knowledge of each Loan Party, threatened against a Loan
Party; and (c) no union representation question existing with respect to the
employees of a Loan Party and no union organizing activities are taking place
with respect to any thereof.
6.19 INSURANCE. Each Loan Party has, with respect to its properties
and business, insurance covering the risks, in the amounts, with the deductible
or other retention amounts, and with the carriers, listed on Schedule 6.19,
which insurance meets the requirements of Section 8.5 hereof and Section 5 of
the Security Agreement and Section 6 of the Leasehold Mortgages and Mortgages as
of the date hereof and the Closing Date.
6.20 SOLVENCY. After giving effect to the consummation of the
refinancing of existing Indebtedness, the Precision Acquisition and to the
incurrence of all indebtedness (including any Subordinated Debt) and obligations
being incurred on or prior to such date in connection herewith and therewith and
after giving effect to the making of each Loan and the issuance of each Letter
of Credit, (i) the amount of the "present fair saleable value" of the assets of
the Borrower and of the Borrower and its Subsidiaries, taken as a whole, will,
as of such date, exceed the amount of all "liabilities of the Borrower and of
the Borrower and its Subsidiaries, taken as a whole, contingent or otherwise",
as of such date, as such quoted terms are determined in accordance with
applicable federal and state laws governing determinations of the insolvency of
debtors, (ii) the present fair saleable value of the assets of the Borrower and
of the Borrower and its Subsidiaries, taken as a whole, will, as of such date,
be greater than the amount that will be required to pay the liabilities of the
Borrower and of the Borrower and its Subsidiaries, taken as a whole, on their
respective debts as such debts become absolute and matured, (iii) neither the
Borrower nor the Borrower and its Subsidiaries, taken as a whole, will have, as
of such date, an unreasonably small amount of capital with which to conduct
their respective businesses, and (iv) each of the Borrower and the Borrower and
its Subsidiaries, taken as a whole, will be able to pay their respective debts
as they mature. For purposes of this Section 6.20, "debt" means "liability on a
claim", "claim" means any (x) right to payment, whether or not such a right is
reduced to judgment, liquidated,
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unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured or unsecured, and (y) right to an equitable remedy for
breach of performance if such breach gives rise to a right to payment, whether
or not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured or unmatured, disputed, undisputed, secured or unsecured.
6.21 PURPOSE OF LOANS. The proceeds of the Loans shall be used by the
Borrower to partially finance the Precision Acquisition, to refinance existing
Indebtedness of the Borrower, Precision and their Subsidiaries, to pay fees,
commissions and expenses in connection herewith and therewith, and for working
capital purposes in the ordinary course of business
6.22 ENVIRONMENTAL MATTERS. Except as disclosed on Schedule 6.22
attached hereto:
(a) The facilities and properties owned, leased or operated by the
Borrower or any of its Subsidiaries (the "PROPERTIES") and all operations at the
Properties are in compliance, and have in the last two years been in compliance,
with all applicable Environmental Laws, and there is no contamination at, under
or about the Properties or violation of any Environmental Law with respect to
the Properties or the business operated by the Borrower or any of its
Subsidiaries (the "BUSINESS") which could materially interfere with the
continued operation of the Properties or materially impair the fair saleable
value thereof.
(b) Neither the Borrower nor any of its Subsidiaries has received any
notice of violation, alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with Environmental Laws
with regard to any of the Properties or the Business, nor does the Borrower have
knowledge or reason to believe that any such notice will be received or is being
threatened, that has not been resolved and which could reasonably be expected to
have a Material Adverse Effect.
(c) Materials of Environmental Concern have not been transported or
disposed of from the Properties in violation of, or in a manner or to a location
which could reasonably be expected to give rise to liability under, any
Environmental Law, nor have any Materials of Environmental Concern been
generated, treated, stored or disposed of at, on or under any of the Properties
in violation of, or in a manner that could reasonably be expected to give rise
to liability under, any applicable Environmental Law.
(d) No judicial proceeding or governmental or administrative action is
pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary is or will be named as
a party with respect to the Properties or the Business, nor are there any
consent decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding under any
Environmental Law with respect to the Properties or the Business.
(e) There has been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising from or related to
the operations
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of the Borrower or any Subsidiary in connection with the Properties or otherwise
in connection with the Business, in violation of or in amounts or in a manner
that could reasonably give rise to liability under Environmental Laws.
6.23 REGULATION H. No Mortgage or Leasehold Mortgage encumbers
improved real property which is located in an area that has been identified by
the Secretary of Housing and Urban Development as an area having special flood
hazards and in which flood insurance has been made available under the National
Flood Insurance Act of 1968.
6.24 YEAR 2000 COMPLIANCE. Any reprogramming required to permit the
proper functioning, in and following the year 2000, of (i) the computer systems
of the Borrower, Precision and their Subsidiaries and (ii) equipment of the
Borrower, Precision and their Subsidiaries containing embedded microchips
(including systems and equipment supplied by others in which their systems
interface) and the testing of all such systems and equipment, as so
reprogrammed, will be completed no later than October 31, 1999. The cost to the
Borrower and Precision of such reprogramming and testing and of the reasonably
foreseeable consequences of the Year 2000 Problem to the Borrower and Precision
(including, without limitation, reprogramming errors and the failure of others'
systems or equipment) will not result in a Default or a Material Adverse Effect.
Except for such of the reprogramming referred to in the preceding sentence as
may be necessary, the computer and management information systems of the
Borrower, Precision and their Subsidiaries are and, with ordinary course
upgrading and maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Borrower, Precision and their Subsidiaries to conduct
their business without a Material Adverse Effect.
SECTION 7. CONDITIONS PRECEDENT
7.1 CONDITIONS TO INITIAL LOANS. The agreement of each Lender to make
the initial Loan requested to be made by it and the agreement of the Issuing
Lender to issue the initial Letter of Credit is subject to the satisfaction,
immediately prior to or concurrently with the making of such Loan on the Closing
Date, of the following conditions precedent:
(a) LOAN DOCUMENTS. The Administrative Agent shall have received:
(i) this Agreement, executed and delivered by a duly authorized
officer of the Borrower, with a counterpart for each Lender,
(ii) for the account of each Lender having a Tranche A Term Loan
Commitment, a Tranche A Term Loan Note of the Borrower conforming to the
requirements hereof and executed by a duly authorized officer of the
Borrower,
(iii) for the account of each Lender having a Tranche B Term Loan
Commitment, a Tranche B Term Loan Note of the Borrower conforming to the
requirements hereof and executed by a duly authorized officer of the
Borrower,
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(iv) for the account of each Lender having a Revolving Credit
Commitment, a Revolving Credit Note of the Borrower conforming to the
requirements hereof and executed by a duly authorized officer of the
Borrower,
(v) the Pledge Agreement, executed and delivered by a duly authorized
officer of each party thereto, with a counterpart or a conformed copy for
each Lender,
(vi) the Guarantee, executed and delivered by a duly authorized
officer of each party thereto, with a counterpart or a conformed copy for
each Lender,
(vii) the Security Agreement, executed and delivered by a duly
authorized officer of each party thereto, with a counterpart or a conformed
copy for each Lender,
(viii) each of the Mortgages relating to the locations listed on
Schedule 7.1(a)(viii), each executed and delivered by a duly authorized
officer of the party thereto, with a counterpart or a conformed copy for
each Lender,
(ix) each of the Leasehold Mortgages relating to the locations listed
on Schedule 7.1(a)(ix), each executed and delivered by a duly authorized
officer of the party thereto, with a counterpart or a conformed copy for
each Lender;
(x) the Assignment of Precision Acquisition Documents, executed and
delivered by a duly authorized officer of each party thereto, with a
counterpart or a conformed copy for each Lender; and
(xi) each Foreign Pledge Agreement, executed and delivered by a duly
authorized officer of each party thereto, with a counterpart or a conformed
copy for each Lender.
(b) RELATED AGREEMENTS. The Administrative Agent shall have received,
with a copy for each Lender, true and correct copies, certified as to
authenticity by the Borrower, of all Precision Acquisition Documents, all
Subordinated Debt Documents and such other documents or instruments as may be
reasonably requested by the Administrative Agent, including, without limitation,
a copy of any debt instrument, security agreement or other material contract to
which the Borrower, Precision or any of their Subsidiaries may be a party.
(c) CONCURRENT TRANSACTIONS.
(i) The Precision Acquisition shall have been, or shall be
concurrently with the making of the initial Loans, consummated in
accordance with the terms of the Precision Acquisition Documents for a
total purchase price not exceeding $73,900,000 (subject to adjustments in
the purchase price pursuant to Section 2.1 of the Precision Acquisition
Agreement), without any amendment, modification or waiver thereof except
with the consent of the Required Lenders, and the Administrative Agent
shall have received evidence satisfactory to it to that effect.
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(ii) All amounts owing to the existing creditors of the Borrower,
Precision or any of their Subsidiaries (other than Indebtedness permitted
under Section 9.2 hereof) under existing financing documents shall have
been, or shall be concurrently with the making of the initial Loans, repaid
in full, and any Liens created pursuant to such existing financing
documents shall have been or shall, concurrently with the making of the
initial Loans, released, and such existing financing documents shall
terminate and be of no further force and effect upon such repayment; in
each case pursuant to such payoff letters, Lien releases, termination
statements, mortgage satisfactions and other documents as the
Administrative Agent may require, each of which shall be in form and
substance satisfactory to the Administrative Agent.
(iii) The Three Cities Subordinated Debt and any Special Subordinated
Notes shall have been, or shall be concurrently with the making of the
initial Loans, consummated in accordance with the terms of the related
Subordinated Debt Documents, without any amendment, modification or waiver
thereof except with the consent of the Required Lenders, and the
Administrative Agent shall have received evidence satisfactory to it to
that effect.
(iv) The Administrative Agent shall have received, with a counterpart
for each Lender, a copy of the resolutions, in form and substance
satisfactory to the Administrative Agent, of the Board of Directors of
Precision authorizing the execution, delivery and performance of the
Precision Acquisition Documents.
(d) SECRETARY'S CERTIFICATES. The Administrative Agent shall have
received, with a counterpart for each Lender, a certificate of each Loan Party,
dated the Closing Date, substantially in the form of Exhibit J, with appropriate
insertions and attachments, satisfactory in form and substance to the
Administrative Agent, executed by the President or any Vice President and the
Secretary or any Assistant Secretary of such Loan Party.
(e) CORPORATE PROCEEDINGS OF THE LOAN PARTIES. The Administrative
Agent shall have received, with a counterpart for each Lender, a copy of the
resolutions, in form and substance satisfactory to the Administrative Agent, of
the Board of Directors of each Loan Party authorizing (i) the execution,
delivery and performance of this Agreement and the other Loan Documents to which
it is a party, (ii) the borrowings contemplated hereunder and (iii) the granting
by it of the Liens created pursuant to the Security Documents, certified by the
Secretary or an Assistant Secretary of such Loan Party as of the Closing Date,
which certificate shall be in form and substance satisfactory to the
Administrative Agent and shall state that the resolutions thereby certified have
not been amended, modified, revoked or rescinded.
(f) INCUMBENCY CERTIFICATES. The Administrative Agent shall have
received, with a counterpart for each Lender, a certificate of each Loan Party,
dated the Closing Date, as to the incumbency and signature of the officers of
such Loan Party executing any Loan Document satisfactory in form and substance
to the Administrative Agent, executed by the President or any Vice President and
the Secretary or any Assistant Secretary of such Loan Party.
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(g) CORPORATE DOCUMENTS. The Administrative Agent shall have received,
with a counterpart for each Lender, true and complete copies of the certificate
of incorporation and by-laws of each Loan Party, certified as of the Closing
Date as complete and correct copies thereof by the Secretary or an Assistant
Secretary of such Loan Party.
(h) GOOD STANDING CERTIFICATES. The Administrative Agent shall have
received, with a copy for each Lender, certificates dated as of a recent date
from the Secretary of State or other appropriate authority, evidencing the good
standing of each Transaction Party (i) in the jurisdiction of its organization
and (ii) in each other jurisdiction where its ownership, lease or operation of
property or the conduct of its business requires it to qualify as a foreign
Person except, as to this subclause (ii), where the failure to so qualify would
not have a Material Adverse Effect.
(i) CONSENTS, LICENSES AND APPROVALS. The Administrative Agent shall
have received, with a counterpart for each Lender, a certificate of a
Responsible Officer of the Borrower (i) attaching copies of all consents,
authorizations and filings referred to in Section 6.4, and (ii) stating that
such consents, licenses and filings are in full force and effect, and each such
consent, authorization and filing shall be in form and substance satisfactory to
the Administrative Agent.
(j) FEES AND EXPENSES. The Administrative Agent shall have received
the fees to be received on the Closing Date referred to in the Fee Letter and
all expenses required to be reimbursed in accordance herewith.
(k) LEGAL OPINIONS. The Administrative Agent shall have received, with
a counterpart for each Lender, the following executed legal opinions:
(i) the executed legal opinion of Thompson, Hine & Flory LLP, counsel
to the Borrower and the other Loan Parties, substantially in the form of
Exhibit K-1;
(ii) the executed legal opinion of local counsel to the Borrower and
the other Loan Parties with respect to Pennsylvania, Ohio, New York and
Indiana, substantially in the form of Exhibit K-2; and
(iii) the executed legal opinion of local counsel to the Borrower and
the other Loan Parties with respect to the United Kingdom, substantially in
the form of Exhibit K-3.
Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Administrative Agent may
reasonably require.
(l) PLEDGED STOCK; STOCK POWERS.
(i) The Administrative Agent shall have received the certificates
representing the shares pledged pursuant to the Pledge Agreement, together
with an undated stock
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power for each such certificate executed in blank by a duly authorized
officer of the pledgor thereof.
(ii) Each Issuer referred to in the Pledge Agreement shall have
delivered an acknowledgement of and consent to such Pledge Agreement, executed
by a duly authorized officer of such Issuer, in substantially the form appended
to such Pledge Agreement.
(m) ACTIONS TO PERFECT LIENS. The Administrative Agent shall have
received evidence in form and substance satisfactory to it that all filings,
recordings, registrations and other actions, including, without limitation, the
filing of duly executed financing statements on form UCC-1, necessary or, in the
opinion of the Administrative Agent, desirable to perfect the Liens created by
the Security Documents shall have been completed.
(n) SURVEYS. The Administrative Agent shall have received, and the
title insurance company issuing the policy referred to in Section 7.1(o) (the
"TITLE INSURANCE COMPANY") shall have received, maps or plats of an as-built
survey of the sites of the property covered by each Mortgage and Leasehold
Mortgage certified to the Administrative Agent and the Title Insurance Company
in a manner satisfactory to them, dated a date satisfactory to the
Administrative Agent and the Title Insurance Company by an independent
professional licensed land surveyor satisfactory to the Administrative Agent and
the Title Insurance Company, which maps or plats and the surveys on which they
are based shall be made in accordance with the Minimum Standard Detail
Requirements for Land Title Surveys jointly established and adopted by the
American Land Title Association and the American Congress on Surveying and
Mapping in 1962, and, without limiting the generality of the foregoing, there
shall be surveyed and shown on such maps, plats or surveys the following: (i)
the locations on such sites of all the buildings, structures and other
improvements and the established building setback lines; (ii) the lines of
streets abutting the sites and width thereof; (iii) all access and other
easements appurtenant to the sites or necessary or desirable to use the sites;
(iv) all roadways, paths, driveways, easements, encroachments and overhanging
projections and similar encumbrances affecting the site, whether recorded,
apparent from a physical inspection of the sites or otherwise known to the
surveyor; (v) any encroachments on any adjoining property by the building
structures and improvements on the sites; and (vi) if the site is described as
being on a filed map, a legend relating the survey to said map.
