-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JF6ili9Uw6GrP14PiYaUQSPikYPDks1ul9asEUFghTe3vsCHeG55CM01Dq3I/JvY 8MR1d8ySWz+iey1rYXPGLw== 0000893220-06-000665.txt : 20060324 0000893220-06-000665.hdr.sgml : 20060324 20060324153909 ACCESSION NUMBER: 0000893220-06-000665 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060324 DATE AS OF CHANGE: 20060324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SL INDUSTRIES INC CENTRAL INDEX KEY: 0000089270 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 210682685 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04987 FILM NUMBER: 06709214 BUSINESS ADDRESS: STREET 1: 520 FELLOWSHIP ROAD STREET 2: SUITE A114 CITY: MT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 8567271500 MAIL ADDRESS: STREET 1: 520 FELLOWSHIP ROAD STREET 2: SUITE A114 CITY: MT LAUREL STATE: NJ ZIP: 08054 FORMER COMPANY: FORMER CONFORMED NAME: SGL INDUSTRIES INC DATE OF NAME CHANGE: 19841008 FORMER COMPANY: FORMER CONFORMED NAME: GL INDUSTRIES INC DATE OF NAME CHANGE: 19710111 FORMER COMPANY: FORMER CONFORMED NAME: GL ELECTRONICS CO INC DATE OF NAME CHANGE: 19670928 10-K 1 w18876e10vk.txt FORM 10-K SL INDUSTRIES, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 Commission file number 1-4987 SL INDUSTRIES, INC. (Exact name of Company as specified in its charter) NEW JERSEY 21-0682685 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
520 FELLOWSHIP ROAD, SUITE A114, MT. LAUREL, NJ 08054 (Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: 856-727-1500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED: ------------------- ------------------------------------------ Common stock, $.20 par value American Stock Exchange Philadelphia Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" and large accelerated filer in Rule 12b-2 of the Exchange Act). Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the Registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price of the Common Stock on the last business day of the Registrant's most recently completed second fiscal quarter, as reported by the American Stock Exchange was approximately $69,879,000. The number of shares of common stock outstanding as of March 1, 2006, was 5,614,213. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III of this report (Items 10, 11, 12, 13 and 14) is incorporated by reference from the Company's proxy statement to be filed pursuant to Regulation 14A with respect to the registrant's 2006 annual meeting of stockholders. ================================================================================ TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business ..................................................... 1 Item 1A Risk Factors.................................................. 7 Item 2 Properties.................................................... 12 Item 3 Legal Proceedings............................................. 13 Item 4 Submission of Matters to a Vote of Security Holders........... 15 PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities............................. 15 Item 6 Selected Financial Data....................................... 17 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 17 Item 7A Quantitative and Qualitative Disclosures about Market Risk................................................ 33 Item 8 Financial Statements and Supplementary Data................... 33 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 33 Item 9A Controls and Procedures....................................... 33 Item 9B Other Information............................................. 34 PART III Item 10 Directors and Executive Officers of the Registrant............ 34 Item 11 Executive Compensation........................................ 34 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............. 34 Item 13 Certain Relationships and Related Transactions................ 34 Item 14 Principal Accountant Fees and Services........................ 34 PART IV Item 15 Exhibits and Financial Statement Schedules.................... 35 SIGNATURES............................................................... 36 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE........... F1
PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS The Company, through its subsidiaries, designs, manufactures and markets power electronics, motion control, power protection and specialized communication equipment that is used in a variety of medical, aerospace, computer, datacom, industrial, telecom, transportation and electric power utility equipment applications. Its products are generally incorporated into larger systems to increase operating safety, reliability and efficiency. The Company's products are largely sold to Original Equipment Manufacturers ("OEMs"), the electric power utility industry, and to a lesser extent, to commercial distributors. On March 29, 1956, the Company was incorporated as G-L Electronics Company in the state of New Jersey. Its name was changed to G-L Industries, Inc. in November 1963; SGL Industries, Inc. in November 1970; and then to the present name of SL Industries, Inc. in September 1984. On January 6, 2003, the Company sold all of the issued and outstanding shares of capital stock of its indirect subsidiary, Elektro-Metall Export GmbH ("EME"), for a purchase price of $8,000,000, which consisted of cash and purchaser notes. In addition, a distribution of $2,000,000 was paid prior to closing by EME to a subsidiary of the Company and the purchaser did not require that the Company pay down EME's bank debt of approximately $3,600,000 prior to closing. The purchaser notes were a $3,000,000 secured note that bore interest at the prime rate plus 2%, which was paid on March 14, 2003, and a $1,000,000 unsecured note that bore interest at an annual rate of 12%, which was paid on April 2, 2004. Cash proceeds of $4,000,000 received at closing plus the $2,000,000 distribution and the $3,000,000 secured note paid March 14, 2003 were used to pay down bank debt. All cash proceeds related to the sale of EME have been received. As a result of the transaction, the Company recorded a pre-tax loss from the sale of discontinued operations of approximately $1,619,000 in 2002. The tax effects were not material to the transaction. On November 24, 2003, the Company sold substantially all of the assets of its subsidiary, SL Surface Technologies, Inc. ("SurfTech"). The Company received cash of $600,000 at closing. In addition, the purchaser assumed certain liabilities and ongoing obligations of SurfTech. As a result of the transaction, the Company recorded an after tax loss from the sale of discontinued operations of approximately $442,000. The results of operations of SurfTech are presented as discontinued operations for the year ended December 31, 2003. On August 3, 2005, the Company entered into a revolving credit facility (the "Revolving Credit Facility") with Bank of America, N.A. ("Bank of America") to replace its previous credit facility. The Revolving Credit Facility (with a standby and commercial letter of credit sub-limit of $5,000,000) provides for borrowings up to $25,000,000 and under certain circumstances maximum borrowings of $30,000,000. The Revolving Credit Facility expires on June 30, 2008. Borrowings under the Revolving Credit Facility bear interest, at the Company's option, at the London interbank offering rate ("LIBOR") plus a margin rate ranging from 0.9% to 1.9%, or the higher of a Base Rate plus a margin rate ranging from 0% to 0.5%. The Base Rate is equal to the higher of (i) the Federal Funds Rate plus 0.5%, or (ii) Bank of America's publicly announced prime rate. The margin rates are based on certain leverage Page 1 ratios, as defined. The Company is subject to compliance with certain financial covenants set forth in the Revolving Credit Facility, including but not limited to, capital expenditures, consolidated net worth, and certain interest and leverage ratios, as defined. On August 10, 2005, James C. Taylor was elected as Chief Executive Officer and President of the Company. On December 19, 2005, the Company announced that it had signed a definitive agreement to acquire all of the outstanding shares of common stock of Ault Incorporated ("Ault") for $2.90 per share in cash. On January 26, 2006, the Company, through a wholly owned subsidiary, completed a tender offer for Ault. The Company acquired approximately 86.9% of the outstanding common stock of Ault at $2.90 per share. The Company had previously purchased in the open market approximately 4.8% of the outstanding common stock of Ault for $567,000. On January 26, 2006, the Company's wholly owned-subsidiary was merged with and into Ault. As a result, Ault became a wholly-owned subsidiary of the Company, and the shares not tendered were converted into the right to receive $2.90 per share in cash, without interest. The total purchase price for the common stock of Ault was approximately $13,986,000, which includes the shares already owned by the Company. The Company also paid approximately $2,079,000 to acquire all of the outstanding shares of Ault's preferred stock. Ault is a leading manufacturer of power conversion products and is a major supplier to OEMs of wireless and wire line communications infrastructure, computer peripherals and handheld devices, medical, industrial, and printing/scanning equipment. Ault is headquartered in Minneapolis, Minnesota and has an engineering and sales office in Norwood, Massachusetts, and engineering, sales and a manufacturing facility in the People's Republic of China. (For additional information regarding the acquisition of Ault see Subsequent Event Note 19 in the notes to the Consolidated Financial Statements included in Part IV of the Annual Report on Form 10-K). (B) FINANCIAL INFORMATION ABOUT SEGMENTS Financial information about the Company's business segments is incorporated herein by reference to Note 16 in the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. (C) NARRATIVE DESCRIPTION OF BUSINESS SEGMENTS In 2005, the Company operated under four business segments: Condor DC Power Supplies, Inc. ("Condor"), Teal Electronics Corp. ("Teal"), SL Montevideo Technology, Inc. ("SL-MTI"), and RFL Electronics Inc. ("RFL"). In the second quarter of 2003, management decided to combine Condor and Teal into one business unit classified as the Power Electronics Group. Accordingly, for the years ended December 31, 2005, December 31, 2004 and December 31, 2003, the Company's reportable segments consisted of Condor, Teal (collectively, The Power Electronics Group), SL-MTI and RFL. CONDOR - Condor produces a wide range of standard and custom power supply products that convert AC or DC power to direct electrical current to be used in customers' end products. Standard and custom AC-DC and DC-DC power supplies in both linear and switching configurations are produced, with Page 2 ranges in power from 1 to 5000 watts, and are manufactured in either commercial or medical configurations. Power supplies closely regulate and monitor power outputs, using patented filter and other technologies, resulting in little or no electrical interference. Power supplies are also used in drive systems for electric equipment and other motion control systems. For the years ended December 31, 2005, December 31, 2004 and December 31, 2003, net sales of Condor, as a percentage of consolidated net sales from continuing operations, were 34%, 35% and 38%, respectively. TEAL - Teal designs and manufactures custom power conditioning and power distribution units. Products are developed and manufactured for custom electrical subsystems for OEMs of semiconductor, medical imaging, graphics and telecommunication systems. Outsourcing the AC power system helps OEMs reduce cost and time to market while increasing system performance and customer satisfaction. Customers are also helped by getting necessary agency approvals. Custom products are often called "Power Conditioning and Distribution Units," which provide voltage conversion and stabilization, system control, and power distribution for systems such as CT and MRI scanners, chip testers and industrial systems. For the years ended December 31, 2005, December 31, 2004 and December 31, 2003, net sales of Teal, as a percentage of consolidated net sales from continuing operations, were 26%, 25% and 19%, respectively. SL-MTI - SL-MTI is a technological leader in the design and manufacture of intelligent, high power density precision motors. Important programs in both traditional and new market areas have been won as a result of new motor and (patented and patent pending) motor control technologies. New motor and motion controls are used in numerous applications, including aerospace, medical and industrial products. Negotiations are continuing with customers on advanced designs for numerous programs, including fuel cell energy storage systems, high performance missile guidance motors, and medical/surgical drills and saws. For the years ended December 31, 2005, December 31, 2004 and December 31, 2003, net sales of SL-MTI, as a percentage of consolidated net sales from continuing operations, were 22%, 21% and 21%, respectively. RFL - RFL designs and manufactures communication and power protection products/systems that are used to protect electric utility transmission lines and apparatus by isolating faulty transmission lines from a transmission grid. These products are sophisticated communication systems that allow electric utilities to manage their high-voltage power lines more efficiently and include a system that is a completely digital, fully-integrated relay/communications terminal, suitable for high-speed protective relaying of overhead or underground high-voltage transmission lines. RFL provides customer service and maintenance for all of its products. For the years ended December 31, 2005, December 31, 2004 and December 31, 2003, net sales of RFL, as a percentage of consolidated net sales from continuing operations, were 18%, 19% and 22%, respectively. THE COMPANY'S DISCONTINUED OPERATIONS CONSIST OF: SURFTECH - SurfTech produced industrial coatings and platings for equipment in the corrugated paper and telecommunications industries. On November 24, 2003, the Company sold substantially all of the assets of SurfTech. As a result, SurfTech is reported as a discontinued operation for all periods presented. For the year ended December 31, 2003, net sales of SurfTech were $1,840,000. Page 3 EME - EME is based in Ingolstadt, Germany with low cost manufacturing operations in Paks, Hungary. EME manufacturered electromechanical actuation systems, power drive units and complex wire harness systems for use in the aerospace and automobile industries. On January 6, 2003, the Company sold all of the issued and outstanding shares of capital stock of EME. As a result, EME is reported as a discontinued operation for all periods presented. SL WABER - SL Waber manufactured surge suppressors that protect computers, audiovisual and other electronic equipment from sudden surges in power. These products were sold to OEM customers as well as to distributors and dealers of electronics and electrical supplies and retailers and wholesalers of office, computer, and consumer products. In September 2001, the Company sold substantially all of the assets of SL Waber, including its name and goodwill, as a going concern. As a result, SL Waber is reported as a discontinued operation for all periods presented. RAW MATERIALS Raw material components are supplied by various domestic and international vendors. In general, availability of materials is not a problem for the Company. However in 2005, the Company did experience a sharp increase in the cost of certain strategic raw materials, particular copper. During 2005, there were no major disruptions in the supply of raw materials. Raw materials are purchased directly from the manufacturer whenever possible to avoid distributor mark-ups. Average lead times generally run from immediate availability to eight weeks. Lead times can be substantially higher for strategic components subject to industry shortages. In most cases, viable multiple sources are maintained for flexibility and competitive leverage. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS The Company has proprietary information that it has developed and uses in its business. This proprietary information is protected by contractual agreements as well as through patents and patents pending, to the extent appropriate. The patents are protected by federal law. To protect its proprietary information, the Company also enters into non-disclosure agreements with its employees, vendors and customers. Where appropriate, the Company will take and has taken all steps necessary to defend its intellectual property. SEASONALITY Generally, seasonality is not a significant factor in any of the Company's segments. SIGNIFICANT CUSTOMERS The Company has no customer that accounts for 10% or more of its consolidated net sales from continuing operations. Each of Condor, Teal, SL-MTI and RFL has certain major customers, the loss of any of which could have a material adverse effect on such entity. BACKLOG Backlog at March 5, 2006, March 6, 2005 and February 29, 2004 was $39,132,000, $41,607,000 and $42,022,000, respectively. The backlog at March 5, 2006 decreased by $2,475,000, or 6%, compared to March 6, 2005. In 2006 the Company experienced a decrease in orders from OEM's in the medical, industrial and military markets, partially offset by increased orders in the medical imaging market. Also, there has been some shift in orders from OEM's to distributors, which has shorter lead times. Page 4 COMPETITIVE CONDITIONS The Company's businesses are in active competition with domestic and foreign companies with national and international name recognition that offer similar products or services and with companies producing alternative products appropriate for the same uses. In addition, Condor has experienced significant offshore competition for certain products in certain markets. The uncertain commercial aerospace market has also created more competitive conditions in that industry. Each of the Company's businesses differentiates themselves from their competition by concentrating on customized products based on customer needs. The Company's businesses seek a competitive advantage based on quality, service, innovation, delivery and price. ENVIRONMENTAL The Company (together with the industries in which it operates or has operated) is subject to United States and Mexican environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters and generation, handling, storage, transportation, treatment and disposal of waste materials. The Company and the industry are also subject to other federal, state and local environmental laws and regulations, including those that require the Company to remediate or mitigate the effects of the disposal or release of certain chemical substances at various sites, including some where it has ceased operations. It is impossible to predict precisely what effect these laws and regulations will have on the Company in the future. It is the Company's policy to comply with all environmental, health and safety regulations, as well as industry standards for maintenance. The Company's domestic competitors are subject to the same environmental, health and safety laws and regulations and the Company believes that the compliance issues and potential expenditures of its operating subsidiaries are comparable to those faced by their major domestic competitors. There are two sites on which the Company may incur material environmental costs in the future as a result of past activities of its former SurfTech subsidiary. These sites are the Company's properties located in Pennsauken, New Jersey, and in Camden, New Jersey. With respect to the Pennsauken site, the Company is one of several defendants in two separate lawsuits, in which it is alleged to be responsible for groundwater contamination. The Company believes it has significant defenses against all or any part of the claims in each of these lawsuits and that any material adverse impact is unlikely. Regarding the Camden site, the Company is still in the early stages of evaluating the nature and extent of any contamination, but based on the information so far, the Company believes that the cost to remediate the property should not exceed approximately $560,000, which has been fully accrued as of December 31, 2005 and December 31, 2004. Anticipated environmental costs have been reclassified in discontinued operations as a result of the sale of SurfTech on November 24, 2003. For additional information related to environmental issues, see "Item 3. Legal Proceedings," and Note 13 to the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. The Company has reported a soil and ground water contamination on SL-MTI's property in Montevideo, Minnesota. SL-MTI has conducted analysis of the contamination and performed remediation at the site. Further remediation efforts will be required and the Company is engaged in discussions with the Minnesota Pollution Control Agency to develop a remediation plan. Based on the current information, Page 5 the Company believes it will incur remediation costs at this site of approximately $220,000, which has been accrued at December 31, 2005. The accrual for this site was $268,000 at December 31, 2004. EMPLOYEES As of December 31, 2005, the Company had approximately 1,348 employees. Of these employees, 193 were subject to collective bargaining agreements. FOREIGN OPERATIONS In addition to manufacturing operations in California, Minnesota, and New Jersey, the Company manufactures substantial quantities of products in premises leased in Mexicali, Mexico and Matamoros, Mexico. The Company has outsourced some of its products with contract manufacturers located in Tecate, Mexico; Shanghai, China; and Dongguan, China. These external and foreign sources of supply present risks of interruption for reasons beyond the Company's control, including political or economic instability and other uncertainties. Generally, the Company's sales are priced in United States dollars and its costs and expenses are priced in United States dollars and Mexican pesos. Accordingly, the competitiveness of the Company's products relative to locally produced products may be affected by the performance of the United States dollar compared with that of its foreign customers' and competitors' currencies. Foreign net sales comprised 13%, 13% and 12% of net sales from continuing operations for the years ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively. Additionally, the Company is exposed to foreign currency exchange rate fluctuations, which might result from adverse fluctuations in the value of the Mexican peso. At December 31, 2005 and December 31, 2004, the Company had net liabilities of $639,000 and $286,000, respectively, subject to fluctuations in the value of the Mexican peso. Fluctuations in the value of the foreign currencies were not significant in 2005. There can be no assurance that the value of the Mexican peso will continue to remain stable. Condor manufactures most of its products in Mexico and incurs its labor costs and supplies in Mexican pesos. Teal has moved a limited amount of its manufacturing to a dedicated contract manufacturer located in Tecate, Mexico, and is in the process of establishing a wholly-owned subsidiary at that location. SL-MTI manufactures approximately 75% of its products in Mexico and incurs related labor costs and supplies in Mexican pesos. Condor, Teal and SL-MTI price and invoice their sales in United States dollars. The Mexican subsidiaries of Condor and SL-MTI, and eventually Teal, maintain their books and records in Mexican pesos. For additional information related to financial information about foreign operations, see Notes 16 and 17 in the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Page 6 ADDITIONAL INFORMATION Additional information regarding the development of the Company's businesses during 2005 and 2004 is contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II and Notes 1 and 2 of the Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. ITEM 1A. RISK FACTORS THE COMPANY MAY BE ADVERSELY IMPACTED BY FLUCTUATIONS IN CASH FLOWS, LIQUIDITY AND DEBT LEVELS. Working capital requirements and cash flows historically have been, and are expected to continue to be, subject to quarterly and yearly fluctuations, depending on such factors as levels of sales, timing and size of capital expenditures, timing of deliveries and collection of receivables, inventory levels, customer payment terms, customer financing obligations, and supplier terms and conditions. The inability to manage adverse cash flow fluctuations resulting from such factors could have a material adverse effect on the Company's business, results of operations, and financial condition. In order to finance the working capital requirements of the Company's business, the Company entered into a three-year revolving credit facility with Bank of America and subsequent to December 31, 2005, borrowed funds thereunder. At December 31, 2005, there were no outstanding borrowed funds under the credit facility, and total availability thereunder was $30,000,000. In addition, at December 31, 2005 the Company maintained a cash balance of $9,985,000. THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE, AND THERE MAY BE VOLATILITY IN GENERAL INDUSTRY, ECONOMIC AND MARKET CONDITIONS. The results of operations for any quarter or year are not necessarily indicative of results to be expected in future periods. Future operating results may be affected by various trends and factors that must be managed in order to achieve favorable operating results. The inability to accurately forecast and manage these trends and factors could have a material adverse effect on the Company's business, results of operations, and financial condition. General economic conditions and specifically market conditions in the medical, telecommunications, semiconductor and electric power utility equipment industries in the United States and globally, affect the Company's business. In addition, reduced capital spending and/or negative economic conditions in the United States, Europe, Asia, Latin America and/or other areas of the world could have a material adverse effect on the Company's business, results of operations, and financial condition. Gross margins may be adversely affected by increased price competition, excess capacity, higher material or labor costs, warranty costs, obsolescence charges, loss of cost savings on future inventory purchases as a result of high inventory levels, introductions of new products, increased levels of customer services, changes in distribution channels, and changes in product and geographic mix. Lower than expected gross margins could have a material adverse effect on the Company's business, results of operations, and financial condition. Page 7 THE COMPANY'S OPERATING RESULTS AND STOCK PRICE MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN CUSTOMERS' BUSINESSES. Business is dependent upon product sales to telecommunications, semiconductor, medical imaging, aerospace and other businesses, which in turn are dependent for their business upon orders from their customers. Any downturn in the business of any of these parties affects the Company. Moreover, sales often reflect orders shipped in the same quarter in which they are received, which makes sales vulnerable to short-term fluctuations in customer demand and difficult to predict. In general, customer orders may be cancelled, modified or rescheduled after receipt. Consequently, the timing of these orders and any subsequent cancellation, modification or rescheduling of these orders has affected, and will in the future affect, results of operations from quarter to quarter. Also, as some of the Company's customers typically order in large quantities, any subsequent cancellation, modification or rescheduling of an individual large order may affect results of operations. FAILURE TO REMAIN COMPETITIVE COULD ADVERSELY IMPACT THE COMPANY'S OPERATING RESULTS. The markets in which the Company sells its products are highly competitive and characterized by rapidly changing and converging technologies. The Company faces intense competition from established competitors and the threat of future competition from new and emerging companies in all aspects of business. The Company's future success will depend on its ability to enhance current products and to develop new products that keep pace with technological developments and respond to changes in customer requirements. Among its current competitors are its customers, who are vertically integrated and either manufacture and/or are capable of manufacturing some or all of the Company's products sold to them. In addition to current competitors, new competitors providing niche, and potentially broad, product solutions will likely increase in the future. To remain competitive in both the current and future business climates, the Company must maintain a substantial commitment to focused research and development, improve the efficiency of its manufacturing operations, and streamline its marketing and sales efforts and attendant customer service and support. Among other things, the Company may not be able to anticipate shifts in its markets or technologies, may not have sufficient resources to continue to make the investments necessary to remain competitive, or may not make the technological advances necessary to remain competitive. In addition, notwithstanding its efforts, technological changes, manufacturing efficiencies or development efforts by competitors may render the Company's products or technologies obsolete or uncompetitive. CONSOLIDATION IN THE INDUSTRY COULD INCREASE COMPETITIVE PRESSURES ON THE COMPANY. The industries in which the Company operates are consolidating and will continue to consolidate in the future as companies attempt to strengthen or hold their market positions. Such consolidations may result in stronger competitors that are better able to compete as sole-source vendors for customers. The Company's relatively small size may increase competitive pressure for customers seeking single vendor solutions. Such increased competition would increase the variability of the Company's operating results and could otherwise have a material adverse effect on the Company's business, results of operations, and financial condition. THE COMPANY IS DEPENDENT UPON THIRD PARTIES FOR PARTS AND COMPONENTS. The ability to meet customer demand depends, in part, on the ability of the Company to obtain timely and adequate delivery of parts and components from suppliers and internal manufacturing capacity. The Company has experienced significant shortages in the past, and although it works closely with its Page 8 suppliers to avoid shortages, there can be no assurance that it will not encounter further shortages in the future. A further reduction or interruption in component supplies or a significant increase in the price of one or more components could have a material adverse effect on the Company's business, results of operations and financial condition. THE COMPANY MAY BE SUBJECT TO SIGNIFICANT COSTS IN COMPLYING WITH ENVIRONMENTAL LAWS. The Company's facilities are subject to a broad array of environmental laws and regulations. The costs of complying with complex environmental laws and regulations may be significant in the future. Present accruals for such costs and liabilities may not be adequate in the future since the estimates on which the accruals are based depend on a number of factors, including the nature of the problem, the complexity of the site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties ("PRPs") at multiparty sites, and the number and financial viability of other PRPs. Further, the Company is the subject of various lawsuits and actions relating to environmental issues, including an administrative action in connection with SurfTech's Pennsauken facility which could subject the Company to, among other things, $9,266,000 in collective reimbursements (with other parties) to NJDEP (as defined herein). In addition, a class action suit was filed on June 12, 2002 against the Company, SurfTech and 37 other defendants alleging that the plaintiffs may suffer personal injuries as a result of consuming contaminated water distributed from the Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey). There can be no assurance that the Company will be able to successfully defend itself against or settle at a reasonable cost these or any other actions to which it is a party. For additional information related to environmental risks, see "Item 3. Legal Proceedings," and Note 13 to the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. THE COMPANY MAY HAVE TO PAY SIGNIFICANT COSTS FOR REGULATORY COMPLIANCE AND LITIGATION. Rapid or unforeseen escalation of the cost of regulatory compliance and/or litigation, including but not limited to, environmental compliance, product-related liability, assertions related to intellectual property rights and licenses, adoption of new accounting policies, or changes in current accounting policies and practices and the application of such policies and practices could have a material adverse effect on the Company's business. Additionally, the Company is subject to certain legal actions involving complaints by terminated employees and disputes with customers and suppliers. In the second quarter of 2005, the Company paid $809,000 to satisfy a judgment resulting from a lawsuit brought by a former customer of SL-MTI. In the future there can be no assurance of the outcome in any litigation. An adverse determination in any one or more significant legal actions could have a material adverse effect on the Company's business, results of operations and financial condition. See "Item 3. Legal Proceedings," and Note 13 to the Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. THE COMPANY IS DEPENDENT UPON KEY PERSONNEL FOR THE MANAGEMENT OF ITS OPERATIONS. The Company's success depends in part upon the continued services of many of its highly skilled personnel involved in management, engineering and sales, and upon its ability to attract and retain additional highly qualified officers and employees. The loss of service of any of these key personnel could have a material adverse effect on business. In addition, future success will depend on the ability of Page 9 officers and key employees to manage operations successfully. THE COMPANY'S OPERATING RESULTS AND COMMON STOCK ARE SUBJECT TO PRICE FLUCTUATIONS. Operating results for future periods are never perfectly predictable even in the most certain of economic times, and the Company expects to continue to experience fluctuations in its quarterly results. These fluctuations, which in the future may be significant, could cause substantial variability in the market price of the Company's stock. The market price for the Company's common stock has been, and is likely to continue to be, highly volatile. The market for the Company's common stock is subject to fluctuations as a result of a variety of factors, including factors beyond its control. These include: - additions or departures of key personnel; - changes in market valuations of similar companies; - announcements of new products or services by competitors or new competing technologies; - conditions or trends in medical equipment, medical imaging, aerospace, and electric utility industries; - general market and economic conditions; and - other events or factors that are unforeseen. OTHER FACTORS MAY AFFECT FUTURE RESULTS. The risks and uncertainties described herein are not the only ones facing the Company. Additional risks and uncertainties not presently known, or that may now be deemed immaterial, may also impair business operations. (D) FORWARD-LOOKING INFORMATION From time to time, information provided by the Company, including written or oral statements made by representatives, may contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, contain forward-looking information, particularly statements which address activities, events or developments that the Company expects or anticipates will or may occur in the future, such as expansion and growth of the Company's business, future capital expenditures and the Company's prospects and strategy. In reviewing such information, it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking information. This forward-looking information is based on various factors and was derived utilizing numerous assumptions. Many of these factors previously have been identified in filings or statements made by or on behalf of the Company. Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking information include changes in the general economy, changes in capital investment and/or consumer spending, competitive factors and other factors affecting the Company's business in or beyond the Company's control. These factors include a change in the rate of inflation, a change in state or federal legislation or regulations, an adverse determination with respect to a claim in litigation or other claims (including environmental matters), the ability to recruit and develop employees, the ability to successfully implement new technology and the stability of product costs. These factors also include the timing and degree of any business recovery in certain of the Page 10 Company's markets that are currently experiencing a cyclical economic downturn. Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. The Company does not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. Future factors include the effectiveness of cost reduction actions undertaken by the Company; the timing and degree of any business recovery in certain of the Company's markets that are currently experiencing economic uncertainty; increasing prices, products and services offered by U.S. and non-U.S. competitors, including new entrants; rapid technological developments and changes and the Company's ability to continue to introduce and develop competitive new products and services on a timely, cost-effective basis; availability of manufacturing capacity, components and materials; credit concerns and the potential for deterioration of the credit quality of customers; customer demand for the Company's products and services; U.S. and non-U.S. governmental and public policy changes that may affect the level of new investments and purchases made by customers; changes in environmental and other U.S. and non-U.S. governmental regulations; protection and validity of patent and other intellectual property rights; compliance with the covenants and restrictions of bank credit facilities; and outcome of pending and future litigation and governmental proceedings. These are representative of the future factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic conditions, including economic instability in the event of a future terrorist attack or sharp increases in the cost of energy and interest rate and currency exchange rate fluctuations and other future factors. Page 11 ITEM 2. PROPERTIES Set forth below are the properties where the Company conducted business as of December 31, 2005.
Approx. Square Owned or Leased And Location General Character Footage Expiration Date -------- ----------------- -------- ------------------- Oxnard, CA Manufacture and distribution of power supply 36,500 Leased - 4/30/06 products (Condor) Ventura, CA Manufacture and distribution of power supply 31,200 Leased - 4/30/11 products (Condor) Mexicali, Mexico Manufacture and distribution of power supply 62,500 Leased - 4/30/06 products (Condor) 14,500 Leased - 4/30/06 South Molton, United Kingdom Distribution of power supply products (Condor) 2,500 Leased - 6/30/10 San Diego, CA Manufacture of power distribution and conditioning 45,054 Leased - 3/22/07 units (Teal) Montevideo, MN Manufacture of precision motors and motion control 30,000 Owned systems (SL-MTI) Matamoros, Mexico Manufacture of precision motors (SL-MTI) 28,517 Leased - 12/31/07 Boonton Twp., NJ Manufacture of electric utility equipment protection 78,000 Owned systems (RFL) Camden, NJ Industrial surface finishing (Other) (1) 15,800 Owned Pennsauken, NJ Document warehouse (Other) (2) 6,000 Owned Mt. Laurel, NJ Corporate office (Other) 4,200 Leased - 11/30/08
(1) Ownership retained by the Company after the sale of SurfTech on November 24, 2003. (2) Formerly used for industrial surface finishing operations. Page 12 All manufacturing facilities are adequate for current production requirements. The Company believes that its facilities are sufficient for future operations, maintained in good operating condition and adequately insured. Of the owned properties, none are subject to a major encumbrance material to the operations of the Company. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is subject to loss contingencies pursuant to foreign and federal, state and local governmental laws and regulations and is also party to certain legal actions, frequently involving complaints by terminated employees and disputes with customers and suppliers. In the opinion of management, such claims are not expected to have a material adverse effect on the financial condition or results of operations of the Company. In a November 1991 Administrative Directive, the New Jersey Department of Environmental Protection ("NJDEP") alleged that SurfTech, formerly SL Modern Hard Chrome, Inc., and 20 other respondents are responsible for a contamination plume which has affected the Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey). SurfTech is alleged to have contributed to the groundwater contamination through its operations conducted in Pennsauken, New Jersey (the "SurfTech site"). Three other actions have been initiated from the underlying directive. The first is Supplemental Directive No. 1 ("Directive No. 1") issued by the NJDEP to the same parties in May 1992, which seeks a cost reimbursement of $8,655,000 for the construction of a treatment system at the Puchack site and an annual payment of $611,000 (a total of $9,266,000) for ongoing operation and maintenance of the treatment system. The second matter is a lawsuit initiated by one of the parties named in Directive No. 1 seeking to have the remainder of those parties, and more than 600 others, pay some or all of that party's cost of compliance with Directive No. 1 and any other costs associated with its site. This second matter is a claim for indemnification of potential damages. Accordingly, it is unspecified in amount. The third matter is a Spill Act Directive by the NJDEP to SurfTech alone, regarding similar matters at its site and consists of a claim for contribution towards potential damages and is unspecified in amount. Both the second and third matters relate to the payment of a portion of the damages set forth in the discussion of Directive No. 1. The state has not initiated enforcement action regarding any of its three Directives. There also exists an outstanding enforcement issue regarding the Company's compliance with state environmental laws at the same site. With regard to the $9,266,000 amount discussed in the preceding paragraph, in the Company's view, it is not appropriate to consider that amount as "potential cost reimbursements." The SurfTech site has undergone remedial activities under NJDEP's supervision since 1983. The Company believes that it has a significant defense against all or any part of the $9,266,000 claim since technical data generated as part of previous remedial activities indicate that there is no offsite migration of contaminants at the SurfTech site. Based on this and other technical factors, the Company has been advised by its outside technical consultant, with the concurrence of its outside counsel, that it has a significant defense to Directive No. 1 and any material exposure is unlikely. On June 12, 2002, the Company and SurfTech were served with notice of a class action complaint filed in Superior Court of New Jersey for Camden County. The Company and SurfTech are currently two of approximately 39 defendants in this action. The complaint alleges, among other things, that plaintiffs Page 13 may suffer personal injuries as a result of consuming water distributed from the Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey). This case arises from the same factual circumstances as the current administrative actions involving the Puchack Wellfield, which are described above. The administrative actions and the class action lawsuit both allege that SurfTech and other defendants contaminated ground water through the disposal of hazardous substances at industrial facilities in the area. As with the administrative actions, the Company believes it has significant defenses against the class action plaintiffs' claims and intends to pursue them vigorously. Technical data generated as part of remedial activities at the SurfTech site have not established offsite migration of contaminants. Based on this and other technical factors, the Company has been advised by its outside counsel that it has a strong defense against the claims alleged in the class action plaintiffs' complaint, as well as the environmental administrative actions discussed above. The Company filed claims with several of its insurers seeking reimbursement for past and future environmental costs. In settlement of its claims, the Company received aggregate cash payments of $2,800,000 prior to fiscal 2001, and commitments from three insurers to pay for a portion of environmental costs associated with the SurfTech site of 15% of costs up to $300,000, 15% of costs up to $150,000 and 20% of costs up to $400,000, respectively. During 2005 and 2004, the Company billed these insurers a total of $131,000 and $654,000, respectively, for their contingent commitments. Reimbursed cost related to these billings is recorded in discontinued operations. Loss contingencies include potential obligations to investigate and eliminate or mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other facilities, whether or not they are currently in operation. The Company is currently participating in environmental assessments and cleanups at six sites under these laws and may in the future be involved in additional environmental assessments and cleanups. Based upon investigations completed by the Company and its independent engineering consulting firms to date, management has provided an estimated accrual for all known costs believed to be probable in the amount of $1,220,000. Of this amount, the Company expects to spend approximately $293,000 related to environmental matters in 2006. However, it is in the nature of environmental contingencies that other circumstances might arise, the costs of which are indeterminable at this time due to such factors as changing government regulations and stricter standards, the unknown magnitude of defense and cleanup costs, the unknown timing and extent of the remedial actions that may be required, the determination of the Company's liability in proportion to other responsible parties, and the extent, if any, to which such costs are recoverable from other parties or from insurance. Although these contingencies could result in additional expenses or judgments, or off-sets thereto, at present such expenses or judgments are not expected to have a material effect on the consolidated financial position or results of operations of the Company. In the second quarter of 2005, the Company paid Eaton Aerospace LLC a final judgment of $809,000, with respect to a lawsuit filed by Eaton alleging breach of contract and warranty. It is management's opinion that the impact of legal actions brought against the Company and its operations will not have a material adverse effect on its financial position or results of operations. However, the ultimate outcome of these matters, as with litigation generally, is inherently uncertain, and Page 14 it is possible that some of these matters may be resolved adversely to the Company. The adverse resolution of any one or more of these matters could have a material adverse effect on the business, operating results, financial condition or cash flows of the Company. Additional information pertaining to legal proceedings is found in Note 13 in the Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of fiscal 2005, no matter was submitted to a vote of the Company's security holders. PART II ITEM 5. MARKET FOR REGISTANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is currently registered on both the AMEX and the Philadelphia Stock Exchange under the symbol "SLI." The Company moved from the NYSE to the AMEX on April 30, 2003. The following table sets forth the high and low closing sales price per share of the Company's common stock for the periods indicated:
Year Year Ended December 31, 2005 Ended December 31, 2004 ----------------------- ----------------------- HIGH LOW HIGH LOW ----- ----- ----- ----- Stock Prices 1st Quarter 14.09 12.45 10.00 8.15 2nd Quarter 18.14 14.03 11.24 9.18 3rd Quarter 18.33 13.93 11.50 9.90 4th Quarter 17.76 13.20 14.46 11.07
As of March 1, 2006, there were approximately 701 registered shareholders. The Company suspended dividend payments during 2001 and has no present intention of making dividend payments in the foreseeable future. The Revolving Credit Facility restricts the payment of dividends. Additional information pertaining to the Revolving Credit Facility is found in Note 10 in the Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. For the "Equity Compensation Plan Information," please refer to the Company's Proxy Statement for the 2006 Annual Meeting of Shareholders, which is incorporated herein by reference. Page 15 On December 12, 2003, the Company announced that its Board of Directors had authorized the repurchase of up to 10% of the outstanding shares of the common stock of the Company. Any repurchases would be made in the open market or in negotiated transactions. For the twelve months ended December 31, 2005, the Company did not repurchase any shares pursuant to its stock repurchase program; however, it did purchase 25,000 shares through its deferred compensation plans. For the twelve months ended December 31, 2004, the Company purchased 545,900 shares pursuant to its stock repurchase program and 56,500 shares through its deferred compensation plans. ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Maximum Number of Shares of Shares That May Total Purchased as Part Yet Be Purchased Number of Average of Publicly under Publicly Shares Price Paid Announced Plans Announced Plans or Period Purchased per Share or Programs Programs ------ --------- ---------- ----------------- ------------------ January 2005 -- -- -- 48,024 February 2005 -- -- -- 48,024 March 2005 1,700(1) $13.50 -- 48,024 April 2005 -- -- -- 48,024 May 2005 3,800(1) $16.71 -- 48,024 June 2005 5,400(1) $17.93 -- 48,024 July 2005 6,900(1) $17.94 -- 48,024 August 2005 -- -- -- 48,024 September 2005 3,900(1) $14.57 -- 48,024 October 2005 -- -- -- 48,024 November 2005 -- -- -- 48,024 December 2005 3,300(1) $17.05 -- 48,024 ------ ------ --- Total 25,000 $16.81 -- ====== ====== ===
(1) The Company purchased these shares other than through a publicly announced plan or program in open market transactions or in negotiated transactions. Page 16 ITEM 6. SELECTED FINANCIAL DATA Selected consolidated financial data with respect to the calendar years ended December 31, 2005, 2004, 2003, 2002 and 2001 are presented below.
