-----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, IWl1opiNXI/ydwkNQKeMm+92zflt6grSTk9ZvspwDsG4oBQK8r/+nj+UjZERy5dz P3WNTO42QNAWiCSST36rdA== 0000950123-97-003286.txt : 19970418 0000950123-97-003286.hdr.sgml : 19970418 ACCESSION NUMBER: 0000950123-97-003286 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970417 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN PRODUCTS INC CENTRAL INDEX KEY: 0001036713 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25325 FILM NUMBER: 97582498 BUSINESS ADDRESS: STREET 1: 500 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43216-1930 BUSINESS PHONE: 6142224400 MAIL ADDRESS: STREET 1: 500 DUBLIN AVENUE CITY: COLUMBUS STATE: OH ZIP: 43216-1930 S-1 1 ACORN PRODUCTS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ACORN PRODUCTS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3423 22-3265462 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ GAVRIL MIHALY PRESIDENT AND CHIEF EXECUTIVE OFFICER 500 DUBLIN AVENUE 500 DUBLIN AVENUE COLUMBUS, OHIO 43216-1930 COLUMBUS, OHIO 43216-1930 (614) 222-4400 (614) 222-4400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT PRINCIPAL EXECUTIVE OFFICES) FOR SERVICE) WITH COPIES TO: CONOR D. REILLY, ESQ. CHRISTOPHER M. KELLY, ESQ. GIBSON, DUNN & CRUTCHER LLP JONES, DAY, REAVIS & POGUE 200 PARK AVENUE 901 LAKESIDE AVENUE NEW YORK, NEW YORK 10166-0193 CLEVELAND, OHIO 44114 (212) 351-4000 (216) 586-3939
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practical after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
============================================================================================== PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------- Common Stock, $.001 par value............... $48,500,000 $14,700 ==============================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 17, 1996 PROSPECTUS SHARES ACORN PRODUCTS, INC. COMMON STOCK ------------------------ All of the shares of common stock, par value $.001 per share (the "Common Stock"), of Acorn Products, Inc. ("Acorn") offered hereby (the "Offering"), are being issued and sold by Acorn. Of the shares being offered hereby, shares have been reserved for sale to The OCM Principal Opportunities Fund, L.P. (the "Oaktree Fund") and shares have been reserved for sale to officers, directors and employees of Acorn and its subsidiaries. See "Underwriting". Prior to this Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Common Stock has been submitted for approval for quotation on the Nasdaq National Market under the symbol " ", subject to official notice of issuance. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================= PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT ACORN(1) - ------------------------------------------------------------------------------------------------- Per share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(2).......................... $ $ $ =================================================================================================
(1) Before deducting expenses payable by Acorn, estimated at $ . Acorn has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. (2) Acorn has granted the Underwriters a 30-day option to purchase up to additional shares of Common Stock at the Price to Public less the Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount, and Proceeds to Acorn will be $ , $ and $ , respectively. See "Underwriting". ------------------------ The shares of Common Stock are offered by the Underwriters subject to receipt and acceptance of the shares by them. The Underwriters reserve the right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of shares of Common Stock will be made at the office of McDonald & Company Securities, Inc. 800 Superior Avenue, Cleveland, Ohio or through the facilities of The Depository Trust Company, on or about , 1997. ------------------------ MCDONALD & COMPANY A.G. EDWARDS & SONS, INC. SECURITIES, INC. The date of this Prospectus is , 1997. 3 [PHOTOGRAPHS OF THE COMPANY'S PRODUCTS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING". 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements (including the Notes thereto) appearing elsewhere in this Prospectus. As used in this Prospectus and except as the context otherwise may require, the "Company" means Acorn and its subsidiaries, other than McGuire-Nicholas Company, Inc. ("McGuire-Nicholas") and VSI Fasteners, Inc. ("VSI"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disposition of Lawn and Garden Business Operations and "Description of McGuire-Nicholas". References to the Company's fiscal year mean the fiscal year ended on the Friday closest to July 31 of the applicable year (e.g., fiscal 1996 means the fiscal year ended August 2, 1996). Unless the context otherwise requires, the information contained herein gives effect to a - -for- split of the Common Stock effected on April , 1997 in the form of a stock dividend to all stockholders of record on April , 1997. In addition, unless the context otherwise requires, the information contained in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such statements as a result of various factors, including those set forth under the caption "Risk Factors" and elsewhere in this Prospectus. THE COMPANY Founded in 1890, the Company is a leading manufacturer and marketer of non-powered lawn and garden tools in the U.S. The Company's principal products include long handle tools (such as forks, hoes, rakes and shovels), snow tools, posthole diggers, wheelbarrows, striking tools and cutting tools. The Company sells its products under a variety of well-known brand names, including Razor-Back, Union, Yard 'n Garden, Perfect Cut and, pursuant to a license agreement, Scotts. In addition, the Company manufactures private label products for a variety of retailers, including products sold under Sears' Craftsman and Cotter & Company's True Value brand names. The Company's customers include mass merchants such as Sears, Kmart and Fred Meyer, home centers such as Home Depot, HomeBase, Builders Square and Payless Cashways, buying groups such as Cotter & Company and Ace Hardware and farm and industrial distributors. The Company believes that the lawn and garden industry is the beneficiary of several significant trends suggesting a growing demand for lawn and garden tools, including (i) the continuing popularity of gardening (industry sources estimate that approximately 75% of the 100 million households in the U.S. participated in some form of gardening in 1995), (ii) the movement of the "baby boomer" generation into the 45 to 64 age group (from approximately 19.5% of the U.S. population in 1995 to 24.3% in 2005), which industry sources believe represents the largest age group of lawn and garden enthusiasts and (iii) an increase in housing starts, representing a net addition of homeowners who are likely purchasers of lawn and garden tools. In addition, due to the comparative affordability of lawn and garden tools, the industry is relatively non-cyclical. The Company's net sales increased from $56.2 million in fiscal 1991 to $92.7 million in fiscal 1996, a compound annual growth rate ("CAGR") of 10.5%. The Company's net sales were $40.7 million for the six months ended January 31, 1997, an increase of 13.5% from the same period in fiscal 1996. In addition, net sales of the Company's higher-margin, best-quality products increased from approximately 5% of total net sales in fiscal 1991 to approximately 35% of total net sales in fiscal 1996, while net sales of the Company's lower-margin, opening-price-point products decreased from approximately 35% of total net sales in fiscal 1991 to approximately 8% of total net sales in fiscal 1996. The Company generated approximately 92% of its revenues in both fiscal 1996 and the six months ended January 31, 1997 from sales of long handle tools. The Company believes that its market share in the long handle tool segment of the industry has increased from approximately 16% in fiscal 1991 to approximately 28% in fiscal 1996, giving the Company the second largest market share in this segment of the industry. BUSINESS STRATEGY Over the past six years the Company has successfully implemented a business strategy designed to transform it from a manufacturing-oriented industrial company into a marketing-oriented consumer products 3 5 company. The central elements of the Company's approach include a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. - Market Segmentation Strategy. The Company has developed a family of brands, each targeted to one or more specific consumer segments and price-points. For example, shovels sold under the Company's opening-price-point Yard 'n Garden brand retail from $3.99 to $5.99, while shovels sold under the Company's best-quality Razor-Back brand retail from $19.99 to $21.99. The Company's products and brands are differentiated by price, features and warranty, as well as by the materials and production processes used. - Merchandising Strategy. The Company was the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. The Company's merchandising programs are designed to (i) create brand identification among goods historically treated as commodities and (ii) increase retail sales while reducing the amount of sales support needed from the retailer's employees. The Company uses innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among the Company's brands. Products within the Company's Union, Scotts and Perfect Cut lines are merchandised using the Company's trademarked "Good/Better/Best" format. Where adequate shelf-space is available, the Company also merchandises its brands together, from the Company's opening price-point Yard 'n Garden brand to its best-quality Razor-Back brand, using a similar value positioning technique. The Company believes that its merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. Over the past six years, the Company also has expanded its infrastructure to support future growth by recruiting an experienced management team, increasing manufacturing capacity and enhancing its management information systems. GROWTH STRATEGY The Company believes that it can leverage the success of its business strategy through the implementation of the following growth strategies: - Increase Penetration in High Growth Distribution Channels. The Company believes that certain distribution channels, such as home centers and mass merchants, are growing more rapidly than the overall industry. The Company believes that it can continue to increase its sales in these high growth distribution channels through its unique combination of brand names, innovative merchandising techniques and high quality products. For example, in August 1996, after the Company demonstrated the effectiveness of its market segmentation and merchandising strategies in a select number of Home Depot stores, Home Depot selected the Company as the supplier of long handle tools for all new Home Depot stores in new markets and for 50 existing Home Depot stores. Home Depot has indicated that it expects to open approximately 450 additional stores over the next five years, primarily in new markets. In addition, the Company has been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. In five of the last six years the Company has received the prestigious "Partners in Progress" trophy awarded to approximately 80 of Sears' 10,000 suppliers. Sears has indicated that it expects to open or acquire over 500 additional non-mall hardware stores over the next five years. - Develop Product Line Extensions. The Company believes that product line extensions allow the Company to increase sales with minimal incremental expenditures. The Company recently expanded its cutting tool and striking tool product lines with the introduction of Perfect Cut pruning shears and loppers and Razor-Back mattocks, picks, axes, hammers and bars. The Company also recently introduced the Lady Gardener line of tools, which is ergonomically designed for female gardeners. The Company is actively developing additional product line extension opportunities. 4 6 - Complete Strategic Acquisitions. The Company intends to increase its presence in certain segments of the lawn and garden industry through selective acquisitions and to increase operating efficiencies through vertical integration. Consistent with this strategy, in February 1997 the Company acquired an injection molding facility from one of the Company's largest suppliers of plastic parts. The Company's Credit Facility contains a $35 million acquisition facility, approximately $ million of which will be available following consummation of the Offering and the application of the net proceeds therefrom. In addition, Oaktree Capital Management, LLC ("Oaktree"), the manager of the Oaktree Fund, has indicated its willingness to consider providing financing from the Oaktree Fund for future acquisitions by the Company. The Company believes that continued application of its market segmentation and merchandising strategies, together with the implementation of the foregoing growth strategies, will enable the Company to continue its growth, increase its profitability and enhance its market share. The Company's executive offices are located at 500 Dublin Avenue, Columbus, Ohio 43216-1930, and its telephone number is (614) 222-4400. DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS In December 1996, the Company sold substantially all of the assets of VSI, a distributor of packaged fasteners, for approximately $6.9 million, plus the assumption of approximately $2.3 million of related liabilities. The Company also intends to sell McGuire-Nicholas within the next 12 months. McGuire-Nicholas is a manufacturer and distributor of leather, canvas and synthetic fabric tool holders and work aprons. VSI's and McGuire-Nicholas' results of operations are shown as "Loss from discontinued operations" in the Summary Consolidated Financial Data, Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this Prospectus. Net assets of the discontinued VSI and McGuire-Nicholas operations are shown as "Net assets of discontinued operations" in the Consolidated Financial Statements appearing elsewhere in this Prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disposition of Non-Lawn and Garden Business Operations" and "Description of McGuire-Nicholas". Following the intended sale of McGuire-Nicholas, UnionTools, Inc. ("UnionTools") will be the Company's only remaining operating subsidiary. FUND TRANSACTIONS Oaktree, on behalf of the Oaktree Fund, has indicated that it intends to purchase shares of Common Stock in the Offering at the per share Price to Public set forth on the cover page of this Prospectus. In December 1993 and in May 1994 Acorn issued certain subordinated promissory notes in the aggregate principal amount of approximately $31.4 million (the "Subordinated Notes") to several investment funds and accounts (the "TCW Funds") managed by affiliates of The TCW Group, Inc. (the "TCW Group"). In August 1996 Acorn issued 100 shares of Series A Preferred Stock with an aggregate stated value of approximately $8.6 million (the "Series A Preferred Stock") to the TCW Funds as payment in full of accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. As of January 31, 1997, the aggregate principal balance of the Subordinated Notes and accrued interest thereon was approximately $33.4 million and the aggregate liquidation value of the Series A Preferred Stock was approximately $9.2 million. See "Certain Transactions". The Company intends to use approximately $ million of the estimated net proceeds of $ million from the Offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and to repay a portion of the Subordinated Notes and accrued interest thereon. Concurrent with the consummation of the Offering, the TCW Funds will exchange the remainder of the Subordinated Notes for a number of shares of Common Stock equal to the remaining aggregate principal amount of the Subordinated Notes and accrued interest thereon (approximately $ million giving effect to the Offering and the application of the net proceeds therefrom as of January 31, 1997) divided by the per share Price to Public set forth on the cover page of this Prospectus (the "Exchange"). As of January 31, 1997 and at an assumed initial public 5 7 offering price of $ , the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, the TCW Funds would receive an aggregate of shares of Common Stock pursuant to the Exchange. See "Risk Factors -- Control by Principal Stockholders", "Use of Proceeds" and "Certain Transactions". THE OFFERING Common Stock offered......................... shares Common Stock outstanding after the shares Offering(1)................................ Use of Proceeds.............................. The Company intends to use substantially all of the estimated net proceeds of $ million to (i) redeem the Series A Preferred Stock and pay accumulated dividends thereon, (ii) reduce indebtedness outstanding under the Company's senior credit facility (the "Credit Facility") and accrued interest thereon and (iii) repay a portion of the Subordinated Notes and accrued interest thereon. See "Use of Proceeds" and "Certain Transactions". Proposed Nasdaq National Market symbol.......
- --------------- (1) Based upon the number of shares of Common Stock outstanding on April , 1997, as adjusted to give effect to the issuance of shares of Common Stock pursuant to the Exchange (giving effect to the Exchange as of January 31, 1997 and at an assumed initial public offering price of $ , the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus). Excludes (i) shares of Common Stock issuable upon the exercise of outstanding stock options, (ii) shares of Common Stock reserved for issuance under Acorn's 1997 Stock Incentive Plan (the "Incentive Plan"), pursuant to which options to purchase shares of Common Stock will be outstanding upon consummation of the Offering, (iii) shares of Common Stock reserved for issuance under Acorn's Deferred Equity Compensation Plan for Directors (the "Director Stock Plan"). See "Management -- 1997 Stock Incentive Plan", "Management -- Director Stock Plan" and Note 10 to Consolidated Financial Statements. RISK FACTORS See "Risk Factors" beginning on page 9 for a description of certain risks relevant to an investment in the Common Stock. As used in this Prospectus, "Ace Hardware" refers to Ace Hardware Corp., "Agway" refers to Agway, Inc., "Builders Square" refers to Builders Square, Inc., "Cotter & Company" refers to Cotter & Company, "Fred Meyer" refers to Fred Meyer, Inc., "Frank's Nursery" refers to Frank's Nursery & Crafts Inc., "HomeBase" refers to HomeBase, Inc., "Kmart" refers to Kmart Corporation, "Payless Cashways" refers to Payless Cashways, Inc., "Sears" refers to Sears, Roebuck & Company, and "Home Depot" refers to The Home Depot, Inc. Lady Gardener(R), Perfect Cut(R), Pro Force(R), Razor-Back(R), Union(R), Union Pro(R) and Yard'n Garden(R) are registered trademarks of the Company. Agway(R) is a registered trademark of Agway. Green Thumb(R) is a registered trademark of Cotter & Company. Frank's(R) is a registered trademark of Frank's Nursery. Craftsman(R) and Sears(R) are registered trademarks of Sears. Scotts(R) is a registered trademark of The Scotts Company. 6 8 SUMMARY CONSOLIDATED FINANCIAL DATA The Summary Consolidated Financial Data for fiscal 1992, fiscal 1993, the four months ended December 2, 1993, the eight months ended July 29, 1994, fiscal 1995 and fiscal 1996 have been derived from the audited Consolidated Financial Statements of the Company. The Summary Consolidated Financial Data for the six months ended January 26, 1996 and the six months ended January 31, 1997 have been derived from the unaudited Consolidated Financial Statements of the Company, which reflect, in the opinion of management of the Company, all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of financial data for such periods. The results of such interim periods are not necessarily indicative of the results that will be reported for the full fiscal year. The Summary Consolidated Financial Data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Consolidated Financial Statements and Notes thereto and the other financial information included elsewhere in this Prospectus.
PREDECESSOR COMPANY SUCCESSOR COMPANY ---------------------------------- ------------------------------------------------------------ FOUR EIGHT MONTHS MONTHS YEAR ENDED ENDED ENDED YEAR ENDED SIX MONTHS ENDED ------------------- ----------- -------- --------------------- ------------------------- JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, JANUARY 26, JANUARY 31, 1992 1993 1993(1) 1994 1995 1996 1996 1997 -------- -------- ----------- -------- -------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.................... $ 60,699 $ 70,051 $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 35,843 $ 40,695 Cost of goods sold........... 43,856 50,548 14,185 52,271 63,411 67,496 27,290 30,142 ------- -------- -------- ------- ------- ------- ------- -------- Gross profit................. 16,843 19,503 6,146 20,099 23,132 25,156 8,553 10,553 Selling, general and administrative expenses.... 11,380 12,648 5,482 9,955 15,531 16,815 7,356 8,641 ------- -------- -------- ------- ------- ------- ------- -------- Operating profit............. 5,463 6,855 664 10,144 7,601 8,341 1,197 1,912 Interest expense............. 4,924 4,939 2,773 3,525 6,485 6,732 2,918 3,243 Amortization of intangibles................ 2,525 2,520 124 601 1,061 1,173 553 572 Other expenses............... -- 34,409(2) -- 11 694 1,522(3) 58 1,088(4) ------- -------- -------- ------- ------- ------- ------- -------- Income (loss) from continuing operations before income taxes...................... (1,986) (35,013) (2,233) 6,007 (639) (1,086) (2,332) (2,991) Income taxes................. -- -- -- 290 -- 582 -- -- ------- -------- -------- ------- ------- ------- ------- -------- Net income (loss) from continuing operations...... (1,986) (35,013) (2,233) 5,717 (639) (1,668) (2,332) (2,991) ------- -------- -------- ------- ------- ------- ------- -------- Loss from discontinued operations(5).............. (5,684) (33,560)(2) (8,373) (614) (1,800) (6,480) (1,111) (7,082) ------- -------- -------- ------- ------- ------- ------- -------- Cumulative effect of change in accounting for post-retirement benefits... -- -- -- -- -- 869 869 -- ------- -------- -------- ------- ------- ------- ------- -------- Net income (loss)............ $ (7,670) $(68,573) $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (2,574) $ (10,073) ======= ======== ======== ======= ======= ======= ======= ======== Net income (loss) from continuing operations per share...................... Weighted average number of shares outstanding......... OTHER DATA: Gross margin................. 27.7% 27.8% 30.2% 27.8% 26.7% 27.2% 23.9% 25.9% Operating margin............. 9.0% 9.8% 3.3% 14.0% 8.8% 9.0% 3.3% 4.7% EBITDA(6).................... $ 6,466 $ 8,343 $ 1,168 $ 11,148 $ 9,570 $ 10,760 $ 2,419 $ 2,847 Adjusted net income (loss) from continuing operations(7).............. $ 3,931 $ 240 $ (302)
PREDECESSOR COMPANY SUCCESSOR COMPANY ---------------------------------- ----------------------------------------------------------- JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, JANUARY 31, 1997 1992 1993 1993 1994 1995 1996 ACTUAL AS ADJUSTED(8) -------- -------- ----------- -------- -------- ---------- ------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital.............. $(20,250) $(17,255) $ (17,902) $ 21,081 $ 5,989 $ 8,543 $18,194 Total assets................. 141,404 68,154 79,439 101,833 112,280 98,895 95,646 Total debt................... 132,382 127,458 137,437 58,854 72,104 61,891 65,577 Stockholders' equity......... 269 (68,304) (126,528) 19,422 17,323 18,530 8,665
7 9 - --------------- (1) Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. See Note 1 to Consolidated Financial Statements. (2) In fiscal 1993 the Company reduced goodwill from continuing operations by $35,826 and goodwill from discontinued operations by $29,659. (3) In fiscal 1996 the Company recognized other expense of $563,000 in connection with the resignation of Acorn's previous Chairman of the Board and other expense of $750,000 in connection with self-insured life insurance accruals related to the death of a former director of the Company. (4) In the six months ended January 31, 1997 the Company recognized other expense of $950,000 from the write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (5) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, as well as (i) a net loss of $380,000 incurred upon the sale of substantially all of the assets of VSI, reflecting a loss of $665,000 recorded in fiscal 1996 and a gain of $285,000 recorded in the six months ended January 31, 1997 and (ii) a loss of $6.3 million in the six months ended January 31, 1997 incurred in connection with the intended disposition of McGuire-Nicholas. See Note 3 to Consolidated Financial Statements. In addition, the four months ended December 2, 1993 include restructuring costs of approximately $8.9 million. (6) EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation, amortization and other expenses. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. (7) As adjusted to give effect to (i) the Offering and the application of the net proceeds therefrom to repay $ million of indebtedness outstanding under the Credit Facility and accrued interest thereon and repay $ million of indebtedness outstanding under the Subordinated Notes and accrued interest thereon and (ii) the Exchange. Adjusted net income (loss) from continuing operations in the six months ended January 31, 1997 reflects a $950,000 write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (8) As adjusted to give effect to (i) the Offering and the application of the net proceeds therefrom to redeem the Series A Preferred Stock and pay accumulated dividends thereon, repay $ million of indebtedness outstanding under the Credit Facility and accrued interest thereon and repay $ million of indebtedness outstanding under the Subordinated Notes and accrued interest thereon and (ii) the Exchange. 8 10 RISK FACTORS Prospective purchasers of the Common Stock should consider carefully the following risk factors relating to the Offering and the business of the Company, together with the information and financial data set forth elsewhere in this Prospectus, prior to making an investment decision. IMPACT OF WEATHER ON RESULTS OF OPERATIONS Weather is the most significant factor in determining market demand for the Company's products and is inherently unpredictable. Inclement weather during the spring gardening season and lack of snow during the winter may have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonal and Quarterly Fluctuations; Impact of Weather". SEASONALITY The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, the Company's sales tend to be greater during its third and fourth fiscal quarters. As a result, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, the Company's levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the Company's first and second fiscal quarters. These factors increase variations in the Company's quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for the Company's products may vary substantially from the anticipated demand, leaving the Company with either excess inventory or insufficient inventory to satisfy customer orders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonal and Quarterly Fluctuations; Impact of Weather". RECENT LOSSES The Company incurred net losses of $7.7 million, $68.6 million, $5.5 million, $2.4 million and $7.3 million, respectively, in fiscal 1992, fiscal 1993, the twelve months ended July 29, 1994, fiscal 1995 and fiscal 1996 and a net loss of $10.1 million during the six months ended January 31, 1997. The Company also incurred net losses from continuing operations of $2.0 million, $35.0 million, $639,000, $1.7 million and $3.0 million, respectively, in fiscal 1992, fiscal 1993, fiscal 1995, fiscal 1996 and the six months ended January 31, 1997. As a result of a high degree of financial leverage incurred in buyout transactions effectuated in 1986 and 1989, the Company restructured certain of its debt obligations in December 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and Note 1 to Consolidated Financial Statements. There can be no assurance that the Company will attain profitability or achieve continued growth in operating performance. DEPENDENCE ON SIGNIFICANT CUSTOMERS The Company's largest customer, Sears, accounted for 8.9%, 12.5% and 11.6% of gross sales in fiscal 1995, fiscal 1996 and the six months ended January 31, 1997, respectively. There can be no assurance that the Company's sales to Sears will continue at existing levels. A substantial reduction or cessation of sales to Sears or other major customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Customers". A key element of the Company's growth strategy is to increase sales in certain distribution channels, such as home centers and mass merchants through retailers such as Home Depot and Sears. Although Home Depot has indicated that it expects to open approximately 450 additional stores over the next five years and Sears has indicated that it expects to open or acquire over 500 additional non-mall hardware stores over the next five years, there can be no assurance that such stores will be opened or, if opened, that the Company will be chosen to supply its products to all or a significant portion of such stores. In addition, there can be no 9 11 assurance that such stores will generate significant additional sales for the Company or that such stores will not result in a reduction of sales to the Company's other customers, whether through consolidation or otherwise. DEPENDENCE ON KEY PERSONNEL The recent growth and development of the Company largely has been dependent upon the services of Gabe Mihaly, President and Chief Executive Officer of Acorn and UnionTools. The loss of Mr. Mihaly's services could have a material adverse effect on the Company. See "Management". UNCERTAINTY OF FUTURE ACQUISITIONS A key element of the Company's strategy is the acquisition of businesses and assets in the lawn and garden industry. There can be no assurance, however, that the Company will be able to identify attractive acquisition opportunities, obtain sufficient financing for acquisitions on satisfactory terms or successfully acquire identified targets. In addition, there can be no assurance that the Company will be successful in integrating acquired businesses into its existing operations or that such integration will not result in unforeseen operational difficulties or require a disproportionate amount of management's attention. Such acquisitions may result in the incurrence of additional indebtedness by the Company or the issuance of preferred stock or additional Common Stock. Furthermore, there can be no assurance that competition for acquisition opportunities in the industry will not escalate, thereby increasing the cost to the Company of making acquisitions or causing the Company to refrain from making further acquisitions. See "Business -- Growth Strategy". AVAILABILITY AND PRICE OF RAW MATERIALS The Company's products require the supply of raw materials consisting primarily of steel, plastics and ash wood. The Company has several suppliers for most of its raw materials. There can be no assurance, however, that the Company will not experience shortages of raw materials or components essential to its production processes or be forced to seek alternative sources of supply. In addition, there can be no assurance that prices for such materials will remain stable. Any shortages of raw materials may result in production delays and increased costs which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Raw Materials". COMPETITION All aspects of the lawn and garden industry, including attracting and retaining customers and pricing, are highly competitive. The Company competes for customers with large consumer product manufacturers and numerous other companies that produce specialty home and garden products, as well as with foreign manufacturers that export their products to the U.S. Many of these competitors are larger and have significantly greater financial resources than the Company. There can be no assurance that increased competition in the lawn and garden industry will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition". SUBSTANTIAL AMOUNT OF COMMON STOCK ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, shares of Common Stock will be outstanding. The shares of Common Stock sold in the Offering will be available for resale in the public market without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for shares purchased by "affiliates" of the Company (in general, any person who has a control relationship with the Company), which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. The remaining outstanding shares of Common Stock are deemed to be "restricted securities" as that term is defined in Rule 144, all of which are eligible for sale in the public market in compliance with Rule 144. 10 12 Certain existing stockholders of the Company (who in the aggregate hold shares of Common Stock), the executive officers and directors of the Company and the Oaktree Fund have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any of the shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. Additionally, the Company has agreed that, during the period of 180 days from the date of this Prospectus, subject to certain exceptions, that it will not issue, sell, offer or agree to sell, grant any options for the sale of (other than employee stock options) or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock, other than pursuant to the Offering. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, such as the TCW Funds, is entitled to sell, within any three-month period, a number of shares of Common Stock which does not exceed the greater of 1% of the number of then-outstanding shares of the Common Stock ( shares immediately after the Offering) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 also may be subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned shares within the definition of "restricted securities" under Rule 144 for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, public information requirements or notice requirements. Acorn intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the shares of Common Stock reserved for issuance under the Incentive Plan. Acorn also intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the shares of Common Stock reserved for issuance under the Director Stock Plan. As a result, any shares of Common Stock issued pursuant to awards granted under such plans will be available, subject to special rules for affiliates, for resale in the public market after the effective date of such registration statement, subject to applicable lock-up arrangements. See "Management -- 1997 Stock Incentive Plan" and "Management -- Director Stock Plan". The TCW Funds and the Oaktree Fund have, subject to certain conditions and restrictions, the right to include the shares of Common Stock owned by them in registered public offerings of Common Stock (or securities exchangeable for or convertible into Common Stock) undertaken by Acorn for its own account, as well as to require Acorn to register the sale of such shares, subject to certain conditions, upon demand. The TCW Group has informed the Company that the TCW Funds currently are in their respective liquidation periods, requiring such funds to liquidate their investments in an orderly manner. Pursuant to their organizational documents, the TCW Funds terminate over the period from November 2001 to June 2003. As a result, it is likely that the shares of Common Stock held by the TCW Funds will be sold prior to such time or distributed to investors in the TCW Funds. All such shares, except those acquired by affiliates of the Company, will be immediately eligible for resale under Rule 144(k). No prediction can be made as to the effect, if any, that market sales of shares of Common Stock that are restricted securities, or the availability of such shares, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the Company's future ability to raise capital through an offering of equity or equity linked securities. See "Shares Available for Future Sale" and "Underwriting". IMPACT OF HOLDING COMPANY STRUCTURE Acorn is a holding company with no business operations of its own. Following the intended sale of McGuire-Nicholas, Acorn's only material asset will be all of the outstanding capital stock of UnionTools. 11 13 Accordingly, Acorn is dependent upon the earnings and cash flows of, and dividends and distributions from, UnionTools to pay its expenses and meet its obligations and to pay any cash dividends or distributions on the Common Stock that may be authorized by the Board of Directors of Acorn. There can be no assurance that UnionTools will generate sufficient earnings and cash flows to pay dividends or distribute funds to Acorn to enable Acorn to pay its expenses and meet its obligations or that applicable state law and contractual restrictions, including negative covenants contained in the debt instruments of UnionTools then in effect, will permit such dividends or distributions. See " -- Restrictions Imposed by the Terms of the Company's Indebtedness" and " -- No Dividends". ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. There can be no assurance that an active public market for the Common Stock will develop or be sustained after the Offering. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters and may bear no relationship to the market price of the Common Stock after the Offering. See "Underwriting". Subsequent to the Offering, prices for the Common Stock will be determined by the market and may be influenced by a number of factors, including the depth and liquidity of the market for the Common Stock, investor perceptions of the Company and other participants in the lawn and garden industry, weather and general economic and other conditions. RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS The terms and conditions of the Credit Facility impose, and the terms and conditions of future debt instruments of the Company may impose, restrictions on the Company that affect, among other things, its ability to incur debt, pay dividends or make distributions, make acquisitions, create liens, sell assets and make certain investments. The terms of the Credit Facility require UnionTools to maintain specified financial ratios and satisfy certain tests, including minimum interest coverage ratios, and place limits on future capital expenditures of UnionTools. In addition, the Credit Facility restricts UnionTools' ability to pay dividends and make distributions. As of January 31, 1997, after giving effect to the Offering and the use of proceeds therefrom (at an assumed initial public offering price of $ per share, the mid-point of the range of initial public offering prices set forth on the cover page of this prospectus) there would have been approximately $ million outstanding under the Credit Facility and approximately $ million available under the revolving portion of the Credit Facility and approximately $ million available under the acquisition line of the Credit Facility. See " -- No Dividends" and "Description of Certain Indebtedness". The ability of the Company to comply with the terms of its debt instruments can be affected by events beyond its control, including events and changes in the competitive environment, which could impair the Company's operating performance. There can be no assurance that the Company will be able to comply with the provisions of its debt instruments, including compliance by UnionTools with the financial ratios and tests contained in the Credit Facility. Breach of any of these covenants or the failure to fulfill the obligations thereunder and the lapse of any applicable grace periods could result in an event of default pursuant to which holders of such indebtedness could declare all amounts outstanding under such debt instruments to be due and payable immediately. Any such declaration under a debt instrument is likely to result in an event of default under one of the other debt instruments of the Company, if any, then outstanding. There can be no assurance that the assets or cash flows of the Company would be sufficient to repay in full borrowings under its outstanding debt instruments, whether upon maturity or in the event of acceleration upon an event of default, or that the Company would be able to refinance or restructure the payments of such indebtedness. See "-- Impact of Holding Company Structure" and "Description of Certain Indebtedness". NO DIVIDENDS Acorn currently does not intend to pay any cash dividends on the Common Stock. Acorn is a holding company with no business operations of its own. Acorn therefore is dependent upon payments, dividends and distributions from UnionTools, its principal operating subsidiary, for funds to pay its expenses and to pay future cash dividends or distributions, if any, to holders of the Common Stock. UnionTools currently intends 12 14 to retain any earnings for support of its working capital, repayment of indebtedness, capital expenditures and general corporate purposes. UnionTools has no current intention of paying dividends or making other distributions to Acorn in excess of amounts necessary to pay Acorn's operating expenses and taxes. The Credit Facility contains restrictions on UnionTools' ability to pay dividends or make other distributions to Acorn. The Credit Facility provides that, unless UnionTools meets certain financial tests, it may not declare any dividends or make any other payments or distributions to Acorn except for amounts necessary to pay Acorn's operating expense up to $125,000 per month and to pay Acorn's federal and state income taxes. See "Dividend Policy" and "Description of Certain Indebtedness". CONTROL BY PRINCIPAL STOCKHOLDERS Upon consummation of the Offering and after giving effect to the Exchange (as of January 31, 1997 and at an assumed initial public offering price of $ , the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus), the TCW Group and the TCW Funds may be deemed to be the beneficial owners of approximately % of the outstanding shares of Common Stock. Upon consummation of the Offering, Oaktree and the Oaktree Fund may be deemed to be the beneficial owner of approximately % of the outstanding shares of Common Stock. Certain individuals designated by the TCW Group to manage the TCW Funds also are principals of Oaktree. However, Oaktree does not have voting or dispositive power with respect to the shares of Common Stock owned by the TCW Funds. Until such time, if ever, that there is a significant decrease in the number of shares of Common Stock held by the TCW Funds and the Oaktree Fund, the TCW Group and Oaktree will be able to control the Company through their ability to determine the outcome of votes of stockholders regarding, among other things, election of directors and approval of significant transactions. In addition, upon consummation of the Offering officers and directors of Acorn will beneficially own an aggregate of approximately shares, or %, of the Common Stock. See "-- Substantial Amount of Common Stock Eligible for Future Sale", "Management", "Principal Stockholders" and "Certain Transactions". EFFECT OF CERTAIN CHARTER, CHANGE OF CONTROL AND STATUTORY PROVISIONS Acorn's Board of Directors is authorized, subject to certain limitations prescribed by law, to issue up to 1,000 shares of preferred stock in one or more classes or series and to fix the designations, powers, preferences, rights, qualifications, limitations or restrictions, including voting rights, of those shares without any further vote or action by stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of Acorn. Acorn has no current plans to issue additional shares of preferred stock. See "Description of Capital Stock -- Preferred Stock". The Credit Facility contains provisions that, under certain circumstances, will cause such indebtedness to become due upon the occurrence of a change of control of the Company. See "Description of Certain Indebtedness". These provisions could have the effect of making it more difficult for a third party to acquire control of the Company. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"). In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. See "Description of Capital Stock -- Certain Provisions of Delaware Law". LABOR RELATIONS Most of the Company's hourly employees are covered by collective bargaining or similar labor agreements. The Company currently is a party to four such agreements, one of which expires in 1998 and three of which expire in 1999. There can be no assurance that the Company will be successful in negotiating new labor contracts on terms satisfactory to the Company or without work stoppages or strikes. A prolonged 13 15 work stoppage or strike at any of the Company's facilities could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees". ENVIRONMENTAL MATTERS The Company is subject to various Federal, state, and local environmental laws, ordinances and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and wastes. The Company has made, and will continue to make, expenditures to comply with these environmental requirements and regularly reviews its procedures and policies for compliance with environmental laws. The Company also has been involved in remediation actions with respect to certain of its facilities. Amounts expended by the Company in such compliance and remediation activities have not been material to the Company. However, current conditions and future events, such as changes in existing laws and regulations, may give rise to additional compliance or remediation costs that could have a material adverse effect on the Company's business, financial condition or results of operations. Furthermore, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. See "Business -- Environmental Matters". IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the net tangible book value of their Common Stock. As of January 31, 1997, the net tangible book value per share was $ . At an assumed initial public offering price of $ per share, the mid-point of the range of the initial public offering prices set forth on the cover page of this Prospectus, current stockholders would experience an increase in net tangible book value per share of $ and purchasers of shares of Common Stock in the Offering would experience dilution in net tangible book value of $ per share. See "Dilution". USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus, and after deducting the underwriting discount and estimated expenses of the Offering) are estimated to be $ million. The Company intends to use the net proceeds from the Offering as follows: (i) approximately $ million of the net proceeds to redeem the Series A Preferred Stock and pay accumulated dividends thereon, (ii) approximately $ of the net proceeds to repay the term loan portion of the Credit Facility and accrued interest thereon and reduce indebtedness outstanding under the acquisition line of the Credit Facility and accrued interest thereon and (iii) approximately $ million of the net proceeds to repay indebtedness outstanding under the Subordinated Notes and accrued interest thereon. Pursuant to the Exchange, the remainder of the Subordinated Notes will be exchanged for shares of Common Stock. See "Certain Transactions". Although application of the net proceeds from the Offering will result in a permanent reduction of the principal amount of the term loan under the Credit Facility, it will not reduce the amounts available to the Company under either the revolving facility or the acquisition line of the Credit Facility. Pursuant to its growth strategy, the Company is actively considering acquisitions, although it currently does not have any understandings or agreements with respect to potential acquisitions. See "Business -- Growth Strategy". The Series A Preferred Stock accrues cumulative dividends at a rate of 13% per year. The Subordinated Notes bear interest at a rate of 13% per year and mature in July 2003. Indebtedness outstanding under the Credit Facility bears interest at variable rates (8.25% per year at January 31, 1997) and matures in December 2003. See "Description of Certain Indebtedness". 14 16 DIVIDEND POLICY Acorn has never paid, and currently does not intend to pay, any cash dividends on the Common Stock. Acorn is a holding company with no business operations of its own. Acorn therefore is dependent upon payments, dividends and distributions from UnionTools for funds to pay dividends to stockholders of Acorn. UnionTools currently intends to retain any earnings for support of its working capital, repayment of indebtedness, capital expenditures and other general corporate purposes. UnionTools has no current intention of paying dividends or making other distributions to Acorn in excess of amounts necessary to pay Acorn's operating expenses and taxes. The Credit Facility contains restrictions on UnionTools' ability to pay dividends or make payments or other distributions to Acorn. The Credit Facility provides that, unless UnionTools meets certain financial tests, it may not declare any dividends or make any other payments or distributions to Acorn except for amounts necessary to pay Acorn's operating expenses up to $125,000 per month and to pay Acorn's federal and state income taxes. See "Risk Factors -- Impact of Holding Company Structure", "Risk Factors -- No Dividends" and "Description of Certain Indebtedness". 15 17 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at January 31, 1997 and as adjusted as of such date to give effect to (i) the issuance and sale of the shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus, and after deducting the underwriting discount and estimated expenses of the Offering) and the application of the net proceeds therefrom and (ii) the Exchange. This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
JANUARY 31, 1997 ------------------------ ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Short-term debt: Revolving portion of Credit Facility................................ $ 14,223 Current portion of long-term debt................................... 3,000 -------- -------- Total short-term debt....................................... $ 17,223 $ ======== ======== Long-term debt: Term loan portion of Credit Facility(1)............................. $ 17,000 $ Subordinated Notes(1)............................................... 31,354 -------- -------- Total long-term debt........................................ $ 48,354 $ ======== ======== Stockholders' equity: Preferred stock, par value $.001 per share; 1,000 shares authorized, 100 shares issued and outstanding (no shares outstanding as adjusted)(2)..................................................... $ 8,596 Common Stock, par value $.001 per share; 20 million shares authorized, shares issued and outstanding ( shares outstanding as adjusted)(3).................. 14,494 Contributed capital-stock options(4)................................ 460 Minimum pension liability(5)........................................ (197) Retained earnings (deficit)......................................... (14,688) -------- -------- Total stockholders' equity....................................... 8,665 -------- -------- Total capitalization........................................ $ 74,242 $ ======== ========
- --------------- (1) See Note 4 to Consolidated Financial Statements. (2) See Note 5 to Consolidated Financial Statements. (3) Excludes (i) shares of Common Stock issuable upon the exercise of outstanding stock options, (ii) shares of Common Stock reserved for issuance under the Incentive Plan, pursuant to which options to purchase shares of Common Stock will be outstanding upon consummation of the Offering and (iii) shares of Common Stock reserved for issuance under the Director Stock Plan. See "Management -- 1997 Stock Incentive Plan", "Management -- Director Stock Plan" and Note 10 to Consolidated Financial Statements. (4) See Note 10 to Consolidated Financial Statements. (5) See Note 7 to Consolidated Financial Statements. 16 18 DILUTION The net tangible book value of the Company at January 31, 1997 was $(22.5) million, or $ per share of Common Stock. Net tangible book value per share represents the amount of tangible assets of the Company, less total liabilities, divided by the number of outstanding shares of Common Stock. Without taking into account any other changes in net tangible book value after January 31, 1997, other than to give effect to (i) the sale by the Company of shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus, and after deducting the underwriting discount and estimated expenses of the Offering), and the application of the estimated net proceeds therefrom and (ii) the Exchange, the pro forma net tangible book value of the Company at January 31, 1997 would have been $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share of Common Stock to existing stockholders and an immediate dilution of approximately $ per share to new investors purchasing shares in the Offering. The following table illustrates the per share book value dilution to new investors: Assumed initial public offering price per share.............................. $ Net tangible book value per share before the Offering...................... $ Increase per share attributable to the Offering............................ Pro forma net tangible book value per share after the Offering............... ------ Net tangible book value dilution per share to new investors(1)............... $ ======
- --------------- (1) Dilution is determined by subtracting pro forma net tangible book value per share after the Offering from the assumed initial public offering price per share of Common Stock. The following table sets forth as of January 31, 1997 the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing holders of Common Stock and the new investors (at an assumed initial public offering price of $ per share, the midpoint of the range of initial public offering prices set forth on the cover page of this Prospectus) before deducting the underwriting discount and estimated offering expenses payable by the Company.