(o) TITLE INSURANCE POLICY. The Administrative Agent shall have
received in respect of each parcel covered by each Mortgage and Leasehold
Mortgage a mortgagee's title policy (or policies) or marked up unconditional
binder for such insurance dated the Closing Date. Each such policy shall (i) be
in an amount satisfactory to the Administrative Agent; (ii) be issued at
ordinary rates; (iii) insure that the Mortgage or Leasehold Mortgage insured
thereby creates a valid first Lien on such parcel free and clear of all defects
and encumbrances, except such as may be approved by the Administrative Agent;
(iv) name the Administrative Agent for the benefit of the Lenders as the insured
thereunder; (v) be in the form of ALTA Loan Policy - 1970 (Amended 10/17/70);
(vi) contain such endorsements and affirmative coverage as the Administrative
Agent may request and (vii) be issued by title companies
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satisfactory to the Administrative Agent (including any such title companies
acting as co-insurers or reinsurers, at the option of the Administrative Agent).
The Administrative Agent shall have received evidence satisfactory to it that
all premiums in respect of each such policy, and all charges for mortgage
recording tax, if any, have been paid.
(p) FLOOD INSURANCE. If requested by the Administrative Agent, the
Administrative Agent shall have received (i) a policy of flood insurance which
(A) covers any parcel of improved real property which is encumbered by any
Mortgage (B) is written in an amount not less than the outstanding principal
amount of the indebtedness secured by such Mortgage which is reasonably
allocable to such real property or the maximum limit of coverage made available
with respect to the particular type of property under the Act, whichever is
less, and (C) has a term ending not later than the maturity of the indebtedness
secured by such Mortgage and (ii) confirmation that the Company has received the
notice required pursuant to Section 208(e)(3) of Regulation H of the Board of
Governors of the Federal Reserve System.
(q) COPIES OF DOCUMENTS. The Administrative Agent shall have received
a copy of all recorded documents referred to, or listed as exceptions to title
in, the title policy or policies referred to in Section 7.1(o) and a copy,
certified by such parties as the Administrative Agent may deem appropriate, of
all other documents affecting the property covered by each Mortgage.
(r) LIEN SEARCHES. The Administrative Agent shall have received the
results of a recent search by a Person satisfactory to the Administrative Agent,
of the Uniform Commercial Code, judgment and tax lien filings which may have
been filed with respect to personal property of each Loan Party, and the results
of such search shall be satisfactory to the Administrative Agent.
(s) INSURANCE. The Administrative Agent shall have received evidence
in form and substance satisfactory to it that all of the requirements of Section
8.5 hereof and Section 5 of the Security Agreement and Section 6 of the
Mortgages and Leasehold Mortgages shall have been satisfied.
(t) ENVIRONMENTAL REPORTS. The Administrative Agent shall have
received Phase I environmental reports, and, if requested by the Administrative
Agent based upon its review of the Phase I environmental reports, Phase II or
other environmental reports, prepared by a Person satisfactory to the
Administrative Agent, and which such Person shall have confirmed in writing that
the Administrative Agent and the Lenders shall be entitled to rely upon, with
respect to each of the Properties, and such environmental reports shall be in
form and substance satisfactory to the Administrative Agent.
(u) LANDLORD ESTOPPEL AGREEMENTS. The Administrative Agent shall have
received a landlord estoppel agreement, in form and substance satisfactory to
the Administrative Agent, with respect to each parcel of real property leased by
any Loan Party as of the Closing Date, duly executed and delivered on behalf of
the lessor of such real property.
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(v) FINANCIAL STATEMENTS. The Administrative Agent and each Lender
shall have received and reviewed all financial projections and financial
statements listed in Section 6.1 hereof, which shall be in form and substance
satisfactory to the Administrative Agent and the Lenders.
(w) DUE DILIGENCE. The Administrative Agent and each Lender shall have
completed to its satisfaction due diligence with respect to the Borrower,
Precision, each of their Subsidiaries and their respective businesses and
properties; including, without limitation, review of and satisfaction with (i)
the tax assumptions of the Transaction Parties, (ii) the ownership, capital,
corporate, organization and legal structure of each Transaction Party, (iii) the
value, scope and extent of the Collateral which secures the Obligations
hereunder, (iv) all material contracts of the Transaction Parties, including
without limitation all documents relating to existing Indebtedness or Guarantee
Obligations of the Loan Parties and all material supply and purchase contracts
of the Loan Parties, (v) the structure of the Precision Acquisition and the
financings relating thereto, (vi) all shareholder agreements, employment
agreements, non-compete agreements and any other agreements among any
Transaction Party and its key personnel and (vii) any collective bargaining
agreements and employee benefit plans of the Transaction Parties.
(x) SOLVENCY LETTER. The Administrative Agent and the Lenders shall
have received a certificate from the chief financial officer of the Borrower, in
form and substance satisfactory to the Administrative Agent and the Lenders, as
to the solvency of the Loan Parties after giving effect to all of the
transactions contemplated hereby.
(y) APPROVALS AND WAITING PERIODS. The Administrative Agent shall have
received evidence to its satisfaction of the termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection
with the Precision Acquisition and the transactions relating thereto.
7.2 CONDITIONS TO EACH LOAN. The agreement of each Lender to make any
Loan requested to be made by it on any date (including, without limitation, its
initial Loan) and the agreement of the Issuing Lender to issue any Letter of
Credit (including, without limitation, its initial Letter of Credit) is subject
to the satisfaction of the following conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties made by the Borrower and the other Loan Parties in or pursuant to the
Loan Documents shall be true and correct in all material respects on and as of
such date as if made on and as of such date.
(b) NO DEFAULT. No Default or Event of Default shall have occurred and
be continuing on such date or after giving effect to the Loans requested to be
made on such date.
(c) NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have
occurred and be continuing that has had a Material Adverse Effect.
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(d) ADDITIONAL MATTERS. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by this Agreement and the other Loan Documents shall
be satisfactory in form and substance to the Administrative Agent, and the
Administrative Agent shall have received such other documents and legal opinions
in respect of any aspect or consequence of the transactions contemplated hereby
or thereby as it shall reasonably request.
Each borrowing by the Borrower hereunder shall constitute a representation and
warranty by the Borrower as of the date thereof that the conditions contained in
this Section 7.2 have been satisfied.
SECTION 8. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as any of the Commitments
remain in effect or any amount is owing to any Lender or the Administrative
Agent hereunder or under any other Loan Document, the Borrower shall and (except
in the case of delivery of financial information, reports and notices) shall
cause each of its Subsidiaries to:
8.1 FINANCIAL STATEMENTS. Furnish to each Lender:
(a) as soon as available, but in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the audited consolidated and
unaudited consolidating balance sheet of the Borrower and its consolidated
Subsidiaries as at the end of such year and the related audited consolidated and
unaudited consolidating statements of income and retained earnings and of cash
flows for such year, setting forth in each case in comparative form the figures
for the previous year, reported on without a "going concern" or like
qualification or exception, or qualification arising out of the scope of the
audit, by PricewaterhouseCoopers LLP or other independent certified public
accountants of nationally recognized standing;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal year
of the Borrower, the unaudited consolidated and consolidating balance sheet of
the Borrower and its consolidated Subsidiaries as at the end of such quarter and
the related unaudited consolidated and consolidating statements of income and
retained earnings and of cash flows of the Borrower and its consolidated
Subsidiaries for such quarter and the portion of the fiscal year through the end
of such quarter, setting forth in each case in comparative form the figures for
the previous year, certified by a Responsible Officer as being fairly stated in
all material respects in accordance with GAAP (subject to normal year-end audit
adjustments); and
(c) as soon as available, but in any event not later than 30 days
after the end of each calendar month, the unaudited consolidated and
consolidating balance sheet of the Borrower and its consolidated Subsidiaries as
at the end of such month and the related unaudited consolidated and
consolidating statements of income and retained earnings and of cash flows of
the Borrower and its consolidated Subsidiaries for such month and the portion of
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<PAGE> 60
the fiscal year through the end of such month, setting forth in each case in
comparative form the figures for the previous year, certified by a Responsible
Officer as being fairly stated in all material respects in accordance with GAAP
(subject to normal year-end audit adjustments);
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
8.2 CERTIFICATES; OTHER INFORMATION. Furnish to each Lender:
(a) concurrently with the delivery of the financial statements
referred to in Section 8.1(a), a certificate of the independent certified public
accountants reporting on such financial statements stating that in making the
examination necessary therefor no knowledge was obtained of any Default or Event
of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in Sections 8.1(a), (b) and (c), a certificate of a Responsible
Officer (i) stating that, to the best of such Officer's knowledge, the Borrower
during such period has observed or performed all of its covenants and other
agreements, and satisfied every condition, contained in this Agreement and the
other Loan Documents to be observed, performed or satisfied by it, and that such
Officer has obtained no knowledge of any Default or Event of Default except as
specified in such certificate and (ii) showing in detail the calculations
supporting such Officer's certification of the Borrower's compliance with the
requirements of Section 9.1(a) through 9.1(h);
(c) not later than thirty days after the end of each fiscal year of
the Borrower, a copy of the then current three-year projections by the Borrower
of the operating budget and cash flow budget of the Borrower and its
Subsidiaries for the succeeding three fiscal years, such projections to be
accompanied by a certificate of a Responsible Officer to the effect that such
projections have been prepared on the basis of sound financial planning practice
and that such Officer has no reason to believe they are incorrect or misleading
in any material respect;
(d) within five days after the same are sent, copies of all financial
statements and reports which the Borrower sends to its stockholders, and within
five days after the same are filed, copies of all financial statements and
reports which the Borrower may make to, or file with, the Securities and
Exchange Commission or any successor or analogous Governmental Authority;
(e) during the month of June in each calendar year, a report of a
reputable insurance broker with respect to the insurance maintained by the
Borrower and its Subsidiaries in accordance with Section 8.5 of this Agreement
and Section 5 of each Security Agreement and Section 6 of each Mortgage and
Leasehold Mortgage, and such supplemental reports as the Administrative Agent
may from time to time request; and
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<PAGE> 61
(f) promptly, such additional financial and other information as any
Lender may from time to time reasonably request.
8.3 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all its
obligations of whatever nature, except where the amount or validity thereof is
currently being contested in good faith by appropriate proceedings and reserves
in conformity with GAAP with respect thereto have been provided on the books of
the Borrower or its Subsidiaries, as the case may be.
8.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Continue to
engage in business of the same general type as now conducted by it and preserve,
renew and keep in full force and effect its corporate existence and take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business except as otherwise permitted
pursuant to Section 9.5; comply with all Contractual Obligations and
Requirements of Law except to the extent that failure to comply therewith could
not, in the aggregate, be reasonably expected to have a Material Adverse Effect.
8.5 MAINTENANCE OF PROPERTY; INSURANCE. Keep all property useful and
necessary in its business in good working order and condition (ordinary wear and
tear excepted); maintain with financially sound and reputable insurance
companies insurance on all its property in at least such amounts and against at
least such risks as are usually insured against in the same general area by
companies engaged in the same or a similar business, which insurance shall name
the Administrative Agent as lender loss payee, in the case of property or
casualty insurance, and as an additional insured, in the case of liability
insurance; and furnish to each Lender, upon written request, full information as
to the insurance carried.
8.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of any Lender to visit and inspect any of its properties and
examine and make abstracts from any of its books and records at any reasonable
time and as often as may reasonably be desired and to discuss the business,
operations, properties and financial and other condition of the Borrower and its
Subsidiaries with officers and employees of the Borrower and its Subsidiaries
and with its independent certified public accountants.
8.7 NOTICES. Promptly give notice to the Administrative Agent and each
Lender of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Subsidiaries or (ii) litigation,
investigation or proceeding which may exist at any time between the Borrower or
any of its Subsidiaries and any Governmental Authority, which in either case, if
not cured or if adversely determined, as the case may be, could reasonably be
expected to have a Material Adverse Effect;
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<PAGE> 62
(c) any litigation or proceeding affecting the Borrower or any of its
Subsidiaries in which the amount involved is $1,000,000 or more and not covered
by insurance or in which injunctive or similar relief is sought;
(d) of the acquisition by any Loan Party of any property or interest
in property (including, without limitation, real property), that is not subject
to a perfected Lien in favor of the Administrative Agent pursuant to the
Security Documents;
(e) of the occurrence of any transaction or occurrence referred to in
Section 5.5(b), and the receipt of any Net Proceeds or any insurance proceeds as
a result thereof (whether or not such Net Proceeds or proceeds are then required
to be applied to the repayment of Loans and reduction of Revolving Credit
Commitments as specified in Section 5.5(b));
(f) the following events, as soon as possible and in any event within
30 days after the Borrower knows or has reason to know thereof: (i) the
occurrence or expected occurrence of any Reportable Event with respect to any
Plan, a failure to make any required contribution to a Plan, the creation of any
Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution
of proceedings or the taking of any other action by the PBGC or the Borrower or
any Commonly Controlled Entity or any Multiemployer Plan with respect to the
withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan;
and
(g) any development or event which has had or could reasonably be
expected to have a Material Adverse Effect.
Each notice pursuant to this Section shall be accompanied by a
statement of a Responsible Officer setting forth details of the occurrence
referred to therein and stating what action the Borrower proposes to take with
respect thereto.
8.8 ENVIRONMENTAL LAWS.
(a) Comply with, and ensure compliance by all tenants and subtenants,
if any, with, all applicable Environmental Laws and obtain and comply with and
maintain, and ensure that all tenants and subtenants obtain and comply with and
maintain, any and all licenses, approvals, notifications, registrations or
permits required by applicable Environmental Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply with all lawful orders and directives of
all Governmental Authorities regarding Environmental Laws.
8.9 PERIODIC AUDIT OF ACCOUNTS RECEIVABLE AND INVENTORY. The
Administrative Agent shall be entitled to perform a periodic due diligence
inspection, test and review of the accounts receivable and inventory of the
Borrower and its Subsidiaries on a
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<PAGE> 63
mutually convenient Business Day twice during each calendar year and shall in
each case be satisfied in all material respects with the results thereof;
PROVIDED HOWEVER, if the Administrative Agent in its reasonable judgment is not
satisfied that the results of any due diligence inspection, test, and review
performed pursuant to this Section 8.10, the Administrative Agent shall be
entitled to perform additional due diligence inspections, tests and reviews of
such inventory and accounts receivable on mutually convenient Business Days
during the succeeding twelve-month period until the Administrative Agent shall
be so satisfied; and PROVIDED FURTHER, that upon the occurrence and during the
continuation of an Event of Default, the Administrative Agent shall be entitled
to perform such additional due diligence inspections, tests and review of such
accounts receivable as any Lender shall deem necessary or advisable.
8.10 ADDITIONAL COLLATERAL; ADDITIONAL GUARANTORS.
(a) In the event that the Borrower or any Subsidiary acquires any
property or interest in property (including, without limitation, real property),
that is not subject to a perfected Lien in favor of the Administrative Agent
pursuant to the Security Documents, the Borrower shall, and shall cause
Subsidiary to, take such action (including, without limitation, the preparation
and filing of mortgages or deeds of trust in form and substance satisfactory to
the Administrative Agent) as the Administrative Agent shall request in order to
create and/or perfect a Lien in favor of the Administrative Agent on such
property.
(b) In the event that the Borrower is permitted to acquire or form any
additional Subsidiary, such Subsidiary shall execute a guarantee and a security
agreement, or supplements to the Guarantee and the Security Agreement, and the
Borrower and/or any Subsidiary which is a holder of any Capital Stock of such
Subsidiary shall execute such pledge agreements or supplements to the Pledge
Agreements, each in form and substance satisfactory to the Administrative Agent,
and shall take such other action as shall be necessary or advisable (including,
without limitation, the execution of financing statements on form UCC-1) in
order to perfect the Liens granted by such Subsidiary in favor of the
Administrative Agent for the benefit of the Lenders and to effect and perfect
the pledge of all of the Capital Stock of such Subsidiary in favor of the
Administrative Agent for the benefit of the Lenders. Such Subsidiary shall
thereupon become a Guarantor for all purposes under the Loan Documents,
including, without limitation, Section 8.10(a) of this Agreement. The
Administrative Agent shall be entitled to receive legal opinions of one or more
counsel to the Borrower and such Subsidiary addressing such matters as the
Administrative Agent or its counsel may reasonably request, including, without
limitation, the enforceability of the guaranty and the security agreement to
which such Subsidiary becomes a party and the pledge of the Capital Stock of
such Subsidiary, and the creation, validity and perfection of the Liens so
granted by such Subsidiary and the Borrower and/or other Subsidiaries to the
Administrative Agent for the benefit of the Lenders.