Years Ended December 31, ---------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- (amounts in thousands except per share data) Net sales(1) $126,873 $118,804 $105,284 $107,912 $109,770 Income (loss) from continuing operations $ 7,620 $ 6,301 $ 3,742 $ 801 $ (8,452) (Loss) income from discontinued operations $ (473) $ 2,371 $ (2,422) $ (1,271) $ (2,927) Net income (loss)(2) $ 7,147 $ 8,672 $ 1,320 $ (470) $(11,379) Diluted net income (loss) per common share $ 1.25 $ 1.48 $ 0.22 $ (0.08) $ (2.00) Shares used in computing diluted net income (loss) per common share 5,738 5,871 5,956 5,867 5,698 Cash dividend per common share $ -- $ -- $ -- $ -- $ -- YEAR-END FINANCIAL POSITION Working capital $ 25,807 $ 19,496 $ 16,612 $ 10,107 $ 12,132 Current ratio(3) 2.40 2.05 1.98 1.03 1.01 Total assets $ 70,314 $ 63,084 $ 58,421 $ 90,667 $109,911 Long-term debt $ -- $ 1,456 $ 2,015 $ -- $ -- Shareholders' equity $ 46,645 $ 37,687 $ 34,581 $ 32,983 $ 33,204 Book value per share $ 8.33 $ 6.91 $ 5.82 $ 5.59 $ 5.81 OTHER Capital expenditures(4) $ 1,904 $ 1,642 $ 1,616 $ 1,466 $ 1,039 Depreciation and amortization $ 1,986 $ 2,133 $ 1,851 $ 2,634 $ 3,670
(1) On November 24, 2003, the Company sold certain assets of SurfTech. On January 6, 2003, effective for the year ended December 31, 2002, the Company sold EME, and in 2001, the Company sold certain assets of SL Waber. Accordingly, the operations of SurfTech, EME, and SL Waber have been accounted for as discontinued operations in all periods presented. (2) Fiscal 2004 includes a settlement fee of $2,516,000, net of tax, received by SL Waber and the recovery of certain legal fees for environmental matters in the amount of $392,000, net of tax. Fiscal 2003 includes an asset impairment of $275,000 recorded against the carrying value of the Company's property located in Camden, New Jersey. Fiscal 2002 includes $1,834,000 of special charges related to change-of-control and proxy costs, $703,000 of impairment charges related to the write-off of goodwill, $556,000 and $147,000 of asset impairment charges at SurfTech. Fiscal 2001 includes costs related to inventory write-offs of $2,890,000, asset impairment charges of $4,145,000 and restructuring costs of $3,683,000 related to Condor, and inventory write-offs of $50,000 and restructuring, and intangible asset impairment charges of $185,000 and $125,000, respectively, related to SurfTech. (3) The current ratio for 2002 and 2001 includes all debt classified as current, due to the December 31, 2002 maturity date of the Company's previous revolving credit facility. The current ratio calculations for all years exclude net current assets and liabilities held for sale. (4) Excludes assets acquired in business combinations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company through its subsidiaries, designs, manufactures and markets power electronics, motion control, power protection, and specialized communication equipment that is used in a variety of aerospace, computer, datacom, industrial, medical, telecom, transportation and utility equipment applications. The Company is comprised of four domestic business segments, two of which have significant manufacturing operations in Mexico. Most of the Company's sales are made to customers who are based in the United States. However, over the years the Company has increased its Page 17 \ presence in international markets. The Company places an emphasis on high quality, well-built, dependable products and continues its dedication to product enhancement and innovations. ORGANIZATION OF FINANCIAL INFORMATION The Company's Management Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess the Company's financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties, as discussed under the caption "Forward-Looking Statements" in Item 1 of this Annual Report on Form 10-K. The consolidated financial statements and notes are presented in Part IV of this Annual Report on Form 10-K. Included in the consolidated financial statements are the Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Shareholders' Equity and Consolidated Statements of Cash Flows. The notes, which are an integral part of the consolidated financial statements, provide additional information required to fully understand the nature of amounts included in the consolidated financial statements. Additionally, in Note 16, the Company provides a summary of net sales, income from continuing operations before income taxes, total assets and depreciation and amortization by industry segment. The Company's Management Discussion and Analysis provides a more detailed discussion related to the operations of business segments. SIGNIFICANT TRANSACTIONS AND FINANCIAL TRENDS Included in the financial sections of this Annual Report on Form 10-K is a description of significant transactions or events that have materially affected earnings, cash flow and business trends. The Company's Management Discussion and Analysis for fiscal 2005 also includes income and charges related to discontinued operations. Significant transactions in 2005 that impacted the Company's financial results and cash flows included: 1) the repayment of the Company's previous credit facility in the amount of $2,015,000; 2) the receipt of proceeds from stock options exercised during the year in the amount of $1,399,000; 3) the recording of foreign tax credits, which has increased income from continuing operations by approximately $1,035,000, or $0.18 per diluted share; and 4) the purchase of approximately 4.8% of the outstanding shares of Ault for $567,000. The Company completed a tender offer for Ault on January 26, 2006 (see Subsequent Events Note 19 presented in Part IV of this report of Form 10-K). Significant transactions in 2004 that impacted the Company's financial results and cash flows included: 1) the expenditure of $6,076,000 to acquire 545,900 shares of common stock pursuant to the Company's publicly announced repurchase program; 2) the tax benefit of approximately $1,295,000, or $0.22 per diluted share, due to research and development tax credits recorded during 2004; and 3) the accrual of $809,000 in compensation expense related to certain stock based compensation arrangements with key executives. The compensation expenses are non-cash charges for the year and are recorded in selling, general and administrative expenses. In addition, the Company recorded income related to a settlement fee received by SL Waber, net of tax, in the amount of $2,516,000 and net proceeds from insurance companies related to the recovery of certain legal fees for environmental matters in the amount of $392,000, net of tax. These transactions were reported as part of income from discontinued operations. While these items are important in understanding and evaluating financial results and trends, other transactions or events, which are disclosed in this Management Discussion and Analysis, have a material impact on continuing operations. A complete understanding of these transactions is necessary in order to estimate the likelihood that these trends will continue. Page 18 CRITICAL ACCOUNTING POLICIES In December 2001, the Securities and Exchange Commission (the "SEC") issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies are deemed to be critical within the SEC definition. REVENUE RECOGNITION Revenue from product sales is recognized at the time the product is shipped, with provisions established for estimated product returns and returns related to one business segment's stock scrap program with distributors. Upon shipment, the Company provides for the estimated cost that may be incurred for product warranties. Rebates and other sales incentives offered by the Company are recorded as a reduction of sales at the time of shipment. Revenue recognition is significant because net sales is a key component of results of operations. In addition, revenue recognition determines the timing of certain expenses, such as commissions and royalties. The Company follows generally accepted guidelines in measuring revenue. Revenue is recorded in accordance with Staff Accounting Bulletin ("SAB") No. 104. However, certain judgments affect the application of its revenue policy. For a discussion of the Company's revenue recognition policies, see Note 1 in the Notes to Consolidated Financial Statements included in Part IV in this Annual Report on Form 10-K. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter and could result in future operating losses. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company's estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, the Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations (bankruptcy, etc.). In these cases, the Company uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on several factors, including historical write-offs as a percentage of sales. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligation), the Company's estimates of the recoverability of amounts due could be reduced by a material amount. INVENTORIES The Company values inventory at the lower of cost or market, and continually reviews the book value of discontinued product lines to determine if these items are properly valued. The Company identifies these Page 19 items and assesses the ability to dispose of them at a price greater than cost. If it is determined that cost is less than market value, then cost is used for inventory valuation. If market value is less than cost, then related inventory is adjusted to market value. If a write down to the current market value is necessary, the market value cannot be greater than the net realizable value, which is defined as selling price less costs to complete and dispose, and cannot be lower than the net realizable value less a normal profit margin. The Company also continually evaluates the composition of its inventory and identifies slow-moving and excess inventories. Inventory items identified as slow-moving or excess are evaluated to determine if reserves are required. If the Company is not able to achieve its expectations of the net realizable value of the inventory at current market value, it would have to adjust its reserves accordingly. ACCOUNTING FOR INCOME TAXES The Company records the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines under Statement of Financial Accounting Standard ("SFAS") No. 109 in determining the recoverability of any tax assets recorded on the balance sheet and provides any necessary allowances as required. As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax exposure, together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, the Company must establish a valuation allowance. To the extent it establishes a valuation allowance or increases or decreases this allowance in a period, it must include expense or income, as the case may be, within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. As of December 31, 2005, the Company had recorded total valuation allowances of $3,572,000 due to uncertainties related to the utilization of some deferred tax assets, primarily consisting of certain research and development tax credits, loss carryforwards and foreign tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which the Company operates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these estimates are adjusted in future periods, the Company may need to establish an additional valuation allowance or reduce existing allowances that could materially impact its consolidated financial position and results of operations. The net deferred tax assets as of December 31, 2005 were $5,980,000, net of valuation allowances of $3,572,000. The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statement of income. Management evaluates the realizability Page 20 of the deferred tax assets and assesses the need for additional valuation allowances quarterly. The Company's effective tax rate includes the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States. The Company's 2005 results do not reflect the impact of the American Jobs Creation Act of 2004 (the "Jobs Act"). The Company re-evaluated its position with respect to the indefinite reinvestment of foreign earnings account for the possible election of the repatriation provisions contained in the Jobs Act. The result of this evaluation had no impact on the Company's results of operations. LEGAL CONTINGENCIES The Company is currently involved in certain legal proceedings. As discussed in Note 13 in the Notes to the Consolidated Financial Statements included in Part IV to this Annual Report on Form 10-K, the Company has accrued an estimate of the probable costs for the resolution of these claims. This estimate has been developed after investigation and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Management does not believe these proceedings will have a material adverse effect on the Company's consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in these assumptions, or the effectiveness of these strategies, related to these proceedings. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS The Company's long-lived and intangible assets primarily consist of fixed assets, goodwill and other intangible assets. Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. Effective January 1, 2002, the Company adopted SFAS 142 and performed a transitional test of its goodwill and intangible assets. No impairment charges were recorded as a result of the initial impairment test. Impairment losses recorded in the future could have a material adverse impact on the Company's financial condition and results of operations. The Company periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of the asset by estimated cash flows and at times by independent appraisals. It compares estimated cash flows expected to be generated from the related assets, or the appraised value of the asset, to the carrying amounts to determine whether impairment has occurred. If the estimate of cash flows expected to be generated changes in the future, the Company may be required to record impairment charges that were not previously recorded for these assets. If the carrying value of a long- Page 21 lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. ENVIRONMENTAL EXPENDITURES The Company is subject to United States and Mexican environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, and generation, handling, storage, transportation, treatment and disposal of waste materials. The Company is also subject to other federal, state and local environmental laws and regulations, including those that require it to remediate or mitigate the effects of the disposal or release of certain chemical substances at various sites, including some where the Company has ceased operations. It is impossible to predict precisely what effect these laws and regulations will have in the future. Expenditures that relate to current operations are charged to expense or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations are expensed and recorded as part of discontinued operations. Expenditures include costs of remediation and legal fees to defend against claims for environmental liability. Liabilities are recorded when remedial efforts are probable and the costs can be reasonably estimated. The liability for remediation expenditures includes, as appropriate, elements of costs such as site investigations, consultants' fees, feasibility studies, outside contractor expenses and monitoring expenses. Estimates are not discounted, and they are not reduced by potential claims for recovery from insurance carriers. The liability is periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity and other relevant factors, including changes in technology or regulations. The above listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternatives would not produce a materially different result. See the Company's audited Consolidated Financial Statements and Notes thereto included in Part IV of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by generally accepted accounting principles. LIQUIDITY AND CAPITAL RESOURCES
December 31, December 31, 2005 2004 $ Variance % Variance ------------ ------------ ---------- ---------- (in thousands) Cash and cash equivalents $ 9,985 $ 2,659 $ 7,326 276% Bank debt $ -- $ 2,015 $(2,015) (100%) Working capital: (less cash) $15,822 $16,837 $(1,015) (6%) Shareholders' equity $46,645 $37,687 $ 8,958 24% ------- ------- ------- ----
At December 31, 2005, the Company maintained a cash balance of $9,985,000, with no outstanding bank debt. During the year ended December 31, 2005 ("2005"), the net cash provided by continuing operating activities was $11,208,000, as compared to net cash provided by continuing operating activities of $4,543,000 during the year ended December 31, 2004 ("2004"). The primary sources of Page 22 cash provided by continuing operating activities for 2005 were income from continuing operations of $7,620,000, a decrease in inventories of $1,269,000 and an increase in accounts payable of $2,026,000. These sources of cash were partially offset by a decrease in other accrued liabilities of $1,487,000. The decreases in inventories were primarily attributable to activities at RFL and Condor, which had decreases of $1,202,000 and $790,000, respectively, offset by an increase at SL-MTI of $914,000. The decreases at RFL and Condor were due to the timing of sales in the fourth quarter of 2005, compared to 2004. SL-MTI's increase was primarily due to increased volume, postponement of customer orders and redesign of some products that have been rescheduled for the first quarter of fiscal 2006. The decrease in other accrued liabilities is primarily related to payments made by the Company to settle certain litigation, fees and claims, which were accrued at December 31, 2004. The primary sources of cash provided by continuing operating activities for 2004 were income from continuing operations of $6,301,000 and an increase in accounts payable in the amount of $1,921,000. These sources of cash were partially offset by an increase in accounts receivable of $2,714,000, an increase in inventory in the amount of $4,830,000 and payments made under the Company's 2003 bonus and incentive programs. The increase in accounts receivable and inventory were primarily related to the Company's sales growth, which was 13% greater than prior year. During 2005, net cash used in investing activities was $2,936,000, primarily related to the purchases of machinery, building improvements, equipment upgrades and manufacturing equipment in the amount of $1,904,000 and the purchases of Ault common stock in the amount of $567,000. During 2004, net cash used in investing activities was $633,000, primarily related to the purchases of machinery and equipment in the amount of $1,642,000. The use of cash was partially offset by proceeds of $1,000,000, representing the final installment on the sale of EME. During 2005, net cash used in financing activities was $529,000, primarily due to the repayment of the Company's previous credit facility in the amount of $2,015,000, partially offset by the proceeds from the exercise of stock options of $1,399,000. During 2004, net cash used in financing activities was $6,603,000, primarily due to the purchase of the Company's common stock. During 2004, the Company expended $6,233,000 to reacquire its shares, of which $6,076,000 related to the purchase of 545,900 shares of common stock at an average price of $11.13 per share. These purchases were made under the Company's repurchase program approved by the Board of Directors on December 12, 2003. Also during this period, the Company made payments of $887,000 under its previous credit facility. These uses of cash were partially offset by proceeds from stock options exercised during the year in the amount of $517,000. During 2005 until August 2, 2005, the Company was a party to a three-year senior secured credit facility with LaSalle Business Credit LLC, which was secured by all of the Company's assets. On August 2, 2005, the Company repaid the outstanding balances under such senior credit facility in the amount of $1,641,000. The Company also paid $212,000 in early termination and legal fees. On August 3, 2005, the Company entered into a Revolving Credit Facility with Bank of America, N.A. (see Note 10 in the Notes to the Consolidated Financial Statements included in Part IV to this Annual Report on Form 10-K). Page 23 The Company's current ratio was 2.40 to 1 at December 31, 2005 and 2.05 to 1 at December 31, 2004. This ratio increased mainly due to an increase in cash and cash equivalents, with current assets increasing by $6,204,000 and current liabilities decreasing by $107,000 from the prior year. As a percentage of total capitalization, consisting of debt and shareholders' equity, total borrowings by the Company were 0% at December 31, 2005 and 5% at December 31, 2004. At December 31, 2005, total borrowings decreased by $2,015,000, compared to December 31, 2004. Capital expenditures of $1,904,000 were made in 2005, primarily for machinery and equipment, building improvements and equipment upgrades. The capital expenditures of $1,642,000 made in 2004 primarily related to machinery and equipment purchases. The Company has been able to generate adequate amounts of cash to meet its operating needs and expects to do so in the future. With the exception of the segment reported as "Other" (which consists primarily of corporate office expenses, financing activities, public reporting costs and accruals not specifically allocated to the reportable business segments) all of the Company's operating segments had income from operations in 2005 and 2004. CONTRACTUAL OBLIGATIONS The following is a summary of the Company's contractual obligations at December 31, 2005 for the periods indicated:
Less Than 1 to 3 4 to 5 After 1 Year Years Years 5 Years Total --------- ------ ------ ------- ------ (in thousands) Operating Leases $1,157 $ 825 $204 $ -- $2,186 Debt -- -- -- -- -- Capital Leases 54 11 -- -- 65 Other Obligations 52 175 136 164 527 ------ ------ ---- ---- ------ $1,263 $1,011 $340 $164 $2,778 ====== ====== ==== ==== ======
Other obligations include the Company's withdrawal liability to a union-administered defined benefit multi-employer pension plan to which SurfTech had made contributions (see Note 2 to the Consolidated Financial Statements). OFF-BALANCE SHEET ARRANGEMENTS It is not the Company's usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and financial commitments, indemnification arrangements and retained interests in assets transferred to an unconsolidated entity for securitization purposes. Consequently, the Company has no off-balance sheet arrangements, except for operating lease commitments disclosed in the table above, which have, or are reasonably likely to have, a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital Page 24 expenditures or capital resources. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
Years Ended December 31, --------------------------------------------- 2005 2004 $ Variance % Variance -------- -------- ---------- ---------- (in thousands) NET SALES Power Electronics Group: Condor $ 43,233 $ 41,457 $1,776 4% Teal 32,777 30,265 2,512 8% -------- -------- ------ --- Total 76,010 71,722 4,288 6% -------- -------- ------ --- SL-MTI 28,085 24,497 3,588 15% RFL 22,778 22,585 193 1% -------- -------- ------ --- Total $126,873 $118,804 $8,069 7% ======== ======== ====== ===
Years Ended December 31, --------------------------------------------- 2005 2004 $ Variance % Variance -------- -------- ---------- ---------- (in thousands) INCOME FROM OPERATIONS Power Electronics Group: Condor $ 4,543 $ 3,789 $ 754 20% Teal 4,911 4,635 276 6% ------- ------- ------ --- Total 9,454 8,424 1,030 12% ------- ------- ------ --- SL-MTI 3,371 2,827 544 19% RFL 2,284 2,091 193 9% Other (4,911) (5,033) 122 2% ------- ------- ------ --- Total $10,198 $ 8,309 $1,889 23% ======= ======= ====== ===
Consolidated net sales for 2005, compared to 2004, increased by $8,069,000, or 7%. All of the Company's business segments contributed to the increase in net sales. SL-MTI, which recorded a sales increase of $3,588,000, or 15%, experienced sales increases in all of its major markets. Teal reported an increase in net sales of $2,512,000, or 8%, primarily due to increases in its medical imaging product line. Condor recorded an increase in net sales of $1,776,000, or 4%, and RFL recorded an increase in net sales of $193,000, or 1%. The Company's income from operations increased to $10,198,000 in 2005, compared to $8,309,000 in 2004, or 23%. All of the Company's operating business segments had increases in income from operations in 2005, as compared to 2004. These increases ranged from 20% to 6%. Income from continuing operations in 2005 was $7,620,000, or $1.33 per diluted share, compared to income from continuing operations in 2004 of $6,301,000, or $1.08 per diluted share. Income from continuing operations benefited by approximately $1,035,000, or $0.18 per diluted share, and by approximately $470,000, or $0.08 per diluted share, due to foreign and research and development tax Page 25 credits recorded during 2005. In 2004 income from continuing operations benefited by approximately $152,000, or $0.03 per diluted share, and by approximately $1,295,000, or $0.22 per diluted share, due to foreign and research and development tax credits. The Company's business segments and the components of operating expenses are discussed more fully in the following sections. The Power Electronics Group, which is comprised of Condor and Teal, recorded a sales increase of $4,288,000, or 6%, and an increase in income from operations of $1,030,000, or 12%. Condor experienced an increase in net sales of $1,776,000, or 4%, and an increase in income from operations of $754,000, or 20%, over the prior year. Condor reported a sales increase in its medical product line of $3,843,000, or 17%, while sales to manufacturers of industrial equipment decreased $1,945,000, or 12%. Net sales of telecommunications products also decreased by $502,000, or 14%. International sales, which represent approximately 18% of Condor's total net sales, increased 62%, aided by sales to two international customers. Also in August 2005 Condor opened a European sales office to increase its presence in the European market. Domestic sales decreased by $1,224,000, or 3%, primarily due to decreased sales to the industrial market. Condor's increase in income from operations is primarily due to its increase in sales and a slight reduction in costs of products sold. Teal experienced a sales increase of $2,512,000, or 8%, primarily due to increased sales of its medical imaging product line of $4,691,000. Sales of its semiconductor product line decreased by approximately $2,589,000. Teal's increase in income from operations is primarily due to increased sales and decreased operating costs. SL-MTI's net sales in 2005 increased approximately $3,588,000, or 15%, while income from operations increased by $544,000, or 19%, compared to net sales and income from operations in 2004. Contributing to the increase in net sales was significant increases in the DC Brush and Brushless Motor product lines, which increased by $3,491,000, or 21%, compared to 2004. By market segment, the largest contributor to the net sales increases was the military market of $2,852,000, or 18%. The increase in net sales was the primary reason that income from operations increased, which was partially offset by increases in cost of products sold. Operating costs at SL-MTI remained relatively constant. RFL's net sales in 2005 increased approximately $193,000, or 1%, and income from operations increased approximately $193,000, or 9%, compared to net sales and income from operations in 2004. Sales of RFL's communications product line increased by $120,000, or 1%, and customer service sales increased $420,000, or 41%, while its teleprotection product line decreased by $347,000, or 4%. RFL's domestic sales increased by $1,415,000, or 9%, while export sales decreased by $1,222,000, or 18%. The decrease in international sales was partially due to a labor strike encountered at one of RFL's largest customers. Income from operations increased due to the increase in sales and a reduction in the cost of products sold, which was partially offset by a modest increase in operating costs. COST OF PRODUCTS SOLD As a percentage of net sales, cost of products sold was approximately 65% in 2005 compared to 64% in 2004. Although aggregate cost of products sold, as a percentage of net sales, remained relatively constant year-to-year, there were differences among the operating business segments. The Power Electronics Group cost of products sold percentage increased to 66% in 2005, from 65% in 2004. This increase was due to increases in the cost of raw materials at Teal, and to a lesser extent the start-up cost associated with moving a portion of its manufacturing operations to Mexico. Condor's cost of products sold percentage improved slightly in 2005, compared to 2004. SL-MTI's experienced an increase in its Page 26 cost of products sold percentage to 71% in 2005, from 69% in 2004. This increase is primarily due to additional training costs, increased cost of quality and higher manufacturing inefficiencies, primarily related to the transfer of new programs to its manufacturing facility in Matamoros, Mexico. RFL's cost of products sold percentage improved to 53%, compared to 54% in 2004. This improvement is attributable to product mix and process improvements in its assembly and test areas. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES Engineering and product development expenses in 2005 were $9,367,000, an increase of approximately $416,000, or 5%, compared to 2004. As a percentage of net sales, engineering and product development expenses in 2005 and 2004 remained relatively constant. Condor and Teal increased engineering and product development expenses, with annual increases of $214,000, or 7%, and $206,000, or 12%, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for 2005 were approximately 19% of net sales, compared to 20% in 2004. These expenses decreased by $283,000, or 1%, over the comparative periods as sales increased 7%. Included in selling, general and administrative costs are compensation expense related to certain stock based compensation arrangements with key executives. These expenses are non-cash charges. For 2005 theses charges were $268,000, compared to $809,000 in 2004, a decrease of $541,000. Without these charges, selling, general and administrative costs would have increased by, $258,000, or less than one percent of sales. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expenses in 2005 were $1,986,000, a decrease of approximately $147,000, or 7%, compared to 2004. Depreciation expense was approximately 2% of sales for each of 2005 and 2004. AMORTIZATION OF DEFERRED FINANCING COSTS In connection with entering into its previous credit facility on January 6, 2003, the Company incurred costs of approximately $1,342,000. These costs had been deferred and were being amortized over the three-year term of the facility. On August 2, 2005 the Company terminated its previous credit facility and accordingly wrote off the remaining deferred financing costs related thereto. In connection with entering into the Revolving Credit Facility with Bank of America, N.A. on August 3, 2005, the Company has incurred costs of approximately $258,000. These costs have been deferred and are being amortized over the three-year term of the Revolving Credit Facility. For the year ended December 31, 2005, amortization of deferred financing costs was $485,000 which included the write-off of the deferred financing costs related to the previous credit facility and the amortization of the deferred financing costs related to the current Revolving Credit Facility with Bank of America, N. A. For the year ended December 31, 2004, amortization of deferred financing costs was $447,000. INTEREST INCOME (EXPENSE) In 2005, interest income was $216,000, compared to $102,000 in 2004. Interest expense in 2005 was $522,000, compared to $347,000 in 2004. The increase in interest expense for 2005 is primarily related to $185,000 in early termination fees related to the repayment of the previous credit facility, which occurred in the third quarter of 2005. Page 27 TAXES The effective tax rate for 2005 was approximately 19%, compared to 17% in 2004. The effective tax rate for both periods reflects the statutory rate after adjustments for state and international tax provisions, offset by the recording of benefits from research and development tax credits, foreign tax credits and certain income exclusion benefits. The benefit rate related to the recording of foreign tax credits was 11% in 2005 and 2% in 2004. The benefit rate related to the recording research and development tax credit was 5% in 2005, compared to 17% in 2004. DISCONTINUED OPERATIONS In 2005, the Company recorded a loss from discontinued operations, net of tax, of $473,000. This amount consists primarily of the cost related to environmental and legal charges, partially offset by insurance recoveries related to discontinued operations. In 2004, the Company recorded income from discontinued operations, net of tax, of $2,371,000. This amount is primarily related to a settlement fee received by SL Waber, in the amount of $2,516,000, net of tax, the reversal of certain tax reserves related to EME, in the amount of $225,000, net of expenses, and insurance proceeds related to environmental matters, in the amount of $392,000, net of tax. These income amounts were partially offset by environmental, legal and litigation charges related to discontinued operations. YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
Years Ended December 31, --------------------------------------------- 2004 2003 $ Variance % Variance -------- -------- ---------- ---------- (in thousands) NET SALES Power Electronics Group: Condor $ 41,457 $ 39,450 $ 2,007 5% Teal 30,265 20,393 9,872 48% -------- -------- ------- --- Total 71,722 59,843 11,879 20% -------- -------- ------- --- SL-MTI 24,497 22,053 2,444 11% RFL 22,585 23,388 (803) (3%) -------- -------- ------- --- Total $118,804 $105,284 $13,520 13% ======== ======== ======== ===
Years Ended December 31, ------------------------------------------- 2004 2003 $ Variance % Variance ------- ------- ---------- ---------- (in thousands) INCOME FROM OPERATIONS Power Electronics Group: Condor $ 3,789 $ 3,377 $ 412 12% Teal 4,635 2,671 1,964 74% ------- ------- ------- --- Total 8,424 6,048 2,376 39% ------- ------- ------- --- SL-MTI 2,827 1,957 870 44% RFL 2,091 2,236 (145) (6%) Other (5,033) (3,563) (1,470) (41%) ------- ------- ------- --- Total $ 8,309 $ 6,678 $ 1,631 24% ======= ======= ======= ===
Page 28 Consolidated net sales from continuing operations for 2004, compared to 2003, increased by $13,520,000, or 13%. This increase is primarily due to a $9,872,000 net sales increase at Teal, a $2,444,000 net sales increase at SL-MTI and a $2,007,000 net sales increase at Condor. Net sales increases from 2003 at Teal, SL-MTI and Condor were 48%, 11% and 5%, respectively. The Company's operating income increased to $8,309,000 in 2004, compared to $6,678,000 in 2003. Other than RFL, all of the Company's business segments had increases in operating income in 2004, compared to 2003. RFL's operating income decreased $145,000, or 6%. Income from continuing operations in 2004 was $6,301,000, or $1.08 per diluted share, compared to net income from continuing operations in 2003 of $3,742,000, or $0.63 per diluted share. Income from continuing operations benefited by approximately $1,295,000, or $0.22 per diluted share, due to research and development tax credits recorded during 2004. The Company's business segments and the components of operating expenses are discussed more fully in the following sections. The Power Electronics Group reported an increase in net sales of $11,879,000, or 20%, and an increase in income from operations of $2,376,000, or 39%, over the prior year. The increase in net sales within the Power Electronics Group was primarily attributable to increased sales at Teal of its medical product line, and to a lesser extent its semiconductor product line. Condor's increase was related to increases in sales to OEMs in the medical and industrial markets. International sales, which represent approximately 12% of Condor's total net sales, decreased 9% from the prior year. Net sales of telecommunications products decreased approximately 35% in 2004, compared to 2003. SL-MTI's net sales in 2004 increased approximately $2,444,000, or 11%, while income from operations increased by $870,000, or 44%, compared to net sales and income from operations in 2003. Contributing to the increase in net sales was significant increases in the windings and DC motor product lines, which increased by 20% and 11%, respectively, compared to 2003. By market segment, the largest contributor to the net sales increases was the military market. In addition to increased net sales, improved gross margins contributed to higher income from operations from the prior year. Page 29 RFL's net sales in 2004 decreased approximately $803,000, or 3%, and income from operations decreased approximately $145,000, or 6%, compared to net sales and income from operations in 2003. RFL recorded sales decreases throughout its product line, with the exception of a sales increase of $632,000, or 7%, in its carrier communications products line. RFL experienced weak demand in the U.S. market, as large infrastructure expansion projects by electric power utility companies continued to be deferred in favor of smaller emergency and maintenance projects. RFL maintained its gross margins, compared to 2003, due to its product mix and certain cost containment programs. Despite lower sales volume, in 2004 RFL increased its expenditures for engineering and product development by approximately 7%, compared to 2003. COST OF PRODUCTS SOLD As a percentage of net sales, cost of products sold in 2004 was approximately 64%, compared to approximately 63% in 2003. Although aggregate cost of products sold, as a percentage of net sales, remained relatively constant year-to-year, there were differences among the business segments. The Power Electronics Group cost of products sold percentage increased to 65% in 2004, from 63% in 2003. This increase was due to increases in the cost of raw materials at Teal, and to a lesser extent, product mix at both Condor and Teal. SL-MTI's decreased its cost of products sold percentage by 3%, primarily due to increased sales volume and improved operating efficiencies at its manufacturing facility in Matamoros, Mexico. RFL's cost of products sold percentage remained constant in 2004, compared to 2003, despite a decrease in sales volume, due to its product mix and cost containment measures. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES Engineering and product development expenses in 2004 were $8,951,000, an increase of approximately $1,095,000, or 14%, compared to 2003. As a percentage of net sales, engineering and product development expenses in 2004 and 2003 were approximately 8%. All of the Company's business segments increased their engineering and product development expenditures in 2004, compared to 2003. Condor and SL-MTI significantly increased engineering and product development expenses, with annual increases of 18% and 24%, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for 2004 were approximately 20% of net sales, compared to 21% in 2003. These expenses increased by $1,215,000, or 5%, over the comparative periods. The major reason for the increase was costs related to the increase in sales volume of 13%. Also contributing to the increase was $809,000 in compensation expense related to certain stock based compensation arrangements with key executives, which were non-cash charges for the period. In addition, the Company named an Executive Vice President and Chief Operating Officer at the beginning of the year, which was a position that did not exist in 2003. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expenses in 2004 were $2,133,000, an increase of approximately $282,000, or 15%, compared to 2003. Depreciation expense for 2004 and 2003 was approximately 2% of sales. AMORTIZATION OF DEFERRED FINANCING COSTS In connection with entering into its previous credit facility on January 6, 2003, the Company incurred Page 30 costs of approximately $1,342,000. These costs were deferred and amortized over the three-year term of the facility. The amortization expense was $447,000 in each of 2004 and 2003, respectively. INTEREST INCOME (EXPENSE) In 2004, interest income was $102,000, compared to $172,000 in 2003. Interest expense in 2004 was $347,000, compared to $380,000 in 2003. The decrease in interest expense for 2004 is related to significantly reduced debt levels. TAXES The effective tax rate for 2004 was approximately 17%, compared to 38% in 2003. The effective tax rate for 2004 is significantly lower than the statutory rate primarily due to research and development tax credits recorded during the year. DISCONTINUED OPERATIONS In 2004, the Company recorded income from discontinued operations, net of tax, of $2,371,000. This amount is primarily related to a settlement fee received by SL Waber, in the amount of $2,516,000, net of tax, the reversal of certain net tax reserves related to EME, in the amount of $225,000, net of expenses, and the receipt of insurance proceeds related to environmental matters, in the amount of $392,000, net of tax. These income amounts were partially offset by current environmental, legal and litigation charges related to discontinued operations. In 2003, the Company recorded a loss of $2,422,000, net of tax, from discontinued operations. This amount consisted primarily of the net loss upon the sale of SurfTech, in the amount of $1,450,000 and after-tax environmental costs of $682,000. NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires these costs be treated as current period charges. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. These provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a significant impact on its financial position and results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends the guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 153 will have a significant impact on its financial position and results of operations. Page 31 In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a revision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related implementation guidance. SFAS 123R establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS 123R were to be effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. On April 14, 2005, the SEC adopted a new rule that amends the compliance dates for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, which for the Company would be for the period ended March 31, 2006. The Company will experience a negative impact on its financial position and results of operations in the first quarter of 2006 as a consequence of adopting the grant date fair value provisions of the statement (See Note 1 in the Notes to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K). In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"), which replaces APB Opinion No. 20, "Accounting Changes," and Statement of Financial Accounting Standards No. 3 "Reporting Accounting Changes in Interim Financial Statements" ("SFAS 3"). This Statement changes the requirements for the accounting for and reporting of a change in accounting principles, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance that it does not include specific transition provisions. Specifically, this Statement requires retrospective application to prior periods' financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new accounting principle must be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of the change, the new principle must be applied as if it were adopted prospectively from the earliest practicable date. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This Statement is effective for the Company for all accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This Statement does not change the transition provisions of any existing pronouncements. The Company does not believe that the adoption of SFAS 154 will have a significant impact on its financial position and results of operations. Page 32 ENVIRONMENTAL See "Item 3. Legal Proceedings" in Part I of this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest and foreign currency exchange rates. Changes in the market interest rate affect both interest paid and earned by the Company. The Company's investments and outstanding debt bear variable interest rates. As of December 31, 2005, the Company had no borrowings under its Revolving Credit Facility. During the year and until August 2, 2005, the Company had an outstanding loan balance under its previous credit facility, which bore interest rates ranging from the prime rate plus fifty basis points to the prime rate plus 2%. The Company manufactures some of its products in Mexico and purchases some components in foreign markets. All other foreign market component purchases are primarily invoiced in U.S. dollars. Changes in interest and foreign currency exchange rates did not have a material impact on earnings for 2005, and are not expected to have a material impact on earnings in 2006. See generally, "Item 1A. Business - Risk Factors" and "Item 1. Business - Foreign Operations" in Part I of this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements and supplementary data, together with the report of Grant Thornton LLP, independent registered public accounting firm, are included in Part IV of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures," as such term is defined in Rules 13a-15e and 15d-15e promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K, and provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Page 33 CHANGES IN INTERNAL CONTROLS: There have been no changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. It should be noted that any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Apart from certain information concerning the Company's executive officers, which is set forth in Part I of this Annual Report on Form 10-K, the information required under this Item is incorporated herein by reference to the applicable information in the Proxy Statement for the Company's 2006 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item is incorporated by reference to the Proxy Statement for the Company's 2006 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required under this Item is incorporated by reference to the Proxy Statement for the Company's 2006 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item is incorporated by reference to the Proxy Statement for the Company's 2006 Annual Meeting of Shareholders. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding the Company's independent auditor fees and services and other information required by Item 14 of Part III of this Report is incorporated herein by reference to the Proxy Statement for the Company's 2006 Annual Meeting of Shareholders. Page 34 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) (1) FINANCIAL STATEMENTS The information required by this Item is included in this Annual Report on Form 10-K. Consolidated financial statements and supplementary data, together with the report of Grant Thornton LLP, independent registered public accounting firm, are filed as part of this report. See Index to Financial Statements and Financial Statement Schedule, which appears on page F-1 herein. (A) (2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedule for the years ended December 31, 2005, December 31, 2004, and December 31, 2003 are submitted herewith: Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because (a) the required information is shown elsewhere in this Annual Report on Form 10-K, or (b) they are inapplicable, or (c) they are not required. See Index at page F-1 to Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K. (A) (3) EXHIBITS The information required by this Item is listed in the Exhibit Index of this Annual Report on Form 10-K. Page 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SL INDUSTRIES, INC. (Company) By /s/ Warren G. Lichtenstein Date March 22, 2006 ---------------------------------- Warren G. Lichtenstein POWER OF ATTORNEY SL INDUSTRIES, INC. AND EACH OF THE UNDERSIGNED DO HEREBY APPOINT GLEN KASSAN AND WARREN LICHTENSTEIN, AND EACH OF THEM SEVERALLY, ITS OR HIS TRUE AND LAWFUL ATTORNEY TO EXECUTE ON BEHALF OF SL INDUSTRIES, INC. AND THE UNDERSIGNED ANY AND ALL AMENDMENTS TO THIS ANNUAL REPORT ON FORM 10-K AND TO FILE THE SAME WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION; EACH OF SUCH ATTORNEYS SHALL HAVE THE POWER TO ACT HEREUNDER WITH OR WITHOUT THE OTHER. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATE INDICATED. By /s/ Warren G. Lichtenstein Date March 22, 2006 ---------------------------------- Warren G. Lichtenstein - Chairman of the Board By /s/ Glen M. Kassan Date March 22, 2006 ---------------------------------- Glen M. Kassan - Vice Chairman By /s/ James C. Taylor Date March 22, 2006 ---------------------------------- James C. Taylor - President and Chief Executive Officer (Principal Executive Officer) By /s/ David R. Nuzzo Date March 22, 2006 ---------------------------------- David R. Nuzzo - Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) By /s/ J. Dwane Baumgardner Date March 22, 2006 ---------------------------------- J. Dwane Baumgardner - Director By /s/ Avrum Gray Date March 22, 2006 ---------------------------------- Avrum Gray - Director By /s/ James R. Henderson Date March 22, 2006 ---------------------------------- James R. Henderson - Director By /s/ James A. Risher Date March 22, 2006 ---------------------------------- James A. Risher - Director By /s/ Mark E. Schwarz Date March 22, 2006 ---------------------------------- Mark E. Schwarz - Director Page 36 INDEX TO EXHIBITS The exhibit number, description and sequential page number in the original copy of this document where exhibits can be found as follows:
Exhibit # Description - --------- ----------- 2.1 Securities Purchase Agreement by and among SL Industries, Inc., SL Industries Vertrieb GmbH, and DCX-Chol Holding GmbH, DCX-Chol Enterprises, Inc. and Chol Enterprises, Inc. dated as of January 3, 2003. Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2003. 2.2 Agreement and Plan of Merger, dated December 16, 2005, by and among SL Industries, Inc., Lakers Acquisition Corp. and Ault Incorporated. Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2005. 3.1 Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to the Company's report on Form 10-K for the fiscal year ended December 31, 2000. 3.2 Restated By-Laws. Incorporated by reference to Exhibit 3.2 to the Company's report on Form 10-K for the fiscal year ended December 31, 2000. 10.1* Supplemental Compensation Agreement for the Benefit of Byrne Litschgi. Incorporated by reference to Exhibit 10.1 to the Company's report on Form 8 dated November 9, 1990. 10.2* 1988 Deferred Compensation Agreement with a Certain Officer. Incorporated by reference to Exhibit 10.6 to the Company's report on Form 8 dated November 9, 1990. 10.3* 1991 Long Term Incentive Plan of SL Industries, Inc., as amended, is incorporated by reference to Appendix to the Company's Proxy Statement for its 1995 Annual Meeting held November 17, 1995, previously filed with the Securities and Exchange Commission. 10.4* Capital Accumulation Plan. Incorporated by reference to the Company's report on Form 10K/A for the fiscal period ended July 31, 1994. 10.5* Change-in-Control Agreement dated May 1, 2001 between the Company and James C. Taylor. Incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-K for the fiscal year ended December 31, 2003. 10.6* Bonus Agreement dated August 5, 2002 between the Company and James C. Taylor. Incorporated by reference to Exhibit 10.10 to the Company's report on Form 10-K for the fiscal year ended December 31, 2003. 10.7* Management Agreement dated as of January 23, 2002 between the Company and Steel Partners, Ltd. Incorporated by reference to Exhibit 10.12 to the Company's report on Form 10-K for the fiscal year ended December 31, 2003. 10.8 Revolving Credit Agreement dated as of August 3, 2005, among Bank of America, N.A., as
Page 37 Agent and Lender, SL Industries, Inc., as parent borrower and Cedar Corporation, Condor D.C. Power Supplies, Inc., Condor Holdings, Inc., RFL Electronics, Inc., SL Auburn, Inc., SL Delaware, Inc., SL Surface Technologies, Inc., SL Montevideo Technology, Inc., SLW Holdings, Inc., Teal Electronics Corporation and Waber Power Ltd., collectively, as subsidiary borrowers (transmitted herewith). 14 Code of Conduct and Ethics. Incorporated by reference to Exhibit 14 to the Company's report on Form 10-K for the fiscal year ended December 31, 2003. 21 Subsidiaries of the Company (transmitted herewith). 23 Consent of Independent Registered Public Accounting Firm (transmitted herewith). 31.1 Certification by Principal Executive Officer pursuant to Rule 13a-15(e) or 15(d)-15(e) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (transmitted herewith). 31.2 Certification by Principal Financial Officer pursuant to Rule 13a-15(e) or 15(d)-15(e) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act (transmitted herewith). 32 Certification by Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a or 15d of the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (transmitted herewith).