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE ---------------------- ------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ----------- ------- ------------- ------- --------- (IN MILLIONS) Existing stockholders(1)............... % $ % $ New investors.......................... ---------- --- ------ --- Total........................ 100% $ 100% ========== === ====== ===
- --------------- (1) Gives effect to the Exchange. As of January 31, 1997, there were options outstanding to purchase a total of shares of Common Stock at a weighted average exercise price of $ per share. To the extent that any of these options are exercised, there will be further dilution to new investors. See "Capitalization" and Note 10 to Consolidated Financial Statements. 17 19 SELECTED CONSOLIDATED FINANCIAL DATA The Selected Consolidated Financial Data for fiscal 1992, fiscal 1993, the four months ended December 2, 1993, the eight months ended July 29, 1994, fiscal 1995 and fiscal 1996 have been derived from the audited Consolidated Financial Statements of the Company. The Selected Consolidated Financial Data for the six months ended January 26, 1996 and the six months ended January 31, 1997 have been derived from the unaudited Consolidated Financial Statements of the Company, which reflect, in the opinion of management of the Company, all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of financial data for such periods. The results of such interim periods are not necessarily indicative of the results that will be reported for the full fiscal year. The Selected Consolidated Financial Data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the Consolidated Financial Statements and Notes thereto and the other financial information included elsewhere in this Prospectus.
PREDECESSOR COMPANY SUCCESSOR COMPANY ---------------------------------- ------------------------------------------------------------ FOUR EIGHT MONTHS MONTHS YEAR ENDED ENDED ENDED YEAR ENDED SIX MONTHS ENDED ------------------- ----------- -------- --------------------- ------------------------- JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, JANUARY 26, JANUARY 31, 1992 1993 1993(1) 1994 1995 1996 1996 1997 -------- -------- ----------- -------- -------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.................. $ 60,699 $ 70,051 $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 35,843 $ 40,695 Cost of goods sold......... 43,856 50,548 14,185 52,271 63,411 67,496 27,290 30,142 -------- -------- --------- -------- -------- -------- --------- --------- Gross profit............... 16,843 19,503 6,146 20,099 23,132 25,156 8,553 10,553 Selling, general and administrative expenses................. 11,380 12,648 5,482 9,955 15,531 16,815 7,356 8,641 -------- -------- --------- -------- --------- --------- --------- --------- Operating profit........... 5,463 6,855 664 10,144 7,601 8,341 1,197 1,912 Interest expense........... 4,924 4,939 2,773 3,525 6,485 6,732 2,918 3,243 Amortization of intangibles.............. 2,525 2,520 124 601 1,061 1,173 553 572 Other expenses............. -- 34,409(2) -- 11 694 1,522(3) 58 1,088(4) -------- -------- --------- -------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes...... (1,986) (35,013) (2,233) 6,007 (639) (1,086) (2,332) (2,991) Income taxes............... -- -- -- 290 -- 582 -- -- -------- -------- --------- -------- --------- --------- --------- --------- Net income (loss) from continuing operations.... (1,986) (35,013) (2,233) 5,717 (639) (1,668) (2,332) (2,991) -------- -------- --------- -------- --------- --------- --------- --------- Loss from discontinued operations(5)............ (5,684) (33,560)(2) (8,373) (614) (1,800) (6,480) (1,111) (7,082) -------- -------- ---------- -------- --------- --------- --------- --------- Cumulative effect of change in accounting for post- retirement benefits...... -- -- -- -- -- 869 869 -- -------- -------- --------- --------- --------- --------- --------- --------- Net income (loss).......... $ (7,670) $(68,573) $ (10,606) $ 5,103 $ (2,439) $ (7,279) $ (2,574) $ (10,073) ======== ======== ========= ========= ========= ========= ========= ========= Net income (loss) from continuing operations per share.................... Weighted average number of shares outstanding....... OTHER DATA: Gross margin............... 27.7% 27.8% 30.2% 27.8% 26.7% 27.2% 23.9% 25.9% Operating margin........... 9.0% 9.8% 3.3% 14.0% 8.8% 9.0% 3.3% 4.7% EBITDA(6).................. $ 6,466 $ 8,343 $ 1,168 $ 11,148 $ 9,570 $ 10,760 $ 2,419 $ 2,847
PREDECESSOR COMPANY SUCCESSOR COMPANY ---------------------------------- ------------------------------------------------------------ JULY 31, JULY 31, DECEMBER 2, JULY 29, JULY 28, AUGUST 2, JANUARY 26, JANUARY 31, 1992 1993 1993 1994 1995 1996 1996 1997 -------- -------- ----------- -------- -------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Working capital............ $(20,250) $(17,255) $ (17,902) $ 21,081 $ 5,989 $ 8,543 $ 2,697 $ 18,194 Total assets............... 141,404 68,154 79,439 101,833 112,280 98,895 116,472 95,646 Total debt................. 132,382 127,458 137,437 58,854 72,104 61,891 75,497 65,577 Stockholders' equity....... 269 (68,304) (126,528) 19,422 17,323 18,530 14,836 8,665
18 20 - --------------- (1) Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. See Note 1 to Consolidated Financial Statements. (2) In fiscal 1993 the Company reduced goodwill from continuing operations by $35,826 and goodwill from discontinued operations by $29,659. (3) In fiscal 1996 the Company recognized other expense of $563,000 in connection with the resignation of Acorn's previous Chairman of the Board and other expense of $750,000 in connection with self-insured life insurance accruals related to the death of a former director of the Company. (4) In the six months ended January 31, 1997 the Company recognized other expense of $950,000 from the write-off of certain capitalized bank fees incurred in connection with the Company's previous bank credit facility. (5) Represents the loss from the discontinued VSI and McGuire-Nicholas operations, as well as (i) a net loss of $380,000 incurred upon the sale of substantially all of the assets of VSI, reflecting a loss of $665,000 recorded in fiscal 1996 and a gain of $285,000 recorded in the six months ended January 31, 1997 and (ii) a loss of $6.3 million in the six months ended January 31, 1997 incurred in connection with the intended disposition of McGuire-Nicholas. See Note 3 to Consolidated Financial Statements. In addition, the four months ended December 2, 1993 include restructuring costs of approximately $8.9 million. (6) EBITDA represents earnings from continuing operations before interest expense, income taxes, depreciation, amortization and other expenses. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Selected Consolidated Financial Data, the Consolidated Financial Statements of the Company and the Notes thereto and the other financial information included elsewhere in this Prospectus. Certain statements under this caption constitute forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in such forward-looking statements as a result of various factors, including those set forth under the caption "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company is a leading manufacturer and distributor of non-powered lawn and garden tools. Acorn is a holding company with no business operations of its own. Following the intended sale of McGuire-Nicholas, Acorn's only material asset will be all of the outstanding capital stock of UnionTools. See "-- Disposition of Non-Lawn and Garden Business Operations". Founded in 1890, the Company was operated as a family owned business until its sale in 1986 pursuant to a leveraged buyout transaction. The Company was sold in a second highly leveraged transaction in 1989. Primarily as a result of these transactions, the Company had approximately $132.4 million and $127.5 million of total indebtedness at July 31, 1992 and July 31, 1993, respectively, with approximately $60.7 million and $70.1 million of net sales in fiscal 1992 and fiscal 1993, respectively. The Company's results of operations from 1989 through December 1993 were adversely affected by a high degree of financial leverage and a lack of liquidity, despite the implementation of successful operating strategies by new senior management recruited in 1991. In December 1993, the Company restructured certain of its debt obligations in connection with the acquisition of the Company by the TCW Funds, thereby significantly reducing the Company's debt burden. Following the acquisition, the Company revalued certain assets, reduced goodwill and recognized a gain on the forgiveness of certain indebtedness. See "-- Results of Operations -- Fiscal 1995 Compared to Twelve Months Ended July 29, 1994". Over the past six years the Company has successfully implemented a business strategy designed to transform it from a manufacturing-oriented industrial company into a marketing-oriented consumer products company. The central elements of the Company's approach include a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. Over the same period the Company also has expanded its infrastructure to support future growth by recruiting an experienced management team, increasing manufacturing capacity and enhancing management information systems. Reflecting the success of these operating strategies, the Company's net sales from continuing operations increased from $56.2 million in fiscal 1991 to $92.7 million in fiscal 1996, a CAGR of 10.5%. The Company's net sales from continuing operations were $40.7 million for the six months ended January 31, 1997, an increase of 13.5% from the same period in fiscal 1996. In addition, net sales of the Company's higher-margin, best-quality products increased from approximately 5% of total net sales in fiscal 1991 to approximately 35% of total net sales in fiscal 1996, while net sales of the Company's lower-margin, opening-price-point products decreased from approximately 35% of total net sales in fiscal 1991 to approximately 8% of total net sales in fiscal 1996. The price of raw materials used in the Company's products remained relatively stable during each of the periods discussed below. Implementation of the Company's market segmentation and merchandising strategies has resulted in increased selling, general and administrative expenses as the Company has increased its marketing focus through the development of merchandising displays, point-of-sale signage and product labeling, as well as additional cooperative advertising. The Company also incurred an increase in selling, general and administrative expenses due to increased staffing and upgrades of management information systems. The Company believes that its current level of selling, general and administrative expenses as a percentage of net sales is now consistent with its marketing-oriented focus. 20 22 DISPOSITION OF NON-LAWN AND GARDEN BUSINESS OPERATIONS In December 1996, the Company sold substantially all of the assets of VSI, a distributor of packaged fasteners, for approximately $6.9 million, plus the assumption of approximately $2.3 million of related liabilities. The Company also intends to sell McGuire-Nicholas within the next 12 months. McGuire-Nicholas is a manufacturer and distributor of leather, canvas and synthetic fabric tool holders and work aprons. The Company intends to use the proceeds from the expected sale of McGuire-Nicholas to reduce outstanding indebtedness. See "Description of McGuire-Nicholas". VSI's and McGuire-Nicholas' results of operations are shown as "Loss from discontinued operations" in the Summary Consolidated Financial Data, Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this Prospectus. Net assets of the discontinued VSI and McGuire-Nicholas operations are shown as "Net assets of discontinued operations" in the Consolidated Financial Statements appearing elsewhere in this Prospectus. RESULTS OF OPERATIONS The following table sets forth certain components of the Company's consolidated statement of operations data expressed as a percentage of net sales:
YEAR ENDED SIX MONTHS ENDED ---------------------- --------------------------- TWELVE MONTHS ENDED JULY 28, AUGUST 2, JANUARY 26, JANUARY 31, JULY 29, 1994(1) 1995 1996 1996 1997 ------------------- -------- --------- ----------- ----------- Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold........... 72.0 73.3 72.8 76.1 74.1 ----- ----- ----- ----- ----- Gross profit................. 28.0 26.7 27.2 23.9 25.9 Selling, general and administrative expenses.... 16.7 17.9 18.1 20.5 21.2 ----- ----- ----- ----- ----- Operating profit............. 11.3 8.8 9.1 3.4 4.7 Interest expense............. 6.8 7.5 7.3 8.1 8.0 Amortization of intangibles................ 0.9 1.2 1.3 1.5 1.4 Other expenses............... 0.0 0.8 1.6 0.2 2.7 ----- ----- ----- ----- ----- Income (loss) from continuing operations before income taxes...................... 3.6 (0.7) (1.1) (6.4) (7.4) Income taxes................. 0.3 -- 0.6 -- -- ----- ----- ----- ----- ----- Net income (loss) from continuing operations...... 3.3 (0.7) (1.7) (6.4) (7.4) ----- ----- ----- ----- ----- Loss from discontinued operations................. (9.7) (2.1) (7.0) (3.1) (17.4) ----- ----- ----- ----- ----- Cumulative effect of change in accounting for post retirement benefits........ -- -- 0.9 2.4 -- ----- ----- ----- ----- ----- Net income (loss)............ (6.4)% (2.8)% (7.8)% (7.1)% (24.8)% ===== ===== ===== ===== =====
- --------------- (1) Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. The percentage of net sales data for the 12 months ended July 29, 1994 has been adjusted to give effect to the foregoing purchase accounting adjustments throughout the period. 21 23 SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 26, 1996 Net Sales. Net sales increased 13.5%, or $4.9 million, to $40.7 million in the six months ended January 31, 1997 compared to $35.8 million in the same period in the prior year. The increase in net sales principally reflected increased unit sales of the Company's better- and best-quality products, which are sold at higher wholesale prices than the Company's opening-price-point products, and increased unit sales across all product lines due to a relatively strong fall lawn and garden season as a result of favorable weather conditions, as well as increased market penetration. Gross Profit. Gross profit increased 23.4%, or $2.0 million, to $10.6 million in the six months ended January 31, 1997 compared to $8.6 million in the same period in the prior year. Gross margin increased to 25.9% in the six months ended January 31, 1997 from 23.9% in the six months ended January 26, 1996. The increase in gross margin reflected improved product mix due to increased sales of the Company's higher-margin, better- and best-quality products. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 17.5%, or $1.3 million, to $8.6 million in the six months ended January 31, 1997 compared to $7.4 million in the same period in the prior year. As a percentage of net sales, selling, general and administrative expenses increased to 21.2% in the six months ended January 31, 1997 from 20.5% in the first six months of fiscal 1996. The increase principally is due to merchandising costs related to the conversion of customer stores previously serviced by the Company's competitors, as well as merchandising costs associated with opening new customer stores. Operating Profit. Operating profit increased 59.7%, or $715,000, to $1.9 million in the six months ended January 31, 1997 compared to $1.2 million in the same period in the prior year. Operating margin increased to 4.7% in the six months ended January 31, 1997 from 3.4% in the six months ended January 31, 1996. Other Expense. Other expense increased to $1,088,000 in the six months ended January 31, 1997 from $58,000 in the same period in the prior year primarily due to the write-off of $950,000 of capitalized bank fees incurred in connection with the Company's previous bank credit facility. Net Loss From Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes increased 28.3%, or $659,000, to $3.0 million in the six months ended January 31, 1997 compared to $2.3 million in the same period in the prior year. Interest expense increased to $3.2 million in the six months ended January 31, 1997 from $2.9 million in the six months ended January 31, 1996. Net Loss. Net loss increased $7.5 million to $10.0 million in the six months ended January 31, 1997 compared to $2.6 million in the same period in the prior year, primarily as a result of a loss of $6.3 million incurred in connection with the intended disposition of McGuire-Nicholas. FISCAL 1996 COMPARED TO FISCAL 1995 Net Sales. Net sales increased 7.1%, or $6.1 million, to $92.7 million in fiscal 1996 compared to $86.5 million in fiscal 1995. The increase in net sales principally reflected increased unit sales across all product lines in fiscal 1996 due to the addition of new customers and favorable weather conditions, as well as lower net sales in fiscal 1995 due to inventory reduction efforts by key mass merchant customers and poor spring weather conditions. Gross Profit. Gross profit increased 8.7%, or $2.0 million, to $25.2 million in fiscal 1996 compared to $23.1 million in fiscal 1995. Gross margin increased to 27.2% in fiscal 1996 from 26.7% in fiscal 1995. The increase in gross margin primarily resulted from increased manufacturing efficiencies related to higher production levels, as well as improved product mix due to increased sales of the Company's higher-margin, better- and best-quality products. 22 24 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 8.3%, or $1.3 million, to $16.8 million in fiscal 1996 compared to $15.5 million in fiscal 1995. As a percentage of net sales, selling, general and administrative expenses increased to 18.1% in fiscal 1996 from 17.9% in fiscal 1995. The increase primarily results from an increase in cooperative advertising expenditures and staffing costs. Operating Profit. Operating profit increased 9.7%, or $740,000, to $8.3 million in fiscal 1996 compared to $7.6 million in fiscal 1995. Operating margin increased to 9.1% in fiscal 1996 from 8.8% in fiscal 1995. Other Expense. Other expense increased $828,000 to $1.5 million in fiscal 1996 compared to $694,000 in fiscal 1995. In fiscal 1996 the Company recognized other expense of $563,000 in connection with the resignation of Acorn's previous Chairman of the Board and other expense of $750,000 in connection with self- insured life insurance accruals related to the death of a former director of the Company. Net Loss From Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes increased 70.0%, or $447,000, to $1.1 million in fiscal 1996 compared to $639,000 in fiscal 1995. Net Loss. Net loss increased $4.8 million to $7.3 million in fiscal 1996 compared to $2.4 million in fiscal 1995, primarily as a result of increased losses from discontinued operations in 1996. FISCAL 1995 COMPARED TO THE TWELVE MONTHS ENDED JULY 29, 1994 Pursuant to the acquisition of the Company by the TCW Funds, the Company made certain purchase accounting adjustments on December 3, 1993. The following purchase accounting adjustments impacted the Company's net income (loss) from continuing operations: (i) the basis of certain manufacturing equipment was increased by an aggregate of approximately $4.5 million; and (ii) goodwill was restated to approximately $40.0 million. The increased basis of the equipment resulted in an annual increase in depreciation expense of approximately $747,000, which is reflected in cost of goods sold. The restatement of goodwill resulted in an annual increase in amortization of intangibles of approximately $430,000. On a pro forma basis, giving effect to the purchase accounting adjustments described above, cost of goods sold and amortization of intangibles for the four months ended December 2, 1993 would have increased by approximately $249,000 and $77,000, respectively. The following discussion compares the Company's results of operations for fiscal 1995 to the Company's results of operations for the 12 months ended July 29, 1994, as adjusted to give effect to the foregoing purchase accounting adjustments throughout the period. Net Sales. Net sales decreased 6.6%, or $6.2 million, to $86.5 million in fiscal 1995 compared to $92.7 million in the twelve months ended July 29, 1994. Net sales for the twelve months ended July 29, 1994 reflected record levels due to significant initial inventory purchases by a key mass merchant customer and favorable weather conditions. The decrease in net sales in fiscal 1995 principally reflected decreased unit sales across all product lines due to poor spring weather conditions, as well as inventory reduction efforts by key mass merchant customers which more than offset increased sales to other customers. Gross Profit. Gross profit decreased 11.0%, or $2.9 million, to $23.1 million in fiscal 1995 compared to $26.0 million in the twelve months ended July 29, 1994. Gross margin decreased to 26.7% in fiscal 1995 from 28.0% in the twelve months ended July 29, 1994. The decrease in gross margin primarily resulted from manufacturing inefficiencies related to lower production levels due to lower net sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 0.6%, or $100,000, to $15.5 million in fiscal 1995 compared to $15.4 million in the twelve months ended July 29, 1994. As a percentage of net sales, selling, general and administrative expenses increased to 17.9% in fiscal 1995 from 16.7% in the twelve months ended July 29, 1994. The increase principally reflects an increase of approximately $1.1 million in cooperative advertising expenditures and approximately $1.3 million in purchase accounting charges, partially offset by reductions in other variable costs related to lower net sales levels. Selling, general and administrative expenses increased in fiscal 1995 and the twelve months ended July 29, 1994 compared to prior periods as a result of management information system improvements. 23 25 Operating Profit. Operating profit decreased 27.9%, or $2.9 million, to $7.6 million in fiscal 1995 compared to $10.5 million in the twelve months ended July 29, 1994. Operating margin decreased to 8.8% in fiscal 1995 from 11.3% in the twelve months ended July 29, 1994. Other Expense. Other expense increased to $694,000 in fiscal 1995 compared to $11,000 in the twelve months ended July 29, 1994. Other expense in fiscal 1995 resulted from compensation expense of $340,000 related to the vesting of executive stock options, as well as banking fees. Net Loss From Continuing Operations Before Income Taxes. Net loss from continuing operations before income taxes increased to $639,000 in fiscal 1995 compared to net income from continuing operations of $3.7 million in the twelve months ended July 29, 1994. Net Loss. Net loss decreased to $2.4 million in fiscal 1995 compared to net loss of $5.8 million in the twelve months ended July 29, 1994. SEASONAL AND QUARTERLY FLUCTUATIONS; IMPACT OF WEATHER The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated in January through May. Accordingly, the Company's sales tend to be greater during its third and fourth fiscal quarters. As a result, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must anticipate demand and build inventories of finished goods throughout the fall and winter. Accordingly, the Company's levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the Company's first and second fiscal quarters. These factors increase variations in the Company's quarterly results of operations and potentially expose the Company to greater adverse effects of changes in economic and industry trends. Moreover, actual demand for the Company's products may vary substantially from the anticipated demand, leaving the Company with excess inventory or insufficient inventory to satisfy customer orders. The following table sets forth certain unaudited data related to net sales for the fiscal quarters in fiscal 1995 and fiscal 1996. The unaudited quarterly information has been prepared on the same basis as the annual financial information and, in the opinion of management of the Company, includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information for the quarters presented.
FISCAL 1995 FISCAL 1996 --------------------------------------------- ----------------------------------------------- QUARTER ENDED ---------------------------------------------------------------------------------------------- OCTOBER 28, JANUARY 27, APRIL 28, JULY 28, OCTOBER 27, JANUARY 26, APRIL 26, AUGUST 2, 1994 1995 1995 1995 1995 1996 1996 1996 ----------- ----------- --------- -------- ----------- ----------- --------- ---------- Net sales..................... $19,150 $18,011 $32,609 $ 16,773 $16,486 $19,357 $33,564 $ 23,245 Cost of goods sold............ 13,623 13,416 23,995 12,377 12,544 14,731 23,738 16,483 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit.................. 5,527 4,595 8,614 4,396 3,942 4,626 9,826 6,762 Selling, general and administrative expenses..... 3,886 3,681 4,490 3,474 3,635 3,721 4,464 4,995 ------- ------- ------- ------- ------- ------- ------- ------- Operating profit.............. $ 1,641 $ 914 $ 4,124 $ 922 $ 307 $ 905 $ 5,362 $ 1,767 ======= ======= ======= ======= ======= ======= ======= ======= Net sales as a percentage of full year net sales......... 22.1% 20.8% 37.7% 19.4% 17.8% 20.9% 36.2% 25.1% Gross profit as a percentage of full year gross profit... 23.9 19.9 37.2 19.0 15.7 18.4 39.1 26.9 Operating profit as a percentage of full year operating profit............ 21.6 12.0 54.3 12.1 3.7 10.9 64.3 21.2 SIX MONTHS ENDED JANUARY 31, 1997 ------------------------- QUARTER ENDED ------------------------- NOVEMBER 1, JANUARY 31, 1996 1997 ------------ ----------- Net sales..................... $ 19,679 $21,018 Cost of goods sold............ 14,507 15,635 ------- ------- Gross profit.................. 5,172 5,381 Selling, general and administrative expenses..... 4,403 4,236 ------- ------- Operating profit.............. $ 767 $ 1,145 ======= ======= Net sales as a percentage of full year net sales......... Gross profit as a percentage of full year gross profit... Operating profit as a percentage of full year operating profit............