8.11 YEAR 2000 COVENANTS. (a) Take all necessary action to (i) comply
with the provisions of Section 6.24 hereof and (ii) test all of its systems and
equipment supplied by others or with which the Borrower's systems interface on
or prior to June 30, 1999 to verify
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<PAGE> 64
the absence of a Year 2000 Problem, and (b) from time to time, at the request of
the Administrative Agent, provide to the Administrative Agent such updated
information or documentation as is requested regarding the status of their
efforts to address the Year 2000 Problem.
8.12 INTEREST RATE PROTECTION ARRANGEMENTS. No later than 180 days
following the Closing Date, enter into interest rate protection arrangements in
respect of 50% of the initial aggregate principal balance of the Tranche A Term
Loans and the Tranche B Term Loans as such aggregate principal amount is
scheduled to be reduced from time to time, in form and substance acceptable to
the Administrative Agent.
SECTION 9. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as any of the Commitments
remain in effect or any amount is owing to any Lender or the Administrative
Agent hereunder or under any other Loan Document, the Borrower shall not, and
(except with respect to Section 9.1) shall not permit any of its Subsidiaries
to, directly or indirectly:
9.1 FINANCIAL CONDITION COVENANTS.
(a) SENIOR LEVERAGE RATIO PRIOR TO PLAN TERMINATION. (1) Permit, for
any period of four consecutive fiscal quarters ending during a period set forth
below that occurs prior to the date of the Plan Termination and the application
of the net proceeds thereof to repayment of the Loans in accordance with Section
5.5(b), the ratio of (i) Consolidated Senior Indebtedness to (ii) Consolidated
EBITDA to be greater than the amount set forth opposite such period below;
PROVIDED, that in calculating Consolidated EBITDA for the periods of four fiscal
quarters ending September 30, 1999, December 31, 1999 and March 31, 2000,
Consolidated EBITDA for the fiscal quarters ending December 31, 1998, March 31,
1999 and June 30, 1999 shall be deemed to be $5,250,000, $5,250,000 and
$5,250,000, respectively:
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<PAGE> 65
<TABLE>
<CAPTION>
-------------------------------------------------------
Test Period Ending Ratio
-------------------------------------------------------
<S> <C> <C>
9/30/99 4.00
-------------------------------------------------------
12/31/99 4.00
-------------------------------------------------------
3/31/00 3.70
-------------------------------------------------------
6/30/00 3.60
-------------------------------------------------------
9/30/00 3.40
-------------------------------------------------------
12/31/00 3.20
-------------------------------------------------------
3/31/01 2.80
-------------------------------------------------------
6/30/01 2.70
-------------------------------------------------------
9/30/01 2.60
-------------------------------------------------------
12/31/01 AND THEREAFTER 2.50
-------------------------------------------------------
</TABLE>
(b) SENIOR LEVERAGE RATIO FOLLOWING PLAN TERMINATION. (1) Permit, for
any period of four consecutive fiscal quarters ending during a period set forth
below that occurs from or after the date of the Plan Termination and the
application of the net proceeds thereof to repayment of the Loans in accordance
with Section 5.5(b), the ratio of (i) Consolidated Senior Indebtedness to (ii)
Consolidated EBITDA to be greater than the amount set forth opposite such period
below; PROVIDED that in calculating Consolidated EBITDA for the periods of four
fiscal quarters ending September 30, 1999, December 31, 1999 and March 31, 2000,
Consolidated EBITDA for the fiscal quarters ending December 31, 1998, March 31,
1999 and June 30, 1999 shall be deemed to be $5,250,000, $5,250,000 and
$5,250,000, respectively:
<TABLE>
<CAPTION>
-------------------------------------------------------
Test Period Ending Ratio
-------------------------------------------------------
<S> <C> <C>
9/30/99 4.00
-------------------------------------------------------
12/31/99 3.50
-------------------------------------------------------
3/31/00 3.10
-------------------------------------------------------
6/30/00 3.00
-------------------------------------------------------
9/30/00 2.70
-------------------------------------------------------
12/31/00 AND THEREAFTER 2.50
-------------------------------------------------------
</TABLE>
(c) INTEREST COVERAGE PRIOR TO PLAN TERMINATION. Permit, for any
period of four consecutive fiscal quarters ending during any period set forth
below, or if less than four consecutive fiscal quarters have elapsed since the
Closing Date, such period of one, two or three consecutive fiscal quarters
following the Closing Date ending during any period set forth below, that occurs
prior to the date of the Plan Termination and the application of the net
proceeds thereof to repayment of the Loans in accordance with Section 5.5(b),
the ratio of (i) Consolidated EBITDA for such period to (ii) Consolidated
Interest Expense for such period, to be less than the amount set forth opposite
such period below:
-60-
----------------------------------- ---------------------
Test Period Ending Ratio
----------------------------------- ---------------------
9/30/99 2.00
----------------------------------- ---------------------
12/30/99 2.00
----------------------------------- ---------------------
3/31/00 2.10
----------------------------------- ---------------------
6/30/00 2.25
----------------------------------- ---------------------
9/30/00 2.40
----------------------------------- ---------------------
12/31/00 2.60
----------------------------------- ---------------------
3/31/01 2.70
----------------------------------- ---------------------
6/30/01 2.80
----------------------------------- ---------------------
9/30/01 2.90
----------------------------------- ---------------------
12/31/01 3.00
----------------------------------- ---------------------
3/31/02 3.10
----------------------------------- ---------------------
6/30/02 3.20
----------------------------------- ---------------------
9/30/02 3.30
----------------------------------- ---------------------
12/31/02 3.40
----------------------------------- ---------------------
3/31/03 AND THEREAFTER 3.50
----------------------------------- ---------------------
(d) INTEREST COVERAGE FOLLOWING PLAN TERMINATION. Permit, for any
period of four consecutive fiscal quarters ending during any period set forth
below, or if less than four consecutive fiscal quarters have elapsed since the
Closing Date, such period of one, two or three consecutive fiscal quarters
following the Closing Date ending during any period set forth below, that occurs
from or after the date of the Plan Termination and the application of the net
proceeds thereof to repayment of the Loans in accordance with Section 5.5(b),
the ratio of (i) Consolidated EBITDA for such period to (ii) Consolidated
Interest Expense for such period, to be less than the amount set forth opposite
such period below:
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<PAGE> 66
----------------------------------- ---------------------
Test Period Ratio
----------------------------------- ---------------------
9/30/99 2.00
----------------------------------- ---------------------
12/31/99 2.00
----------------------------------- ---------------------
3/31/00 2.25
----------------------------------- ---------------------
6/30/99 2.40
----------------------------------- ---------------------
9/30/99 2.55
----------------------------------- ---------------------
12/31/00 2.75
----------------------------------- ---------------------
3/31/01 2.85
----------------------------------- ---------------------
6/30/01 3.00
----------------------------------- ---------------------
9/30/01 3.10
----------------------------------- ---------------------
12/31/01 3.20
----------------------------------- ---------------------
3/31/02 3.30
----------------------------------- ---------------------
6/30/02 3.40
----------------------------------- ---------------------
9/30/02 AND THEREAFTER 3.50
----------------------------------- ---------------------
(e) MINIMUM FIXED CHARGE COVERAGE PRIOR TO PLAN TERMINATION. Permit,
for any period of four consecutive fiscal quarters ending during any period set
forth below, or if less than four consecutive fiscal quarters have elapsed since
the Closing Date, such period of one, two or three consecutive fiscal quarters
following the Closing Date ending during any period set forth below, that occurs
prior to the date of the Plan Termination and the application of the net
proceeds thereof to repayment of the Loans in accordance with Section 5.5(b),
the ratio of (i) the sum of (A) Consolidated EBITDA and (B) Consolidated Lease
Expense to (ii) Consolidated Fixed Charges to be less than the ratio set forth
opposite such period below:
----------------------------------- ---------------------
Test Period Ratio
----------------------------------- ---------------------
9/30/99 1.00
----------------------------------- ---------------------
12/31/99 1.00
----------------------------------- ---------------------
3/31/00 1.10
----------------------------------- ---------------------
6/30/00 1.10
----------------------------------- ---------------------
9/30/00 1.20
----------------------------------- ---------------------
12/31/00 AND THEREAFTER 1.25
----------------------------------- ---------------------
(f) MINIMUM FIXED CHARGE COVERAGE FOLLOWING PLAN TERMINATION. Permit,
for any period of four consecutive fiscal quarters ending during any period set
forth below, or if less than four consecutive fiscal quarters have elapsed since
the Closing Date, such period of one, two or three consecutive fiscal quarters
following the Closing Date ending during any period set forth below, that occurs
from or after the date of the Plan Termination and the application of the net
proceeds thereof to repayment of the Loans in accordance with Section 5.5(b),
the ratio of (i) the sum of (A) Consolidated EBITDA and (B) Consolidated Lease
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<PAGE> 67
Expense to (ii) Consolidated Fixed Charges to be less than the ratio set forth
opposite such period below:
----------------------------------- ---------------------
Test Period Ratio
----------------------------------- ---------------------
9/30/99 1.00
----------------------------------- ---------------------
12/31/99 1.00
----------------------------------- ---------------------
3/31/00 1.10
----------------------------------- ---------------------
6/30/00 1.20
----------------------------------- ---------------------
9/30/00 AND THEREAFTER 1.25
----------------------------------- ---------------------
(g) MAINTENANCE OF CONSOLIDATED NET WORTH. Permit Consolidated Net
Worth at any time, to be less than the sum of (i) $46,000,000 LESS any net
losses from write down of assets recorded prior to June 30, 1999 relating to the
sale of the machine tool division and (ii) the sum of 75% of Adjusted
Consolidated Net Income for each fiscal quarter ended prior to such time,
commencing with the fiscal quarter ended September 30, 1999.
9.2 LIMITATION ON INDEBTEDNESS. Create, incur, assume or suffer to
exist any Indebtedness, except:
(a) Indebtedness of the Borrower under this Agreement;
(b) the Subordinated Debt;
(c) Indebtedness of the Borrower to any Subsidiary and of any
Subsidiary to the Borrower or any other Subsidiary; and
(d) Indebtedness outstanding on the date hereof and listed on Schedule
9.2.
9.3 LIMITATION ON LIENS. Create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings, PROVIDED that adequate reserves with
respect thereto are maintained on the books of the Borrower or its
Subsidiaries, as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a period of more than 60 days or which are being contested
in good faith by appropriate proceedings;
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<PAGE> 68
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insurance carriers under insurance or self-insurance
arrangements;
(d) deposits to secure the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the
Borrower or such Subsidiary;
(f) Liens in existence on the date hereof listed on Schedule 9.3,
securing Indebtedness permitted by Section 9.2(d), PROVIDED that no such
Lien is spread to cover any additional property after the Closing Date and
that the amount of Indebtedness secured thereby is not increased;
(g) unperfected Liens arising by operation of law under Article 2 of
the Uniform Commercial Code in favor of unpaid sellers or prepaying buyers
of goods;
(h) statutory Liens arising from leases or subleases which are entered
into in the ordinary course of business and which do not interfere in any
material respect with the ordinary conduct of the business of the Borrower
or its Subsidiaries; and
(i) Liens created pursuant to the Security Documents.
9.4 LIMITATION ON GUARANTEE OBLIGATIONS. Create, incur, assume or
suffer to exist any Guarantee Obligation except:
(a) Guarantee Obligations in existence on the date hereof and listed
on Schedule 9.4;
(b) guarantees made in the ordinary course of its business by the
Borrower of obligations of any of its Subsidiaries, which obligations are
otherwise permitted under this Agreement; and
(c) the Guarantees.
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<PAGE> 69
9.5 LIMITATION ON FUNDAMENTAL CHANGES. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in its present method of conducting
business, except:
(a) any Subsidiary of the Borrower may be merged or consolidated with
or into the Borrower (PROVIDED that the Borrower shall be the continuing or
surviving corporation) or with or into any one or more wholly owned
Subsidiaries of the Borrower (PROVIDED that a wholly owned Subsidiary or
Subsidiaries shall be the continuing or surviving corporation);
(b) any wholly owned Subsidiary may sell, lease, transfer or otherwise
dispose of any or all of its assets (upon voluntary liquidation or
otherwise) to the Borrower or any other wholly owned Subsidiary of the
Borrower; and
(c) the restructuring of the Borrower and its Subsidiaries as
described on Schedule 9.5 hereof (the "RESTRUCTURING").
9.6 LIMITATION ON SALE OF ASSETS. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests), whether
now owned or hereafter acquired, or, in the case of any Subsidiary, issue or
sell any shares of such Subsidiary's Capital Stock (other than directors'
qualifying shares of Foreign Subsidiaries) to any Person other than the Borrower
or any wholly owned Subsidiary, except:
(a) the sale or other disposition of obsolete or worn out property in
the ordinary course of business; PROVIDED, that the Net Proceeds of each
such transaction are applied to the prepayment of the Loans as provided in
Section 5.5(b);
(b) the sale of inventory in the ordinary course of business;
(c) the sale of the Borrower's machine tool division; PROVIDED, that
the Net Proceeds of such transaction are applied to the prepayment of the
Loans as provided in Section 5.5(b);
(d) the sale or discount without recourse of accounts receivable
Farising in the ordinary course of business in connection with the
compromise or collection thereof;
(e) as permitted by Section 9.5(b); and
(f) the sale of assets listed on Schedule 9.6 hereof; PROVIDED, that
the Net Proceeds of each such transaction are applied to the prepayment of
the Loans as provided in Section 5.5(b).
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<PAGE> 70
9.7 LIMITATION ON DIVIDENDS. Declare or pay any dividend (other than
dividends payable solely in common stock of the Borrower) on, or make any
payment on account of, or set apart assets for a sinking or other analogous fund
for, the purchase, redemption, defeasance, retirement or other acquisition of,
any shares of any class of Capital Stock of the Borrower or any warrants or
options to purchase any such Capital Stock or make any prepayment, repurchase,
redemption or defeasance in respect of the Three Cities Subordinated Debt or any
Special Subordinated Debt (other than with the proceeds of Replacement
Subordinated Debt and regularly scheduled payments in accordance with the terms
thereof), whether now or hereafter outstanding, or make any other distribution
in respect thereof, either directly or indirectly, whether in cash or property
or in obligations of the Borrower or any Subsidiary (such declarations,
payments, setting apart, purchases, redemptions, defeasances, retirements,
acquisitions and distributions being herein called "RESTRICTED PAYMENTS"),
except that the Borrower may make Restricted Payments as follows:
(a) dividends in respect of preferred stock of the Borrower in an
amount not to exceed $30,000 during any period of four consecutive fiscal
quarters;
(b) dividends in respect of common stock of the Borrower in an amount
not to exceed, during any period of four consecutive fiscal quarters, when
combined with the amount of Restricted Payments made during such period
pursuant to Section 9.7(a), the lesser of (i) $1,000,000 and (ii) 25% of
Consolidated Net Income during such period;
(c) prepayments, repurchases, redemptions or defeasances of any
Subordinated Debt made with the proceeds of Replacement Subordinated Debt;
(d) prepayments, repurchases, redemptions or defeasances of any
Special Subordinated Debt made no earlier than June 30, 2002 (unless paid
from proceeds described in Exhibit 1.2-B(1) of the Precision Acquisition
Agreement) in an amount not to exceed $3,000,000;
(e) purchases of the Capital Stock of the Borrower in connection with
the payment of the option price or taxes in connection with the exercising
of options or the grant of restricted shares under compensation plans of
the Borrower done in the ordinary course of the Borrower's business and
consistent with past practices of the Borrower;
(f) purchases of the Capital Stock of the Borrower in connection with
the termination of any pension plans to the extent permitted by Section
5.5(b).