* Indicates a management contract or compensatory plan or arrangement. Page 38 SL Industries, Inc. Index to Financial Statements and Financial Statement Schedule
Page number in this report -------------- Report of Independent Registered Public Accounting Firm F2 Consolidated Balance Sheets F3 Consolidated Statements of Income F4 Consolidated Statements of Comprehensive Income F4 Consolidated Statements of Shareholders' Equity F5 Consolidated Statements of Cash Flows F6 Notes to Consolidated Financial Statements F7 to F32 Financial Statement Schedule: II. Valuation and Qualifying Accounts F33
F-1 Report of Independent Registered Public Accounting Firm ------------------------------------------------------- The Board of Directors and Shareholders SL Industries, Inc. We have audited the accompanying consolidated balance sheets of SL Industries, Inc. and its subsidiaries (the Company) as of December 31, 2005 and 2004 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SL Industries, Inc. and its subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II, Valuation and Qualifying Accounts, is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 3, 2006 F-2 Item 1. Financial Statements SL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2005 2004 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 9,985,000 $ 2,659,000 Receivables, net 16,436,000 15,734,000 Inventories, net 14,570,000 15,839,000 Prepaid expenses 632,000 714,000 Deferred income taxes, net 2,571,000 3,044,000 ------------ ------------ Total current assets 44,194,000 37,990,000 ------------ ------------ Property, plant and equipment, net 8,754,000 8,509,000 Deferred income taxes, net 3,409,000 3,280,000 Goodwill 10,303,000 10,303,000 Investments available for sale 670,000 -- Other intangible assets, net 1,085,000 1,209,000 Other assets and deferred charges 1,899,000 1,793,000 ------------ ------------ Total assets $ 70,314,000 $ 63,084,000 ============ ============ LIABILITIES Current liabilities: Debt, current portion $ -- $ 559,000 Accounts payable 7,648,000 5,626,000 Accrued income taxes 417,000 962,000 Accrued liabilities Payroll and related costs 6,229,000 6,059,000 Other 4,093,000 5,288,000 ------------ ------------ Total current liabilities 18,387,000 18,494,000 ------------ ------------ Debt, less current portion -- 1,456,000 Deferred compensation and supplemental retirement benefits 3,829,000 3,858,000 Other liabilities 1,453,000 1,589,000 ------------ ------------ Total liabilities 23,669,000 25,397,000 ------------ ------------ Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, no par value; authorized, 6,000,000 shares; none issued $ -- $ -- Common stock, $.20 par value; authorized, 25,000,000 shares; issued, 8,298,000 shares 1,660,000 1,660,000 Capital in excess of par value 40,136,000 39,210,000 Accumulated other comprehensive income 67,000 -- Retained earnings 24,837,000 17,690,000 Treasury stock at cost, 2,701,000 and 2,844,000 shares, respectively (20,055,000) (20,873,000) ------------ ------------ Total shareholders' equity 46,645,000 37,687,000 ------------ ------------ Total liabilities and shareholders' equity $ 70,314,000 $ 63,084,000 ============ ============
See accompanying notes to consolidated financial statements. F-3 SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003 ------------ ------------ ------------ Net sales $126,873,000 $118,804,000 $105,284,000 Cost and expenses: Cost of products sold 81,776,000 75,582,000 66,010,000 Engineering and product development 9,367,000 8,951,000 7,856,000 Selling, general and administrative 23,546,000 23,829,000 22,614,000 Depreciation and amortization 1,986,000 2,133,000 1,851,000 Asset impairment -- -- 275,000 ------------ ------------ ------------ Total cost and expenses 116,675,000 110,495,000 98,606,000 ------------ ------------ ------------ Income from operations 10,198,000 8,309,000 6,678,000 Other income (expense): Amortization of deferred financing costs (485,000) (447,000) (447,000) Interest income 216,000 102,000 172,000 Interest expense (522,000) (347,000) (380,000) ------------ ------------ ------------ Income from continuing operations before income taxes 9,407,000 7,617,000 6,023,000 Income tax provision 1,787,000 1,316,000 2,281,000 ------------ ------------ ------------ Income from continuing operations 7,620,000 6,301,000 3,742,000 (Loss) income from discontinued operations (net of tax) (473,000) 2,371,000 (2,422,000) ------------ ------------ ------------ Net income $ 7,147,000 $ 8,672,000 $ 1,320,000 ============ ============ ============ BASIC NET INCOME (LOSS) PER COMMON SHARE Income from continuing operations $ 1.37 $ 1.10 $ 0.63 (Loss) income from discontinued operations (net of tax) (0.09) 0.41 (0.41) ------------ ------------ ------------ Net income $ 1.29 $ 1.51 $ 0.22 ============ ============ ============ * DILUTED NET INCOME (LOSS) PER COMMON SHARE Income from continuing operations $ 1.33 $ 1.08 $ 0.63 (Loss) income from discontinued operations (net of tax) (0.08) 0.40 (0.41) ------------ ------------ ------------ Net income $ 1.25 $ 1.48 $ 0.22 ============ ============ ============ Shares used in computing basic net income (loss) per common share 5,544,000 5,760,000 5,917,000 Shares used in computing diluted net income (loss) per common share 5,738,000 5,871,000 5,956,000
SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31,
2005 2004 2003 ---------- ---------- ---------- Net income $7,147,000 $8,672,000 $1,320,000 Other comprehensive income (net of tax): Unrealized gain on securities 67,000 -- -- ---------- ---------- ---------- Comprehensive income $7,214,000 $8,672,000 $1,320,000 ========== ========== ==========
* Earnings per share does not total due to rounding. See accompanying notes to consolidated financial statements. F-4 SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
Common Stock -------------------------------------------------- Accumulated Issued Held In Treasury Capital in Other ---------------------- ------------------------- Excess of Retained Comprehensive Shares Amount Shares Amount Par Value Earnings Income (Loss) --------- ---------- ---------- ------------ ----------- ----------- ------------- BALANCE DECEMBER 31, 2002 8,298,000 $1,660,000 (2,398,000) $(15,195,000) $38,820,000 $ 7,698,000 $ -- Net income 1,320,000 Other, including exercise of employee stock options and related income tax benefits 20,000 143,000 6,000 Treasury stock sold 171,000 1,070,000 37,000 Treasury stock purchased (149,000) (978,000) --------- ---------- ---------- ------------ ----------- ----------- ------- BALANCE DECEMBER 31, 2003 8,298,000 $1,660,000 (2,356,000) $(14,960,000) $38,863,000 $ 9,018,000 $ -- ========= ========== ========== ============ =========== =========== ======= Net income 8,672,000 Other, including exercise of employee stock options and related income tax benefits 73,000 497,000 170,000 Treasury stock sold 41,000 277,000 177,000 Stock repurchase plan (546,000) (6,101,000) Treasury stock purchased (56,000) (586,000) --------- ---------- ---------- ------------ ----------- ----------- ------- BALANCE DECEMBER 31, 2004 8,298,000 $1,660,000 (2,844,000) $(20,873,000) $39,210,000 $17,690,000 $ -- ========= ========== ========== ============ =========== =========== ======= Net income 7,147,000 Unrealized gain on securities 67,000 Other, including exercise of employee stock options and related income tax benefits 136,000 1,005,000 394,000 Treasury stock sold 32,000 233,000 532,000 Treasury stock purchased (25,000) (420,000) --------- ---------- ---------- ------------ ----------- ----------- ------- BALANCE DECEMBER 31, 2005 8,298,000 $1,660,000 (2,701,000) $(20,055,000) $40,136,000 $24,837,000 $67,000 ========= ========== ========== ============ =========== =========== =======
See accompanying notes to consolidated financial statements. F-5 SL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2005 2004 * 2003 * ----------- ----------- ------------ OPERATING ACTIVITIES: Net income $ 7,147,000 $ 8,672,000 $ 1,320,000 Add: losses (less: income) from discontinued operations 473,000 (2,371,000) 2,422,000 ----------- ----------- ------------ Income from continuing operations 7,620,000 6,301,000 3,742,000 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation 1,605,000 1,848,000 1,654,000 Amortization 381,000 285,000 197,000 Amortization of deferred financing costs 485,000 447,000 447,000 Asset impairment -- -- 275,000 Non-cash compensation expense 268,000 959,000 309,000 Provisions for losses on accounts receivable 72,000 136,000 23,000 Cash surrender value of life insurance policies (26,000) (17,000) 21,000 Deferred compensation and supplemental retirement benefits 510,000 348,000 458,000 Deferred compensation and supplemental retirement benefit payments (529,000) (502,000) (545,000) Deferred income taxes 107,000 (651,000) 2,122,000 Loss on sales of equipment 12,000 3,000 9,000 Changes in operating assets and liabilities, excluding effects of business dispositions: Accounts receivable (731,000) (2,714,000) 4,366,000 Inventories 1,269,000 (4,830,000) 2,711,000 Prepaid expenses 533,000 353,000 (410,000) Other assets (580,000) (512,000) (346,000) Accounts payable 2,026,000 1,921,000 (1,508,000) Other accrued liabilities (1,487,000) (137,000) (2,249,000) Accrued income taxes (327,000) 1,305,000 (1,312,000) ----------- ----------- ------------ Net cash provided by operating activities from continuing operations 11,208,000 4,543,000 9,964,000 Net cash (used in) provided by operating activities from discontinued operations (417,000) 1,851,000 (1,410,000) ----------- ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 10,791,000 6,394,000 8,554,000 ----------- ----------- ------------ INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,904,000) (1,642,000) (1,616,000) Purchases of investments available for sale (567,000) -- -- Purchases of other assets (465,000) -- -- Proceeds from sale of subsidiary (cash and notes receivable) -- 1,000,000 7,600,000 Proceeds from sale of equipment -- 9,000 -- Proceeds from notes receivable -- -- 2,000 ----------- ----------- ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,936,000) (633,000) 5,986,000 ----------- ----------- ------------ FINANCING ACTIVITIES: Payments of deferred financing costs (258,000) -- (201,000) Payments of term loans (2,015,000) (887,000) (616,000) Proceeds from stock options exercised 1,399,000 517,000 149,000 Treasury stock sales (purchases), net 345,000 (6,233,000) 129,000 Net proceeds from Senior Credit Facility -- -- 3,518,000 Payments to Revolving Credit Facility -- -- (17,557,000) ----------- ----------- ------------ NET CASH USED IN FINANCING ACTIVITIES (529,000) (6,603,000) (14,578,000) ----------- ----------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 7,326,000 (842,000) (38,000) ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,659,000 3,501,000 3,539,000 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,985,000 $ 2,659,000 $ 3,501,000 =========== =========== ============
* Revised from prior presentation (see Note 1). See accompanying notes to consolidated financial statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BACKGROUND: SL Industries, Inc. (the "Company"), a New Jersey corporation, through its subsidiaries, designs, manufactures and markets power electronics, motion control, power protection, and specialized communication equipment that is used in a variety of medical, aerospace, computer, datacom, industrial, telecom, transportation and electric power utility equipment applications. Its products are incorporated into larger systems to increase operating safety, reliability and efficiency. The Company's products are largely sold to original equipment manufacturers, the electric utility industry, and, to a lesser extent, commercial distributors. The Company's customer base is primarily located in the United States. BASIS OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. CASH FLOW REVISION: In 2005, the Company has separately disclosed cash flows attributable to discontinued operations (all of which are operating activities), which in the prior periods were reported on a combined basis as a single amount outside of operating, investing and financing activities. The Company had no cash flows attributable to discontinued operations related to investing and financing activities for all periods presented. RECLASSIFICATIONS: Reclassifications, when applicable, are made to the prior year consolidated financial statements to conform with the current year presentation. CASH EQUIVALENTS: The Company considers all highly liquid debt instruments with an original maturity date of three months or less and investments in money market accounts to be cash equivalents. At December 31, 2005 and December 31, 2004, cash and cash equivalents are held principally at one financial institution. REVENUE RECOGNITION: Revenue is recognized when persuasive evidence of an arrangement exists, when title and risk of ownership passes, the sales price is fixed or determined and collectibility is probable. Generally, those criteria are met at the time the product is shipped. Provisions are made at the time the related revenue is recognized for product returns, product warranties, rebates, certain stock scrap programs with distributors and other sales incentives offered by the Company to its customers. Freight revenues billed to customers are included in net sales and expenses for shipping products are included in cost of sales. ACCOUNTS RECEIVABLE: The Company's accounts receivable primarily consist of trade receivables and are reported net of allowances for doubtful accounts of approximately $569,000 and $472,000 for 2005 and 2004, respectively. The Company's estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, the Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations (bankruptcy, etc.). In these cases, the Company uses its judgment, based on the best available facts and circumstances, and F-7 records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on several factors, including historical write-offs as a percentage of sales and anticipated returns related to customer receivables. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligation), the Company's estimates of the recoverability of amounts due could be reduced by a material amount. INVENTORIES: Inventories are valued at the lower of cost or market. Cost is primarily determined using the first-in, first-out ("FIFO") method. Cost for certain inventories is determined using the last-in, first-out ("LIFO") method. The Company ensures inventory is valued at the lower of cost or market, and continually reviews the book value of discontinued product lines to determine if these items are properly valued. The Company identifies these items and assesses the ability to dispose of them at a price greater than cost. If it is determined that cost is less than market value, then cost is used for inventory valuation. If market value is less than cost, then related inventory is set to that value. If a write down to the current market value is necessary, the market value cannot be greater than the net realizable value, defined as selling price less costs to complete and dispose and cannot be lower than the net realizable value less a normal profit margin. The Company also continually evaluates the composition of its inventory and identifies slow-moving and excess inventories. Inventory items identified as slow-moving or excess are evaluated to determine if reserves are required. If the Company is not able to achieve its expectations of the net realizable value of the inventory at current value, it would adjust its reserves accordingly. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at cost and include expenditures for new facilities and major renewals and betterments. Maintenance, repairs and minor renewals are charged to expense as incurred. When assets are sold or otherwise disposed of, any gain or loss is recognized currently. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the assets, which range from 25 to 40 years for buildings, 3 to 15 years for equipment and other property, and the lease term for leasehold improvements. GOODWILL AND OTHER INTANGIBLES: In June 2001, FASB issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which requires that goodwill and certain other intangible assets having indefinite lives will no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have definitive lives will continue to be amortized over their estimated useful lives. LONG-LIVED ASSETS: As of January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS No. 144"), which supersedes Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." Accordingly, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company assesses the recoverability of the asset either by estimated cash flows or independent appraisals. ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to current operations are charged to expense or capitalized, as appropriate. Environmental expenditures that relate to former business units are reported as part of discontinued operations. Liabilities are recorded when remedial efforts are F-8 probable and the costs can be reasonably estimated. The liability for remediation expenditures includes elements of costs such as site investigations, consultants' fees, feasibility studies, outside contractor expenses and monitoring expenses. Estimates are not discounted, nor are they reduced by potential claims for recovery from the Company's insurance carriers. The liability is periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity and other relevant factors including changes in technology or regulations. DEBT ISSUANCE COSTS: Costs incurred in securing long-term debt are deferred and amortized over the term of the related debt. PRODUCT WARRANTY COSTS: The Company offers various warranties on its products. The Company provides for its estimated future warranty obligations in the period in which the related sale is recognized primarily based on historical experience. For 2005, 2004 and 2003, these expenses were $273,000, $326,000 and $423,000, respectively. ADVERTISING COSTS: Advertising costs are expensed as incurred. For 2005, 2004 and 2003, these costs were $289,000, $268,000 and $296,000, respectively. RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as incurred. For 2005, 2004 and 2003, these costs were $3,319,000, $3,811,000 and $2,659,000, respectively. INCOME TAXES: The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. FOREIGN CURRENCY CONVERSION: The Company's Mexican subsidiaries' functional currency is U.S. dollars. Conversion gains or losses resulting from these foreign currency transactions are included in the accompanying consolidated statements of income. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant areas which require the use of management estimates relate to product warranty costs, accrued liabilities related to litigation, allowance for doubtful accounts, allowance for inventory obsolescence and environmental costs. NET INCOME PER COMMON SHARE: The Company has presented net income per common share pursuant to Financial Accounting Standards Board Statement of Financial Accounting Standard No. 128, "Earnings per Share." Basic net income per common share is computed by dividing reported net income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted net income per common share is computed by dividing reported net income available to common shareholders by the weighted average shares outstanding for the period, adjusted for the dilutive effect of common stock equivalents, which consist of stock options, using the treasury stock method. F-9 The table below sets forth the computation of basic and diluted net income per share:
Net Income Shares Per Share Amount ---------- ------ ---------------- (in thousands, except per share amounts) For the Year Ended December 31, 2005: Basic net income per common share $7,147 5,544 $ 1.29 Effect of dilutive securities -- 194 (0.04) ------ ----- ------ Diluted net income per common share $7,147 5,738 $ 1.25 ====== ===== ====== For the Year Ended December 31, 2004: Basic net income per common share $8,672 5,760 $ 1.51 Effect of dilutive securities -- 111 (0.03) ------ ----- ------ Diluted net income per common share $8,672 5,871 $ 1.48 ====== ===== ====== For the Year Ended December 31, 2003: Basic net income per common share $1,320 5,917 $ 0.22 Effect of dilutive securities -- 39 -- ------ ----- ------ Diluted net income per common share $1,320 5,956 $ 0.22 ====== ===== ======
For the years ended December 31, 2005 and December 31, 2004, 6,000 and 437,000 stock options were excluded from the dilutive computations because the option exercise prices were greater than the average market price of the Company's common stock. STOCK BASED COMPENSATION: In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure" ("SFAS No. 148"), an amendment of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 148 provides alternative methods for a voluntary change to the fair value method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. The Company has elected to continue to account for its stock-based employee compensation plans under Accounting Principals Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations. The following disclosures are provided in accordance with SFAS No. 148. As permitted by the FASB, the Company has elected to follow APB No. 25 and related interpretations in accounting for its stock option plans. Under APB Opinion No. 25, compensation expense is measured as the excess, if any, of the fair value of the Company's common stock at the date of the grant over the amount a grantee must pay to acquire the stock. The Company's stock option plans enable the Company to grant options with an exercise price not less than the fair value of the Company's common stock at the date of the grant. However, the Company has recognized approximately $268,000 and $809,000 in the years ended December 31, 2005 and December 31, 2004, respectively, in compensation expense related to certain stock based compensation arrangements. The exercise price of all stock options generally equals the market price of the Company's common stock on the date of grant. Compensation cost has been recognized for the Company's stock option plans as noted in the table below. Had compensation cost for the Company's stock option plans been F-10 determined based upon the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 123, the Company's net income and net income per common share would have been as follows:
Years Ended December 31, ------------------------ 2005 2004 2003 ------ ------ ------ (in thousands, except per share amounts) Net income, as reported $7,147 $8,672 $1,320 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 170 534 186 ------ ------ ------ 7,317 9,206 1,506 Deduct: Total stock-based employee compensation expense determined under fair value based method for awards granted, modified, or settled, net of related tax effects (280) (761) (752) ------ ------ ------ Pro forma net income $7,037 $8,445 $ 754 ====== ====== ====== Earnings per common share: Basic - as reported $ 1.29 $ 1.51 $ 0.22 Basic - pro forma $ 1.27 $ 1.47 $ 0.13 Diluted - as reported $ 1.25 $ 1.48 $ 0.22 Diluted - pro forma $ 1.23 $ 1.44 $ 0.13 ====== ====== ======
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Years Ended December 31, --------------------------- 2005 2004 2003 ------- ------- ------- Expected dividend yield 0% 0% 0% Expected stock price volatility 36.87% 46.73% 66.18% Risk-free interest rate 4.35% 2.81% 2.69% Expected life of stock option 5 years 5 years 5 years ======= ======= =======
In December 2004, the FASB issued Statement of Financial Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), requiring all share-based payments to employees, including grants of employee stock options to be recognized as compensation expense in the financial statements based on their fair values. The Securities and Exchange Commission ("SEC") has specified that this standard is to be effective for annual periods beginning after June 15, 2005, the Company's first quarter in fiscal 2006 and includes two transition methods. The Company will use the "modified prospective method" upon adoption and therefore not restate prior period results. Under the modified prospective method, awards granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the consolidated statements of income. All of the Company's stock option plans have expired and are fully vested at December 31, 2005 (See Note 14). During the year, the Company did issue 25,000 options to a recently hired executive of the Company in accordance with the rules and regulations of the SEC. These options are 25% vested at December 31, 2005 and are subject to the F-11 provisions of SFAS No. 123R. The Company has not accelerated or modified the existing stock option plans to eliminate the recording of stock option expense as required by SFAS No. 123R. The unrecognized compensation expense associated with unvested stock options was approximately $170,000 as of December 31, 2005, which will be amortized over an average period of approximately three years. The Company's 2006 fiscal results are expected to include approximately $66,000 of additional compensation expense as a result of the adoption of SFAS No. 123R. RECENT ACCOUNTING PRONOUNCEMENTS: In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R is a revision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related implementation guidance. SFAS 123R establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS 123R were to be effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. On April 14, 2005, the SEC adopted a new rule that amends the compliance dates for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, which for the Company would be for the period ended March 31, 2006. The Company will experience a negative impact on its financial position and results of operations by the first quarter of 2006 as a consequence of adopting the grant date fair value provisions of the statement. Also the effects of adopting this standard will depend on the Company's future stock option activity and terms of options granted. NOTE 2. DISCONTINUED OPERATIONS SL WABER, INC. Effective August 27, 2001, substantially all of the assets of SL Waber, Inc. ("SL Waber") and the stock of Waber de Mexico S.A. de C.V. was sold for approximately $1,053,000. As part of this transaction, the purchaser acquired the rights to the SL Waber name and assumed certain liabilities and obligations of SL Waber. Subsequent to the sale, the Company changed the name of SL Waber to SLW Holdings, Inc. ("SLW Holdings"). The net income or losses of this subsidiary are included in the consolidated statements of income under discontinued operations for all periods presented. ELEKTRO-METALL EXPORT GMBH On January 6, 2003, the Company sold its wholly-owned, indirect German subsidiary, Elektro-Metall Export GmbH ("EME"). EME was a producer of electronic actuation devices and cable harness systems sold to original equipment manufacturers in the aerospace and automotive industries. Its operations are located in Ingolstadt, Germany and Paks, Hungary. In consideration for 100% of the issued and outstanding capital stock of EME, the purchaser paid $8,000,000, consisting of cash of $4,000,000 paid at closing and $4,000,000 of purchaser notes. In addition, EME made a distribution of $2,000,000 to the F-12 Company prior to closing. The purchaser notes were comprised of a $3,000,000 secured note that bore interest at the prime rate plus 2%, which was paid on March 14, 2003, and a $1,000,000 unsecured note that bore interest at an annual rate of 12%, which was paid on April 2, 2004. The net income or losses of this subsidiary are included in the consolidated statements of income under discontinued operations for all periods presented. SL SURFACE TECHNOLOGIES, INC. SL Surface Technologies, Inc. ("SurfTech") produced industrial coatings and platings for equipment in the corrugated paper and telecommunications industries. On November 24, 2003, the Company sold the operating assets of SurfTech. The sale included current assets and equipment used by SurfTech. The purchaser paid $600,000 in cash, plus the assumption of certain liabilities. The Company continues to own the land and building on which SurfTech's operations were conducted, and has entered into a ten-year lease with the buyer. As a result of the sale, the Company recorded an after tax loss of $442,000, which included severance, closing costs and a required contribution to a union pension plan discussed more fully below. In addition, as a result of the sale, the Company had reclassified a $428,000 asset impairment charge related to SurfTech's assets as part of discontinued operations. SurfTech had made contributions, based on rates per hour, as specified in two union agreements, to two union-administered defined benefit multi-employer pension plans. Under the multi-employer Pension Plan Amendments Act of 1980, an employer is liable upon withdrawal from or termination of a multi-employer plan for its proportionate share of the plan's unfunded vested benefits liability. During 2003 the Company withdrew from both plans and recorded a total charge of $684,000 regarding the Company's withdrawal from the two plans. Revenue and income before income taxes from the discontinued operations of SurfTech (exclusive of the loss on the sale of net assets) were as follows:
Year Ended December 31, 2003 ----------------- (in thousands) Revenues $ 1,840 Net loss before income taxes $(2,941) =======
NOTE 3. INCOME TAXES Income tax (benefit) provision for the years ended December 31, 2005, 2004 and 2003 is as follows:
Years Ended December 31, ------------------------- 2005 2004 2003 ------ ------ ------- (in thousands) Income tax from continuing operations $1,787 $1,316 $ 2,281 Income tax (benefit) provision from discontinued operations (295) 892 (1,097) ------ ------ ------- $1,492 $2,208 $ 1,184 ====== ====== =======
F-13 Income from continuing operations before provision for income taxes consists of the following:
Years Ended December 31, ------------------------ 2005 2004 2003 ------ ------ ------ (in thousands) U.S. $9,378 $7,504 $5,724 Non-U.S. 29 113 299 ------ ------ ------ $9,407 $7,617 $6,023 ====== ====== ======
The provision (benefit) for income taxes from continuing operations consists of the following:
Years Ended December 31, ------------------------ 2005 2004 2003 ------ ------ ------ (in thousands) Current: Federal $1,276 $1,367 $ 32 International 152 110 144 State 121 (24) 158 Deferred: Federal 10 (5) 1,576 State 228 (132) 371 ------ ------ ------ $1,787 $1,316 $2,281 ====== ====== ======
The benefit for income taxes related to discontinued operations for 2005 was $295,000. The income tax provision related to discontinued operations for 2004 was $892,000, and a benefit of $1,097,000 was recorded for 2003. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2005 and December 31, 2004 are as follows: F-14
December 31, ----------------- 2005 2004 ------- ------- (in thousands) Deferred tax assets: Deferred compensation $ 1,683 $ 1,646 Inventory valuation 531 759 Tax loss carryforwards 1,871 1,837 Foreign tax credit carryforwards 1,113 564 R&D tax credit carryforwards 2,707 2,856 Other 1,479 1,364 ------- ------- 9,384 9,026 ------- ------- Less: valuation allowance (3,572) (3,267) ------- ------- 5,812 5,759 ------- ------- Deferred tax liabilities: Accelerated depreciation and amortization 954 663 ------- ------- 4,858 5,096 ------- ------- Assets & liabilities related to discontinued operations, net 1,122 1,228 ------- ------- $ 5,980 $ 6,324 ======= =======
As of December 31, 2005 and December 31, 2004, the Company's gross foreign tax credits totaled approximately $1,113,000 and $564,000, respectively. These credits can be carried forward for ten years and expire between 2009 and 2015. As of December 31, 2005 and December 31, 2004, the Company's research and development tax credits totaled approximately $2,707,000 and $2,856,000. Of these credits approximately $2,196,000 can be carried forward for fifteen years and expire between 2013 and 2020, while $511,000 will carry over indefinitely. The Company has assessed its past earnings history and trends, sales backlog, budgeted sales, and expiration dates of tax carryforwards and has determined that it is more likely than not that the $5,980,000 of the net deferred tax assets as of December 31, 2005 will be realized. The Company has an allowance of $3,572,000 provided against the gross deferred tax asset, relating primarily to research and development tax credits and state net operating loss carryforwards. F-15 The following is a reconciliation of income tax expense (benefit) related to continuing operations at the applicable federal statutory rate and the effective rates:
Years Ended December 31, ------------------------ 2005 2004 2003 ---- ---- ---- Statutory rate 34% 34% 34% Tax rate differential on foreign sales corporation/extraterritorial income exclusion benefit earnings (1) (2) (2) International rate differences 2 1 1 State income taxes, net of federal income tax 4 5 5 Foreign tax credits (11) (2) -- Research and development credits (5) (17) -- Other (4) (2) -- --- --- --- 19% 17% 38% === === ===
NOTE 4. RECEIVABLES Receivables consist of the following:
December 31, ----------------- 2005 2004 ------- ------- (in thousands) Trade receivables $16,638 $15,771 Less: allowance for doubtful accounts (569) (472) ------- ------- 16,069 15,299 Recoverable income taxes 2 82 Other 365 353 ------- ------- $16,436 $15,734 ======= =======
NOTE 5. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many industries and geographic regions. F-16 NOTE 6. INVENTORIES Inventories consist of the following:
December 31, ----------------- 2005 2004 ------- ------- (in thousands) Raw materials $ 9,774 $ 9,669 Work in process 4,699 5,000 Finished goods 1,926 3,633 ------- ------- 16,399 18,302 Less: allowances (1,829) (2,463) ------- ------- $14,570 $15,839 ======= =======
The above includes certain inventories which are valued using the LIFO method, which aggregated $4,746,000 and $3,832,000 as of December 31, 2005 and December 31, 2004, respectively. The excess of FIFO cost over LIFO cost as of December 31, 2005 and December 31, 2004 was approximately $502,000 and $565,000, respectively. NOTE 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
December 31, ------------------- 2005 2004 -------- -------- (in thousands) Land $ 1,170 $ 1,170 Buildings and leasehold improvements 6,956 6,834 Equipment and other property 18,585 17,013 -------- -------- 26,711 25,017 Less: accumulated depreciation (17,957) (16,508) -------- -------- $ 8,754 $ 8,509 ======== ========
NOTE 8. INVESTMENTS AVAILABLE FOR SALE Investments available for sale consist of the Company's equity ownership in Ault Incorporated ("Ault"), a publicly traded company. The Company's investment in Ault is accounted for as an available for sale security in accordance with the provisions of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The investment, which has a cost basis of $567,000, is carried at fair value determined by currently available market prices. The unrealized gain, net of tax, in the amount of $67,000, is reported in accumulated other comprehensive income as a component of shareholders' equity until realized. At December 31, 2005, the Company owned approximately 234,000 shares of Ault, which were purchased in the open market. (See Note 19 Subsequent Events for further discussion of Ault securities). F-17 NOTE 9. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets consist of the following:
December 31, 2005 December 31, 2004 -------------------------------------- -------------------------------------- Accumulated Accumulated Gross Value Amortization Net Value Gross Value Amortization Net Value ----------- ------------ --------- ----------- ------------ --------- (in thousands) Goodwill $10,303 $ -- $10,303 $10,303 $ -- $10,303 ------- ---- ------- ------- ------ ------- Other intangible assets: Patents 919 723 196 946 666 280 Covenant not to compete -- -- -- 110 110 -- Trademarks 572 -- 572 572 -- 572 Licensing fees 355 53 302 355 18 337 Other 51 36 15 437 417 20 ------- ---- ------- ------- ------ ------- Total other intangible assets 1,897 812 1,085 2,420 1,211 1,209 ------- ---- ------- ------- ------ ------- $12,200 $812 $11,388 $12,723 $1,211 $11,512 ======= ==== ======= ======= ====== =======
The Company conducted its initial test for impairment of goodwill and other intangible assets in the second quarter of 2002. The Company allocated its adjusted goodwill balance to its reporting units and conducted the transitional impairment tests required by SFAS No. 142. The fair values of the reporting units were estimated using a combination of the expected present values of future cash flows and an assessment of comparable market values. No impairment charges were recorded as a result of the initial impairment test. There were no impairment charges related to goodwill and intangible assets recorded during 2005, 2004 and 2003. The other intangible assets that have definite lives are all amortizable and have original estimated useful lives as follows: patents are amortized over approximately 13 years, licensing fees over approximately 10 years and trademarks are not amortized. Amortization expense for intangible assets subject to amortization in each of the next five fiscal years is estimated to be approximately $111,000 for the next two years, $66,000 in the third year and $39,000 in the fourth and fifth years. Amortization expense related to intangible assets for 2005, 2004 and 2003 was $112,000, $126,000 and $113,000, respectively. Intangible assets subject to amortization have a weighted average life of approximately 11 years. F-18 NOTE 10. DEBT Debt consists of the following:
December 31, -------------- 2005 2004 ---- ------ (in thousands) Term loan A $-- $1,600 Term loan B -- 415 --- ------ -- 2,015 Less: current portion -- (559) --- ------ Total long-term debt $-- $1,456 === ======
During 2005 until August 2, 2005, the Company was a party to a three-year senior secured credit facility (the "Senior Credit Facility") with LaSalle Business Credit LLC. The Senior Credit Facility provided for a revolving loan and two term loans up to a maximum indebtedness of $20,000,000. The revolving loan of up to $16,810,000 was based upon eligible receivables and inventory, as well as an overadvance amount of $1,500,000. The overadvance amount was fully paid down on April 7, 2004. The two term loans of $2,350,000 and $840,000 were to be paid down over a three-year term. The Senior Credit Facility restricted investments, acquisitions, capital expenditures and dividends. The Senior Credit Facility also contained financial covenants relating to minimum levels of net worth, fixed charge coverages, levels of earnings before interest, taxes, depreciation and amortization and maximum levels of capital expenditures, as defined. The Company's Senior Credit Facility bore interest ranging from the prime rate plus fifty basis points to the prime rate plus 2%. The Senior Credit Facility was secured by all of the Company's assets. The Senior Credit Facility also provided for certain reserves for outstanding letters of credit and other contingencies. These reserves reduced the Company's availability under the revolving loan portion of the Senior Credit Facility. In July 2005, the Company received a waiver related to the reserves for other contingencies. This waiver reduced the Company's reserve requirement by $3,000,000. The Senior Credit Facility was set to expire on January 6, 2006. The outstanding term loan balances bore interest at an annual rate of 6.75%. On August 2, 2005, the Company paid the outstanding term loan balances under its existing Senior Credit Facility in the amount of $1,641,000. The Company also paid legal and early termination fees of $212,000. These payments were made from the Company's available funds. Also the Company wrote off approximately $189,000 of the remaining deferred financing costs related to the Senior Credit Facility. On August 3, 2005, the Company entered into a revolving credit facility (the "Revolving Credit Facility") with Bank of America, N.A. ("Bank of America") to replace its Senior Credit Facility. The Revolving Credit Facility (with a standby and commercial letter of credit sub-limit of $5,000,000) provides for borrowings up to $25,000,000 and under certain circumstances maximum borrowings of $30,000,000. The Revolving Credit Facility expires on June 30, 2008. Borrowings under the Revolving Credit Facility bear interest, at the Company's option, at the London interbank offering rate ("LIBOR") plus a margin rate ranging from 0.9% to 1.9%, or the higher of a Base Rate plus a margin rate ranging F-19 from 0% to 0.5%. The Base Rate is equal to the higher of (i) the Federal Funds Rate plus 0.5%, or (ii) Bank of America's publicly announced prime rate. The margin rates are based on certain leverage ratios, as defined. The Company is subject to compliance with certain financial covenants set forth in the Revolving Credit Facility, including but not limited to, capital expenditures, consolidated net worth, and certain interest and leverage ratios, as defined. As of December 31, 2005, the Company did not have any outstanding balances under its Revolving Credit Facility. The weighted average interest rate on borrowings during 2005 and 2004 was 6.33% and 4.99%, respectively. NOTE 11. ACCRUED LIABILITIES - OTHER Accrued liabilities - other consist of the following:
December 31, --------------- 2005 2004 ------ ------ (in thousands) Taxes (other than income) and insurance $ 483 $ 805 Commissions 451 482 Accrued litigation and legal fees 558 1,190 Other professional fees 484 689 Environmental 1,220 1,275 Warranty 851 921 Other 973 915 Reclassified to other long-term liabilities (927) (989) ------ ------ $4,093 $5,288 ====== ======
Included in the environmental accrual are estimates for all known costs believed to be probable for sites, which the Company currently operates or had operated at one time and which are explained more fully under Environmental (Note 13). A summary of the Company's warranty reserve for 2005 and 2004 is as follows:
December 31, -------------- 2005 2004 ----- ----- (in thousands) Liability, beginning of year $ 921 $ 915 Expense for new warranties issued 434 330 Expense related to accrual revisions for prior year (161) (4) Warranty claims paid (343) (320) ----- ----- Liability, end of period $ 851 $ 921 ===== =====
F-20 NOTE 12. RETIREMENT PLANS AND DEFERRED COMPENSATION The Company maintains three noncontributory, defined contribution pension plans covering all of its full-time, US employees. The Company's contributions to these plans are based on a percentage of employee contributions and/or plan year gross wages, as defined. The Company's subsidiaries: Teal Electronics Corp. ("Teal"), Condor D.C. Power Supplies, Inc. ("Condor") and SL-Montevideo Technology, Inc. ("SL-MTI"), as well as the corporate office provide contributions to their plans based on a percentage of employee contributions. Condor, SL-MTI and the corporate office also provide profit sharing contributions annually, based on plan year gross wages, as does another subsidiary, RFL Electronics Inc. ("RFL"). Costs incurred under these plans during 2005, 2004 and 2003 amounted to approximately $1,049,000, $976,000 and $1,131,000, respectively. The Company has agreements with certain active and retired directors, officers and key employees providing for supplemental retirement benefits. The liability for supplemental retirement benefits is based on the most recent mortality tables available and discount rates of 6% to 12%. The amount charged to income in connection with these agreements amounted to $422,000, $358,000 and $411,000, for 2005, 2004 and 2003, respectively. The Company is the owner and beneficiary of life insurance policies on the lives of some of the participants having a deferred compensation or supplemental retirement agreement. As of December 31, 2005, the aggregate death benefit totaled $586,000, with the corresponding cash surrender value of all policies totaling $297,000. As of December 31, 2005, certain agreements may restrict the Company from utilizing cash surrender value of certain life insurance policies totaling approximately $297,000 for purposes other than the satisfaction of the specific underlying deferred compensation agreements, if benefits are not paid by the Company. The Company nets the dividends realized from the life insurance policies with premium expenses. Net expenses recorded in connection with these policies amounted to $17,000, $9,000 and $0 for 2005, 2004 and 2003, respectively. NOTE 13. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities, equipment and vehicles from third parties that expire through 2011. The minimum rental commitments as of December 31, 2005 are as follows:
Operating Capital --------- ------- (in thousands) 2006 $1,157 $ 66 2007 506 14 2008 193 -- 2009 126 -- 2010 110 -- Thereafter 94 -- ------ ---- Total minimum payments $2,186 $ 80 ------ ---- Less: interest (15) ---- Total principal payable $ 65 ====
F-21 For 2005, 2004 and 2003, rental expense applicable to continuing operations aggregated approximately $1,456,000, $1,393,000 and $1,394,000, respectively. LETTERS OF CREDIT: As of December 31, 2005 and 2004, the Company was contingently liable for $634,000 and $605,000, respectively, under an outstanding letter of credit issued for casualty insurance requirements. LITIGATION: In the ordinary course of its business, the Company is subject to loss contingencies pursuant to foreign and domestic federal, state and local governmental laws and regulations and is also party to certain legal actions, which may occur in the normal operations of the Company's business. It is management's opinion that the impact of these legal actions will not have a material adverse effect on the consolidated financial position or results of operations of the Company. SL-MTI defended a cause of action brought against it in the fall of 2000 in the federal district court for the western district of Michigan. The lawsuit was filed by a customer, Eaton Aerospace, Inc. ("Eaton"), alleging breach of contract and warranty in the defective design and manufacture of a high precision motor and demanding compensatory damages of approximately $3,900,000. On November 7, 2002, after a full trial of the facts, a jury awarded Eaton damages of $650,000. In the second quarter of 2005, the Company paid the judgment, together with interest, in the amount of $809,000. The Company is the subject of certain lawsuits and actions relating to environmental issues, including an administrative action in connection with a chrome plating facility in Pennsauken, New Jersey formerly operated by SurfTech (the "SurfTech Site"), which could subject the Company to, among other things, $9,266,000 in collective reimbursements (with other parties) to the New Jersey Department of Environmental Protection (the "NJDEP"). The Company believes that it has significant defenses against all or any part of the claim and that any material impact is unlikely. On June 12, 2002, the Company and SurfTech were served with notice of class action complaint filed in Superior Court of New Jersey for Camden County. The Company and SurfTech are currently two of approximately 39 defendants in this action. The complaint alleges, among other things, that plaintiffs suffered personal injuries as a result of consuming water distributed from the Puchack Wellfield in Pennsauken, New Jersey (which supplies Camden, New Jersey). This case arises from the same factual circumstances as current administrative actions involving the Puchack Wellfield, to which the Company is a party. The administrative actions and the class action lawsuit both allege that SurfTech and other defendants contaminated ground water through the disposal of hazardous substances at the SurfTech site. As with the administrative actions, the Company believes it has significant defenses against the class action plaintiff's claims and intends to pursue them vigorously. Technical data generated as part of remedial activities at the SurfTech Site have not established offsite migration of contaminants. Based on this and other technical factors, the Company has been advised by its outside counsel that it has a strong defense against the claims alleged in the class action plaintiffs' complaint, as well as the environmental administrative actions. It is management's opinion that the impact of legal actions brought against the Company and its operations will not have a material adverse effect on its financial position or results of operations. F-22 However, the ultimate outcome of these matters, as with litigation generally, is inherently uncertain, and it is possible that some of these matters may be resolved adversely to the Company. The adverse resolution of any one or more of these matters could have a material adverse effect on the business, operating results, financial condition or cash flows of the Company. ENVIRONMENTAL: Loss contingencies include potential obligations to investigate and eliminate or mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other facilities, whether or not they are currently in operation. The Company is currently participating in environmental assessments and cleanups at a number of sites under these laws and may in the future be involved in additional environmental assessments and cleanups. Based upon investigations completed by the Company and its independent engineering consulting firms to date, management has provided an estimated accrual for all known costs believed to be probable in the amount of $1,220,000. Of this amount the Company expects to spend approximately $293,000 related to environmental matters in 2006. However, it is in the nature of environmental contingencies that other circumstances might arise, the costs of which are indeterminable at this time due to such factors as changing government regulations and stricter standards, the unknown magnitude of defense and cleanup costs, the unknown timing and extent of the remedial actions that may be required, the determination of the Company's liability in proportion to other responsible parties, and the extent, if any, to which such costs are recoverable from other parties or from insurance. Although these contingencies could result in additional expenses or judgments, or off-sets thereto, at present such expenses or judgments are not expected to have a material effect on the consolidated financial position or results of operations of the Company. Most of the Company's environmental costs relate to discontinued operations and all such appropriate costs have been recorded in discontinued operations. The Company has reported a ground water contamination plume on its property in Camden, New Jersey. In January 2003, the Company submitted to the NJDEP a plan to remediate the site, which is currently under review. Based upon the preliminary evidence, the Company was advised that the cost to remediate the site could amount to $560,000, which has been fully accrued as of December 31, 2005 and December 31, 2004 and has been recorded as part of discontinued operations. The Company has reported soil and groundwater contamination on SL-MTI's property in Montevideo, Minnesota. SL-MTI has conducted analysis of the contamination and performed remediation at the site. Further remediation efforts will be required and the Company is engaged in discussions with the Minnesota Pollution Control Agency to develop a remediation plan. Based on current information, the Company believes it will incur remediation costs at this site of $220,000, which has been accrued as of December 31, 2005. The accrual for this site was $268,000 at December 31, 2004. The Company filed claims with several of its insurers seeking reimbursement for past and future environmental costs. In settlement of its claims, the Company received aggregate cash payments of $2,800,000 prior to fiscal 2001, and commitments from three insurers to pay for a portion of environmental costs associated with the SurfTech site of 15% of costs up to $300,000, 15% of costs up to $150,000 and 20% of costs up to $400,000, respectively. During 2005 and 2004, the Company billed these insurers a total of $131,000 and $654,000, respectively, for their contingent commitments. Reimbursed cost related to these billings is recorded in discontinued operations. As of December 31, 2005 and 2004, the remaining environmental accruals of $1,220,000 and $1,275,000, respectively, have been included in "Accrued Liabilities - Other" (Note 11). F-23 EMPLOYMENT AGREEMENTS: The Company entered into severance agreements with certain key employees in 2001 that provide for one-time payments in the event of a change-in-control, as defined, if the employee is terminated within 12 months of any such change-of-control. These payments range from three to 24 months of the employee's base salary as of the termination date, as defined. If a triggering event had taken place in 2005 and if these employees had been terminated during the year, the payments would have aggregated approximately $3,600,000 under the change-of-control agreements. NOTE 14. STOCK OPTIONS AND CAPITAL STOCK At the Company's 1993 Annual Meeting, the shareholders approved a Non-employee Director Nonqualified Stock Option Plan (the "Director Plan"), which was effective June 1, 1993. The Director Plan provides for the granting of nonqualified options to purchase up to 250,000 shares of the Company's common stock to non-employee directors of the Company in lieu of paying quarterly retainer fees and regular quarterly meeting attendance fees, when elected. The Director Plan enables the Company to grant options, with an exercise price per share not less than fair market value of the Company's common stock on the date of grant, which are exercisable at any time. Each option granted under the Director Plan expires no later than ten years from date of grant and the expiration date of the Director Plan was May 31, 2003. Information for 2005, 2004 and 2003 with respect to the Director Plan is as follows:
Shares Weighted Average (in thousands) Option Price Exercise Price -------------- ------------------ ---------------- Outstanding and exercisable as of December 31, 2002 67 $3.5625 to $14.625 $8.57 Granted 91 $6.00 to $6.00 $6.00 Exercised (18) $6.00 to $6.00 $6.00 --- ------------------ ----- Outstanding and exercisable as of December 31, 2003 140 $3.5625 to $14.625 $7.23 Granted 39 $6.00 to $6.00 $6.00 Exercised (32) $3.5625 to $6.00 $5.41 Cancelled (2) $7.27 to $7.31 $7.30 --- ------------------ ----- Outstanding and exercisable as of December 31, 2004 145 $4.75 to $14.625 $7.31 Exercised (11) $4.75 to $8.5625 $6.15 --- ------------------ ----- Outstanding and exercisable as of December 31, 2005 134 $6.00 to $14.625 $7.40 === ================== =====
As of December 31, 2005, there are no shares available for grant. At the Company's 1991 Annual Meeting, the shareholders approved the adoption of a Long-Term Incentive Plan (the "1991 Plan"), which provided for the granting of options to officers and key employees of the Company to purchase up to 500,000 shares of the Company's common stock. At various annual meetings, from 1995 through 1998, the shareholders approved amendments to increase the number of shares subject to options to 1,522,650. The 1991 Plan enables the Company to grant either nonqualified options, with an exercise price per share established by the Board's Compensation Committee, or incentive stock options, with an exercise price per share not less than the fair market value of the Company's common stock on the date of grant, which are exercisable at any time. Each option granted under the 1991 Plan expires no later than ten years from date of grant. The Plan expired on September 25, 2001 and no future option can be granted under the Plan. F-24 During 2005, the Company issued 25,000 options to a recently hired executive of the Company in accordance with the rules and regulations of the SEC. Information for 2005, 2004, 2003 related to the 1991 Plan and the options issued in 2005 is as follows:
Shares Weighted Average (in thousands) Option Price Exercise Price -------------- ---------------- ---------------- Outstanding as of December 31, 2002 741 $3.25 to $13.50 $10.37 Exercised (10) $5.75 to $5.75 $ 5.75 Cancelled (59) $3.25 to $13.50 $ 8.24 ---- ---------------- ------ Outstanding as of December 31, 2003 672 $3.50 to $13.50 $10.62 Exercised (33) $5.75 to $12.175 $ 7.04 Cancelled (39) $3.50 to $13.50 $ 9.66 ---- ---------------- ------ Outstanding as of December 31, 2004 600 $5.75 to $13.50 $10.84 Granted 25 $17.01 to $17.01 $17.01 Exercised (126) $5.75 to $13.50 $10.58 ---- ---------------- ------ Outstanding as of December 31, 2005 499 $5.75 to $17.01 $11.21 ==== ================ ======
The number of shares exercisable as of December 31, 2005, was 480,000. Transactions from December 31, 2002 through December 31, 2005, under the above plans, were as follows:
Weighted Average Life Shares Weighted Average Remaining (in thousands) Option Price Exercise Price (years) -------------- ------------------ ---------------- ------------ Outstanding as of December 31, 2002 808 $3.25 to $14.625 $10.218 7.25 Granted 91 $6.00 to $6.00 $ 6.00 Exercised (28) $5.75 to $6.00 $ 5.91 Cancelled (59) $3.25 to $13.50 $ 8.24 ---- ------------------ ------- ---- Outstanding as of December 31, 2003 812 $3.50 to $14.625 $10.037 6.44 Granted 39 $6.00 to $6.00 $ 6.00 Exercised (65) $3.5625 to $12.175 $ 6.24 Cancelled (41) $3.50 to $13.50 $ 9.57 ---- ------------------ ------- ---- Outstanding as of December 31, 2004 745 $4.75 to $14.625 $10.154 5.52 Granted 25 $17.01 to $17.01 $ 17.01 Exercised (137) $4.75 to $13.50 $ 10.24 ---- ------------------ ------- ---- Outstanding as of December 31, 2005 633 $5.75 to $17.01 $10.406 4.78 ---- ------------------ ------- ---- Exercisable as of December 31, 2005 614 $5.75 to $17.01 $10.205 ==== ================== =======
The following tables segregate the outstanding options and exercisable options as of December 31, 2005, into three ranges: F-25
Weighted Average Options Outstanding Range of Option Prices per Weighted Average Life Remaining (in thousands) Share Exercise Price (years) - ------------------- -------------------------- ---------------- ---------------- 192 $5.75 to $8.5625 $ 6.023 6.14 326 $8.6875 to $12.9375 $11.664 4.06 115 $13.0625 to $17.01 $14.199 4.58 --- 633 ===
Options Exercisable Range of Option Prices per Weighted Average (in thousands) Share Exercise Price - ------------------- -------------------------- ---------------- 192 $5.75 to $8.5625 $ 6.023 326 $8.6875 to $12.9375 $11.664 96 $13.0625 to $17.01 $13.646 --- 614 ===
NOTE 15. CASH FLOW INFORMATION Supplemental disclosures of cash flow information:
Years Ended December 31, ------------------------ 2005 2004 2003 ------ ---- ------ (in thousands) Interest paid $ 489 $321 $2,640 Income taxes paid $1,480 $407 $ 379 ====== ==== ======
On November 24, 2003, the Company sold substantially all the assets of SurfTech. In conjunction with this sale, the Company received $600,000 in cash and deconsolidated the net book value of assets sold of $782,000. On January 6, 2003, the Company sold its wholly owned German subsidiary EME. In conjunction with this sale, the Company received $7,000,000 in cash in 2003 and deconsolidated the net book value of assets of $9,686,000. On April 2, 2004, the Company received $1,000,000 as final cash payment from the sale of EME. NOTE 16. INDUSTRY SEGMENTS The Company currently operates under four business segments: Condor, Teal, SL-MTI and RFL. In the second quarter of 2003, management decided to combine Condor and Teal into one business unit classified as the Power Electronics Group. Accordingly, for the years ended December 31, 2005, 2004 and 2003, the Company's reportable segments consisted of Condor, Teal (The Power Electronics Group), SL-MTI and RFL. On November 24, 2003 the Company sold the operating assets of SurfTech. Accordingly, the Company has classified this former operating segment as discontinued for all periods presented. Condor produces a wide range of standard and custom power supply products that convert AC or DC power to direct electrical current to be used in customers' end products. Power supplies closely regulate and monitor power outputs, using patented filter and other technologies, resulting in little or no electrical F-26 interference. Teal is a leader in the design and manufacture of custom power conditioning and power distribution units. Teal products are developed and manufactured for custom electrical subsystems for original equipment manufacturers of semiconductor, medical imaging, graphics, and telecommunications systems. SL-MTI is a technological leader in the design and manufacture of intelligent, high power density precision motors. These motor and motion controls are used in numerous applications, including aerospace, medical, and industrial products. RFL designs and manufactures communication and power protection products/systems that are used to protect utility transmission lines and apparatus by isolating faulty transmission lines from a transmission grid. RFL also provides customer service and maintenance for all of its products. The Other segment includes corporate related items, financing activities and other costs not allocated to reportable segments, which includes but is not limited to certain legal, litigation and public reporting charges and the results of insignificant operations. The accounting policies of these business units are the same as those described in the summary of significant accounting policies (see Note 1 for additional information). Business segment operations are conducted through domestic subsidiaries. For all periods presented, sales between business segments were not material. No single customer accounted for more than 10% of consolidated net sales during 2005, 2004 and 2003. Each of the segments has certain major customers, the loss of any of which would have a material adverse effect on such segment.