Weather is the single most important factor in determining market demand for the Company's products and also is the least predictable. For example, while floods in the Midwest adversely affected the sale of most types of lawn and garden equipment in 1992, the severe winter of 1994 resulted in a surge in demand for snow shovels. In addition, bad weather during the spring gardening season, such as that experienced throughout most of the U.S. in the spring of 1995, can adversely affect overall annual sales. 24 26 LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs are for working capital, capital expenditures and debt service. The Company has financed its working capital, capital expenditures and debt service requirements primarily through internally generated cash flow and funds borrowed under the Credit Facility and the Subordinated Notes. See "Use of Proceeds", "Certain Transactions" and "Description of Certain Indebtedness". Net cash used in continuing operations was $13.0 million in the six months ended January 31, 1997 compared to net cash used in continuing operations of $1.3 million in the comparable period in the prior fiscal year. This increase reflects a seasonal increase of inventories of $8.4 million required to meet anticipated sales demand. A corresponding seasonal build of inventories was not required in fiscal 1996 due to higher inventory levels at July 28, 1995. Net cash provided by continuing operations was $14.0 million in fiscal 1996 compared to net cash used in continuing operations of $504,000 in fiscal 1995. This increase resulted from a reduction of inventory levels from July 28, 1995, which were unusually high as a result of poor spring weather conditions in 1995, as well as inventory reduction efforts by key mass merchant customers. Net cash used in continuing operations was $504,000 in fiscal 1995 from net cash provided by continuing operations of $1.8 million in the eight months ended July 29, 1994. This increase primarily reflects the unusually high inventory levels at July 28, 1995. The Company made capital expenditures of approximately $2.3 million, $2.9 million, $1.5 million and $887,000 during fiscal 1994, fiscal 1995, fiscal 1996 and the six months ended January 31, 1997, respectively. The capital expenditures relate primarily to on-going maintenance of property, plant and equipment, manufacturing process improvements and increased manufacturing capacity. The Company intends to make capital expenditures of approximately $1.6 million in the remainder of fiscal 1997 and capital expenditures of approximately $3.4 million in fiscal 1998 primarily related to the purchase of new equipment and equipment and facility maintenance. In December 1993 and May 1994 Acorn issued the Subordinated Notes in the aggregate principal amount of approximately $31.4 million. In August 1996 the Company issued 100 shares of Series A Preferred Stock as payment in full of accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. As of January 31, 1997, the aggregate principal balance of the Subordinated Notes and accrued interest thereon was approximately $33.5 million and the aggregate liquidation value of the Series A Preferred Stock was approximately $9.2 million. The Company intends to use a portion of the net proceeds from the Offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and to repay a portion of the Subordinated Notes and accrued interest thereon. Pursuant to the Exchange, the remainder of the Subordinated Notes will be exchanged for shares of Common Stock upon consummation of the Offering. See "Use of Proceeds" and "Certain Transactions". In December 1996, the Company entered into the Credit Facility to finance capital expenditures, including future acquisitions, if any, and to fund working capital and other general business requirements. As of January 31, 1997, after giving effect to the Offering and the use of proceeds therefrom (at an assumed initial public offering price of $ per share, the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus), there would have been approximately $ million available under the revolving portion of the Credit Facility and approximately $ million available under the acquisition line of the Credit Facility. Indebtedness outstanding under the Credit Facility bears interest at variable rates (8.25% per year at January 31, 1997). The Company believes that cash generated from operations, together with amounts available under the Credit Facility, will be adequate to meet its debt service requirements, capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard. In addition, actual capital requirements may change, particularly as a result of acquisitions, if any, that the Company may make in the future. Depending on the nature, size and timing of future acquisitions, the Company may be required to raise additional financing. There can be no assurance that such additional financing will be available to the Company on acceptable terms. 25 27 EFFECTS OF INFLATION The Company is affected by inflation primarily through the purchase of raw materials, increased operating costs and expenses and higher interest rates. The Company believes that the effects of inflation on the Company's operations have not been material in recent years. 26 28 BUSINESS GENERAL Founded in 1890, the Company is a leading manufacturer and marketer of non-powered lawn and garden tools in the U.S. The Company's principal products include long handle tools (such as forks, hoes, rakes and shovels), snow tools, posthole diggers, wheelbarrows, striking tools and cutting tools. The Company sells its products under a variety of well-known brand names, including Razor-Back, Union, Yard 'n Garden, Perfect Cut and, pursuant to a license agreement, Scotts. In addition, the Company manufactures private label products for a variety of retailers, including products sold under Sears' Craftsman and Cotter & Company's True Value brand names. The Company's customers include mass merchants such as Sears, Kmart and Fred Meyer, home centers such as Home Depot, HomeBase, Builders Square and Payless Cashways, buying groups such as Cotter & Company and Ace Hardware and farm and industrial distributors. The Company's net sales increased from $56.2 million in fiscal 1991 to $92.7 million in fiscal 1996, a CAGR of 10.5%. The Company's net sales were $40.7 million for the six months ended January 31, 1997, an increase of 13.5% from the same period in fiscal 1996. In addition, net sales of the Company's higher-margin, best-quality products increased from approximately 5% of total net sales in fiscal 1991 to approximately 35% of total net sales in fiscal 1996, while net sales of the Company's lower-margin, opening-price-point products decreased from approximately 35% of total net sales in fiscal 1991 to approximately 8% of total net sales in fiscal 1996. The Company generated approximately 92% of its revenues in both fiscal 1996 and the six months ended January 31, 1997 from sales of long handle tools. The Company believes that its market share in the long handle tool segment of the industry has increased from approximately 16% in fiscal 1991 to approximately 28% in fiscal 1996, giving the Company the second largest market share in this segment of the industry. BUSINESS STRATEGY Over the past six years the Company has successfully implemented a business strategy designed to transform it from a manufacturing-oriented industrial company into a marketing-oriented consumer products company. The central elements of the Company's approach include a market segmentation strategy based primarily on brand management and a merchandising strategy based on attractive and informative product displays and labeling. - Market Segmentation Strategy. The Company has developed a family of brands, each targeted to one or more specific consumer segments and price-points. For example, shovels sold under the Company's opening-price-point Yard'n Garden brand retail from $3.99 to $5.99, while shovels sold under the Company's best-quality Razor-Back brand retail from $19.99 to $21.99. The Company's products and brands are differentiated by price, features and warranty, as well as by the materials and production processes used. - Merchandising Strategy. The Company was the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. The Company's merchandising programs are designed to (i) create brand identification among goods historically treated as commodities and (ii) increase retail sales while reducing the amount of sales support needed from the retailer's employees. The Company uses innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among the Company's brands. Products within the Company's Union, Scotts and Perfect Cut lines are merchandised using the Company's trademarked "Good/Better/Best" format. Where adequate shelf-space is available, the Company also merchandises its brands together, from the Company's opening price-point Yard'n Garden brand to its best-quality Razor-Back brand, using a similar value positioning technique. The Company believes that its merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. 27 29 Over the past six years, the Company also has expanded its infrastructure to support future growth by recruiting an experienced management team, increasing manufacturing capacity and enhancing its management information systems. GROWTH STRATEGY The Company believes that it can leverage the success of its business strategy through the implementation of the following growth strategies: - Increase Penetration in High Growth Distribution Channels. The Company believes that certain distribution channels, such as home centers and mass merchants, are growing more rapidly than the overall industry. The Company believes that it can continue to increase its sales in these high growth distribution channels through its unique combination of brand names, innovative merchandising techniques and high quality products. For example, in August 1996, after the Company demonstrated the effectiveness of its market segmentation and merchandising strategies in a select number of Home Depot stores, Home Depot selected the Company as the supplier of long handle tools for all new Home Depot stores in new markets and for 50 existing Home Depot stores. Home Depot has indicated that it expects to open approximately 450 additional stores over the next five years, primarily in new markets. In addition, the Company has been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. In five of the last six years the Company has received the prestigious "Partners in Progress" trophy awarded to approximately 80 of Sears' 10,000 suppliers. Sears has indicated that it expects to open or acquire over 500 additional non-mall hardware stores over the next five years. - Develop Product Line Extensions. The Company believes that product line extensions allow the Company to increase sales with minimal incremental expenditures. The Company recently expanded its cutting tool and striking tool product lines with the introduction of Perfect Cut pruning shears and loppers and Razor-Back mattocks, picks, axes, hammers and bars. The Company also recently introduced the Lady Gardener line of tools, which is ergonomically designed for female gardeners. The Company is actively developing additional product line extension opportunities. - Complete Strategic Acquisitions. The Company intends to increase its presence in certain segments of the lawn and garden industry through selective acquisitions and to increase operating efficiencies through vertical integration. Consistent with this strategy, in February 1997 the Company acquired an injection molding facility from one of the Company's largest suppliers of plastics parts. The Company's Credit Facility contains a $35 million acquisition facility, approximately $ million of which will be available following consummation of the Offering and the application of the net proceeds therefrom. In addition, Oaktree, the manager of the Oaktree Fund, has indicated its willingness, to consider providing financing from the Oaktree Fund for future acquisitions by the Company. The Company believes that continued application of its market segmentation and merchandising strategies, together with the implementation of the foregoing growth strategies, will enable the Company to continue its growth, increase its profitability and enhance its market share. INDUSTRY The non-powered lawn and garden tool industry is mature and, due in part to the low-cost nature of non-powered equipment, relatively non-cyclical. The Company believes that demand for non-powered lawn and garden tools generally is driven by the desire of do-it-yourself ("DIY") consumers to maintain and landscape residential properties and the need of industrial and farm professionals to acquire and utilize high-quality equipment that will aid them in efficiently completing their jobs. The non-powered lawn and garden tool market is comprised of the following product categories: long handle tools, garden hose, hose attachments, cutting tools, hose reels, sprayers, wheelbarrows and spreaders. The Company believes that long handle tools comprise the largest segment of the non-powered lawn and garden tool market. 28 30 The Company believes that the lawn and garden industry is the beneficiary of several trends suggesting a growing demand for lawn and garden tools, including the following: - Demographic Trends. According to industry sources, consumers age 45 to 64 represent the largest age group of lawn and garden enthusiasts. Census Bureau projections suggest that the proportion of the U.S. population in this age bracket will increase from 19.5% in 1995 to 24.3% in 2005 as "baby boomers" age. - Lifestyle Trends. According to the 1995-1996 National Gardening Survey conducted for the National Gardening Association by the Gallup Organization, 72% of the approximately 100 million households in the U.S. participated in some form of gardening in 1995. The Company believes that increased environmental awareness, greater interest in healthy lifestyles and heightened concerns regarding the maintenance of property values will continue to increase the popularity of lawn and garden activities, particularly among young adults. In addition, the success of several new gardening publications has contributed to the increased popularity of gardening and the greater sophistication of lawn and garden consumers. - Housing Starts and Sales of Existing Homes. New housing starts often represent an addition to the overall number of consumers in the lawn and garden tool market and, accordingly, an increase in demand. Consumers moving into new homes often spend substantially on landscaping, including the purchase of lawn and garden equipment. PRODUCTS AND BRANDS Product Lines The Company sells an extensive line of non-powered lawn and garden tools. The Company designs, manufactures and markets tools in the following product lines: (i) shovels and scoops; (ii) other steel products, such as hoes, forks, scrapers and rakes; (iii) garden hand tools and posthole diggers; (iv) snow tools, such as shovels and pushers; and (v) other products such as repair handles, weeders, edging tools and brooms. In addition, the Company sells wheelbarrows and cutting and striking tools purchased from outside equipment manufacturers. As a result of its recent acquisition of an injection molding facility, the Company also manufactures proprietary custom molded products and component parts for other manufacturers and distributors, as well as plastic components used in the Company's products. Brand Positioning Pursuant to its market segmentation strategy, the Company has developed a family of brands, each targeted to one or more specific consumer segments and price-points. For example, shovels sold under the Company's opening-price-point Yard 'n Garden brand retail from $3.99 to $5.99, while products sold under the Company's best-quality Razor-Back brand retail from $19.99 to $21.99. The Company's products and brands are differentiated by price, features and warranty (up to a lifetime warranty). Product grades also differ with respect to the materials and production processes used. For example, the steel components of the Company's Razor-Back line are heavy-gauge and forged in order to maximize the product's strength and durability, while the Company's Yard 'n Garden products are made with lighter gauge components. The Company carefully monitors its products and searches for growth opportunities that result from changes in market segments. For example, the Company repositioned the Razor-Back brand to cater to the growing population of serious DIY consumers by updating the brand image, introducing product line extensions and developing new promotional campaigns. See "-- Merchandising and Marketing". The Company's major brands are described below. Razor-Back. The Company sells a full line of best-quality, industrial duty tools for farm, industrial and professional users under the Razor-Back name. The brand enjoys a strong franchise with agricultural and industrial professionals and is widely acknowledged as the quality and performance standard for the long handle tool industry. In 1995 the Company expanded the brand with a high quality line of cutting and striking 29 31 tools. The Razor-Back line is sold primarily through home center, hardware store, industrial distributor and farm sector distribution channels. UnionPro. The Company sells a limited line of high quality, industrial duty tools for farm, industrial and professional users under the UnionPro name. The UnionPro line is sold primarily through industrial distributor and farm sector distribution channels. Union. The Union line generates the largest sales volume for the Company. Under the Union name, the Company sells a full line of medium-quality, professional duty tools with a wide range of features, quality points and performance levels designed to match the needs of tradesmen and serious DIY consumers. The Union line is sold through all distribution channels except warehouse clubs and is merchandised in a trademarked Good/Better/Best quality configuration. Perfect Cut. The Perfect Cut line was introduced in August 1995. The Company sells a limited line of consumer and professional duty cutting tools for tradesmen and serious DIY consumers under the Perfect Cut name. The Perfect Cut line is sold primarily through home centers, mass merchants and hardware store distribution channels and is merchandised in a trademarked Good/Better/Best quality configuration. Scotts. In July 1992, the Company obtained from The Scotts Company the exclusive right to manufacture, distribute and market in the U.S. and Canada an extensive line of lawn and garden tools under the Scotts name. The Company has sought to benefit from The Scotts Company's national prime time advertising campaigns, to develop joint promotional programs with The Scotts Company and to leverage the Scotts brand reputation and recognition among retailers that support The Scotts Company bagged-goods program. Under the Scotts name, the Company sells a full line of high quality, consumer-oriented tools for home gardeners who associate the Scotts name with value and quality. The Scotts line is sold primarily though mass merchant and home center distribution channels and is merchandised in a trademarked Good/Better/ Best quality configuration. ProForce. The ProForce line was introduced in August 1993 and is comprised of a limited line of medium-quality, consumer-oriented tools for DIY consumers. The ProForce line is sold exclusively through the warehouse club distribution channel. Yard 'n Garden. Under the Yard 'n Garden name, the Company sells a limited line of standard quality, promotional tools designed for occasional DIY consumers who demand value in basic tools for home use. The Yard 'n Garden line is sold through all distribution channels. Lady Gardener. The Lady Gardener line was introduced in August 1996. Under the Lady Gardener name, the Company sells a limited line of high-quality, consumer oriented tools ergonomically designed for female gardeners. The Lady Gardener line is sold primarily through mass merchant, home center and hardware store distribution channels. Private Label Products In addition to its own brands, the Company also manufactures private label products for a variety of customers including Sears, Cotter & Company, Frank's Nursery and Agway, which are sold under the Craftsman and Sears, Green Thumb, Frank's and Agway brand names, respectively. The Company has been a continuous supplier to Sears for over 80 years and the primary supplier of long handle tools to Sears for over 50 years. Private label products generated approximately $17.1 million, or 15.9%, of the Company's net sales in fiscal 1996 and approximately $7.4 million, or 16.3%, of the Company's net sales in the six months ended January 31, 1997. As a result of its recent acquisition of an injection molding facility, the Company also manufactures proprietary custom molded products and component parts for other manufacturers and distributors, as well as plastic components used in the Company's products. 30 32 New Product Development The Company believes that internally developed products, which often extend existing product lines, allow it to increase sales with relatively modest expenditures. For example, the Company recently introduced striking tools, such as mattocks, picks, axes, hammers and bars, to extend the Razor-Back line. The Company also introduced cutting tools, such as pruners, loppers, shears and bow and pruning saws marketed under the Perfect Cut line. The striking and cutting tools are made for the Company by outside manufacturers. The Company also has recently introduced redesigned posthole diggers with superior functionality and lower production costs. As part of its product development effort, the Company tests different materials in order to enhance product features, reduce tool weight and facilitate usage. For example, the Company's recently introduced Lady Gardener line, ergonomically designed for female gardeners, employs plastic or plastic and steel tool heads in order to make the equipment lighter and easier to handle. CUSTOMERS The Company has well-established customer relationships with most major retailers in the lawn and garden industry. The Company's largest customer, Sears, accounted for 8.9%, 12.5% and 11.6% of gross sales in fiscal 1995, fiscal 1996 and the six months ended January 31, 1997, respectively. The Company's ten largest customers accounted for approximately 44.0%, 51.4% and 50.7% of gross sales during each such period. The Company sells its products through a variety of distribution channels, including (i) mass merchants such as Sears, Kmart and Fred Meyer, (ii) home centers such as Home Depot, HomeBase, Builders Square and Payless Cashways, (iii) buying groups such as Cotter & Company and Ace Hardware, (iv) farm distributors and stores such as Mid-States Distributing Co., Agway, Wheatbelt, Inc. and Tractor Supply Company, Inc. and (v) industrial distributors such as Oklahoma Rig & Supply Company, Texas Mill Supply & Manufacturing, Inc., Hughes Supply, Inc. and McMaster-Carr Supply Company. The Company believes that it provides value to its customers by offering a wide selection of products at a variety of price-points and by reliably servicing customer needs. MERCHANDISING AND MARKETING The Company was the first in the long handle tool segment of the non-powered lawn and garden industry to successfully implement sophisticated merchandising and marketing programs. The Company's merchandising programs are designed to (i) create brand identification among goods historically treated as commodities and (ii) increase retail sales while reducing the amount of sales support needed from the retailer's employees. The Company uses innovative product labeling and point-of-sale signage and racking to highlight the comparative value and quality of products within and among the Company's brands. Products within the Company's Union, Scotts and Perfect Cut lines are merchandised using the Company's trademarked "Good/Better/Best" format. Where adequate shelf-space is available, the Company also merchandises its brands together, from the Company's opening price-point Yard 'n Garden brand to its best-quality Razor-Back brand, utilizing a similar value positioning technique. The Company believes that its merchandising strategy facilitates comparison shopping and encourages consumers to purchase higher price-point products. Where applicable, the Company provides its customers with merchandising plan-o-grams. The Company also provides its customers with custom designed product displays complete with informative signs and other "wall-talkers" to answer consumer questions without the help of the retailer's sales staff. The Company primarily uses cooperative advertising to promote its products to consumers. SALES The Company's sales force is divided into five regions, each led by a regional manager. The regional manager supervises a sales force consisting of 14 direct sales professionals who are employed by the Company. In addition, the Company utilizes 23 manufacturers' representative agencies who also report to the regional managers. The manufacturers' representatives also sell lawn and garden products for other manufacturers, but 31 33 not products that compete with the Company's products. Company management and senior sales professionals regularly call on the Company's significant customers, while the manufacturing representatives provide store level support. The Company's sales professionals are compensated with a base salary and bonuses based upon a formula that rewards them for individual performance against an established quota, as well as Company-wide sales and earnings targets. DISTRIBUTION AND LOGISTICS Customer orders arrive at the Company's headquarters in Columbus, Ohio and are processed centrally. If the Company can fill the order from the current stock of finished goods, the order is forwarded to one of the Company's three distribution centers for shipment based on proximity and availability. The Company maintains distribution centers in La Mirada, California, Columbus, Ohio and Frankfort, New York. The Company owns or leases a fleet of three tractors and 15 trailers for transporting products between its manufacturing and distribution facilities. Common carriers are used for shipping finished products from warehouses to customer delivery points. The Company uses a computerized management information and control system which allows the Company to determine the status of customer orders and enables the Company to process the orders quickly, respond to customer inquiries and adjust shipping schedules to meet customer requirements. Within this system, the Company uses an electronic data interchange system that enables customers, through computerized telephone communications, to place orders directly with the Company. The Company believes that these systems enable efficient order processing, expedite shipments and improve customer service. The Company also provides its customers with the service of pre-ticketing and bar-coding its products in accordance with customer specifications. MANUFACTURING The production of non-powered lawn and garden tools is an extensive manufacturing and assembly process that involves several different technologies, including sawmill operations, wood finishing, heavy gauge forging, stamping, grinding and metal painting. The complexity of certain tasks and the coordination of the various steps of the manufacturing process have been developed by the Company over the last 100 years. At the Company's Columbus, Ohio and Frankfort, New York manufacturing facilities, steel components undergo hot and cold stamping and hot forging or welding, depending on the type of tool head being produced. The metal is then cleaned by grinding and polishing the shaped steel heads. The steel components then are painted using various techniques depending on product type and product material. The Company operates its own water based paint manufacturing process which is used for all steel tool components. Some steel components undergo additional finishing steps such as anodization or immersion in special chemical baths. At the Company's eight saw mills, ash logs are cut into flitches, then into squares and finally into rounds. The rounds, which have diameters of one to two inches depending on the finished product requirements, then are inspected to remove defects. The end product of this process is a green ash dowel that is then shipped to either the Company's Frankfort, New York or Delaware, Ohio sawmill to be kiln dried, cut to length, shaped and turned into a handle. The kiln drying process takes approximately six days and removes enough moisture from the wood to reduce the weight of the original green dowel by approximately 35%. Wood handles undergo chucking, boring, sanding and a finishing process at the Company's Columbus and Frankfort facilities. The inventory of handles maintained at these facilities is a function of both price and seasonal considerations. The assembly of the steel tool head to the handle and packaging take place in the final manufacturing stage. The Company has implemented a seasonally adjusted production schedule in order to maximize its inventories of finished goods. Production is increased during December through March, the Company's busiest season, and lowered during the summer and fall seasons. RAW MATERIALS The primary raw materials used to produce the Company's products are steel, plastics and ash wood. 32 34 Steel. The Company purchases its steel requirements from several domestic suppliers. The primary considerations in specialty steel sourcing are metallurgy, price and width. The Company has strong and long established relationships with its steel suppliers and has never experienced sourcing problems. The Company does not enter into long-term contracts with regard to any of its steel purchases. The Company purchased approximately 75% and 17% of its steel requirements from Worthington Steel and Acme Steel Corporation, respectively, in fiscal 1996 and approximately 69% and 19%, respectively, from such suppliers in the six months ended January 31, 1997. The Company has had relationships with these suppliers in excess of 15 and 7 years, respectively. Plastics. The Company has selected specially formulated plastics and resins for use in its tools. Plastic tool heads historically have been produced by six outside injection molders (including the former owner of the injection molding facility that the Company recently acquired), utilizing molds developed and owned by the Company. The Company intends to use its new facility to manufacture proprietary custom molded products and component parts for other manufacturers and distributors, as well as to manufacture plastic components used in the Company's products. The Company does not enter into any long-term contracts with regard to its plastics purchases. Ash Wood. Ash is the ideal hardwood for handles because it is lightweight, flexible and splinters less than most hardwoods. The Company has wood specialists who maintain relationships with numerous log suppliers and are responsible for sourcing the Company's ash needs. The Company believes that it will continue to be able to obtain sufficient quantities of ash. The Company typically maintains a six to eight week inventory of ash at each of its sawmills to cover occasional short-term fluctuations in supply. The Company imports ramin wood handles for some of its promotionally priced Yard 'n Garden brand products, such as rakes and hoes. Ramin wood is less expensive than ash and is of sufficient quality for tools (other than shovels) designed for opening-price-point levels. FACILITIES The Company's headquarters and executive offices, located in Columbus, Ohio, occupy approximately 31,000 square feet in a facility owned by the Company. As of April 16, 1997, the other principal properties owned or leased by the Company for use in its business are set forth below. DISTRIBUTION FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET ------------------------------------------------------- --------- ------- Columbus, Ohio......................................... Leased 170,000 Frankfort, New York(1)................................. Owned 31,000 La Mirada, California.................................. Leased 19,000
MANUFACTURING FACILITIES
OWNED SQUARE LOCATION OR LEASED FEET ------------------------------------------------------- --------- ------- Columbus, Ohio(2)...................................... Owned 165,000 Frankfort, New York(1)................................. Owned 351,000 Hebron, Ohio........................................... Owned 170,000
33 35 SAWMILLS
OWNED SQUARE LOCATION OR LEASED FEET ------------------------------------------------------- --------- ------- Beverly, West Virginia................................. Owned 5,100 Cookeville, Tennessee.................................. Owned 12,000 Delaware, Ohio......................................... Owned 56,000 Frankfort, New York(1)................................. Owned 39,000 Huntington, Indiana.................................... Owned 7,500 Lebanon, Kentucky...................................... Owned 13,500 Portville, New York.................................... Owned 15,000 Shippenburg, Pennsylvania.............................. Owned 15,000
- --------------- (1) The Company's 421,000 square foot Frankfort, New York facility is comprised of a distribution center, a manufacturing facility and a sawmill. The Company also maintains approximately 20,000 square feet of office space in this facility. (2) The Company's 196,000 square foot Columbus, Ohio headquarters consists of the Company's executive offices and a manufacturing facility. The Company believes that its existing manufacturing facilities, distribution centers and sawmills are adequate for the current level of the Company's operations. The Company believes that its manufacturing facilities have sufficient excess capacity to accommodate a 35% to 50% increase in current levels of output. The Company believes that its current sawmill capacity is sufficient to accommodate up to a 30% increase in current levels of output. EMPLOYEES As of April 16, 1997, the Company employed approximately 780 people (including seasonal employees), approximately 570 of whom were paid on an hourly basis. The Company's staffing requirements fluctuate during the year as a result of the seasonality of the lawn and garden industry, adding approximately 100 to 200 additional seasonal employees in the third quarter. The average tenure of the Company's hourly employees is in excess of 15 years. Hourly employees at the Company's Columbus, Ohio manufacturing facility and distribution center and Delaware, Ohio sawmill are represented by the International Association of Machinists (the "IAM"). Hourly employees at the Company's Frankfort, New York facilities are represented by the International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers (the "IBB"). Hourly employees at the Company's Portville, New York sawmill are represented by the International Brotherhood of Teamsters (the "IBT"). Hourly employees at the Company's Hebron, Ohio injection molding facility are represented by the Glass, Molders, Pottery, Plastics & Allied Workers International Union AFL-CIO (the "AGM"). The Company's contracts with the IAM, the IBB, the IBT and the AGM expire in March 1999, May 1998, August 1999 and February 1999, respectively. No other employees of the Company are represented by unions. The Company has not been subject to a strike or work stoppage in over 20 years and believes that its relationships with its employees, the IAM, the IBB, the IBT and the AGM are good. PATENTS AND TRADEMARKS The Company's success and ability to compete are dependent to a significant degree on its patents and trademarks. The Company registers its patents and trademarks in the United States Patent and Trademark Office and the patent and trademark offices of certain other countries and intends to continue to do so as new patents and trademarks are developed or acquired. The Company's trademarks include the Lady Gardener, Perfect Cut, Pro Force, Razor-Back, Union, Union Pro and Yard 'n Garden brand names. In addition, the Company holds trademarks on various configurations of its Good/Better/Best product labels and signage. In July 1992, the Company obtained the exclusive right to manufacture, distribute and market in the U.S. and Canada an extensive line of lawn and garden tools under the Scotts brand name. The Company pays certain 34 36 royalties to The Scotts Company, the owner of the Scotts trademark, pursuant to a license agreement. The current term of the license agreement expires in August 1998 and, subject to certain conditions, is automatically renewed for successive three year periods. COMPETITION All aspects of the lawn and garden industry, including attracting and retaining customers and pricing, are highly competitive. The Company competes for customers in this industry with large consumer product manufacturers and numerous other companies that produce specialty home and garden products, as well as with foreign manufacturers that export their products to the U.S. Many of these competitors are larger and have significantly greater financial resources than the Company. In the long handle tool segment of the industry, the Company competes primarily with Ames Company, Inc. and True Temper Hardware Company, Inc. The Company has increased its market share in the long handle tool segment of the industry to approximately 28% in 1996 from approximately 16% in 1991. The Company believes that it currently has the second largest market share in the long handle tools segment of the industry. The Company believes that Ames currently has the largest market share in the long handle tools segment of the industry (approximately 43%) and that True Temper currently has the third largest in this segment of the industry (approximately 15%). ENVIRONMENTAL MATTERS The Company is subject to various Federal, state, and local environmental laws, ordinances and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and wastes. The Company has made, and will continue to make, expenditures to comply with these environmental requirements and regularly reviews its procedures and policies for compliance with environmental laws. The Company also has been involved in remediation actions with respect to certain of its facilities. Amounts expended by the Company in such compliance and remediation activities have not been material to the Company. However, current conditions and future events, such as changes in existing laws and regulations, may give rise to additional compliance or remediation costs that could have a material adverse effect on the Company's business, financial condition or results of operations. Furthermore, as is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. At January 31, 1997 the Company had a reserve for environmental remediation of $451,000. The actual cost of remediating environmental conditions may be different than that accrued by the Company due to the difficulty in estimating such costs and due to potential changes in the status of legislation. The Company does not maintain an insurance policy for environmental matters. LITIGATION The Company from time to time is involved in routine litigation incidental to the conduct of its business. Management believes that no currently pending litigation to which the Company is a party will have a material adverse effect on its financial position or results of operations. 35 37 DESCRIPTION OF MCGUIRE-NICHOLAS Founded in 1932, McGuire-Nicholas is a leader in the worldwide leather, canvas and manmade fabric tool holder and work apron market. McGuire-Nicholas designs, manufactures and markets construction aprons, nail and tool bags, tool pouches, tool holders, work and support belts and knee pads. The McGuire- Nicholas brand set the design and quality standards for the industry and enjoys high name recognition with professional and serious DIY consumers. McGuire-Nicholas leads the industry in market share among industrial and professional end users and has the second leading market share among DIY consumers. McGuire-Nicholas sells its products through market leaders in all hardware distribution channels, including mass merchants, home centers, buying groups, distributors, industrial retailers and club stores. McGuire-Nicholas' merchandising and marketing strategy is focused on brand management, increased penetration of certain specified distribution channels and satisfying customer needs. McGuire-Nicholas, has developed innovative new products, packaging and customer specific merchandising programs and provides retail service and support through plan-o-gram services, custom flyers and circulars. McGuire-Nicholas participates in distribution channel and customer specific advertising and promotional events, including "best buy" and "item-of-the-month" specials and special promotions using custom packaging. McGuire-Nicholas' manufacturing process largely is comprised of cutting, sewing and riveting. Leather or canvas is transported from an adjacent warehouse to the cutting floor, where workers cut the raw material to size and shape. After cutting, the material is sewn and riveted to form the finished product. Finished items are packaged on the premises. The principal raw materials used in McGuire-Nicholas' products consist of tanned leather, Cordura, canvas, nylon, webbing for belts, rivets and other hardware. McGuire-Nicholas does not engage in leather tanning. McGuire-Nicholas manufactures and distributes its products worldwide out of a 72,000 square foot leased facility in Los Angeles, California. It currently is in the process of moving a portion of its manufacturing facilities to Tecate, Mexico. It employs approximately 300 non-union employees with an average tenure in excess of 10 years. In December 1996 McGuire-Nicholas entered into a Loan and Credit Facility (the "Loan Facility"). The Loan Facility is comprised of (i) a $9.25 million revolving facility, (ii) a $250,000 term loan and (iii) a $500,000 non-revolving capital expenditure facility to purchase new equipment. All borrowings made under the Loan Facility bear interest at the rate of 1% over the Prime Rate (as defined in the Loan Facility). The Loan Facility is secured by, among other things, all of McGuire-Nicholas' accounts, general intangibles, securities, inventory and equipment. Neither Acorn nor UnionTools is a party to the Loan Agreement, either as principal or guarantor. 36 38 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position of each of the directors of Acorn and the executive officers of the Company. Each director of Acorn will hold office until the next annual meeting of stockholders of Acorn or until his successor has been elected and qualified. The executive officers of Acorn and UnionTools are appointed by the Boards of Directors of Acorn and UnionTools, respectively, and serve at the discretion of such Boards of Directors.
NAME AGE POSITION - ------------------------------------------- ---- ------------------------------------------- Gabe Mihaly................................ 49 President, Chief Executive Officer and Director of Acorn and UnionTools James B. Farland........................... 58 Vice President -- Sales and Marketing of UnionTools Thomas A. Hyrb............................. 53 Vice President -- Operations of UnionTools Stephen M. Kasprisin....................... 43 Chief Financial Officer and Vice President of Acorn and Union Tools Conor D. Reilly............................ 45 Chairman of the Board and Director of Acorn and UnionTools William W. Abbott.......................... 65 Director of Acorn Matthew S. Barrett......................... 37 Director of Acorn Stephen A. Kaplan.......................... 38 Director of Acorn John I. Leahy.............................. 66 Director of Acorn
Gabe Mihaly became President and Chief Executive Officer of UnionTools in May 1991 and President, Chief Executive Officer and a director of Acorn in August 1996. From October 1986 to May 1991, Mr. Mihaly was a partner at Ernst & Young, where he provided consulting services to senior executives in the areas of strategy, cost and operations management, performance and competitive analysis and turnaround management. James B. Farland became Vice President Sales and Marketing of UnionTools in March 1992. From October 1990 to March 1992, Mr. Farland was Vice President National Accounts of Poulan/Weedeater. From March 1988 to October 1990, Mr. Farland was Vice President Sales and Marketing of Allegratti Co. until its acquisition by Poulan/Weedeater. Thomas A. Hyrb became Vice President Operations of UnionTools in August 1991. From September 1982 to July 1991, Mr. Hyrb was Director of Quality Assurance and Plant Manager of True Temper. From May 1966 to August 1982, Mr. Hyrb held various manufacturing and engineering management positions with Clarke (a division of McGraw Edison), Roper Corporation and Allis Chalmers. Stephen M. Kasprisin became Chief Financial Officer and Vice President of Acorn in February 1989 and Chief Financial Officer and Vice President of UnionTools in January 1994. From January 1981 to February 1989, Mr. Kasprisin held various financial positions with certain private enterprises. From June 1976 to January 1981 Mr. Kasprisin was employed by Coopers & Lybrand, certified public accountants. Conor D. Reilly became Chairman and a director of Acorn and UnionTools in August 1996. Mr. Reilly has been a partner at Gibson, Dunn & Crutcher LLP since January 1989. Mr. Reilly served as Vice Chairman of Memorex-Telex N.V. in 1992 and 1993 and has been a director of John Deere Insurance Group, Inc. since August 1992. William W. Abbott became a director of Acorn in January 1997. Mr. Abbott currently is self-employed as a business consultant. From August 1989 to January 1995, Mr. Abbott served as Senior Advisor to the United Nations Development Programme. In 1989, Mr. Abbott retired from 35 years of service at Procter & Gamble, as a Senior Vice President in charge of worldwide sales and other operations. From April 1982 to April 1994 37 39 Mr. Abbot served as a member of the Board of Directors of Armstrong World Industries. He currently serves as a member of the Board of Directors of Horace Mann Educators Corporation, Fifth Third Bank of Naples, Florida, a member of the Advisory Board of Deloitte & Touche LLP, a member of the Advisory Board of Manco, a member of the Board of Overseers of the Duke Cancer Center and an Executive in Residence of Appalachian State University. Matthew S. Barrett became a director of the Company in December 1993. Mr. Barrett is a managing director of Oaktree. Prior to joining Oaktree, from 1991 to April 1995, Mr. Barrett was Senior Vice President of TCW Asset Management Company. Stephen A. Kaplan became a director of Acorn in December 1993. Mr. Kaplan is a principal of Oaktree, where he runs the Principal Activities Group. Prior to joining Oaktree, from November 1993 to April 1995, Mr. Kaplan was a managing director of Trust Company of the West and was portfolio manager of The Principal Fund. From January 1991 to October 1993, Mr. Kaplan was a partner at Gibson, Dunn & Crutcher LLP. Mr. Kaplan currently serves as a member of the Board of Directors of Chief Auto Parts, Inc., Stratagene Holding Corporation, Decorative Home Accents, Inc. and KinderCare Learning Centers, Inc. John I. Leahy became a director of the Company in August 1994. Mr. Leahy has been the President of Management & Marketing Associates, a management consulting firm owned by Mr. Leahy, since 1987. In 1987, Mr. Leahy retired after 34 years of service at the Black & Decker Corporation, where he was President and Group Executive, Western Hemisphere. Mr. Leahy currently serves as a director of Allied Capital Corporation II, Motorvac Technologies, Inc. and several privately held companies. Mr. Leahy is a Trustee of Loyola College of Maryland and St. Mary's University. COMMITTEES OF THE BOARD OF DIRECTORS In March, 1997 Acorn created a Management Development and Compensation Committee (the "Compensation Committee") and an Audit Committee (the "Audit Committee"). Messrs. Abbott (Chairman), Kaplan and Reilly were appointed to the Compensation Committee and Messrs. Leahy (Chairman) and Barrett were appointed to the Audit Committee. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to March 1997, Acorn did not have a compensation committee. The full Board of Directors of Acorn participated in deliberations concerning compensation of executive officers of the Company during fiscal 1996. None of the executive officers of Acorn served on the board of directors or on the compensation committee of any other entity, any of whose officers served either on the Board of Directors or on the compensation committee of Acorn. DIRECTOR COMPENSATION Directors who are employees of the Company receive no compensation for serving as directors. Non-employee directors receive annual compensation of $30,000, plus reimbursement of reasonable out-of-pocket expenses. Non-employee directors can elect to have all of their annual compensation paid in shares of Common Stock pursuant to the Director Stock Plan or one-half paid in cash and one-half paid in shares of Common Stock pursuant to the Director Stock Plan. 38 40 EXECUTIVE COMPENSATION The following summary compensation table sets forth information concerning the annual and long-term compensation earned by Acorn's chief executive officer and each of the four other most highly compensated executive officers of the Company whose annual salary and bonus during fiscal 1996 exceeded $100,000 (the "Named Officers"). All compensation was paid by UnionTools.
ANNUAL COMPENSATION -------------------- FISCAL ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) - ------------------------------------------------ ------ -------- ------- --------------- Gabe Mihaly(2).................................. 1996 $296,181 $14,000 $12,986 President and Chief Executive Officer of Acorn and UnionTools James B. Farland................................ 1996 181,482 49,450 9,470 Vice President Sales and Marketing of UnionTools Thomas A. Hyrb.................................. 1996 159,966 46,500 51,752 Vice President Operations of UnionTools Stephen M. Kasprisin............................ 1996 164,642 46,359 11,887 Chief Financial Officer and Vice President of Acorn and UnionTools Joseph J. Duffy(2).............................. 1996 405,233 -- 20,852 President and Chief Executive Officer of Acorn
- --------------- (1) Amounts shown include $4,500 of matching benefits paid under the Company's defined contribution 401(k) plan and other miscellaneous cash benefits, but do not include retirement benefits under the Company's Salaried Employee Pension Plan or Supplemental Pension Plan. See "-- Pension Plans". The amounts shown for Messrs. Duffy and Mihaly include $4,200 and $2,553, respectively, paid by the Company with respect to supplementary life insurance for the benefit of Messrs. Duffy and Mihaly. The amount shown for Mr. Duffy also includes $6,850 paid by the Company with respect to disability income insurance for the benefit of Mr. Duffy. The amount shown for Mr. Hyrb includes $43,454 paid by the Company with respect to relocation expenses. (2) Mr. Duffy was Chairman of the Board, President and Chief Executive Officer of Acorn until August 1, 1996. Mr. Mihaly became President and Chief Executive Officer and Mr. Reilly became Chairman of the Board of Acorn immediately thereafter. 39 41 The following table contains certain information regarding options to purchase Common Stock held as of August 2, 1996 by each of the Named Officers. None of such Named Officers exercised any options during fiscal 1996.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END(1) ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------- ----------- ------------- ----------- ------------- Gabe Mihaly................................ (2) $ 140,000 $0(2) James B. Farland........................... -- -- -- -- Thomas A. Hyrb............................. -- -- -- -- Stephen M. Kasprisin....................... -- -- -- -- Joseph J. Duffy............................ $ 192,500 --
- --------------- (1) Calculated on the basis of $ per share, the fair market value of the Common Stock at August 2, 1996, as determined by the Board of Directors, less the exercise price payable for such shares. (2) Following August 2, 1996, options exercisable for shares of Common Stock vested at an exercise price of $ and options exercisable for shares of Common Stock expired. Upon consummation of the Offering, options exercisable for of such shares vest at an exercise price of $0 per share and the remaining options expire. PENSION PLANS UnionTools maintains five noncontributory defined benefit pension plans covering substantially all of the hourly employees of the Company. UnionTools also maintains a noncontributory defined benefit pension plan covering salaried, administrative and supervisory employees of the Company (the "Salaried Employee Pension Plan") and a supplemental noncontributory defined benefit pension plan covering certain senior executive officers of the Company (the "Supplemental Pension Plan"). The following table sets forth the estimated annual benefits payable upon retirement under the Salaried Employee Pension Plan based on retirement at age 65 and fiscal 1996 covered compensation.
YEARS OF SERVICE ----------------------------------------------------------- REMUNERATION(1) 15 20 25 30 35 - ------------------------------------- ------- ------- ------- ------- ------- $125,000............................. $42,187 $56,250 $70,313 $70,313 $70,313 150,000 and above................... 50,625 67,000 84,375 84,375 84,375
- --------------- (1) Based on final earnings. For each Named Officer, the Salaried Employee Pension Plan covers total compensation as listed in the summary compensation table, but limited to $150,000 as required by the Employee Retirement Income Security Act of 1974. Messrs. Mihaly, Farland, Hyrb and Kasprisin have credited service of approximately 5, 4, 5 and 7 years, respectively, under the Salaried Employee Pension Plan. Mr. Duffy had credited service of approximately 6 years under the Salaried Employee Pension Plan at the time of termination of his employment with Acorn. Benefits under the Salaried Employee Pension Plan are based on years of credited service and final earnings (the highest average monthly earnings over any 60 consecutive calendar month period in the 120 calendar months preceding retirement or termination of employment). Monthly benefits are paid under the Salaried Employee Pension Plan in an amount equal to 2.25% of the employees' final earnings multiplied by the lesser of 25 years or the total number of years of credited service. Benefits under the Salaried Employee Pension Plan for credited years of service prior to 1993 were determined pursuant to a formula that yielded slightly lower benefits. Accordingly, actual benefits for each of the Named Officers are slightly lower than the amounts indicated in the foregoing table. The Company's policy is to fund the maximum amount deductible for federal income tax purposes. Benefits under the Salaried Employee Pension Plan are not subject to any offset. 40 42 The following table sets forth the estimated annual benefits payable upon retirement under the Supplemental Pension Plan based on retirement at age 65 and fiscal 1996 covered compensation.
YEARS OF SERVICE ----------------------------------------------------------- REMUNERATION(1) 15 20 25 30 35 - ------------------------------------- ------- -------- -------- -------- -------- $175,000............................. $ 8,437 $ 11,250 $ 14,063 $ 14,063 $ 14,063 200,000............................. 16,875 22,500 28,125 28,125 28,125 225,000............................. 25,313 33,750 42,188 42,188 42,188 250,000............................. 33,750 45,000 56,250 56,250 56,250 300,000............................. 50,625 67,500 84,375 84,375 84,375 400,000............................. 84,375 112,500 140,625 140,625 140,625
- --------------- (1) Based on final earnings. For Messrs. Mihaly and Duffy, the Supplemental Pension Plan covers compensation as listed in the summary compensation table above $150,000. Mr. Mihaly has credited service of approximately 6 years under the Supplemental Pension Plan. Mr. Duffy had credited service of approximately 6 years under the Supplemental Pension Plan at the time of termination of his employment with Acorn. Benefits under the Supplemental Pension Plan are based on years of credited service and final earnings (the highest average monthly earnings over any 60 consecutive calendar month period in the 120 calendar months preceding retirement or termination of employment). Monthly benefits are paid under the Salaried Employee Pension Plan in an amount equal to 2.25% of the employees' final earnings (as described above) multiplied by the lesser of 25 years or the total number of years of credited service. Benefits under the Supplemental Pension Plan are not subject to any offset. AGREEMENTS WITH KEY EMPLOYEES The Company has entered into an employment agreement with Mr. Mihaly which provides for his employment as the President and Chief Executive Officer of Acorn and UnionTools. The agreement has a five year term and automatically is extended for successive one-year periods thereafter unless notice is given at least 90 days, if by Mr. Mihaly, or three years, if by the Company, prior to expiration of the then-current term. Mr. Mihaly's employment agreement provides for a base salary of $275,000 per year, a bonus of $260,000 if Mr. Mihaly is employed by the Company on January 5, 1998, an annual cash bonus in an amount to be determined by the Board of Directors of Acorn and certain additional benefits, including participation in pension, health and other employee benefits plans of the Company. Mr. Mihaly's employment agreement also provides that if Mr. Mihaly's employment is terminated by the Company without cause (as defined in the agreement) or if Mr. Mihaly resigns due to a material diminution in his responsibilities, a material breach by the Company of its obligations under the agreement or for certain other stated reasons (collectively, "Termination"), the Company is required to make a lump sum payment to Mr. Mihaly in an amount equal to the full cash compensation due through the remaining term of the agreement. In addition, Mr. Mihaly will be treated for purposes of pension and related plans as having been employed by the Company through the end of the then-current term of the agreement. If such Termination occurs within two years following a change in control of the Company (as defined in the agreement), the Company also is required to pay to Mr. Mihaly an amount equal to three times the highest aggregate annual compensation (including salary, bonuses and incentive payments) includable in gross income paid to Mr. Mihaly during any one of the three taxable years preceding the date of the Termination. The Company has entered into an agreements with each of Messrs. Farland, Hyrb and Kasprisin which provide that following the Termination of such officers' employment with the Company, the Company will pay to such employee an amount equal to the highest aggregate annual compensation (including salary, bonuses and incentive payments) includable in gross income paid to such employee during any one of the three taxable years preceding the date of his Termination. If such Termination occurs within two years following a change in control of the Company (as defined in such agreement), the Company will instead pay to such employee an amount equal to three times the amount described in the preceding sentence. 41 43 1997 STOCK INCENTIVE PLAN In April 1997, Acorn adopted the Incentive Plan for members of senior management and certain other officers and employees of the Company. The purpose of the Incentive Plan is to provide incentives to employees of the Company by granting awards tied to the performance of the Common Stock. The Incentive Plan is administered by the Compensation Committee, which has broad authority in administering the Incentive Plan. Awards to employees may take the form of options, stock appreciation rights or sales or grants of restricted stock. Options granted under the Incentive Plan may be options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or options not intended to so qualify. An award granted to an employee under the Incentive Plan may include a provision terminating the award upon termination of employment under certain circumstances or accelerating the receipt of benefits upon the occurrence of certain specified events. All awards granted under the Incentive Plan immediately vest upon the occurrence of a change in control of the Company, as defined in the Incentive Plan. Acorn has reserved an aggregate of shares of Common Stock for issuance under the Incentive Plan. There are awards currently outstanding under the Incentive Plan. Acorn has approved the grant of the following options under the Incentive Plan contingent upon the consummation of the Offering:
NUMBER OF SHARES NAME SUBJECT TO OPTIONS ----------------------------------------------------- ------------------ Gabe Mihaly.......................................... James B. Farland..................................... Thomas A. Hyrb....................................... Stephen M. Kasprisin................................. Conor D. Reilly......................................