9.8 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by way
of the acquisition of securities of a Person or otherwise) any expenditure in
respect of the purchase or other acquisition of fixed or capital assets
(excluding any such asset acquired in connection with normal replacement and
maintenance programs properly charged to current operations) except for
expenditures in the ordinary course of business not exceeding, in the aggregate
for the Borrower and its Subsidiaries (i) during the period of four consecutive
fiscal
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quarters of the Borrower ending on June 30, 2000, $9,000,000, (ii) during the
fiscal year of the Borrower ending December 31, 2000, the sum of (A) $5,000,000
and (B) the lesser of (x) $4,000,000 and (y) the excess (if any) of $9,000,000
over the actual capital expenditures of the Borrower and its Subsidiaries during
the period of four consecutive fiscal quarters of the Borrower ending on June
30, 2000 and (iii) during any fiscal year of the Borrower thereafter,
$5,000,000.
9.9 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. Make any advance,
loan, extension of credit or capital contribution to, or purchase any stock,
bonds, notes, debentures or other securities of or any assets constituting a
business unit of, or make any other investment in, any Person, except :
(a) extensions of trade credit in the ordinary course of business;
(b) investments in Cash Equivalents;
(c) investments by the Borrower in any Subsidiary and investments by
such Subsidiary in the Borrower and in other Subsidiaries of the Borrower;
(d) seller financing for assets sold by the Borrower or any of its
Subsidiaries in accordance with Section 9.6(f) hereof; PROVIDED, that any
promissory note relating thereto shall have been pledged to the
Administrative Agent for the benefit of the Lenders pursuant to the
Security Agreement and shall be delivered to the Administrative Agent;
(e) loans to employees for relocation expenses in an aggregate amount
at any time outstanding not to exceed $500,000; and
(f) payment of contingent payments if required under Section 2.5 of
the Stock Purchase Agreement, dated as of December 30, 1998 (the "GFG
AGREEMENT"), between Durlan Industries, Inc. and the Borrower in an
aggregate amount not to exceed $1,780,000, or in payment of the amount
required under Section 6.6(b) of the GFG Agreement if the Borrower elects
to make a 338(h)(10) election as permitted by Section 6.6(b) of the GFG
Agreement in an amount not to exceed $1,000,000.
9.10 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT
INSTRUMENTS. (a) Make any optional payment or prepayment on or redemption or
purchase of any Subordinated Debt, (b) amend, modify or change, or consent or
agree to any amendment, modification or change to any of the terms of any
Subordinated Debt Documents (other than any such amendment, modification or
change which would extend the maturity or reduce the amount of any payment of
principal thereof or which would reduce the rate or extend the date for payment
of interest thereon) or any Precision Acquisition Documents.
9.11 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Enter into any
transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) otherwise permitted
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under this Agreement, (b) in the ordinary course of the Borrower's or such
Subsidiary's business and (c) upon fair and reasonable terms no less favorable
to the Borrower or such Subsidiary, as the case may be, than it would obtain in
a comparable arm's length transaction with a Person which is not an Affiliate.
9.12 LIMITATION ON SALES AND LEASEBACKS. Enter into any arrangement
with any Person providing for the leasing by the Borrower or any Subsidiary of
real or personal property which has been or is to be sold or transferred by the
Borrower or such Subsidiary to such Person or to any other Person to whom funds
have been or are to be advanced by such Person on the security of such property
or rental obligations of the Borrower or such Subsidiary.
9.13 LIMITATION ON CHANGES IN FISCAL YEAR. Permit the fiscal year of
the Borrower to end on a day other than December 31.
9.14 LIMITATION ON NEGATIVE PLEDGE CLAUSES. Enter into with any Person
any agreement, other than (a) this Agreement and (b) any industrial revenue
bonds, purchase money mortgages or Financing Leases permitted by this Agreement
(in which cases, any prohibition or limitation shall only be effective against
the assets financed thereby), which prohibits or limits the ability of the
Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist
any Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired.
9.15 LIMITATION ON LINES OF BUSINESS. Enter into any business, either
directly or through any Subsidiary, except for those businesses in which the
Borrower and its Subsidiaries are engaged on the date of this Agreement.
9.16 GOVERNING DOCUMENTS. Amend its certificate of incorporation
(except to increase the number of authorized shares of common stock or to change
its name in connection with the Restructuring; PROVIDED, that notice of such
name change is given to the Administrative Agent in accordance with the Security
Agreement), partnership agreement or other Governing Documents, without the
prior written consent of the Required Lenders, which shall not be unreasonably
withheld or delayed.
9.17 LIMITATION ON SUBSIDIARY FORMATION. Form any Subsidiaries unless,
immediately upon the formation of such Subsidiary, all requirements of Section
8.10 shall have been satisfied.
SECTION 10 EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Loan when due
in accordance with the terms thereof or hereof; or the Borrower shall fail
to pay any interest on any Loan, or any other amount payable hereunder or
under the other Loan
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Documents, within five days after any such interest or other amount becomes
due in accordance with the terms thereof or hereof; or
(b) Any representation or warranty made or deemed made by the Borrower
or any other Loan Party herein or in any other Loan Document or which is
contained in any certificate, document or financial or other statement
furnished by it at any time under or in connection with this Agreement or
any such other Loan Document shall prove to have been incorrect in any
material respect on or as of the date made or deemed made; or
(c) The Borrower or any other Loan Party shall default in the
observance or performance of any agreement contained in Section 9 hereof,
Section 10 (b) or 10 (h) of the Mortgage or the Leasehold Mortgage, Section
5 (b) or 5 (g) of the Pledge Agreement or Section 5 (h), 5 (i) or 5 (p) of
the Security Agreement; or
(d) The Borrower or any other Loan Party shall default in the
observance or performance of any other agreement contained in this
Agreement or any other Loan Document (other than as provided in paragraphs
(a) through (c) of this Section), and such default shall continue
unremedied for a period of 30 days; or
(e) The Borrower or any of its Subsidiaries shall (i) default in any
payment of principal of or interest of any Indebtedness (other than the
Loans) or in the payment of any Guarantee Obligation, beyond the period of
grace (not to exceed 30 days), if any, provided in the instrument or
agreement under which such Indebtedness or Guarantee Obligation was
created, if the aggregate amount of the Indebtedness and/or Guarantee
Obligations in respect of which such default or defaults shall have
occurred is at least $1,000,000; or (ii) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or Guarantee Obligation or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event
shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or holders of such
Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation
(or a trustee or Administrative Agent on behalf of such holder or holders
or beneficiary or beneficiaries) to cause, with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity or
such Guarantee Obligation to become payable; or
(f) (i) The Borrower or any of its Subsidiaries shall commence any
case, proceeding or other action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any substantial
part of its assets,
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or the Borrower or any of its Subsidiaries shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against
the Borrower or any of its Subsidiaries any case, proceeding or other
action of a nature referred to in clause (i) above which (A) results in the
entry of an order for relief or any such adjudication or appointment or (B)
remains undismissed, undischarged or unbonded for a period of 60 days; or
(iii) there shall be commenced against the Borrower or any of its
Subsidiaries any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all
or any substantial part of its assets which results in the entry of an
order for any such relief which shall not have been vacated, discharged, or
stayed or bonded pending appeal within 60 days from the entry thereof; or
(iv) the Borrower or any of its Subsidiaries shall take any action in
furtherance of, or indicating its consent to, approval of, or acquiescence
in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v)
the Borrower or any of its Subsidiaries shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as
they become due; or
(g) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of the
Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall
occur with respect to, or proceedings shall commence to have a trustee
appointed, or a trustee shall be appointed, to administer or to terminate,
any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of
the Required Lenders, likely to result in the termination of such Plan for
purposes of Title IV of ERISA, (iv) any Single Employer Plan shall
terminate for purposes of Title IV of ERISA, (v) the Borrower or any
Commonly Controlled Entity shall, or in the reasonable opinion of the
Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (vi) any other event or condition shall occur or exist with respect
to a Plan; and in each case in clauses (i) through (vi) above, such event
or condition, together with all other such events or conditions, if any,
could reasonably be expected to have a Material Adverse Effect; or
(h) One or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a liability
(not paid or fully covered by insurance, subject to customary deductibles)
of $1,000,000 or more, and all such judgments or decrees shall not have
been vacated, discharged, stayed or bonded pending appeal within 60 days
from the entry thereof; or
(i) (i) Any of the Security Documents shall cease, for any reason, to
be in full force and effect, or the Borrower or any other Loan Party which
is a party to any of the Security Documents shall so assert or (ii) the
Lien created by any of the Security Documents shall cease to be enforceable
and of the same effect and priority purported to be created thereby; or
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(j) Any Guarantee shall cease, for any reason, to be in full force and
effect or any Guarantor shall so assert; or
(k) The subordination provisions relating to any Subordinated Debt
shall cease for any reason to be effective in respect of the Loans, or any
holder thereof shall so assert; or
(l) A Change of Control shall occur;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) of this Section with respect to the
Borrower, automatically the Commitments shall immediately terminate and the
Loans hereunder (with accrued interest thereon) and all other amounts owing
under this Agreement shall immediately become due and payable, and (B) if such
event is any other Event of Default, either or both of the following actions may
be taken: (i) with the consent of the Required Lenders, the Administrative Agent
may, or upon the request of the Required Lenders, the Administrative Agent
shall, by notice to the Borrower declare the Commitments to be terminated
forthwith, whereupon the Commitments shall immediately terminate; and (ii) with
the consent of the Required Lenders, the Administrative Agent may, or upon the
request of the Required Lenders, the Administrative Agent shall, by notice to
the Borrower, declare the Loans hereunder (with accrued interest thereon) and
all other amounts owing under this Agreement (including, without limitation, all
amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit have presented the documents required thereunder)
to be due and payable forthwith, whereupon the same shall immediately become due
and payable.
With respect to all Letters of Credit with respect to which presentment for
honor shall not have occurred at the time of an acceleration pursuant to the
preceding paragraph, the Borrower shall at such time deposit in a cash
collateral account opened by the Administrative Agent an amount equal to the
aggregate then undrawn and unexpired amount of such Letters of Credit. The
Borrower hereby grants to the Administrative Agent, for the benefit of the
Issuing Lender and the L/C Participants, a security interest in such cash
collateral to secure all obligations of the Borrower under this Agreement and
the other Loan Documents. Amounts held in such cash collateral account shall be
applied by the Administrative Agent to the payment of drafts drawn under such
Letters of Credit, and the unused portion thereof after all such Letters of
Credit shall have expired or been fully drawn upon, if any, shall be applied to
repay other obligations of the Borrower hereunder and under the Notes. After all
such Letters of Credit shall have expired or been fully drawn upon, all
Reimbursement Obligations shall have been satisfied and all other obligations of
the Borrower hereunder and under the Notes shall have been paid in full, the
balance, if any, in such cash collateral account shall be returned to the
Borrower. The Borrower shall execute and deliver to the Administrative Agent,
for the account of the Issuing Lender and the L/C Participants, such further
documents and instruments as the Administrative Agent may request to evidence
the creation and perfection of the within security interest in such cash
collateral account.
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SECTION 11 THE ADMINISTRATIVE AGENT
11.1 APPOINTMENT. Each Lender hereby irrevocably designates and
appoints the Administrative Agent as the Administrative Agent of such Lender
under this Agreement and the other Loan Documents, and each such Lender
irrevocably authorizes the Administrative Agent, in such capacity, to take such
action on its behalf under the provisions of this Agreement and the other Loan
Documents and to exercise such powers and perform such duties as are expressly
delegated to the Administrative Agent by the terms of this Agreement and the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the
Administrative Agent.
11.2 DELEGATION OF DUTIES. The Administrative Agent may execute any of
its duties under this Agreement and the other Loan Documents by or through
Administrative Agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Administrative
Agent shall not be responsible for the negligence or misconduct of any
Administrative Agents or attorneys in-fact selected by it with reasonable care.
11.3 EXCULPATORY PROVISIONS. Neither the Administrative Agent nor any
of its officers, directors, employees, Administrative Agents, attorneys-in-fact
or Affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Loan Document (except for its or such Person's own gross negligence or
willful misconduct) or (ii) responsible in any manner to any of the Lenders for
any recitals, statements, representations or warranties made by the Borrower or
any officer thereof contained in this Agreement or any other Loan Document or in
any certificate, report, statement or other document referred to or provided for
in, or received by the Administrative Agent under or in connection with, this
Agreement or any other Loan Document or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document or for any failure of the Borrower to perform its obligations hereunder
or thereunder. The Administrative Agent shall not be under any obligation to any
Lender to ascertain or to inquire as to the observance or performance of any of
the agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower.
11.4 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent shall
be entitled to rely, and shall be fully protected in relying, upon any Note,
writing, resolution, notice, consent, certificate, affidavit, letter, cablegram,
telegram, telecopy, telex or teletype message, statement, order or other
document or conversation believed by it to be genuine and correct and to have
been signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Borrower or any other Loan Party), independent accountants and other experts
selected by the
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Administrative Agent. The Administrative Agent may deem and treat the payee of
any Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Administrative Agent. The Administrative Agent shall be fully justified in
failing or refusing to take any action under this Agreement or any other Loan
Document unless it shall first receive such advice or concurrence of the
Required Lenders as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action. The
Administrative Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement and the other Loan Documents in
accordance with a request of the Required Lenders, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders and all future holders of the Loans.
11.5 NOTICE OF DEFAULT. The Administrative Agent shall not be deemed
to have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Administrative Agent has received notice from a Lender or
the Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default". In the event that
the Administrative Agent receives such a notice, the Administrative Agent shall
give notice thereof to the Lenders. The Administrative Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders; provided that unless and until the
Administrative Agent shall have received such directions, the Administrative
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable in the best interests of the Lenders.
11.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each
Lender expressly acknowledges that neither the Administrative Agent nor any of
its officers, directors, employees, Administrative Agents, attorneys-in-fact or
Affiliates has made any representations or warranties to it and that no act by
the Administrative Agent hereinafter taken, including any review of the affairs
of the Borrower or any other Loan Party, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Lender. Each
Lender represents to the Administrative Agent that it has, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Borrower and the other
Loan Parties and made its own decision to make its Loans hereunder and enter
into this Agreement. Each Lender also represents that it will, independently and
without reliance upon the Administrative Agent or any other Lender, and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Borrower. Except for notices, reports and other documents expressly required to
be furnished to the Lenders by the Administrative Agent hereunder or under the
other Loan Documents, the Administrative Agent shall not have any duty or
responsibility to provide any Lender with any
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credit or other information concerning the business, operations, property,
condition (financial or otherwise), prospects or creditworthiness of the
Borrower or any other Loan Party which may come into the possession of the
Administrative Agent or any of its officers, directors, employees,
Administrative Agents, attorneys-in-fact or Affiliates.
11.7 INDEMNIFICATION. The Lenders agree to indemnify the
Administrative Agent in its capacity as such (to the extent not reimbursed by
the Borrower and without limiting the obligation of the Borrower to do so),
ratably according to their respective Credit Exposure Percentages in effect on
the date on which indemnification is sought, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Loans)
be imposed on, incurred by or asserted against the Administrative Agent in any
way relating to or arising out of, the Commitments, this Agreement, any of the
other Loan Documents or any documents contemplated by or referred to herein or
therein or the transactions contemplated hereby or thereby or any action taken
or omitted by the Administrative Agent under or in connection with any of the
foregoing; provided that no Lender shall be liable for the payment of any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting solely from the
Administrative Agent's gross negligence or willful misconduct. The agreements in
this Section shall survive the payment of the Loans and all other amounts
payable hereunder.
11.8 ADMINISTRATIVE AGENT IN ITS INDIVIDUAL CAPACITY. The
Administrative Agent and its Affiliates may make loans to, accept deposits from
and generally engage in any kind of business with the Borrower and the other
Loan Parties as though the Administrative Agent were not the Administrative
Agent hereunder and under the other Loan Documents. With respect to the Loans
made by it, the Administrative Agent shall have the same rights and powers under
this Agreement and the other Loan Documents as any Lender and may exercise the
same as though it were not the Administrative Agent, and the terms "Lender" and
"Lenders" shall include the Administrative Agent in its individual capacity.