Years Ended December 31, ------------------------------ 2005 2004 2003 -------- -------- -------- (in thousands) NET SALES Power Electronics Group: Condor $ 43,233 $ 41,457 $ 39,450 Teal 32,777 30,265 20,393 -------- -------- -------- Total 76,010 71,722 59,843 -------- -------- -------- SL-MTI 28,085 24,497 22,053 RFL 22,778 22,585 23,388 -------- -------- -------- Consolidated $126,873 $118,804 $105,284 ======== ======== ========
F-27
Years Ended December 31, ---------------------------- 2005 2004 2003 ------- ------- -------- (in thousands) INCOME FROM OPERATIONS Power Electronics Group: Condor $ 4,543 $ 3,789 $ 3,377 Teal 4,911 4,635 2,671 ------- ------- ------- Total 9,454 8,424 6,048 ------- ------- ------- SL-MTI 3,371 2,827 1,957 RFL 2,284 2,091 2,236 Other (4,911) (5,033) (3,288) Impairment of assets (a) -- -- (275) ------- ------- ------- Income from operations 10,198 8,309 6,678 ------- ------- ------- Amortization of deferred financing costs (485) (447) (447) Interest income 216 102 172 Interest expense (522) (347) (380) ------- ------- ------- Income from continuing operations before income taxes $ 9,407 $ 7,617 $ 6,023 ======= ======= =======
(a) $275 related to a building owned by the Company, which was used by SurfTech.
December 31, ----------------- 2005 2004 ------- ------- (in thousands) TOTAL ASSETS Power Electronics Group: Condor $13,330 $14,105 Teal 12,574 12,742 ------- ------- Total 25,904 26,847 ------- ------- SL-MTI 12,495 10,849 RFL 15,825 16,767 Other 16,090 8,621 ------- ------- Consolidated $70,314 $63,084 ======= =======
December 31, ----------------- 2005 2004 ------- ------- (in thousands) INTANGIBLE ASSETS, NET Teal $ 5,822 $ 5,906 SL-MTI 15 20 RFL 5,551 5,586 ------- ------- Consolidated $11,388 $11,512 ======= =======
F-28
Years Ended December 31, ------------------------ 2005 2004 2003 ------ ------ ------ (in thousands) CAPITAL EXPENDITURES Power Electronics Group: Condor $ 606 $ 542 $ 936 Teal 156 189 23 ------ ------ ------ Total 762 731 959 ------ ------ ------ SL-MTI 515 476 201 RFL 627 410 435 Other -- 25 21 ------ ------ ------ Consolidated $1,904 $1,642 $1,616 ====== ====== ======
Years Ended December 31, ------------------------ 2005 2004 2003 ------ ------ ------ (in thousands) DEPRECIATION AND AMORTIZATION Power Electronics Group: Condor $ 706 $ 978 $ 704 Teal 298 291 268 ------ ------ ------ Total 1,004 1,269 972 ------ ------ ------ SL-MTI 355 289 304 RFL 577 532 516 Other 50 43 59 ------ ------ ------ Consolidated $1,986 $2,133 $1,851 ====== ====== ======
Financial information relating to the Company's segments by geographic area is as follows:
Years Ended December 31, ------------------------------ 2005 2004 2003 -------- -------- -------- (in thousands) NET SALES (1) United States $109,941 $103,141 $ 92,169 Foreign 16,932 15,663 13,115 -------- -------- -------- Consolidated $126,873 $118,804 $105,284 ======== ======== ======== LONG-LIVED ASSETS United States $ 19,281 $ 18,637 $ 19,110 Foreign 861 1,384 1,720 -------- -------- -------- Consolidated $ 20,142 $ 20,021 $ 20,830 ======== ======== ========
(1) Net sales are attributed to countries based on location of customer. F-29 NOTE 17. FOREIGN OPERATIONS In addition to manufacturing operations in California, Minnesota and New Jersey, the Company manufactures substantial quantities of products in leased premises located in Mexicali and Matamoros, Mexico. The Company has outsourced the manufacture of some of its products with contract manufacturers located in Tecate, Mexico, Shanghai and Dongguan, China. These sources of supply present risks of interruption for reasons beyond the Company's control, including political and other uncertainties. Condor manufactures most of its products in Mexico and incurs its labor costs and supplies in Mexican pesos. Teal has moved a limited amount of its manufacturing to Mexico. SL-MTI manufactures approximately 75% of its products in Mexico and incurs related labor costs and supplies in Mexican pesos. Condor, Teal and SL-MTI price their sales in United States dollars. The Mexican subsidiaries of Condor and SL-MTI maintain their books and records in Mexican pesos. Generally, the Company's sales from continuing operations are priced in United States dollars and its costs and expenses are priced in United States dollars and Mexican pesos. Foreign sales comprised 13%, 13% and 12% of sales for 2005, 2004 and 2003, respectively. Accordingly, the competitiveness of the Company's products relative to locally produced products may be affected by the performance of the United States dollar compared with that of its foreign customers' currencies. Additionally, the Company is exposed to foreign currency transaction and translation losses that might result from adverse fluctuations in the values of the Mexican peso. As of December 31, 2005 and 2004, the Company had net liabilities of $639,000 and $286,000, respectively, subject to fluctuations in the value of the Mexican peso. Fluctuations in the value of the Mexican peso were not significant in 2005. However, there can be no assurance that the value of the Mexican peso will continue to remain stable. NOTE 18. RELATED PARTY TRANSACTIONS RFL has an investment of $15,000 in RFL Communications PLC, ("RFL Communications"), representing 4.5% of the outstanding equity thereof. RFL Communications is a distributor of teleprotection and communication equipment located in the United Kingdom. It is authorized to sell RFL products in accordance with an international sales agreement. Sales to RFL Communications for the years ended 2005, 2004 and 2003 were $954,000, $1,156,000 and $621,000, respectively. Accounts receivable due from RFL Communications at December 31, 2005 and 2004 were $168,000 and $116,000, respectively. As a result of certain services being provided to the Company by Steel Partners, Ltd. ("SPL"), a company controlled by the Chairman of the Board of the Company, Warren Lichtenstein, the Compensation Committee has approved fees for services provided by SPL. These fees are the only consideration for the services of the Chairman of the Board, Warren Lichtenstein and the Company's Vice Chairman, Glen Kassan (effective August 10, 2005, Messrs. Lichtenstein and Kassan relinquished their roles as Chief Executive Officer and President, respectively) and other assistance from SPL. The services provided include management and advisory services with respect to operations, strategic planning, finance and accounting, merger, sale and acquisition activities and other aspects of the businesses of the Company. Fees of $475,000 were expensed by the Company for SPL's services in F-30 2005, 2004 and 2003 pursuant to the Management Agreement dated as of January 23, 2002 by and between the Company and SPL. Approximately $40,000 and $290,000 were payable at December 31, 2005 and December 31, 2004, respectively. An additional payment of $250,000 was also awarded to SPL by the Compensation Committee on account of SPL's services in 2004 in recognition of SPL's very significant contributions to the Company's success, including the improvement in operating performance and the reduction of indebtedness, as well as the improvement in returns on invested capital and the Company's stock price, among other things. During the period January 1, 2004 to June 9, 2004, the Company was billed $81,000 in legal fees for services performed by Olshan Grundman Frome Rosenzweig & Wolosky LLP ("Olshan"), a law firm in which a former director of the Company is a senior partner. This director did not stand for reelection at the Company's Annual Meeting of Shareholders held on June 9, 2004 and therefore is no longer considered a related party. All fees incurred through June 9, 2004 for 2004 services had been paid by the Company as of December 31, 2004. The fees related to general corporate and securities matters. NOTE 19. SUBSEQUENT EVENTS On January 26, 2006, the Company, through a wholly owned subsidiary, completed a tender offer for Ault Incorporated ("Ault"). The Company acquired approximately 86.9% of the outstanding common stock of Ault at $2.90 per share. The Company had previously purchased in the open market approximately 4.8% of the outstanding common stock of Ault for $567,000. On January 26, 2006, the Company's wholly-owned subsidiary was merged with and into Ault. As a result, Ault became a wholly-owned subsidiary of the Company, and the shares not tendered were converted into the right to receive $2.90 per share in cash, without interest. The total purchase price for the common stock of Ault was approximately $13,986,000, which includes the shares already owned by the Company. The Company also paid approximately $2,079,000 to acquire all of the outstanding shares of Ault's preferred stock. Ault is a leading manufacturer of power conversion products and is a major supplier to the original equipment manufactures of wireless and wire line communications infrastructure, computer peripherals and handheld devices, medical, industrial, and printing/scanning equipment. Ault is headquartered in Minneapolis, Minnesota and has an engineering and sales office in Norwood, Massachusetts, and engineering, sales and a manufacturing facility in the People's Republic of China. The purchase price will be allocated to the underlying assets and liabilities based on their estimated fair values, pending the results of appraisals and further financial analysis. For the twelve months ended November 27, 2005, Ault had net sales of $37,107,000 (unaudited) and net loss of $5,834,000 (unaudited), of which $2,626,000 related to discontinued operations (unaudited). The source of funds for the acquisition was a combination of the Company's available cash, as well as borrowings from the Revolving Credit Facility. F-31 NOTE 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Three Months Three Months Three Months Ended Ended Ended Ended March 31, 2005 June 30, 2005 September 30, 2005 December 31, 2005 -------------- ------------- ------------------ ----------------- (in thousands, except per share data) Net sales $32,456 $31,259 $32,098 $31,060 Gross margin $11,861 $11,429 $11,167 $10,640 Income from continuing operations before income taxes $ 2,566 $ 1,955 $ 2,931 $ 1,955 Net income (a) $ 1,899 $ 1,127 $ 2,454 $ 1,667 Diluted net income per common share $ 0.34 $ 0.20 $ 0.42 $ 0.29 (a) Includes loss from discontinued operations, net of tax ($70) ($231) ($98) ($74)
Three Months Three Months Three Months Three Months Ended Ended Ended Ended March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004 -------------- ------------- ------------------ ----------------- (in thousands, except per share data) Net sales $26,641 $30,508 $30,910 $30,745 Gross margin $ 9,596 $11,388 $11,280 $10,958 Income from continuing operations before income taxes $ 1,036 $ 2,135 $ 2,522 $ 1,924 Net income (a) $ 3,142 $ 1,579 $ 2,551 $ 1,400 Diluted net income per common share $ 0.52 $ 0.26 $ 0.43 $ 0.25 (a) Includes income (loss) from discontinued operations, net of tax $ 2,457 $ 20 ($3) ($103)
F-32 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions --------------------- Balance at Charged to Charged Balance Beginning Costs and to Other at End of Description of Period Expenses Accounts Deductions Period ----------- ---------- ---------- -------- ---------- --------- (in thousands) YEAR ENDED DECEMBER 31, 2005 Allowance for: Doubtful accounts $472 $ 86 $ 38 $27 $569 YEAR ENDED DECEMBER 31, 2004 Allowance for: Doubtful accounts $365 $136 $ 3 $32 $472 YEAR ENDED DECEMBER 31, 2003 Allowance for: Doubtful accounts $270 $ 76 $102(a) $83 $365
(a) Due to reclassifications. F-33 EX-10.8 2 w18876exv10w8.txt REVOLVING CREDIT AGREEMENT DATED AS OF AUGUST 3, 2005 Exhibit 10.8 REVOLVING CREDIT AGREEMENT AMONG BANK OF AMERICA, N.A., AS AGENT AND A LENDER CERTAIN LENDERS SL INDUSTRIES, INC., AS PARENT BORROWER AND CEDAR CORPORATION CONDOR D.C. POWER SUPPLIES, INC. CONDOR HOLDINGS, INC. RFL ELECTRONICS, INC. SL AUBURN, INC. SL DELAWARE, INC. SL DELAWARE HOLDINGS, INC. SL SURFACE TECHNOLOGIES, INC. SL MONTEVIDEO TECHNOLOGY, INC. SLW HOLDINGS, INC. TEAL ELECTRONICS CORPORATION WABER POWER LTD. COLLECTIVELY, AS SUBSIDIARY BORROWERS DATED AUGUST 3, 2005 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 THE REVOLVING LOAN FACILITY.................................... 2 Section 1.01 Commitment to Lend...................................... 2 Section 1.02 Manner of Borrowing..................................... 2 Section 1.03 Disbursements........................................... 2 Section 1.04 Letters of Credit and Letter of Credit Fees............. 3 ARTICLE 2 PAYMENTS AND PREPAYMENTS....................................... 5 Section 2.01 Reductions In Commitment................................ 5 Section 2.02 Optional Prepayments of Loans........................... 5 Section 2.03 Repayment of Loans In Connection with Reductions of Commitment.............................................. 6 ARTICLE 3 INTEREST AND FEES.............................................. 6 Section 3.01 Interest................................................ 6 Section 3.02 Election of Interest Rate............................... 7 Section 3.03 Interest Upon Default................................... 7 Section 3.04 Fees.................................................... 8 Section 3.05 Computation of Interest and Related Fees................ 8 ARTICLE 4 GENERAL MATTERS CONCERNING LOANS............................... 8 Section 4.01 Manner of Tendering Payments by Borrowers............... 8 Section 4.02 The Notes............................................... 9 Section 4.03 Loan Account............................................ 10 Section 4.04 Additional Provisions Concerning Certain Loans.......... 10 Section 4.05 Taxes................................................... 12 Section 4.06 Lenders' Obligations Several............................ 14 Section 4.07 Permitted Assumptions by Agent as to Lender Payments.... 14 ARTICLE 5 CONDITIONS PRECEDENT........................................... 14 Section 5.01 Conditions Precedent to Initial Loan.................... 14 5.01.1 Loan Documents.............................................. 14 5.01.2 UCC Collateral Documents.................................... 15 5.01.3 Real Estate Collateral Documents............................ 15 5.01.4 Financial Documents......................................... 15
-i- TABLE OF CONTENTS (CONTINUED)
PAGE ---- 5.01.5 Consents, Certificates and Opinions......................... 16 5.01.6 Third Party Agreements...................................... 16 5.01.7 Merger Documents............................................ 17 Section 5.02 Payment of Fees and Costs.............................. 17 Section 5.03 Conditions Precedent to Each Loan...................... 17 Section 5.04 Method of Satisfying Certain Conditions................ 18 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWERS.................... 18 Section 6.01 Organization and Qualification.......................... 18 Section 6.02 Capitalization and Ownership of Subsidiary Borrowers.... 18 Section 6.03 Authorization and Execution............................. 18 Section 6.04 Enforceability; Consents................................ 19 Section 6.05 Security Interests in Collateral........................ 19 Section 6.06 Real Property of Borrowers.............................. 19 Section 6.07 Absence of Conflict with other Agreements, Etc.......... 19 Section 6.08 Business................................................ 20 Section 6.09 Condition of Assets..................................... 20 Section 6.10 Use of Proceeds......................................... 20 Section 6.11 Litigation.............................................. 20 Section 6.12 Indebtedness............................................ 20 Section 6.13 Financial Statements.................................... 20 Section 6.14 Fiscal Year............................................. 21 Section 6.15 Title to Assets......................................... 21 Section 6.16 Patents, Trademarks, Licenses and Franchises............ 21 Section 6.17 Compliance with Law..................................... 21 Section 6.18 Compliance with ERISA................................... 22 Section 6.19 Compliance with Regulations U and X..................... 23 Section 6.20 Investment Company Act.................................. 23 Section 6.21 Public Utility Holding Company Act...................... 23 Section 6.22 Absence of Default...................................... 23 Section 6.23 Agreements with Affiliates and Management Agreements.... 23
-ii- TABLE OF CONTENTS (CONTINUED)
PAGE ---- Section 6.24 No Burdensome Agreements; Material Agreements........... 23 Section 6.25 Solvency................................................ 24 Section 6.26 Taxes................................................... 24 Section 6.27 Environmental Compliance................................ 24 Section 6.28 Labor Disputes and Acts of God.......................... 25 ARTICLE 7 FINANCIAL COVENANTS............................................ 25 Section 7.01 Financial Covenants..................................... 25 Section 7.02 Calculations............................................ 26 ARTICLE 8 COVENANTS CONCERNING REPORTING REQUIREMENTS.................... 26 Section 8.01 Financial Statements.................................... 26 Section 8.02 Officer's Compliance Certificates....................... 27 Section 8.03 Auditors' Reports....................................... 28 Section 8.04 Notice of Default....................................... 28 Section 8.05 Notice Concerning Representations and Warranties........ 28 Section 8.06 Notice of Litigation.................................... 28 Section 8.07 SEC Disclosure.......................................... 28 Section 8.08 Conditions Affecting Collateral......................... 28 Section 8.09 ERISA Notices........................................... 29 Section 8.10 Miscellaneous........................................... 29 Section 8.11 Authorization of Third Parties to Deliver Information... 29 ARTICLE 9 BUSINESS COVENANTS............................................. 30 Section 9.01 Indebtedness............................................ 30 Section 9.02 Liens................................................... 30 Section 9.03 Investments and Acquisitions............................ 32 Section 9.04 Restricted Payments..................................... 34 Section 9.05 Affiliate Transactions.................................. 34 Section 9.06 Disposition of Assets................................... 35 Section 9.07 Liquidation or Merger................................... 35 Section 9.08 Change in Organizational Documents...................... 35 Section 9.09 Issuance of Equity...................................... 36
-iii- TABLE OF CONTENTS (CONTINUED)
PAGE ---- Section 9.10 Environmental Violations................................ 36 Section 9.11 Preservation of Existence, Etc.......................... 36 Section 9.12 Permitted Businesses.................................... 36 Section 9.13 Compliance with Law..................................... 36 Section 9.14 Payment of Taxes and Claims............................. 37 Section 9.15 Tax Consolidation....................................... 37 Section 9.16 Maintenance of Properties............................... 37 Section 9.17 Insurance............................................... 37 Section 9.18 Compliance with ERISA................................... 38 Section 9.19 Maintenance of Records; Fiscal Year..................... 39 Section 9.20 Inspections and Field Examinations...................... 39 Section 9.21 Exchange of Notes....................................... 40 Section 9.22 Compliance with Federal Reserve Regulations............. 40 Section 9.23 Limitations on Certain Restrictive Provisions........... 40 Section 9.24 Corporate Separateness.................................. 40 Section 9.25 Deposit Accounts........................................ 41 Section 9.26 Collateral; Lockbox..................................... 41 Section 9.27 Joinder of Subsidiaries................................. 41 Section 9.28 Further Assurances...................................... 43 ARTICLE 10 DEFAULT....................................................... 43 Section 10.01 Events of Default....................................... 43 Section 10.02 Remedies................................................ 45 Section 10.03 Cash Collateral......................................... 46 ARTICLE 11 DEFINITIONS................................................... 46 Section 11.01 Defined Terms........................................... 46 Section 11.02 Accounting Terms........................................ 65 Section 11.03 Other Definitional Provisions........................... 66 ARTICLE 12 AGENT......................................................... 66 Section 12.01 Authority............................................... 66 Section 12.02 Expenses................................................ 66
-iv- TABLE OF CONTENTS (CONTINUED)
PAGE ---- Section 12.03 Action by Agent......................................... 66 Section 12.04 Exculpatory Provisions.................................. 67 Section 12.05 Investigation by Lenders................................ 67 Section 12.06 Notice of Events of Default............................. 67 Section 12.07 Resignation; Termination................................ 68 Section 12.08 Sharing................................................. 68 Section 12.09 Other Relationships..................................... 68 ARTICLE 13 MISCELLANEOUS................................................. 68 Section 13.01 Notices................................................. 68 Section 13.02 Duration; Survival...................................... 69 Section 13.03 Borrower Representative................................. 69 Section 13.04 No Implied Waiver; Rights Cumulative.................... 69 Section 13.05 Entire Agreement and Amendments......................... 70 Section 13.06 Successors and Assigns.................................. 70 Section 13.07 Descriptive Headings.................................... 72 Section 13.08 Governing Law........................................... 72 Section 13.09 Payments Due on Non-Business Days....................... 72 Section 13.10 Counterparts............................................ 72 Section 13.11 Maximum Lawful Interest Rate............................ 73 Section 13.12 Set-off of Bank Accounts................................ 73 Section 13.13 Severability............................................ 74 Section 13.14 Payment and Reimbursement of Costs and Expenses; Indemnification......................................... 74 Section 13.15 Consent to Jurisdiction................................. 75 Section 13.16 Termination............................................. 75 Section 13.17 Waiver of Right to Jury Trial........................... 75 Section 13.18 Confidentiality......................................... 76 Section 13.19 USA Patriot Act......................................... 76
-v- EXHIBITS EXHIBIT A Form of Revolving Loan Note EXHIBIT B Form of Request for Advance EXHIBIT C Form of Notice of Conversion EXHIBIT D Form of Compliance Certificate EXHIBIT E Form of Assignment and Acceptance Agreement EXHIBIT F Form of Joinder Agreement SCHEDULES Schedule A Commitments Schedule 6.01 Jurisdictions Where each Borrower and Each of Foreign Subsidiary is Incorporated/Organized and Qualified Schedule 6.02 Capital Stock of (or Other Equity or Ownership Interests in) the Borrowers and Foreign Subsidiaries Schedule 6.05 Filing Locations for Financing Statements and Mortgages Schedule 6.06 Real Property Owned or Leased by Borrowers and Subsidiaries Schedule 6.11 Litigation Schedule 6.12 Indebtedness of Borrowers and Subsidiaries Schedule 6.16 List of Patents, Trademarks and Other Intangible Rights Schedule 6.18 ERISA Disclosure Schedule 6.23 Agreements With Affiliates Schedule 6.24 Material Agreements Schedule 9.01 Existing Indebtedness Schedule 9.02 Existing Liens Schedule 9.03 XYZ Acquisition -vi- REVOLVING CREDIT AGREEMENT REVOLVING CREDIT AGREEMENT (this "Agreement") made as of August 3, 2005, by and among SL INDUSTRIES, INC., a New Jersey corporation ("Parent Borrower"), CEDAR CORPORATION, a Nevada corporation, CONDOR D.C. POWER SUPPLIES, INC., a California corporation, CONDOR HOLDINGS, INC., a Delaware corporation, RFL ELECTRONICS, INC., a Delaware corporation, SL AUBURN, INC., a New York corporation, SL DELAWARE, INC., a Delaware corporation, SL DELAWARE HOLDINGS, INC., a Delaware corporation, SL SURFACE TECHNOLOGIES, INC., a New Jersey corporation, SL MONTEVIDEO TECHNOLOGY, INC., a Minnesota corporation, SLW HOLDINGS, INC., a New Jersey corporation, TEAL ELECTRONICS CORPORATION, a California corporation, WABER POWER LTD., a Connecticut corporation (each a "Subsidiary Borrower", and collectively, "Subsidiary Borrowers", and together with Parent Borrower, each a "Borrower" and collectively, the "Borrowers"), BANK OF AMERICA, N.A. ("Bank"), individually, as Administrative Agent, Issuer and a Lender, and the OTHER FINANCIAL INSTITUTIONS listed on the signature pages to this agreement. Bank, the financial institutions listed on the signature pages to this Agreement and any other financial institutions which may become parties to this Agreement from time to time, are sometimes collectively referred to as the "Lenders" and individually as a "Lender". Bank, when acting in its capacity as agent for the Lenders and Issuer, or any successor or assign that assumes that position pursuant to the terms of this Agreement, is hereinafter sometimes referred to as the "Agent". RECITALS: WHEREAS, Borrowers desire that the Lenders extend a revolving loan facility (with a standby and commercial letter of credit sublimit), to provide funds to pay off and terminate that certain Loan and Security Agreement dated effective January 6, 2003 among LaSalle Business Credit LLC, Standard Federal National Association, Parent Borrower and SL Delaware, Inc. as borrowers, and certain subsidiary guarantors party thereto (the "Prior Facility"), and to provide credit for the possible acquisition of XYZ, Inc., working capital purposes and general business purposes of the Borrowers; and WHEREAS, the Borrowers desire to borrow, and the Lenders are willing to extend credit from time to time on a revolving credit basis until the Revolving Credit Termination Date (as defined below), an aggregate principal amount not to exceed Thirty Million Dollars ($30,000,000) outstanding at any time. The loans and credit are to be secured by the assets of the Parent Borrower and the assets and stock of the Subsidiary Borrowers. Certain terms used herein are defined in Article 13 below. NOW THEREFORE, the Borrowers, jointly and severally, and Agent and the Lenders, severally but not jointly, intending to be legally bound, agree as follows: -1- ARTICLE 1 THE REVOLVING LOAN FACILITY Section 1.01 COMMITMENT TO LEND. The Lenders severally agree, upon the terms and conditions set forth below, from time to time until the Revolving Credit Termination Date, to make Revolving Credit Loans to the Borrowers in such amounts as the Borrowers may request, subject to the limitation that: (a) at no time shall Revolving Credit Outstandings exceed the amount of the Commitment; and (b) the amount and percentage of the Commitment which each Lender is obligated to lend shall not exceed at any time the amount or percentages set forth opposite the name of such Lender on SCHEDULE A hereto (as supplemented and amended by giving effect to the assignment contemplated in this Agreement). The amount of any single Base Rate Loan shall be fifty thousand dollars ($50,000) or an integral multiple of ten thousand dollars ($10,000) in excess thereof, and the amount of any single LIBOR Loan shall be one hundred thousand dollars ($100,000) or an integral multiple of ten thousand dollars ($10,000) in excess thereof. Within such limitations and subject to the terms and conditions set forth below, the Borrowers may borrow, prepay and reborrow, from time to time, on a revolving basis. The Lenders shall have no obligation to make any Revolving Credit Loans at any time that a Default exists. Section 1.02 MANNER OF BORROWING. (a) To request a Revolving Credit Loan, the Borrowers shall, prior to 12:00 noon on the desired date of a Base Rate Loan or at least two (2) Business Days prior to the desired date for a LIBOR Loan, (a) deliver to the Agent a Request for Advance or (b) give the Agent telephonic notice of the information specified in a Request for Advance followed immediately by delivery of such a Request for Advance, provided, however, that the Borrowers' failure to confirm any telephonic notice with a Request for Advance shall not invalidate any notice so given if acted upon by the Agent. Any notice given to the Agent pursuant to this Section shall be given prior to 11:00 a.m. (Philadelphia time) on the requisite Business Day and shall be irrevocable once given. (b) The Agent in turn shall give prompt written or telephonic (promptly confirmed in writing) notice to each Lender of its pro rata share of the borrowing, the interest rate option selected and the scheduled date of the funding. After receipt of such notice, each Lender shall make such arrangements as are necessary to assure that its share of the funding shall be immediately available (in Dollars) to the Agent no later than 1:30 p.m. (Philadelphia, PA time), on the date on which the funding is to occur. Section 1.03 DISBURSEMENTS. Prior to 2:00 p.m. (Philadelphia time) on the date of a Revolving Credit Loan, the Agent shall, subject to the satisfaction of the conditions set forth in Article 7 below, disburse the funds to the Borrowers (a) by wire transfer pursuant to the Borrowers' instructions, or (b) in the absence of such instructions, by crediting the account of the Parent Borrower maintained with the Agent. -2- Section 1.04 ETTERS OF CREDIT AND LETTER OF CREDIT FEES. (a) Letter of Credit. On the terms and subject to the conditions set forth herein, Issuer will prior to the Revolving Credit Termination Date issue standby or documentary Letters of Credit so long as: (i) Issuer shall have received a Notice of LC Credit Event at least two (2) Business Days before the relevant date of issuance; and (ii) After giving effect to such issuance (A) the aggregate Letter of Credit Liabilities under all Letters of Credit do not exceed $5,000,000 and (B) the Revolving Credit Outstandings do not exceed the amount of the Commitment. (b) Letter of Credit Fee. Borrowers shall pay to the Agent for the account of the Lenders a letter of credit fee with respect to the Letter of Credit Liabilities for each Letter of Credit, computed for each day from the date of issuance of such Letter of Credit to the date that is the last day a drawing is available under such Letter of Credit, at a rate per annum equal to the Applicable Margin then applicable to LIBOR Loans. Such fee shall be payable in arrears on the first Business Day of each fiscal quarter prior to the Revolving Credit Termination Date and on such date. In addition, the Issuer shall receive a fronting fee equal to 0.125% of the face amount of each outstanding Letter of Credit ("Fronting Fee"), payable upon issuance. The Borrowers shall also pay to the Issuer all of the Issuer's standard fees and charges for the opening, amendment, modification, presentation or cancellation of a Letter of Credit and otherwise in respect of a Letter of Credit and shall execute all of the Issuer's standard agreements in connection with the issuance of the Letter of Credit. (c) Reimbursement Obligations of Borrowers. If Issuer shall make a payment pursuant to a Letter of Credit, the Borrowers shall promptly reimburse Issuer, following notice from Issuer to Borrowers of the amount of such payment, for the amount of such payment and, to the extent that so doing would not cause the Revolving Credit Outstandings to exceed the amount of the Commitment, and there is no outstanding Default, Borrowers shall be deemed to have requested a Revolving Credit Loan, the proceeds of which will be used to satisfy such Reimbursement Obligations. To the extent that such Reimbursement Obligations are not so satisfied the Borrowers shall pay interest, on demand, on all amounts so paid by Issuer for each day until Borrowers reimburse Issuer therefor at a rate per annum equal to the sum of two percent (2%) plus the interest rate applicable to Revolving Credit Loans (which are Prime Rate Loans) for such day. The obligations of the Borrowers to the Issuer, the Agent and the Lenders in respect of Letters of Credit shall be guaranteed pursuant to the Loan Documents and shall be secured by the Collateral. (d) Objections Absolute. The obligations of Borrowers under this Section 1.04 shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including the following: (i) any lack of validity or enforceability of, or any amendment or waiver of or any consent to departure from, any Letter of Credit or any related document; -3- (ii) the existence of any claim, set-off, defense or other right which Borrowers may have at any time against the beneficiary of any Letter of Credit, the Issuer, the Agent or any Lender (including any claim for improper payment), or any other Person, whether in connection with any Loan Document or any unrelated transaction, provided, that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (iii) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; or (iv) to the extent permitted under applicable law, any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. (e) Deposit Obligations of Borrowers. In the event any Letters of Credit are outstanding at the time that Borrowers prepay, or are required to repay, the Obligations or the Commitment is terminated, Borrowers shall (i) deposit with Issuer either cash or an irrevocable letter of credit in form and substance satisfactory to Issuer from a bank satisfactory to Issuer, in either case, in an amount equal to one hundred and two percent (102%) of the aggregate outstanding Letter of Credit Liability, to be available to Issuer to reimburse payments of drafts drawn under such Letters of Credit and pay any fees and expenses related thereto, and (ii) prepay the fee payable under Section 1.04(b) with respect to such Letters of Credit for the full remaining terms of such Letters of Credit. Upon termination of any such Letter of Credit, the unearned portion of such prepaid fee attributable to such Letter of Credit shall be refunded to Borrowers, together with the deposit described in the preceding clause (i) to the extent not previously applied by Issuer in the manner described herein. (f) Participation by Lenders. (i) Effective immediately upon the issuance of each Letter of Credit and without further action on the part of the Issuer, the Issuer shall be deemed to have granted to each Lender, and each Lender shall be deemed to have irrevocably purchased and received from the Issuer, without recourse or warranty, an undivided interest and participation in such Letter of Credit to the extent of each Lender's percentage of the Revolving Credit Limit. Further, each Lender acknowledges and agrees that it shall be absolutely liable, to the extent of its percentage of the Revolving Credit Limit, to fund on demand or reimburse the Issuer on demand for the amount of each draft paid by the Issuer under each Letter of Credit to the extent that such amount is not immediately reimbursed by the Borrowers. (ii) In furtherance of the provisions of the preceding paragraph (a), the Issuer shall notify the Agent promptly upon receipt of notice of an intended draw under a Letter of Credit. The Agent shall give written, telecopied or telegraphic notice to each of the other Lenders of its pro rata share of such draw and the scheduled date thereof. After receipt of such notice, and whether or not an Event of Default or Default then exists, each Lender shall make available to the Agent such Lender's share of such draw in immediately available (in Dollars) to the Agent no later than noon (Philadelphia, PA time), on the date specified in the Agent's notice. The failure of the Issuer or the Agent to give timely notice pursuant to this -4- Subsection 1.04(f) shall not affect the right of the Issuer to reimbursement from the Lenders. Any amount paid by Agent and Lenders pursuant to a draw made under a Letter of Credit shall constitute a Revolving Credit Loan and shall be repaid pursuant to the provisions respecting Revolving Credit Loans, provided that if an Event of Default or Default exists at the time of a draw, the Borrowers shall immediately reimburse the amount of such draw to the Agent for the benefit of the Lenders. (g) Standard of Conduct. The Issuer shall be entitled to administer each Letter of Credit in the ordinary course of business and in accordance with its usual practices, modified from time to time as it deems appropriate under the circumstances, and shall be entitled to use its discretion in taking or refraining from taking any action in connection herewith as if it were the sole party involved. Any action taken or omitted to be taken by the Issuer under or in connection with any Letter of Credit shall not create for the Issuer any resulting liability to any other Lender. The Issuer shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and believed by it to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the Issuer and the Agent. ARTICLE 2 PAYMENTS AND PREPAYMENTS Section 2.01 REDUCTIONS IN COMMITMENT. The Borrowers may, at any time and from time to time upon one (1) Business Day's prior irrevocable written notice to the Agent, reduce (on a pro rata basis among the Lenders) or terminate the Commitment without premium or penalty, provided, however, that each partial reduction shall be in an amount equal to One Million Dollars ($1,000,000) or an integral multiple of One Hundred Thousand Dollars ($100,000) in excess thereof and provided further, that the Commitment shall not be reduced or terminated at any time that would require the prepayment of a LIBOR Loan on a day other than the last day of the relevant Interest Period, unless the reduction notice is accompanied by the breakage payments referred to in Section 4.04 (Additional Provisions Concerning Certain Loans) below. Once so reduced, the Commitment shall not be increased and once so terminated, the Commitment shall not be reinstated. Section 2.02 OPTIONAL PREPAYMENTS OF LOANS. (a) Subject to the provisions of paragraph (c) below, the Borrowers may, at any time and from time to time, without penalty, prepay any or all Base Rate Loans. (b) Subject to the provisions of paragraph (c) below, the Borrowers may, at any time and from time to time, prepay any or all LIBOR Loans upon giving three (3) Business Days irrevocable notice to the Agent, but if any such payment shall be made on a day other than the last day of the applicable Interest Period, such payment shall be accompanied by -5- the breakage payments referred to in Section 4.04 (Additional Provisions Concerning Certain Loans) below. (c) The foregoing prepayment rights are subject to the following: (i) any prepayment of less than all the outstanding Loans shall be in an amount equal to Fifty Thousand Dollars ($50,000) or an integral multiple of ten thousand dollars ($10,000) in excess thereof, (ii) no prepayment may be made in an amount that would cause the amount of any outstanding LIBOR Loan to be less than One Hundred Thousand Dollars ($100,000); and (iii) any prepayment in full of all outstanding Loans shall be accompanied by the payment of all Obligations accrued or payable as of the date of such prepayment. Section 2.03 REPAYMENT OF LOANS IN CONNECTION WITH REDUCTIONS OF COMMITMENT. On or before the effective date of any reduction in the Commitment (whether scheduled, mandatory, voluntary or otherwise), the Borrowers shall repay such of the outstanding Loans, together with accrued interest thereon, and/or pay to the Agent for the benefit of the Lenders as cash collateral an amount equal to all Letter of Credit Liabilities, so as to reduce the Revolving Credit Outstandings to the Revolving Credit Limit, giving effect to the amount of the Commitment as so reduced, provided, however, any prepayment of a LIBOR Loan on a day that is not the last day of the relevant Interest Period shall be accompanied by the amounts provided for in Section 4.04 (Additional Provisions Concerning Certain Loans) below. ARTICLE 3 INTEREST AND FEES Section 3.01 INTEREST. Subject to the provisions of Sections 3.02 (Election of Interest Rate) and 4.04 (Additional Provisions Concerning Certain Loans) below and to the conditions set forth in this Section, the Loans shall bear interest at the Borrowers' option, as follows: (a) Base Rate Loans. The interest rate on each Base Rate Loan shall equal the sum of the Base Rate plus the Applicable Margin for Base Rate Loans, as in effect from time to time. Changes in the rate of interest resulting from changes in the Base Rate shall take place immediately without notice or demand of any kind. Interest on Base Rate Loans is payable in arrears on the first day of each month and on the maturity of such Loans, whether by acceleration or otherwise. (b) LIBOR Loans. During any period that a Loan is a LIBOR Loan, Borrowers shall pay interest on such Loan at a rate equal to the LIBOR Rate for the applicable Interest Period plus the Applicable Margin for LIBOR Loans, as in effect from time to time. Interest on LIBOR Loans shall be payable in arrears on the last day of the applicable Interest Period relating to such Loan, provided that if the Interest Period is longer than 30 days, interest shall be payable 30 days after the relevant Loan is made and on each 30-day anniversary thereof, if applicable, and on the last day of the Interest Period. All payments are due on or prior to the Revolving Credit Termination Date. -6- Section 3.02 ELECTION OF INTEREST RATE. Subject to the provisions of Section 4.04 (Additional Provisions Concerning Certain Loans) below, the Borrowers may elect the interest rate applicable to each Revolving Credit Loan as follows: (a) Rate in Absence of Election. Unless otherwise elected by the Borrowers, each Revolving Credit Loan shall bear interest at the Base Rate plus the Applicable Margin. (b) Election of LIBOR Loans. The Borrowers may elect to request an advance hereunder as a LIBOR Loan by so specifying the amount and the desired Interest Period on the Request for Advance delivered pursuant to Section 1.02 (Manner of Borrowing) above. (c) Conversion to Different Type of Loan. All or any part of the principal amount of Revolving Credit Loans of any Type may, on any Business Day, be converted into any other Type or Types of Revolving Credit Loans, except that (i) a LIBOR Loan may be converted only on the last day of the applicable Interest Period therefor and (ii) a Base Rate Loan may be converted into a LIBOR Loan only on a Business Day for LIBOR Loans. (d) Notice of Election to Convert. The Borrowers shall give the Agent notice (which shall be irrevocable) of each conversion of a Base Rate Loan into a LIBOR Loan or each conversion of a LIBOR Loan at the end of the relevant Interest Period into another LIBOR Loan, no later than 11:00 a.m. (Philadelphia time) three (3) Business Days prior to the requested date of such conversion. Each notice of conversion shall be (i) in writing in substantially the form of Exhibit C attached hereto or (ii) by telephone specifying the information set forth in Exhibit C attached hereto, followed immediately by delivery of such notice, provided, however, that the Borrowers' failure to confirm any telephonic notice in writing shall not invalidate any telephonic notice if acted upon by the Agent. (e) Presumption In Absence of Election to Convert. Base Rate Loans shall continue as Base Rate Loans unless and until such Revolving Credit Loans are converted into Revolving Credit Loans of another Type pursuant to the preceding paragraph (d). LIBOR Loans of any Type shall continue as Revolving Credit Loans of such Type until the end of the then current Interest Period therefor, at which time they shall be automatically converted into Base Rate Loans unless the Borrowers shall have given the Agent notice in accordance with the preceding paragraph (d). (f) Limitations on Election of LIBOR Loans. The Borrowers may not elect to borrow, continue or convert a Revolving Credit Loan to a LIBOR Loan if such election would (i) require the Agent to administer concurrently more than six (6) Types of Revolving Credit Loans or (ii) require the Borrowers to make any scheduled or required payment of principal prior to the last day to the Interest Period or Interest Periods selected as a result of a reduction of the Available Commitment, a mandatory repayment or otherwise hereunder. Section 3.03 INTEREST UPON DEFAULT. Anything in this Agreement to the contrary notwithstanding, upon the occurrence of an Event of Default (whether or not the Lenders have accelerated payment of the Notes), or after maturity or judgment has been rendered on the Notes, -7- the Borrowers' right to select interest rate options shall cease and the unpaid principal of the Loans shall, at the option of the Agent, bear interest at the Base Rate plus the Applicable Margin plus two percent (2%) (the "Default Rate"). Such interest shall be payable on the earlier of (i) demand or (ii) the next Payment Date. Interest at the Default Rate shall continue to accrue (both before and after judgment) until the earlier of (i) the waiver or cure of the applicable Event of Default or (ii) the payment in full of the Obligations. Furthermore, at the election of Agent or Majority Lenders during any period in which any Event of Default is continuing (x) as the Interest Periods for LIBOR Loans then in effect expire, such Loans shall be converted into Base Rate Loans and (y) the LIBOR election shall not be available to Borrowers. Section 3.04 FEES. (a) Commitment Fee. The Borrowers shall pay to the Agent for the account of the Lenders a commitment fee, such fee to be payable in arrears on every third Payment Date and on the Revolving Credit Termination Date and equal to the product of the Commitment Fee Margin times the average daily unused portion of the Commitment during the period commencing on the date following the preceding commitment fee payment date (or, if none, on the date hereof) and ending on such commitment fee payment date. (b) Other Fees. The Borrowers shall pay the Agent, the Issuer and/or the Lenders such other fees as the Borrowers have otherwise agreed to pay in writing. (c) Letter of Credit and Fronting Fees. The Borrowers shall pay to the Agent for the account of the Issuer and/or the Lenders, as applicable, such letter of credit fees as are described in Section 1.04. Section 3.05 COMPUTATION OF INTEREST AND RELATED FEES. All interest and fees under each Loan Document shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The date of funding of a Base Rate Loan and the first day of an Interest Period with respect to a LIBOR Loan shall be included in the calculation of interest. The date of payment of a Base Rate Loan and the last day of an Interest Period with respect to a LIBOR Loan shall be excluded from the calculation of interest. If a Loan is repaid on the same day that it is made, one (1) day's interest shall be charged. ARTICLE 4 GENERAL MATTERS CONCERNING LOANS Section 4.01 MANNER OF TENDERING PAYMENTS BY BORROWERS. (a) Time of Payments. Each payment (including any prepayment) by the Borrowers on account of the principal of, or interest on, the Loans, commitment fees and any other amount owed to the Agent on behalf of the Lenders under any Loan Document shall be made not later than 1:00 p.m. (Philadelphia time) on the date specified for payment under such Loan Document in lawful money of the United States of America in immediately available funds. Any payment received after 1:00 p.m. (Philadelphia time) shall be deemed received on the next Business Day. If any payment hereunder becomes due and payable on a day other than -8- 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. (b) Location of Payments. All payments shall be made by the Borrowers to the Agent at Bank of America, N.A., P.O. Box 660576, Dallas, TX 75266-0576 or such other place as the Agent may from time to time specify in writing, except that all payments with respect to Letters of Credit shall be made by the Borrowers to such other place as the Agent and, respectively, the Issuer, may from time to time specify in writing. Any such payment shall be made in United States dollars in immediately available funds, without counterclaim or setoff and free and clear of, and without any deduction or withholding for, any taxes or other payments. (c) Agent and Lenders Authorized to Take Action for Borrowers. If any payment is not made when due, the Borrowers authorize the Agent and any Lender to (i) deduct the amount of such payment from any deposit account maintained by any Borrower, and/or (ii) whether or not there is then any unused Commitment, cause the aforesaid payments to be made by drawing under the loan facility provided under this Agreement, any such Loan being subject to interest at the Default Rate; provided, however, that notwithstanding the making by the Agent and any Lender of any of the aforesaid payments as set forth in this sentence, the failure of the Borrowers to make any of the aforesaid payments when due shall constitute a Default or Event of Default, as the case may be, and, provided, further, the failure of the Agent and any Lender to take any of the aforesaid action shall not affect any of its rights hereunder or under any other Loan Document or under law. (d) No Set-Off. The Borrowers agree to pay principal, interest, fees, expenses, indemnities, reimbursements and all other amounts due under any Loan Document, without set-off or counterclaim or any deduction whatsoever. (e) Presumptions. Except as expressly set forth to the contrary in this Agreement or by the Borrowers with respect to any payment, all payments shall be applied