The exercise price for each such option will equal the initial public offering price per share in the Offering. Upon consummation of the Offering, 25% of each officer's options vest, with an additional 25% vesting annually over the next three years. DIRECTOR STOCK PLAN In April 1997, Acorn adopted the Director Stock Plan. The purpose of the Director Stock Plan is to increase the proprietary interest in Acorn of non-employee members of the Board of Directors by providing for payment of all or one half of their fees in the form of common stock units, thereby increasing their incentive to contribute to the success of the Company. The Director Stock Plan is administered by an Administrative Committee comprised of the Chief Financial Officer and Secretary of Acorn. The Director Stock Plan is intended to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Only non-employee directors are eligible to participate in the Director Stock Plan. The number of shares of Common Stock reserved for issuance pursuant to the Director Stock Plan is . In lieu of cash, non-employee directors can elect to receive all or one-half of their fees in the form of common stock units. The number of common stock units issued is determined by dividing (i) an amount equal to the dollar amount of the fees to be received in the form of common stock units by (ii) the average of the high and low sale prices of the Common Stock on the Nasdaq National Market on the last business day preceding the date of payment. Any cash or stock dividends payable on shares of Common Stock accrue for the benefit of the directors in the form of additional common stock units. Common stock units are distributed to non-employee directors in the form of Common Stock following the director's resignation from the Board of Directors. Each non-employee director may elect to receive the Common Stock distributed pursuant to common stock units either (a) immediately following his or her resignation from the Board of Directors or (b) in annual installments over a period of time following such resignation. In addition, common stock units are distributed to directors in the form of Common Stock following the death of the director or a change in control of Acorn, as defined in the Director Stock Plan. 42 44 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of April 16, 1997, by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of the Common Stock; (ii) each director and Named Officer and (iii) all executive officers and directors as a group. Unless otherwise indicated, each person has sole voting power and investment power with respect to the shares attributed to them.
BENEFICIAL OWNERSHIP(1) ----------------------------------------------- AFTER THE OFFERING PRIOR TO THE OFFERING AND THE EXCHANGE(2) --------------------- --------------------- NUMBER OF NUMBER OF NAME OF BENEFICIAL OWNER(3) SHARES PERCENT SHARES PERCENT - ---------------------------------------------------- --------- ------- --------- ------- The TCW Group, Inc.(4).............................. 96.5% Oaktree Capital Management, LLC(5).................. -- -- The OCM Principal Opportunities Fund, LLC........... -- -- Joseph J. Duffy(6).................................. 2.2 Gabe Mihaly(7)...................................... 2.8 * James B. Farland.................................... -- -- (8) * Thomas A. Hyrb...................................... -- -- (9) * Stephen M. Kasprisin................................ -- -- (10) * Conor D. Reilly..................................... -- -- (11) * William W. Abbott................................... -- -- (12) * Matthew S. Barrett(13).............................. -- -- Stephen A. Kaplan(14)............................... -- -- John I. Leahy....................................... * (15) * All directors and executive officers as group (9 people)(16)....................................... 3.8
- --------------- * Less than 1% (1) As used in this table, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise has or shares (i) the power to vote, or direct the voting of, such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. In addition, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days. (2) Assumes the issuance of an aggregate of shares of Common Stock pursuant to the Exchange (giving effect to the Exchange as of January 31, 1997 and at an assumed initial public offering price of $ , the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus). (3) The address of the TCW Group is 865 South Figueroa Street, Los Angeles, California 90017. The address of Oaktree, the Oaktree Fund, Mr. Barrett and Mr. Kaplan is 550 South Hope Street, 22nd Floor, Los Angeles, California 90071. The address of Mr. Duffy is [1077 Old County Road, Severna Park, Maryland 21146]. The address for Messrs. Mihaly, Farland, Herb, Kasprisin and Reilly is c/o Acorn Products, Inc., 500 Dublin Avenue, Columbus, Ohio 43216. The address of Mr. Abbott is [6923 Greentree Drive, Naples, Florida 33963.] The address of Mr. Leahy is c/o Management & Marketing Associates, 30 East Padonia Road, Timonium, Maryland 21093. (4) All such shares of Common Stock are owned by (i) TCW Special Credit Fund III ( shares), (ii) TCW Special Credits Fund IIIb ( shares), (iii) TCW Special Credits Plus Fund ( shares), (iv) TCW Special Credits Trust IIIb ( shares), (v) TCW Special Credits Fund IV ( shares), (vi) TCW Special Credits Trust ( shares), (vii) TCW Special Credits, as investment manager of Weyerhaeuser Company Pension Trust, (viii) TCW Special Credits Trust IV ( shares), (ix) TCW Special Credits Trust IV a ( shares), (x) TCW 43 45 Special Credits, as investment manager of Delaware State Employees' Retirement Fund and (xi) TCW Special Credits, as investment manager of The Common Fund for Bond Investments, each of which is managed by affiliates of the TCW Group. (5) All of such shares of Common Stock are owned by the Oaktree Fund. (6) Includes shares of Common Stock issuable pursuant to options. (7) Includes shares of Common Stock issuable pursuant to options currently held by Mr. Mihaly. After the Offering and the Exchange includes shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (8) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (9) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (10) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering. (11) Reflects shares of Common Stock issuable pursuant to options granted under the Incentive Plan contingent upon the consummation of the Offering and shares of Common Stock to be held pursuant to the Director Stock Plan following the consummation of the Offering. (12) Reflects shares of Common Stock to be held pursuant to the Director Stock Plan following the consummation of the Offering. (13) Includes shares of Common Stock owned by the Oaktree Fund and also shown as beneficially owned by Oaktree. To the extent that Mr. Barrett, on behalf of Oaktree, participates in the process to vote or dispose of any such shares, he may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares of Common Stock. Mr. Barrett disclaims beneficial ownership of such shares of Common Stock. After the Offering and the Exchange also includes shares of Common Stock to be held pursuant to the Director Stock Plan following the consummation of the Offering. (14) Includes shares of Common Stock owned by the Oaktree Fund and also shown as beneficially owned by Oaktree. To the extent that Mr. Kaplan, on behalf of Oaktree, participates in the process to vote or dispose of any such shares, he may be deemed under such circumstances for the purpose of Section 13 of the Exchange Act to be the beneficial owner of such shares of Common Stock. Mr. Kaplan disclaims beneficial ownership of such shares of Common Stock. After the Offering and the Exchange also includes shares of Common Stock to be held pursuant to the Director Stock Plan following the consummation of the Offering. (15) Reflects shares of Common Stock to be held pursuant to the Director Stock Plan following the consummation of the Offering. (16) See notes (6) through (15) above. 44 46 CERTAIN TRANSACTIONS In December 1993 and May 1994 the Company issued the Subordinated Notes in the aggregate principal amount of approximately $31.4 million to the TCW Funds. The Subordinated Notes mature in July 2003 and bear interest at a rate of 13% per year. In August 1996 the Company issued 100 shares of Series A Preferred Stock with an aggregate stated value of approximately $8.6 million to the TCW Funds as payment in full of accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. As of January 31, 1997, the aggregate principal amount of the Subordinated Notes and accrued interest thereon was approximately $33.5 million and the aggregate liquidation value of the Series A Preferred Stock was approximately $9.2 million. The Company intends to use approximately $ million of the estimated net proceeds of $ million from the Offering to redeem the Series A Preferred Stock and pay accumulated dividends thereon and to repay a portion of the indebtedness outstanding under the Subordinated Notes and accrued interest thereon. Pursuant to the Exchange, concurrent with the consummation of the Offering the TCW Funds will exchange remainder of the Subordinated Notes for a number of shares of Common Stock equal to the remaining aggregate principal amount of the Subordinated Notes and accrued interest thereon (approximately $ million giving effect to the Offering and the application of the net proceeds therefrom as of January 31, 1997) divided by the per share Price to Public set forth on the cover page of this Prospectus. As of January 31, 1997 and at an assumed initial public offering price of $ , the mid-point of the range of initial public offering prices set forth on the cover page of this Prospectus, the TCW Funds would receive an aggregate of shares of Common Stock pursuant to the Exchange. See "Risk Factors -- Control by Principal Stockholders" and "Use of Proceeds". In December 1996 the Company issued a subordinated promissory note to the TCW Funds in the aggregate principal amount of $6 million and bearing interest at a rate of 13% per year as bridge financing. In December 1996 the Company paid $6.3 million to the TCW Funds in prepayment of the subordinated promissory note, accrued interest thereon and a $180,000 facility fee. Conor D. Reilly, Chairman of the Board of Acorn and a director of Acorn and UnionTools, is a partner in the law firm of Gibson, Dunn & Crutcher LLP. The Company paid fees of approximately $774,280 and $689,940 to Gibson, Dunn & Crutcher LLP in fiscal 1996 and the six months ended January 31, 1997, respectively. In fiscal 1996 John I. Leahy, a director of Acorn, received fees in the aggregate amount of $15,500 for consulting services rendered to the Company. In connection with Joseph J. Duffy's resignation as the Chairman of the Board, President and Chief Executive Officer of Acorn on August 1, 1996, upon consummation of the Offering Mr. Duffy will receive accelerated payments in the aggregate amount of $574,942 for certain consulting services rendered to the Company. Mr. Duffy also is entitled to certain pension benefits. See "Management -- Executive Compensation -- Pension Plans". From time to time, the Company extends loans to certain officers and directors in connection with the purchase of Common Stock. In January 1994, Mr. Mihaly, the President, Chief Executive Officer and a director of Acorn and UnionTools, received a loan from UnionTools in the aggregate principal amount of $245,000. The loan matures in January 1998, bears interest at an annual rate of 5.34% and is secured by a pledge of Common Stock. The principal of, and accrued interest on, the loan becomes due upon the occurrence of certain events, including voluntary termination of Mr. Mihaly's employment with the Company. 45 47 DESCRIPTION OF CAPITAL STOCK GENERAL Acorn's authorized capital stock consists of 20 million shares of Common Stock, $.001 par value per share, of which shares are issued and outstanding and 1,000 shares of Preferred Stock, par value $.001 per share, of which 100 shares of Series A Preferred Stock are issued and outstanding. A portion of the net proceeds from the Offering will be used to redeem the Series A Preferred Stock and pay accumulated dividends thereon. See "Certain Transactions". The material terms of Acorn's Amended and Restated Certificate of Incorporation (the "Charter") and bylaws are discussed below. COMMON STOCK Holders of Common Stock are entitled to one vote per share in the election of directors and on all other matters on which stockholders are entitled or permitted to vote. Holders of Common Stock are not entitled to vote cumulatively for the election of directors. Holders of Common Stock have no redemption, conversion, preemptive or other subscription rights. There are no sinking fund provisions relating to the Common Stock. Holders of Common Stock are entitled to receive dividends when and as declared by the Board of Directors of Acorn out of funds legally available therefor. Acorn does not anticipate paying cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy". In the event of the liquidation, dissolution or winding up of Acorn, the holders of Common Stock will be entitled to share ratably in all of the assets of Acorn, if any, remaining after satisfaction of the debts and liabilities of Acorn. The outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, upon payment therefor as contemplated herein, validly issued, fully paid and nonassessable. PREFERRED STOCK Under the Charter, the Board of Directors is authorized, subject to certain limitations prescribed by law, to issue the preferred stock in one or more classes or series and to fix the designations, powers, preferences and relative participation, option or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, the dividend rate, conversion or exchange rights, redemption price and liquidation preference, of any such class or series. In addition, the Board of Directors may fix the number of shares constituting any such class or series, and increase or decrease the number of shares of any such class or series, but not below the number of outstanding shares of any such class or series. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of Acorn. Acorn has no current plans to issue additional shares of preferred stock. See "Risk Factors -- Effect of Certain Charter, Change of Control and Statutory Provisions". CERTAIN PROVISIONS OF DELAWARE LAW Acorn is incorporated under the DGCL. Acorn is subject to Section 203 of the DGCL, which restricts certain transactions and "business combinations" between a Delaware corporation and an "interested stockholder" (in general, a stockholder owning 15% or more of the corporation's outstanding voting stock) or an affiliate or associate of an interested stockholder, for a period of three years from the date the stockholder becomes an interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, unless the transaction is approved by the Board of Directors and the holders of at least 66 2/3% of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder), Section 203 prohibits significant business transactions such as a merger with, disposition of assets to or receipt of disproportionate financial benefits by the interested stockholder, or any other transaction that would increase the interested stockholder's proportionate ownership of any class or series of the corporation's stock. The statutory ban does not apply if, upon consummation of the transaction in which any person becomes an interested stockholder, 46 48 the interested stockholder owns at least 85% of the outstanding voting stock of the corporation (excluding shares held by persons who are both directors and officers or by certain employee stock plans). See "Risk Factors -- Effect of Certain Charter, Change of Control and Statutory Provisions". Acorn's Charter contains certain provisions permitted under the DGCL relating to the liability of directors. The Charter provides that, to the fullest extent permitted by the DGCL, no director of Acorn will be personally liable to Acorn or its stockholders for monetary damages for breach of fiduciary duty as a director. The Charter and Bylaws of Acorn also contain provisions indemnifying the directors, officers and employees of Acorn or individuals serving at the request of Acorn as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by the DGCL. Section 203 and certain provisions of Acorn's Charter and Bylaws described above may make it more difficult for a third party to acquire, or discourage acquisition bids for, Acorn. Section 203 and these provisions could have the effect of inhibiting attempts to change the membership of the Board of Directors of Acorn. In addition, the limited liability provisions in the Charter and the indemnification provisions in the Charter and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty (including breaches resulting from grossly negligent conduct) and may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise have benefited Acorn and its stockholders. Furthermore, a stockholder's investment in Acorn may be adversely affected to the extent Acorn pays the costs of settlement and damage awards against directors and officers of Acorn pursuant to the indemnification provisions in Acorn's Bylaws. The limited liability provisions in the Charter will not limit the liability of directors under federal securities laws. SHARES RESERVED FOR ISSUANCE Acorn has shares of Common Stock reserved for issuance upon the exercise of outstanding options. In addition, Acorn has shares of Common Stock reserved for issuance pursuant to awards available for grant under the Incentive Plan and shares of Common Stock reserved for issuance pursuant to common stock units generated pursuant to the Director Stock Plan. Acorn has approved the grant of options to purchase shares of Common Stock contingent upon consummation of the Offering. Upon consummation of the Offering, options for the purchase of shares of Common Stock will be fully vested. TRANSFER AGENT The transfer agent and registrar for the Common Stock is . LISTING Application has been made for quotation of the Common Stock on the Nasdaq National Market under the symbol " ". 47 49 DESCRIPTION OF CERTAIN INDEBTEDNESS In December 1996, UnionTools entered into the Credit Facility with Heller Financial, Inc., as agent for the lenders party thereto (the "Lenders"), and Acorn, as guarantor. Upon consummation of the Offering, the Credit Facility will provide for a $30 million revolving credit facility (the "Revolving Facility") and a $35 million acquisition facility (the "Acquisition Line"). Prior to the consummation of the Offering, the Credit Facility also contains a $20 million term loan (the "Term Loan"). The Company intends to use approximately $ million of the net proceeds from the Offering to repay the Term Loan and accrued interest thereon and reduce indebtedness outstanding under the Acquisition Line and accrued interest thereon. The Revolving Facility is available until 2003. The Revolving Facility is subject to a maximum revolving loan balance equal to 85% of eligible accounts receivable (as defined in the Credit Facility) plus 60% of eligible inventory (as defined in the Credit Facility). There is a $3 million limit on the issuance of letters of credit or other risk participation agreements under the terms of the Credit Facility. The Acquisition Line is available until 2000 and is limited to $15 million per year and $7.5 million per acquisition without the prior approval of the Lenders. Potential targets must be in a line of business similar to that of UnionTools and have a positive pro forma EBITDA (as defined in the Credit Facility) for the previous twelve months. The Acquisition Facility will convert into a three year term loan in 2000, with 25% of the balance due in each of 2001 and 2002 and the remainder due in 2003. Interest on all amounts outstanding under the Credit Facility are payable quarterly in arrears at either the Base Rate (as defined in the Credit Facility) plus a margin ranging from 0.25% to 0.75% or, at UnionTools' option, the LIBOR Rate (as defined in the Credit Facility) plus a margin ranging from 2.25% to 2.75%. The applicable margin is determined based on the Adjusted Total Indebtedness to Operating Cash Flow Ratio (as defined in the Credit Facility). The Credit Facility is secured by a first priority, senior security interest in and lien upon substantially all of UnionTools' real and personal property and is guaranteed by Acorn. The Acorn guarantee is secured by a pledge of all of the capital stock of UnionTools. Under the terms of the Credit Facility, UnionTools is required to make certain mandatory prepayments in an amount equal to (i) 50% of UnionTools' excess cash flow (as defined in the Credit Facility) commencing in fiscal 1998, (ii) the net proceeds from the disposition of assets, including the proceeds from the sale of stock of any of UnionTools' subsidiaries and (iii) the net proceeds from the sale of UnionTools' capital stock after June 30, 1998. UnionTools may elect to prepay all or a portion of the Credit Facility at any time. The Credit Facility contains certain covenants, which, among other things, require UnionTools to maintain specified financial ratios and satisfy certain tests including minimum interest coverage ratios and places limits on future capital expenditures by UnionTools. The Credit Facility also includes negative covenants including limitations on indebtedness, liens, guarantees, obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances, optional payments and modifications and other debt instruments, transactions with affiliates, changes in fiscal year, negative pledge clauses and changes in line of business. 48 50 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, shares of Common Stock will be outstanding. The shares of Common Stock sold in the Offering will be available for resale in the public market without restriction or further registration under the Securities Act, except for shares purchased by "affiliates" of the Company (in general, any person who has a control relationship with the Company), which shares will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. The remaining outstanding shares of Common Stock are deemed to be "restricted securities" as that term is defined in Rule 144, all of which are eligible for sale in the public market in compliance with Rule 144. Certain existing stockholders of the Company (who in the aggregate hold shares of Common Stock), the executive officers and directors of the Company and the Oaktree Fund have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any of the shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. Additionally, the Company has agreed that, during the period of 180 days from the date of this Prospectus, subject to certain exceptions, that it will not issue, sell, offer or agree to sell, grant any options for the sale of (other than employee stock options) or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock, other than pursuant to the Offering. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, such as the TCW Funds, is entitled to sell, within any three-month period, a number of shares of Common Stock which does not exceed the greater of 1% of the number of then-outstanding shares of the Common Stock ( shares immediately after the Offering) or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 also may be subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned shares within the definition of "restricted securities" under Rule 144 for at least two years, is entitled to sell such shares under Rule 144(k) without regard to the volume limitation, manner of sale provisions, public information requirements or notice requirements. Acorn intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the shares of Common Stock reserved for issuance under the Incentive Plan. Acorn also intends to file a registration statement on Form S-8 under the Securities Act to register the sale of the shares of Common Stock reserved for issuance under the Director Stock Plan. As a result, any shares of Common Stock issued pursuant to awards granted under such plans will be available, subject to special rules for affiliates, for resale in the public market after the effective date of such registration statement, subject to applicable lock-up arrangements. See "Management -- 1997 Stock Incentive Plan" and "Management -- Director Stock Plan". The TCW Funds and the Oaktree Fund have, subject to certain conditions and restrictions, the right to include the shares of Common Stock owned by them in registered public offerings of Common Stock (or securities exchangeable for or convertible into Common Stock) undertaken by Acorn for its own account, as well as to require Acorn to register the sale of such shares, subject to certain conditions, upon demand. The TCW Group has informed the Company that the TCW Funds currently are in their respective liquidation periods, requiring such funds to liquidate their investments in an orderly manner. Pursuant to their organizational documents, the TCW Funds terminate over the period from November 2001 to June 2003. As a result, it is likely that some or all of the shares of Common Stock held by the TCW Funds will be sold prior to such time or distributed to investors in the TCW Funds. All such shares, except those acquired by affiliates of the Company, will be immediately eligible for resale under Rule 144(k). 49 51 No prediction can be made as to the effect, if any, that market sales of shares of Common Stock that are restricted securities, or the availability of such shares, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the Company's future ability to raise capital through an offering of equity or equity linked securities. See "Underwriting". 50 52 UNDERWRITING In the Underwriting Agreement, the Underwriters, represented by McDonald & Company Securities, Inc. and (the "Representatives"), have agreed, severally, subject to the terms and conditions therein set forth, to purchase from the Company, and the Company has agreed to sell to them, the number of shares of Common Stock totaling shares, set forth opposite their respective names below:
UNDERWRITERS NUMBER OF SHARES --------------------------------------------------------------------- ---------------- McDonald & Company Securities, Inc. ................................. A.G. Edwards & Sons, Inc. ........................................... --------- Total...................................................... =========
The nature of the Underwriters' obligation under the Underwriting Agreement is such that all shares of Common Stock being offered, excluding shares covered by the over-allotment option granted to the Underwriters, must be purchased if any shares of Common Stock are purchased. The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus. The Underwriters may allow to certain selected dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") a discount not exceeding $ per share, and the Underwriters may allow, and such selected dealers may re-allow, a discount not exceeding $ per share to other dealers who are members of the NASD. After this Offering, the public offering price and the discount to dealers may be changed by the Representatives. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of shares of Common Stock at the public offering price, less the underwriting discount, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments in the sale of the Common Stock that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase the same percentage of the option shares as the number of shares to be purchased and offered by that Underwriter in the table above bears to the total. At the request of the Company, up to shares of Common Stock in the Offering have been reserved for sale to the Oaktree Fund at the Price to Public set forth on the cover page of this Prospectus, and up to shares of Common Stock in the Offering have been reserved for sale to certain officers and directors of the Company at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus. The number of shares of Common Stock available for sale in the Offering will be reduced to the extent such persons purchase such shares. Purchases will be prohibited to the extent that they are requested in lots of less than 100 shares. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as the other shares available through the Offering. The Company has agreed to indemnify the Underwriters against certain liabilities which maybe incurred in connection with the Offering, including liabilities under the Securities Act or to contribute to payments that the Underwriters may be required to make. Certain existing stockholders of the Company (who in the aggregate hold shares of Common Stock), the executive officers and directors of the Company and the Oaktree Fund have agreed, subject to certain exceptions, that they will not offer, sell or otherwise dispose of any of the shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. Additionally, the Company has agreed that, during the period of 180 days from the date of this Prospectus, subject to certain exceptions, that it will not issue, sell, offer or 51 53 agree to sell, grant any options for the sale of (other than employee stock options) or otherwise dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable for Common Stock, other than pursuant to the Offering. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The rules of the Commission generally prohibit the Underwriters and other members of the selling group from making a market in the Common Stock during the "cooling off" period immediately preceding the commencement of sales in the Offering. The Commission has, however, adopted an exemption from these rules that permits passive market making under certain conditions. These rules permit an Underwriter or other member of the selling group to continue to make a market in the Common Stock subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the Offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group intend to engage in passive market making in the Common Stock during the cooling off period. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for Acorn by Gibson, Dunn & Crutcher LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Conor D. Reilly, a partner of Gibson, Dunn & Crutcher LLP, is Chairman and a director of Acorn and UnionTools. See "Certain Transactions" and "Principal Stockholders". EXPERTS The consolidated balance sheets of the Company as of July 28, 1995 and August 2, 1996 and the consolidated statements of operations, stockholders' equity and cash flows for the four months ended December 2, 1993, the eight months ended July 29, 1994, fiscal 1995 and fiscal 1996, included in this Prospectus have been included herein in reliance on the report of Ernst & Young LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION Acorn has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions having been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, although the material terms thereof are described in this Prospectus, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified by such reference to such exhibits. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office in Washington D.C., at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and through the SEC's internet site at http://www.sec.gov. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. The Company intends to furnish its stockholders with annual reports containing audited consolidated financial statements certified by its independent auditors and quarterly reports for each of the first three fiscal quarters of each fiscal year containing unaudited financial information. 52 54 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors........................................................ F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statements of Stockholders' Equity....................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
55 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Acorn Products, Inc. We have audited the accompanying consolidated balance sheets of Acorn Products, Inc. (formerly Vision Hardware Group, Inc.) and Subsidiaries (Successor Company) as of July 28, 1995 and August 2, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended and for the period from December 3, 1993 through July 29, 1994 (Successor Company period), and consolidated statements of operations, stockholders' equity and cash flows of Better Vision Hardware Group, Inc. (Predecessor Company) for the period from August 1, 1993 through December 2, 1993 (Predecessor Company period). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned Successor Company consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acorn Products, Inc. and Subsidiaries at July 28, 1995 and August 2, 1996, and the consolidated results of their operations and their cash flows for the Successor Company period in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor Company consolidated financial statements present fairly, in all material respects, the results of their operations and their cash flows for the Predecessor Company period, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective December 3, 1993, all of the outstanding stock of the Predecessor Company was acquired in a business combination accounted for as a purchase. As a result of this acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. As discussed in Note 8 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1996. Columbus, Ohio October 4, 1996, except for Notes 3, 4, 11 and 13 as to which the date is April , 1997 The foregoing opinion is in the form that will be signed upon the determination of the stock split as described in Note 13 to the Financial Statements. ERNST & YOUNG LLP Columbus, Ohio April 17, 1997 F-2 56 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JULY 28, AUGUST 2, JANUARY 31, 1995 1996 1997 -------- --------- ----------- (UNAUDITED) ASSETS Current assets: Cash..................................................... $ 2,109 $ 502 $ -- Accounts receivable, less allowance for doubtful accounts (1995-$645; 1996-$557)................................ 10,670 12,067 18,012 Inventories.............................................. 31,802 23,433 31,787 Prepaids and other current assets........................ 1,511 1,701 1,670 -------- ------- -------- Total current assets.................................. 46,092 37,703 51,469 Property, plant and equipment, net of accumulated depreciation............................................. 11,511 10,558 10,372 Goodwill................................................... 30,988 30,184 29,781 Deferred income taxes...................................... 756 -- -- Other intangible assets.................................... 1,170 1,166 1,390 Net assets of discontinued operations...................... 21,763 19,284 2,634 -------- ------- -------- Total assets..................................... $112,280 $98,895 $ 95,646 ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Revolving credit facility................................ $ 19,250 $12,537 $ 14,223 Accounts payable......................................... 5,920 5,198 7,973 Accrued expenses......................................... 4,845 6,154 5,401 Accrued interest......................................... 4,133 -- 1,878 Current portion of long-term debt........................ 3,500 3,500 3,000 Income taxes payable..................................... 1,756 1,100 132 Other current liabilities................................ 699 671 668 -------- ------- -------- Total current liabilities............................. 40,103 29,160 33,275 Long-term debt............................................. 49,354 45,854 48,354 Other long-term liabilities................................ 5,500 5,351 5,352 -------- ------- -------- Total liabilities................................ 94,957 80,365 86,981 Stockholders' equity: Common stock, par value of $.001, authorized 20,000,000 shares, issued and outstanding in 1995 and shares in 1996........................................ 14,319 14,406 14,494 Preferred stock, par value of .001, authorized 1,000 shares, issued and outstanding 100 shares in 1996..... -- 8,596 8,596 Contributed capital-stock options........................ 340 340 460 Minimum pension liability................................ -- (197) (197) Retained earnings (deficit).............................. 2,664 (4,615) (14,688) -------- ------- -------- Total stockholders' equity............................ 17,323 18,530 8,665 -------- ------- -------- Total liabilities and stockholders' equity....... $112,280 $98,895 $ 95,646 ======== ======= ========
See accompanying notes. F-3 57 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------- --------------------------------------------------------------- AUGUST 1, DECEMBER 3, YEAR ENDED SIX MONTHS SIX MONTHS 1993 THROUGH 1993 THROUGH -------------------- ENDED ENDED DECEMBER 2, JULY 29, JULY 28, AUGUST 2, JANUARY 26, JANUARY 31, 1993 1994 1995 1996 1996 1997 ------------ ------------ -------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales.................... $ 20,331 $ 72,370 $ 86,543 $ 92,652 $ 35,843 $ 40,695 Cost of products sold........ (14,185) (52,271) (63,411) (67,496) (27,290) (30,142) Selling and administrative expenses................... (5,482) (9,955) (15,531) (16,815) (7,356) (8,641) -------- -------- -------- -------- -------- -------- 664 10,144 7,601 8,341 1,197 1,912 Interest expense............. 2,773 3,525 6,485 6,732 2,918 3,243 Amortization of intangible assets..................... 124 601 1,061 1,173 553 572 Other expenses............... -- 11 694 1,522 58 1,088 -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes and cumulative effect adjustment................. (2,233) 6,007 (639) (1,086) (2,332) (2,991) Provision for income taxes... -- 290 -- 582 -- -- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before cumulative effect adjustment................. (2,233) 5,717 (639) (1,668) (2,332) (2,991) Discontinued operations: Loss from operations....... (8,373) (614) (1,800) (5,815) (1,111) (1,063) Loss on disposal........... -- -- -- (665) -- (6,019) -------- -------- -------- -------- -------- -------- Loss from discontinued operations................. (8,373) (614) (1,800) (6,480) (1,111) (7,082) -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect adjustment................. (10,606) 5,103 (2,439) (8,148) (3,443) (10,073) -------- -------- -------- -------- -------- -------- Cumulative effect of change in accounting for postretirement benefits.... -- -- -- 869 869 -- -------- -------- -------- -------- -------- -------- Net income (loss)............ (10,606) 5,103 (2,439) (7,279) (2,574) (10,073) Dividends on preferred stock...................... -- -- -- -- -- (559) -------- -------- -------- -------- -------- -------- Net income (loss) applicable to Common Stock............ $(10,606) $ 5,103 $ (2,439) $ (7,279) $ (2,574) $ (10,632) ======== ======== ======== ======== ======== ======== Earnings per share: Continuing operations...... $ Discontinued operations.... Adjustment for cumulative effect of change in accounting for post- retirement benefits..... -------- -------- -------- -------- -------- -------- Net income (loss) applicable to common stock................... $ ======== ======== ======== ======== ======== ======== Weighted average number of shares outstanding.........