11.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may
resign as Administrative Agent upon 10 days' notice to the Lenders. If the
Administrative Agent shall resign as Administrative Agent under this Agreement
and the other Loan Documents, then the Required Lenders shall appoint from among
the Lenders a successor Administrative Agent for the Lenders, which successor
Administrative Agent shall be approved by the Borrower, whereupon such successor
Administrative Agent shall succeed to the rights, powers and duties of the
Administrative Agent, and the term "Administrative Agent" shall mean such
successor Administrative Agent effective upon such appointment and approval, and
the former Administrative Agent's rights, powers and duties as Administrative
Agent shall be terminated, without any other or further act or deed on the part
of such former Administrative Agent or any of the parties to this Agreement or
any holders of the Loans. After any retiring Administrative Agent's resignation
as Administrative Agent, the provisions of this Section 11 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Loan Documents.
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SECTION 12 MISCELLANEOUS
12.1 AMENDMENTS AND WAIVERS. Neither this Agreement nor any other Loan
Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section 12.1. The
Required Lenders may, or, with the written consent of the Required Lenders, the
Administrative Agent may, from time to time, (a) enter into with the Borrower
written amendments, supplements or modifications hereto and to the other Loan
Documents for the purpose of adding any provisions to this Agreement or the
other Loan Documents or changing in any manner the rights of the Lenders or of
the Borrower hereunder or thereunder or (b) waive, on such terms and conditions
as the Required Lenders or the Administrative Agent, as the case may be, may
specify in such instrument, any of the requirements of this Agreement or the
other Loan Documents or any Default or Event of Default and its consequences;
PROVIDED, HOWEVER, that no such waiver and no such amendment, supplement or
modification shall (i) reduce the amount or extend the scheduled date of
maturity of any Loan or of any installment thereof, or reduce the stated rate of
any interest or fee payable hereunder or extend the scheduled date of any
payment thereof or increase the amount or extend the expiration date of any
Lender's Commitments, in each case without the consent of each Lender affected
thereby, or (ii) amend, modify or waive any provision of this Section 12.1 or
reduce the percentage specified in the definition of Required Lenders, or
consent to the assignment or transfer by the Borrower of any of its rights and
obligations under this Agreement and the other Loan Documents or release all or
substantially all of the Collateral or release all or substantially all of the
Guarantors from their obligations under the Guarantees, in each case without the
written consent of each of the Lenders directly affected thereby, or (iii)
amend, modify or waive any provision of Section 11 without the written consent
of the then Agent. Any such waiver and any such amendment, supplement or
modification shall apply equally to each of the Lenders and shall be binding
upon the Borrower, the Lenders, the Administrative Agent and all future holders
of the Loans. In the case of any waiver, the Borrower, the Lenders and the
Administrative Agent shall be restored to their former positions and rights
hereunder and under the other Loan Documents, and any Default or Event of
Default waived shall be deemed to be cured and not continuing; but no such
waiver shall extend to any subsequent or other Default or Event of Default or
impair any right consequent thereon. Notwithstanding anything to the contrary
contained in this Section 12.1, the Restructuring and all amendments,
modifications and releases necessary to give effect thereto shall be permitted
and shall not require the consent of the Lenders.
12.2 NOTICES. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
facsimile transmission) and, unless otherwise expressly provided herein, shall
be deemed to have been duly given or made (a) in the case of delivery by hand,
when delivered, (b) in the case of delivery by mail, three days after being
deposited in the mails, postage prepaid, or (c) in the case of delivery by
facsimile transmission, when sent and receipt has been electronically confirmed,
addressed as follows in the case of the Borrower and the Administrative Agent,
and as set forth in Schedule I in the case of the other parties hereto, or to
such other address as may be hereafter notified by the respective parties
hereto:
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The Borrower: The Monarch Machine Tool Company
2600 Kettering Tower
Dayton, Ohio 45423
Attention: Richard E. Clemens
Fax: (937) 910-9305
Telephone: (937) 910-9300
The Administrative Agent: ING (U.S.) Capital LLC
55 East 52nd Street
New York, New York 10055
Attention: Robert L. Fellows
Fax: (212) 309-8900
Telephone: (212) 409-1727
PROVIDED that any notice, request or demand to or upon the Administrative Agent
or the Lenders pursuant to Section 2.5, 3.3, 3.5, 5.2, 5.4 or 5.8(b) shall not
be effective until received.
12.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Administrative Agent or any Lender, any
right, remedy, power or privilege hereunder or under the other Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.
12.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made hereunder, in the other Loan Documents and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the execution and delivery of this Agreement and the making of the
Loans hereunder.
12.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees (a) to pay or
reimburse the Administrative Agent for all its out-of-pocket costs and expenses
incurred in connection with the development, preparation and execution of, and
any amendment, supplement or modification to, this Agreement and the other Loan
Documents and any other documents prepared in connection herewith or therewith,
and the consummation and administration of the transactions contemplated hereby
and thereby, including, without limitation, the reasonable fees and
disbursements of counsel to the Administrative Agent, (b) to pay or reimburse
each Lender and the Administrative Agent for all its costs and expenses incurred
in connection with the enforcement or preservation of any rights under this
Agreement, the other Loan Documents and any such other documents, including,
without limitation, the fees and disbursements of counsel to each Lender and of
counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Lender
and the Administrative Agent harmless from, any and all recording and filing
fees and any and all liabilities with respect to, or resulting from any delay in
paying, stamp, excise and other taxes, if any, which
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<PAGE> 81
may be payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the other Loan Documents and
any such other documents, and (d) to pay, indemnify, and hold each Lender and
the Administrative Agent harmless from and against any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever with respect
to the execution, delivery, enforcement, performance and administration of this
Agreement, the other Loan Documents, the Precision Acquisition Documents, the
Subordinated Debt Documents, the Precision Acquisition or the use of the
proceeds of the Loans in connection with the Precision Acquisition and any such
other documents, including, without limitation, any of the foregoing relating to
the violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the Borrower, any of its Subsidiaries or any of
the Properties (all the foregoing in this clause (d), collectively, the
"INDEMNIFIED LIABILITIES"), provided, that the Borrower shall have no obligation
hereunder to the Administrative Agent or any Lender with respect to indemnified
liabilities arising from (i) the gross negligence or willful misconduct of the
Administrative Agent or any such Lender or (ii) legal proceedings commenced
against the Administrative Agent or any such Lender by any security holder or
creditor thereof arising out of and based upon rights afforded any such security
holder or creditor solely in its capacity as such. The agreements in this
Section shall survive repayment of the Loans and all other amounts payable
hereunder.
12.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS.
(a) This Agreement shall be binding upon and inure to the benefit of
the Borrower, the Lenders, the Administrative Agent and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of each Lender.
(b) Any Lender may, in the ordinary course of its commercial banking
business, commercial lending or investment business and in accordance with
applicable law, at any time sell to one or more banks or other entities
("PARTICIPANTS") participating interests in any Loan owing to such Lender, any
Commitment of such Lender or any other interest of such Lender hereunder and
under the other Loan Documents. In the event of any such sale by a Lender of a
participating interest to a Participant, such Lender's obligations under this
Agreement to the other parties to this Agreement shall remain unchanged, such
Lender shall remain solely responsible for the performance thereof, such Lender
shall remain the holder of any such Loan for all purposes under this Agreement
and the other Loan Documents, and the Borrower and the Administrative Agent
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement and the other Loan
Documents. The Borrower agrees that if amounts outstanding under this Agreement
are due or unpaid, or shall have been declared or shall have become due and
payable upon the occurrence of an Event of Default, each Participant shall, to
the maximum extent permitted by applicable law, be deemed to have the right of
setoff in respect of its participating interest in amounts owing under this
Agreement to the same extent as if the
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<PAGE> 82
amount of its participating interest were owing directly to it as a Lender under
this Agreement, PROVIDED that, in purchasing such participating interest, such
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 12.7(a) as fully as if it were a Lender
hereunder. The Borrower also agrees that each Participant shall be entitled to
the benefits of Sections 5.10, 5.11, and 5.12 with respect to its participation
in the Commitments and the Loans outstanding from time to time as if it was a
Lender; PROVIDED that, in the case of Section 5.11, such Participant shall have
complied with the requirements of said Section and PROVIDED, FURTHER, that no
Participant shall be entitled to receive any greater amount pursuant to any such
Section than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such transferor Lender
to such Participant had no such transfer occurred.
(c) Any Lender may, in the ordinary course of its commercial banking
business, commercial lending or investment business and in accordance with
applicable law, at any time and from time to time assign to any Lender or any
affiliate thereof or, with the consent of the Administrative Agent and the
Borrower (which in each case shall not be unreasonably withheld), to an
additional bank or financial institution ("an ASSIGNEE") all or any part of its
rights and obligations under this Agreement and the other Loan Documents
pursuant to an Assignment and Acceptance, substantially in the form of Exhibit
L, with appropriate completions (an "ASSIGNMENT AND ACCEPTANCE"), executed by
such Assignee, such assigning Lender (and, in the case of an Assignee that is
not then a Lender or an affiliate thereof, by the Administrative Agent and the
Borrower) and delivered to the Administrative Agent for its acceptance and
recording in the Register; PROVIDED, that no such assignment shall be permitted
if the aggregate amount of the Loans, L/C Obligations and Available RC
Commitments assigned shall be less than $5,000,000, unless otherwise agreed by
the Administrative Agent. Upon such execution, delivery, acceptance and
recording, from and after the effective date determined pursuant to such
Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto
and, to the extent provided in such Assignment and Acceptance, have the rights
and obligations of a Lender hereunder with Commitments as set forth therein, and
(y) the assigning Lender thereunder shall, to the extent provided in such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of an assigning Lender's rights and obligations under this Agreement,
such assigning Lender shall cease to be a party hereto). Notwithstanding any
provision of this paragraph (c) and paragraph (e) of this Section, the consent
of the Borrower shall not be required, and, unless requested by the Assignee
and/or the assigning Lender, new Notes shall not be required to be executed and
delivered by the Borrower, for any assignment which occurs at any time when any
of the events described in Section 10(f) shall have occurred and be continuing.
(d) The Administrative Agent, on behalf of the Borrower, shall
maintain at the address of the Administrative Agent referred to in Section 12.2
a copy of each Assignment and Acceptance delivered to it and a register (the
"REGISTER") for the recordation of the names and addresses of the Lenders and
the Commitments of, and principal amounts of the Loans owing to, each Lender
from time to time. The entries in the Register shall be conclusive, in the
absence of manifest error, and the Borrower, the Administrative Agent and the
Lenders
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<PAGE> 83
may (and, in the case of any Loan or other obligation hereunder not evidenced by
a Note, shall) treat each Person whose name is recorded in the Register as the
owner of a Loan or other obligation hereunder as the owner thereof for all
purposes of this Agreement and the other Loan Documents, notwithstanding any
notice to the contrary. Any assignment of any Loan or other obligation hereunder
not evidenced by a Note shall be effective only upon appropriate entries with
respect thereto being made in the Register. The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee (and, in the case of an Assignee that is not
then a Lender or an affiliate thereof, by the Borrower and the Administrative
Agent) together with payment to the Administrative Agent of a registration and
processing fee of $3,500, the Administrative Agent shall (i) promptly accept
such Assignment and Acceptance and (ii) on the effective date determined
pursuant thereto record the information contained therein in the Register and
give notice of such acceptance and recordation to the Lenders and the Borrower.
(f) The Borrower authorizes each Lender to disclose to any Participant
or Assignee (each, a "TRANSFEREE") and any prospective Transferee any and all
financial information in such Lender's possession concerning the Borrower and
its Affiliates which has been delivered to such Lender by or on behalf of the
Borrower pursuant to this Agreement or which has been delivered to such Lender
by or on behalf of the Borrower in connection with such Lender's credit
evaluation of the Borrower and its Affiliates prior to becoming a party to this
Agreement.
(g) For avoidance of doubt, the parties to this Agreement acknowledge
that the provisions of this Section concerning assignments of Loans and Notes
relate only to absolute assignments and that such provisions do not prohibit
assignments creating security interests, including, without limitation, any
pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank
in accordance with applicable law.
12.7 ADJUSTMENTS; SET-OFF.
(a) If any Lender (a "BENEFITED LENDER") shall at any time receive any
payment of all or part of its Loans, or interest thereon, or receive any
collateral in respect thereof (whether voluntarily or involuntarily, by set-off,
pursuant to events or proceedings of the nature referred to in Section 10(f), or
otherwise), in a greater proportion than any such payment to or collateral
received by any other Lender, if any, in respect of such other Lender's Loans,
or interest thereon, such benefited Lender shall purchase for cash from the
other Lenders a participating interest in such portion of each such other
Lender's Loan, or shall provide such other Lenders with the benefits of any such
collateral, or the proceeds thereof, as shall be necessary to cause such
benefited Lender to share the excess payment or benefits of such collateral or
proceeds ratably with each of the Lenders; provided, however, that if all or any
portion of such excess payment or benefits is thereafter recovered from such
benefited
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Lender, such purchase shall be rescinded, and the purchase price and benefits
returned, to the extent of such recovery, but without interest. The Borrower
agrees that each Lender so purchasing a portion of another Lender's Loan may
exercise all rights of payment (including, without limitation, rights of
set-off) with respect to such portion as fully as if such Lender were the direct
holder of such portion.
(b) In addition to any rights and remedies of the Lenders provided by
law, each Lender shall have the right, without prior notice to the Borrower, any
such notice being expressly waived by the Borrower to the extent permitted by
applicable law, upon any amount becoming due and payable by the Borrower
hereunder (whether at the stated maturity, by acceleration or otherwise) to
set-off and appropriate and apply against such amount any and all deposits
(general or special, time or demand, provisional or final), in any currency, and
any other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender or any branch or agency thereof to or for the
credit or the account of the Borrower. Each Lender agrees promptly to notify the
Borrower and the Administrative Agent after any such set-off and application
made by such Lender, PROVIDED, that the failure to give such notice shall not
affect the validity of such set-off and application.
12.8 COUNTERPARTS. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by facsimile transmission of signature pages hereto), and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Borrower and the Administrative Agent.
12.9 SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
12.10 INTEGRATION. This Agreement and the other Loan Documents
represent the agreement of the Borrower, the Administrative Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to subject matter hereof not expressly set forth or referred to
herein or in the other Loan Documents.
12.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
12.12 SUBMISSION TO JURISDICTION; WAIVERS. The Borrower hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which it
is a party, or for
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<PAGE> 85
recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the courts of the State of New York, the
courts of the United States of America for the Southern District of New York,
and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the venue
of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to the Borrower at its
address set forth in Section 12.2 or at such other address of which the
Administrative Agent shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages.
12.13 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Administrative Agent nor any Lender has any fiduciary
relationship with or duty to the Borrower arising out of or in connection with
this Agreement or any of the other Loan Documents, and the relationship between
the Borrower and the other Loan Parties, on one hand, and Administrative Agent
and Lenders, on the other hand, in connection herewith or therewith is solely
that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among the
Lenders or among the Borrower and the Lenders.
12.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT
AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
12.15 CONFIDENTIALITY. Each Lender agrees to keep confidential any
written or oral information (a) provided to it by or on behalf of the Borrower
or any of its Subsidiaries
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pursuant to or in connection with this Agreement or (b) obtained by such Lender
based on a review of the books and records of the Borrower or any of its
Subsidiaries; PROVIDED, that nothing herein shall prevent any Lender from
disclosing any such information (i) to the Administrative Agent or any other
Lender, (ii) to any Transferee which agrees to comply with the provisions of
this Section 12.15, (iii) to its employees, directors, agents, attorneys,
accountants and other professional advisors, (iv) upon the request or demand of
any examiner or other Governmental Authority having jurisdiction over such
Lender, (v) in response to any order of any court or other Governmental
Authority or as may otherwise be required pursuant to any Requirement of Law,
(vi) which has been publicly disclosed other than in breach of this Agreement,
or (vii) in connection with the exercise of any remedy hereunder.