first to the payment of all fees, expenses and other amounts due to the Agent or the Lenders (excluding principal and interest), then to accrued interest, and the balance on account of outstanding principal of Base Rate Loans and then to principal of LIBOR Loans (and among such LIBOR Loans, first to those with the earliest expiring Interest Periods); provided, however, that after an Event of Default which is continuing, payments will be applied to the Obligations of Borrowers as Agent determines in its sole discretion. (f) Disbursements from Agent to Lenders. The Agent shall promptly remit to each Lender its pro rata share of payments received pursuant to Section 4.01 in immediately available funds, except that all reimbursement payments in respect of losses, out-of-pocket expenses, funding losses or like matters shall be retained by the Agent or remitted to the Lenders according to their respective appropriate entitlement to such reimbursement. Section 4.02 THE NOTES. The aggregate principal amount of each Lender's share of the Commitment and Loans shall be evidenced by a note to be issued by the Borrowers to each Lender in substantially the form attached hereto as EXHIBIT A (with appropriate completion of the name of the applicable Lender). -9- Section 4.03 LOAN ACCOUNT. The Agent may open and maintain on its books in the name of the Borrowers a loan account with respect to the Loans and interest thereon. If the Agent opens such an account, it shall debit such loan account for the principal amount of each Loan made by it and accrued interest thereon, and, subject to Section 1.03 (Disbursements) above, shall credit such loan account for each payment on account of principal or interest. The records of the Agent with respect to the loan account maintained by it shall be prima facie evidence of the Loans and accrued interest thereon, but the failure of the Agent to make any such notations or any error or mistake in such notations shall not affect the Borrowers' repayment obligations with respect to such Loans. Section 4.04 ADDITIONAL PROVISIONS CONCERNING CERTAIN LOANS. (a) Mandatory Suspension and Conversion of LIBOR Loans. The Lenders' obligation to make, continue or convert into LIBOR Loans of any Type shall be suspended, all Lenders' outstanding Loans of such Type shall be converted into Base Rate Loans on the last day of their applicable Interest Periods (or, if earlier, in the case of clause (iii) below, on the last day the Lenders may lawfully continue to maintain Loans of such Type or, in the case of clause (iv) below, on the day determined by the Agent to be the last Business Day before the effective date of the applicable restriction) into, and all pending requests for the making or continuation of or conversion into Loans of such Type by the Agent shall be deemed requests for Base Rate Loans, if: (i) on or prior to the determination of an interest rate for a LIBOR Loan for any Interest Period, the Agent reasonably determines that for any reason appropriate information is not available to it for purposes of determining the LIBOR Rate for such Interest Period; (ii) on or prior to the first day of any Interest Period for a LIBOR Loan of such Type, any of the Lenders reasonably determines that the LIBOR Rate as determined by such Lender for such Interest Period would not accurately reflect the cost to such Lender of making, continuing or converting into a LIBOR Loan of such Type for such Interest Period; (iii) at any time any of the Lenders determines that any Regulatory Change makes it unlawful or impracticable for such Lender or its applicable lending office to make, continue or convert into a LIBOR Loan of such Type, or to comply with its obligations hereunder in respect thereof; or (iv) any of the Lenders determines that, by reason of any Regulatory Change, such Lender or its applicable lending office is restricted, directly or indirectly, in the amount that it may hold of (A) a category of liabilities that includes deposits by reference to which, or on the basis of which, the interest rate applicable to LIBOR Loans of such Type is directly or indirectly determined or (B) the category of assets that includes LIBOR Loans of such Type. -10- (b) Regulatory Changes. If in the determination of any of the Lenders: (i) any Regulatory Change shall directly or indirectly (A) reduce the amount of any sum received or receivable by such Lender with respect to the Revolving Credit Facility, (B) impose a cost on such Lender or any Affiliate of such Lender that is attributable to the making available or maintaining of, or such Lender's commitment to make available, the Revolving Credit Facility, (C) require such Lender or any Affiliate of such Lender to make any payment on, or calculated by reference to, the gross amount of any amount received by such Lender under any Loan Document or (D) reduce, or have the effect of reducing, the rate of return on any capital of such Lender or any Affiliate of such Lender that such Lender or such Affiliate is required to maintain on account of the Revolving Credit Facility, or such Lender's Commitment and (ii) such reduction, increased cost or payment shall not be fully compensated for by an adjustment in the applicable rates of interest payable under the Loan Documents; then the Borrowers shall pay to such Lender such additional amounts as such Lender reasonably determines will, together with any adjustment in the applicable rates of interest payable hereunder, fully compensate it for such reduction, increased cost or payment. Such additional amounts shall be payable, in the case of those applicable to prior periods, within 15 Business Days after request by such Lender for such payment and, in the case of those applicable to future periods, on the date specified, or determined in accordance with a method specified, by such Lender. Such Lender will promptly notify the Agent and the Borrowers of any determination made by it referred to in clauses (i) and (ii) above and provide to Agent and Borrowers a reasonably detailed calculation of all amounts required to be paid by the Borrowers, but the failure to give such notice shall not affect such Lender's right to such compensation. (c) Capital Requirements. If, in the determination of any Lender, such Lender or any Affiliate of such Lender is required, as a result of a Regulatory Change, to maintain capital on account of the Revolving Credit Facility or such Lender's Commitment, then, upon request by such Lender, the Borrowers shall from time to time thereafter pay to such Lender such additional amounts as such Lender reasonably determines will fully compensate it for any reduction in the rate of return on the capital that such Lender or such Affiliate is so required to maintain on account of the Revolving Credit Facility or Commitment suffered as a result of such capital requirement. Such additional amounts shall be payable, in the case of those applicable to prior periods, within 15 Business Days after request by such Lender to the Borrowers and in the case of those relating to future periods, on the date specified, or determined in accordance with a method specified by such Lender. Such Lender will promptly notify the Agent and the Borrowers of any determination made by it referred to in this paragraph (c), but the failure to give such notice shall not affect such Lender's right to such compensation. (d) Funding Losses. The Borrowers shall pay to the Agent on behalf of the Lenders, from time to time, upon request, such amount as the Agent reasonably determines is necessary to compensate the Lenders for any loss, cost or expense, including, without limitation, loss of the Applicable Margin incurred by it as a result of (a) any payment, prepayment or conversion of a LIBOR Loan on a date other than the last day of an Interest -11- Period for such LIBOR Loan or (b) a LIBOR Loan for any reason not being made or converted, or any payment of principal thereof or interest thereof not being made, on the date therefor determined in accordance with the applicable provisions of this Agreement. At the election of the Agent, and without limiting the generality of the foregoing, but without duplication, such compensation on account of losses may include an amount equal to the excess of (i) the interest that would have been received from the Borrowers under this Agreement including the Applicable Margin on any amounts to be reemployed during an Interest Period or its remaining portion over (ii) the interest component of the return that the Agent determines the Lenders could have obtained had they placed such amount on deposit in the London Interbank Eurodollar Market selected by it for a period equal to such Interest Period or remaining portion. (e) Determinations. In making the determinations contemplated by this Section, the Agent or the applicable Lender may make such estimates, assumptions, allocations and the like that the Agent or such Lender in good faith determines to be appropriate, and the Agent or specified Lender selection thereof in accordance with this Section, and the determinations made by such Lender on the basis thereof, shall be final, binding and conclusive upon the Borrowers. Notwithstanding any other provision of this Section, such Lender shall not apply the provisions of subsections (b) or (c) of this Section with respect to the Borrowers if it shall not at the time be the general policy or practice of the Agent or such Lender to apply provisions of subsections (b) or (c) of this Section to other borrowers in substantially similar circumstances under substantially comparable provisions of other credit agreements. (f) Rate Quotations. The Borrowers may call the Agent on or before the date on which a Request for Advance or notice of conversion is to be delivered to receive an indication of the rates then in effect, but it is acknowledged that such projection shall not be binding on the Agent nor affect the rate of interest which thereafter is actually in effect when the election is made. Section 4.05 TAXES. (a) Payments Free and Clear. (i) Any and all payments by the Borrowers hereunder or under the Notes shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholding, and all liabilities with respect thereto excluding, in the case of each Lender and the Agent, (A) income and franchise taxes imposed by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or is or should be qualified to do business or any political subdivision thereof, and (B) income and franchise taxes imposed by the jurisdiction of each Lender's lending office or any political subdivision thereof, and (C) United States federal income taxes imposed by reason of failure or the inability of a Lender to comply with Section 4.05(e) (unless such compliance is precluded as a result of a change in any law, rule, regulation or treaty or in the administrative interpretation or application thereof after the date hereof (or, in the case of a Participant or Assignee, the date on which such Participant or Assignee receives its interest in the Loans) (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). -12- (ii) If the Borrowers shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note, (A) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) each Lender or the Agent (as the case may be) receives an amount equal to the amount such party would have received had no such deductions been made, (B) the Borrowers shall make such deductions, (C) the Borrowers shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (D) the Borrowers shall deliver to the Agent evidence of such payment to the relevant taxing authority or other authority in the manner provided in Section 4.05(d). (b) Stamp and Other Taxes. In addition, the Borrowers shall pay any present or future stamp, registration, recordation or documentary taxes or any other similar fees or charges or excise or property taxes, levies of the United States or any state or political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Loans, the other Loan Documents, or the perfection of any rights or security interest in respect thereto (hereinafter referred to as "Other Taxes"). (c) Indemnity. The Borrowers shall indemnify each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by such Lender or the Agent and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Such indemnification shall be made within thirty (30) days from the date such Lender or the Agent makes written demand therefor. (d) Evidence of Payment. Within thirty (30) days after the date of any payment of Taxes or Other Taxes, the Borrowers shall furnish to the Agent, at its address referred to in Section 12.01, the original or a certified copy of a receipt evidencing payment thereof or other evidence of payment satisfactory to the Agent. (e) Non-U.S. Lender. On or prior to the date on which any Participant or Assignee that is not a United States person as defined in Section 7701(a)(30) of the Code (each a "Non-U.S. Lender") receives its interest in the Loans, each Non-U.S. Lender that is entitled at such time to an exemption from United States of America withholding tax, or that is subject to such tax at a reduced rate under an applicable tax treaty, shall provide Agent and the Borrowers with two duly completed copies of the appropriate United States Internal Revenue Service Form W-8, or other applicable successor form prescribed by the Internal Revenue Service of the United States, certifying that such Non-U.S. Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. The Borrowers shall have no obligation to pay any taxes with respect to Loans made to a Non-U.S. Lender pursuant to Section 4.05(a) or indemnify any Non-U.S. Lender under Section 4.05(c) if such Non-U.S. Lender is eligible to comply with the provisions of this Section 4.05(e) and has not done so. Notwithstanding any other provision of this Section 4.05(e), no Non-U.S. Lender shall be required to deliver any form pursuant to this Section 4.05(e) that such Non-U.S. Lender is not legally able or obligated to deliver and, for -13- purposes of this Section 4.05, such non-delivery of a form shall not be decreed to be non-compliant with this Section 4.05(e). (f) Survival. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations contained in this Section shall survive the payment in full of the Obligations and the termination of the Commitment. Section 4.06 LENDERS' OBLIGATIONS SEVERAL. Each Lender is severally bound by this Agreement, but there shall be no joint obligation of the Lenders under this Agreement. The failure of any Lender to make any share of the Loans or obligations respecting Letters of Credit to be made by it on the date specified for the Loans or such obligations shall not relieve any other Lender of its obligation to make its share of the Loans or other obligations on such date, but neither any Lender nor the Agent shall be responsible for the failure of any other Lender to make a share of the Loans or other obligations to be made by such other Lender. Section 4.07 PERMITTED ASSUMPTIONS BY AGENT AS TO LENDER PAYMENTS. Unless the Agent shall have been notified by a Lender prior to noon on the date on which it is scheduled to fund to the Agent any amount payable by a Lender under this Agreement (such payment being the "Lender Required Payment") that it does not intend to make the Lender Required Payment to the Agent, the Agent may assume that the Lender Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the Borrowers (or other appropriate party) on such date. If such Lender has not in fact made the Lender Required Payment to the Agent, the Borrowers (or other recipient) shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate equal to the Base Rate. The foregoing does not limit the obligation of any Lender to make a Lender Required Payment. Any Lender Required Payment made by the Agent in reliance on the assumption that the applicable Lender was funding the same, if not returned by the Borrowers (or other recipient), shall be paid, on demand, to the Agent by the applicable Lender, together with interest thereon accruing at the Base Rate. In addition, any Lender that fails to make a Lender Required Payment upon receipt of notice therefor, shall not be entitled to vote on any matters that it otherwise would be entitled to vote on under this Agreement until it makes such payment. ARTICLE 5 CONDITIONS PRECEDENT Section 5.01 CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of the Lenders to make the initial Loan is subject to the condition that each of the Lenders, or the Agent, as applicable, shall have received each of the following, in form and substance satisfactory to it: 5.01.1 Loan Documents. (a) a duly executed Revolving Loan Note; and (b) a duly executed Foreign Subsidiary Guaranty. -14- 5.01.2 UCC Collateral Documents. (a) (i) a Security Agreement (also constituting a pledge agreement), duly executed by each Borrower and each Foreign Subsidiary, which owns equity interests in another Foreign Subsidiary together with such Uniform Commercial Code financing statements as are necessary or, in the opinion of the Agent, desirable to perfect the security interests created by such Security Agreement, (ii) a landlord waiver to each leased facility of any Borrower, and (iii) the certificates, if any, representing the equity or other ownership interests of each Subsidiary Borrower and 66% of the equity or other ownership interests of each Foreign Subsidiary, together with duly executed, undated stock powers or similar assignments respecting such equity or other ownership interests; (b) A perfection questionnaire duly completed by Borrowers, such questionnaire to be delivered to the Agent at least fifteen (15) days prior to the closing of the Initial Loan; (c) insurance policies or certificates designating the Agent as lender loss payee or mortgagee as its interests may appear, as appropriate, as required by Section 9.17 of this Agreement or as required by any other Loan Document; (d) an IP Collateral Agreement executed by each Borrower, as appropriate, as to all registered or pending patents, trademarks and copyrights, in appropriate form to file of record; and (e) the results of tax, judgments and other lien searches in form and substance satisfactory to the Agent, and from such jurisdictions as may be satisfactory to the Agent, together with U.S. Patent and Trademark Office and Copyright Office searches of a recent date, in each case, with respect to the Parent Borrower and each Subsidiary Borrower, showing no Liens except Permitted Liens. 5.01.3 Real Estate Collateral Documents. (a) Mortgages on all real property owned by each Borrower; and (b) title insurance insuring the priority of the Mortgage covering the property located in Boonton, New Jersey, and for each other property subject to a Mortgage (i) zoning certification, (ii) a flood certification, and (iii) a survey; in each case satisfactory to the Agent. 5.01.4 Financial Documents. (a) audited financial statements of Parent Borrower and its Subsidiaries on a Consolidated basis for the fiscal year ended December 31, 2004, together with projections of financial statements respecting each fiscal year through the fiscal year 2008, which projections shall be approved by the chief financial officer of Parent Borrower and based on reasonable assumptions; and -15- (b) pro forma financial statements giving the effect to the acquisition of 100% of the capital stock of XYZ, Inc. for consideration paid entirely in cash. 5.01.5 Consents, Certificates and Opinions. (a) any required governmental consents or other required consents to the closing of this Agreement or to the execution, delivery and performance of this Agreement and the other Loan Documents, each of which shall be in form and substance satisfactory to the Agent; (b) a certificate of each Loan Party to which is attached each of the following certified as such by a duly authorized officer of such Loan Party: (i) a certificate of incumbency with respect to each Authorized Signatory thereof that signs any Loan Documents, (ii) a copy of the charter or other organizational documents of such Loan Party certified by the Secretary of State or similar state official of the jurisdiction of formation of such Loan Party, (iii) a copy of the bylaws or other constituent documents of such Loan Party, (iv) a certificate of good standing or subsistence, as the case may be, for such Loan Party issued as of a recent date by the Secretary of State or similar state official in the jurisdiction of its organization and in each state in which such Loan Party is qualified to do business as set forth on Schedule 6.01, (v) a copy of the resolutions duly adopted by the Board of Directors or other governing body of such Loan Party authorizing it to execute, deliver and perform each Loan Document to which it is, or is to be, a party, and (vi) a copy of any shareholders agreement or similar agreement respecting such Loan Party, if any such agreement exists; (c) a legal opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel to each of the Loan Parties; (d) a certificate of the chief financial officer or Treasurer of the Parent Borrower with respect to the solvency and adequacy of capital of Parent Borrower and each Subsidiary Borrower after giving effect to the initial Loan and the application of the proceeds thereof. 5.01.6 Third Party Agreements. Evidence that, prior to or substantially simultaneously with the making of the initial Loan, (i) all Indebtedness under the Prior Facility shall have been repaid, (ii) all commitments to lend in respect of the Prior Facility shall have been effectively terminated and (iii) all UCC-3 termination statements and all other documents necessary in the determination of the Agent to effectively terminate of record all security -16- interests related to the Prior Facility shall have been duly executed by the proper parties and shall have been delivered to the Agent, all pledged instruments shall have been returned to the proper parties, and other arrangements with respect thereto satisfactory to the Agent shall have been made; 5.01.7 Merger Documents. True and correct copies of drafts of the Merger Documents. Section 5.02 PAYMENT OF FEES AND COSTS. In addition to the conditions specified in Section 5.01 (Conditions Precedent to Initial Loan) above, prior to making the initial Loan, the Agent shall receive payment of all accrued costs and fees and (if then ascertainable) expenses arising out of reasonable attorneys' fees for the preparation of the Loan Documents and related services. Section 5.03 CONDITIONS PRECEDENT TO EACH LOAN. The obligation of the Lenders to make each Loan (including the initial Loan) or issue a Letter of Credit is subject to the fulfillment of each of the following conditions: (a) All of the representations and warranties of the Borrowers in this Agreement and all representations and warranties of each Loan Party in each other Loan Document shall be true and correct in all material respects at such time, both before and after giving effect to the application of the proceeds of such Loan; (b) No Default or Event of Default hereunder shall then exist or be caused thereby; (c) No Material Adverse Change shall have occurred and no event shall have occurred which could reasonably be expected to result in a Material Adverse Change; (d) The Agent shall have received a duly executed Request for Advance, or, as to a Letter of Credit, a Notice of LC Credit Event; and (e) If after giving effect to the requested Loan or the requested issuance of a Letter of Credit, the Revolving Credit Outstandings would exceed $25 million, then either (i) Parent Borrower shall have acquired 100% of the outstanding capital stock of XYZ, Inc. and the provisions of Section 9.03(h) and Section 9.27 shall have been fully satisfied with respect to XYZ, Inc. and its direct and indirect subsidiaries, or (ii) the Borrower shall have delivered to the Agent a letter of credit in the stated amount of $5 million in form and substance satisfactory to the Agent and from an issuing bank satisfactory to the Agent, upon which the Agent may draw upon the occurrence of an Event of Default, or, if the conditions of subsection (e)(i) above have not been satisfied on or before December 30, 2005, after that date and on or before January 15, 2006. Section 5.04 METHOD OF SATISFYING CERTAIN CONDITIONS. The request for, and acceptance of, each Loan by the Borrowers shall be deemed a representation and warranty by the Borrowers that the conditions specified in subparts (a), (b) and (c) of Section 5.03 (Conditions Precedent to Each Loan) have been satisfied. -17- ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BORROWERS In order to induce the Lenders to enter into this Agreement, the Borrowers jointly and severally make the following representations, covenants and warranties: Section 6.01 ORGANIZATION AND QUALIFICATION. Each Borrower and each of its Foreign Subsidiaries are corporations or other entities, duly organized, validly existing and in good standing under the laws of their respective jurisdictions of organization. Each Borrower and each of its Foreign Subsidiaries have the lawful power to own or lease their respective properties and to engage in the respective business they presently conduct or propose to conduct. Each Borrower and each of its Foreign Subsidiaries are duly licensed or qualified and in good standing in each jurisdiction where property is owned or leased by them, or the nature of the business transacted by them, or both, makes such licensing or qualification necessary, except where the failure to be so qualified could not reasonably be expected to result in a Material Adverse Change. SCHEDULE 6.01 hereto shows as of the date hereof each state or jurisdiction in which each Borrower and each of its Foreign Subsidiaries are qualified and their respective jurisdictions of incorporation or organization, as applicable. Section 6.02 CAPITALIZATION AND OWNERSHIP OF SUBSIDIARY BORROWERS. The name of each Borrower and each of its Foreign Subsidiaries, their authorized equity or other ownership interests, the number of issued and outstanding equity and other ownership interests and the owners thereof as of the date hereof are set forth on SCHEDULE 6.02 attached hereto. All outstanding equity or other ownership interests of the Loan Parties are duly authorized, validly issued, fully paid and nonassessable and are owned free and clear by the Borrowers except as pledged pursuant to the Loan Documents and except for Permitted Liens to the extent arising by operation of law. As of the date hereof, there are no options, warrants or other rights outstanding to purchase any such equity and other ownership interests except as indicated on said SCHEDULE 6.02. Each Borrower has the unrestricted right to vote the issued and outstanding equity and other ownership interests owned by it. Each Borrower's ownership interest in a Subsidiary represents a direct controlling interest of such Subsidiary for purposes of directing or causing the direction of the management and policies of such Subsidiary. Section 6.03 AUTHORIZATION AND EXECUTION. The execution, delivery and performance of this Agreement, and each other Loan Document to which any Loan Party is, or will be, a party are within such Loan Party's power and authority and have been duly authorized by all necessary corporate or other applicable action. This Agreement has been, and each other Loan Document when delivered hereunder will be, duly executed by each Loan Party which is a party hereto or thereto, as the case may be. Section 6.04 ENFORCEABILITY; CONSENTS. This Agreement is, and each of the other Loan Documents when delivered hereunder will be, a legal, valid and binding obligation of each of the Loan Parties which is, or will then be, a party hereto or thereto, as the case may be, enforceable against each such Loan Party in accordance with its terms. No recording, filing, registration, notice, consent (governmental or otherwise) or other similar action including, without limitation, -18- any action involving any federal, state, local or other applicable regulatory body, is required in order to insure the legality, validity, binding effect or enforceability of this Agreement or the other Loan Documents as against all Persons, except the filing of UCC-1 financing statements and the recording of the Mortgages as contemplated by this Agreement. Section 6.05 SECURITY INTERESTS IN COLLATERAL. (a) As of the date hereof, upon the filing of the UCC-1 financing statements in the jurisdictions listed on Schedule 6.05 attached hereto and the delivery of the stock certificates listed on Schedule 3.9(a) to the Security Agreement, no further action, including without limitation, any filing or recording of any document or the obtaining of any consent, is necessary in order to establish, perfect and maintain the Agent's first priority security interests in the Collateral being encumbered pursuant to the Security Agreement, subject to Permitted Liens to the extent taking priority by operation of law, except for the periodic filing of continuation statements with respect to such UCC-1 financing statements. As of the date hereof, the perfection questionnaire previously delivered to the Agent by Borrowers is true and correct and there have been no changes thereto since the date of delivery. (b) The Mortgages when duly filed in the offices listed on Schedule 6.05 attached hereto, will create perfected Liens on the real property described in the Mortgages subject to no Liens of equal or greater priority except for Permitted Liens to the extent taking priority by operation of law, and no further action, including, without limitation, the filing or recording of any document, is necessary to maintain such perfected Liens. Section 6.06 REAL PROPERTY OF BORROWERS. As of the date hereof, SCHEDULE 6.06 attached hereto is a complete and correct list of all real property owned or leased by each Borrower, specifying, in each case, whether such property is owned or leased and specifying the owner/lessee thereof. Section 6.07 ABSENCE OF CONFLICT WITH OTHER AGREEMENTS, ETC. The execution, delivery and performance by each Borrower of this Agreement and the other Loan Documents to which it is, or will be, a party do not and will not (a) require any consent or approval, governmental or otherwise, not already obtained, (b) violate any Applicable Law respecting such Borrower, (c) conflict with, result in a breach of, or constitute a default under, the organizational and governing documents of such Borrower or any of its Foreign Subsidiaries, or under any material indenture, agreement, license or other instrument to which such Borrower or any of its Foreign Subsidiaries are party to or by which any of them or their respective properties may be bound, or (d) result in, or require the creation or imposition of, any Lien upon or with respect to any property now owned or hereafter acquired by any Borrower or any of its Foreign Subsidiaries other than as contemplated hereby. Section 6.08 BUSINESS. Each Borrower, together with each of its Foreign Subsidiaries, is currently engaged in the business of designing, manufacturing and marketing power electronics, power motion, power protection, teleprotection and specialized communication equipment that is used in a variety of medical, aerospace, computer, datacom, industrial, telecom, transportation, and electric power utility equipment applications. -19- Section 6.09 CONDITION OF ASSETS. All of the material properties, equipment and systems of each Borrower and each of its Foreign Subsidiaries are in good repair, working order and condition for their intended use, ordinary wear and tear excepted, and are and will be in material compliance with all standards or rules imposed by any governmental agency or authority (including, without limitation, any federal or state or local governments or instrumentalities) or otherwise under Applicable Law. Section 6.10 USE OF PROCEEDS. The proceeds of the Loans will be used for the Acquisition of XYZ, Inc. certain Permitted Acquisitions, general corporate purposes and working capital purposes. No proceeds of any Loan shall be used for any illegal purposes. Section 6.11 LITIGATION. Except as described in SCHEDULE 6.11, There is no action, suit, proceeding or investigation pending against, or, to the best of the Borrowers' knowledge, threatened against or in any other manner relating to, any Borrower or any of its Foreign Subsidiaries or any of their respective properties, in any court or before any arbitrator of any kind or before or by any governmental body, which individually or in the aggregate, could (if adversely determined) reasonably be expected to result in a Material Adverse Change, nor is any Borrower or any of its Foreign Subsidiaries in violation of any order, writ, injunction or decree of any such governmental body which could reasonably be expected to result in a Material Adverse Change. Section 6.12 INDEBTEDNESS. As of the date hereof, SCHEDULE 6.12 attached hereto correctly describes all outstanding Indebtedness of each Borrower and each of its Foreign Subsidiaries, and any commitments of any such Person to incur additional Indebtedness (other than Indebtedness pursuant to this Agreement), and shows the Indebtedness to be paid off on the date hereof. Section 6.13 FINANCIAL STATEMENTS. (a) The audited financial statements for Parent Borrower and its Subsidiaries on a Consolidated basis for the fiscal year ended December 31, 2004, and the unaudited consolidated financial statements of Parent Borrower and its Subsidiaries on a Consolidated basis for the three months ended March 31, 2005, together with any other financial statements furnished to the Lenders, are complete and correct in all material respects and present fairly in accordance with GAAP the financial position of Parent Borrower and its Subsidiaries on a Consolidated basis on and as at such dates and the results of operations for the periods then ended (subject, in the case of unaudited financial statements, to normal year-end adjustments). Neither Parent Borrower nor any of its Subsidiaries has any material liabilities, contingent or otherwise, other than as disclosed in the financial statements referred to in the preceding sentence and there are not now and not anticipated any material unrealized losses of Parent Borrower or any of its Subsidiaries. (b) The projections delivered to the Lenders pursuant to Section 5.01 (Conditions Precedent to Initial Loan) above and Section 8.01 (Financial Statements) below are made in good faith, based on reasonable assumptions by the Parent Borrower. -20- (c) Since December 31, 2004, there has been no Material Adverse Change. Section 6.14 FISCAL YEAR. The fiscal year of each Borrower ends on December 31. Section 6.15 TITLE TO ASSETS. Borrowers have good, legal and marketable title to, or a valid leasehold interest in, all of the assets included on the last balance sheet previously delivered to the Lenders except for assets disposed of in the ordinary course of business or as permitted hereby. Each of Borrowers' Subsidiaries has good, legal and marketable title to, or a valid leasehold interest in, all of its assets included on the last balance sheet previously delivered to the Lenders except for assets disposed of in the ordinary course of business. None of such properties or assets is subject to any Liens, except for Permitted Liens and liens to be released on the Closing Date. No financing statement under the Uniform Commercial Code as in effect in any jurisdiction and no other filing which names any Borrower or any of its Subsidiaries as debtor or which covers or purports to cover any of the assets of any Borrower or any of its Subsidiaries is currently effective and on file in any state or other jurisdiction, and neither any Borrower nor any of its Subsidiaries have signed any such financing statement or filing or any security agreement authorizing any secured party thereunder to file any such financing statement or filing except with respect to Permitted Liens and Liens to be released on the Closing Date. Section 6.16 PATENTS, TRADEMARKS, LICENSES AND FRANCHISES. Each Borrower and each of its Foreign Subsidiaries hold or have the right to use all patents, trademarks, service marks, trade names, copyrights, franchises, licenses and authorizations, governmental or otherwise, necessary for the conduct of their business as now conducted, without any known material conflict with the rights of others which could reasonably be expected to result in a Material Adverse Change. As of the date hereof SCHEDULE 6.16 attached hereto correctly lists all patents, trademarks and copyrights registered to the Loan Parties as well as all material governmental licenses, authorizations and similar rights. Each license agreement necessary to any Borrower's or any of its Foreign Subsidiaries' business, and under which any Borrower or any of its Foreign Subsidiaries are the licensee is a valid and binding license agreement, enforceable against the licensee and, to Borrowers' knowledge, the licensor. Section 6.17 COMPLIANCE WITH LAW. Each Borrower and each of its Foreign Subsidiaries are in material compliance with all Applicable Law. Section 6.18 COMPLIANCE WITH ERISA. (a) Neither Borrowers, Borrowers' Subsidiaries, nor any ERISA Affiliate thereof maintains or contributes to any Plan, Multiemployer Plan or other employee benefit plan, except as disclosed on Schedule 6.18 attached hereto. (b) Each Plan, which is intended to be qualified within the meaning of Section 401(a) of the Code, is the subject of a favorable determination by the Internal Revenue Service with respect to all plan document qualification requirements for which the remedial amendment period under Section 401(b) of the Code has closed, any plan document amendments required by such determination letter were made as and when required by such determination letter, and nothing has occurred, whether by action or failure to act, since the date of such letter -21- which would prevent any such plan from remaining so qualified. Each Borrower has furnished to the Agent a copy of the most recent actuarial report for each Plan which is a defined benefit plan as defined in Section 3(35) of ERISA and for any Plan that is a funded employee welfare benefit plan, and each such report is accurate in all material respects. (c) Each Borrower, each of its Subsidiaries and their respective ERISA Affiliates have operated each Plan in all material respects in compliance with the requirements of the Code and ERISA and the terms of each Plan. (d) Except as specifically disclosed on Schedule 6.18 attached hereto, (1) no Plan has engaged in any transaction in connection with which any Borrower or any of its Subsidiaries or ERISA Affiliates could be subject to either a material civil penalty assessed pursuant to Section 502(i) of ERISA or a material tax penalty imposed pursuant to Section 4975 of the Code, (2) there is no Accumulated Funding Deficiency with respect to any Plan, whether or not waived, or an unfulfilled obligation to contribute to any Multiemployer Plan or withdrawal from any Multiemployer Plan, (3) no Plan has been terminated under conditions which resulted, or could result in any material liability to the PBGC, (4) no material liability to the PBGC has been or is expected by any Borrower to be incurred with respect to any Plan by any Borrower or any of its Subsidiaries or ERISA Affiliates except for required premium payments to the PBGC, (5) there has been no Reportable Event with respect to any Plan, and no event or condition exists which presents a material risk of termination of any Plan by the PBGC, (6) none of the Borrowers or any of their Subsidiaries or any ERISA Affiliate have incurred or anticipate incurring Withdrawal Liability with respect to any Multiemployer Plan, (7) no Multiemployer Plan is in Reorganization, and neither any Borrower, any of its Subsidiaries, or any ERISA Affiliate reasonably expects any Multiemployer Plan to be in Reorganization, (8) each Borrower and each of its Subsidiaries and ERISA Affiliates have complied in all material respects with the requirements of COBRA and HIPAA, and no material liability, and no circumstances exist pursuant to which any such material liability could reasonably be imposed on any Borrower, any of its Subsidiaries or any ERISA Affiliate under Sections 4980B, 4980D or 5000 of the Code or Sections 409 and 502(l) of ERISA, (9) there are no unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) in respect of any Plan, (10) there is no violation of the Code or ERISA with respect to the filing of applicable reports, documents and notices regarding any Plan with the Secretary of Labor, the Secretary of the Treasury, the PBGC or any other governmental entity or the furnishing of documents as required to participants and/or beneficiaries, (11) there is no Plan providing for retiree health and/or life insurance or other death benefits or any other "employee benefit welfare plan" (as defined in Section 3(1) of ERISA) having unfunded liabilities, and (12) neither any Borrower, any of its Subsidiaries nor any ERISA Affiliate are subject to the Early Warning Program of the PBGC (as described in PBGC Technical Update 00-3) or have been contacted by the PBGC in connection with the PBGC's Early Warning Program; except for any event described in the foregoing clauses (1)-(12) which could not reasonably be expected to have a Material Adverse Effect. (e) No liability (whether or not such liability is being litigated) has been asserted against any Borrower, any of its Subsidiaries or any ERISA Affiliate in connection with any Plan or any Multiemployer Plan by the PBGC other than for required premium payments to the PBGC, by a trustee appointed pursuant to Section 4042(b) or (c) of ERISA, or by a sponsor or an agent of a sponsor of a Multiemployer Plan, and no Lien has been attached -22- and no Person has threatened to attach a Lien on any property of any Borrower, any of its Subsidiaries or ERISA Affiliates as a result of failure to comply with ERISA or as a result of the termination of any Plan. Section 6.19 COMPLIANCE WITH REGULATIONS U AND X. Neither any Borrower nor any of its Foreign Subsidiaries are engaged principally or as one of their important activities in the business of using credit for the purpose of purchasing or carrying, any "margin security" or "margin stock" as defined in Regulations U and X of the Board of Governors of the Federal Reserve System. Section 6.20 INVESTMENT COMPANY ACT. Neither any Borrower nor any of its Foreign Subsidiaries are an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 6.21 PUBLIC UTILITY HOLDING COMPANY ACT. Neither any Borrower nor any of its Foreign Subsidiaries are considered a "holding company", or a "subsidiary company" or "affiliate" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. Section 6.22 ABSENCE OF DEFAULT. No event has occurred which constitutes a Default or an Event of Default. Section 6.23 AGREEMENTS WITH AFFILIATES AND MANAGEMENT AGREEMENTS; MANAGEMENT COMPENSATION. Except for agreements or arrangements with Affiliates in which any Borrower or any of its Foreign Subsidiaries provides services to such Affiliates or vice versa for fair consideration and which are set forth on SCHEDULE 6.23 attached hereto, as of the date hereof neither any Borrower nor any of its Foreign Subsidiaries have any contracts or written agreements or binding arrangements of any kind with any Affiliate. Section 6.24 NO BURDENSOME AGREEMENTS; MATERIAL AGREEMENTS. Neither any Borrower nor any of its Foreign Subsidiaries are parties to any agreement or instrument or subject to any corporate or other restrictions which, assuming compliance by such Persons with the terms of such agreements or instruments could result in a Material Adverse Change. SCHEDULE 6.24 hereto lists all material agreements as of the date hereof (the "Material Agreements") of each Borrower and each of its Foreign Subsidiaries. Neither any Borrower nor any of its Foreign Subsidiaries are in material default of any of the Material Agreements. Except where any Borrower or any of its Foreign Subsidiaries have allowed a Material Agreement to terminate because such termination was in the best interests of such Borrower or such Foreign Subsidiary, each of the Material Agreements remains in full force and effect. Section 6.25 SOLVENCY. After giving effect to the transactions contemplated by the Loan Documents: (i) the property of each Borrower, at a fair valuation, will exceed its debt; (ii) the capital of each Borrower will not be unreasonably small to conduct its business; (iii) each Borrower will not have incurred debts, or have intended to incur debts, beyond its ability to pay such debts as they mature; and (iv) the present fair salable value of the assets of each Borrower will be materially greater than the amount that will be required to pay its probable liabilities (including debts) as they become absolute and matured. The representations set forth in the -23- preceding sentence are equally true of the Loan Parties on a Consolidated basis and of each Subsidiary in a Consolidating basis. For purposes of this Section, "debt" means any liability on a claim, and "claim" means (i) the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, undisputed, legal, equitable, secured or unsecured, or (ii) the 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, unmatured, undisputed, secured or unsecured. Section 6.26 TAXES. All federal, state and other tax returns of each Borrower and each of its Foreign Subsidiaries required by law to be filed have been duly filed and all federal, state and other taxes, as applicable, including, without limitation, withholding taxes, assessments and other governmental charges or levies required to be paid by such Borrower or Foreign Subsidiary, which are due and payable, have been paid, provided that there shall not be deemed to be a violation of this representation if any such tax is being diligently contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which adequate reserves shall have been set aside on the appropriate books, but only if no foreclosure, distraint, sale or similar proceeding shall have been commenced. The charges, accruals and reserves on the books of each Borrower and each of its Foreign Subsidiaries in respect of taxes are adequate. Section 6.27 ENVIRONMENTAL COMPLIANCE. Except as would not reasonably be expected to result in a Material Adverse Change or as scheduled in SCHEDULE 6.27: (a) None of the real property currently owned or occupied by any Borrower or any of its Foreign Subsidiaries has ever been used by any Borrower or any of its Foreign Subsidiaries during its or their ownership or occupancy, or, to the best of Borrowers' knowledge, by previous owners or occupiers to treat, produce, store, handle, transfer, process, transport, dispose of or otherwise release any Hazardous Substances in violation of any Environmental Law. (b) There is no condition which exists on the real property owned or occupied by any Borrower or any of its Foreign Subsidiaries which requires Remedial Action and which was caused by any Borrower or any of its Foreign Subsidiaries or, to Borrowers' knowledge, any other Person. (c) Neither any Borrower nor any of its Foreign Subsidiaries have been notified of, or have actual knowledge of any notification having been filed with regard to, a Release on or into any real property owned or occupied by any Borrower or any of its Foreign Subsidiaries. (d) Neither any Borrower nor any of its Foreign Subsidiaries have received a summons, citation, notice of violation, administrative order, directive, letter or other communication, written or oral, from any governmental or quasi-governmental authority concerning any Release or need for Remedial Action. (e) There are no "friable" (as that term is defined in regulations under the Federal Clean Air Act) asbestos or friable asbestos-containing materials which have not been -24- encapsulated as required by Environmental Laws in accordance with accepted guidelines promulgated by the United States Environmental Protection Agency existing in or on any real property owned and/or in the portion of any other property occupied by any Borrower or any of its Foreign Subsidiaries. (f) No equipment for which any Borrower or any of its Foreign Subsidiaries are responsible containing polychlorinated biphenyls, including electrical transformers, is located on any real property owned or occupied by any Borrower or any of its Foreign Subsidiaries in levels which exceed those permitted by any and all governmental authorities with jurisdiction over such premises or which are not properly labeled in accordance with requisite standards. (g) There are no tanks on any real property owned or occupied by any Borrower or any of its Foreign Subsidiaries that have been used for the storage of petroleum products or any other substance, nor, to the knowledge of the Borrowers, have any such tanks been located on such property at any time. Section 6.28 LABOR DISPUTES AND ACTS OF GOD. Neither the business nor the properties of any Borrower or any of its Foreign Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance) which could reasonably be expected to result in a Material Adverse Change. ARTICLE 7 FINANCIAL COVENANTS Section 7.01 FINANCIAL COVENANTS. Each Borrower shall, and shall cause each of its Subsidiaries to, maintain compliance with the following financial covenants: (a) Maximum Total Leverage Ratio. As of any fiscal quarter end, the ratio of (a) Total Funded Indebtedness as of such date to (b) EBITDA for the period of four (4) consecutive fiscal quarters ending on or prior to such date shall not be greater than 3:25 to 1:00. (b) Minimum Interest Coverage Ratio. As of any fiscal quarter end, the ratio of (a) EBIT for the period of four (4) consecutive fiscal quarters ending on or immediately prior to such date to (b) Interest Expense (whether or not paid) payable during the period of four (4) consecutive fiscal quarters ending on or immediately prior to such date, shall not be less than 2:50 to 1:00. (c) Minimum Net Worth. As of any fiscal quarter end, the total amount of stockholders' equity of Parent Borrower and