See accompanying notes. F-4 58 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON SHARES PREFERRED SHARES ------------------- ------------------- CONTRIBUTED MINIMUM RETAINED NUMBER NUMBER CAPITAL-STOCK PENSION EARNINGS OF SHARES AMOUNT OF SHARES AMOUNT OPTIONS LIABILITY (DEFICIT) TOTAL --------- ------- --------- ------- ------------- ------- --------- --------- PREDECESSOR COMPANY: Balances at July 31, 1993..... 1,000 $ 2,000 4,427 $43,364 $ -- $ -- $(113,668) $ (68,304) Net loss for the period August 1, 1993 through December 2, 1993........................ -- -- -- -- -- -- (10,606) (10,606) ----- ------- ----- ------- ---- ----- --------- --------- Balances at December 2, 1993........................ 1,000 $ 2,000 4,427 $43,364 $ -- $ -- $(126,528) $(126,528) ===== ======= ===== ======= ==== ===== ========= ========= SUCCESSOR COMPANY: Acquisition of Predecessor Company..................... 1,000 $13,864 -- $ -- $ $ $ -- $ 13,864 Net income for the period December 3, 1993 through July 31, 1994............... -- -- -- -- -- -- 5,103 5,103 Stock issued.................. 26 455 -- -- -- 455 ----- ------- ----- ------- ---- ----- --------- --------- Balances at July 29, 1994..... 1,026 14,319 -- -- -- -- 5,103 19,422 Net loss for the period August 1, 1994 through July 31, 1995........................ -- -- -- -- -- -- (2,439) (2,439) Stock options issued.......... -- -- -- -- 340 -- -- 340 ----- ------- ----- ------- ---- ----- --------- --------- Balances at July 28, 1995..... 1,026 14,319 -- -- 340 -- 2,664 17,323 Net loss for the period August 1, 1995 through August 2, 1996........................ -- -- -- -- -- (7,279) (7,279) Conversion of debt............ -- -- 100 8,596 -- -- -- 8,596 Stock issued.................. 5 87 -- -- -- -- -- 87 Adjustment to recognize minimum pension liability... -- -- -- -- -- (197) -- (197) ----- ------- ----- ------- ---- ----- --------- --------- Balances at August 2, 1996.... 1,031 14,406 100 8,596 340 (197) (4,615) 18,530 Net loss for the period August 3, 1996 through January 31, 1997........................ -- -- -- -- -- -- (10,073) (10,073) Stock issued.................. 5 88 -- -- -- -- -- 88 Stock options issued.......... -- -- -- -- 120 -- -- 120 ------------------------------------------------------------------------------------------- Balances at January 31, 1997 (unaudited)................. 1,036 $14,494 100 $ 8,596 $ 460 $(197) $ (14,688) $ 8,665 ===== ======= ===== ======= ==== ===== ========= =========
See accompanying notes. F-5 59 ACORN PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------- -------------------------------------------------------------- AUGUST 1, DECEMBER 3, 1993 1993 YEAR ENDED SIX MONTHS SIX MONTHS THROUGH THROUGH -------------------- ENDED ENDED DECEMBER 2, JULY 29, JULY 28, AUGUST 2, JANUARY 26, JANUARY 31, 1993 1994 1995 1996 1996 1997 ----------- ----------- -------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................... $ (10,606) $ 5,103 $ (2,439) $ (7,279) $(2,574) $ (10,073) Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operations: Loss from discontinued operations... 8,373 614 1,800 6,480 1,111 7,082 Depreciation and amortization....... 628 1,605 3,030 3,592 1,775 1,645 Deferred income taxes............... -- 87 -- 756 157 -- Conversion of debt to preferred stock............................. -- -- -- 4,463 -- -- Financing fees and other, net....... (364) (1,437) (556) (365) (158) (393) Issuance of stock options........... -- -- 340 -- -- 120 Cumulative effect of the change in accounting principal.............. -- -- -- 869 869 -- Changes in operating assets and liabilities: -- -- -- Accounts receivable................. 1,233 (5,359) 6,815 (1,397) (4,458) (5,945) Inventories......................... (9,468) (2,652) (8,051) 8,369 504 (8,354) Other assets........................ (4,163) 3,963 (739) (190) (1,549) 31 Accounts payable, accrued expenses and accrued interest.............. 4,663 (170) 1,788 587 3,655 3,900 Income taxes payable................ 20 1,542 19 (656) (292) (968) Other liabilities................... 125 (1,477) (2,511) (1,243) (347) (2) -------- -------- ------- -------- ------- -------- Net cash provided by (used in) continuing operations............... (9,559) 1,819 (504) 13,986 (1,307) (12,957) Net cash provided by discontinued operations.......................... 1,363 (6,876) (9,894) (4,001) (3,857) 3,391 -------- -------- ------- -------- ------- -------- Net cash provided by (used in) operating activities................ (8,196) (5,057) (10,398) 9,985 (5,164) (9,566) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment, net...................... (527) (1,738) (2,870) (1,466) (663) (887) Proceeds from disposal of discontinued operation........................... -- -- -- -- -- 6,177 -------- -------- ------- -------- ------- -------- Net cash provided by (used in) investing activities................ (527) (1,738) (2,870) (1,466) (663) 5,290 CASH FLOWS FROM FINANCING ACTIVITIES Subordinated debt..................... -- 6,354 -- -- -- -- Net activity on term loan............. 50 12,500 (3,500) (3,500) -- 2,000 Net activity on revolving loan........ 9,931 (12,354) 16,750 (6,713) 3,393 1,686 Issuance of stock..................... -- 455 -- 87 87 88 -------- -------- ------- -------- ------- -------- Net cash provided by (used in) financing activities................ 9,981 6,955 13,250 (10,126) 3,480 3,774 -------- -------- ------- -------- ------- -------- Net increase (decrease) in cash....... 1,258 160 (18) (1,607) (2,347) (502) Cash at beginning of period........... 730 1,967 2,127 2,109 2,109 502 -------- -------- ------- -------- ------- -------- Cash at end of period................. $ 1,988 $ 2,127 $ 2,109 $ 502 $ (238) $ -- ======== ======== ======= ======== ======= ========
See accompanying notes. F-6 60 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACQUISITION AND DESCRIPTION OF THE BUSINESS Effective December 3, 1993, Better Vision Hardware Group, Inc. (the "Predecessor Company") merged with Acorn Products, Inc. (formerly Vision Hardware Group, Inc.) (the "Successor Company"), a corporation controlled by affiliates of The TCW Group, Inc. (the "TCW Group"). The merger was a part of a series of transactions whereby the TCW Group acquired the revolving credit facility and bank term loan of the Predecessor Company, as well as $5,000,000 aggregate principal amount of senior subordinated notes of the Predecessor Company. The TCW Group also acquired all of the outstanding senior preferred stock and class A, B and C preferred stock of the Predecessor Company. The Predecessor Company and Successor Company collectively are referred to herein as Acorn. Acorn and its subsidiaries collectively are referred to herein as the "Company". Pursuant to the foregoing transaction, several investment funds and accounts (the "TCW Funds") managed by affiliates of the TCW Group became the beneficial owners of substantially all of the capital stock of Acorn. The total purchase price of the above transaction was approximately $66.2 million. The purchase accounting method was used to record the transaction. The estimated fair value of the acquired assets, excluding goodwill, aggregated approximately $31.7 million and liabilities assumed aggregated approximately $5.5 million. The excess of the purchase price over the fair value of net assets of approximately $40 million was established as goodwill and is being amortized over 40 years. Since purchase accounting was reflected in the opening balance sheet of the Successor Company on December 3, 1993, the financial statements of the Successor Company are not comparable to the financial statements of the Predecessor Company. Accordingly, a vertical black line is shown to separate Successor Company financial statements from those of the Predecessor Company for the period ended December 2, 1993. Business Founded in 1890, the Company is a leading manufacturer and marketer of non-powered lawn and garden tools in the U.S. The Company's principal products include long handle tools (such as forks, hoes, rakes and shovels), snow tools, posthole diggers, wheelbarrows, striking tools and cutting tools. The Company sells its products under a variety of well-known brand names. In addition, the Company manufactures private label products for a variety of retailers. The Company sells its products through a variety of distribution channels. The Company is a holding company with no business operations of its own. (See Note 3 for a discussion of the Company's disposition of non-lawn and garden operations.) The lawn and garden industry is seasonal in nature, with a high proportion of sales and operating income generated from January through May of each year. As a result, the Company's operating results depend significantly on the spring selling season. To support this sales peak, the Company must build inventories of finished goods throughout the fall and winter and, accordingly, its levels of raw materials and finished goods inventories tend to be at their highest, relative to sales, during the Company's first and second fiscal quarters. See Note 12 below. Weather is the most significant factor in determining market demand for the Company's products and is inherently unpredictable. Fluctuations in weather can be favorable or unfavorable for the sale of lawn and garden equipment. The Company's largest customer, Sears, accounted for 8.9%, 12.5% and 11.6% of gross sales in fiscal 1995 and fiscal 1996 and the six months ended January 31, 1997, respectively. No other customer accounted for 10% or more of the Company's sales in fiscal 1995, fiscal 1996 or the six months ended January 31, 1997. The Company's products require the supply of raw materials consisting primarily of steel, plastics and ash wood. The Company has several suppliers for most of its raw materials. F-7 61 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Acorn and its subsidiaries, UnionTools, Inc. ("UnionTools"), McGuire-Nicholas Company, Inc. ("McGuire-Nicholas") and VSI Fasteners, Inc. ("VSI"). All intercompany accounts and transactions have been eliminated. See Note 3 -- Discontinued Operations. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following:
JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Finished goods................................................... $ 17,372 $12,473 Work in process.................................................. 6,021 5,703 Raw materials and supplies....................................... 8,759 5932 ------- ------- 32,152 24,108 Valuation reserves............................................... (350) (675) ------- ------- Total inventories................................................ $ 31,802 $23,433 ======= =======
Property, Plant and Equipment Property, plant and equipment is stated at cost and is depreciated using the straight-line method over the following estimated useful lives: Machinery and equipment........................................ 3 to 15 years Buildings and improvements..................................... 3 to 40 years Furniture and fixtures......................................... 3 to 15 years
Property, plant and equipment consists of the following:
JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Land............................................................. $ 1,181 $ 1,207 Buildings and improvements....................................... 2,431 2,553 Machinery and equipment.......................................... 9,610 10,840 Furniture and fixtures........................................... 1,266 1,355 -------- --------- 14,488 15,955 Accumulated depreciation and amortization........................ (2,977) (5,397) -------- --------- $ 11,511 $10,558 ======= =======
Goodwill Goodwill, resulting from the cost of assets acquired exceeding the underlying net asset value, is being amortized on the straight-line method over a forty-year period. Accumulated amortization was $1,411,000 at July 28, 1995 and $2,215,000 at August 2, 1996. The Company periodically evaluates the carrying value of goodwill to assess its continued recoverability as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which was adopted during fiscal 1996. F-8 62 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The determination includes evaluation of factors such as current market value, future asset utilization, business climate and future cash flows expected to result from the use of related assets. The Company's policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset may not be recoverable. Income Taxes The Company files a consolidated federal income tax return. Federal income taxes are apportioned to each includable member based on that member's taxes as determined on a separate return basis. State tax returns are filed on a separate-company basis. The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Fiscal Year The Company's fiscal year is comprised of the 52 or 53 weeks, ending on the Friday closest to July 31 of each year. Unless otherwise stated, references to fiscal 1995 and 1996 relate to the fiscal years ended July 28, 1995 and August 2, 1996 and were comprised of 52 weeks and 53 weeks, respectively. The Company's interim reporting periods for quarterly periods end on the Friday closest to the last day of each month. Earnings Per Share Earnings per share have been computed by dividing net income (loss) applicable to Common Stock by the weighted average number of common and common equivalent shares outstanding during the periods presented, giving effect to the stock split subsequent to August 2, 1996 and to stock options granted in April 1997 (see Note 10), utilizing the treasury stock method, as if the shares and options were granted and outstanding as of the earliest year presented. Primary and fully-diluted earnings per share were not materially different during the periods presented. Interim Financial Reporting In the opinion of management, the unaudited information as of January 31, 1997 and for the six months ended January 26, 1996 and January 31, 1997 includes all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of such financial statements in accordance with generally accepted accounting principles. Operating results for the six months ended January 31, 1997 are not necessarily indicative of the results that may be expected for the year ending July 31, 1997. 3. DISCONTINUED OPERATIONS In March 1996, the Company adopted a formal plan to sell VSI. Accordingly, VSI was accounted for as a discontinued operation in the financial statements for the fiscal year ended August 2, 1996. Prior year financial statements were reclassified to conform to the 1996 presentation. During the fiscal year ended August 2, 1996, the Company provided for estimated losses on the disposal of $665,000, which represented the write-down of F-9 63 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) inventory and other assets to estimated net realizable value and the estimated loss through the disposal date. The Company completed the sale of substantially all of the assets of VSI on December 4, 1996 and recognized a gain on disposal of approximately $285,000 during the six months ended January 31, 1997. The reduction in the overall loss on disposal was due primarily to lower than anticipated operating losses prior to the sale. On January 23, 1997, the Company adopted a formal plan to sell McGuire-Nicholas. The Company currently is in the process of reviewing offers for the sale of McGuire-Nicholas and anticipates that the sale will be completed in the near future. Accordingly, McGuire-Nicholas has been accounted for as a discontinued operation and classified as such in the accompanying consolidated financial statements. The prior year financial statements have been reclassified to conform to the current year presentation. The estimated loss on the disposal of McGuire-Nicholas is $7,367,000, consisting of an estimated loss on disposal of $6,304,000 and a provision of $1,063,000 for anticipated operating losses until disposal. The loss on disposal represents the write-off of goodwill relating to McGuire-Nicholas. The following represents the combined results of operations of the Company's discontinued operations:
FOUR MONTHS EIGHT MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 2, JULY 29, JULY 28, AUGUST 2, 1993 1994 1995 1996 ----------- ------------ ---------- ---------- (IN THOUSANDS) Revenues........................... $18,738 $ 34,955 $ 53,050 $ 49,810 Costs and expenses................. 28,856 34,682 53,145 50,143 Interest expense................... (254) (670) (1,422) (1,577) Income (loss) from operations...... (8,373) (614) (1,800) (5,815)
Interest expense has been allocated to discontinued operations for all periods based on the ratio of net assets of discontinued operations to consolidated net assets plus debt. The following table summarizes the net assets of the Company's discontinued operations:
JULY 28, AUGUST 2, JANUARY 31, 1995 1996 1997 -------- --------- ----------- (IN THOUSANDS) Accounts receivable.................................. $ 6,935 $ 6,109 $ 3,046 Inventories.......................................... 14,781 10,321 3,853 Property and equipment............................... 2,299 2,470 1,456 Other assets (including goodwill of $7,600, $7,400 and $422, respectively)............................ 7,725 8,518 1,013 Liabilities.......................................... (9,977) (8,134) (6,734) ------- ------- ------- Net assets of discontinued operations...... $ 21,763 $19,284 $ 2,634 ======= ======= =======
4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY Long-term debt consists of the following:
JULY 28, AUGUST 2, JANUARY 31, 1995 1996 1997 -------- --------- ----------- (IN THOUSANDS) Term loan............................................ $ 21,500 $18,000 $20,000 Subordinated debt to shareholder..................... 31,354 31,354 31,354 ------- ------- ------- 52,854 49,354 51,354 Less current portion of long-term debt............... 3,500 3,500 3,000 ------- ------- ------- $ 49,354 $45,854 $48,354 ======= ======= =======
F-10 64 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1996, UnionTools entered into a credit facility (the "Credit Facility") which provided for a $20,000,000 term loan (the "Term Loan"), a revolving credit facility with a maximum borrowing of $30,000,000 (the "Revolving Facility") and a $15,000,000 acquisition facility (the "Acquisition Line"). Upon consummation of the Offering (as defined below), the Credit Facility will provide for a $30 million Revolving Facility and a $35 million Acquisition Line. The Company intends to use a portion of the net proceeds from the Offering to repay the Term Loan and accrued interest thereon and reduce indebtedness outstanding under the Acquisition Line and accrued interest thereon. The Credit Facility, which is collateralized by substantially all of the assets and common stock of UnionTools, is guaranteed by Acorn. The Revolving Facility will expire in 2003. The Acquisition Line is available until 2000. Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable and inventory. As of January 31, 1997, there was $15.8 million available for future borrowing under the Revolving Facility. Available borrowings under the Acquisition Line are subject to various financial and non-financial requirements and are limited to $7,500,000 per acquisition and $15,000,000 per year without the prior approval of the lenders. Following the second anniversary of the Acquisition Line will convert to a three year term loan and will be payable according to a predetermined amortization schedule. The Revolving Facility has a letter of credit subcommitment of $3,000,000. The Credit Facility bears interest at either the bank prime rate plus a margin ranging from 0.25% to 0.75% (prime rate at August 2, 1996 was 8.25%) or at UnionTools' option, the LIBOR rate plus a margin ranging from 2.25% to 2.75% (LIBOR rate at August 2, 1996 was 5.5%). At January 31, 1997, UnionTools had all debt outstanding under the LIBOR interest rate option. The interest rate margin fluctuates based on the ratio of total senior debt to operating cash flow as set forth in a predetermined pricing table. In addition, UnionTools is required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility and the Acquisition Line. The Credit Facility contains certain covenants, which, among other things, require UnionTools to maintain specified financial ratios and satisfy certain tests including minimum interest coverage ratios and places limits on future capital expenditures by UnionTools. The Credit Facility also includes negative covenants including limitations on indebtedness, liens, guarantees, obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances, optional payments and modifications and other debt instruments, transactions with affiliates, changes in fiscal year, negative pledge clauses and changes in line of business. UnionTools was in compliance of all debt covenants at January 31, 1997. UnionTools is required to make certain mandatory prepayments under the Credit Facility based upon cash flow and other events as defined. UnionTools may elect to prepay all or a portion of the Credit Facility at any time. The fair value of the Company's long-term debt approximates the carrying amount. In December 1993, the Company issued a Subordinated Unsecured Promissory Note in the amount of $25,000,000 to the TCW Funds. In May 1994 the Company issued a Temporary Subordinated Promissory Note in the amount of $6,354,000 to the TCW Funds. The Subordinated Unsecured Promissory Note and the Temporary Subordinated Promissory Note collectively are referred to herein as the "Subordinated Notes". The Subordinated Notes are due on July 31, 2003 and carry interest at 13% per year. Annual interest payments for the Subordinated Notes are contingent upon meeting certain financial measures. These financial measures were not met during fiscal 1995 and 1996, thus, no cash interest payments were permitted. The Subordinated Notes require that any non-payment of interest be added to the principal balance of the outstanding Subordinated Notes. On August 2, 1996, the Company issued 100 shares of Series A Preferred Stock (the "Series A Preferred Stock") with a par value of $.001 per share and a stated F-11 65 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) value of $8,596,000 as payment in full of accrued interest on the Subordinated Notes due for fiscal years 1995 and 1996. Interest paid on the Subordinated Notes was $2,113,000 for the eight month period ended July 29, 1994. Interest on the Subordinated Notes of $4,133,000 and $4,463,000 was paid in the form of Series A Preferred Stock during fiscal 1995 and fiscal 1996, respectively. In December 1996 the Company issued a subordinated promissory note to the TCW Funds in the aggregate principal amount of $6 million and bearing interest at a rate of 13% per year as bridge financing. In December 1996 the Company paid $6.3 million to the TCW Funds in prepayment of the subordinated promissory note, accrued interest thereon and a $180,000 facility fee. Debt of Discontinued Operations In December 1996, McGuire-Nicholas entered into a loan agreement which provides for a revolving loan with a maximum borrowing of $9,250,000 and a term loan in the amount of $250,000. In addition, the loan agreement provides for a $500,000 capital expenditure facility. Available borrowings are based on specified percentages of accounts receivable and inventory. The revolving loan has a letter of credit subcommitment of $1,000,000. The loan agreement is collateralized by substantially all of the assets of McGuire-Nicholas and expires on December 30, 1999. The Company does not guarantee McGuire-Nicholas' debt nor do any of Acorn's or UnionTools' assets collateralize the debt. The loan agreement will bear interest at the bank prime rate plus 1%. The term loan calls for monthly maturities of $4,167. Aggregate maturities of the McGuire-Nicholas term loan for the five years following August 2, 1996 are as follows: $25,000 in 1997; $50,000 in 1998; $50,000 in 1999; $50,000 in 2000; $50,000 in 2001; and $25,000 in 2002. 5. PREFERRED STOCK At August 2, 1996, the Company had 100 shares of non-voting, non-convertible, Series A Preferred Stock issued and outstanding. Holders of the Series A Preferred Stock are entitled to a cumulative 13% dividend, payable quarterly in additional Series A Preferred Stock at a value of $85,962 per share. The Series A Preferred Stock is redeemable at the option of the Company at any time, in whole or in part, at a price of $85,962 per share, plus accrued dividends. In the event of an involuntary liquidation, the holders of the outstanding Series A Preferred Stock would be entitled to full face value plus any unpaid accrued dividends prior to any payment to common stockholders. As of January 31, 1997, the aggregate liquidation value of the Series A Preferred Stock was approximately $9.2 million. F-12 66 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Deferred tax assets: Inventory.................................................... $ 1,971 $ 1,752 Restructuring expenses....................................... 2,909 230 Accrued expenses and other................................... 2,542 8,043 Net operating loss carryforwards............................. 4,531 5,910 -------- -------- Total deferred tax assets................................. 11,953 15,935 Valuation allowance for deferred tax assets.................... (10,693) (14,897) -------- -------- Deferred tax assets............................................ 1,260 1,038 Deferred tax liabilities: Income taxes................................................. 363 209 Depreciation and other....................................... 141 829 -------- -------- Total deferred tax liabilities............................ 504 1,038 -------- -------- Net deferred tax assets.............................. $ 756 $ -- ======== ========
Based upon the Company's operating losses in the past two fiscal years and the uncertainty of operating earnings in the future, management has determined that it is not likely that the deferred tax assets will be fully recognized. Accordingly, a valuation allowance has been recorded. The provision for income taxes is comprised of the following:
EIGHT MONTHS FOUR MONTHS ENDED YEAR ENDED YEAR ENDED ENDED JULY 29, JULY 28, AUGUST 2, DECEMBER 2, 1993 1994 1995 1996 ---------------- ------------ ---------- ---------- (IN THOUSANDS) Current -- state.............................. $ -- $215 $ -- $ -- Deferred -- state............................. -- 75 -- 582 ---- ---- ---- ---- $ -- $290 $ -- $582 ==== ==== ==== ====
At August 2, 1996, the Company has net operating loss carryforwards of $16,917,700 for income tax purposes that expire in the years 2009 and 2010. 7. RETIREMENT PLANS UnionTools maintains defined benefit pension plans which cover substantially all employees. Benefits paid under the defined benefit plans are based generally on either years of service and the employee's compensation in recent years of employment or years of service multiplied by contractual amounts. The Company's funding policy is to fund the maximum amount deductible for federal income tax purposes. F-13 67 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following sets forth the funded status of the defined benefit plans (in thousands):
PLANS WHOSE ASSETS PLAN WHOSE BENEFITS EXCEED BENEFITS EXCEED ASSETS ---------------------- ---------------------- JULY 28, AUGUST 2, JULY 28, AUGUST 2, 1995 1996 1995 1996 -------- --------- -------- --------- Actuarial present value of benefit obligations: Accumulated benefit obligation, (primarily vested)......................................... $ 8,101 $ 8,291 $ 4,714 $ 5,064 ====== ====== ======= ======= Projected benefit obligation for service rendered to date......................................... $ 8,194 $ 8,451 $ 4,714 $ 5,064 Plan assets at fair value.......................... 8,816 9,101 3,381 3,508 ------ ------ ------- ------- Projected benefit obligation less than (in excess) of plan assets.................................. 622 650 (1,333) (1,556) Unrecognized prior service cost.................... (82) (61) 109 156 Unrecognized net losses (gains).................... 438 621 (109) 327 Adjustment to recognize minimum liability.......... -- -- -- (552) ------ ------ ------- ------- Prepaid (accrued) pension cost included in the accompanying balance sheet...................... $ 978 $ 1,210 $ (1,333) $(1,625) ====== ====== ======= =======
The components of net periodic pension cost are as follows (in thousands):
EIGHT MONTHS YEAR ENDED ENDED ---------------------- JULY 29, JULY 28, AUGUST 2, 1994 1995 1996 ------------ -------- --------- Service cost........................................ $ 345 $ 371 $ 438 Interest on projected benefit obligation............ 535 965 981 Return on plan assets............................... (338) (462) (411) Net amortization and deferral....................... (194) (465) (582) ----- ----- ----- Net periodic pension cost......................... $ 348 $ 409 $ 426 ===== ===== =====
Significant assumptions used in 1994, 1995 and 1996 in calculating periodic pension cost are as follows: Discount rate.................................................. 8% Expected long-term rate of return.............................. 8% Rate of increase in future compensation........................ 4%
Plan assets consist primarily of guaranteed interest contracts and pooled investment debt securities. 8. POSTRETIREMENT BENEFITS In addition to providing pension benefits, UnionTools sponsors a defined benefit health care plan that provides postretirement medical and life insurance benefits to employees who had attained age 50 and 10 years of service by July 1, 1995 and to current participants receiving benefits. In connection with the merger between Better Vision Hardware Group, Inc. and Acorn, the purchase price allocation included an estimated obligation for the retiree health care benefits of the Company, and accordingly, an accrual of approximately $5,500,000 was recorded. Effective August 1, 1995, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," whereby the cost of such postretirement benefits is accrued during the employees' active service period. The Company elected to immediately recognize the accumulated benefit obligation rather than amortize it over future periods. The cumulative effect of this accounting change as of August 1, 1995 was to increase net income by $869,000. F-14 68 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Postretirement benefit expense was $105,459 in the four months ended December 2, 1993, $216,596 in the eight months ended July 29, 1994, $431,000 in the fiscal year ended 1995 and $425,242 in the fiscal year ended 1996. The components of expense in 1996 follow: Service cost benefits earned.............................. $ 80,131 Interest cost on projected benefit obligations............ 345,111 -------- $425,242 ========
The following table presents supplemental information related to the Company's postretirement health care benefits:
AUGUST 2, 1996 -------------- Accumulated postretirement benefit obligation: Retirees............................................. $2,773,644 Active employees..................................... 1,938,511 ---------- 4,712,155 Unrecognized net loss.................................. (111,046) ---------- Accrued postretirement benefit cost.................... $4,601,109 ==========
As the benefits provided by the plan are fixed by the plan document, no annual assumed rate of increase in per capita cost of covered benefits is included in the obligation calculation. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. 9. COMMITMENTS AND CONTINGENCIES UnionTools entered into a royalty agreement with The Scotts Company, pursuant to which UnionTools obtained the exclusive right to manufacture, distribute and market in the U.S. and Canada an extensive line of lawn and garden tools under the Scotts(R) brand name. Under the agreement, UnionTools must pay certain minimum royalty amounts annually. Rent expense under operating leases was $662,000 in the four months ended December 2, 1993, $1,080,000 in the eight months ended July 29, 1994, $2,170,000 in the year ended July 28, 1995 and $2,000,000 in the year ended August 2, 1996. The minimum annual payments for leases under noncancelable operating leases and the royalty agreement at August 2, 1996 are as follows (in thousands): 1997........................................................ $2,036 1998........................................................ 1,735 1999........................................................ 1,571 2000........................................................ 917 2001........................................................ 812 Thereafter.................................................. 467 ------ $7,538 ======
The Company is a party to personal injury litigation arising out of incidents involving the use of Company products purchased by consumers from retailers to whom the Company distributes. The Company generally is covered by insurance for these product liability claims. Management believes that the ultimate disposition of this litigation will not have a material effect on the consolidated financial position or the results of future operations of the Company. F-15 69 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. CONTRIBUTED CAPITAL-STOCK OPTIONS During the six months ended January 31, 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS 123, the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its employee stock options and, accordingly, does not recognize compensation costs when the exercise price of its employee stock options is equal to the fair market value of the stock at the grant date. Pursuant to employment agreements, certain executive officers of the Company were granted options to purchase shares of Common Stock. Vesting of the options and the related exercise price are contingent upon the attainment of certain profitability targets, and portions of the options that fail to vest expire. In addition, during fiscal 1996 an executive officer of the Company was granted options to purchase 10 shares of Common Stock at an exercise price of $17,500 per share (does not give effect to the Company's proposed stock split). The following table summarizes the stock option activity (without giving effect to the Company's proposed stock split):
SIX MONTHS EIGHT MONTHS YEAR ENDED ENDED ENDED ---------------------- JANUARY JULY 29, JULY 28, AUGUST 2, 31, 1994 1995 1996 1997 ------------ -------- --------- ---------- Outstanding at beginning of period...... -- 77 77 49 Granted................................. 77 11 10 -- Exercised............................... -- -- 5 5 Expired/terminated...................... -- 11 33 12 -- -- -- -- Outstanding at end of period............ 77 77 49 32 == == == == Exercisable at end of period............ -- 19 24 23
During fiscal 1995 and the six months ended January 31, 1997, options to purchase 19 and 4 shares of common stock, respectively, vested at an exercise price of $0 per share and $17,500 per share, respectively. The Company recognized compensation expense of $340,000 and $120,000 in fiscal 1995 and the six months ended January 31, 1997, respectively, related to the vesting of these options. Of the remaining options, options to purchase 4 shares of common stock will vest at an exercise price of $0 upon consummation of the Offering (as defined below) and options to purchase 5 shares of common stock will expire. Vested options expire in December 2003. 11. ACQUISITION OF BUSINESS On February 19, 1997, the Company acquired for approximately $6,268,000 in cash certain assets of an injection molding company. The Company will account for the acquisition as a purchase and the results of the injection molding division's operations will be included in the accompanying financial statements beginning with the date of acquisition. The Company's preliminary allocation of the purchase price, based upon an assessment of the fair value of such assets at the date of acquisition, is as follows: Inventories.............................................................. $1,068,000 Land and buildings....................................................... 2,600,000 Equipment................................................................ 2,370,000 Non-compete agreement.................................................... 230,000 ---------- $6,268,000 ==========
The non-compete agreement is to be amortized over a two year period. F-16 70 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain financial data of the Company for each quarter of fiscal 1995 and 1996. The financial data for each of these quarters is unaudited but includes all adjustments, consisting of only normal recurring adjustments, which the Company believes to be necessary for a fair presentation. These operating results, however, are not necessarily indicative of results for any future period.
INCOME (LOSS) BEFORE CUMULATIVE LOSS FROM EFFECT DISCONTINUED NET INCOME NET SALES GROSS PROFIT ADJUSTMENT OPERATIONS (LOSS) --------- ------------ ------------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 First quarter.......................... $19,150 $ 5,527 $ 206 $ (589) $ (383) Second quarter......................... 18,011 4,595 430 (547) (1,380) Third quarter.......................... 32,609 8,614 1,972 (104) 1,868 Fourth quarter......................... 16,773 4,396 (3,247) (560) (2,544) ------- ------- ------- ------- ------- $86,543 $ 23,132 $ (639) $ (1,800) $ (2,439) ======= ======= ======= ======= ======= 1996 First quarter.......................... $16,486 $ 3,942 $(1,614) $ (291) $ (1,036) Second quarter......................... 19,357 4,626 (1,061) (477) (1,538) Third quarter.......................... 33,564 9,826 2,888 (355) 2,533 Fourth quarter......................... 23,245 6,762 (1,881) (5,357) (7,238) ------- ------- ------- ------- ------- $92,652 $ 25,156 $(1,668) $ (6,480) $ (7,279) ======= ======= ======= ======= =======
The fourth quarter of fiscal 1996 reflects expense of $563,000 incurred in connection with the resignation of Acorn's previous Chairman of the Board and expense of $750,000 incurred in connection with self-insured life insurance accruals related to the death of a former director of the Company. 13. SUBSEQUENT EVENTS Public Offering In April 1997, the Company filed a registration statement (the "Registration Statement") with the Securities and Exchange Commission in connection with the offer and sale of shares ( shares if the underwriters' over-allotment option is exercised in full) of Common Stock (the "Offering"). Increase in Authorized Capital Stock and Stock Split In April 1997, the Company increased the number of authorized shares of Common Stock to 20 million and effected a -for- split of the Common Stock in the form of a common stock dividend (the "Stock Split"). All share and per share information has been restated to reflect the stock split. 1997 Stock Incentive Plan In April 1997, the Company adopted the 1997 Stock Incentive Plan (the "Incentive Plan") for members of senior management and certain other officers and employees of the Company. The purpose of the Incentive Plan is to provide incentives to employees of the Company by granting awards tied to the performance of the Common Stock. Awards to employees may take the form of options, stock appreciation rights or sales or grants of restricted stock. The Company has reserved an aggregate of shares of Common Stock for issuance under the Incentive Plan. There are no options currently outstanding under the Incentive Plan. The F-17 71 ACORN PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company has approved the grant of an aggregate of options under the Incentive Plan upon consummation of the Offering. The exercise price for each such option will equal the initial public offering price per share in the Offering. Director Stock Plan In April 1997, the Company adopted the Deferred Equity Compensation Plan for Directors (the "Director Stock Plan"). The purpose of the Director Stock Plan is to increase the proprietary interest in the Company of non-employee members of the Board of Directors thereby increasing their incentive to contribute to the success of the Company. Only non-employee directors are eligible to participate in the Director Stock Plan. The number of shares of Common Stock reserved for issuance pursuant to the Director Stock Plan is . In lieu of cash, non-employee directors can elect to receive all or one-half of their fees in the form of common stock units. The number of common stock units issued is determined by dividing (i) an amount equal to the dollar amount of the fees to be received in the form of common stock units by (ii) the average of the high and low sale prices of the Common Stock on the Nasdaq National Market on the last business day preceding the date of payment. Any cash or stock dividends payable on shares of Common Stock accrue for the benefit of the directors in the form of additional common stock units. Common stock units are distributed to non-employee directors in the form of Common Stock following the director's resignation from the Board of Directors. In addition, common stock units are distributed to directors in the form of Common Stock following the death of the director or a change in control of the Company as defined in the Director Stock Plan. Agreements with Key Employees In April 1997, the Company terminated existing employment agreements with certain executive officers of the Company and entered into a new employment agreement with the President and Chief Executive Officer of the Company. In addition, the Company entered into agreements with certain of its executive officers providing for, under certain circumstances, payments from the Company following the termination of such officers' employment with the Company or following a change in control of the Company (as defined therein). F-18 72 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 9 Use of Proceeds....................... 14 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Consolidated Financial Data................................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 27 Description of McGuire-Nicholas....... 36 Management............................ 37 Principal Stockholders................ 43 Certain Transactions.................. 45 Description of Capital Stock.......... 46 Description of Certain Indebtedness... 48 Shares Eligible for Future Sale....... 49 Underwriting.......................... 51 Legal Matters......................... 52 Experts............................... 52 Additional Information................ 52 Index to Consolidated Financial Statements.......................... F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== SHARES ACORN PRODUCTS, INC. COMMON STOCK ($.001 PAR VALUE) --------------------------- PROSPECTUS --------------------------- MCDONALD & COMPANY SECURITIES, INC. A.G. EDWARDS & SONS, INC. DATED , 1997 ====================================================== 73 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The Registrant's expenses in connection with the Offering described in this registration statement are set forth below. All amounts except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. (the "NASD") filing fee and the Nasdaq National Market listing fee are estimated. Securities and Exchange Commission registration fee........................ $ 14,700 NASD filing fee............................................................ 5,350 Printing and engraving expenses............................................ * Accounting fees and expenses............................................... * Legal fees and expenses.................................................... * Nasdaq National Market listing fee......................................... * Fees and expenses (including legal fees) for qualifications under state securities laws.......................................................... * Transfer agent's fees and expenses......................................... * Miscellaneous.............................................................. * ------- Total................................................................. $ * =======
- --------------- * To be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") makes provision for the indemnification of officers and directors of corporations in terms sufficiently broad to indemnify the officers and directors of the Registrant under certain circumstances from liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the DGCL, the Registrant's Certificate of Incorporation (the "Charter") provides that, to the fullest extent permitted by the DGCL, no director shall be liable to the Registrant or to its stockholders for monetary damages for breach of his fiduciary duty as a director. Delaware law does not permit the elimination of liability (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases or (iv) for any transaction from which the director derives an improper personal benefit. The effect of this provision in the Charter is to eliminate the rights of the Registrant and its stockholders (through stockholders' derivative suits on behalf of the Registrant) to recover monetary damages against a director for breach of fiduciary duty as a director thereof (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i)-(iv), inclusive, above. These provisions will not alter the liability of directors under federal securities laws. The Registrant's Bylaws (the "Bylaws") provide that the Registrant may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Registrant) by reason of the fact that he is or was a director, officer, employee or agent of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. II-1 74 The Bylaws also provide that the Registrant may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Registrant to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Registrant unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Bylaws also provide that to the extent a director or officer of the Registrant has been successful in the defense of any action, suit or proceeding referred to in the previous paragraphs or in the defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for in the Bylaws shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the Registrant may purchase and maintain insurance on behalf of a director or officer of the Registrant against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the Registrant would have the power to indemnify him against such liabilities under such Bylaws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Registrant has not issued or sold securities within the past three years pursuant to offerings that were not registered under the Securities Act, except as follows (the following information does not give effect to the proposed split of the Registrant's Common Stock): (a) In December 1993, Acorn issued a subordinated promissory note in the aggregate principal amount of $25 million to several investment funds and accounts (the "TCW Funds") managed by affiliates of the TCW Group, Inc. This note was restated in May 1994. (b) In May 1994, Acorn issued a subordinated promissory note in the aggregate principal amount of approximately $6.4 million to the TCW Funds. (c) Pursuant to the terms of an employment agreement dated as of January 1994 between Acorn and Joseph I. Duffy, Acorn granted to Mr. Duffy an option to purchase 44 shares of Common Stock. The vesting schedule and exercise price per share were determined based on certain profitability targets. Options to purchase 11 shares of Common Stock vested in fiscal 1995 and options to purchase 11 and 22 shares of Common Stock expired in fiscal 1995 and fiscal 1996, respectively. (d) Pursuant to the terms of an employment agreement dated as of January 1994 between Acorn and Gabe Mihaly, Acorn granted to Mr. Mihaly an option to purchase 33 shares of Common Stock. The vesting schedule and exercise price per share were determined based on certain profitability targets. Options to purchase 8 shares of Common Stock vested in fiscal 1995, options to purchase 4 shares and 12 shares of Common Stock vested and expired, respectively, the six months ended January 31, 1996 and options to purchase 4 shares and 5 shares of Common Stock will vest and expire, respectively, upon consummation of the Offering. (e) In May 1994, Acorn sold 12 shares of Common Stock to Joseph I. Duffy for an aggregate purchase price of $210,000. (f) In May 1994, Acorn sold 14 shares of Common Stock to Gabe Mihaly for an aggregate purchase price of $245,000. (g) Pursuant to the terms of an employment agreement dated as of August 1994 between Acorn and L. Edwin Donegan, Jr., Acorn granted to Mr. Donegan an option to purchase 11 shares of Common Stock. All such options expired. II-2 75 (h) Pursuant to the terms of an option agreement dated as of August 1, 1995, the Company granted John I. Leahy an option to purchase 10 shares of Common Stock at an exercise price of $17,500 per share. Mr. Leahy exercised the option with respect to 5 shares of Common Stock in each of November 1995 and November 1996. (i) In August 1996, Acorn issued 100 shares of Series A Preferred Stock to the TCW Funds as payment in full of approximately $8.6 million in accrued interest on the Subordinated Notes for fiscal 1995 and fiscal 1996. (j) In December 1996, Acorn issued a subordinated promissory note in the aggregate principal amount of $6 million to the TCW Funds. The transactions set forth above were undertaken in reliance upon the exemptions from the registration requirements of the Securities Act afforded by (i) Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales not involving a public offering, and/or (ii) Rule 701 promulgated thereunder, as sales by an issuer to employees, directors, officers, consultants or advisors pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. The purchasers of the securities described above acquired such securities for their own account not with a view to any distribution thereof to the public. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ---------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement* 2.1 Asset Purchase Agreement, dated as of February 19, 1997, between Greif Bros. Corporation and UnionTools, Inc. 3.1 Amended and Restated Certificate of Incorporation of Acorn Products, Inc. 3.2 Amended and Restated Bylaws of Acorn Products, Inc. 4.1 Specimen of Certificate for Common Stock* 5.1 Opinion of Gibson, Dunn & Crutcher LLP* 10.1 Employment Agreement dated April , 1997, between the Company, UnionTools and Gabe Mihaly* 10.2.1 Employee Severance Agreement, dated as of April , 1997, between the Company and James B. Farland* 10.2.2 Employee Severance Agreement, dated as of April , 1997, between the Company and Thomas A. Hyrb* 10.2.3 Employee Severance Agreement, dated as of April , 1997, between the Company and Stephen M. Kasprisin* 10.3 Acorn Products, Inc. Deferred Equity Compensation Plan for Directors 10.4 Acorn Products, Inc. 1997 Stock Incentive Plan 10.5 Standard Form of Acorn Products, Inc. Stock Option Agreement 10.6 UnionTools, Inc. Retirement Plan for Salaried Employees 10.7 Amendment No. 1 to UnionTools, Inc. Retirement Plan for Salaried Employees 10.8 Acorn Products, Inc. Supplemental Pension Plan for Executive Employees 10.9 Credit Agreement, dated as of December 27, 1996, between UnionTools and Heller Financial, Inc. 10.10 Amendment No. 1 to Credit Agreement between UnionTools and Heller Financial, Inc. dated as of February 28, 1997 10.11 Amendment No. 2 to Credit Agreement between UnionTools and Heller Financial, Inc.*
II-3 76
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ---------------------------------------------------------------------------------- 10.12 License Agreement, dated as of August 1, 1992, between The Scott Company and UnionTools 10.13 Registration Rights Agreement, dated as of April , 1997, between Acorn Products, Inc. and various funds and accounts managed by TCW Special Credits* 10.14 Registration Rights Agreement, dated as of April , 1997, between Acorn Products, Inc. and The OMC Principal Opportunities Fund, L.P.* 11.1 Statement re computation of earnings per share (See Note 14 of the Notes to the Consolidated Financial Statements)* 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1) 24.1 Power of Attorney (included in signature page to registration statement) 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. (B) Financial Statement Schedules
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE - -------- ---------------------------------------------------------------------------------- I Condensed Financial Information of Registrant II Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 77 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Columbus, State of Ohio, on April 16, 1997. ACORN PRODUCTS, INC. By: /s/ GAVRIL MIHALY ------------------------------------ Gavril Mihaly Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gabe Mihaly and Conor D. Reilly and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacity indicated on April 16, 1997.