[Signature Pages Follow]
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<PAGE> 87
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
THE MONARCH MACHINE TOOL
COMPANY
By:________________________________
Title:
ING (U.S.) CAPITAL LLC,
as Administrative Agent and as a Lender
By:________________________________
Title:
[Credit Agreement - Signature Page]
<PAGE> 88
SCHEDULE 1.1
<TABLE>
<CAPTION>
LENDERS, COMMITMENTS AND APPLICABLE LENDING OFFICES
-----------------------------------------------------------------------------------------------
Tranche A Tranche B
Lender and Lending Offices Term Loan Term Loan Revolving Credit
Commitment Commitment Commitment
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ING (U.S.) CAPITAL LLC
Applicable Lending Offices:
Base Rate Loans and Eurodollar
Loans:
55 East 52nd Street
New York, New York 10055
Attention: Lisa H. Cummings
Telephone: 212-409-1676
Telecopy: 212-486-6341
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Total:
$50,000,000 $20,000,000 $30,000,000
=========== =========== ===========
-----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 89
Schedule 2.2
SCHEDULED TRANCHE A TERM LOAN REPAYMENTS
The Tranche A Term Loans shall be repaid in 28 quarterly installments of
principal payable on the last day of each March, June, September and December,
commencing September 1999, each in the aggregate amount set forth below opposite
such installment (as they may be reduced in accordance with the terms of this
Agreement):
INSTALLMENT NO. AMOUNT
--------------- ------
1-4 $1,000,000
5-8 $1,250,000
9-12 $1,750,000
13-16 $1,750,000
17-20 $2,000,000
21-24 $2,250,000
25-28 $2,500,000
<PAGE> 90
Schedule 2.4
SCHEDULED TRANCHE B TERM LOAN REPAYMENTS
The Tranche B Term Loans shall be repaid in 30 quarterly installments of
principal payable on the last day of each March, June, September and December,
commencing September 1999, each in the aggregate amount set forth below opposite
such installment (as they may be reduced in accordance with the terms of this
Agreement):
INSTALLMENT NO. AMOUNT
--------------- ------
1-28 $50,000
29-30 $9,300,000
<PAGE> 1
Exhibit 4.2
AGREEMENT
This is an agreement dated June 30, 1999 between The Monarch Machine
Tool Company (the "Buyer"), an Ohio corporation, and the persons (the "Selling
Stockholders") listed on Exhibit A to the Stock Purchase Agreement (the "Stock
Purchase Agreement"), dated May 13, 1999, among the Buyer and those persons.
1. PURCHASE OF NOTE AND WARRANTS. The Selling Stockholders agree to purchase
from Buyer, and Buyer agrees to sell to the Selling Stockholders, at the Closing
(as defined below) (i) a promissory note in the principal amount of $15,000,000
(the "Note"), in the form attached to this Agreement as Exhibit A and (ii)
Warrants, in the form attached to this Agreement as Exhibit B, as follows:
(a) At the Closing, warrants to purchase 100,000 shares of the
Buyer's common stock, no par value ("Buyer Common Stock"), at a purchase price
of $7.75 per share, subject to adjustment as provided in the Warrants;
(b) on June 30, 2000, unless the principal and interest on the
Note has been paid in full by that date, warrants to purchase 150,000 shares of
Buyer Common Stock at a purchase price equal to the lower of (i) $7.75 per share
and (ii) the market price of the Buyer Common Stock at June 30, 2000, subject to
adjustment as provided in the Warrants;
(c) on each of October 2, 2000, and January 2, April 2, July 2 and
October 1, 2001 (or such of these dates as fall before the principal and
interest of the Note has been paid in full) warrants to purchase 50,000 shares
of Buyer Common Stock at a purchase price equal to the lower of (x) $7.75 per
share and (y) the market price of the Buyer Common Stock at the date of
purchase, subject to adjustment as provided in the Warrants.
(d) For the purpose of determining the exercise price of the
warrants, the "market price" of the Buyer Common Stock will be the arithmetic
mean of the last reported sale prices of Buyer Common Stock reported on the New
York Stock Exchange (or in such other market as is the principal market for
Buyer Common Stock) on each of the five trading days before the date as of which
the market price is determined.
(e) If when the Buyer is required by subparagraph (c) to issue
Warrants, the rules of the New York Stock Exchange require that the Company's
stockholders approve the Company's issuance of Common Stock on exercise of those
Warrants, but the Company's stockholders have not approved that issuance of
Common Stock, on the day when the Company was required to issue those Warrants,
the Company will, instead of issuing the Warrants, issue to the Selling
Stockholders a number of stock appreciation rights ("SARs") equal to the number
of Warrants the Company was required to issue on that day, which SARs will have
the following principal terms:
<PAGE> 2
(i) The exercise price of the SARs will be the same as the exercise
price of the warrants would have been, as provided in subparagraph (c above.
(ii) The expiration date of the SARs will be June 30, 2009.
(iii) The SARs will include provisions which are substantially
identical with Article III of the Warrants regarding adjustment to the exercise
price and to the number of shares of Common Stock or other securities or assets
which the holders will receive upon exercise.
(iv) When an SAR is exercised (x) the holder will not have to pay
the exercise price or any other sum to the Company and (y) the holder will
receive cash per share as to which the SAR is exercised equal to (A) the fair
value on the day the SAR is exercised of Common Stock or other securities or
assets as to which the SAR is exercised (which, as to Common Stock, will be the
average of the last sale price of the Common Stock reported on the New York
Stock Exchange composite tape (or in such other market as is the principal
market for the Common Stock) on each of the ten trading days next preceding the
day for which the fair value is being determined, and as to any other securities
or assets will be their fair value as determined in good faith by the Board of
Directors of the Company), minus (B) the per share exercise price of the SAR.
The SARs will also have other customary terms which will be nearly as possible
the same as the comparable terms of the Warrants.
2. PURCHASE PRICE. The price to be paid by the Selling Stockholders for
the Note and the Warrants (or SARs) described in Section 2 will be $15,000,000,
which will be paid by wire transfer of immediately available funds on the date
of the Closing to an account with a bank in the United States of America which
Buyer specifies at least 48 hours before the Closing to the Three Cities
Research, Inc., as Stockholders Representative for the Selling Stockholders.
3. BOARD OF DIRECTORS. The Stockholders' Representative will have the
right, which the Stockholders Representative may exercise at any time beginning
90 days after the day of the Closing, to nominate two individuals to serve on
the Board of Directors of Buyer, and Buyer agrees to take all actions in its
power to cause the election of the individuals designated by the Stockholders
Representative to its Board of Directors as promptly as practicable. Buyer
further agrees to take all actions in its power to maintain two individuals
nominated by the Stockholders Representative on its Board of Directors until the
Note is repaid in full, except that at any time when, because of prepayments or
transfers of portions of the Note, the principal amount of the Note beneficially
owned by Selling Stockholders is less than 50% of the original principal amount
of the Note, the Buyer need only take all actions in its power to maintain one
individual nominated by the Stockholders Representative on its Board of
Directors. The Stockholders Representative will use its best efforts to cause
the individuals who it nominates to resign from the Board of Directors promptly
after the Note is paid in full, and if at the time the principal amount of the
Note beneficially owned by Selling Stockholders ceases to be at least 50% of the
original principal amount of the Note, there are two individuals nominated by
the Stockholders Representative serving on the Board of Directors, at the
Company's request the Stockholders Representative will use its best efforts to
cause one of those individuals to resign from the Board of Directors.
2
<PAGE> 3
4. CLOSING. The closing (the " Closing") of the purchase of the Notes
and the Warrants to be issued at the Closing will take place at the same place
and time as the closing under the Stock Purchase Agreement. At the Closing, (i)
the Buyer will deliver to the Stockholders Representative, on behalf of the
Selling Stockholders, the Note and the Warrants described in subparagraph 1(a),
registered in the name of the Stockholders Representative, as Stockholders
Representative, and (ii) the Stockholders Representative will deliver to the
Buyer evidence of the wire transfer described in Paragraph 2.
5. CONDITIONS TO OBLIGATIONS OF SELLING STOCKHOLDERS. The obligations
of the Selling Stockholders at the Closing are subject to (i) satisfaction of
all the conditions set forth in Section 5.2 of the Stock Purchase Agreement and
(ii) Buyer's purchasing all the outstanding stock of Precision Industrial
Corporation from the Selling Stockholders at the Closing under the Stock
Purchase Agreement.
6. CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of the Buyer at
the Closing are subject to (i) satisfaction of all the conditions set forth in
Section 5.1 of the Stock Purchase Agreement and (ii) Buyer's purchasing all the
outstanding stock of Precision Industrial Corporation from the Selling
Stockholders at the Closing under the Stock Purchase Agreement.
7. SECURITIES LAW MATTERS. Each of the Selling Stockholders
acknowledges that the Note and the Warrants, and the shares of Buyer Common
Stock issuable upon the Warrants, may not have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be sold
or transferred other than in a transaction which is registered under the
Securities Act or is exempt from the registration requirements of the Securities
Act.
8. AUTHORITY OF STOCKHOLDERS REPRESENTATIVE. The Stockholders
Representative represents and warrants to the Buyer that the Stockholders
Representative is duly authorized to execute and delivery this Agreement on
behalf of each of the Selling Stockholders.
IN WITNESS WHEREOF, the Buyer and the Stockholders Representative, on
behalf of the Selling Stockholders, have executed this Agreement, intending to
be legally bound by it, on the day shown on the first page of this Agreement.
THE MONARCH MACHINE TOOL
COMPANY
By:________________________________
Title: President
THREE CITIES RESEARCH, INC., as
Stockholders Representative
By:________________________________
Title:
3
<PAGE> 1
Exhibit 4.2.1
THE MONARCH MACHINE TOOL COMPANY
12% JUNIOR SUBORDINATED NOTE
$15,000,000.00 June 30, 1999
The Monarch Machine Tool Company (the "Company"), an Ohio
corporation, promises to pay to Three Cities Research, Inc., as Sellers
Representative under a Stock Purchase Agreement (the "Agreement") dated May 13,
1999 between the Company and the stockholders of Precision Industrial
Corporation (the "Holder"), at the times and in the respective amounts described
below, the total principal sum of $15,000,000.00. The Company also promises to
pay interest on the unpaid principal amount of this Note at the rate which is
12% per annum until June 30, 2000 and increases by 50 basis points on July 1,
2000 and each October 1, January 1, April 1 and July 1 after that until October
1, 2002, on and after which the rate of interest payable under this Note will be
17% per annum. Interest will be based on a year of 365/366 days. To the extent
any interest payment (other than a payment under Paragraph 4 below) is at a rate
in excess of 14% per annum, the amount above 14% per annum will be paid with a
note containing the same terms as this Note, dated the date of the interest
payment, in a principal amount equal to the amount by which the interest payment
exceeds what it would have been at 14% per annum.
1. The entire unpaid principal balance of the sum evidenced by
this Note will be due and payable on December 31, 2007. (the "Maturity Date").
If, however, at any time or times prior to the Maturity Date, the Company
completes a public offering for cash of equity securities or of debt securities
which are subordinated to some or all of the Company's Senior Indebtedness
described in Paragraph 8, other than upon exercise of options granted to
directors of the Company or officers of the Company or its subsidiaries under a
stock option plan for directors or employees, simultaneously with the sale of
the securities which are the subject of that public offering, the Company will
make a prepayment of the principal sum evidenced by this note which is equal to
at least 80% of the proceeds of the public offering, net of underwriting
discounts and commissions, or which is equal to the entire unpaid balance of
that principal sum if that is less, and the Company will pay all accrued but
unpaid interest on the principal sum which is being prepaid.
2. Interest will be payable on March 31, June 30, September 30
and December 31 of each year (each an "Interest Payment Date"), with the first
interest payment to be made on the first of those dates after interest begins to
accrue.
3. Each payment of principal or interest will be made to the
Holder by certified or bank cashier's check or wire transfer, at such address or
to such account as the Holder specifies to the Company in writing at least three
business days before the payment is to be made.
4. Any payment of principal or interest which is not made when
it is due will bear interest from the date it is due until it is paid at the
rate which is 200 basis points higher than the interest rate in effect on the
day the payment is due, or such lower rate as is the maximum rate permitted by
law.
5. The Company may at any time prepay all or any portion of
the outstanding balance of the principal sum evidenced by this Note (provided
that each prepayment must be at least $100,000, or such lesser amount as is the
entire outstanding balance of principal immediately before the
<PAGE> 2
prepayment). Each prepayment will be applied against the payments of principal
required by this Note in the reverse of the order in which they are to be made.
Each prepayment of principal will be accompanied by all accrued but unpaid
interest on the principal sum being prepaid.
6. Each of the following events will constitute an Event of
Default:
(a) The Company fails to make any payment of principal on
or before the day on which it is due; or
(b) The Company fails to make any payment of interest
within ten days after the day on which is it due; or
(c) The Company defaults in any of its obligations under
this Note other than obligations described in subparagraphs (a) and (b) and
fails to cure that default within 30 days after a written demand from the Holder
that the Company do so; or
(d) The Company or a significant subsidiary (as that term
is defined in Securities and Exchange Commission Regulation S-X) commences a
proceeding seeking relief as a debtor under the Bankruptcy Code or any state or
foreign insolvency law; or
(e) An order is entered in a proceeding under the
Bankruptcy Code or any state or foreign insolvency law declaring the Company or
a significant subsidiary to be insolvent or appointing a receiver or similar
official for substantially all the Company's or a significant subsidiary's
properties, and that order is not dismissed within 90 days; or
(f) Because of an event of default with regard to Senior
Indebtedness, a holder of Senior Indebtedness accelerates the time when the
principal of the Senior Indebtedness is due and payable.
(g) Because of events of default with regard to
indebtedness which is not Senior Indebtedness, holders of indebtedness
aggregating $500,000 which is not Senior Indebtedness accelerate the time when
that indebtedness is due and payable.
7. Upon the occurrence of an Event of Default, the Holder may,
by a notice to the Company given while the Event of Default is continuing,
declare the entire unpaid balance of the principal sum evidenced by this Note
and the accrued but unpaid interest to be due and payable, in which event that
principal balance and accrued but unpaid interest will be immediately due and
payable, except that if the Event of Default is of the type described in
subparagraph (d) or (e), the entire unpaid balance of the principal sum
evidenced by this Note and all accrued but unpaid interest will be immediately
due and payable when the Event of Default occurs, without requiring any notice
or other action by the Holder.
8. (a) The Company's obligations to make payments of principal
and interest under this Note are subordinate and subject in right of payment to
the prior payment in full of all Senior Indebtedness. "Senior Indebtedness"
means all principal, premium, interest, and other sums due with regard to all
indebtedness for money borrowed (including the obligation to reimburse for
amounts drawn against letters of credit) from banks, insurance companies or
other financial institutions which the Company states, in the instrument
governing the indebtedness or a document delivered to the holder of the
indebtedness, to be Senior Indebtedness with regard to this Note, except that no
indebtedness (and no obligations with regard to the indebtedness) will be Senior
Indebtedness to the extent that incurrence of the indebtedness would cause the
entire Senior Indebtedness at the time the indebtedness is incurred to exceed
$100,000,000, plus, as to Senior Indebtedness which when it was incurred did not
cause the entire
2
<PAGE> 3
Senior Indebtedness to exceed that amount, additional advances totaling not more
than 10% of the maximum committed amount of that Senior Indebtedness made by the
lender to protect the Senior Indebtedness already held by the lender. In
furtherance and not in limitation of the foregoing, but subject to the foregoing
limitation on amount, "Senior Indebtedness" includes all principal, interest and
other obligations of the Company under a Credit Agreement dated as of June 30,
1999 among the Company, the lenders party thereto, and ING (U.S.) Capital LLC as
administrative agent, as amended, supplemented and otherwise modified from time
to time.
(b) No payment of principal or interest on this Note will be
made (i) unless all amounts then due for principal, premium, if any, and
interest on Senior Indebtedness have been paid in cash or provided for, or (ii)
during the period (a "Blockage Period") between the time the Company is notified
by a holder of Senior Indebtedness that an event of default with respect to that
Senior Indebtedness exists which permits the holder of that Senior Indebtedness
to accelerate its maturity (a "Blockage Event") and the earlier of (x) the time
that event of default is cured or waived or ceases to exist, and (y) 180 days
after the holder of that Senior Indebtedness became entitled to accelerate its
maturity, unless the holder of that Senior Indebtedness has accelerated its
maturity.