its Subsidiaries, on a consolidated basis, shall be not less than the sum of (i) Thirty-Three Million, Nine Hundred Eighteen Thousand and Three Hundred Dollars ($33,918,300) -25- plus (ii) an amount equal to 50% of the cumulative amount of Net Income (which shall not be reduced by the amount of any net loss for any fiscal quarter) of Parent Borrower and its Subsidiaries, on a consolidated basis, for the period commencing on April 1, 2005 and ending on the date of determination minus (iii) the aggregate amount paid on or after April 1, 2005 for permitted stock purchases described in Section 9.04(a). (d) Maximum Capital Expenditures. The aggregate amount of Capital Expenditures made during any period of twelve (12) calendar months shall not exceed Five Million Dollars ($5,000,000), without cumulation or carryover, which amount shall not include any amounts used for Permitted Acquisitions. Section 7.02 CALCULATIONS. Calculations made pursuant to Section 7.01 shall give effect, on a pro forma basis, to all Acquisitions and dispositions made during the period to which the required compliance relates (the "Applicable Period"), as if such Acquisition or disposition had been consummated on the first day of the applicable period such that (a) the results of operations of the assets or entities acquired or disposed of are included or excluded, as applicable, and (b) any Indebtedness assumed or incurred or paid off in connection with such Acquisition or disposition is included or excluded, as applicable, on a pro forma basis from the first day of the Applicable Period. ARTICLE 8 COVENANTS CONCERNING REPORTING REQUIREMENTS Section 8.01 FINANCIAL STATEMENTS. So long as any of the Obligations is unpaid or any Lender has any commitment to make Loans hereunder, the Parent Borrower shall, from time to time, furnish (or cause to be furnished, as the case may be) to the Lenders the following information: (a) Annual Financial Statements. As soon as available and in any event within ninety (90) calendar days after the end of each of each fiscal year of the Parent Borrower, but no later than the date upon which the Parent Borrower's annual report on Form 10-K is to be filed with the Securities and Exchange Commission, the Parent Borrower shall deliver to the Lenders audited Consolidated financial statements, together with any notes thereto of the Parent Borrower and its Subsidiaries, consisting of a balance sheet as at the end of such fiscal year and related statements of income, cash flows, and changes in retained earnings for the fiscal year then ended, all in reasonable detail and setting forth in comparative form the respective consolidated financial statements as at the end of and for the preceding fiscal year, prepared in accordance with GAAP and Unqualifiedly Certified by independent certified public accountants of nationally recognized standing satisfactory to the majority Lenders. The Parent -26- Borrower shall also deliver a letter signed by such accountants stating that, having conducted an ordinary and customary examination of the affairs of the Parent Borrower in connection with the preparation of the respective Consolidated financial statements, they are not aware of the existence of any condition or event which constitutes a Default or an Event of Default hereunder, and, promptly upon receipt, a copy of any management letter. (b) Quarterly Financial Statements. As soon as available and in any event within forty-five (45) calendar days after the end of each of the first three fiscal quarters in each fiscal year of the Parent Borrower, the Parent Borrower shall deliver to the Lenders Consolidated financial statements of the Parent Borrower and its Subsidiaries, consisting of a balance sheet as at the end of such fiscal quarter and related statements of income, cash flows, and changes in retained earnings for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and setting forth in comparative form the respective Consolidated financial statements of the corresponding date and period in the previous fiscal year and certified (subject to normal year-end audit adjustments) by the President or chief financial officer of the Parent Borrower as (i) having been prepared in accordance with GAAP and (ii) presenting fairly the financial position of the Parent Borrower and its Subsidiaries as at the end of each fiscal quarter. (c) Subsidiary Financial Statements. At the same time as the financial statements delivered under subsections (a) and (b) above, a balance sheet, statement of income and statement of cash flows for each Subsidiary of the Parent Borrower in form reasonably satisfactory to the Agent. (d) Business Plan. As soon as available and in any event within seventy-five (75) calendar days after the end of each fiscal year, the Parent Borrower shall deliver to the Lenders the annual budget for the Parent Borrower and its Subsidiaries, including forecasts of the income statement, the balance sheet, cash flow report and an EBITDA statement for such year on a quarter by quarter basis. Such Business Plan shall be accompanied by a certification of the President or Chief Financial Officer of the Parent Borrower that such Business Plan is reasonable, made in good faith, consistent with the Loan Documents, and represents the Parent Borrower's best judgment as to such matters. Section 8.02 OFFICER'S COMPLIANCE CERTIFICATES. As soon as available and in any event within forty-five (45) calendar days after the end of each of the first three fiscal quarters, and within ninety (90) calendar days after the end of each fiscal year, but no later than the date upon which the Parent Borrower's annual report on Form 10-K is to be filed with the Securities and Exchange Commission, the Parent Borrower shall deliver to the Lenders a certificate of the President or Chief Financial Officer of the Parent Borrower, in substantially the form of EXHIBIT D attached hereto, containing the following information: (a) a statement that no Default or Event of Default exists and is continuing on the date of such certificate; and (b) calculations in sufficient detail to demonstrate compliance as of the date of the relevant financial statements with all of the financial covenants contained in Article 7 (Financial Covenants) hereof. -27- Section 8.03 AUDITORS' REPORTS. Promptly upon receipt, the Parent Borrower shall deliver to the Lenders copies of all financial reports or written recommendations, if any, submitted to the Parent Borrower or any of its Subsidiaries by its auditors in connection with each annual or interim auditor examination of its books by such auditors. Section 8.04 NOTICE OF DEFAULT. Promptly after any officer of any Borrower has learned of the occurrence of a Default or an Event of Default, the Parent Borrower shall deliver to the Agent, the Issuer and the Lenders a notice of such Default or Event of Default. Each such notice pursuant to this Section shall set forth details of the matter referred to therein and state what action the Parent Borrower or the affected Subsidiary has taken, is taking and proposes to take, with respect thereto, and shall be certified by the President or Chief Financial Officer of the Parent Borrower as true and correct in all material respects. Section 8.05 NOTICE CONCERNING REPRESENTATIONS AND WARRANTIES. Each Borrower shall give the Agent notice of any changes in facts or circumstances on which the representations and warranties set forth in this Agreement are made which makes such representations and warranties false or misleading in any material respect. Such notice shall be given promptly, but in any event not later than ten (10) days after any officer of any Borrower becomes aware of its occurrence. Except as set forth in the proviso to Section 5.03 (Conditions Precedent to Each Loan), the delivery of such a notice shall not imply any waiver by the Lenders. Section 8.06 NOTICE OF LITIGATION. Promptly after the commencement thereof, but in any event not later than ten (10) days after any officer or director of any Borrower becomes aware thereof, the Parent Borrower shall deliver to the Agent notice of any actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting any Borrower or any of its Subsidiaries in which the amount involved is $250,000 or more or, which, if not solely for monetary damages, could result in a Material Adverse Change. Section 8.07 SEC DISCLOSURE. Promptly after the sending or filing thereof, the Parent Borrower shall deliver to the Agent and the Lenders copies of all proxy statements, financial statements, and reports which the Parent Borrower or any Subsidiary sends to its shareholders, and copies of all regular, periodic, and special reports, and all registration statements which the Parent Borrower or any Subsidiary files with the Securities and Exchange Commission (or any governmental authority which may be substituted therefor, or with any national securities exchange or regulatory body thereof. Section 8.08 CONDITIONS AFFECTING COLLATERAL. Each Borrower shall give the Agent at least thirty (30) days prior written notice of any of the following conditions: (a) the opening or acquisition of a new facility or office; (b) a change in the jurisdiction of incorporation of any Borrower or any Subsidiary of a Borrower; (c) any creation or acquisition of a Subsidiary; (d) acquisition of any material amount of property by such Borrower or any Subsidiary not subject to a valid and perfected Lien pursuant to the then existing Loan Documents with the priority required by the Loan Documents; or (e) or any change of domicile or change of name or any change of address of the chief executive office of any Loan Party. -28- Section 8.09 ERISA NOTICES. (a) Promptly after the filing or receiving thereof, each Borrower shall deliver to the Agent copies of all reports and notices, including annual reports and audited financial statements, which any Borrower or any Subsidiary or any ERISA Affiliate files with or receives from PBGC, the U.S. Department of Labor under ERISA, or the Internal Revenue Service, (b) as soon as possible and in any event within ten (10) business days after any Borrower or any Subsidiary or any ERISA Affiliate knows or has reason to know that (i) any Reportable Event has occurred or is reasonably expected to occur with respect to any Plan, (ii) that the PBGC or any Borrower or any Subsidiary, or any ERISA Affiliate has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, (iii) that any Withdrawal Liability from a Multiemployer Plan has been or will be incurred by any Borrower or any of its Subsidiaries or any ERISA Affiliate, (iv) that any Multiemployer Plan is or will be in Reorganization terminated, partitioned or declared insolvent, (v) an Accumulated Funding Deficiency has been incurred or an application has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard or an extension of any amortization period under Section 412 of the Code with respect to a Plan, (vi) an action has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Multiemployer Plan, (vii) any event, transaction or condition has occurred or will occur that could reasonably be expected to result in the imposition of a lien under Part 3 of Subtitle B of Title I of ERISA or Title IV of ERISA, (viii) any Prohibited Transaction or other transaction, event or condition has occurred or will occur with respect to a Plan that could reasonably be expected to result in any Borrower, any of its Subsidiaries or any ERISA Affiliate incurring a material liability or becoming subject to a material penalty or excise tax, or (ix) the PBGC has contacted any Borrower, any of its Subsidiaries or any ERISA Affiliate with respect to the PBGC's Early Warning Program, each Borrower shall deliver to the Agent a certificate of the chief financial officer of such Borrower setting forth details as to such event, transaction or condition and the action such Borrower has taken, is taking or proposes to take with respect thereto, in either case, which respects an event, transaction or condition which could result in a Material Adverse Change. Section 8.10 MISCELLANEOUS. With reasonable promptness, each Borrower shall give to the Agent and the Lenders such other information respecting the business operations and financial condition of such Borrower or any of its Subsidiaries as the Agent may, from time to time, request, including with limitation any change in management. Section 8.11 AUTHORIZATION OF THIRD PARTIES TO DELIVER INFORMATION. Each Borrower hereby agrees that any opinion, report or other information delivered to the Agent or the Lenders pursuant to the Loan Documents is hereby deemed to have been authorized and directed by the Borrowers to be delivered for the benefit, and reliance thereupon, of the Agent and the Lenders. ARTICLE 9 BUSINESS COVENANTS So long as any of the Obligations is unpaid or any of the Lenders has any commitment to make Loans hereunder, the Borrowers shall, and shall cause each of their Subsidiaries to, comply with the following covenants. -29- Section 9.01 INDEBTEDNESS. (a) Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, directly or indirectly, create, assume, incur or otherwise become or remain obligated in respect of, or permit to be outstanding, any Indebtedness, except: (i) Indebtedness in favor of the Lenders; (ii) obligations in an aggregate principal amount not to exceed at any time Two Million Five Hundred Thousand Dollars ($2,500,000) in respect of Capital Lease Obligations and purchase money Indebtedness in respect of equipment; (iii) obligations owing to any Borrower or any of its Foreign Subsidiaries; (iv) Indebtedness outstanding on the Closing Date as set forth on Schedule 9.01 and refinancings thereof, but not Indebtedness shown thereon as being paid off on the date hereof; and (v) Other Indebtedness not described in clauses (i)-(iv) above in an amount not to exceed Two Million Five Hundred Thousand Dollars ($2,500,000). (b) In addition to the limitations on the incurrence or existence of Indebtedness referred to above, no Indebtedness may be incurred by any Borrower or any of its Foreign Subsidiaries unless immediately before and after giving effect to the incurrence of such Indebtedness, no Default or Event of Default shall have occurred and be continuing. (c) Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, directly or indirectly, (i) pay, make or set aside any amount for payment of the Indebtedness set forth in clauses (i)-(v) of Section 9.01(a) above (collectively, "Permitted Indebtedness"), except for regularly scheduled payments required by the provisions of any agreements governing Permitted Indebtedness, or (ii) amend or otherwise modify the terms of any agreements governing Permitted Indebtedness. Section 9.02 LIENS. (a) Each Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, assume, incur or permit to exist, any Lien on any of its properties or assets, whether now owned or hereafter acquired, except the following (collectively, the "Permitted Liens"): (i) Liens in favor of the Agent arising out of the Collateral Agreements; (ii) Liens for taxes, assessments, or other governmental charges the payment of which is not at the time required to be paid pursuant to Section 9.14 (Payment of Taxes and Claims), not yet subject to penalty or which are being contested in good faith and by -30- appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the Borrowers in accordance with GAAP; (iii) statutory Liens of bankers, carriers, landlords, warehousemen, mechanics, laborers and materialmen incurred in the ordinary course of business for sums not yet due, or which are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Borrowers in accordance with GAAP; (iv) Capital Leases and purchase money security interests incurred in compliance with clause (a)(ii) of Section 9.01 (Indebtedness) above, provided, that no such Liens shall extend to or cover any property other than the leased property or equipment purchased by proceeds of such permitted purchase money Indebtedness; (v) zoning restrictions, easements, rights-of-way, minor restrictions and other similar encumbrances on real property, in each case incidental to, and not interfering with, the ordinary conduct of the business of such Person; (vi) Liens incurred or deposits made in the ordinary course of business to secure the obligations of each Borrower and each Foreign Subsidiary under workers' compensation, unemployment insurance and other types of social security legislation or otherwise to secure statutory or regulatory obligations or for the payment of rent of each Borrower or any of its Foreign Subsidiaries in the ordinary course of business consistent with past practice, including to secure the performance of tenders, surety and appeal bonds, performance bonds, performance of bids, leases, trade contracts, governmental contracts, operating leases, performance and return-of-money bonds and other similar obligations (exclusive in each case of obligations for the payment of borrowed money); provided, that the obligations in connection with which such Liens were incurred or deposits made shall have been incurred in the ordinary course of business and shall otherwise be permitted by this Agreement; (vii) Judgment Liens not giving rise to an Event of Default so long as any such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (viii) Liens securing Indebtedness, or Liens on shares of capital stock, of a Person existing at the time such Person becomes a Subsidiary or is merged with or into any Borrower or any of its Foreign Subsidiaries pursuant to a Permitted Acquisition or any Lien securing Indebtedness incurred in connection with a Permitted Acquisition, provided that (A) such Liens were in existence prior to the date of such Permitted Acquisition, were not incurred in anticipation thereof, and do not extend to any other assets; and (B) do not exceed One Million Dollars ($1,000,000) in the aggregate; (ix) licenses, leases or subleases granted to other Persons in the ordinary course of business not materially interfering with the conduct of the business of any Borrower or any of its Foreign Subsidiaries or materially detracting from the value of the assets of any Borrower or any of its Foreign Subsidiaries; and -31- (x) Liens disclosed on the title reports delivered to Agent on the date hereof or listed on Schedule 9.02, provided that such Liens do not extend to assets or secure liabilities in addition to those existing on the date hereof. (b) Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, agree with any Person to restrict or place limitations on the right of any Borrower or any of its Foreign Subsidiaries to create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any Borrower or any of its Foreign Subsidiaries, other than the lessor as to a Capital Lease or the secured party as to a purchase money security interest, as long as the restriction applies only to the specific equipment involved. (c) Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, license or sublicense any of their owned or licensed Intellectual Property or general intangibles except to any Subsidiary and in the ordinary course of business consistent with past practice as described on Schedule 9.02. Section 9.03 INVESTMENTS AND ACQUISITIONS. Each Borrower shall not, and shall not permit any Foreign Subsidiary to, directly or indirectly, make or permit to exist any Investment or make any Acquisition, except that so long as no Default or Event of Default then exists or would be caused thereby, any Borrower and any of its Foreign Subsidiaries may: (a) maintain existing Investments in direct or indirect wholly-owned Subsidiaries; (b) create new direct or indirect wholly-owned Subsidiaries, subject to the provisions of Section 9.27 (Joinder of Subsidiaries); (c) make Investments in Cash Equivalents; (d) make Investments in securities of trade creditors, customers or any debtor of any Borrower or any of its Subsidiaries received in compromise of obligations incurred in the ordinary course of business, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors, customers or debtors and any Investments received in satisfaction of judgments; (e) make loans or advances to employees, directors, officers or consultants of any Borrower or any of its Subsidiaries of the types consistent with past practice in an aggregate amount at any time outstanding not to exceed Five Hundred Thousand Dollars ($500,000); (f) make payroll, travel and similar advances to cover matters that are expected at the time of the advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business and consistent with past practice; (g) make Investments in any Person to the extent such Investments consist of prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits made in the ordinary course of business and consistent with past practice; -32- (h) acquire a majority (but not less than a majority) of the outstanding common stock of XYZ, Inc., provided that each of the requirements set forth in Schedule 9.03 shall first have been satisfied in form and substance satisfactory to the Agent; or (i) make Acquisitions and Investments, including additional Investments in Foreign Subsidiaries, if the aggregate Consideration paid or payable with respect thereto, plus all amounts paid or payable under Section 9.04(a), shall not exceed Ten Million Dollars ($10,000,000) for any fiscal year, without cumulation or carry-over, provided that all of the Acquisition Requirements shall have been fulfilled and satisfied as to each Acquisition and Investment. Section 9.04. RESTRICTED PAYMENTS. Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum or property for any Restricted Payment or agree with any Person to restrict or place limitations on the right of each Borrower or any of its Foreign Subsidiaries to declare, order, pay, make or set apart any sum or property for any Restricted Payment, except that: (a) the Parent Borrower may, subject to compliance with 9.03(i), purchase its registered capital stock then issued and outstanding; (b) Subsidiaries may make Restricted Payments to the Borrowers or another Subsidiary of the Borrowers which is not a Foreign Subsidiary; (c) so long as no Default or Event of Default shall have occurred and be continuing, the payment of cash dividends to Parent Borrower to the extent applied by Parent Borrower to repurchase, redeem or otherwise retire or acquire equity or other ownership interests of Parent Borrower from its employees or directors (or their heirs or estates) or employees or directors (or their heirs or estates) of Parent Borrower or its Subsidiaries, in each case, pursuant to the terms of any stockholders agreement, employment agreement, severance agreement, employee stock option agreement or similar agreement in accordance with the provisions of any such arrangement as in effect on the date hereof, in an aggregate amount pursuant to this paragraph (b) to all such employees or directors (or their heirs or estates) not to exceed $500,000 per fiscal year on and after the date hereof; (d) the payment of cash dividends to Parent Borrower (i) to the extent applied by Parent Borrower to pay reasonable and customary directors fees payable to, and indemnity provided on behalf of, the Board of Directors of Parent Borrower, indemnity provided on behalf of officers and employees of Parent Borrower, and customary reimbursement of travel and similar expenses incurred in the ordinary course of business (without giving effect to any amendment or supplement thereto or modification thereof), (ii) in an aggregate not to exceed $250,000 per fiscal year, to the extent applied by Parent Borrower to pay its general administrative expenses, including, without limitation, in respect of director fees and expenses, administrative, legal and accounting services, or (iii) solely to enable Parent Borrower to make payments in cash to holders of its capital stock in lieu of the issuance of fractional shares of its capital stock in an aggregate amount not to exceed $200,000 on and after the date hereof; -33- (e) Payments may be made to the Parent Borrower to the extent applied to the tax liability of any Subsidiary, computed as if the Subsidiary Borrowers and their Subsidiaries were a separate group filing a consolidated return, reduced by the amount of such tax liability actually paid by the Parent Borrower; and (f) Payments may be made pursuant to the Management Agreement referred to in Section 9.05(b). Section 9.05 AFFILIATE TRANSACTIONS. (a) Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, directly or indirectly, engage in any transaction with an Affiliate, or make an assignment or other transfer of any of its properties or assets to any Affiliate on terms that are less favorable to such Borrower or such Foreign Subsidiary than those which might be obtained at the time from unaffiliated third parties; provided, however, the foregoing restrictions shall not apply to transactions exclusively among the Borrowers; (i) Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, (a) enter into any management agreement with any Person that gives such Person the right to manage its business except for usual and customary employment agreements and consulting agreements consistent with past practice, or (b) directly or indirectly pay or accrue to any Person any sum or property for fees for management or similar services rendered in connection with the operation of a business except as set forth in clause (a) above; except for a certain Management Agreement dated as of January 23, 2002 between the Parent Borrower and Steel Partners II, L.P., providing for $475,000 in annual management fees, which shall not be materially amended, supplemented or otherwise modified without the Agent's prior written consent, except to permit (i) an annual bonus of up to $250,000, if approved in advance by the Board of Directors and the Compensation Committee of Parent Borrower or (ii) reductions in compensation; provided that, while payments are being made under such Management Agreement, Steel Partners II, L.P. shall maintain material involvement in the management of Parent Borrower, and Parent Borrower shall not hire any senior executive officer not employed by Parent Borrower on the date hereof. Section 9.06 DISPOSITION OF ASSETS. Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, directly or indirectly, sell, assign, lease, abandon, or otherwise transfer or dispose of any of their assets (including, without limitation, shares of stock and indebtedness of Subsidiaries, receivables, and leasehold interests), except: (a) inventory disposed of in the ordinary course of its business as presently conducted; (b) the sale or other disposition of assets no longer used or useful in the conduct of its business; (c) that any Foreign Subsidiary may assign or otherwise transfer its assets to any Borrower; or (d) property subject to a governmental condemnation. -34- Section 9.07 LIQUIDATION OR MERGER. Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, liquidate or dissolve itself (or suffer any liquidation or dissolution) or otherwise wind up, or enter into any merger or consolidation or division or similar transaction, other than: (a) a merger or consolidation between any two or more Borrowers, (b) a merger or consolidation between or among two or more Foreign Subsidiaries, or (c) the liquidation and dissolution of a non-operating Subsidiary or a Subsidiary having book assets not in excess of $100,000.00. Section 9.08 CHANGE IN ORGANIZATIONAL DOCUMENTS. Each Borrower shall not, and shall not permit any Foreign Subsidiary to, amend or otherwise modify, the respective articles or certificate of incorporation, bylaws or other organizational documents of such Person, except in connection with a merger permitted by Section 9.07 (Liquidation or Merger) above. Section 9.09 ISSUANCE OF EQUITY. Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, issue, authorize the issuance of, or obligate itself to issue any shares of its capital stock or other equity (including, without limitation, any options, warrants or other rights in respect thereof) to any Person that (a) would contravene any other provision of this Agreement (including any provision respecting Change of Control) or (b) would result in there being equity of any Subsidiary of any Borrower that is not pledged pursuant to the Security Agreement. Section 9.10 ENVIRONMENTAL VIOLATIONS. Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to, or permit any Person to, use, generate, treat, store, dispose of or otherwise introduce, any Hazardous Materials into or on any real property owned or leased by any of them and shall not permit such actions to occur, except in an environmentally safe manner through methods which have been approved by and meet all of the standards of the federal Environmental Protection Agency and any other federal, state or local agency with authority to enforce Environmental Laws except where the failure to comply with the foregoing sentence could not reasonably be expected to result in a Material Adverse Change. Without limiting the generality of any other indemnities provided under this Agreement, each Borrower hereby agrees to indemnify, reimburse, defend and hold harmless any Indemnified Person for, from and against all demands, liabilities, damages, costs, claims, suits, actions, legal or administrative proceedings, interest, losses, expenses and reasonable attorney's fees (including any such fees and expenses incurred in enforcing this indemnity) asserted against, imposed on or incurred by any of the Indemnified Persons, directly or indirectly, pursuant to, or in connection with, the application of any Environmental Law to acts or omissions occurring at any time on or in connection with any real estate owned or leased by any Borrower or any of its Foreign Subsidiaries or any business conducted thereon except those which result from the gross negligence or willful misconduct of any Indemnified Person. Section 9.11 PRESERVATION OF EXISTENCE, ETC. Except as permitted by Section 9.07, each Borrower shall at all times preserve and keep in full force and effect (a) its corporate, -35- partnership or other existence and (b) the corporate, partnership or other existence of each Foreign Subsidiary and (c) the good standing of such Persons in all states or jurisdictions in which they are formed or required to qualify to do business, except, as to qualification only, where the failure to keep in full force and effect any such good standing could not result in a Material Adverse Change. Section 9.12 PERMITTED BUSINESSES. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to engage in the businesses permitted under Section 6.08 and no other business. Section 9.13 COMPLIANCE WITH LAW. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, comply with the requirements of all Applicable Law and will obtain or maintain all franchises, permits, licenses and other governmental authorizations and approvals, necessary to the ownership, acquisition or disposition of their respective properties or to the conduct of their respective businesses except where failure to comply with, obtain or maintain any of the foregoing could not reasonably be expected to result in a Material Adverse Change. Section 9.14 PAYMENT OF TAXES AND CLAIMS. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, timely file all tax and information returns required by federal, state or local tax authorities. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, pay all taxes (including, without limitation, withholding taxes), assessments and governmental charges or levies required to be paid by it or imposed on it or on its income or profits or upon any of its properties or assets, prior to the date on which penalties attach thereto or interest accrues, and all claims for (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which, if unpaid, might become a Lien upon its properties or assets; provided that it shall not be deemed to be a violation of this covenant if any such charge or claim not paid is being diligently contested in good faith by appropriate proceedings promptly initiated and diligently conducted and for which adequate reserves shall have been set aside on the appropriate books, but only so long as no foreclosure, distraint, sale or similar proceeding shall have been commenced. Section 9.15 TAX CONSOLIDATION. Each Borrower shall not file or consent to or permit the filing of any consolidated income tax return on behalf of it or any Subsidiary with any Person (other than a consolidated return for the group of which Parent Borrower is the common parent). Each Borrower shall not, and shall not permit any Subsidiary to, enter into any agreement with any Person which would cause such Borrower or such Subsidiary to bear more than the amount of taxes to which it would have been subject had it separately filed (or filed as part of a consolidated return among the Parent Borrower's Subsidiaries). Section 9.16 MAINTENANCE OF PROPERTIES. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition (ordinary wear and tear excepted) all properties used or useful in its business (whether owned or leased), such maintenance to include, without limitation, repair, renewal, replacement or improvement thereto; and keep, and cause each Subsidiary to keep, all systems and equipment which may now or in the future be subject to compliance with any standard or rules imposed by any Governmental Authority in compliance in all material respects with such standards or rules. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, -36- maintain, preserve and protect, and, when necessary, renew, all franchises, licenses, patents, copyrights, permits, service marks, trademarks and trade names and other general intangibles held by any of them and all agreements to which any of them are parties which are necessary to conduct such Borrower's or any applicable Subsidiary's business. Section 9.17 INSURANCE. (a) Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, maintain or cause to be maintained with financially sound and reputable insurers, insurance with respect to the properties and business of such Borrower or any such Foreign Subsidiary against loss or damage of the kinds and in the amounts reasonably prudent for the operation of its business and including such risks as are customarily insured against by entities of established reputation having similar properties similarly situated or engaged in the same or similar type of businesses. Each Borrower and each of its Foreign Subsidiaries shall cause each insurance policy issued in connection herewith to provide, and the insurer issuing such policy to certify to the Agent that (i) the Agent will be named as additional insured and lender loss payee or mortgagee, as appropriate, under each such insurance policy; (ii) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer will promptly notify the Agent and such cancellation or change shall not be effective as to the Agent for at least thirty (30) days after receipt by the Agent of such notice, unless the effect of such change is to extend or increase coverage under the policy; and (iii) the Agent will have the right (but no obligation) at its election to remedy any default in the payment of premiums within thirty (30) days of notice from the insurer of such default. (b) If no Default or Event of Default exists, loss payments will be applied by each Borrower or the relevant Subsidiary to the repair and/or replacement of property with respect to which the loss was incurred to the extent reasonably feasible, and any loss payments or the balance thereof remaining, to the extent not so applied or used to purchase other assets useful in the business of each such Borrower and each such Subsidiary within 360 days of receipt thereof and subject to the Liens of the Agent hereunder, shall be payable to the Agent on behalf of the Lenders and applied to the Obligations. If an Event of Default or Default shall then exist then such proceeds shall, at the option of the Agent, be applied to reduce the Obligations, and at the Agent's election the Commitment shall be permanently reduced, or be reinvested in the business of such Borrower or applicable Subsidiary. Notwithstanding the foregoing, payments received by the Agent in excess of all Obligations shall be paid over by the Agent to the Borrowers. Copies of such policies or the related certificates, in each case, naming the Agent as additional insured and lender loss payee or mortgagee, as appropriate, shall be delivered to the Agent annually at the time of the delivery of the financial statements referred to in Section 8.01(a) above and at the time any new policy of insurance is issued. If no Default or Event of Default exists, no claim may be adjusted without the consent of the Borrowers. (c) Each Borrower shall maintain or cause to be maintained all insurance available through the PBGC and/or insurers acceptable to the Agent against their obligations and the obligations of any of its Foreign Subsidiaries to the PBGC. Section 9.18 COMPLIANCE WITH ERISA. -37- (a) Each Borrower shall, and shall cause each of its Subsidiaries and any ERISA Affiliates to comply in all material respects with the requirements of the Code and ERISA with respect to the operation of all Plans and Multiemployer Plans. (b) Each Borrower shall, and shall cause each of its Subsidiaries and any ERISA Affiliates to, comply in all material respects with the requirements of COBRA, HIPAA and Section 1862(b) of the Social Security Act with respect to any Plans subject to the requirements thereof. (c) Each Borrower shall not take, and shall prevent each of its Subsidiaries and any ERISA Affiliate from taking, any of the following actions and shall not permit any of the following events to occur if such action or event together with all other such actions or events, would subject any Borrower, any of its Subsidiaries or any of its ERISA Affiliates to any tax, penalty, or other liabilities which could reasonably be expected to result in a Material Adverse Change: (i) engage in or knowingly consent to any "party in interest" or any "disqualified person," as such terms are defined in Section 3(14) of ERISA and Section 4975(e)(2) of the Code respectively, engaging in any Prohibited Transaction in connection with which any Borrower, any of its Subsidiaries or any ERISA Affiliate could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code; (ii) terminate any Plan in a manner, or take any other action, which could result in any liability of any Borrower, any of its Subsidiaries or any ERISA Affiliate to the PBGC; (iii) fail to make full payment when due of all amounts which, under the provisions of any Plan or any Multiemployer Plan, any Borrower, any of its Subsidiaries or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any Accumulated Funding Deficiency, whether or not waived, with respect to any Plan or fail to pay PBGC premiums when due; (iv) permit the current value of all accrued benefits under all Plans which are subject to Title IV of ERISA to exceed the current value of the assets of such Plans allocable to such vested accrued benefits, except as may be permitted under actuarial funding standards adopted in accordance with Section 412 of the Code; (v) withdraw from any Multiemployer Plan, if such withdrawal would result in the imposition of Withdrawal Liability; or (vi) adopt a Plan amendment which results in significant underfunding (as defined in Section 307 of ERISA) which requires any Borrower or any of its Subsidiaries or ERISA Affiliates to provide security. (d) The Borrower shall comply with the ERISA reporting requirements set forth in Section 8.09 (ERISA Notices). -38- As used in this Section 9.18, the term "accrued benefit" has the meaning specified in Section 3(23) of ERISA and the term "current value" has the meaning specified in Section 4001(a)(18)(B) of ERISA. Section 9.19. MAINTENANCE OF RECORDS; FISCAL YEAR. Each Borrower shall, and shall cause each of its Foreign Subsidiaries to, keep at all times books of record and account in which entries will be made of all dealings or transactions in relation to its business and affairs as required by GAAP. Each Borrower shall keep, and shall cause each of its Foreign Subsidiaries to keep, its books of account and financial statements in accordance with GAAP and report on the basis of a fiscal year ending December 31. Section 9.20. INSPECTIONS AND FIELD EXAMINATIONS. Upon reasonable notice (and for this purpose no more than two Business Days notice shall be required under any circumstances) if no Event of Default or Default shall exist, or at any time with or without notice after the occurrence of an Event of Default or Default, each Borrower shall, and shall cause each of its Foreign Subsidiaries to, allow any representative of the Agent or any Lender to visit and inspect any of the properties of such Borrower and any of its Foreign Subsidiaries, to examine the books of account and other records and files of such Borrower and any of its Foreign Subsidiaries (including, without limitation, the financial statements (audited and unaudited, to the extent prepared) of each Subsidiary and information with respect to each business operated by such Borrower and any of its Foreign Subsidiaries), to make copies thereof and to discuss the affairs, business, finances and accounts of such Borrower and its Foreign Subsidiaries with its personnel and accountants. The Agent or any Lender shall also be permitted to conduct field examinations at Borrowers' expense, not more than once a year before the occurrence of an Event of Default and thereafter without limitation. The Agent and the Lenders' inspections are solely for the protection of the Agent and the Lenders and no action or inaction of the Agent or the Lenders shall constitute any representation by the Agent or the Lenders that the Borrowers are in compliance with the terms of any Loan Documents or that the Agent or the Lenders approve of the Borrowers' affairs, business, finances or accounts. Section 9.21. EXCHANGE OF NOTES. Upon receipt of a written notice of loss, theft, destruction or mutilation of a Note and of a letter of indemnity from the affected Lender or its successors or assigns, and upon surrendering for cancellation such Note if mutilated (in which event no indemnity shall be required), each Borrower shall execute and deliver a new Note of like tenor in lieu of such lost, stolen, destroyed or mutilated Note, as the case may be. Section 9.22. COMPLIANCE WITH FEDERAL RESERVE REGULATIONS. The Loans shall not be used, in whole or in part, for the purpose of purchasing or carrying any margin stock, secured directly or indirectly by margin stock, within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. Following application of the proceeds of each Loan, not more than 25 percent of the value of the assets of any Borrower or the Borrowers and their Subsidiaries on a Consolidated basis, which are subject to the provisions of Section 9.02(a) or Section 9.06 or subject to any restriction contained in any agreement or instrument between any Borrower and any Lender or any Affiliate of any Lender, is represented by margin stock. If requested by the Agent or any Lender, each Borrower shall complete and sign Part I of a copy of the Federal Reserve Form U-1 referred to in Regulation U of the Board of Governors of the Federal Reserve System and deliver such copy to the Agent or such Lender. Neither any -39- Borrower nor any of its Foreign Subsidiaries, nor any bank acting on any of their behalf, have taken or will take any action which might cause this Agreement or the Notes to violate Regulation U or X or any other regulation of the Board of Governors of the Federal Reserve System, as now or hereafter in effect. Section 9.23. LIMITATIONS ON CERTAIN RESTRICTIVE PROVISIONS. Each Borrower shall not, and shall not permit any of its Foreign Subsidiaries to (a), permit or place any restriction, directly or indirectly, on (i) the payment of dividends or distributions by any Subsidiary or (ii) the making of advances or other cash payments by any such Subsidiary or (iii) the transfer by any Subsidiary of any of its properties or assets, in each case to any Borrower or its Subsidiaries, or (b) agree with any Person other than Agent and the Lenders that the Borrowers and/or their Subsidiaries shall not amend the Loan Documents. Section 9.24. CORPORATE SEPARATENESS. Each Borrower and each of its Foreign Subsidiaries, on the one hand, shall conduct their business and operations separate from that of each other and their Affiliates, on the other hand. Without limiting the generality of the foregoing, each Borrower shall not, and shall not permit any of its Foreign Subsidiaries, to commingle funds with any Person that is not a Borrower or a Subsidiary of a Borrower. Section 9.25. DEPOSIT AND SECURITIES ACCOUNTS. Each Borrower and its Foreign Subsidiaries shall at all times maintain their primary demand, time and other deposit accounts with the Agent or a Lender approved by the Agent in order to facilitate the making of the Loans and to provide security for repayment of the Obligations. Deposits and investments in securities accounts with financial institutions, other than as provided above, shall at no time exceed an aggregate of $200,000, provided that, (a) one account may be maintained in each of England, China, Germany and Mexico, with deposits in each such account to be limited to an aggregate of $100,000, and (b) amounts in excess of the aggregate limits stated above may be deposited in employee payroll accounts (whether domestic or foreign) on any particular day if such excess is paid as compensation to employees on such day. Section 9.26. COLLATERAL; LOCKBOX. (a) Without limiting the generality of the provisions of Section 9.28 (Further Assurances) below, at any time that any Borrower or any of its Foreign Subsidiaries shall (a) acquire any property, whether real, personal or other and whether tangible or intangible, (b) change the location of any property, (c) transfer or otherwise issues shares of capital stock, (d) change its name or (e) take any action that would cause the Agent to fail to have a valid, perfected first priority security interest in all the property of the Borrowers and the Foreign Subsidiaries and in all the equity or other ownership interests of the Borrowers and the Foreign Subsidiaries, subject only to the exceptions explicitly permitted under the terms of this Agreement, or at any time any condition shall exist which results in such failure of the Agent to be so secured, then each Borrower shall, and shall cause its Subsidiaries to, take such action as is necessary to provide such security to the Agent, all at the expense of the Borrowers. (b) If any Borrower or any of its Foreign Subsidiaries elect at any time to maintain a lockbox or any other mechanism for the direct deposit or collection of accounts receivable or from which collected accounts receivable will be swept into another deposit -40- account, such lockbox or mechanism shall be maintained with Agent or with a Lender approved by the Agent, and no other Person, and it shall be maintained pursuant to documentation reasonably satisfactory to Agent. Section 9.27. JOINDER OF SUBSIDIARIES. Without limiting the generality of the provisions of Section 9.28, at any time that any Borrower or any of its Foreign Subsidiaries forms or acquires any new Subsidiary (a "New Subsidiary"), which formation or acquisition shall be effected only if no Default or Event of Default has occurred or would be caused thereby and only if all of the Acquisition Requirements are satisfied, then such New Subsidiary shall simultaneously deliver to the Agent: (a) a duly executed joinder in the form of Exhibit F to this Agreement and joinders satisfactory to the Agent to the Security Agreement and Notes; (b) a perfection questionnaire duly completed by such New Subsidiary; (c) the results of tax, judgments and other lien searches in form and substance satisfactory to the Agent, and from such jurisdictions as may be satisfactory to the Agent, together with U.S. Patent and Trademark Office and Copyright Office searches of a recent date, in each case, with respect to such New Subsidiary, showing no Liens except Permitted Liens. (d) Mortgages on all real property located in the United States owned by such New Subsidiary; (e) for each property subject to a Mortgage, (i) title insurance insuring the priority of the Mortgage, (ii) zoning certification, (iii) a flood certification, and (iv) a survey; in each case satisfactory to the Agent; (f) any required governmental consents or other required consents to the execution, delivery and performance of the Loan Documents, each of which shall be in form and substance satisfactory to the Agent; (g) a certificate of such New Subsidiary to which is attached each of the following certified as such by a duly authorized officer of such New Subsidiary: (i) a certificate of incumbency with respect to each Authorized Signatory thereof that signs any Loan Documents, (ii) a copy of the charter or other organizational documents of such New Subsidiary certified by the Secretary of State or similar state official of the jurisdiction of formation of such New Subsidiary, (iii) a copy of the bylaws or other constituent documents of such New Subsidiary, -41- (iv) a certificate of good standing or subsistence, as the case may be, for such New Subsidiary issued as of a recent date by the Secretary of State or similar state official in the jurisdiction of its organization and in each state in which such New Subsidiary, (v) a copy of the resolutions duly adopted by the Board of Directors or other governing body of such New Subsidiary authorizing it to execute, deliver and perform each Loan Document to which it is, or is to be, a party, and (vi) a copy of any shareholders agreement or similar agreement respecting such New Subsidiary, if any such agreement exists; (h) a legal opinion of counsel and special local counsel in such states as may be reasonably requested by the Agent speaking to such matters as the Agent may reasonably request; and (i) such stock certificates and other documentation as shall be necessary or advisable to perfect the pledge of the equity of the New Subsidiary in favor of the Agent; provided that, if such New Subsidiary is a Foreign Subsidiary, the foregoing agreements delivered by the New Subsidiary shall be modified to the extent necessary that income is not recognized by one or more of the Borrowers due to the operation of Code Section 956(d); the Agent may waive delivery of one or more of the required items to the extent that in its discretion such items are not material; and the Foreign Subsidiary shall execute and deliver a joinder to the Foreign Subsidiary Guaranty. Section 9.28. FURTHER ASSURANCES. Each Borrower, at its own expense, will promptly execute and deliver or cause to be executed and delivered to the Agent all such other and further documents, agreements and instruments, and shall provide or cause to be provided to the Agent such additional information, and shall do or cause to be done such further acts, as may be necessary or proper in the reasonable opinion of the Agent or any Lender to carry out more effectively the provisions and purposes of this Agreement and the other Loan Documents. ARTICLE 10. DEFAULT Section 10.01. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or otherwise: (a) Any Borrower shall fail to make any payment of principal on the Loans on the dates when the same shall become due and payable, whether at stated maturity or at a date fixed for any installment or prepayment thereof or otherwise; -42- (b) Any Borrower shall fail to make any payment of interest on the Loans or shall fail to pay the commitment fees or any other amounts owing hereunder (other than principal of the Loans) or under the other Loan Documents on the dates when such interest, commitment fees or other amounts shall become due and payable and such failure continues for more than three (3) Business Days; (c) Any representation or warranty made in any Loan Document shall prove to have been incorrect or misleading in any material respect when made or deemed to have been made; (d) Any Borrower shall fail (i) to perform or observe of any agreement or covenant contained in Article 7 or Article 9 (other than those sections referred to in subsection (d)(iii) below) hereof or (ii) to provide any financial statement or report under Article 8 hereof, and, with respect to this clause (ii) only, such failure shall not be cured within a period of ten (10) days from the occurrence thereof or (iii) to perform or observe any agreement or covenant contained in Section 9.13, 9.16 or 9.19 and, with respect to this clause (iii) only, such failure shall not be cured within a period of ten (10) days from the occurrence thereof; (e) Any Borrower or any Subsidiary shall fail to perform or observe any other agreement or covenant contained in this Agreement or any other Loan Document other than those referred to in subsections (a), (b), (c) or (d) above, and, if such failure is capable of being remedied, such failure shall not be cured within a period of thirty (30) days from the occurrence thereof; (f) Any breach, violation, default or event of default shall occur in connection with any Indebtedness of any Borrower or any of its Subsidiaries aggregating Two Hundred Fifty Thousand Dollars ($250,000) or more which would permit, or which after the giving of notice or passage of time would permit, the acceleration of the payment or maturity of any such indebtedness; (g) Any Collateral Agreement shall at any time after its execution and delivery for any reason cease to create a valid and perfected first priority security interest in and to the property purported to be subject to such Collateral Agreement; (h) Judgments, assessments or orders for the payment of money which aggregate at any time in excess of Five Hundred Thousand Dollars ($500,000) shall be entered against any Borrower and/or any of its Subsidiaries by a court or other tribunal of competent jurisdiction, which judgments, assessments or orders are not discharged, vacated, bonded or stayed pending appeal within a period of thirty (30) days from the date of entry; (i) Any Borrower or any of its Subsidiaries shall suspend or discontinue its business, shall make an assignment for the benefit of creditors or a composition with creditors, shall generally not be paying their debts as they mature, shall admit their inability to pay their debts as they mature, shall file a petition in bankruptcy, shall become insolvent (howsoever such insolvency may be evidenced), shall be adjudicated insolvent or bankrupt, shall petition or apply to any tribunal for the appointment of any receiver, custodian, liquidator or trustee of or for them or any substantial part of their property or assets, shall commence any -43- proceeding relating to them under any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall be commenced against any Borrower or any of its Subsidiaries, any such proceeding and the same shall not be dismissed within sixty (60) days after an order, judgment or decree approving the petition in any such proceeding shall be entered against any Borrower or any of its Subsidiaries; or if any Borrower or any of its Subsidiaries shall by any act or failure to act indicate their consent to, approval of or acquiescence in, any such proceeding or any appointment of any receiver, custodian, liquidator or trustee of or for it or for any substantial part of its property or assets; or if any court of competent jurisdiction shall assume jurisdiction with respect to any such proceeding and the same shall not be dismissed within sixty (60) days; or if a receiver or a trustee or other officer or representative of a court, governmental office or agency, shall, under color of legal authority, take and hold possession of any substantial part of the property or assets of any Borrower or any of its Subsidiaries, and shall not have relinquished possession within sixty (60) days; or if any Borrower or any of its Subsidiaries shall have concealed, removed, or permitted to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors, or any of them, or shall have made or suffered a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; (j) There shall be any Accumulated Funding Deficiency, whether or not waived, with respect to any Plan maintained by any Borrower or any of its Subsidiaries or any ERISA Affiliate, or to which any Borrower or any of its Subsidiaries or any ERISA Affiliate has any liabilities, or any trust created thereunder; or a trustee shall be appointed by a United States District Court to administer any such Plan; or PBGC shall institute proceedings to terminate any such Plan; or any Borrower or any of its Subsidiaries or any ERISA Affiliate shall incur any liability to PBGC in connection with the termination of any such Plan or their withdrawal from any such Plan with respect to which they are substantial employer within the meaning of Section 4063(b) of ERISA; or any Plan or trust created under any Plan of any Borrower or any of its Subsidiaries or any ERISA Affiliate shall engage in a Prohibited Transaction which would subject any such Plan, any trust created thereunder, any trustee or administrator thereof, or any party dealing with any such Plan or trust to the tax or penalty on Prohibited Transactions imposed by Section 502 of ERISA or Section 4975 of the Code; or any Borrower or any Subsidiary or ERISA Affiliate fails to make a quarterly installment to a Plan as required under Section 412(m) of the Code if such failure results in a lien in favor of the Plan under Section 412(n) of the Code; or any Borrower or any Subsidiary or ERISA Affiliate incurs any Withdrawal Liability which, individually or in the aggregate, could reasonably be expected to result in a liability in excess of One Million Dollars ($1,000,000); (k) If there shall occur a Material Adverse Change that, in the reasonable judgment of the Agent, could be expected to result in any Borrower's failure to pay the Obligations when due; (l) Any Loan Document shall cease to be a legal, valid and binding agreement, enforceable against each Loan Party signatory thereto, in accordance with its terms or shall in any way be declared ineffective or inoperative or shall in any way be challenged or contested by any Loan Party; -44- (m) Any attachment or garnishment proceeding or similar type of action shall be commenced against or involving the property of any Borrower or any of its Subsidiaries, which proceeding or action could affect or involve any deposits held by any Borrower or any of its Subsidiaries with any Lender; or (n) A Change of Control shall occur. Section 10.02. REMEDIES. (a) Termination of Obligation to Make Loans. Without limiting the generality of Section 5.03, at any time after an Event of Default, the Lenders shall have no obligation to make any Loans or otherwise extend credit hereunder. (b) Acceleration. At any time an Event of Default specified in Section 10.01 above (other than an Event of Default under subsection (i) thereof) shall have occurred and shall be continuing, the Agent may, by providing written notice to the Parent Borrower, declare the principal, interest and other amounts due hereunder and under the Notes and all other Obligations to be forthwith due and payable without presentment, demand, protest or notice of protest, notice of dishonor or other notice of any kind, all of which are hereby expressly waived, anything in any Loan Document to the contrary notwithstanding. (c) Automatic Acceleration in Connection with Bankruptcy or Insolvency Proceeding. Upon the occurrence of an Event of Default specified in subsection (i) of Section 10.01 above, all principal, interest and other amounts due hereunder and under the Note, and all other Obligations, shall be immediately due and payable, all without any action by the Agent or the Lenders and without presentment, demand, protest or other notice of protest or other notice of dishonor of any kind, all of which are expressly waived, anything in the Loan Documents to the contrary notwithstanding. (d) Appointment of Receiver. Upon acceleration of the Note as provided in paragraphs (b) or (c) above, the Agent shall have the right to the appointment of a receiver for the properties and assets of any Borrower and its Subsidiaries. Each Borrower, for itself and on behalf of its Subsidiaries, hereby consents to such right and such appointment and hereby waives any objection it or any Subsidiary may have thereto or the right to have a bond or other security posted by, or on behalf of, the Agent, in connection therewith. (e) Additional Remedies. In addition to the remedies set forth above, the Agent and the Lenders shall have all of the post-default rights granted to it under any of the Loan Documents and under Applicable Law. Section 10.03. CASH COLLATERAL. If (a) any Event of Default specified in Section 10.01(i) shall occur, (b) the Obligations shall have otherwise been accelerated pursuant to Section 10.02, or (c) the Commitment shall have been terminated pursuant to Section 10.02, then without any request or the taking of any other action by Agent, Borrowers shall immediately comply with the provisions of Section 1.04(e) with respect to the deposit of cash collateral to secure the existing Letter of Credit Liabilities and future payment of related fees. -45- ARTICLE 11. DEFINITIONS Section 11.01. DEFINED TERMS. For the purposes of this Agreement, the following terms shall have the meanings specified in this Article 13 unless the context otherwise requires: "ACQUISITION" means (whether by purchase, lease, exchange, issuance of equity or debt securities, merger, reorganization or any other method) (i) any acquisition by any Borrower or any of its Subsidiaries of an interest in any other Person which shall then become Consolidated with any Borrower or any such Subsidiary in accordance with GAAP, or (ii) any acquisition by any Borrower or any of its Subsidiaries of all or any substantial part of the assets of any other Person. "ACQUISITION REQUIREMENTS" means all of the following: (a) the Person whose assets or securities are to be acquired does not oppose the Acquisition or Investment and the line or lines of business of such Person are, in the reasonable judgment of the Agent, substantially similar to, or ancillary or complementary to, one or more line or lines of business conducted by the Borrowers; (b) no Default or Event of Default is in existence at the time of the consummation of such Acquisition or Investment or would exist after giving effect thereto, and the Parent Borrower shall deliver to the Agent a certificate signed by its chief executive officer, its controller/chief accounting officer or its treasurer stating that such condition precedent has been fulfilled; (c) the Parent Borrower shall deliver to the Agent such updated schedules to this Agreement as may be required to make such schedules accurate in light of such Acquisition or Investment; (d) in the case of an Acquisition, the Person acquired shall be or become a Consolidated Subsidiary, or be merged into a Borrower, immediately upon consummation of the Acquisition (or if assets are being acquired, the acquirer shall be a Borrower); (e) the Parent Borrower shall deliver to the Agent a certificate signed by its Chief Executive Officer, its Chief Financial Officer, controller/chief accounting officer, or its treasurer, certifying as to such officer's good faith belief that the financial covenants contained in Article VII hereof will continue to be met for the first four (4) full fiscal quarters following the consummation of such Acquisition or Investment, to which shall be attached computations as to such financial covenants and pro forma financial statements in form and substance satisfactory to the Agent giving effect to such Acquisition or Investment; and (f) in the case of an Acquisition, all of the requirements of Section 9.27 shall be satisfied and fulfilled. "ACCUMULATED FUNDING DEFICIENCY" means any accumulated funding deficiency as defined in Section 302(a) of ERISA. -46- "AFFILIATE" means, with respect to a Person, a spouse of such Person, any relative (by blood, adoption or marriage) of such Person within the third degree, any director, officer or employee of such Person, any other Person of which such first Person is a partner, member, director, officer or employee, and any other Person directly or indirectly controlling or controlled by or under common control with such first Person. For purposes of this definition "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, direct or indirect, of the power to direct, or cause the direction of, the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. Without limiting the generality of the foregoing, (a) Steel shall be deemed to be an "Affiliate" of the Borrowers, and (b) any Person who has the direct or indirect beneficial ownership of more than thirty percent (30%) of the voting securities or voting equity of another Person shall be deemed an Affiliate of such other Person. "AGREEMENT" means this Revolving Credit Agreement, as the same may be amended, modified or supplemented, from time to time. "APPLICABLE LAW" means, with respect to any Person, all provisions of constitutions, laws, statutes, ordinances, rules, treaties, regulations, permits, licenses, approvals, interpretations and orders of court or Governmental Authorities and all orders of arbitrators with appropriate jurisdiction (by contract or otherwise), and decrees of all courts and arbitrators in proceedings or actions to which the Person is a party or by which it (or any of its property) is bound. "APPLICABLE MARGIN" means the interest rate margin applicable to the Loans as follows:
REVOLVING CREDIT LOANS THEN THE APPLICABLE MARGIN IS ------------------------------ TIER IF THE TOTAL LEVERAGE RATIO IS: LIBOR + BASE RATE + - ---- ------------------------------- ------- ----------- 1 Less than or equal to 1.50 to .90% 0% 1.00 2 Greater than 1.50 to 1.00, but 1.40% .25% less than or equal to 2.50 to 1.00 3 Greater than 2.50 to 1.00 1.90% .50%
The Applicable Margin shall be determined and adjusted quarterly on the date (each a "Calculation Date") ten (10) Business Days after the date by which the Parent Borrower is required to provide a Compliance Certificate pursuant to Section 8.02 for the most recently ended fiscal quarter of the Parent Borrower; provided, however, that if the Parent Borrower fails to provide the Compliance Certificate as required by Section 8.02 for the most recently ended fiscal quarter of the Parent Borrower preceding the applicable Calculation Date, the Applicable Margin from such Calculation Date shall be based on Tier 3 until such time as an appropriate Compliance Certificate is provided, at which time the Tier shall be determined by reference to the Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Parent Borrower preceding such Calculation Date. The Applicable Margin shall be effective from one Calculation Date until the next Calculation Date. -47- Any adjustment in the Applicable Margin shall be applicable to all Loans then existing or subsequently made or issued. "ASSIGNEE" has the meaning set forth in Section 13.05(c). "ASSIGNMENT AND ACCEPTANCE AGREEMENT" means an Assignment and Acceptance Agreement in substantially the form of EXHIBIT E attached hereto. "AUTHORIZED SIGNATORY" means, with respect to any documents, agreements or instruments, such officer(s) of a Person as may be duly authorized by its Board of Directors, its bylaws or similar authority to execute the relevant documents, agreements or instruments on behalf of such Person. "AVAILABLE COMMITMENT" means that portion of the Commitment which, at any date of determination, the Borrowers are eligible to borrow under the terms of this Agreement. "BASE RATE" means, at any time, the higher of (i) the variable per annum rate of interest so designated from time to time by the Agent as its prime rate (which rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer) and (ii) the Federal Funds Rate plus one-half of one percent (1/2%). The Base Rate is not necessarily the lowest rate of interest charged by the Agent. Changes in the rate of interest resulting from changes in the Agent's prime rate shall take place immediately without notice or demand of any kind. "BASE RATE LOAN" means any Loan that bears interest at the Base Rate plus the Applicable Margin. "BORROWER" means each Borrower referred to in the preamble hereto, together with such successors and assigns thereof as are permitted pursuant to the terms of Section 12.05 (Successors and Assigns) below. "BUSINESS DAY" means any day on which commercial banks are not required or permitted to be closed for the transaction of business in Philadelphia, Pennsylvania and, if the applicable Business Day relates to a LIBOR Loan, then the term "Business Day" shall exclude any day on which dealings are not carried on in the London Interbank Eurocurrency Market. "BUSINESS PLAN" means, for any fiscal year of the Parent Borrower, a detailed budget by operating Subsidiary setting forth the amounts budgeted on a quarterly basis for revenues and operating expenses by category for each Subsidiary as well as the amount of Capital Expenditures, along with a comparison of the actual amounts (and, if applicable, the budgeted amounts) of such items for the preceding year. "CAPITAL EXPENDITURES" means expenditures for the purchase of assets of long-term use which are or should be capitalized in accordance with GAAP. "CAPITAL LEASE" means, with respect to any Person, any lease which has been, or should be in accordance with GAAP, accounted for as a capital lease in respect of which such Person is liable as lessee. -48- "CAPITAL LEASE OBLIGATION" means that portion of any obligation of a Person as lessee under a Capital Lease which at the time appears, or in accordance with GAAP should appear, on the balance sheet of such Person or in a note to such balance sheet. "CASH EQUIVALENT" means: (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided, that the full faith and credit of the United States of America is pledged in support thereof), (b) securities issued or directly and fully guaranteed or insured by any state of the United States of America or any agency or instrumentality thereof and that are rated within one of the two highest ratings for such securities by Standard & Poor's Corporation or Moody's Investors Service, Inc., (c) demand and time deposits, certificates of deposit, bankers' acceptances and commercial paper issued by the parent corporation of any domestic commercial bank of recognized standing having capital and surplus in excess of $500 million, (d) commercial paper issued by others rated at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc., (e) repurchase obligations with a term of not more than seven days for underlying securities of the types described in (a) through (d) above entered into with any financial institution meeting the qualifications specified in (d) above, or (f) money market funds, substantially all of the assets of which constitute Cash Equivalents of the kinds described in (a) through (e) of this definition, and in the case of each of (b), (c), (d) and (e) maturing within one year after the date of acquisition. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time. "CHANGE OF CONTROL" means (a) any "person" or "group" (each as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than any person or group which was on April 14, 2005 the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of outstanding shares of common stock of Parent Borrower (or securities convertible into or exchangeable for such stock) representing twenty-five percent (25%) or more of the outstanding common stock of the Parent Borrower as set forth in the Parent Borrower's Proxy Statement dated April 20, 2005 for the Parent Borrower's 2005 Annual Meeting of Shareholders, either (A) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or -49- indirectly, of voting Stock of the Parent Borrower (or securities convertible into or exchangeable for such voting Stock) representing thirty percent (30%) or more of the combined voting power of all voting Stock of the Parent Borrower (on a fully diluted basis) or (B) otherwise has the ability, directly or indirectly, to elect a majority of the board of directors of the Parent Borrower; or (b) During any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors (together with any new directors whose election by such board of directors or whose nomination for election by the shareholders of the Parent Borrower was approved by a vote of 66 2/3% of the directors of the Parent Borrower at the time of such approval who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) of Parent Borrower cease for any reason to constitute a majority of the board of directors then in office; (c) Parent Borrower shall cease to own 100% of the outstanding equity or other ownership interests of the Subsidiary Borrowers, except as permitted under Section 9.07; (d) The Agent shall fail to have a valid, first priority Lien in all issued and outstanding shares of capital stock of each Borrower (other than Parent Borrower) and its Subsidiaries (except to the extent provided in Section 9.27); (e) Any Borrower or any Subsidiary adopts a plan of liquidation, except as permitted under Section 9.07; (f) any merger or consolidation of Parent Borrower with or into another Person or the merger of another Person with or into Parent Borrower, unless in the case of a merger or consolidation transaction, holders of securities that represented 100% of the aggregate voting power of Parent Borrower's voting stock immediately prior to such transaction (together with holders of nonvoting securities that were convertible into Borrower's voting stock immediately prior to such transaction) own directly or indirectly at least a majority of the aggregate voting power of the voting stock of the surviving Person in such merger or consolidation transaction immediately after such transaction or have the right or ability by voting power, contract or otherwise to elect or designate for a election a majority of Parent Borrower's Board of Directors; (g) the sale of all or substantially all of Parent Borrower's assets (determined on a consolidated basis) to another Person; or (h) There exists any "change of control" or "change in control" as defined under any agreement to which any Borrower or any Subsidiary is party or is subject. For purposes of this definition, "voting stock" means capital stock or other ownership interests of any class or classes of a corporation or another entity the holders of which are entitled to elect a majority of the corporate directors or Persons performing similar functions. "COBRA" means group health plan continuation coverage requirements of Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA. -50- "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations, revenue rulings or technical information releases issued thereunder. "COLLATERAL" means all property which is, or is to be, subject to the Lien granted by the Collateral Agreements. "COLLATERAL DOCUMENTS" means the Security Agreement, the Mortgages, the IP Collateral Agreement, the Uniform Commercial Code financing statements, and all other Loan Documents which purport to grant or perfect a Lien in favor of the Agent, on behalf of the Lenders, securing the Obligations. "COMMITMENT" means the obligation of the Lenders pursuant to the terms hereof to make Revolving Credit Loans to the Borrowers in an initial aggregate principal amount outstanding at any time not to exceed Thirty Million Dollars ($30,000,000), from time to time until the Termination Date. The amount of the Commitment may be reduced pursuant to the terms hereof. "COMMITMENT FEE MARGIN" means the corresponding percentages set forth below:
THEN THE COMMITMENT FEE TIER IF THE TOTAL LEVERAGE RATIO IS: MARGIN IS - ---- ---------------------------------------- ----------------------- 1 Less than or equal to 1.50 to 1.00 .25% 2 Greater than 1.50 to 1.00, but less than .35% or equal to 2.50 to 1.00 3 Greater than 2.50 to 1.00 .50%
The Commitment Fee Margin shall be determined and adjusted quarterly on the date (each a "Calculation Date") ten (10) Business Days after the date by which the Parent Borrower is required to provide a Compliance Certificate pursuant to Section 8.02 for the most recently ended fiscal quarter of the Parent Borrower; provided, however, that if the Parent Borrower fails to provide the Compliance Certificate as required by Section 8.02 for the most recently ended fiscal quarter of the Parent Borrower preceding the applicable Calculation Date, the Commitment Fee Margin from such Calculation Date shall be based on Tier 3 until such time as an appropriate Compliance Certificate is provided, at which time the Tier shall be determined by reference to the Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Parent Borrower preceding such Calculation Date. The Commitment Fee Margin shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Applicable Margin shall be applicable to all Loans then existing or subsequently made or issued. "CONSIDERATION" means an amount equal to the sum of (a) the aggregate fair market value of any securities and any other non-cash consideration, (including, without limitation, any joint venture interest delivered to, or retained by, the applicable selling entity), issued or delivered or to be issued or delivered and any cash or deferred consideration paid or payable in connection with an -51- Acquisition, and (b) the amount of all indebtedness and preferred stock of the selling entity which is assumed or acquired by the applicable Borrower or retired or defeased in connection with an Acquisition. The fair market value of any securities issued and any other non-cash consideration delivered or retained in connection with an Acquisition shall be the value stated in the agreements governing such Acquisition. "CONSOLIDATED" means, with respect to any Person and any specified Subsidiaries, the consolidation of financial statements of such Person and such Subsidiaries in accordance with GAAP. "DEFAULT" means any event which, with the giving of notice or passage of time, or both, would constitute an Event of Default. "DEFAULT RATE" is defined in Section 3.03. "DISQUALIFIED STOCK" means, with respect to any Person, any capital stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable): (a) matures or is mandatorily redeemable for any reason, (b) is convertible or exchangeable for Indebtedness or Disqualified Stock, or (c) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the first anniversary of the stated maturity of the Notes. "EBIT" means, for any Person for any period, the Net Income of such Person for such period (before deducting fees either paid in cash or deferred during the applicable period under the Management Agreement referenced in Section 9.05) plus the sum of the following (to the extent deducted in the computation of such Net Income): (a) Interest Expense; (b) income taxes including (with respect to each Subsidiary Borrower) any amounts payable or paid to Parent Borrower for such taxes (but, if there is a net tax benefit, that should be deducted from Net Income in calculating EBIT). "EBITDA" means, for any Person for any period, the Net Income of such Person for such period (before deducting fees either paid in cash or deferred during the applicable period under the Management Agreement referenced in Section 9.05) plus the sum of the following (to the extent deducted in the computation of such Net Income): (a) depreciation expense; (b) amortization expense (including amortization expense associated with purchase accounting write-up of tangible and intangible assets) and deferred financing costs; (c) Interest Expense; -52- (d) income taxes including (with respect to each Subsidiary Borrower) any amounts payable or paid to Parent Borrower for such taxes (but, if there is a net tax benefit, that should be deducted from Net Income in calculating EBITDA); (e) restructuring charges (as determined in accordance with GAAP) relating to the consolidation of operations or reduction in head-count; (f) all other non-cash charges reducing Net Income for such period (A) including, but not limited to, (1) non-cash charges attributable to the grant, exercise or repurchase of options for or shares of capital stock to or from employees of such Person and its Consolidated Subsidiaries determined in accordance with GAAP, (2) unrealized losses resulting solely from the marking to market of derivative securities or securities held in deferred compensation plans, (3) non-cash charges associated with the amortization or write-off of deferred financing costs and debt issuance costs of such Person and its Consolidated Subsidiaries during such period, and (4) non-cash charges associated with the purchase accounting write-up of inventory, but (B) excluding non-cash charges that require an accrual of or a reserve for cash charges for any future periods and normally occurring accruals such as reserves for accounts receivable; and (g) any premium or penalty paid in connection with redeeming or retiring Indebtedness of such Person and its Consolidated Subsidiaries prior to the stated maturity thereof pursuant to the agreements governing such Indebtedness. less: (i) all non-cash items increasing Consolidated Net Income for such period (including unrealized gains resulting solely from the marking to market of derivative securities or securities held in deferred compensation plans), and (ii) the amount of all cash payments made by such Person or any of the Subsidiaries during such period to the extent such payments relate to non-cash charges that were added back in determining EBITDA for such period or any prior period. "ELIGIBLE ASSIGNEE" one or more banks or other financial institutions, each having a combined capital surplus of at least $500,000,000. "ELIGIBLE INSTITUTION" means any federally chartered or state chartered bank or any financial institution whose deposits are insured by the Federal Deposit Insurance Corporation. "ENVIRONMENTAL LAWS" means all Applicable Laws relating to the pollution or protection of the environment, including, without limitation, Applicable Laws relating to the release, discharge, emission, spill, leaching, or disposal of Hazardous Substances to air, water or land, or to the withdrawal or use of ground water, or to the use, handling, disposal, treatment, storage or management of Hazardous Substances, including, without limitation, CERCLA and the Resource Conservation and Recovery Act of 1976, as amended. -53- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rules and regulations issued thereunder. "ERISA AFFILIATE" means (i) any corporation included with any Borrower in a controlled group of corporations within the meaning of Section 414(b) of the Code, (ii) any trade or business (whether or not incorporated) which is under common control with the Borrowers within the meaning of Section 414(c) of the Code, (iii) any member of an affiliated service group of which any Borrower is a member within the meaning of Section 414(m) of the Code, and (iv) any other entity required to be aggregated with any Borrower pursuant to Section 414(o) of the Code. "EVENT OF DEFAULT" means any of the events specified in Section 10.01 (Events of Default), provided that any requirement for notice or lapse of time has been satisfied. "FEDERAL FUNDS RATE" means, for any period, a fluctuating interest rate equal, for each day during such period, to the rate announced by the Federal Reserve Bank of New York on each such day as the weighted average of the rates on overnight federal funds transactions with the members of the Federal Reserve System arranged by federal funds brokers (or, if such day is not a Business Day, for the next preceding Business Day) or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three (3) federal funds brokers of recognized standing selected by the Agent. "FOREIGN SUBSIDIARY" means any Subsidiary of any Borrower which (i) is not organized under the laws of the United States, any state thereof or the District of Columbia and (ii) conducts substantially all of its business operations outside the United States of America. "FOREIGN SUBSIDIARY GUARANTY" means a Guaranty of the Obligations executed by each Foreign Subsidiary in favor of the Agent and the Lenders. "FRONTING FEE" has the meaning specified in Subsection 1.04(b). "GAAP" means generally accepted accounting principles in the United States, which, as to any Borrower and its Subsidiaries, shall be consistently applied with those applied in the preparation of the financial statements referred to in Section 5.01.4(a) (Conditions Precedent to Initial Loan), with such changes as may be agreed pursuant to Section 11.02. "GOVERNMENTAL AUTHORITY" means any nation, province, state or political subdivision thereof, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, including, without limitation, any central bank or comparable agency and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "GUARANTY" or "GUARANTEED," as applied to any Person (the "guarantor") means and includes any direct or indirect liability, contingent or otherwise, of such guarantor with respect to any indebtedness, lease, dividend or other financial or performance obligation of another Person ("primary obligor"), including, but not limited to (1) any direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), discount or sale with -54- recourse by such guarantor of the obligations of the primary obligor and (2) any agreement (contingent or otherwise) to (a) purchase, repurchase or otherwise acquire an obligation of the primary obligor or any security therefor, (b) provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), (c) maintain the solvency or financial condition of the primary obligor, or (d) make payment for any products, materials, supplies or services tendered or rendered to the primary obligor, in any case if the purpose or intent of such agreement or arrangement is to provide assurance that the primary obligor's obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. In addition to the other restrictions on Guaranties set forth in this Agreement, no Guaranty shall be permitted by this Agreement unless the maximum dollar amount of the obligation being guaranteed is readily ascertainable by the terms of such obligation or the agreement or instrument evidencing such Guaranty specifically limits the dollar amount of the maximum exposure of the guarantor thereunder. For purposes of making computations under this Agreement, the amount of any Guaranty made during any period shall be the aggregate amount of the obligation guaranteed (or such lesser amount as to which the maximum exposure of the guarantor shall have been specifically limited), less any amount by which the guarantor may have been discharged with respect thereto (including any discharge by way of a reduction in the amount of the obligation guaranteed). "HAZARDOUS SUBSTANCES" means any and all pollutants, contaminants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required, or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which may be restricted, prohibited or penalized by any Environmental Law (including, without limitation, petroleum products, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls and substances defined as Hazardous Substances under CERCLA). "HIPAA" means the Health Insurance Portability and Accountability Act of 1996, as amended from time to time. "INDEBTEDNESS" means, with respect to any Person (without duplication): (a) all indebtedness for borrowed money of such Person; (b) all obligations of such Person for the deferred purchase price of capital assets or other property or services (other than accounts payable incurred in the ordinary course of business) to the extent such liabilities and obligations would appear as a liability upon the Consolidated balance sheet of such specified Person in accordance with GAAP; (c) all obligations of such Person evidenced by notes, bonds, debentures or other instruments; (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are -55- limited to repossession or sale of such property) and all other obligations secured by a Lien on the property or assets of such Person; (e) all Capital Lease Obligations of such Person; (f) all obligations, contingent or otherwise, of such Person under acceptances, letters of credit or similar facilities; (g) all obligations of such Person in respect of Disqualified Stock or other obligations of such Person to purchase, redeem, retire or otherwise acquire for value any capital stock of such Person or any warrants, rights or options to acquire such capital stock, which obligations shall be valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends and, in the case of other such obligations, at the amount that, in light of all the facts and circumstances existing at the time of determination, is reasonably expected to be payable; (h) interest accrued but not paid on the scheduled date; (i) all Guarantees of such Person; (j) all Indebtedness referred to in clauses (a) through (i) above secured by (or which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; (k) all fixed (but not variable) payments required by such Person under non-compete agreements; and (l) all obligations of such Person that are the functional equivalent of the Indebtedness referred to in clauses (a) through (k) above. "INDEMNIFIED PERSON" means the Agent, the Issuer, the other Lenders and their officers, agents, employees, attorneys, consultants and Affiliates and any successors, assigns and participants thereof. "INTELLECTUAL PROPERTY" means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, and all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all -56- goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, (iv) all rights to obtain any reissues or extensions of the foregoing and (v) all licenses for any of the foregoing. "INTEREST EXPENSE" means, with respect to any Person for any period, all cash interest expense (including imputed interest with respect to Capitalized Lease Obligations and accreted interest on zero coupon bonds and similar obligations) paid, accrued or accreted, or to be paid, accrued or accreted, with respect to any Indebtedness of such Person during such period pursuant to the terms of the agreement respecting such Indebtedness, together with all fees (including, without limitation, commitment or unused fees) payable in respect thereof, all as calculated in accordance with GAAP, excluding amortization or write-off or deferred financing cost and debt issuance cost of such Person for such period. "INTEREST PERIOD" means a period commencing, in the case of the first Interest Period applicable to a LIBOR Loan, on the day of the making of, or conversion into, such Loan, and, in the case of each subsequent, successive Interest Period applicable thereto, on the last day of the immediately preceding Interest Period, and ending on the same day in the first, second, third or sixth calendar month thereafter except that (a) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day, unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period 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 in which such Interest Period ends) shall end on the last Business Day of the calendar month in which such Interest Period ends. "INVENTORY" means "inventory" (as defined in Article 9 of the UCC) of Borrowers and their Subsidiaries. "INVESTMENT" means, as applied to any Person, any direct or indirect purchase or other acquisition by such Person of stock or other securities of another Person, or any direct or indirect loan, advance or capital contribution by such Person to any other Person, including all Indebtedness and accounts receivable from such other Person which are not current assets or did not arise from sales to such other Person in the ordinary course of business. "IP COLLATERAL AGREEMENT" means the one or more IP Collateral Agreement(s) executed or to be executed and delivered pursuant to the terms of the Security Agreement, as such IP Collateral Agreement(s) may be amended, modified or supplemented from time to time. "ISSUER" means Bank so long as it is a Lender, or if Bank is no longer a Lender, then a Lender designated by the Parent Borrower as Issuer and acceptable to the Agent. -57- "LENDER" means each of the Persons that execute this Agreement as a Lender together with any other Persons which become parties to this Agreement as a Lender from time to time. "LENDER REQUIRED PAYMENT" has the meaning set forth in Section 4.07. "LETTER OF CREDIT" means a standby letter of credit issued for the account of Borrowers or any of their Subsidiaries by Issuer which expires by its terms within one year after the date of issuance and in any event at least thirty (30) days prior to the Revolving Credit Termination Date. Notwithstanding the foregoing, a Letter of Credit may provide for automatic extensions of its expiry date for one or more successive one (1) year periods provided that the Issuer has the right to terminate such Letter of Credit on each such annual expiration date and no renewal term may extend the term of the Letter of Credit to a date that is later than the thirtieth (30th) day prior to the Revolving Credit Termination Date. "LETTER OF CREDIT FACILITY" means the facility extended pursuant to Section 1.04 for the Borrowers to request Letters of Credit from Issuer. "LETTER OF CREDIT LIABILITIES" means, at any time of calculation, the sum of (i) the amount then available for drawing under all outstanding Letters of Credit (without regard to whether any conditions to drawing thereunder can then be met), plus (ii) the aggregate unpaid amount of all reimbursement obligations in respect of previous drawings made under such Letters of Credit. "LIBOR LOAN" means any Loan bearing interest at a rate equal to the LIBOR Rate plus Applicable Margin. "LIBOR RATE" means, as applicable to any LIBOR Loan, the rate per annum as determined on the basis of the offered rates for deposits in U.S. Dollars, for a period of time comparable to such LIBOR Loan which appears on the Telerate page 3750 as of 11:00 a.m. London time on the day that is two London Banking Days preceding the first day of such LIBOR Loan; provided, however, if the rate described above does not appear on the Telerate System on any applicable interest determination date, the LIBOR rate shall be the rate (rounded upward, if necessary, to the nearest one hundred-thousandth of a percentage point), determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such LIBOR Loan which are offered by four major banks in the London interbank market at approximately 11:00 a.m. London time, on the day that is two (2) London Banking Days preceding the first day of such LIBOR Loan as selected by the Agent. The principal London office of each of the four major London banks will be requested to provide a quotation of its U.S. Dollar deposit offered rate. If at least two such quotations are provided, the rate for that date will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such LIBOR Loan offered by major banks in New York City at approximately 11:00 am. New York City time, on the day that is two London Banking Days preceding the first day of such LIBOR Loan. In the event that the Agent is unable to obtain any such quotation as provided above, it will be deemed that LIBOR pursuant to a -58- LIBOR Loan cannot be determined. In the event that the Board of Governors of the Federal Reserve System shall impose a Reserve Percentage with respect to LIBOR deposits of Bank, then for any period during which such Reserve Percentage shall apply, LIBOR shall be equal to the amount determined above divided by an amount equal to 1 minus the Reserve Percentage. "Reserve Percentage" shall mean the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed on member banks of the Federal Reserve System against "Euro-currency Liabilities" as defined in Regulation D. "Banking Day" shall mean, in respect of any city, any day on which commercial banks are open for business in that city. "LIEN" means any mortgage, lien, pledge, adverse claim, assignment, charge, security interest, title retention agreement, separate beneficial interest, levy, execution, seizure, attachment, garnishment or other encumbrance in respect of any property, whether created by statute, contract, common law or otherwise, and whether or not choate, vested or perfected. "LOAN DOCUMENTS" means this Agreement, the Notes, the Foreign Subsidiary Guarantee, the Collateral Agreements, and all other documents and agreements executed or delivered in connection with or contemplated by this Agreement, in each case as amended, modified or supplemented, from time to time. "LOAN PARTY" means any Borrower, any of its Foreign Subsidiaries, and any other obligor under any of the Loan Documents. "LOANS" means the Revolving Credit Loans. "MAJORITY LENDERS" means at any time, Lenders having greater than or equal to fifty-one percent (51%) of the Commitment (whether borrowed or not). "MATERIAL ADVERSE CHANGE" means (a) any material adverse change in the business, condition (financial or otherwise), assets, liabilities, results of operations, properties, or business prospects of the Borrowers and the Foreign Subsidiaries on a Consolidated basis, or (b) any material adverse change with respect to the binding nature, validity, or enforceability of this Agreement or any other Loan Document, or with respect to the ability of any Loan Party to perform its obligations under this Agreement or deed(s) of trust, as applicable, whether resulting from any single act, omission, situation or event or taken together with other such acts, omissions, situations or events. "MATERIAL AGREEMENTS" has the meaning set forth in Section 6.25 (No Burdensome Agreements; Material Agreements). "MATURITY DATE" means June 30, 2008. "MORTGAGE" means one or more real estate mortgages or deeds of trust, as applicable, executed or to be executed and delivered pursuant to the terms of this Agreement, as such instruments may be amended, modified or supplemented, from time to time. -59- "MULTIEMPLOYER PLAN" means a multiemployer pension plan as defined in Section 3(37) of ERISA to which any Borrower, any of its Subsidiaries or any ERISA Affiliate is, or was, required to contribute. "NET INCOME" means, for any Person and for any period, the net income (or net loss) of such Person for such period determined in accordance with GAAP provided that such amount shall be adjusted to exclude (to the extent otherwise included therein and without duplication) the following: (a) any write-up or write-down of any asset; (b) any net gain from the collection of the proceeds of life insurance policies; (c) any gain (or loss) arising from the acquisition or sale of any securities or Indebtedness of such Person and any gain or loss arising from the exercise of any warrant of such Person; (d) any aggregate net gain (or 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) other than any sale, exchange or other disposition in the ordinary course of business; (e) all other extraordinary items; (f) any net income that is attributable to or derived from an entity or other issuer that is not a Subsidiary of such Person; and (g) all non-recurring items properly identified as such on such Person's financial statements and reports including, for the quarter ending June 30, 2004, with respect to all fees and costs relating to the transactions contemplated by this Agreement. "NEW SUBSIDIARY" has the meaning set forth in Section 9.27. "NON-U.S. LENDER" has the meaning set forth in Section 4.05(e). "NOTES" means the promissory notes in the original aggregate principal amount of Thirty Million Dollars ($30,000,000) issued by the Borrowers to the Lenders in substantially the form of EXHIBIT A attached hereto, and any other promissory note or notes issued by the Borrowers to evidence the Loans and Reimbursement Obligations pursuant to this Agreement and any replacement or restatement of, and any supplement to, such note. "NOTICES" has the meaning set forth in Section 13.01. "NOTICE OF LC CREDIT EVENT" means a written notice from an Authorized Signatory of Parent Borrower to the Issuer with respect to any issuance, increase or extension of a Letter of -60- Credit specifying: (i) the date of issuance or increase of a Letter of Credit; (ii) the expiry date of such Letter of Credit; (iii) the proposed terms of such Letter of Credit, including the face amount; and (iv) the transactions or additional transaction or transactions that are to be supported or financed with such Letter of Credit or increase thereof. "OBLIGATIONS" means (a) all payment and performance obligations of every kind, nature and description of the Borrowers and any other Loan Party to the Agent or any Lender under this Agreement and the other Loan Documents (including, without limitation, any interest, fees and other charges on the Loans or otherwise under the Loan Documents that would accrue but for the filing of a bankruptcy action, whether or not such claim is allowed in such bankruptcy action), whether such obligations are direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, now existing or hereafter arising, and (b) (to the extent not included in the preceding clause (a)) the obligation of the Borrowers or any obligor to pay an amount equal to the amount of any and all damage which the Agent or any Lender may suffer by reason of a breach by such Person of any obligation, covenant or undertaking with respect to this Agreement or any other Loan Document. "OTHER TAXES" has the meaning set forth in Section 4.05(b). "PAYMENT DATE" means (a) the last Business Day of each calendar month and (b) the Revolving Credit Termination Date. "PERMITTED INDEBTEDNESS" has the meaning set forth in Section 9.01. "PERMITTED LIENS" has the meaning set forth in Section 9.02 (Liens). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all its functions under ERISA. "PERSON" means an individual, corporation, limited liability company, association, partnership, business, joint venture, trust, estate, unincorporated organization, government or any agency or political subdivision thereof, or any other entity. "PLAN" means an "Employee Pension Benefit Plan" (as defined in Section 3(2) of ERISA) and/or an "Employee Welfare Benefit Plan" (as defined in Section 3(1) of ERISA) which is or has been established or maintained, or to which contributions are, or are required to be, or were, or were required to be, made by any Borrower, any of its Subsidiaries or any ERISA Affiliate (or any predecessor thereof), except a Multiemployer Plan. "PRIOR FACILITY" has the meaning set forth in the Recitals hereto. "PROHIBITED TRANSACTION" has the meaning given to such term in Section 406 of ERISA, Section 4975(c) of the Code, or any successor sections, and any Treasury regulations issued thereunder. -61- "REGULATORY CHANGE" means any Applicable Law including, without limitation, any interpretation, directive, request or guideline (whether or not having the force of law) or any change therein or in the administration or enforcement thereof, that becomes effective or is implemented or first required or expected to be complied with after the date of this Agreement (including any Applicable Law that shall have become such as the result of any act or omission of any Borrower or any of its Affiliates without regard to when such Applicable Law shall have been enacted or implemented), whether the same is (i) the result of an enactment by a government or any agency or political subdivision thereof, a determination of a court or regulatory authority or otherwise; or (ii) enacted, adopted, issued or proposed before or after the date of this Agreement, including any such that imposes, increases or modifies any tax, reserve requirement, insurance charge, special deposit requirement, assessment or capital adequacy requirement. "REIMBURSEMENT OBLIGATIONS" means, at any date, the obligations of Borrowers then outstanding to reimburse the Issuer for payments made by the Issuer under a Letter of Credit. "RELEASE" means a release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of any Hazardous Substance into the indoor or outdoor environment or into or out of any property, including the movement of Hazardous Substances through or in air, soil, surface water or groundwater on any property. "REMEDIAL ACTION" means any action necessary to comply with any Environmental Law with respect to (1) clean up, removal, treatment or handling of Hazardous Substances in the indoor or outdoor environment; (2) prevention of Releases or threats of Releases or minimization of further Releases so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; or (3) performance of pre-remedial studies and investigations and post-remedial monitoring and care. "REORGANIZATION" means reorganization as defined in Section 4241(a) of ERISA. "REPORTABLE EVENT" means an event described in Section 4043(c) of ERISA. "REQUEST FOR ADVANCE" means a certificate designated as a "Request for Advance", signed by an Authorized Signatory of the Parent Borrower requesting an Advance hereunder, which shall be substantially in the form of EXHIBIT B attached hereto. "RESERVE PERCENTAGE" means, with respect to any LIBOR Loan, the maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during the relevant Interest Period under Regulation D (and/or other similar regulation) of the Board of Governors of the Federal Reserve System against "Eurocurrency Liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Percentage shall reflect any other reserves required to be maintained by reason of any regulatory change against (i) any category of liabilities which includes deposits by reference to which LIBOR Rate is to be determined as provided in the definition of "LIBOR Rate" or (ii) any category of extensions of credit or other assets which include loans the interest rate of which is based on LIBOR Rate. -62- "RESTRICTED PAYMENT" means: (a) any direct or indirect distribution, dividend or other payment (other than stock dividends and stock splits) to any Person on account of (i) any general or limited partnership interest in, or shares of capital stock or other securities of, any Borrower or any of its Subsidiaries or (ii) any warrants or other rights or options to acquire shares of capital stock of, or other interest in, any Borrower or any of its Subsidiaries; (b) any redemption, retirement, purchase or other acquisition or any other payment on account of any interests or securities listed above, except to the extent that the consideration therefor consists solely of shares of stock of any Borrower or its Subsidiary, as the case may be; (c) any sinking fund, other prepayment or installment payment on account of the foregoing; (d) any other payment, loan or advance to a shareholder, partner or equity owner of any Borrower or any of its Subsidiaries (whether or not in its capacity as shareholder, partner or equity owner) other than salaries or compensation which are (i) not otherwise restricted under the Loan Documents, (ii) in reasonable amounts and (iii) paid in the ordinary course of business; and (e) any forgiveness or release without adequate consideration by any Borrower or any of its Subsidiaries of any Indebtedness or other obligation of a shareholder, partner or equity owner. "REVOLVING CREDIT FACILITY" means the Revolving Credit Facility of Thirty Million Dollars ($30,000,000) extended hereunder, consisting of the Revolving Loan Facility and the Letter of Credit Facility. "REVOLVING CREDIT LOANS" means the loans made by the Lenders to the Borrowers pursuant to Section 1.01 (Commitment to Lend) below. "REVOLVING CREDIT OUTSTANDINGS" means at any time of calculation the sum of the then existing aggregate outstanding principal amount of Revolving Credit Loans and the then existing Letter of Credit Liabilities. "REVOLVING CREDIT TERMINATION DATE" means the Maturity Date, or such earlier date on which the Commitment shall be completely terminated hereunder. "REVOLVING LOAN FACILITY" means the facility extended pursuant to Article 1 for the Borrowers to make Revolving Loans from Lender. "SECURITY AGREEMENT" means the one or more Security Agreement(s) executed and delivered pursuant to the terms of this Agreement, as such Security Agreement(s) may be amended, modified or supplemented from time to time. -63- "SUBSIDIARY" means, as applied to any Person, (a) any corporation of which more than fifty percent (50%) of the outstanding stock (other than directors' qualifying shares) having ordinary voting power to elect a majority of the board of directors of such corporation (regardless of whether the holders of any class or classes of securities shall or might have such voting power upon the occurrence of any contingency) is directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries, or by one or more of such Person's other Subsidiaries, (b) any partnership, joint venture or other association which is owned or controlled by such Person, by such Person and one or more of its other Subsidiaries, or by one or more of such Person's other Subsidiaries, or (c) any other entity which is directly or indirectly controlled or capable of being controlled by such Person, or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person. "TAXES" has the meaning set forth in Section 4.05(a)(i). "TOTAL FUNDED INDEBTEDNESS" means all Indebtedness other than that described in subsections (h), (i), (j) and (k) of the definition thereof. "TRANSFEREE" has the meaning set forth in Section 9.11. "TYPE" with respect to any Loan, means its designation as a Base Rate Loan or LIBOR Loan of a specified Interest Period. Loans with Interest Periods ending on different days or of differing durations shall be deemed to be different Types of Loans. "UCC" shall have the meaning set forth in the Security Agreement. "UNQUALIFIEDLY CERTIFIED" when used in connection with audited financial statements delivered pursuant to Section 8.01 (Financial Statements) hereby by the Parent Borrower's independent auditors or accountants, means the absence of any qualification, limitation, exception or explanatory paragraph that would (x) call into question or express substantial doubt about the ability of the Parent Borrower or any Subsidiary to continue as a going concern, as discussed in the American Institute of Certified Public Accountants Statement of Auditing Standard Number 59, (y) relate to the limited scope of examination of matters relevant to such financial statements or (z) relate to the treatment or classification of any item in such financial statements and, which as a condition of its removal would require an adjustment to such item the effect of which would be to cause the occurrence of a Default or an Event of Default. "WITHDRAWAL LIABILITY" means any withdrawal liability as defined in Section 4201 of ERISA. "XYZ, INC." means the corporation identified as such in a separate letter executed by Parent Borrower and the Agent. Section 11.02 ACCOUNTING TERMS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder (including without limitation determinations made pursuant to the exhibits hereto) shall be made, and all -64- financial statements required to be delivered hereunder shall be prepared on a consolidated basis in accordance with GAAP applied on a basis consistent with the audited consolidated financial statements of Parent Borrower and its Consolidated Subsidiaries for the year ended December 31, 2004 delivered to the Lenders; provided, that if (a) Parent Borrower shall object to determining compliance with the provisions of this Agreement on such basis by written notice delivered to the Lenders at the time of delivery of required financial statements due to any change in GAAP or the rules promulgated with respect thereto or (b) the Majority Lenders shall so object in writing by written notice delivered to Parent Borrower within sixty (60) days after delivery of such financial statements, then compliance with this Agreement shall be determined on a basis consistent with the above-referenced financial statements, but the parties hereto shall promptly enter into negotiations in order to amend the financial covenants and other terms of this Agreement and so as to equitably reflect such changes in GAAP with the desired result that the criteria for evaluating the financial condition of Parent Borrower and its Consolidated Subsidiaries and such other terms shall be the same in all material respects after such changes as if such changes had not been made. All amounts used for purposes of financial calculations required to be made herein shall be without duplication. Section 11.03 OTHER DEFINITIONAL PROVISIONS. References in this Agreement to "Articles", "Sections", "Annexes" or "Exhibits" shall be to Articles, Sections, Annexes or Exhibits of or to this Agreement unless otherwise specifically provided. Any term defined herein may be used in the singular or plural. "Include", "includes" and "including" shall be deemed to be followed by "without limitation". Except as otherwise specified herein, references to any Person include the successors and assigns of such Person. References "from" or "through" any date mean, unless otherwise specified, "from and including" or "through and including", respectively. References to any statute or act shall include all related current regulations and all amendments and any successor statutes, acts and regulations. Unless the context otherwise requires, any terms used in the masculine form shall also include the feminine and neuter forms and vice versa and any terms used in the plural shall include the singular and vice versa. ARTICLE 12 AGENT Section 12.01 AUTHORITY. The Lenders (for themselves and their successors and assigns) hereby irrevocably appoint Bank to act as Agent as specified herein and in the other Loan Documents. Each such Person hereby irrevocably authorizes Bank to execute and take such action on its behalf under the provisions of this Agreement, the Notes, and the other Loan Documents and to exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of the Loan Documents and such powers as are reasonably incidental thereto. Section 12.02 EXPENSES. In default of reimbursement or indemnification by the Borrowers, the Lenders will, in proportion to their respective portions of the Commitment, reimburse the Agent for and against all expense, liability, penalty and damage of any nature whatsoever (including but not limited to reasonable attorneys' fees) which may be incurred or -65- sustained by the Agent in any way in connection with the Loan Documents or its duties under the Loan Documents provided that no Lender shall be liable for any portion of the foregoing items resulting from the gross negligence or willful misconduct of the Agent. Without limiting the generality of any other provision excusing the Agent form taking any actions, the Agent shall not have any obligation to take any action in connection with the performance of its duties as Agent under the Loan Documents which, in its opinion, requires the payment of expenses or the incurrence of liability, if there is any ground for belief that reimbursement of such expenses or liability is not reasonably assured to it. Section 12.03 ACTION BY AGENT. The Agent is authorized to take any action specified in this Agreement and all actions reasonably related thereto. However, except for actions expressly required to be taken by the Agent in this Agreement (which actions the Agent will take as required subject to all of the exculpatory provisions herein), the Agent is not required to take actions that it may be authorized to take. Section 12.04 EXCULPATORY PROVISIONS. (a) General Standard. Neither the Agent nor any of its officers, directors, employees or agents, shall be liable for any action taken or omitted under the Loan Documents or in connection with the Loan Documents unless caused by its or their gross negligence or willful misconduct. Neither the Agent nor any of its officers, directors, employees or agents, shall be liable for any action taken or omitted by it at the direction of the Majority Lenders. The Agent shall not be responsible for any recitals, warranties or representations in the Loan Documents or for the validity, enforceability, collectability or due execution of this Agreement or any of the other Loan Documents. (b) Agents and Employees. The Agent may execute any of its duties by or through agents or employees, all of whom shall be entitled to the benefits of any exculpatory provision herein. (c) Advice of Professionals. Agent shall be entitled to advice of counsel, accountants or other professionals of its selection concerning all matters pertaining to the Loan Documents and its duties under the Loan Documents. Agent is entitled to rely on the advice of its professionals whether or not the advice is correct. (d) Reliance on Information Believed to Be Genuine. The Agent shall be entitled to rely upon any writing or other document, telegram or telephone conversation believed by it to have been signed, sent or made by the proper person or persons. Section 12.05 INVESTIGATION BY LENDERS. Each Lender expressly acknowledges that the Agent has not made any representation or warranty to it and that no act taken by the Agent shall be deemed to constitute a representation or warranty by the Agent to the Lenders. Each Lender further acknowledges that it has taken and will continue to take such action and to make such investigation as it deems necessary to inform itself of the affairs of the Loan Parties. Each Lender further acknowledges that it has made and will continue to make its own independent investigation of the creditworthiness and the business and operations of the Loan Parties. In entering into this Agreement, and in making an advance under this Agreement, each Lender -66- represents that it has not relied and shall not rely upon any information or representations furnished or given by the Agent or by any other Lender. The Agent shall be under no duty or responsibility to the Lenders to ascertain or to inquire into the performance or observance by the Loan Parties of any of the provisions of this Agreement or any document or instrument now or hereafter executed in connection with this Agreement. Section 12.06 NOTICE OF EVENTS OF DEFAULT. Without limiting the generality of the provisions of the preceding Section 12.05, it is expressly understood and agreed that the Agent shall not be deemed to have knowledge of the existence, occurrence or continuance of an Event of Default or Default, unless the Agent shall have been notified in writing of such Event of Default by any Lender or the Borrowers pursuant to a writing designated as a "Notice of Event of Default". For the avoidance of doubt, the provisions of this Section 12.06 are expressly not for the benefit of the Borrowers. Section 12.07 RESIGNATION; TERMINATION. The Agent may resign at any time by giving prior written notice to the Parent Borrower and the Lenders and the Agent may be removed at any time with or without cause by the Majority Lenders. Such resignation or removal shall take effect at the end of the sixty (60) day period after such notice of resignation or removal has been given or upon the earlier appointment of a successor agent. The Lenders shall (with the consent of the Parent Borrower so long as no Event of Default has occurred and is then continuing), upon receipt of such notice, appoint a successor agent from among the Lenders. The Lenders and the Borrowers shall execute such documents as shall be necessary to effect such appointment. During any period that there shall not be a duly appointed and acting Agent, the Borrowers agree to make each payment due under this Agreement and under the Notes directly to each Lender entitled thereto and to provide copies of each certificate or other document required under this Agreement directly to each Lender. Section 12.08 SHARING. If any Lender shall at any time receive payment of principal on account of all or a part of any Note held by it, whether by set-off or otherwise, in a greater proportion than the principal payments made on the Notes held by the other Lenders, such Lender shall simultaneously purchase, without recourse, for cash, ratably from each of the other Lenders, such portion of the Notes held by such other Lenders so that, after such purchase, each Lender will hold an unpaid principal amount of Notes in the same proportion that the outstanding principal balance due to such Lender immediately prior to such payment bore to the aggregate outstanding principal balance due to all Lenders immediately prior to such payment. In the event that, at any time, any Lender shall be required to refund any amount which has been paid to or received by it on account of any Note held by it, and which has been applied to the purchase of a portion of the Notes held by other Lenders pursuant to this Section, then, upon notice from such Lender, each of the other Lenders shall simultaneously purchase, without recourse, its portion for cash, to the extent of its ratable share thereof, of the Notes held by the Lender required to make such refund. Section 12.09 OTHER RELATIONSHIPS. It is acknowledged that the Agent, the Lenders and/or any of their Affiliates may now or hereafter have lending or other relationships with the Borrowers and Affiliates of the Borrowers. It is agreed that the Agent and the Lenders are free to act with respect thereto without consulting with one another and without regard to the effect of any such action or relationship upon the Loans or other Obligations. With respect to the portion -67- of the Loans made by it and Notes issued to it, the Agent shall have the same rights and powers under the Loan Documents as any other Lender or holder of a Note and may exercise the same as though it were not the Agent, and the term "Lenders" or "Holders of Notes" or any similar term shall, unless the context otherwise indicates, include the Agent in its capacity as a Lender. ARTICLE 13 MISCELLANEOUS Section 13.01 NOTICES. All notices, requests, demands, directions and other communications (collectively, "Notices") given to or made upon any party hereto under the provisions of this Agreement shall be by telephone or in writing (including telex or facsimile communication) unless otherwise expressly provided hereunder and, if in writing, shall be delivered or sent by telex or facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages hereof or in accordance with any subsequent unrevoked written direction from any party to the others. All Notices shall, except as otherwise expressly herein provided, be effective (a) in the case of facsimile, when received, (b) in the case of over-night courier or other hand-delivered notice, when hand-delivered, (c) in the case of telephone or e-mail, when telephoned or e-mailed; provided, however, that in order to be effective, telephonic Notices or e-mail must be confirmed in writing by another medium provided for in this Section 13.01, received no later than the next day, (d) if given by mail, four (4) days after such communication is deposited in the mails with first class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered. In the event of a discrepancy between any telephonic or written notice, the written notice shall control. Any Lender giving any Notice to the Borrowers shall simultaneously send a copy of such Notice to the Agent. Section 13.02 DURATION; SURVIVAL. All representations and warranties of the Borrowers contained in the Loan Documents shall survive the making of the Loans and shall not be waived by the execution and delivery of any Loan Document or any investigation by the Agent or the Lenders, or payment in full of the Loans. All such representations and warranties as well as all other covenants and agreements of the Borrowers contained in the Loan Documents shall continue in full force and effect from and after the date hereof so long as the Borrowers may borrow hereunder and until termination of the Commitment and payment in full of the Obligations. Section 13.03 BORROWER REPRESENTATIVE. Each Subsidiary Borrower does hereby irrevocably make, constitute and appoint the Parent Borrower as its agent and attorney-in-fact for all purposes in connection with the Loan Documents, including, without limitation, with respect to any and all payments, borrowings, disbursements and notices described hereunder. All actions taken by the Agent or the Lenders for the benefit of the Parent Borrower with respect to the matters described above shall be deemed to have been taken for the benefit of each Borrower. The power of attorney granted in this Section 13.03 is coupled with an interest. All actions taken by the Parent Borrower with respect to the matters described above shall be deemed to have been taken on behalf of each Borrower. The Agent and the Lender shall be entitled to rely -68- conclusively upon the status of the Parent Borrower as agent and attorney-in-fact of each Subsidiary Borrower. Section 13.04 NO IMPLIED WAIVER; RIGHTS CUMULATIVE. No failure or delay on the part of the Agent or any Lender in exercising any right, power or privilege hereunder or under any other Loan Document and no course of dealing between the Borrowers and the Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any other rights or remedies which the Agent or any Lender would otherwise have. No notice to or demand on the Borrowers in any case shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances or shall constitute a waiver of the right of the Agent or any Lender to take any other or further action in any circumstances without notice or demand. Section 13.05 ENTIRE AGREEMENT AND AMENDMENTS. (a) This Agreement and the other Loan Documents are intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Agreement and the other Loan Documents, and no party is relying on any promise, agreement or understanding not set forth in this Agreement and the other Loan Documents. (b) This Agreement and the other Loan Documents may not be amended, waived or modified except by a written instrument describing such amendment, waiver or modification executed by Borrowers, Agent and Majority Lenders provided, however, that, unless approved in writing by all the Lenders, no such amendment, waiver or consent shall (i) waive any Event of Default under Section 10.01(a) or (b) hereof, change the amount or maturity date of the principal of, or reduce the rate or extend the time of payment of interest on, any Note, or reduce any fee to be paid to the Lenders, (ii) change the amount of any of the Commitments, (iii) change or affect the definition of "Majority Lenders," (iv) subordinate the Obligations in right of payment to any other Indebtedness or obligation whatsoever, (v) change or affect any provision of this Section, (vi) waive a Section 10.01(i) Event of Default or release a material part of the Collateral, (vii) release all or substantially all of the Guarantors or (viii) change or affect Section 4.01(f) in a manner that would alter the pro rata sharing of payments among the Lenders. (c) Any such waiver, consent or approval shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrowers, any Subsidiary or any Guarantor in any case shall entitle the Borrowers, any Subsidiary or any Guarantor to any other or further notice or demand in the same, similar or other circumstances. Each holder of any Note outstanding shall be bound by any modification, waiver, or consent authorized by this Section, whether or not such Note shall have been marked to indicate such modification, waiver or consent. -69- (d) No waiver by the Agent or any Lender of any breach or default of or by the Borrowers, any Subsidiary or any Guarantor under this Agreement or Loan Document shall be deemed a waiver of any other previous breach or default or any thereafter occurring. Section 13.06 SUCCESSORS AND ASSIGNS. (a) Successors Bound. Whenever in this Agreement or any other Loan Document any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrowers or the Agent or the Lenders that are contained in such agreement shall bind and inure to the benefit of their respective successors and assigns; provided, however, without the prior written consent of the Lenders, the Borrowers may not assign, or permit or suffer the assignment whether by operation of law or otherwise any of its rights or delegate any of its duties or obligations hereunder. (b) Participations. With the prior written consent of the Parent Borrower and the Agent, which shall not be unreasonably withheld, any Lender may sell participations to any Person (other than a natural person or the Borrowers or any of the Borrowers' Affiliates or Subsidiaries) (each a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrowers, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender shall not, without the consent of the Participant, agree to any amendment, modification or waiver with respect to the amounts and dates on which the Obligations are due and payable and the release of any material portion of the Collateral. A Lender may furnish any information concerning Borrowers in its possession from time to time to prospective Participants provided that such Lender shall require any such prospective Participant to agree in writing to maintain the confidentiality of such information. (c) Assignments. Any Lender shall have the right at any time or from time to time, upon the Parent Borrower's and Agent's prior written consent, which shall not be unreasonably withheld, to assign all or any portion of its rights and obligations hereunder to one or more Lenders or other financial institutions (each, an "Assignee"), and Borrowers and each Guarantor agrees that it shall execute, or cause to be executed, such documents, including without limitation, amendments to this Agreement and to any other documents, instruments and agreements executed in connection herewith as the Agent shall deem necessary to effect the foregoing. In addition, upon request Borrowers shall issue one or more new Notes, as applicable, to any such Assignee and, if the transferor Lender has retained any of its rights and obligations hereunder following such assignment, to such transferor Lender, which new Notes shall be issued in replacement of, but not in discharge of, the liability evidenced by the Note held by such transferor Lender prior to such assignment and shall reflect the amount of the respective -70- commitments and loans held by such Assignee and the transferor Lender after giving effect to such assignment. Upon the execution and delivery of the Assignment and Assumption Agreement in the form attached hereto as Exhibit G and any other documentation required by the Agent in connection with such assignment, and the payment by Assignee of the purchase price agreed to by the transferor Lender, and such Assignee, such Assignee shall be a party to this Agreement and shall have all of the rights and obligations of a Lender hereunder (and under any and all other guaranties, documents, instruments and agreements executed in connection herewith) to the extent that such rights and obligations have been assigned by such transferor Lender pursuant to the assignment documentation between such transferor Lender and such Assignee, and such transferor Lender shall be released from its obligations hereunder and thereunder to a corresponding extent. Borrowers may furnish any information concerning Borrowers in their possession from time to time to prospective Assignees, provided that the transferor Lender shall require any such prospective Assignees to agree in writing to maintain the confidentiality of such information. (d) Issuance of New Note. Within five (5) Business Days after receipt of an Assignment and Acceptance Agreement, the Borrowers, at their own expense, shall execute and deliver to the Assignee in exchange for the surrendered Note (a) a new Note (or Notes) to the order of the Assignee in an amount equal to its portion of the Commitment and Loans assigned to it pursuant to such Assignment and Acceptance Agreement and (b) a new Note (or Notes) to the order of the transferor Lender in an amount equal to the Commitment and Loans retained by it thereunder. Such Note(s) shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Note(s) shall be dated the date of such surrendered Note(s) and shall otherwise be in substantially the form of Exhibit A hereto. Cancelled Notes shall be returned to the Borrowers upon the execution of such new Notes. (e) Assignment to Federal Reserve Lender. Any Lender may at any time pledge or assign all or any portion of its rights under the Loan Documents including any portion of the promissory note to any of the twelve (12) Federal Reserve Lenders organized under Section 4 of the Federal Reserve Act. 12 U.S.C. Section 341. No such pledge or assignment or enforcement thereof shall release the Lender from its obligations under any of the Loan Documents. (f) Register. The Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at one of its offices in the United States a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrowers, the Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrowers and any Lender, at any reasonable time and from time to time upon reasonable prior notice. Section 13.07 DESCRIPTIVE HEADINGS. The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not affect the meaning or construction of any of the provisions hereof. -71- Section 13.08 GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania (the "Governing State") (excluding the laws applicable to conflicts or choice of law). Section 13.09 PAYMENTS DUE ON NON-BUSINESS DAYS. If any payment under the Loan Documents becomes due on a day which is not a Business Day, the due date of such payment shall be extended to the next succeeding Business Day, and such extension of time shall be included in computing interest and fees in connection with such payment. Section 13.10 COUNTERPARTS. This Agreement and the other Loan Documents may be executed in one or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. Delivery of a photocopy or telecopy of an executed counterpart of a signature page to any Loan Document shall be as effective as delivery of a manually executed counterpart of such Loan Document. Section 13.11 MAXIMUM LAWFUL INTEREST RATE. (a) All agreements between Borrowers and Guarantor(s) and the Lenders are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to the Lenders for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "Applicable Law" shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the law, which results in a higher permissible rate of interest, then this Agreement shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of Borrowers and the Lenders in the execution, delivery and acceptance of this Agreement to contract in strict compliance with the laws of the Commonwealth of Pennsylvania from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the Loan Documents at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by Applicable Law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever the Lenders should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between Borrowers, Guarantor(s) and the Lenders. (b) If, at any time, the rate of interest, together with all amounts which constitute interest and which are reserved, charged or taken by the Lenders as compensation for fees, services or expenses incidental to the making, negotiating or collection of the loan evidenced hereby, shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted to be charged by the Lenders to Borrowers under applicable law, then, during such time as such rate of interest would be deemed excessive, that portion of each sum paid attributable to that portion of such interest rate that exceeds the maximum rate of interest so permitted shall be deemed a voluntary prepayment of principal. -72- Section 13.12 SET-OFF OF BANK ACCOUNTS. The Borrowers hereby grant to Agent for the pro rata benefit of the Lenders and their successors and assigns a continuing lien, security interest and right of set-off as security for all Obligations, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property now or hereafter in the possession, custody, safekeeping or control of any Lender or any entity under common control with any Lender or in transit to any of them. At any time following an Event of Default which is continuing without demand or notice (any such notice being expressly waived by the Borrowers), the Agent and/or such Lender may set-off the same or any part thereof and apply the same to the Obligations of the Borrowers or any Guarantor even though unmatured and regardless of the adequacy of the other Collateral. ALL RIGHTS TO REQUIRE THE AGENT OR ANY LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOANS, PRIOR TO EXERCISING ITS RIGHT TO SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWERS, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. Section 13.13 SEVERABILITY. Every provision of the Loan Documents is intended to be severable, and if any term or provision hereof or thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions hereof or thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. Section 13.14 PAYMENT AND REIMBURSEMENT OF COSTS AND EXPENSES; INDEMNIFICATION. (a) Whether or not any Loans are made, the Borrowers shall, unconditionally upon demand, pay or reimburse the Agent for, and indemnify and save the Agent harmless against, any and all liabilities, losses (including judgments, penalties and fines), costs, expenses, claims, and/or charges (including without limitation reasonable fees and disbursements of legal counsel, accountants, investigators, the reasonable allocated costs of in-house legal counsel, accounting, consulting, brokerage or other similar professional fees and expenses, and any fees and expenses associated with travel or other costs relating to any appraisals or examinations conduction with the Loans or any Collateral, and other experts, whether or not they are employees of the Agent) (collectively, "Losses") arising out of, relating to or connected with: (i) the negotiation, preparation, default, collection, waiver or amendment of any of the Loan Documents, whether or not executed, or any waiver, modification, restatement, reaffirmation, amendment or consent thereunder or thereto; (ii) the administration of the Loan Documents, including, without limitation, performing audits or investigations or consulting with attorneys or other advisors with respect to any matter in any way arising out of, related to, or connected with, the Loan Documents; and (iii) the Agent's exercise, preservation or enforcement of any of its rights, remedies or options hereunder. -73- (b) Without limiting the generality of the foregoing paragraph (a), whether or not any Loans are made, the Borrowers shall, unconditionally upon demand, pay or reimburse each Indemnified Person for, and indemnify and save each Indemnified Person harmless against, any and all Losses incurred by such Indemnified Person in connection with, arising out of or in any way relating to: (i) any claim (whether civil, criminal or administrative and whether sounding in tort, contract or otherwise) arising out of, related to or connected with, the Loan Documents (including, without limitation, related to property subject to Mortgages or Leasehold Mortgages), whether such claim arises or is asserted before or after the date hereof or before or after the Maturity Date (whether such claim is asserted by such Indemnified Person or the Borrowers or any other Person), or (ii) any investigation, governmental or otherwise, arising out of, related to, or in any way connected with, the Loan Documents or the relationships established thereunder, including the prosecution or defense or investigation thereof and any litigation or proceeding with respect thereto (whether or not, in the case of any such litigation or proceeding, such Indemnified Party is a party thereto); (iii) protecting, preserving, exercising or enforcing any of the rights of the Agent and the Lenders in, under or related to the Loan Documents; (iv) all transfer, documentary, stamp and similar taxes, and all recording and filing fees and taxes payable in connection with, arising out of, or in any way related to, the execution, delivery and performance of the Loan Documents or the making of the Loans; and (v) commissions or claims by or on behalf of brokers, finders or agents not retained by the Lenders; the Borrowers represent that they have not engaged or used any such broker, finder or agent; except to the extent any of the foregoing is held by a final, non-appealable judgment of a court of competent jurisdiction to have resulted solely and directly from the gross negligence or willful misconduct of such Indemnified Person. (c) The amount of all of such Losses shall, beginning ten (10) days following notification of the Parent Borrower thereof until paid, bear interest at the rate applicable to Base Rate Loans hereunder (including the Default Rate) and all obligations of Borrowers in respect thereof shall be secured by the Collateral. Section 13.15 CONSENT TO JURISDICTION. For the purpose of any action that may be brought in connection with this Agreement or any Loan Document, the Borrowers hereby consent to the jurisdiction and venue of the courts of the Commonwealth of Pennsylvania or of any federal court located in such state and waives personal service of any and all process upon it and consents that all such service of process be made by certified or registered mail directed to such Borrowers at the address provided for in Section 13.01 (Notices) and service so made shall be deemed to be completed on actual receipt. The Borrowers waive the right to contest the jurisdiction and venue of the courts located in the Commonwealth of Pennsylvania on the ground -74- of inconvenience or otherwise and, further, waives any right to bring any action or proceeding against the Lenders in any court outside the City of Philadelphia in the Commonwealth of Pennsylvania. The provisions of this Section shall not limit or otherwise affect the right of the Agent or any Lender to institute and conduct an action in any other appropriate manner, jurisdiction or court. Section 13.16 TERMINATION. This Agreement shall remain in full force and effect until the later of (a) the time that all Obligations shall have been indefeasibly paid in full and (b) the time that there shall be no Commitment; provided, however, that the Borrowers' expense and indemnification obligations pursuant to Section 13.13 above as well as any liability in connection with any untrue representation or warranty, shall survive such termination. Section 13.17 WAIVER OF RIGHT TO JURY TRIAL. EACH PARTY MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE AGENT OR ANY LENDER RELATING TO THE ADMINISTRATION OF THE LOAN OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, BORROWERS HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. BORROWERS CERTIFY THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE AGENT OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT OR ANY LENDER WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS AGREEMENT AND MAKE THE LOAN. Section 13.18 CONFIDENTIALITY. The Agent and the Lenders agree to keep confidential all non-public information provided to it by any Loan Party pursuant to this Agreement; provided that nothing herein shall prevent the Agent and the Lenders from disclosing any such information (a) to any Transferee or prospective Transferee that agrees to comply with the provisions of this Section (or executes a confidentiality agreement with confidentiality terms that are substantially similar to the terms of this Section), (b) to any of its employees, directors, agents, attorneys, accountants and other professional advisors), (c) upon the request or demand of any Governmental Authority or self-regulatory body having or claiming to have jurisdiction over it, (d) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any requirement of law, (e) if requested or required to do so in connection with any litigation or similar proceeding to which it is a party (so long as the pertinent Loan Party is given a reasonable opportunity to seek a protective order to safeguard such information), or (f) in connection with the exercise of any remedy hereunder or under any -75- other Loan Document. Notwithstanding any other express or implied agreement, arrangement or understanding to the contrary, each of the parties hereto hereby agree that, each party hereto (and each of its employees, representatives or agents) are permitted to disclose to any and all persons, without limitation, the tax treatment and tax aspects of the Loans and the other transactions contemplated hereby, and all materials of any kind (including opinions or other tax analyses) that are provided to the Loan Parties or the Agent and the Lenders, related to such tax treatment and tax aspects. To the extent not inconsistent with the immediately preceding sentence, this authorization does not extend to disclosure of any other information or any other term or detail not related to the tax treatment or tax aspects of the Loans or the other transactions contemplated hereby. Section 13.19 USA PATRIOT ACT. Each Lender that is subject to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act") hereby notifies the Borrowers that, pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies each Borrower, which information includes the name and address of each Borrower and other information that will allow such Lender to identify such Borrower in accordance with the Act. [THE NEXT PAGES ARE THE SIGNATURE PAGES] -76- IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or caused it to be executed by their duly authorized officers, all as of the day and year first above written. PARENT BORROWER: SL INDUSTRIES, INC. By: /s/ David R. Nuzzo ------------------------------------ Name: David R. Nuzzo Title: Vice President, Finance & Administration, Secretary and Treasurer Phone: (856) 222-5515 Fax: (856) 727-1683 E-Mail: david.nuzzo@slindustries.com SUBSIDIARY BORROWERS: CEDAR CORPORATION CONDOR D.C. POWER SUPPLIES, INC. CONDOR HOLDINGS, INC. RFL ELECTRONICS INC. SL AUBURN, INC. SL DELAWARE, INC. SL DELAWARE HOLDINGS, INC. SL SURFACE TECHNOLOGIES, INC. SL MONTEVIDEO TECHNOLOGY, INC. SLW HOLDINGS, INC. TEAL ELECTRONICS CORPORATION WABER POWER, LTD By: /s/ David R. Nuzzo ------------------------------------ Name: David R. Nuzzo Title: Authorized Officer See contact information above [signature page for Credit Agreement] -1- AGENT AND LENDER: BANK OF AMERICA, N.A. By: /s/ Henry Bullitt ------------------------------------ Name: Henry Bullitt Title: Senior Vice President Mail Stop: PA7-188-11-01 1600 John F. Kennedy Blvd. 4 Penn Center, Suite 1100 Philadelphia, PA 19103 Phone: 267-675-0194 Fax: 267-675-0219 E-Mail: henry.bullitt@bankofamerica.com Wire Transfer Information: ABA# G/L AC/# RE: ------------------------------------ Att: ----------------------------------- [signature page for Credit Agreement] EX-21 3 w18876exv21.txt SUBSIDIARIES OF THE COMPANY . . . Exhibit 21 Subsidiaries of the Registrant
State or Other Jurisdiction of Subsidiaries Incorporation - ------------ --------------- Cedar Corporation Nevada Cedro de Mexico, S.A. de C.V. Mexico Condor D.C. Power Supplies, Inc. California Condor Holdings, Inc. Delaware Condor Power Supplies de Mexico, S.A. de C.V. Mexico Condor Power Supplies (Europe) Ltd. United Kingdom Industrias SL, S.A. de C.V Mexico RFL Electronics Inc. Delaware SL Auburn, Inc. New York SL Delaware, Inc. Delaware SL Delaware Holdings, Inc. Delaware SL Surface Technologies, Inc. (a) New Jersey SL Montevideo Technology, Inc. Minnesota SLW Holdings, Inc. (b) New Jersey Teal Electronics Corporation California Waber Power, LTD (c) Connecticut
All of the subsidiaries are included in the consolidated financial statements for the year ended December 31, 2005. (a) Formerly SL Modern Hard Chrome, Inc. (b) Certain net assets disposed on August 29, 2001, and name changed from SL Waber, Inc. on September 10, 2001. (c) Formerly SL Electrostatic Technology, Inc. EX-23 4 w18876exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit 23 Consent of Independent Registered Public Accounting Firm -------------------------------------------------------- We have issued our report dated March 3, 2006, accompanying the consolidated financial statements and schedule included in the Annual Report of SL Industries, Inc. and its subsidiaries on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said report in the Registration Statements of SL Industries, Inc. and its subsidiaries on Form S-8 (File No. 333-53274, effective June 18, 1996, File No. 333-00269, effective February 6, 1996, File No. 033-63681, effective November 13, 1995, File No. 033-65446, effective January 16, 1996, and File No. 333-73407, effective March 5, 1995). /s/ GRANT THORNTON LLP Philadelphia, Pennsylvania March 3, 2006 EX-31.1 5 w18876exv31w1.txt CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATIONS I, James C. Taylor, certify that: 1. I have reviewed this annual report on Form 10-K of SL Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ James C. Taylor --------------------------------- James C. Taylor President and Chief Executive Officer Date: March 22, 2006 EX-31.2 6 w18876exv31w2.txt CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER Exhibit 31.2 CERTIFICATIONS I, David R. Nuzzo, certify that: 1. I have reviewed this Annual Report on Form 10-K of SL Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ David R. Nuzzo ---------------------------------------- David R. Nuzzo Vice President, Chief Financial Officer, Treasurer and Secretary Date: March 22, 2006 EX-32 7 w18876exv32.txt CERTIFICATION BY PEO AND PFO PURSUANT TO RULE 13A OR 15D Exhibit 32 Section 1350 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of SL Industries, Inc., a New Jersey corporation (the "Corporation"), does hereby certify that: The Annual Report on Form 10-K for the year ended December 31, 2004 (the "Form 10-K") of the Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ James C. Taylor - ------------------------------------- James C. Taylor President and Chief Executive Officer March 22, 2006 /s/ David R. Nuzzo - ------------------------------------- David R. Nuzzo Vice President, Chief Financial Officer, Treasurer and Secretary March 22, 2006 -----END PRIVACY-ENHANCED MESSAGE-----