SIGNATURE TITLE - --------------------------------------------- -------------------------------------------- /s/ GAVRIL MIHALY Chief Executive Officer and President - --------------------------------------------- (Principal Executive Officer) Gavril Mihaly /s/ STEPHEN M. KASPRISIN Chief Financial Officer and Treasurer - --------------------------------------------- (Principal Financial and Accounting Officer) Stephen M. Kasprisin /s/ CONOR D. REILLY Chairman of the Board - --------------------------------------------- Conor D. Reilly Director - --------------------------------------------- William W. Abbott /s/ MATTHEW S. BARRETT Director - --------------------------------------------- Matthew S. Barrett /s/ STEPHEN A. KAPLAN Director - --------------------------------------------- Stephen A. Kaplan /s/ JOHN I. LEAHY Director - --------------------------------------------- John I. Leahy
II-5 78 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Acorn Products, Inc. We have audited the consolidated balance sheets of Acorn Products, Inc. (formerly Vision Hardware Group, Inc.) and Subsidiaries (Successor Company) as of July 28, 1995 and August 2, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years then ended and for the period from December 3, 1993 through July 29, 1994 (Successor Company period), and consolidated statements of operations, stockholders' equity and cash flows of Better Vision Hardware Group, Inc. (Predecessor Company) for the period from August 1, 1993 through December 2, 1993 (Predecessor Company period) and have issued our report thereon dated October 4, 1996 (except for notes 3, 4, 11 and 13 as to which the date is April , 1997) (included elsewhere in this Registration Statement). Our audits also included the financial statement schedules listed in Item 16(b) of this Registration Statement. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, effective December 3, 1993, all of the outstanding stock of the Predecessor Company was acquired in a business combination accounted for as a purchase. As a result of this acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. As discussed in Note 8 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1996. Columbus, Ohio October 4, 1996, except for Notes 3, 4, 11 and 13 as to which the date is April , 1997 The foregoing opinion is in the form that will be signed upon the determination of the stock split as described in Note 13 to the Financial Statements. Ernst & Young LLP Columbus, Ohio April 17, 1997 S-1 79 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) CONDENSED BALANCE SHEETS
JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) ASSETS Cash..................................................................... $ 1,211 $ 253 Accounts receivable...................................................... 480 253 Prepaids and other....................................................... 2,501 945 -------- --------- Total current assets..................................................... 4,192 1,451 Property, plant and equipment, net....................................... 11 4 Goodwill................................................................. 6,995 6,812 Other assets (principally investment in and amounts due from wholly-owned subsidiaries).......................................................... 64,730 57,420 -------- --------- Total assets................................................... $ 75,928 $65,687 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Revolving credit facility................................................ $ 19,250 $12,537 Accounts payable and accrued expenses.................................... 742 1,421 Accrued interest......................................................... 4,133 -- Income taxes payable..................................................... 1,488 875 Other current liabilities................................................ 231 220 -------- --------- Total current liabilities................................................ 25,844 15,053 Long-term debt........................................................... 31,354 31,354 Other long-term liabilities.............................................. 1,407 750 -------- --------- Total liabilities........................................................ 58,605 47,157 Stockholders' equity Common stock........................................................... 14,319 14,406 Preferred stock........................................................ -- 8,596 Contributed capital -- stock options................................... 340 340 Minimum pension liability.............................................. -- (197) Retained earnings (deficit)............................................ 2,664 (4,615) -------- --------- Total stockholders' equity.......................................... 17,323 18,530 -------- --------- Total liabilities and stockholders' equity..................... $ 75,928 $65,687 ======= =======
S-2 80 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) (PARENT COMPANY) CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED ---------------------- JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Selling and administrative expenses...................................... $ 1,524 $ 1,828 Interest expense......................................................... -- 1,659 Amortization of intangible assets........................................ 370 471 Other expenses........................................................... -- 1,014 -------- --------- Loss before equity in earnings of subsidiaries........................... (1,894) (4,972) Equity in earnings of wholly-owned subsidiaries.......................... (545) (2,307) -------- --------- Net loss................................................................. $ (2,439) $(7,279) ======= =======
S-3 81 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED ---------------------- JULY 28, AUGUST 2, 1995 1996 -------- --------- (IN THOUSANDS) Net cash from operating activities....................................... (17,621) $ 5,661 INVESTING ACTIVITIES Property and equipment................................................. 5 7 FINANCING ACTIVITIES Net activity on revolving loan......................................... 16,750 (6,713) Issuance of stock...................................................... -- 87 -------- --------- 16,750 (6,626) -------- --------- Decrease in cash......................................................... $ (866) $ (958) ======= =======
S-4 82 ACORN PRODUCTS, INC. SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED) (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the parent company-only financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries. The Company's share of net income (loss) of its unconsolidated subsidiaries is included in consolidated income using the equity method. Parent company-only financial statements should be read in conjunction with the Company's consolidated financial statements. 2. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY At July 28, 1995 and August 2, 1996, the Company had a revolving credit facility with a maximum borrowing of $30 million (the Revolving Facility). The Revolving Facility is collateralized by substantially all of the assets and common stock of the Company's subsidiaries. Available borrowings under the Revolving Facility are based on specified percentages of accounts receivable, inventory and fixed assets of the Company's subsidiaries. The Revolving Facility has a letter of credit subcommitment of $5,000,000. The Revolving Facility bears interest at either the bank prime rate plus a margin ranging from 0.25% to 0.75% (prime rate at August 2, 1996 was 8.25%) or at the Company's option, the LIBOR rate plus a margin ranging from 2.25% to 2.75% (LIBOR rate at August 2, 1996 was 5.5%). At August 2, 1996, the Company had all debt outstanding under the LIBOR interest rate option. The interest rate margin fluctuates based on the ratio of total senior debt to operating cash flow as set forth in a predetermined pricing table. In addition, the Company is required to pay a fee of 0.5% per year on the unused portion of the Revolving Facility. The Credit Facility contains certain covenants, which, among other things, require the Company to maintain specified financial ratios and satisfy certain tests including minimum interest coverage ratios and places limits on future capital expenditures. The Company was in compliance of all debt covenants at August 2, 1996. In December 1993, the Company issued a Subordinated Unsecured Promissory Note in the amount of $25,000,000 to the TCW Funds. In May 1994 the Company issued a Temporary Subordinated Promissory Note in the amount of $6,354,000 to the TCW Funds. The Subordinated Unsecured Promissory Note and the Temporary Subordinated Promissory Note collectively are referred to herein as the "Subordinated Notes". The Subordinated Notes are due on July 31, 2003 and carry interest at 13% per year. Annual interest payments for the Subordinated Notes are contingent upon meeting certain financial measures. These financial measures were not met during fiscal 1995 and 1996, thus, no cash interest payments were permitted. The Subordinated Notes require that any non-payment of interest be added to the principal balance of the outstanding Subordinated Notes. On August 2, 1996, the Company issued 100 shares of Series A Preferred Stock (the "Series A Preferred Stock") with a par value of $.001 per share and a stated value of $8,596,000 as payment in full of accrued interest on the Subordinated Notes due for fiscal years 1995 and 1996. Interest on the Subordinated Notes of $4,133,000 and $4,463,000 was paid in the form of Series A Preferred Stock during fiscal 1995 and fiscal 1996, respectively. S-5 83 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ACORN PRODUCTS, INC. AND SUBSIDIARIES AUGUST 2, 1996
COL. A COL. B COL. C COL. D COL. E - -------------------------------- ------------ ----------------------------------- ---------- ---------- ADDITIONS BALANCE AT ----------------------------------- BALANCE AT BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS END OF DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DESCRIBE PERIOD - -------------------------------- ------------ ---------------- ---------------- ---------- ---------- Year Ended August 2, 1996: Deducted from asset accounts: Allowance for doubtful accounts................. $175,000 $ 0 $ 35,000(1) $ 140,000 Reserve for sales discounts and allowances............. 470,205 105,46 159,000(1) 416,673 -- -------- -------- -------- -------- Total................. $645,205 $105,468 $194,000 $ 556,673 ======== ======== == ======== ======== Year Ended July 28, 1995: Deducted from asset accounts: Allowance for doubtful accounts................. $175,689 $ 0 $ 689(1) $ 175,000 Reserve for sales discounts and allowances............. 305,962 329,000 164,757(2) 470,205 -- -------- -------- -------- -------- Total................. $481,651 $329,000 $165,446 $ 645,205 ======== ======== == ======== ======== Eight months ended July 29, 1994: Deducted from asset accounts: Allowance for doubtful accounts................. $175,433 $ 256 $ 175,689 Reserve for sales discounts and allowances............. 219,582 86,380 305,962 -- -------- -------- -------- -------- $395,015 $ 86,636 $ 481,651 ======== ======== == ======== ========
- --------------- (1) Uncollectible accounts written off net of recoveries. (2) Discounts taken by customers during year. S-6 84 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT PAGE - ------ -------------------------------------------------------------------------- ---- 1.1 Form of Underwriting Agreement*........................................... 2.1 Asset Purchase Agreement, dated as of February 19, 1997, between Greif Bros. Corporation and UnionTools, Inc. ................................... 3.1 Amended and Restated Certificate of Incorporation of Acorn Products, Inc. ..................................................................... 3.2 Amended and Restated Bylaws of Acorn Products, Inc. ...................... 4.1 Specimen of Certificate for Common Stock*................................. 5.1 Opinion of Gibson, Dunn & Crutcher LLP*................................... 10.1 Employment Agreement dated April , 1997, between the Company, UnionTools and Gabe Mihaly*.......................................................... 10.2.1 Employee Severance Agreement, dated as of April , 1997, between the Company and James B. Farland*............................................. 10.2.2 Employee Severance Agreement, dated as of April , 1997, between the Company and Thomas A. Hyrb*............................................... 10.2.3 Employee Severance Agreement, dated as of April , 1997, between the Company and Stephen M. Kasprisin*......................................... 10.3 Acorn Products, Inc. Deferred Equity Compensation Plan for Directors...... 10.4 Acorn Products, Inc. 1997 Stock Incentive Plan............................ 10.5 Standard Form of Acorn Products, Inc. Stock Option Agreement.............. 10.6 UnionTools, Inc. Retirement Plan for Salaried Employees................... 10.7 Amendment No. 1 to UnionTools, Inc. Retirement Plan for Salaried Employees................................................................. 10.8 Acorn Products, Inc. Supplemental Pension Plan for Executive Employees.... 10.9 Credit Agreement, dated as of December 27, 1996, between UnionTools and Heller Financial, Inc. ................................................... 10.10 Amendment No. 1 to Credit Agreement between UnionTools and Heller Financial, Inc. dated as of February 28, 1997............................. 10.11 Amendment No. 2 to Credit Agreement between UnionTools and Heller Financial, Inc.*.......................................................... 10.12 License Agreement, dated as of August 1, 1992, between The Scott Company and UnionTools............................................................ 10.13 Registration Rights Agreement, dated as of April , 1997, between Acorn Products, Inc. and various funds and accounts managed by TCW Special Credits Funds*............................................................ 10.14 Registration Rights Agreement, dated as of April , 1997, between Acorn Products, Inc. and The OMC Principal Opportunities Fund, L.P.*............ 11.1 Statement re computation of earnings per share (See Note 14 of the Notes to the Consolidated Financial Statements)*................................ 21.1 Subsidiaries of the Registrant............................................ 23.1 Consent of Ernst & Young LLP.............................................. 23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1).......... 24.1 Power of Attorney (included in signature page to registration statement)................................................................ 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. EX-2.1 2 ASSET PURCHASE AGREEMENT 1 EXHIBIT 2.1 Execution Copy ASSET PURCHASE AGREEMENT DATED AS OF FEBRUARY 19, 1997 BETWEEN GREIF BROS. CORPORATION AND UNIONTOOLS, INC. 2 TABLE OF CONTENTS
Page ---- PARTIES ................................................................................................1 RECITALS ...............................................................................................1 ARTICLE I - DEFINITIONS......................................................................................1 SECTION 1.01. Defined Terms.........................................................................1 ARTICLE II - PURCHASE AND SALE...............................................................................6 SECTION 2.01. Assets................................................................................6 SECTION 2.02. Assumed Liabilities...................................................................8 SECTION 2.03. Purchase Price........................................................................9 SECTION 2.04. Closing..............................................................................10 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER......................................................11 SECTION 3.01. Organization, Good Standing and Authority of Seller.....................................................11 SECTION 3.02. No Conflict..........................................................................12 SECTION 3.03. No Consents or Approvals.............................................................12 SECTION 3.04. Financial Information................................................................12 SECTION 3.05. Right, Title and Interest in Transferred Assets......................................................14 SECTION 3.06. Real Property........................................................................14 SECTION 3.07. Inventories..........................................................................15 SECTION 3.08. Other Tangible Personal Property.....................................................15 SECTION 3.09. Trade Names, Trademarks and Copyrights..............................................................16 SECTION 3.10. Trade Secrets........................................................................17 SECTION 3.11. Computer Software; Other Intangible Personal Property.......................................................17
(i) 3
Page ---- SECTION 3.12. Material Contracts...................................................................18 SECTION 3.13. Litigation...........................................................................19 SECTION 3.14. Compliance with Laws.................................................................19 SECTION 3.15. Labor Relations......................................................................20 SECTION 3.16. Employment and Compensation Arrangements............................................................21 SECTION 3.17. Employee Benefit Plans and Benefit Arrangements............................................................22 SECTION 3.18. Taxes................................................................................22 SECTION 3.19. Insurance............................................................................23 SECTION 3.20. Licenses, Franchises, Permits and Authorizations..........................................................23 SECTION 3.21. Agreement Not In Breach of Other Instruments.............................................................23 SECTION 3.22. Brokers..............................................................................24 SECTION 3.23. Full Disclosure......................................................................24 ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER........................................................24 SECTION 4.01. Organization, Good Standing and Authority of Buyer......................................................24 SECTION 4.02. No Conflict..........................................................................24 SECTION 4.03. No Consents or Approvals.............................................................25 SECTION 4.04. Absence of Litigation................................................................25 SECTION 4.05. Agreement Not In Breach of Other Instruments.............................................................25 SECTION 4.06. Brokers..............................................................................25 ARTICLE V - ADDITIONAL AGREEMENTS...........................................................................25 SECTION 5.01. No Solicitation, Etc.................................................................25 SECTION 5.02. Conduct of Business Prior to the Closing.................................................................26
(ii) 4
Page ---- SECTION 5.03. Approvals; Consents..................................................................26 SECTION 5.04. Access to Premises and Information...................................................27 SECTION 5.05. Employees............................................................................27 SECTION 5.06. Due Diligence; Right to Terminate....................................................27 SECTION 5.07. Proration and Sharing of Taxes.......................................................28 SECTION 5.08. Further Action.......................................................................29 SECTION 5.09. Assets After the Closing.............................................................29 SECTION 5.10. Consents to Transfer of the Material Contracts...............................................................29 SECTION 5.11. Covenant Not to Compete..............................................................29 SECTION 5.12. Power of Attorney....................................................................30 SECTION 5.13. Uniform Commercial Code and Other Lien Searches...........................................................31 SECTION 5.14. Worker Adjustment and Retraining Notification Act........................................................31 SECTION 5.15. Licenses, Franchises, Permits and Authorizations..........................................................31 SECTION 5.16. Molds................................................................................31 SECTION 5.17. Railroad Spur Access and Maintenance Agreement...............................................................31 SECTION 5.18. Turn About Access and Maintenance Agreement...............................................................32 ARTICLE VI - CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS...................................................32 SECTION 6.01. Representations and Warranties.......................................................32 SECTION 6.02. Performance of Covenants.............................................................33 SECTION 6.03. Authority............................................................................33 SECTION 6.04. Approval of Governmental Authorities.................................................33 SECTION 6.05. Purchase Price.......................................................................33
(iii) 5
Page ---- SECTION 6.06. Ancillary Agreements.................................................................33 SECTION 6.07. Buyer's Certificate..................................................................33 SECTION 6.08. Approval of Documentation............................................................33 SECTION 6.09. Consents.............................................................................33 SECTION 6.10. Access Agreements....................................................................34 ARTICLE VII - CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS...................................................34 SECTION 7.01. Representations and Warranties.......................................................34 SECTION 7.02. Performance of Covenants.............................................................34 SECTION 7.03. Authority............................................................................34 SECTION 7.04. Seller's Certificate.................................................................34 SECTION 7.05. Bulk Sales Laws......................................................................34 SECTION 7.06. Sales and Use Tax on Prior Sales.....................................................35 SECTION 7.07. Consents.............................................................................35 SECTION 7.08. Approval of Documentation............................................................35 SECTION 7.09. Approval of Governmental Authorities.................................................35 SECTION 7.10. No Material Adverse Change...........................................................35 SECTION 7.11. Interim Financial Statements.........................................................35 SECTION 7.12. Ancillary Agreements.................................................................35 SECTION 7.13. Key Employees........................................................................36 SECTION 7.14. Title Insurance......................................................................36 SECTION 7.15. Access Agreements....................................................................36 ARTICLE VIII - INDEMNIFICATION..............................................................................36 SECTION 8.01. Seller's Indemnity...................................................................36 SECTION 8.02. Buyer's Indemnity....................................................................36 SECTION 8.03. Claims for Indemnification...........................................................37
(iv) 6
Page ---- ARTICLE IX - GENERAL PROVISIONS.............................................................................38 SECTION 9.01. Termination..........................................................................38 SECTION 9.02. Specific Performance.................................................................38 SECTION 9.03. Survival of Representations and Warranties..............................................................38 SECTION 9.04. Expenses.............................................................................39 SECTION 9.05. Notices..............................................................................39 SECTION 9.06. Amendment............................................................................39 SECTION 9.07. Waiver...............................................................................40 SECTION 9.08. Headings.............................................................................40 SECTION 9.09. Severability.........................................................................40 SECTION 9.10. Entire Agreement.....................................................................40 SECTION 9.11. Binding Agreement; Assignment........................................................40 SECTION 9.12. Governing Law........................................................................40 SECTION 9.13. [Intentionally Omitted]..............................................................41 SECTION 9.14. Counterparts.........................................................................41 SECTION 9.15. No Third Party Beneficiaries.........................................................41 SECTION 9.16. Publicity............................................................................41 SIGNATURE PAGE..............................................................................................42 LIST OF EXHIBITS............................................................................................43 LIST OF SCHEDULES...........................................................................................44
(v) 7 This ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of February 19, 1997 between GREIF BROS. CORPORATION, a Delaware corporation ("Seller"), and UNIONTOOLS, INC., a Delaware corporation ("Buyer"). RECITALS WHEREAS, Seller is engaged in the business (the "Business") of manufacturing plastic forms by injection molding at Seller's injection molding division (the "Facility") located in Hebron, Ohio. WHEREAS, Seller desires to sell to Buyer the Business, including substantially all of the assets of the Seller which comprise and are necessary for the conduct of the Business (except those hereinafter specifically excluded from such sale), and Buyer desires to acquire such Business and assets from Seller and assume certain liabilities on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants, representations and warranties herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, unless otherwise provided, the following terms shall have the meanings ascribed to them below (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any court, governmental or other regulatory or administrative agency or commission or arbitration tribunal. "Affiliate" shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations of the Securities Exchange Act of 1934. "Ancillary Agreements" means the other agreements, documents and instruments to be executed and delivered by Buyer and/or Seller pursuant hereto, including, without limitation, the Assumption Agreement and the Bill of Sale and Assignment. 1 8 "Annual Financial Statements" mean (a) the profit and loss statement of the Business and (b) the statement of fixed assets (including depreciation) and inventory of the Business, each prepared in accordance with Seller's internal standards, consistently applied, for a division of the same type as the Business, for each of the Seller's fiscal years ended October 31, 1996, 1995 and 1994. "Assumed Liabilities" means, and shall consist only of, the Liabilities which are specifically identified in Section 2.02(a). "Assumption Agreement" means an assumption agreement in substantially the form of Exhibit A hereto. "Bill of Sale and Assignment" means a bill of sale and assignment in substantially the form of Exhibit B hereto. "Blow Molding Division" means Seller's Blow Molding Division at 1001 O'Neil Drive, Hebron, Ohio 43025, known as Building 17 in the industrial park where the Owned Realty is situated. "Business" has the meaning set forth in the first recital. "Business Combination Proposal" means any proposal or offer to acquire the Business or any or all of the Transferred Assets other than as contemplated by this Agreement. "Business Day" means a day of the year on which banks are not authorized to be closed in Columbus, Ohio. "Buyer" has the meaning set forth in the preamble. "Buyer's Auditors" means Ernst & Young LLP, independent certified public accountants. "Closing" and "Closing Date" have the meanings specified in Section 2.04. "Code" means the Internal Revenue Code of 1986, as amended. "Employees" shall mean (i) all employees of Seller who, on the Closing Date, are full-time employees whose employment relates solely to the Business and who are at work on the Closing Date or any day within the five days prior thereto, all of whom are set forth or referred to in part (a) of Schedule 3.16, as well as (ii) the employees of Seller who are set forth in part (b) of Schedule 3.16. 2 9 "Environmental Damages" means all claims, judgments, damages, losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of investigation and defense of claims, whether or not any such claim is ultimately defeated, and of any good faith settlement of judgment for such claims, of whatever kind or nature, contingent or otherwise, matured or unmatured, foreseeable or unforeseeable, including without limitation reasonable attorneys' fees and disbursements and consultants' fees, any of which are incurred at any time as a result of the existence during the period from the first date Seller owned the Owned Realty through the Closing Date of Hazardous Materials upon, about or beneath the Owned Realty or migrating or threatening to migrate from the Owned Realty, or the existence of a violation of Environmental Requirements pertaining to the Owned Realty, or the transportation of Hazardous Materials to, from or across the Owned Realty. "Environmental Requirements" means all applicable present statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises and similar items, of all governmental agencies, departments or instrumentalities of the United States, the states and political subdivisions thereof and all applicable judicial and administrative and regulatory decrees, judgments and orders relating to the protection of human health or the environment and including, but not limited to, those pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, releases or threatened releases of Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Excluded Assets" means all the assets of the Facility except for the Transferred Assets, including without limitation the assets set forth in Section 2.01(b). "Facility" has the meaning set forth in the first recital. "Financial Statements" means, collectively, the Annual Financial Statements and the Interim Financial Statements. "GAAP" means generally accepted accounting principles, applied in a manner consistent with Seller's past practices as reflected in its financial statements for its fiscal year ended October 31, 1996. "Goodwill" means the intangible value of the Business on the basis of its good customer relations, high employee morale and similar factors. "Governmental Authority" means any court, agency, department, ministry, commission, board or other administrative or 3 10 governmental body of the United States, or any state, political subdivision or jurisdiction thereof. "Hazardous Materials" means any chemical substance, material or waste which is defined as a "hazardous waste" or "hazardous substance" or "pollutant or contaminant" under any federal, state or local statute, regulation or ordinance or amendments thereto, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) and including, without limitation, petroleum and petroleum products or byproducts, and any substance which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is regulated by any Governmental Authority. "Impairments" has the meaning set forth in Section 3.06(a). "Indemnified Damages" means any costs, losses, liabilities, claims and expenses (reduced by any offsetting or related asset or service received and any recovery from any third party, such as an insurer) including reasonable legal fees and costs of investigation. "Interim Financial Statements" mean (a) the profit and loss statement of the Business and (b) the statement of fixed assets (including depreciation) and inventory of the Business, each prepared in accordance with Seller's internal standards, consistently applied, for a division of the same type as the Business, for the two months ended December 31, 1996. "Inventory" has the meaning set forth in Section 2.01(a)(ii). "Inventory Value" shall mean the lower of cost (as determined in a manner consistent with the past practices of Seller) or fair market value of the Inventory, net of applicable reserves, calculated in accordance with GAAP. "Liabilities" means any and all debts, liabilities, losses, claims, damages, costs, expenses and obligations, whether fixed or contingent, or matured or unmatured, including, without limitation, those arising under any law, rule, regulation, action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. "Material Contracts" has the meaning set forth in Section 3.12. 4 11 "Main Spur" means the spur which attaches the public railroad to Spur #1 and Spur #2 and the switching gear appurtenant thereto. "Owned Realty" means the real property more particularly described on Exhibit C attached hereto and made a part hereof, including, without limitation, all easements related to the Turn About and for railroad spurs to which the Business has access. "Person" includes any individual, sole proprietorship, partnership, joint venture, trust, incorporated organization, limited liability company, association, corporation, institution, party, entity or governmental authority. "Purchase Price" has the meaning set forth in Section 2.03. "Railroad Spur Agreement" has the meaning set forth in Section 5.17. "Relative Use", with respect to either party hereto and with respect to either the Main Spur or Spur #2, a fraction, the numerator of which is the number of rail cars that ran on such spur to such party's facility during the immediately preceding six months and the denominator of which is the aggregate number of rail cars that ran on such spur to that party's facility and the other party's facility during the immediately preceding six months. "Retained Liabilities" means all Liabilities of Seller other than the Assumed Liabilities. "Seller" has the meaning set forth in the preamble. "Seller's Auditors" means Price Waterhouse LLP, independent certified public accountants. "Sewer Permit" means the Village of Hebron Sewer Permit referred to in Schedule 3.20. "Spur #1" means the railroad spur labeled "Spur #1" on Exhibit D hereto. "Spur #2" means the railroad spur labeled "Spur #2" on Exhibit D hereto. "Storm Water Permit" means Ohio EPA Storm Water General Permit - - Permit Number OHR001150, referred to in Schedule 3.20. "Tax" means any income, gross receipts, transfer, gains, sales, use, employment, franchise, profits, property or other taxes, fees, stamp taxes and duties, assessments or charges of any kind whatsoever (whether payable directly or by withholding), together with any interest and any penalties, additions to tax or 5 12 additional amounts imposed by any taxing authority with respect thereto. "Trade Secrets" has the meaning set forth in Section 3.10(a). "Transferred Assets" has the meaning set forth in Section 2.01(a). "Turn About" means the concrete area, a portion of which is located on the Owned Realty and the remaining portion of which is located on adjacent real estate that will continue to be owned by Seller, which is used to access the loading docks on the Owned Realty and on the real estate that will continue to be owned by Seller. "Turn About Agreement" has the meaning set forth in Section 5.18. ARTICLE II PURCHASE AND SALE SECTION 2.01. Assets. (a) Transferred Assets. Subject to the terms set forth in this Agreement, on the Closing Date, Seller agrees to convey, sell, transfer, assign and deliver to Buyer, and Buyer agrees to purchase from Seller, all of the properties, assets, business, rights, claims and contracts of every kind used solely in the conduct of the Business or otherwise owned or used by Seller solely in connection with the Business, other than the Excluded Assets (such assets and properties of Seller are collectively referred to hereinafter as the "Transferred Assets"), including, without limitation, the following assets: (i) The Owned Realty and the improvements thereon; (ii) All inventories of raw materials used at the Facility, finished goods produced at the Facility and work-in-process at the Facility owned by Seller as of the Closing Date (collectively, the "Inventory"); (iii) All tangible assets and properties of Seller employed in the Business, including machinery and equipment, tooling, tools, furniture, cooperage, office equipment, furnishings and fixtures, including, without limitation, those which are listed in Schedule 3.08; (iv) All rights and claims existing on the Closing Date under express or implied warranties from suppliers to Seller or Seller's customers, relating to the Business; 6 13 (v) All of Seller's right, title and interest in and to each lease (capital and operating), license, contract, vendor agreement, distribution right, right to advertising space and listings in directories, purchase or sales order or commitment, whether written or oral, relating solely to the Business, except for any right, title or interest listed in Schedule 2.01(a); (vi) All of Seller's right, title and interest in and to all trade names, trademarks and trademark applications, service marks and service mark applications, patents and patent applications, copyrights and copyright applications (in each such case, whether registered or to be registered in the United States of America or elsewhere) applied for, issued to or owned by Seller and relating solely to the Business, all intangible assets of Seller relating solely to the Business, and all processes, inventions, trade secrets, engineering or technical drawings, data and designs, formulas and past and present customer lists owned by Seller in connection with the Business or which Seller has the right to use relating to the Business and all Goodwill and other intangibles relating to the Business, including, without limitation, those which are listed in Schedules 3.09 and 3.10, provided that the names "Greif" and "Greif Bros. Corporation" are not being transferred; (vii) The computer equipment and computer software, including source codes, whether completed or under development, and software licenses owned or held by Seller or which Seller has the right to use which are necessary to Buyer's operation of the Business and which are more particularly described and are limited to those which are described in Schedule 3.11, it being agreed that not all computer equipment is being sold; (viii) Licenses, franchises, permits and governmental authorizations relating to the Transferred Assets or the operation of the Business, including, without limitation, those listed in Schedule 3.20, but excluding those which are not assignable or otherwise transferable and are so designated in Schedule 3.20; and (ix) Originals or, to the extent originals are not appropriate, copies of all of the following that relate solely to the Transferred Assets and the Business: business tax records (excluding corporate minute books and stock records), correspondence, files, databases, employment, payroll, personnel and workers' compensation records, environmental control records, sales, marketing and advertising data and materials, and all other books, records, documents and information relating to the Transferred Assets and the Business, provided that upon request Seller may have copies of 7 14 any of the foregoing and otherwise have access to the foregoing at reasonable times during business hours. (b) Excluded Assets. Notwithstanding anything to the contrary in Section 2.01 hereof, Seller is not selling, and Buyer is not purchasing, any of the following assets owned by Seller, all of which shall be retained by Seller (such assets of Seller are hereinafter referred to collectively as the "Excluded Assets"): (i) All cash, notes and accounts receivable owned by Seller; (ii) The assets listed in the Excluded Assets Schedule attached as Schedule 2.01(b) hereto; (iii) Seller's minute books, seal, stock record books, stock certificates and other similar corporate documents that are not necessary for Buyer to operate the Business, provided that upon request Buyer may have copies thereof; (iv) The rights which accrue or will accrue to Seller under or pursuant to this Agreement; and (v) All other assets owned by Seller, including those assets that are part of the Facility or the Business, that are not specifically listed in Section 2.01(a). SECTION 2.02. Assumed Liabilities. (a) Assumed Liabilities. Buyer hereby assumes and shall hereafter pay or perform, to the extent not paid or performed at the Closing Date, and defend and hold Seller harmless from, all liabilities with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing (the "Assumed Liabilities"). (b) Buyer Not Responsible for Liabilities Except Assumed Liabilities. Except for the assumption of the Assumed Liabilities as set forth above, Buyer does not assume and shall not be obligated to pay, perform or otherwise be responsible for any Retained Liabilities. Without limiting the generality of the foregoing, it is hereby expressly acknowledged and agreed that Buyer shall be deemed not to assume or be obligated to pay any of the following Retained Liabilities: (i) any liabilities of Seller to any director, officer, shareholder or employee of Seller (including, without limitation, any liabilities for severance or termination pay to former employees) other than liabilities included on Schedule 2.02(a); 8 15 (ii) any liabilities or expenses for Taxes of Seller on income related to the sale of the Transferred Assets; (iii) to the extent not expressly assumed pursuant to Section 2.02(a), any liabilities or claims of any kind or nature, fixed or contingent, asserted or unasserted, arising out of or related to the operation of the Business or the Transferred Assets prior to the Closing Date, including any claim for the breach of any express or implied product warranty or any similar claim that relates to any product manufactured or sold by Seller on or before the Closing Date; (iv) to the extent not expressly assumed pursuant to Section 2.02(a), any liabilities of Seller arising out of or in connection with any employee compensation or benefit plan or arrangement of any kind; (v) any claims or causes of action, brought by any governmental agency or any Person whatsoever, arising from any condition in existence on or before the Closing Date on any of the premises where the Business has been conducted; (vi) any liability of Seller to any Person the existence of which constitutes a breach of any covenant, agreement, representation, or warranty of Seller contained in this Agreement; (vii) to the extent not expressly assumed pursuant to Section 2.02(a), any liability or obligation (contingent or otherwise) of Seller arising out of any threatened or pending litigation; and (viii) any indebtedness of Seller. SECTION 2.03. Purchase Price. (a) Consideration to be Paid at Closing. As consideration for the purchase of the Transferred Assets and the covenant not to compete of Seller, Buyer, in addition to assuming the Assumed Liabilities, shall pay to Seller an aggregate purchase price of SIX MILLION SEVEN HUNDRED THOUSAND DOLLARS ($6,700,000) (the "Purchase Price"), subject to adjustment as provided in subsection 2.03(b) hereof. SIX MILLION DOLLARS ($6,000,000) (the "Initial Payment") shall be paid by Buyer to Seller at Closing by a bank wire transfer in immediately available funds to an account designated by Seller at least two Business Days before the Closing Date. EIGHT HUNDRED THOUSAND DOLLARS ($800,000) of the Initial Payment shall be allocable to Inventory, subject to adjustment as set forth in Section 2.03(b) hereof. In addition to the Purchase Price, Buyer shall pay to Seller the portion of the Taxes allocated to Buyer in accordance with the provisions of Section 5.07 hereof. 