(c) During a Blockage Period, the Holder of this Note shall
not ask for, sue for, take, demand or set off or in any other manner, direct or
indirect, attempt to enforce any right or collect any payment or distribution on
account of this Note, nor present this Note for payment.
(d) Upon any distribution of assets of the Company as a result
of any dissolution, winding up, liquidation or reorganization (whether in a
bankruptcy or insolvency proceeding or otherwise) (an "Insolvency Event"), (i)
all Senior Indebtedness must be paid in full in cash, or provision made for its
payment, before any payment is made on account of principal or interest on this
Note, (ii) any payment or distribution of assets of the Company to which the
Holder would be entitled except for this Paragraph must be paid or delivered by
the Company or by any trustee in bankruptcy, receiver, assignee for the benefit
of creditors or other liquidating agent, directly to the holders of the Senior
Indebtedness, pro rata to the amounts of Senior Indebtedness held by each of
them (or in accordance with any subordination agreements or other agreements
among them), to the extent necessary to pay all Senior Indebtedness in full
after giving effect to any concurrent payments or distributions to the holders
of the Senior Indebtedness or provision for payment or distribution to them, and
(iii) if, notwithstanding the foregoing, the Holder receives any payment or
distribution of property of the Company before all Senior Indebtedness is paid
in full, or provision made for its payment, the Holder will receive the cash or
property paid or distributed to the Holder in trust for the holders of the
Senior Indebtedness, and, upon a request made to the Holder by a holder of
Senior Indebtedness within one year after the cash or property is paid or
distributed to the Holder, the Holder will pay or deliver that cash or property
to the holders of the Senior Indebtedness, for application to the payment of any
Senior Indebtedness remaining unpaid after giving effect to any concurrent
payment or distribution to the holders of the Senior Indebtedness or provision
for payment or distribution to them. If no claim is made by holders of Senior
Indebtedness to cash or property paid or distributed to the Holder within one
year after the payment or distribution to the Holder, after the end of the one
year period, the Holder will hold the cash or property free of any trust.
3
<PAGE> 4
(e) Following the occurrence and during the continuation of
any Insolvency Event:
i. the Holder of this Note shall take such action, duly
and promptly, as any holder of Senior Indebtedness may request from
time to time (A) to collect this Note for the account of the holders
of Senior indebtedness and (B) to file appropriate proofs of claim in
respect of this Note;
ii. the Holder of this Note irrevocably authorizes and
empowers each holder of Senior Indebtedness (A) to demand, sue for,
collect and receive every payment or distribution on account of this
Note payable or deliverable in connection with such event or
proceeding and give acquittance therefor, and (B) to file claims and
proofs of claim in any statutory or non-statutory proceeding and take
such other actions, in its own name, or in the name of the Holder of
this Note or otherwise, as such holders of Senior Indebtedness may
deem necessary or advisable for the enforcement of the provisions of
this Note; PROVIDED, HOWEVER, that the foregoing authorization and
empowerment imposes no obligation on the holders of Senior
Indebtedness to take any such action; and
iii. the Holder of this Note shall execute and deliver
such powers of attorney, assignments or proofs of claim or other
instruments as any holder of Senior Indebtedness may reasonably
request to enable such holder of Senior Indebtedness to enforce any
and all claims in respect of this Note and to collect and receive any
and all payments and distributions which may be payable or
deliverable at any time upon or in respect of this Note;
PROVIDED, that the holders of Senior Indebtedness shall not exercise the rights
granted under this paragraph unless the Holder of this Note has failed to take
the necessary actions referenced above on or prior to the date which is 15 days
prior to the last date on which such actions may be taken in accordance with
applicable law.
(f) The Holder of this Note consents that, without the
necessity of any reservation of rights against the Holder of this Note, and
without notice to or further assent by the Holder of this Note:
i. any demand for payment of any Senior Indebtedness made
by any holder of Senior Indebtedness may be rescinded in whole or in
part by such holder of Senior Indebtedness, and any obligations under
the Senior Indebtedness may be continued, and the Senior
Indebtedness, or the liability of the Company or any guarantor or any
other party upon or for any part thereof, or any collateral security
or guarantee therefor or right of offset with respect thereto, or any
obligation or liability of the Company or any other party under the
Senior Indebtedness or any other agreement, may, from time to time,
in whole or in part, be renewed, extended, modified, accelerated,
compromised, waived, surrendered, or released by any holder of Senior
Indebtedness; and
ii. the agreements relating to the Senior Indebtedness may
be amended, modified, supplemented or terminated, in whole or in
part, as any holder of Senior Indebtedness may deem advisable from
time to time, and any collateral security at any time held by any
holder of Senior Indebtedness for the payment of any of the Senior
Indebtedness may be sold, exchanged, waived, surrendered or released,
in each case all without notice to or further assent by the Holder of this Note,
which will remain bound under this Section 8, and all without impairing,
abridging, releasing or affecting the subordination provided for herein.
4
<PAGE> 5
(g) Subject to the payment in full of all Senior Indebtedness,
the Holder will be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of property of the Company
made with regard to the Senior Indebtedness until the principal and interest
with regard to this Note is paid in full. For the purpose of that subrogation,
no payment or distribution to the holders of Senior Indebtedness, which, except
for the provisions of this Paragraph 8, would be payable or distributable to the
Holder, will, as between the Company, its creditors other than holders of Senior
Indebtedness, and the Holder, be deemed to be a payment by the Company with
regard to the Senior Indebtedness, it being understood that the provisions of
this Paragraph 8, other than subparagraph (c), are intended solely for the
purpose of defining the relative rights of the Holder, on the one hand, and the
holders of the Senior Indebtedness, on the other.
(h) Nothing in this Paragraph 8 is intended to impair, as
between the Company, its creditors other than the holders of Senior
Indebtedness, and the Holder, the obligation of the Company, which is absolute
and unconditional, to pay the principal and interest on this Note when they
become due. Nothing in this Paragraph 8 prevents the Holder from exercising all
remedies otherwise permitted by law upon default under this Note, subject to the
rights of holders of Senior Indebtedness under this Paragraph 8.
(i) Any person who becomes the Holder of this Note, or an
interest in it, will be deemed to have agreed by acquiring this Note, or the
interest in it, to be bound by the provisions of this Paragraph 8.
9. No amendment of this Note, waiver of any provision of this Note, or
extension of the time by which the Company must make any payment of principal or
interest on this Note, will be effective unless it is made in writing by the
Holder. Any waiver or extension will be effective only in the instance and for
the purpose for which it is given.
10. The remedies provided in this Note are cumulative and are not
exclusive of any other remedies provided by law. The Company will pay on demand
any expenses (including reasonable attorneys fees and expenses) incurred by the
Holder in enforcing its rights under this Note.
11. Any notices or other communications required or permitted to be
given under this Note must be in writing and will be deemed given on the day
when delivered in person or sent by facsimile (with proof of receipt at the
number to which it is required to be sent), or on the third business day after
the day on which it is mailed by first class mail from within the United States
of America, addressed (i) if to the Company, to the Company's principal
executive offices and to the principal facsimile number at those executive
offices, Attention: President, or at such other address or facsimile number as
the Company may specify to the Holder in writing, and (ii) if to the Holder, at
the address or facsimile number specified by the Holder to the Company in
writing.
12. This Note will be binding upon Company and its assigns, and will
inure to the benefit of the Holder and the Holder's assigns. This Note will be
governed by, and construed under, the laws of the State of New York.
5
<PAGE> 6
IN WITNESS WHEREOF, the Company is executing this Note as of
the date shown on the first page.
THE MONARCH MACHINE TOOL COMPANY
By:________________________________
President
6
<PAGE> 1
Exhibit 4.2.2
NEITHER THIS WARRANT NOR THE SHARES OF
COMMON STOCK ISSUABLE ON EXERCISE OF THIS
WARRANT MAY BE TRANSFERRED EXCEPT IN A
TRANSACTION REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR WHICH IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THAT
ACT.
VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
ON JUNE 30, 2009
No. W-001 100,000 SHARES
WARRANT TO PURCHASE SHARES
OF
COMMON STOCK
OF
THE MONARCH MACHINE TOOL COMPANY
This certifies that Three Cities Research, Inc., as Sellers
Representative under a Stock Purchase Agreement, dated May 13, 1999 between The
Monarch Machine Tool Company (the "Company") and the stockholders of Precision
Industrial Corporation, or registered assigns, (the "Warrant Holder") is
entitled to purchase from The Monarch Machine Tool Company (the "Company"), an
Ohio corporation, at any time on or after July 1, 2000 and before 5:00 P.M., New
York City time, on the Expiration Date described in paragraph 1.01(c), the
number of fully paid and nonassessable shares of Common Stock, without par
value, of the Company ("Common Stock") stated above at the Exercise Price
described in Section 1.01(b). The Exercise Price and the number and nature of
the Warrant Shares which may be purchased on exercise of this Warrant are
subject to adjustment as provided in Article III.
ARTICLE I
Definitions
-----------
Section 1.01.
(a) The term "Business Day" means a day other than a Saturday, Sunday
or other day on which banks in the State of New York are authorized by law to
remain closed.
(b) The term "Exercise Price" means $7.75 per share, as that price may
be adjusted from time to time as provided in Article III.
(c) The term "Expiration Date" means June 30, 2009.
<PAGE> 2
(d) The term "Warrant Holder" means the person or entity named above or
any other person or entity in whose name this Warrant is registered on the books
of the Company.
(e) The term "Warrants" means this Warrant and all similar warrants
which together entitle the holders to purchase a total of 100,000 shares of
Common Stock.
(f) The term "Warrant Shares" means the shares of Common Stock or other
securities deliverable upon exercise of the Warrants.
ARTICLE II
Duration and Exercise of Warrant
--------------------------------
Section 2.01. This Warrant may be exercised at any time before 5:00
P.M., New York City time, on the Expiration Date. If this Warrant is not
exercised at or before 5:00 P.M., New York City time, on the Expiration Date, it
will become void and neither the Warrant Holder nor any other person will have
any rights under this Warrant.
(a) To exercise this Warrant, in whole or in part, the Warrant Holder
must surrender this Warrant, with the Subscription Form on it duly executed, to
the Company at its principal office accompanied by a certified or official bank
check payable to the order of the Company in an amount equal to the Exercise
Price for the Warrant Shares as to which this Warrant is being exercised.
(b) When the Company receives this Warrant with the Subscription Form
duly executed and accompanied by payment of the full Exercise Price for the
Warrant Shares as to which this Warrant is being exercised, the Company will
issue certificates, registered in the name of the Warrant Holder or such other
names as are designated by the Warrant Holder, representing the total number of
shares of Common Stock (and other securities, if any) as to which this Warrant
is being exercised, and the Company will deliver those certificates to the
Warrant Holder.
(c) If the Warrant Holder exercises this Warrant with respect to fewer
than all the Warrant Shares to which it relates, the Company will execute a new
Warrant for the balance of the Warrant Shares that may be purchased upon
exercise of this Warrant and deliver that new Warrant to the Warrant Holder.
(d) The Company will pay any issuance, transfer or similar taxes which
may be payable in respect of the issuance of Warrant Shares or in respect of the
issuance of a new Warrant if this Warrant is exercised as to fewer than all the
Warrant Shares to which it relates. The Company will not, however, be required
to pay any transfer tax which becomes payable because Warrant Shares or a new
Warrant are to be registered in a name other than that of the Warrant Holder,
and the Company will not be required to issue any Warrant Shares or to issue a
new Warrant registered in a name other than that of the Warrant Holder until the
Company receives either evidence that any applicable transfer taxes have been
paid or funds with which to pay those taxes.
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<PAGE> 3
(e) If, when the Warrant Holder delivers the Subscription Form, the
Warrant Holder notifies the Company that the Warrant Holder believes the
purchase of the Warrant Shares as to which this Warrant is being exercised must
be preceded by a notification under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"), or if upon receiving the Subscription Form the
Company notifies the Warrant Holder that the Company believes a notification
under the HSR Act is required, (i) unless the Warrant Holder and the Company
subsequently agree that notification under the HSR Act is not required, the
Warrant Holder and the Company each will, as promptly as practicable, make the
filing it is required (or that one of the parties believes it is required) to
make under the HSR Act with regard to the issuance of the Warrant Shares as to
which this Warrant is being exercised, and each of them will take all reasonable
steps within its control (including providing information to the Federal Trade
Commission and the Department of Justice) to cause the waiting periods required
by the HSR Act to be terminated or to expire as promptly as practicable, (ii)
the Warrant Holder and the Company will cooperate in all other respects to
assist the other of them in making its filing under the HSR Act, (iii) the
Company will not issue the Warrant Shares as to which this Warrant is being
exercised until the waiting periods under the HSR Act are terminated or expire,
and (iv) if the waiting periods under the HSR Act are not terminated or do not
expire within 60 days after the Warrant Holder delivers the Subscription Form to
the Company, the Warrant Holder will be entitled to rescind the exercise of this
Warrant at any time between the expiration of the 60 day period and the day the
waiting periods under the HSR Act are terminated or expire, in which case the
Company will promptly return to the Warrant Holder the amount the Warrant Holder
had paid to the Company as the (x) Exercise Price of this Warrant and (y)
deliver to the Warrant Holder a new Warrant for the shares as to which exercise
of this Warrant was rescinded.
ARTICLE III
Adjustment of Warrant Securities
and Warrant Price
-----------------
Section 3.01. The Exercise Price and the shares of Common Stock or
other securities issuable on exercise of this Warrant are subject to adjustment
as follows:
(a) If, after the date Warrants are first issued, the Company (i) makes
a distribution on its Common Stock in shares of its capital stock, (ii)
subdivides the outstanding Common Stock into a greater number of shares, or
(iii) combines the outstanding Common Stock into a lesser number of shares, in
each such case, the Exercise Price in effect at the record date for the
distribution or the effective date of the subdivision or combination will be
adjusted so that upon exercise of this Warrant after the record date or
effective date with respect to the shares which can be purchased for a specified
total purchase price, the Warrant Holder will receive the kind and number of
shares which the Warrant Holder would have owned if the Warrant Holder had
exercised this Warrant with respect to the shares which could be purchased for
that total purchase price immediately before the first of those events and
retained all the shares and other securities which the Warrant Holder received
as a result of each of those events.
(b) If, after the date Warrants are first issued, the Company fixes a
record date for the issuance (or issues without fixing a record date) to the
holders of the Common Stock of rights, options or warrants to subscribe for or
purchase Common Stock, or securities which are
3
<PAGE> 4
convertible into or exchangeable for Common Stock, at an exercise, conversion or
exchange price per share less than the Exercise Price in effect on the record
date (or on the date of issuance, if there is no record date), the Exercise
Price will be adjusted by multiplying the Exercise Price in effect immediately
prior to that record date (or issuance date) by a fraction, the numerator of
which is the number of shares of Common Stock outstanding on that record date
(or issuance date) plus the number of shares of Common Stock which the aggregate
exercise, conversion or exchange price would purchase at that Exercise Price,
and the denominator of which is the number of shares of Common Stock outstanding
on that record date (or issuance date) plus the number of additional shares of
Common Stock which the Company would be required to issue upon exercise,
conversion or exchange of all the rights, options, warrants or convertible or
exchangeable securities. Each adjustment will become effective at the close of
business on the record date for issuance of the rights, options, warrants or
convertible or exchangeable securities (or the date of issuance, if there is no
record date). For the purposes of this paragraph 3.01(b), the exercise,
conversion or exchange price of rights, options, warrants or convertible or
exchangeable securities will include any consideration the holders of the Common
Stock are required to pay in order to receive the rights, options, warrants or
convertible or exchangeable securities, as well as any consideration the holders
are required to pay upon exercise, conversion or exchange (other than surrender
of the securities being exercised, converted or exchanged). If the right to
exercise any rights, options or warrants, or to convert or exchange any
convertible or exchangeable securities, the issuance of which results in an
adjustment under this paragraph 3.01(b), expires in whole or in part without
being exercised, when that occurs, the Exercise Price will be readjusted as
though the rights, options, warrants or convertible or exchangeable securities
which were not exercised, converted or exchanged had not been issued. However,
no readjustment will affect any exercise of this Warrant which takes place
before the readjustment.