9 16 (b) Inventory Adjustment. On the Closing Date, Seller shall conduct a full, tagged physical inventory, and a representative of Buyer may attend and observe such inventory. Within ten (10) days after such physical inventory, Seller shall prepare a calculation of Inventory Value based on such physical inventory and deliver a copy thereof to Buyer and Buyers' Auditors for review. Buyer shall have ten (10) days after receipt of such calculation to review it and have it reviewed by Buyer's Auditors. If Buyer disagrees with such calculation, Buyer and Seller shall resolve such disagreements within ten (10) days thereafter. If the Inventory Value, as agreed on by Buyer and Seller, is greater than $800,000, Buyer shall promptly pay Seller by bank wire transfer an amount for the Inventory equal to the difference between the Inventory Value and $800,000, provided that Buyer shall not be required to pay Seller more than $700,000. If the Inventory Value, as agreed on by Buyer and Seller, is less than $800,000, Seller shall promptly pay Buyer by bank wire transfer an amount equal to the difference between $800,000 and the Inventory Value. (c) Allocation of Purchase Price. The parties agree that the Purchase Price shall be allocated among the Transferred Assets and the covenant not to compete contained in Section 5.11 in accordance with Schedule 2.03(c). Subject to the requirements of applicable law, such allocation (and any amendments thereto by reason of adjustments to the purchase price hereunder) shall be binding on the parties for purposes of filing any return, report or schedule regarding Taxes arising from or in connection with Buyer's acquisition of the Transferred Assets from Seller, and any such return, report or schedule shall be consistent with such allocation. Buyer shall promptly furnish Schedule 2.03(c) after such time as an amount has been settled with respect to Inventory Value. SECTION 2.04. Closing. (a) Time and Place. Subject to the terms and conditions of this Agreement, the sale and purchase contemplated hereby shall take place at a closing (the "Closing") at 10:00 a.m., local time, as soon as practicable after all conditions for the Closing are satisfied or waived, at the offices of Vorys, Sater, Seymour & Pease located at 52 East Gay Street, Columbus, Ohio, or at such other time or on such other date or at such other place as Seller and Buyer may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date"). (b) Deliveries at the Closing by Seller. At the Closing, Seller shall deliver to Buyer the Bill of Sale and Assignment and such assignments, consents, and other instruments of transfer and powers of attorney as are reasonably required to transfer to Buyer good and marketable title to the Transferred Assets, free and clear of any claims, liens, trusts, encumbrances or other rights or interests of any person other than the Impairments or as otherwise expressly permitted by the terms of 10 17 this Agreement. In particular, but without limiting the foregoing, Seller shall deliver to Buyer at the Closing: (i) The Bill of Sale and Assignment, duly executed by Seller; (ii) Certified resolutions of Seller's Board of Directors approving the sale of the Business to Buyer; (iii) A certification of non-foreign status executed by Seller and satisfying the requirements of Section 1.1445-2(b)(2)(i) of the United States Treasury Regulations promulgated under the Code; (iv) A warranty deed with respect to the real estate transferred, duly executed by Seller; and (v) Such other documents as are required to effectuate the transactions contemplated by this Agreement. (c) Deliveries at the Closing by Buyer. At the Closing, Buyer shall deliver to Seller: (i) The Assumption Agreement, duly executed by Buyer; (ii) Certified resolutions of Buyer's Board of Directors approving the purchase of the Business from Seller; (iii) Payment of the Initial Payment as provided in Section 2.03; (iv) The "sale for resale" certificate or a direct pay permit number necessary to exempt the inventory that is part of the Transferred Assets from Ohio sales tax; and (v) Such other documents as are required to effectuate the transactions contemplated by this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Buyer to enter into this Agreement, Seller represents and warrants to Buyer as follows: SECTION 3.01. Organization, Good Standing and Authority of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power to own its properties and carry on the Business as now owned and operated by 11 18 Seller. Seller is duly qualified to transact business as a foreign corporation and is in good standing in each jurisdiction required for the conduct of the Business, except where the failure so to qualify would not have a material effect on the Business. Seller has all requisite corporate power and authority to enter into this Agreement and each of the Ancillary Agreements to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the Ancillary Agreements to which Seller is a party have been duly authorized by all necessary corporate action on the part of Seller, have been or will be duly executed and delivered by Seller, and this Agreement and such Ancillary Agreements constitute or, upon execution and delivery, will constitute, legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their terms. SECTION 3.02. No Conflict. The execution, delivery and performance by Seller of this Agreement and each of the Ancillary Agreements to which Seller is a party do not and, subject to the receipt of consents to assignments of contracts listed on Schedule 3.02, will not (a) violate or conflict with any provision of the Articles of Incorporation or By-Laws of Seller, (b) conflict with or violate any law (other than bulk sales or similar laws), rule, regulation, order, writ, judgment, injunction, decree, determination or award applicable to Seller, the Transferred Assets or the Business, (c) except as would not materially affect Seller's ability to consummate the transactions contemplated by this Agreement, violate any provision of or result in any breach of, or constitute a default (or event which, with the giving of notice or lapse of time, or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument relating to the Transferred Assets to which Seller is a party or by which Seller or any of such Transferred Assets are bound or affected or (d) result in the creation of any lien, security interest or encumbrance on the Transferred Assets. SECTION 3.03. No Consents or Approvals. The execution, delivery and performance by Seller of this Agreement and each of the Ancillary Agreements to which Seller is a party do not, and will not, require any consent, approval, authorization or other action by, or registration or filing with or notification to, any governmental or regulatory authority or any third party, except as disclosed on Schedule 3.03. 12 19 SECTION 3.04. Financial Information. (a) Financial Statements. Seller has previously furnished to Buyer the Annual Financial Statements. The Annual Financial Statements (i) are correct and complete in all material respects and were prepared in accordance with the books and records of Seller; (ii) were prepared in accordance with Seller's internal standards, consistently applied, for divisions of the same type as the Business; (iii) fairly present the value of the Transferred Assets and the results of the operations of the Business as at each relevant date thereof and for the periods covered thereby; and (iv) with respect to contracts and commitments relating to the Business, contain and reflect adequate reserves for all reasonably anticipated material losses and costs and expenses in excess of expected receipts. (b) Absence of Certain Changes. Except as set forth in Schedule 3.04(b), since October 31, 1996 there has not been (i) any transaction by Seller relating to the Business not in the ordinary course of business as conducted on such date; (ii) any material adverse change in the results of operations, condition (financial or otherwise), assets or liabilities (whether absolute, accrued or contingent or otherwise) of the Business, or occurrence of any event or condition which to Seller's knowledge reasonably could result in any such material adverse change; (iii) any damage, destruction or loss, whether or not covered by insurance, that, individually or in the aggregate, has had a material adverse effect on the results of operations, condition (financial or otherwise), assets or properties of the Business; (iv) any sale or transfer of any of Seller's assets relating to the Business, except sales in the ordinary course of business of inventory or immaterial amounts of other tangible personal property not required by the Business; (v) any mortgage, pledge or subjection to lien, charge or encumbrance of any kind, of any of the assets of Seller relating to the Business, except for liens for Taxes not due; (vi) any material amendment or termination of any contract, agreement or license which is identified on Schedule 3.12 hereto; (vii) any change in accounting methods or practices by Seller or Seller's Auditors or any material alteration in the manner of keeping the books, accounts or records of Seller except for changes, if any, required by GAAP; (viii) any waiver or release of any material right or claim of Seller relating to the Business; (ix) any commencement, notice or threat of commencement of any material civil litigation or governmental proceeding against or investigation of Seller relating to the Business; (x) any other event or condition of any character which has had a material adverse effect on the results of operations, condition (financial or otherwise), assets or properties of the Business, or the occurrence of any event or condition which reasonably could result in any such material adverse change; (xi) any material revaluation by Seller of any of its assets relating to the Business; (xii) any increase in the salary or other compensation or benefits payable or to become payable by Seller to any of its Employees, or the declaration, 13 20 payment or commitment or obligation of any kind for the payment by Seller of a bonus or other additional salary or compensation or benefits to any such person other than the year end adjustment to salaries of 3.15% for all salaried employees effective January 1, 1997; or (xiii) any agreement by Seller to do any of the foregoing or to cause any of the foregoing to occur. SECTION 3.05. Right, Title and Interest in Transferred Assets. Except as set forth in Schedule 3.05, Seller is the lawful owner of the Transferred Assets, has good and marketable title thereto, and has the complete and unrestricted power and the unqualified right to sell, transfer, assign and deliver the Transferred Assets to Buyer. The Transferred Assets (excluding the Owned Realty) will be transferred to Buyer on the Closing Date free and clear of all liens, security interests, claims (including claims for Taxes), rights to use or possess, other contractual restrictions and other charges and encumbrances and, upon such transfer, Buyer will be vested with good and marketable title to the Transferred Assets. SECTION 3.06. Real Property. (a) Seller has good and marketable title in fee simple to the Owned Realty and to all plants, buildings and improvements thereon, free and clear of any mortgage, lien, claim, charge, exception, imperfection of title, encroachment, easement, right-of-way, squatters' right or encumbrance (collectively, "Impairments"), except for those Impairments (i) which are described in part 1 of Schedule 3.06, (ii) which, individually or in the aggregate, are not material in character, amount or extent and do not have a material adverse effect on the title, or the present use of, the property subject thereto or affected thereby or do not otherwise materially impair the Business; or (iii) which are liens for property taxes not yet due and payable. With respect to Seller's ownership and use of the Owned Realty, the Impairments described in (i) above which will remain on the Owned Realty at the time of sale hereunder, individually and in the aggregate, are not material in character, amount or extent and have not had a material adverse effect on the present use of the property subject thereto or affected thereby and have not otherwise materially impaired the Business. Subject to such Impairments, on the Closing Date, Buyer will be vested with good and marketable title to the Owned Realty. The legal descriptions of the Owned Realty set forth on part 1 of Schedule 3.06 are complete and correct descriptions of such real property, its location and limits and Seller's rights therein and are in each case sufficient to locate the records pertaining to such Owned Realty in the offices in the jurisdictions where such Owned Realty is located where public records concerning Owned Realty are kept. True and complete copies of the deeds, title insurance policies, surveys, mortgages, agreements and other documents granting or relating to Seller's ownership of such Owned Realty have previously been delivered to Buyer. 14 21 (b) No part of the Business is located on real property under which Seller is a lessee or sublessee. (c) To the best of Seller's knowledge, the buildings and improvements owned by Seller as part of the Business, and the operation and maintenance thereof as now operated and maintained, do not (i) contravene any zoning or building law or ordinance or other administrative regulation or (ii) violate any restrictive covenant or any provision of federal, state or local law, the effect of which materially interferes with or prevents the continued use of such properties for the purposes for which they are now being used, or would materially affect the value thereof. All of the plants, buildings, structures and equipment owned by Seller and used in the Business are in good operating condition and in a state of reasonable maintenance and repair to the extent necessary for the efficient operation of the Business. (d) There exists no pending or, to the best knowledge of Seller, threatened condemnation, eminent domain or similar proceeding with respect to, or which could affect, any Owned Realty or buildings or improvements thereon. SECTION 3.07. Inventories. Except as set forth on Schedule 3.07 hereto, Seller has good and merchantable title to its inventories of raw materials, finished goods, parts and supplies used in the Business, as of the date hereof, free and clear of all security interests, liens, claims and encumbrances or any adverse rights whatsoever; all inventories of finished goods used in the Business consist of items that have been manufactured in accordance with, and which meet, applicable industry standards; all inventories used in the Business are correctly marked with respect to class and character in accordance with applicable specifications and if tested will meet the indicated class and character; and each class or type of inventory of finished goods used in the Business is usable and salable without discount from the prices generally charged for like material of the same quality in the ordinary course of business, subject to obsolescence and write-downs consistent with Seller's experience in its fiscal year ended October 31, 1996. SECTION 3.08. Other Tangible Personal Property. Schedule 3.08 hereto sets forth (i) a description and the location of each item of tangible personal property (other than inventory described in Section 3.07 hereof and Excluded Assets) owned by Seller or in the possession of Seller and used in the Business that is being sold to Buyer; and (ii) an identification and description of each material lease of personal property used in the Business under which Seller is a lessee or a lessor, copies of which have been made available to Buyer. With respect to the foregoing personal property: (a) Each of the leases described in Schedule 3.08 is in full force and effect and is a valid and binding obligation of 15 22 Seller, and Seller has no knowledge that any such lease is not a valid and binding obligation of each of the other parties thereto; (b) Seller is not, nor does Seller have knowledge that any other party is, in default with respect to any material term or condition of any such lease or any other agreement related to such properties, nor has any event occurred which, through the lapse of time or the giving of notice, or both, would constitute a default thereunder or would cause the acceleration of any obligation of any party thereto or the creation of a lien or encumbrance upon any asset of Seller; (c) Each item of tangible personal property used in the current conduct of the Business is in good operating and usable condition and repair, subject to normal and reasonable wear and tear; however, Seller makes no other warranties, express or implied, including any warranty of merchantability or fitness for a particular purpose; and (d) Seller has good and merchantable title to and is in possession of all items of tangible personal property owned or leased by Seller and used in the Business, free and clear of all liens, pledges, charges, security interests, restrictions, prior assignments and encumbrances of any kind, except for property taxes not yet due and payable and except as set forth on Schedule 3.05. SECTION 3.09. Trade Names, Trademarks and Copyrights. Schedule 3.09 hereto is a list of all trade names, trademarks, service marks and copyrights and their registrations or applications, owned solely by Seller or in which Seller has any rights or licenses and used solely in the Business, together with a brief description of each. Except as set forth in Schedule 3.09, to the best knowledge of Seller, no person has infringed or is infringing on any such trade name, trademark, service mark or copyright. To the best knowledge of Seller, Seller, in its operation of the Business, has not infringed, and is not now infringing, on any trade name, trademark, service mark or copyright belonging to any other person, firm or corporation. Except as set forth in Schedule 3.09, Seller is not a party to any license agreement or arrangement, whether as licensor, licensee, franchiser, franchisee or otherwise, with respect to any trademarks, service marks, trade names or any copyrights, or applications or registrations for such items, used in the Business. To the best knowledge of Seller, Seller owns, or holds adequate licenses, free and clear of any liens or encumbrances, to use, and has full right to use, all trademarks, service marks, trade names and copyrights necessary for Seller to conduct the Business as now conducted by it and all such items are listed in Schedule 3.09, and such use does not and will not conflict with, infringe on or otherwise violate any rights of others. Seller has the right to sell or assign to Buyer all such owned trademarks, trade names, service marks and copyrights, and all such licenses and other rights. All trade names, trademarks, service marks, copyrights and 16 23 licenses listed in Schedule 3.09 are registered or recorded (except as otherwise disclosed therein) in all jurisdictions material to the Business where failure to register or record could materially impair Seller's ownership of, or right to use, such item. All such registrations and recordings are in full force and effect and no governmental proceeding, including the possible revocation or cancellation of any such registration, is pending or, to the best knowledge of Seller, threatened. SECTION 3.10. Trade Secrets. (a) Schedule 3.10 hereto is a true and complete list, without extensive or revealing descriptions, of Seller's trade secrets which are material to the conduct of the Business, including all material customer (active and inactive) lists, vendor lists and arrangements therewith, processes, know-how, computer program and routines and other technical data (collectively, "Trade Secrets"). The specific location of each Trade Secret's documentation, including its complete description, specifications, charts, procedures and other material relating to it, is also set forth in Schedule 3.10. To the extent necessary for Buyer's conduct of the Business, each Trade Secret's documentation is current, accurate and sufficient in detail and content to identify and explain it and to allow its full and proper use by Buyer without reliance on the special knowledge or memory of others. (b) Seller is the sole owner of each Trade Secret owned by it, free and clear of any liens, encumbrances, restrictions or legal or equitable claims of others, except as specifically stated in Schedule 3.10. Seller has taken reasonable security measures to protect the secrecy, confidentiality and value of the Trade Secrets; any of its employees and any other persons who, either alone or in concert with others, developed, invented, discovered, derived, programmed or designed the Trade Secrets, or who have knowledge of or access to information relating to them, have been put on notice and, if appropriate, have entered into agreements that the Trade Secrets are proprietary to Seller and are not to be divulged or misused. (c) To the best knowledge of Seller, all of the Trade Secrets have not been used, divulged or appropriated to the detriment of Seller. SECTION 3.11. Computer Software; Other Intangible Personal Property. Schedule 3.11 hereto identifies the computer software and computer programs owned by Seller or used by Seller in the conduct of its Business which is necessary to Buyer's operation of the Business, and to the extent used by Seller pursuant to a license or other authorization of a third party, describes such license or other authorization and which is being sold by Seller to Buyer. To the best of Seller's knowledge, with respect to any such computer software and programs owned by Seller, such is owned free and clear of all liens, pledges, charges, security interests, 17 24 restrictions, prior arrangements and encumbrances of any kind, including without limitation, any claim of any present or former employee of Seller who may have developed or participated in the development of any such computer software or program or any portion thereof. Such license or other authorization pursuant to which Seller is entitled to use any computer software or program is in full force and effect, is a valid and binding obligation of the parties thereto, is identified on Schedule 3.11 hereto, is included in the Transferred Assets, and is assignable to Buyer without the consent of any third party except as otherwise described in Schedule 3.11 hereto. Schedule 3.11 hereto also lists and describes any and all interests of Seller in any intangible personal property used in the Business and not listed in Schedule 3.09 or 3.10. SECTION 3.12. Material Contracts. (a) Schedule 3.12 hereto lists each lease, license, contract, vendor agreement, distribution right, right to advertising space and listings in directories, purchase or sales order and commitment, whether written or oral (collectively, the "Material Contracts"), (other than any of the foregoing specifically disclosed under other sections of this Article) to which Seller is a party, or by which it or any of its properties are bound, which relates to the Business and (i) involves expenditures or income in excess of $50,000 per year and which are not cancelable within 30 calendar days, (ii) is otherwise material in nature or amount or (iii) is necessary for the continued operation of the Business as presently conducted. With respect to each such Material Contract: (i) Each Material Contract is in full force and effect and is a valid and binding agreement of Seller and, to the best knowledge of Seller, of the other parties thereto; (ii) Seller has fulfilled all material obligations required pursuant to such Material Contract to have been performed by Seller on its part prior to the date hereof, and Seller has no reason to believe that it will not be able to fulfill, when due, all of Seller's obligations under such Material Contract which remain to be performed after the date hereof; (iii) To the best knowledge of Seller, there is no default or event that with notice or lapse of time, or both, would constitute a default by any other party to such Material Contract; and (iv) Seller has not received notice that any party to such Material Contract intends to cancel or terminate such Material Contract or to exercise or not exercise any options thereunder. 18 25 (b) Except for the Material Contracts listed in Schedule 3.12, copies of which have been furnished or made available to Buyer, Seller is not a party to, nor is any of Seller's property bound by, any distributor's or manufacturer's representative or agency agreement, any output or requirements agreement, any agreement that restricts Seller's right to engage in business or any other agreement that is unusual in nature or amount or that calls for the payment by Seller of consideration of more than $50,000 per year and which is not cancelable within 30 calendar days. SECTION 3.13. Litigation. Except as set forth in Schedule 3.13, there is no Action pending or, to the best knowledge of Seller, threatened, against or affecting the Business or based upon any theory of product liability with regard to products produced by the Business. The matters set forth in Schedule 3.13 hereto, if decided adversely to Seller, will not result in a material adverse change in the Business. Seller has furnished or made available to Buyer copies of all relevant court papers and other documents relating to the matters set forth in Schedule 3.13 hereto. Seller is not in default with respect to any order, writ, injunction or decree relating to the Business of any federal, state, local or foreign court, department, agency or instrumentality. Except as set forth in Schedule 3.13, Seller is not currently engaged in any legal action to recover material amounts of money due to it or damages sustained by it arising out of the Business. SECTION 3.14. Compliance with Laws. Except as set forth in Schedule 3.14: (a)(i) Seller is in full compliance with all Environmental Requirements applicable to operations on and the conditions of the Owned Realty or the Facility. The Seller has no basis to expect, and has not received, any actual or threatened order, notice or other communication from any Governmental Authority or third party of any actual or potential violation or failure to comply with any Environmental Requirement, or of any actual or threatened obligation to undertake or bear the costs of any Environmental Damages with respect to the Owned Realty or the Facility. (ii) There are no pending or, to the knowledge of Seller, threatened claims, encumbrances or other restrictions of any nature, resulting from any Environmental Damages or arising under or pursuant to any Environmental Requirement with respect to or affecting the Owned Realty or the Facility. (iii) Seller has no basis to expect and has not received any citation, directive, inquiry, notice, order, summons, warning or other communication that relates to Hazardous Materials or any actual or potential violation or failure to comply with any Environmental Requirement or of any 19 26 alleged, actual or potential obligation to undertake or bear the costs of any Environmental Damages with respect to the Owned Realty or the Facility or with respect to any property or facility to which hazardous materials generated, manufactured, refined, transferred, imported, used or processed by Seller at the Facility have been transported, treated, stored, handled, transferred, disposed, recycled or received. (iv) Seller has not generated, stored, used, released, treated or disposed of any Hazardous Material on the Owned Realty or at the Facility except in full compliance with all Environmental Requirements. (v) Seller timely obtained and has kept current, as appropriate, all permits, notifications, and authorizations required under any environmental law or any activity conducted on the Owned Realty or at the Facility by Seller or any other Person. (vi) There are no underground storage tanks or gas or oil wells on the Owned Realty. (b) Seller has complied with all requirements of the Occupational Safety and Health Act and its state equivalents and regulations promulgated under any such legislation, and with all orders, judgments and decrees of any tribunal under such legislation that apply to the Business. (c) Seller has not directly or indirectly paid or delivered any fee, commission or other money or property, however characterized, to any finder, agent, government official or other party, in the United States or any other country, that is in any manner related to the Business, the payment or delivery of which was illegal under any federal, state or local law of the United States or any other country having jurisdiction. (d) Seller has complied with, and is not in violation of, any other applicable federal, state or local statute, law or regulation applicable to, or affecting the operation of, the Business. SECTION 3.15. Labor Relations. Except as set forth on Schedule 3.15: (i) No Employee is covered by a collective bargaining agreement and there is not now, nor has there occurred at any time during the past three years, any union representation activities respecting Employees. Seller has not experienced any work stoppage or slow down within the last three years. 20 27 (ii) No proceedings or claims by Employees are pending or, to the best knowledge of Seller, threatened against Seller with respect to any violation or alleged violation of any applicable federal, state or local laws, rules and regulations prohibiting discrimination on any basis, including, without limitation, on the basis of race, color, religion, sex, national origin, age or disability. (iii) No proceedings or claims by or relating to Employees are pending or, to the best knowledge of Seller, threatened against Seller with respect to any violation or alleged violation of any applicable federal, state or local laws, rules and regulations relating to the employment of labor, including, without limitation, those related to wages, hours and collective bargaining. Seller has made all payments and withholdings of taxes and other sums as required by appropriate governmental authorities and has withheld and paid to the appropriate governmental authorities, or is holding for payment not yet due to such authorities, all amounts required to be withheld from Employees and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any laws, rules or regulations relating to the foregoing. SECTION 3.16. Employment and Compensation Arrangements. (a) Schedule 3.16 hereto identifies each (i) pension, profit sharing, deferred compensation, bonus, stock option, stock purchase or incentive plan or agreement, written or oral, applicable to Employees, except for such plans or arrangements listed in Schedule 3.17; and (ii) retainer, consulting, severance, employment or similar contract or agreement, written or oral, applicable to Employees, to which Seller is a party or by which it is bound. Seller has delivered to Buyer copies of all such plans and agreements, as they are currently in effect. Seller is not, and, to the best of its knowledge, no other party thereto is, in default with respect to any material term or condition thereof, nor has any event occurred which, with the lapse of time or the giving of notice, or both, would constitute a material default thereunder or would cause the acceleration of any material obligation of any party thereto, or the creation of a lien or encumbrance upon any asset of Seller. (b) All obligations of Seller relating to Employees, whether arising by operation of law, by contract or past custom, for payments by Seller to trusts or other funds or to any governmental agency with respect to workers compensation, unemployment compensation, social security or any other benefits for its employees with respect to employment of said Employees through the date hereof have been paid or adequate accruals thereof have been made and are reflected in the Financial Statements. All obligations of Seller with respect to such Employees, whether arising by operation of law, by contract, by past custom or 21 28 otherwise, for salaries, vacation and holiday pay, sick pay, bonuses, other forms of compensation or other benefits payable to such employees in respect of the services rendered by any of them prior to the date hereof have been paid or adequate accruals therefor have been made and are reflected in the Financial Statements; provided that with respect to accrued but unpaid vacations through the Closing Date, Seller shall either (i) pay Buyer the aggregate amount of such accrual or (ii) pay each Employee the portion of such aggregate accrual attributable to such Employee. (c) Schedule 3.16 also sets forth a true and complete list, as of February __, 1997, of the names and current salaries or compensation rates of all Employees and of all agents and representatives of Seller. Those Employees who are at work on the Closing Date or any day within five days prior thereto are set forth or referred to in part (a) of Schedule 3.16, and those other Employees being offered employment by Buyer are set forth in part (b) of Schedule 3.16. SECTION 3.17. Employee Benefit Plans and Benefit Arrangements. Schedule 3.17 lists each (i) "Employee Benefit Plan," as such term is defined in Section 3(3) of ERISA, whether written or oral, that provides or authorizes benefits to any Employee and (ii) "Benefit Arrangement" which means each contract, agreement, policy, practice or commitment, whether written or oral, that provides or authorizes employee benefits to any Employee, other than Employee Benefit Plans. Except as set forth on Schedule 3.17, (i) each Employee Benefit Plan and each Benefit Arrangement complies with, and has been operated in accordance with, all applicable law, including, without limitation, the provisions of ERISA, in all material respects, and (ii) no event has occurred in connection with any Employee Benefit Plan or Benefit Arrangement which has, will or may result in any fine, penalty, assessment or other liability for which Seller, any Affiliate of Seller or transferee of the assets of Seller may be responsible, whether by reason of operation of law or contract. SECTION 3.18. Taxes. (a) There are no outstanding assessments for Taxes otherwise due that if not paid on a timely basis would result, on or after the Closing Date, in any liens for Taxes on any of the Transferred Assets. (b) Except as otherwise disclosed on Schedule 3.18, none of the Transferred Assets is tax-exempt use property within the meaning of Section 168(h) of the Code, and none of the Transferred Assets is property that is or will be required to be treated as being owned by another person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in 22 29 effect immediately before the enactment of the Tax Reform Act of 1986. (c) Seller is not a foreign person within the meaning of Section 1445(b)(2) of the Code. SECTION 3.19 Insurance. Schedule 3.19 sets forth a true and correct list of all insurance policies of any nature whatsoever maintained by Seller which relate to the Business, all of which are in full force and effect. Seller is in compliance with all material requirements of such policies. All of the customarily commercially insurable properties and assets of Seller that constitute Transferred Assets are covered by effective insurance in amounts at least equal to their fair market value and such insurance provides protection against all liabilities, claims, losses and risks as are generally insured against by comparable businesses. There are no outstanding requirements or recommendations by any insurance company that issued any such policy or by any governmental authority which requires or recommends any change in the conduct of the Business, or any repairs or other work to be done on or with respect to any of the properties of Seller related to the Business. Seller has not received any notice or other communication from any insurance company within the three years preceding the date hereof canceling or materially amending any insurance policies on or relating to the Transferred Assets, and to the best knowledge of Seller, no such cancellation or amendment nor any material increase of premiums is threatened with respect to the policies listed in Schedule 3.19 hereto. Except as set forth in Schedule 3.19, no claim is pending under any policy listed in Schedule 3.19. SECTION 3.20. Licenses, Franchises, Permits and Authorizations. Schedule 3.20 hereto lists all licenses, franchises, permits and authorizations held by Seller which constitute all of the licenses, franchises, permits and authorizations necessary for the lawful conduct of the Business, and specifically notes any such licenses, franchises, permits and authorizations that are not assignable. Seller has previously delivered copies of such licenses, franchises, permits and authorizations to Buyer. Seller has not violated, nor is in material violation of, any of the terms and conditions of such licenses, franchises, permits and authorizations. As of the Closing Date, to the best knowledge of Seller, no change will have occurred in the facts or circumstances reported or assumed in the application for or the granting of such licenses, franchises, permits or authorizations, and each such license, franchise, permit and authorization will be in full force and effect. SECTION 3.21. Agreement Not In Breach of Other Instruments. Except as set forth in Schedule 3.21, the execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby will not result in or constitute any of the following: 23 30 (a) a default or an event that, with the giving of notice or lapse of time, or both, would be a default, breach or violation of the Articles of Incorporation or By-Laws of Seller or any Material Contract, promissory note, indenture, mortgage, deed of trust or other material agreement, instrument or arrangement to which Seller is a party or by which it or its properties are bound; (b) an event that would permit any party to terminate any Material Contract; or (c) the creation or imposition of any lien, charge or encumbrance on any of the Transferred Assets. SECTION 3.22. Brokers. No person or entity is entitled to any brokerage commission, finder's fee or like payment from Seller in connection with the transactions contemplated by this Agreement, other than Phil Starr. SECTION 3.23. Full Disclosure. To the best of Seller's knowledge, the representations and warranties made by Seller and the information provided by Seller to Buyer in this Agreement, including its Schedules and its Exhibits, do not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein, or necessary to make the statements and facts contained herein or therein, in light of the circumstances in which they are made, not false or misleading. Copies of all documents heretofore or hereafter delivered or made available to Buyer pursuant to this Agreement were or will be complete and accurate copies of such documents. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER As an inducement to Seller to enter into this Agreement, Buyer represents and warrants to Seller as follows: SECTION 4.01. Organization, Good Standing and Authority of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to enter into this Agreement and each of the Ancillary Agreements to which it is a party, to carry out its obligations hereunder or thereunder, and to consummate the transactions contemplated hereby or thereby. The execution, delivery and performance of this Agreement and the Ancillary Agreements to which Buyer is a party have been duly authorized by all necessary corporate action on the part of Buyer, have been or will be duly executed and delivered by Buyer, and this Agreement and such Ancillary Agreements constitute or, upon execution and delivery, will constitute, legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their terms. 24 31 SECTION 4.02. No Conflict. The execution, delivery and performance by Buyer of this Agreement and each of the Ancillary Agreements to which it is a party do not, and will not, (a) violate or conflict with the Articles of Incorporation or By-Laws of Buyer, (b) conflict with or violate any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award applicable to Buyer or (c) except as would not materially affect the ability of Buyer to consummate the transactions contemplated by this Agreement, result in any breach of, or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any lien or other encumbrance on any of the assets or properties of Buyer pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument relating to such assets or properties to which Buyer is a party or by which any of such assets or properties is bound or affected. SECTION 4.03. No Consents or Approvals. Except as set forth on Schedule 4.03, no authorization, consent or approval of any public body, authority or any third party is necessary for the consummation by Buyer of the transactions contemplated by this Agreement. SECTION 4.04. Absence of Litigation. No Action is pending or threatened against Buyer which seeks to delay or prevent the consummation of the transactions contemplated hereby or which may adversely affect or restrict Buyer's ability to consummate the transactions contemplated hereby. SECTION 4.05. Agreement Not In Breach of Other Instruments. The execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby will not result in or constitute a default or an event that, with the giving of notice of lapse of time or both, would be a default, breach or violation of the Articles of Incorporation of Bylaws of Buyer. SECTION 4.06. Brokers. No person or entity is entitled to any brokerage commission, finder's fee or like payment from Buyer in connection with the transactions contemplated by this Agreement, other than Phil Starr. ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. No Solicitation, Etc. Seller agrees that, between the date hereof and either the Closing Date or the termination of this Agreement in accordance with the terms of Section 5.06 or 9.01, Seller shall not, directly or indirectly, 25 32 (i) encourage, initiate or solicit the submission of a Business Combination Proposal, (ii) enter into any agreement with respect to any Business Combination Proposal or (iii) participate in any way in discussions or negotiations with, or furnish any information to, any Person in connection with, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Business Combination Proposal. SECTION 5.02. Conduct of Business Prior to the Closing. Seller agrees that, between the date of this Agreement to and including the Closing Date, except as permitted by the prior written consent of Buyer and as contemplated by this Agreement: (i) the Business shall continue to be conducted in, and Seller shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; (ii) Seller shall use its best efforts to (v) preserve the Business substantially intact, (w) maintain the Transferred Assets in customary repair, order and condition (subject to ordinary wear and tear) and maintain in full force and effect all insurance relating to the Transferred Assets, (x) comply with all governmental and regulatory requirements applicable to the Business or the Transferred Assets, (y) keep available the services of substantially all of the present employees of Seller involved in the Business and (z) preserve the present relationships of the Business with customers, suppliers and other Persons with which the Business has significant business relations; and (iii) Seller shall not: (i) encumber any material asset, property or right of Seller relating to the Business or enter into any transaction or make any contract or commitment relating to the Transferred Assets except in the ordinary course of business; (ii) enter into any employment contract with an Employee which is not terminable without cost or other liability to Seller or any successor thereof; (iii) enter into or amend any contract or agreement relating to the Business (x) which cannot be performed within three months or less or (y) which involves the expenditure of over $10,000, except for sales and purchase contracts in the ordinary course of business; (iv) transfer any assets of Seller relating to the Business to any shareholder; or (v) agree to do any of the above. SECTION 5.03. Approvals; Consents. (a) Each of Buyer and Seller will use its best efforts to obtain or cause to be obtained all necessary consents, 26 33 approvals, authorizations or other actions by, or filings with, or notifications to, any governmental or regulatory authority or any Person listed on Schedule 5.10, in connection with the consummation of the sale and transfer by Seller of the Transferred Assets and the transactions contemplated hereby. (b) Each of Buyer and Seller will use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective, as soon as reasonably practicable, the transactions contemplated by this Agreement. SECTION 5.04. Access to Premises and Information. (a) Subject to the provisions of Section 5.04(b), from the date hereof, Seller shall, and shall cause its officers, directors, employees and authorized agents, to provide to Buyer and its officers, employees and authorized agents full access to Seller's officers, employees, authorized agents, offices and other facilities and to all books and records during normal business hours and in a manner not unreasonably disruptive to the operation of the Business, and shall promptly furnish to Buyer all financial and operating data and other information regarding the Business and the Transferred Assets as Buyer may from time to time reasonably request. (b) Until the Closing, all information relating to Seller obtained by Buyer and its authorized representatives in connection with the transactions contemplated hereby shall be kept confidential by Buyer and shall not be used by it for any purpose other than in connection with the transactions contemplated hereby; provided, however, that the foregoing shall not apply to (i) any information generally available to the public on the date hereof or which becomes generally available to the public through no fault of Buyer, but only from and after the date such information becomes so available, and (ii) any information obtained by Buyer from a third party having the right to disclose such information. SECTION 5.05. Employees. On the Closing Date, Buyer agrees to offer to employ the Employees, at substantially the same salary and wage rate levels as in effect on the Closing Date. With regard to benefits, subject to applicable law, Buyer shall offer Employees so hired benefits consistent with those extended to its Employees on the Closing Date. Seller makes no representation or warranty that any of the employees will accept Buyer's offer of employment. In addition, Seller makes no representation or warranty that any of the Employees that are covered by a collective bargaining agreement will be removed from coverage under such collective bargaining agreement as a result of the sale of the Business to Buyer and Buyer's hiring of such Employees. 