(c) If, after the date Warrants are first issued, the Company
distributes to the holders of its Common Stock any cash, evidences of
indebtedness or other assets (other than distributions to which paragraph
3.01(a) or (b) applies and other than cash dividends totaling (i) in either of
1999 or 2000, an amount per share not higher than the per share dividends paid
with regard to the Common Stock in 1998, and (ii) in 2001 or any subsequent
calendar year, not more than 5% of the Company's net income in the prior
calendar year), in each such case, the Exercise Price will be adjusted by
subtracting from the Exercise Price in effect immediately prior to the record
date for the determination of stockholders entitled to receive the distribution
the value of the cash, evidences of indebtedness or other assets to be
distributed with respect to a share of Common Stock. Each adjustment under this
paragraph will be effective at the close of business on the record date for the
determination of stockholders entitled to receive the distribution which results
in the adjustment. The value of evidences of indebtedness or other assets will
be their fair market value as determined in good faith by the Board of Directors
of the Company.
(d) If, after the date Warrants are first issued, the Company sells or
otherwise issues any Common Stock (other than in a transaction to which
paragraph 3.01(a) applies or upon exercise of rights, options or warrants, or
conversion or exchange of convertible or exchangeable securities) at a price per
share which is less than the Exercise Price in effect immediately before the
sale or other issuance, in each such case, the Exercise Price will be adjusted,
effective at the close of business on the date of the sale or other issuance, by
multiplying the Exercise Price in effect immediately before the sale or other
issuance by a fraction (i) the numerator of which will
4
<PAGE> 5
be equal to the sum of (A) the number of shares of Common Stock outstanding
immediately before the sale or other issuance plus (B) the number of shares of
Common Stock which could be purchased at the Exercise Price in effect
immediately before the sale or other issuance for the consideration received by
the Company upon the sale or other issuance, and (ii) the denominator of which
will be the total number of shares of Common Stock outstanding immediately after
the sale or other issuance. If, after the date the Warrants are first issued,
the Company sells or otherwise issues any rights, options, warrants or
convertible or exchangeable securities (other than (x) in a distribution to
which paragraph 3.01(b) applies, (y) under stock option and compensation plans
for the Company's directors or for employees of the Company and its subsidiaries
which do not at any time authorize the Company to issue more than 10% of the
outstanding Common Stock, or (z) under the Agreement dated June 30, 1999 between
the Company and the then stockholders of Precision Industrial Corporation
pursuant to which this Warrant, or a predecessor Warrant, was issued), when it
does so it will, for the purpose of this paragraph 3.01(d), be treated as having
sold the Common Stock it would be required to issue upon exercise of all the
rights, options or warrants, or upon conversion or exchange of all the
convertible or exchangeable securities, for a price per share equal to (i) (A)
the total price paid for the rights, options or warrants or convertible or
exchangeable securities, divided by (B) the number of shares of Common Stock
issuable on exercise, conversion or exchange of the rights, options, warrants or
convertible or exchangeable securities, plus (ii) any additional consideration
per share of Common Stock which must be paid upon exercise of the rights,
options or warrants or conversion or exchange of the convertible or exchangeable
securities (other than surrender of the securities being exercised, converted or
exchanged). If the right to exercise any rights, options or warrants, or to
convert or exchange any convertible or exchangeable securities, the issuance of
which results in an adjustment under this paragraph 3.01(d), expires in whole or
in part without being exercised, when that occurs, the Exercise Price will be
readjusted as though the rights, options, warrants or convertible or
exchangeable securities which were not exercised, converted or exchanged had not
been issued. However, no readjustment will affect any exercise of this Warrant
which takes place before the readjustment.
(e) If, after the date Warrants are first issued, there is a
reclassification or change of outstanding shares of Common Stock (other than a
change in par value or a change as a result of a subdivision or combination to
which paragraph 3.01(a) applies) or a merger or consolidation of the Company
with any other entity that results in a reclassification, change, conversion,
exchange or cancellation of outstanding shares of Common Stock, or a sale or
transfer of all or substantially all the assets of the Company and distribution
of all or a portion of the proceeds of that sale or transfer, upon any
subsequent exercise of this Warrant as to a specified number of Warrant Shares,
the Warrant Holder will receive the kind and amount of securities, cash and
other property which the Warrant Holder would have received if the Warrant
Holder had exercised this Warrant as to that number of Warrant Shares
immediately before the first of those events and had retained all the
securities, cash and other assets received as a result of these events.
(f) If all or part of the consideration for, or payable on exercise,
conversion or exchange of, any shares of Common Stock, rights, options, warrants
or convertible or exchangeable securities is other than cash, for the purposes
of this Section 3.01, the non-cash consideration will be valued at its fair
market value as determined in good faith by the Board of Directors of the
Company. If, in connection with any sale or other issuance of Common Stock or
5
<PAGE> 6
other securities or assets, the Company is required to pay underwriting
discounts or other fees or commissions, for the purposes of this Section 3.01,
the consideration the Company receives will be the amount it receives net of the
underwriting discounts, fees or commissions.
(g) If the exercise price of any rights, options or warrants, or the
conversion or exchange price of any convertible or exchangeable securities, is
changed, on the day the change becomes effective, the Company will be treated
for the purposes of the Warrants (other than to determine for the purposes of
paragraph 3.01(d) the date on which the rights, options or warrants, or
convertible or exchangeable securities were issued) as having (i) cancelled the
outstanding rights, options, warrants or convertible or exchangeable securities
which were exercisable, convertible or exchangeable at the prior price and (ii)
issued new rights, options, warrants or convertible or exchangeable securities
which are exercisable, convertible or exchangeable at the new price.
(h) No adjustment in the Exercise Price will be required if the
adjustment is less than $.10 per Warrant Share. However, any adjustments which
are not made because of this paragraph 3.01(h) will be carried forward and taken
into account in any subsequent adjustments. All calculations under this Section
3.01 will be made to the nearest cent.
(i) Upon each adjustment of the Exercise Price under subparagraph (a),
(b) or (d) of this Section 3.01, the number of Warrant Shares which will be
issued upon exercise of this Warrant will be adjusted so that (i) if this
Warrant is exercised in full, the Warrant Holder will receive (A) the number of
Warrant Shares the Warrant Holder would receive by exercising this Warrant in
full immediately before the adjustment, times (B) the Exercise Price in effect
immediately before the adjustment, divided by (C) the Exercise Price in effect
after the adjustment, and (ii) if this Warrant is exercised only in part, the
Warrant Holder will receive the fraction of the number of Warrant Shares the
Warrant Holder would have received if it had exercised this Warrant in full of
which the numerator is the number of Warrant Shares as to which this Warrant is
exercised and the denominator is the total number of Warrant Shares issuable on
exercise of this Warrant.
(j) If any adjustment in the Exercise Price or in the number of shares
or type of securities to be issued upon exercise of this Warrant becomes
effective as of a record date for a specified event, and this Warrant is
exercised between that record date and the date the event occurs, the Company
may elect to defer, until the event occurs, issuing to the Warrant Holder the
shares of Common Stock or other securities to which the Warrant Holder is
entitled solely by reason of that event. However, if the Company does that, when
this Warrant is exercised, the Company will deliver to the Warrant Holder a due
bill or other instrument evidencing the Warrant Holder's right to receive the
additional shares or other securities upon occurrence of the event.
Section 3.02. Whenever the Warrant Price or the Warrant Shares are
adjusted as provided in this Section, the Company will send to the Warrant
Holder a certificate signed by its principal accounting officer setting forth
the adjusted Warrant Price, the adjusted number of Warrant Shares and the date
the adjustment became effective, and containing a brief description of the
events which caused the adjustment.
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Section 3.03. If at any time after the Warrants are first issued:
(a) the Company declares a dividend or other distribution on its Common
Stock (other than a cash dividend which, together with all other cash dividends
in the same calendar year, totals (i) if the dividend is paid in either of 1999
or 2000, an amount per share not higher than the per share dividends paid with
regard to the Common Stock in 1998 and (ii) if the dividend is paid in 2001 or
any subsequent year, not more than 5% of the Company's net income in the prior
calendar year); or
(b) the Company authorizes the granting to the holders of its Common
Stock of rights to subscribe for or purchase any shares of any class or any
other securities; or
(c) there is any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding Common Stock), or any
consolidation or merger to which the Company is a party and for which approval
of the holders of the Common Stock is required, or a sale or transfer of all or
substantially all the assets of the Company; or
(d) there is a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
in each case, the Company will mail to the Warrant Holder at least days before
the applicable record date, a notice stating (i) the record date for the
dividend, distribution or rights, or, if there will not be a record date, the
date as of which the holders of record of Common Stock who will be entitled to
the dividend, distribution or rights will be determined, or (ii) the date on
which the reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected the holders of record of Common Stock who will be entitled
to receive securities or other property with respect to their Common Stock as a
result of the reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up will be determined. Failure to give any
notice or any defect in the notice will not affect the validity of the action
which should have been the subject of the notice.
(e) The form of Warrant need not be changed because of any change in
the Warrant Price or in the number of Warrant Shares which may be purchased by
exercising Warrants and Warrants issued after the change may state the same
Warrant Price and the same number of Warrant Shares as are stated in Warrants
issued before the change. However, the Company may at any time make any change
in the form of Warrant that it deems appropriate to reflect a change in the
Warrant Price or in the Warrant Shares which may be purchased by exercising
Warrants (provided the change in the form of Warrant does not otherwise affect
the substance of the Warrant), and any Warrant issued after the form of Warrant
is changed may be in the changed form.
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ARTICLE IV
Other Provisions Relating to
Rights of Warrant Holder
------------------------
Section 4.01. The Warrant Holder will not, as such, be entitled to
vote, to receive dividends or to have any other of the rights of a shareholder
of the Company, except that when this Warrant is exercised, the persons in whose
names the Warrant Shares purchased through exercise of this Warrant are to be
issued will be deemed to become the holders of record of those Warrant Shares
for all purposes even if certificates representing those Warrant Shares are not
issued.
Section 4.02. If this Warrant is lost, stolen, mutilated or destroyed,
the Company may, upon receipt of evidence satisfactory to the Company of the
loss, theft, mutilation or destruction and such indemnity (which may include a
bond), as the Company may require (and, in the case of a mutilated Warrant,
surrender of the mutilated Warrant), issue a new Warrant relating to the same
number of shares of Common Stock as the lost, stolen, mutilated or destroyed
Warrant.
Section 4.03. (1) The Company will at all times reserve and keep
available for issuance upon exercise of this Warrant a number of shares of
Common Stock equal to the maximum number of shares of Common Stock the Company
may be required to issue upon exercise of this Warrant at the Warrant Price in
effect from time to time.
(2) All shares of Common Stock issued on exercise of this Warrant will,
when they are issued, be validly issued, fully paid, nonassessable and free of
preemptive rights.
(3) When shares of Common Stock (or other securities) are issued on
exercise of this Warrant, resales of these securities will have been registered
under the Securities Act of 1933, as amended (the "Securities Act") and the
registration statement relating to these resales will be effective.
(4) The Company will keep the registration statement described in
subparagraph (3) effective and available with regard to resales of the shares of
Common Stock (or other securities) issued upon exercise of this Warrant until at
least the second anniversary of the issuance of those securities or until such
earlier time as all the Common Stock (or other securities) issued upon exercise
of this Warrant have been sold or counsel to the Company has delivered to the
Warrant Holder an opinion that all of the shares issued upon exercise of this
Warrant may be sold without registration under the Securities Act, and the
Company will do all other things that are required so that all shares of Common
Stock (or other securities) issued upon exercise of this Warrant may at all
times be resold without violating the Securities Act.
(5) The Company will take all steps which are necessary so that all the
shares of Common Stock (or other securities) which the Company may be required
to issue on exercise of this Warrant will, upon issuance, be listed on each
securities exchange and quoted on each automated quotation system on which the
Common Stock is (or those other securities are) listed or quoted.
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Section 4.04. The Company will not be required to issue any fraction of
a share upon exercise of this Warrant. In any case in which the Warrant Holder
would, except for the provisions of this Section 4.03, be entitled to receive a
fraction of a share upon exercise of this Warrant, the Company will, upon
exercise of this Warrant, issue the maximum number of whole shares it is
required to issue, and the Company will pay the Warrant Holder cash in lieu of
the fraction of a share based upon the last sale price (or if there is none, the
mean of the high bid and low asked prices) of the Common Stock on the day this
Warrant is exercised.
Section 4.05. The Company will maintain a Warrant Register in which the
name and address of each registered holder of Warrants will be recorded.
Section 4.06. Notices or other communications to the Warrant Holder
will be deemed given by the Company on the day on which they are delivered to
the Warrant Holder, or on the third Business Day after the day on which they are
sent by first class mail addressed to the Warrant Holder at the Warrant Holder's
last known address shown on the Warrant Register maintained by the Company.
Section 4.07. Until this Warrant is presented to the Company for
transfer with the Assignment on it duly executed and with all other
documentation the Company may reasonably require in connection with the transfer
(including evidence that any applicable transfer taxes have been paid), the
Company may treat the Warrant Holder as the owner of this Warrant for all
purposes, including for the purpose of determining who is entitled to exercise
this Warrant, despite any notice to the contrary.
ARTICLE V
Other Matters
-------------
Section 5.01. The provisions of this Warrant will bind, and inure to
the benefit of, the Company and its successors and assigns.
Section 5.02. (a) Any notice or other communication to the Company
relating to this Warrant will be deemed given on the day when it is delivered or
sent by facsimile transmission (with a confirmation of receipt at the facsimile
number to which it is to be sent), or on the third Business Day after the day on
which it is sent by first-class mail, to the following address (or such other
address as may be specified by the Company after the date of this Warrant):
The Monarch Machine Tool Company
2600 Kettering Tower
Dayton, Ohio 4525
Attention: President
Facsimile No.: 937-910-9305
(b) Any notice or other communication to the Warrant Holder will be
deemed given when it is given as provided in Section 4.06.
Section 5.03. This Warrant will be governed by, and construed under,
the laws of the State of Delaware relating to contracts made and to be performed
in that state.
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Section 5.04. The Article headings in this Warrant are for convenience
only, are not part of this Warrant and are not intended to affect the meaning or
interpretation of any of the terms of this Warrant.
Section 5.05. The respective rights and obligations of the Company and
the Warrant Holder may be modified only by a writing executed by the party
against whom the amendment or waiver is sought to be enforced.
IN WITNESS WHEREOF, the Company has executed this Warrant on June 30,
1999.
THE MONARCH MACHINE TOOL COMPANY
By: ____________________________
Name:
Title:
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ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned sells, assigns and transfers the
attached Warrant to __________________________________ to the extent of the
right to purchase _________________ Warrant Shares, and the undersigned appoints
___________________________, with full power of substitution, to transfer that
Warrant, with respect to the right to purchase that number of Warrant Shares, on
the books of The Monarch Machine Tool Company.
Dated: ___________, ___
SIGNATURE GUARANTEED
________________________________
(Signature must conform to
the name of the Warrant
________________________________________ Holder specified on the face
of the Warrant)
By:_____________________________________
Dated:__________________________________
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SUBSCRIPTION FORM
-----------------
To: The Monarch Machine Tool Company
The undersigned irrevocably elects to purchase _______________ Warrant
Shares by exercising the Warrant to which this form is attached and tenders
payment of the full Exercise Price with respect to those Warrant Shares. The
undersigned requests that the certificates representing the Warrant Shares as to
which the Warrant is being exercised be registered as follows:
Name:______________________
Social Security or Employer Identification Number:__________________________
Address:____________________________
Deliver to:_________________________
Address:____________________________
[ ] (Check if applicable) The undersigned will be acquiring
the Warrant Shares as to which this Warrant is being exercised for investment
and not with a view to their resale or distribution.
If the Warrant Shares as to which the Warrant is being
exercised are fewer than all the Warrant Shares to which the Warrant relates,
please issue a new Warrant for the balance of the Warrant Shares registered in
the name of the undersigned and deliver it to the undersigned at the following
address:
________________________
________________________
________________________
Date:__________________ _______________________________
(Signature must conform to the
name of the Warrant Holder
specified on the face of the
Warrant)
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