27 34 SECTION 5.06. Due Diligence; Right to Terminate. (a) Buyer shall promptly conduct its due diligence review of the Business including, without limitation, the books and records, financial and operating data and other information regarding the Business and the Transferred Assets as Buyer may reasonably request. (b) In the event that Buyer determines in good faith during the course of its due diligence investigation (i) that any of the representations and warranties in this Agreement are false or incorrect in any material respect or (ii) the existence of facts or conditions concerning the results of operations, condition (financial or otherwise), assets or liabilities (whether absolute, accrued or contingent or otherwise) or prospects of the Business, or the occurrence of any event or condition which, in Buyer's discretion, have had or are reasonably likely to have a material adverse effect on the results of operations, condition (financial or otherwise), assets or liabilities (whether absolute, accrued or contingent or otherwise) or prospects of the Business, or make it impracticable to proceed with the transactions contemplated by this Agreement, whether or not such facts or conditions are within Seller's control, then Buyer may elect to terminate this Agreement by providing Seller with written notice thereof on or before the Closing Date. (c) If Buyer elects to terminate this Agreement pursuant to subsection (b) above, neither party shall have any indemnification or other obligations or liability to the other party hereto as a result of such termination or the events that gave rise to it, other than pursuant to Section 5.04(b). SECTION 5.07. Proration of Taxes. Buyer agrees to execute and deliver to Seller at the Closing any certificates or other documents that Seller may reasonably request to document any exemption from Ohio sales tax. Seller agrees to assume liability for and to pay for all transfer and documentary taxes and fees imposed with respect to instruments of conveyance in the transactions contemplated hereby. Seller agrees to assume liability for and pay for any personal property taxes assessed against it on the Transferred Assets, except that Buyer agrees to pay to Seller an amount equal to $20,000 with respect to such taxes. In addition, Seller and Buyer agree to prorate any real property taxes on the Transferred Assets. Such proration shall (a) be made on the basis of the most recent real tax bill received by Seller prior to the Closing Date (each, a "Tax Bill") and (b) make Seller liable for all such taxes through the Closing Date and Buyer liable for all such taxes from and after the Closing Date. Specifically, with respect to each Tax Bill, Buyer shall pay to Seller an amount equal to (x) the amount of such Tax Bill attributable to the Transferred Assets multiplied by (y) a fraction, the numerator of which is the number of days remaining in calendar year 1997 as of the Closing Date and the denominator of 28 35 which is 365. Amounts with respect to personal or property taxes for which Buyer is responsible under this paragraph shall be an addition to the Purchase Price and shall be delivered to Seller at Closing. Seller shall be responsible for making payment of all such Taxes as are contemplated by this paragraph to the appropriate taxing authorities. SECTION 5.08. Further Action. Each of the parties hereto shall execute such documents (including, without limitation, the Ancillary Agreements) and other papers and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby or, at or after the Closing, to evidence the consummation of the transactions consummated pursuant to this Agreement and each of the Ancillary Agreements, upon the terms and subject to the conditions hereof and thereof. Each of the parties hereto shall take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and each of the Ancillary Agreements and to obtain in a timely manner all necessary waivers, consents and approvals and to effect all necessary registrations and filings. SECTION 5.09. Assets After the Closing. If Seller shall, at any time after the Closing, receive any Transferred Assets, or any payments relating thereto (including any payments in respect of the Material Contracts but excluding payments on accounts receivable), it shall promptly deliver such assets or property to Buyer. SECTION 5.10. Consents to Transfer of the Material Contracts. Schedule 5.10 hereto lists and describes all Persons whose authorization is required to effect the sale and delivery of all of the Transferred Assets as contemplated by this Agreement. SECTION 5.11. Covenant Not to Compete. (a) Subject to the Closing having occurred, without the prior written consent of Buyer, Seller will not, directly or indirectly, (i) engage in any business, activity or operation that competes in the business of manufacturing or selling plastic spools within the United States or (ii) approach or seek Restricted Business (as defined below) from any Customer (as defined below), refer Restricted Business from any Customer to any enterprise or business, or be paid commissions based on sales to any Customer by any enterprise or business where such sales constitute Restricted Business; provided that, if Seller has engaged in, is engaged in or becomes engaged in any Restricted Business with any Person at any time before or after the Closing Date but prior to the time such Person becomes a Customer and such Person does not become a Customer until after the Closing Date, the foregoing restrictions contained in this paragraph shall not apply to any business between 29 36 Seller and such Person. Seller shall not, directly or indirectly, induce, solicit, aid or assist any other person to induce or solicit, employees, salespersons, agents, consultants, distributors, representatives, advisors, customers or suppliers of the Business to terminate, curtail or otherwise limit their employment or business relations with the Business. (b) The covenant not to compete contained in paragraph (a) shall extend for a period of two (2) years from the Closing Date, or until such earlier time as Buyer, its successors or assigns, shall cease to carry on or have an interest in the Business and the Transferred Assets. Nothing in this covenant not to compete shall prohibit Seller from selling product to, and otherwise engaging in business with, Seller's affiliates and other divisions of Seller. (c) If any one or more of the provisions contained in this Section 5.11 shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the validity, legality and enforceability of any other provisions of this Agreement. Such invalid, illegal or unenforceable provision or provisions shall be deemed to be modified to the extent necessary to render it, or them, valid, legal and enforceable, and if no such modification shall render it, or them, valid, legal and enforceable, then this Section 5.11 shall be construed as if not containing the provision or provisions held to be invalid, illegal or unenforceable, and the rights and obligations of the parties shall be construed and enforced accordingly. (d) For purposes of this Section, the following terms shall have the following meanings: (i) "Restricted Business" means any business that is competitive with the Business. (ii) "Customer" means any Person which (A) is currently provided goods or services by the Business, (B) has been provided goods or services by the Business during the 5-year period prior to the date hereof or (C) which shall be provided with goods or services by the Business during the 2-year period from the date hereof. SECTION 5.12. Power of Attorney. On the Closing Date, Seller will, by appropriate instrument, constitute and appoint Buyer and its successors and assigns, the true and lawful attorneys for Seller, with full power of substitution, in the name of Seller but on behalf of and for the benefit of and at the expense of Buyer, to institute and prosecute, in the name of Seller or otherwise, all proceedings which Buyer may in good faith deem proper in order to collect, assert or enforce any claim, right or title of any kind in or to the Transferred Assets, to defend and compromise any and all actions, suits or proceedings in respect of 30 37 any of such Transferred Assets, and to do all such acts and things in relation thereto as Buyer in good faith shall deem advisable. The foregoing powers are and shall be coupled with an interest and shall be irrevocable by Seller or by Seller's dissolution or in any manner or for any reason. Buyer shall retain for its own account any amounts collected pursuant to the foregoing powers, including any sums payable in respect thereof, and Seller shall promptly pay to Buyer, when received, any amounts which shall be received by Seller in respect of the Transferred Assets as provided herein. SECTION 5.13. Uniform Commercial Code and Other Lien Searches. To the extent that Buyer conducts a UCC-1 search or other lien search in the state and county in which Seller conducts the Business and such search indicates the existence of a security interest or other lien on any of the Transferred Assets, Seller shall promptly obtain a termination or, to the extent such security interest or lien extends to assets in addition to the Transferred Assets, a release of the Transferred Assets from such security interest or lien. SECTION 5.14. Worker Adjustment and Retraining Notification Act. Buyer agrees to indemnify and hold harmless Seller from any and all claims arising under the Worker Adjustment and Retraining Notification ("WARN") Act as a result of actions by Buyer from and after the Closing Date. SECTION 5.15. Licenses, Franchises, Permits and Authorizations. Seller agrees to maintain the effectiveness with respect to the Facility of the Sewer Permit and Storm Water Permit, in each case from the date hereof until such time as Buyer is able to secure a separate sewer permit from the Village of Hebron or an Ohio EPA Storm Water General Permit, respectively, for the Facility. Buyer agrees to use its best efforts to secure such permits as soon as practicable following the Closing Date and agrees to indemnify and hold harmless Seller from any and all claims arising as a result of Buyer's operation of the Business under the Storm Water Permit and Sewer Permit from and after the Closing Date. SECTION 5.16. Molds. Seller will use its best efforts to enable Buyer to take possession of all injection molds at the Closing, including such injection molds as constitute Excluded Assets, and will take all necessary steps as are reasonable, including such steps as Buyer may reasonably request, to allow Buyer's use of such molds in the continuing operations of the Business from the date of the Closing. SECTION 5.17. Railroad Spur Access and Maintenance Agreement. At the Closing, Seller and Buyer shall enter into a Railroad Spur Access and Maintenance Agreement (the "Railroad Spur Agreement"), in a form mutually agreeable, which provides substantially as follows: 31 38 (a) Buyer shall have sole access to and responsibility for maintenance of Spur #1. (b) With respect to the Main Spur and the portion of Spur #2 that crosses behind the Blow Molding Division's real property, Buyer and Seller shall each (i) pay for the maintenance of the Main Spur and such portion of Spur #2, respectively, an amount equal to the total amount of maintenance for the Main Spur or such portion of Spur #2 multiplied by that party's Relative Use of the Main Spur or such portion of Spur #2 and (ii) have access to the Main Spur and such portion of Spur #2. (c) Buyer shall have sole access to and responsibility for maintenance of that portion of Spur #2 that crosses behind the Owned Realty. (d) Buyer and Seller each grant the other party such easements as are necessary, and shall grant the other party such appropriate rights as the other party shall reasonably request, to provide the access contemplated by, and give public record of, the Railroad Spur Agreement. SECTION 5.18. Turn About Access and Maintenance Agreement. At the Closing, Seller and Buyer shall enter into a Turn About Access and Maintenance Agreement (the "Turn About Agreement"), in a form mutually agreeable, which provides substantially as follows: (a) Buyer and Seller each shall have access to all of the Turn About, including that portion of the Turn About that is located on the other's property. (b) Buyer and Seller shall share equally the maintenance costs of all the Turn About. (c) Buyer and Seller each grant the other party such easements as are necessary, and shall grant the other party such appropriate rights as the other party shall reasonably request, to provide the access contemplated by, and give public record of, the Turn About Agreement. ARTICLE VI CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: SECTION 6.01. Representations and Warranties. The representations and warranties of Buyer contained in this Agreement 32 39 (including the Schedules and Exhibits hereto) or in any agreement, certificate or document delivered in connection herewith, including the Ancillary Agreements to which Buyer is a party, shall be true and correct in all material respects on the Closing Date with the same effect as if made on and as of the Closing Date. SECTION 6.02. Performance of Covenants. Each of the obligations of Buyer to be performed on or before the Closing Date pursuant to the terms of this Agreement and the Ancillary Agreements shall have been duly performed in all material respects on or before the Closing Date. SECTION 6.03. Authority. All actions required to be taken by, or on the part of, Buyer to authorize the execution, delivery and performance of this Agreement and the Ancillary Agreements shall have been duly and validly taken by the Board of Directors of Buyer. SECTION 6.04. Approval of Governmental Authorities. No claim, action, suit, investigation or other proceeding shall be pending or threatened before any court or governmental agency which presents a substantial risk of the restraint or prohibition of the transactions contemplated by this Agreement. All approvals of governmental agencies necessary for the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect. SECTION 6.05. Purchase Price. Seller shall have received the Initial Payment by wire transfer in immediately available funds to an account designated by Seller. SECTION 6.06. Ancillary Agreements. Buyer shall have executed and delivered to Seller the Ancillary Agreements to which Buyer is a party, including, without limitation, the Assumption Agreement and such other instruments effecting or evidencing the assumption of Assumed Liabilities contemplated hereby. SECTION 6.07. Buyer's Certificate. Seller shall have been furnished with a certificate (dated as of the Closing Date and in form and substance reasonably satisfactory to Seller) executed by (i) the President of Buyer certifying as to the fulfillment of the conditions specified in Section 6.01 and 6.02 and (ii) the Secretary of Buyer certifying as to the fulfillment of the condition specified in Section 6.03 and the incumbency of each officer of Buyer who has executed this Agreement or any Ancillary Agreement. 33 40 SECTION 6.08. Approval of Documentation. The form and substance of all certificates, instruments and other documents delivered to Seller under this Agreement shall be satisfactory in all reasonable respects to Seller and its counsel. SECTION 6.09. Consents. All agreements and consents of third parties, including, without limitation, all consents from licensors, vendors, lessors and other parties to agreements with Seller, to the consummation of the transactions contemplated by this Agreement, or otherwise pertaining to matters covered by it, which are material to the continued conduct of the Business after the consummation of such transactions and the absence of which would result in a breach of contractual obligations by Seller, shall have been obtained by Seller and delivered to Buyer. SECTION 6.10. Access Agreements. Buyer and Seller shall have entered into the Railroad Spur Agreement and the Turn About Agreement. ARTICLE VII CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver, at or prior to the Closing, of each of the following conditions: SECTION 7.01. Representations and Warranties. The representations and warranties of Seller contained in this Agreement (including the Schedules and Exhibits hereto) or in any agreement, certificate or document delivered in connection herewith, including the Ancillary Agreements to which Seller is a party, shall be true and correct in all material respects on the Closing Date with the same effect as if made on and as of the Closing Date. SECTION 7.02. Performance of Covenants. Each of the obligations of Seller to be performed by it on or before the Closing Date pursuant to the terms of this Agreement and the Ancillary Agreements shall have been duly performed in all material respects on or before the Closing Date. SECTION 7.03. Authority. All actions required to be taken by, or on the part of, Seller to authorize the execution, delivery and performance of this Agreement and the Ancillary 34 41 Agreements shall have been duly and validly taken by the Board of Directors of Seller. SECTION 7.04. Seller's Certificate. Buyer shall have been furnished with a certificate (dated as of the Closing Date and in form and substance reasonably satisfactory to Buyer) executed by (i) the President of Seller certifying as to the fulfillment of the conditions specified in Sections 7.01 and 7.02 and (ii) the Secretary of Seller certifying as to the fulfillment of the condition specified in Section 7.03 and the incumbency of each officer of Seller who has executed this Agreement or any Ancillary Agreement. SECTION 7.05. Bulk Sales Laws. Buyer and Seller agree that, because Ohio's bulk sales law was repealed on August 15, 1996, no action is necessary with respect to bulk sales in connection with the sale of the Transferred Assets to Buyer. SECTION 7.06. Sales and Use Tax on Prior Sales. Seller shall furnish any documentation that Buyer may reasonably request as evidence that all sales and use tax liabilities of Seller accruing before the Closing Date have been fully satisfied or provided for. SECTION 7.07. Consents. All agreements and consents of third parties, including, without limitation, all consents from licensors, vendors, lessors and other parties to agreements with Seller, for the consummation of the transactions contemplated by this Agreement, or otherwise pertaining to matters covered by it, which are material to the continued conduct of the Business after the consummation of such transactions, shall have been obtained by Seller and delivered to Buyer or shall have been taken and proof thereof provided to Buyer by Seller. SECTION 7.08. Approval of Documentation. The form and substance of all certificates, instruments and other documents delivered to Buyer under this Agreement shall be satisfactory in all reasonable respects to Buyer and its counsel. SECTION 7.09. Approval of Governmental Authorities. No claim, action, suit, investigation or other proceeding shall be pending or threatened before any court or governmental agency which presents a substantial risk of the restraint or prohibition of the transactions contemplated by this Agreement. All approvals of governmental agencies necessary for the consummation of the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect. SECTION 7.10. No Material Adverse Change. During the period from the date hereof to the Closing Date, there shall not have occurred any material adverse change in the Business. 35 42 SECTION 7.11. Interim Financial Statements. Seller shall have furnished Buyer with complete copies of the Interim Financial Statements. The Interim Financial Statements (i) are correct and complete in all material respects and were prepared in accordance with the books and records of Seller; (ii) were prepared in accordance with Seller's internal standards, consistently applied, for divisions of the same type as the Business; (iii) fairly present the value of the Transferred Assets and the results of the operations of the Business as at the relevant date thereof and for the period covered thereby; and (iv) with respect to contracts and commitments relating to the Transferred Assets, contain and reflect adequate reserves for all reasonably anticipated material losses and costs and expenses in excess of expected receipts. SECTION 7.12. Ancillary Agreements. Seller shall have executed and delivered to Buyer the Ancillary Agreements to which Seller is a party, including, without limitation, the Bill of Sale and Assignment, the warranty deed and such other instruments effecting or evidencing Buyer's assumption of Assumed Liabilities contemplated hereby. SECTION 7.13. Key Employees. Paul Devin and James Schultice shall have agreed to terms of employment with Buyer beginning on the Closing Date. SECTION 7.14. Title Insurance. Buyer shall have received an irrevocable commitment for title insurance covering the Owned Realty from Chicago Title Insurance Company in the amount of One Million Dollars ($1,000,000), at Seller's expense, which commitment shall contain no exceptions other than the Impairments. SECTION 7.15. Access Agreements. Seller and Buyer shall have entered into the Railroad Spur Agreement and the Turn About Agreement. ARTICLE VIII INDEMNIFICATION SECTION 8.01. Seller's Indemnity. Seller shall, up to a maximum aggregate payment of $2,000,000 for a period of two years after the Closing, indemnify, defend, save and hold harmless Buyer and its successors and assigns, and their employees, representatives, officers, directors and agents from and against any and all Indemnified Damages arising out of or resulting from (a) any breach or inaccuracy in any representation or warranty made by Seller in this Agreement or any Schedule or Exhibit to, or in any certificate or other document furnished by Seller pursuant to, this Agreement, or (b) any breach of any covenant requiring performance after the Closing Date, or (c) any claims against, or liabilities or obligations of, Seller not specifically assumed by 36 43 Buyer pursuant to this Agreement. Notwithstanding the foregoing, Seller shall not be liable for any Indemnified Damages pursuant to clause (a) of the preceding sentence until the amount thereof exceeds $250,000 and then Seller shall be liable for the excess; provided, however, that Seller shall be liable for the full amount of Indemnified Damages pursuant to clauses (b) and (c) of the preceding sentence up to the maximum aggregate payment of $2,000,000 listed above. SECTION 8.02. Buyer's Indemnity. Buyer shall, up to a maximum aggregate payment of $2,000,000, for a period of two years after the Closing, indemnify, defend, save and hold harmless Seller and its successors and assigns, and their employees, representatives, officers, directors and agents from and against any and all Indemnified Damages arising out of or resulting from (a) any breach or inaccuracy in any representation or warranty made by Buyer in this Agreement or any Schedule or Exhibit to, or in any certificate or other document furnished by Buyer pursuant to, this Agreement, or (b) any breach of any covenant requiring performance after the Closing Date, including without limitation, Buyer's performance of the Assumed Liabilities. Notwithstanding the foregoing, Buyer shall not be liable for any Indemnified Damages pursuant to clause (a) of the preceding sentence until the amount thereof exceeds $250,000 and then Buyer shall be liable for the excess; provided, however, that Buyer shall be liable for the full amount of Indemnified Damages pursuant to clause (b) of the preceding sentence. SECTION 8.03. Claims for Indemnification. Whenever any claim for indemnification shall arise under this Article VIII, the party asserting such claim (the "Indemnified Party") shall notify the other party (the "Indemnifying Party") of the claim and, when known, the facts constituting the basis for such claim. In the event of any claim for indemnification hereunder resulting from or in connection with legal proceedings by a third party, such notice shall also specify, if known, the amount or an estimate of the amount of the liability arising therefrom. If any lawsuit is filed or instituted against the Indemnified Party asserting any claim for which the Indemnifying Party may be responsible hereunder, written notice thereof shall be given to the Indemnifying Party as promptly as practicable; and if the Indemnifying Party shall acknowledge in writing that the Indemnifying Party shall be responsible and liable for payment of all costs, losses, liabilities, claims and expenses in connection with such lawsuit, then the Indemnifying Party shall be entitled, if the Indemnifying Party so elects (subject to the Indemnified Party's written consent which may be withheld by the Indemnified Party to the extent that the Indemnified Party's rights under any other contested matter or any aspect of the Indemnified Party's ongoing business operations may be prejudiced materially by the Indemnified Party's lack of control over such lawsuit), to take control of the defense and investigation of such lawsuit and to employ and engage attorneys of its own choice to handle and defend the same, at the Indemnifying Party's cost, risk and expense; and 37 44 the Indemnified Party shall cooperate in all reasonable respects, at the Indemnifying Party's cost, risk and expense, with the Indemnifying Party and such attorneys in the investigation, trial and defense of such lawsuit and any appeal arising therefrom; provided, however, that the Indemnified Party may, at its own cost, participate in any such investigation, trial and defense of any such lawsuit and any appeal arising therefrom. Unless authorized in the Indemnified Party's consent, the Indemnifying Party shall not consent to a settlement of, or the entry of any judgment arising from, any such claim or legal proceeding, without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld. If the Indemnifying Party does not assume the defense of any such claim or litigation resulting therefrom in accordance with the terms hereof, the Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate, including, without limitation, settling such claim or litigation, after giving notice of the same to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate. If the Indemnifying Party seeks to question the manner in which the Indemnified Party defended such claim or litigation or the amount of or other nature of any such settlement, the Indemnifying Party shall have the burden to prove by a preponderance of the evidence that the Indemnified Party did not defend such claim in a reasonably prudent manner. ARTICLE IX GENERAL PROVISIONS SECTION 9.01. Termination. This Agreement may be terminated at any time prior to the Closing: (i) by the mutual written consent of Seller and Buyer; (ii) by Seller if any of the conditions set forth in Article VI shall not have been satisfied or waived prior to Closing; (iii) by Buyer if any of the conditions set forth in Article VII shall not have been satisfied or waived before Closing; (iv) by either party hereto, if the Closing does not occur on or prior to February 28, 1997; or (v) by Buyer pursuant to Section 5.06 hereof; provided, however, that the party seeking termination pursuant to clause (ii), (iii) or (iv) is not in material breach of any of its representations, warranties, covenants or agreements contained in this Agreement. In the event that this Agreement is terminated as provided above, this Agreement shall become void and of no further force and effect, except for Article VIII and Sections 5.04(b), 9.04 and 9.13, and other than pursuant to such provisions, there shall be no liability on the part of either party hereto; provided, however, that nothing in this Section 9.01 or elsewhere in this Agreement shall release either party from any liability for breach of this Agreement. SECTION 9.02. Specific Performance. The parties hereto agree that money damages would not be a sufficient remedy for a breach of this Agreement or the Ancillary Agreements by Seller or 38 45 Buyer because of the difficulty of ascertaining the amount of damages that will be suffered in connection therewith, that each party would be irreparably damaged in the event any obligation of the other party under this Agreement or the Ancillary Agreements is not performed in accordance with its specific terms and that each party shall be entitled to equitable relief (including injunction and specific performance) in any action instituted in any court of the United States or any state thereof having subject matter jurisdiction, as a remedy for any breach or to prevent any breach of this Agreement or the Ancillary Agreements. Such remedies shall not be deemed to be exclusive remedies for a breach or anticipatory breach of this Agreement or the Ancillary Agreements, but shall be in addition to all other remedies available at law or equity. SECTION 9.03. Survival of Representations and Warranties. The respective representations and warranties of Buyer and Seller contained herein, in the Ancillary Agreements, or in writing in any certificates or other documents delivered in connection herewith prior to or at the Closing, shall survive the execution and delivery of this Agreement and the Closing for a period of two years. SECTION 9.04. Expenses. Subject to Section 7.14, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the Ancillary Agreements shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred; provided that any fees payable to Phil Starr in connection with this Agreement shall be paid in equal part by each of Buyer and Seller. SECTION 9.05. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered if delivered personally or by telecopy or fifteen (15) days after being mailed by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice, except that notices of changes of address shall be effective upon receipt): (a) if to Seller: Greif Bros. Corporation 621 Pennsylvania Avenue Delaware, Ohio 43015 Attn.: William B. Sparks, Jr. Telephone: 614-363-1271 Telecopier: 614-363-9742 with a copy to: Vorys, Sater, Seymour and Pease 52 East Gay Street Columbus, Ohio 43215 Attn.: Thomas O. Ruby Telephone: 614-464-5698 39 46 Telecopier: 614-464-6350 (b) if to Buyer: UnionTools, Inc. 500 Dublin Avenue Columbus, Ohio 43216-1930 Attn: Gabe Mihaly Telephone: 614-222-4400 Telecopier: 614-222-4437 with a copy to: Gibson, Dunn & Crutcher LLP 200 Park Avenue, 47th Fl. New York, New York 10166-0193 Attn: Conor D. Reilly, Esq. Telephone: 212-351-3850 Telecopier: 212-351-5247 SECTION 9.06. Amendment. Subject to applicable law, no provision of this Agreement may be amended, modified, supplemented or waived except by written agreement duly executed by Buyer and Seller. SECTION 9.07. Waiver. At any time prior to the Closing, either party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other party hereto, (b) waive any inaccuracies in the representations and warranties made by the other party and contained herein or in any document delivered by the other party pursuant hereto and (c) waive compliance by the other party hereto with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. SECTION 9.08. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.09. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the greatest extent possible. SECTION 9.10. Entire Agreement. This Agreement and the Ancillary Agreements constitute the entire agreement between Seller and Buyer and supersede and cancel all prior agreements and 40 47 undertakings, both written and oral, with respect to the subject matter hereof. SECTION 9.11. Binding Agreement; Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, by operation of law or otherwise, by any party hereto without the prior written consent of the other party; provided, however, that Buyer may assign this Agreement and all of its rights, interests and obligations hereunder to any Affiliate of Buyer but that in such event Buyer shall remain a guarantor of the performance by such Affiliate of its obligations hereunder. SECTION 9.12. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio applicable to contracts executed and to be performed wholly in Ohio, without regard to principles of conflicts of laws. SECTION 9.13. [Intentionally Omitted]. SECTION 9.14. Counterparts. This Agreement may be executed in one or more counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties. SECTION 9.15. No Third Party Beneficiaries. Nothing express or implied in this Agreement is intended to confer upon any Person, other than Buyer and Seller and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. SECTION 9.16. Publicity. Buyer and Seller shall consult with each other before issuing any press release or announcement concerning the transactions contemplated by this Agreement; provided, however, that if Seller is required by law to make any such disclosure prior to agreement with Buyer regarding its contents, it shall be permitted to do so. [The remainder of this page has been left intentionally blank.] 41 48 IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. GREIF BROS. CORPORATION By: /s/ Michael J. Gasser ------------------------------------ Name: Michael J. Gasser Title: Chairman and Chief Executive Officer UNIONTOOLS, INC. By: /s/ Gabe Mihaly ------------------------------------ Name: Gabe Mihaly Title: President & CEO 42 49 LIST OF EXHIBITS
Exhibit A Assumption Agreement Exhibit B Bill Of Sale and Assignment Exhibit C Description of Real Property Transferred Exhibit D Diagram of Rail Spurs
43 50 LIST OF SCHEDULES
Schedule 2.01(a) Excluded Contracts Schedule 2.01(b) Excluded Assets Schedule 2.02(a) Schedule of Assumed Liabilities Schedule 2.03(c) Allocation of Purchase Price Schedule 3.02 Conflicts Schedule 3.03 Consents or Approvals (Seller) Schedule 3.04(b) Certain Changes Schedule 3.05 Right, Title and Interest in Transferred Assets Schedule 3.06 Part 1 Owned Realty Part 2 Leased Realty: None Schedule 3.07 Liens on Inventory Schedule 3.08 Other Tangible Personal Property Schedule 3.09 Trade Names, Trademarks, Service Marks and Copyrights Schedule 3.10 Trade Secrets Schedule 3.11 Computer Software, Computer Programs and Other Intangible Personal Property Schedule 3.12 Material Contracts Schedule 3.13 Litigation Schedule 3.14 Compliance with Laws Schedule 3.15 Labor Relations Schedule 3.16 Employment and Compensation Arrangements; Employees Schedule 3.17 Employee Benefit Plans Schedule 3.18 Taxes Schedule 3.19 Insurance Schedule 3.20 Licenses, Franchises, Permits and Authorizations Schedule 3.21 Breach of Other Agreements Schedule 4.03 Consents or Approvals (Buyer) Schedule 5.10 Consents to Transfer of Material Contracts
44 EX-3.1 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ACORN PRODUCTS, INC. ---------------------------- The undersigned, for the purpose of amending and restating the Certificate of Incorporation of Acorn Products, Inc., a Delaware corporation (the "Corporation"), does hereby certify that: (1) The name of the Corporation is Acorn Products, Inc. (2) The date of filing of its original Certificate of Incorporation with the Secretary of State of Delaware under the Corporation's prior name of New Vision, Incorporated, was November 3, 1993. (3) Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation was adopted by the Corporation's Board of Directors and stockholders, the stockholders of the Corporation having approved the Amended and Restated Certificate of Incorporation by the written consent of the holders of a majority of the outstanding shares in accordance with Section 228 thereof, and written notice having been given in accordance with the requirements of such Section. The Amended and Restated Certificate of Incorporation restates and integrates the provisions of the Certificate of Incorporation of the Corporation. (4) The Certificate of Incorporation of Acorn Products, Inc. is hereby amended and restated in its entirety as follows: FIRST: The name of the Corporation (hereinafter called the "Corporation) is Acorn Products, Inc. SECOND: The address, including street, number, city, and county, of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, City of Wilmington 19805, County of New Castle, and the name of the registered agent of the Corporation in the State of Delaware at such address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. 2 FOURTH: The total number of shares which the corporation shall have authority to issue is Twenty Million One Thousand (20,001,000) consisting of: (a) 20,000,000 shares of common stock, par value $0.001 per share (the "Common Stock"); and (b) 1,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby vested with authority to fix by resolution or resolutions the designations and the powers, preferences and relative participation, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, the dividend rate, conversion or exchange rights, redemption price and liquidation preference, of any series of the Preferred Stock, and to fix the number of shares constituting any such series and to increase or decrease the number of shares of any such series (but not below the number of shares thereof outstanding). In case the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution or resolutions originally fixing the number of shares of such series. FIFTH: The name and the mailing address of the incorporator is as follows:
NAME MAILING ADDRESS ---- --------------- Sherry A. Craig Corporation Service Company 1013 Centre Road Wilmington, D.E. 19805
SIXTH: The Corporation is to have perpetual existence. SEVENTH: For the management of the business and the conduct of the affairs of the Corporation, and in further definition, limitation, and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of the directors" shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies. 2 3 2. After the original or other Bylaws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the Delaware General Corporation Law, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the Bylaws of the Corporation may be exercised by the Board of Directors of the Corporation. EIGHTH: To the full extent permitted by the Delaware General Corporation Law as the same may be amended or supplemented, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the Delaware General Corporation Law is amended after the date of the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time. No repeal or modification of this Article EIGHTH by the stockholders shall adversely affect any right or protection of a director of the Corporation existing by virtue of this Article EIGHTH at the time of such repeal or modification. NINTH: The Corporation shall, to the fullest extent permitted by the Delaware General Corporation Law, as the same may be amended or supplemented, indemnify any and all persons whom it shall have power to indemnify under said law from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. If the Delaware General Corporation Law is amended after the date of filing of this Certificate of Incorporation to authorize corporate action providing for additional indemnification, then the Corporation shall provide for such indemnification to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time. No repeal or modification of this Article NINTH by the stockholders shall adversely affect any right of any person otherwise entitled to indemnification by virtue of this Article NINTH at the time of such repeal or modification. TENTH: From time to time, subject to the provisions of any Certificate of Designation filed by the Board of Directors, any of the provisions of this Certificate of Incorporation may be amended, altered, or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders 3 4 of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article TENTH. IN WITNESS WHEREOF, the undersigned has executed, signed and acknowledged this Amended and Restated Certificate of Incorporation on behalf of Acorn Products, Inc. this 15th day of April, 1997. /s/ Stephen M. Kasprisin ---------------------------------------- Name: Stephen M. Kasprisin Title: Chief Financial Officer 4 EX-3.2 4 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2 ACORN PRODUCTS, INC. (A DELAWARE CORPORATION) AMENDED AND RESTATED BYLAWS (ADOPTED ON APRIL 3, 1997) ARTICLE I OFFICES SECTION 1.01 Registered Office. The registered office of Acorn Products, Inc. (hereinafter called the Corporation) in the State of Delaware shall be at 1013 Centre Road, City of Wilmington 19805, County of New Castle and the name of the registered agent in charge thereof shall be The Corporation Service Company. SECTION 1.02 Other Offices. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board of Directors (hereinafter called the Board) may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 2.01 Annual Meetings. Annual meetings of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings may be held at such time, date and place as the Board shall determine by resolution. SECTION 2.02 Special Meetings. A special meeting of the stockholders for the transaction of any proper business may be called at any time by the Board, the Chairman of the Board, the President or a stockholder or stockholders holding of record at least a majority of the shares of outstanding stock of the Corporation. SECTION 2.03 Place of Meetings. All meetings of the stockholders shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the 2 person or persons calling the respective meeting and specified in the respective notices or waivers of notice thereof. SECTION 2.04 Notice of Meetings. Except as otherwise required by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to such stockholder personally, or by depositing such notice in the United States mail or in the care of an express courier, in a postage prepaid envelope, directed to such stockholder at his or her post office address or other delivery address furnished by such stockholder to the Secretary of the Corporation for such purpose or, if such stockholder shall not have furnished to the Secretary his or her address for such purpose, then at his or her post office address last known to the Secretary, or by transmitting a notice thereof to such stockholder at such address by facsimile, telegraph, cable, or wireless. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. Every notice of a meeting of the stockholders shall state the place, date and hour of the meeting, and, in the case of a special meeting, shall also state the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall have waived such notice and such notice shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, except as a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. SECTION 2.05 Quorum. Except in the case of any meeting for the election of directors summarily ordered as provided by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders of the Corporation or any adjournment thereof. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the stockholders present in person or by proxy 2 3 and entitled to vote thereat or, in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.06 Voting. (a) Each stockholder shall, at each meeting of the stockholders, be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by him or her and registered in his or her name on the books of the Corporation: (i) on the date fixed pursuant to Section 6.05 of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or (ii) if no such record date shall have been so fixed, then (a) at the close of business on the day next preceding the day on which notice of the meeting shall be given or (b) if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which the meeting shall be held. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he or she shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his or her proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons or other entities, whether fiduciaries, members of a partnership, joint tenants in common, tenants by entirety or otherwise, or with respect to which two or more persons or other entities have the same fiduciary 3 4 relationship, shall be voted in accordance with the provisions of the General Corporation Law of the State of Delaware. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by his or her proxy appointed by an instrument in writing, subscribed by such stockholder or by his or her attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless he or she shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of the stockholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat and thereon, a quorum being present. The vote at any meeting of the Stockholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot each ballot shall be signed by the stockholder voting, or by his or her proxy, if there be such proxy, and it shall state the number of shares voted. SECTION 2.07 List of Stockholders. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.08 Judges. If at any meeting of the stockholders a vote by written ballot shall be taken on any question, the chairman of such meeting may appoint a judge or judges to act 4 5 with respect to such vote. Each judge so appointed shall first subscribe an oath faithfully to execute the duties of a judge at such meeting with strict impartiality and according to the best of his or her ability. Such judges shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of judges shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The judges need not be stockholders of the Corporation, and any officer of the Corporation may be a judge on any question other than a vote for or against a proposal in which he or she shall have a material interest. SECTION 2.09 Action Without Meeting. Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares of stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III BOARD OF DIRECTORS SECTION 3.01 General Powers. The property, business and affairs of the Corporation shall be managed by the Board. SECTION 3.02 Number and Term of Office. The number of directors shall be such number as from time to time shall be fixed by resolution of the Board. Each of the directors of the Corporation shall hold office until his or her successor shall have been duly elected and shall qualify or until he or she shall resign or shall have been removed in the manner hereinafter provided. 5 6 SECTION 3.03 Election of Directors. The directors shall initially consist of the persons elected as such by the incorporator and thereafter shall be elected annually by the stockholders of the Corporation entitled to vote thereon and the persons receiving the greatest number of votes, up to the number of directors to be elected, shall be the directors. SECTION 3.04 Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.05 Vacancies. Except as otherwise provided in the Certificate of Incorporation, any vacancy on the Board, whether because of death, resignation, disqualification, an increase in the number of directors, or any other cause, may be filled by vote of the majority of the remaining directors, although less than a quorum. Each director so chosen to fill a vacancy shall hold office until his or her successor shall have been elected and shall qualify or until he or she shall resign or shall have been removed in the manner hereinafter provided. SECTION 3.06 Place of Meeting, Etc. The Board may hold any of its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 3.07 First Meeting. The Board shall meet as soon as practicable after each annual election of directors and notice of such first meeting shall not be required. SECTION 3.08 Regular Meetings. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting 6 7 is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. SECTION 3.09 Special Meetings. Special meetings of the Board shall be held whenever called by the Chairman of the Board, the President or a majority of the number of directors then serving on the Board of Directors. Except as otherwise provided by law notice of the time and place of each such special meeting shall be mailed to each director, addressed to him or her at his or her residence or usual place of business, at least five (5) days before the day on which the meeting is to be held, or shall be sent to him or her at such place by facsimile, wireless, telegraph or cable or be delivered personally not less than forty-eight (48) hours before the time at which the meeting is to be held. Except where otherwise required by law or by these Bylaws, notice of the purpose of a special meeting need not be given. Notice of any meeting of the Board shall not be required to be given to any director who is present at such meeting, except a director who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3.10 Quorum and Manner of Acting. Except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, the presence of a majority of the authorized number of directors shall be required to constitute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the directors present. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board, and the individual directors shall have no power as such. SECTION 3.11 Action by Consent. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such 7 8 committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 3.12 Removal of Directors. Subject to the provisions of the Certificate of Incorporation, any director may be removed at any time, either with or without cause, by the affirmative vote of the stockholders having a majority of the shares entitled to elect directors of the Corporation given at a special meeting of the stockholders called for the purpose. SECTION 3.13 Compensation. The directors shall receive only such compensation for their services as directors as may be allowed by resolution of the Board. The Board may also provide that the Corporation shall reimburse each such director for any expense incurred by him or her on account of his or her attendance at any meetings of the Board or committees of the Board. Neither the payment of such compensation nor the reimbursement of such expenses shall be construed to preclude any director from serving the Corporation or its subsidiaries in any other capacity and receiving compensation therefor. SECTION 3.14 Committees. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board and except as otherwise limited by law, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Any such committee shall keep written minutes of its meetings and report the same to the Board at the next regular meeting of the Board. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. ARTICLE IV OFFICERS SECTION 4.01 Number. The Board shall elect a President, a Secretary and a Treasurer and it may, if it so determines, choose 8 9 a Chairman of the Board from among its members as well as such other officers of the Corporation as it shall deem necessary who shall have such authority and shall perform such duties as the Board may prescribe. The Board may also choose one or more Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers. SECTION 4.02 Election, Term of Office and Qualifications. The officers of the Corporation, except such officers as may be appointed in accordance with Section 4.03, shall be elected annually by the Board at the first meeting thereof held after the election thereof. Each officer shall hold office until his or her successor shall have been duly chosen and shall qualify or until his or her resignation or removal in the manner hereinafter provided. SECTION 4.03 Assistants, Agents and Employees, Etc. In addition to the officers specified in Section 4.01, the Board may appoint other assistants, agents and employees as it may deem necessary or advisable, including one or more Assistant Secretaries, and one or more Assistant Treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as the Board may from time to time determine. The Board may delegate to any officer of the Corporation or any committee of the Board the power to appoint, remove and prescribe the duties of any such assistants, agents or employees. SECTION 4.04 Removal. Any officer, assistant, agent or employee of the Corporation may be removed, with or without cause, at any time: (i) in the case of an officer, assistant, agent or employee appointed by the Board, only by resolution of the Board; and (ii) in the case of any other officer, assistant, agent or employee, by any officer of the Corporation or committee of the Board upon whom or which such power of removal may be conferred by the Board. SECTION 4.05 Resignations. Any officer or assistant may resign at any time by giving written notice of his or her resignation to the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, upon receipt thereof by the Board or the Secretary, as the case may be; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9 10 SECTION 4.06 Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or other cause, may be filled for the unexpired portion of the term thereof in the manner prescribed in these Bylaws for regular appointments or elections to such office. SECTION 4.07 The President. The President of the Corporation, may, by resolution of the Board, be the chief executive officer of the Corporation and shall have, subject to the control of the Board, general and active supervision and management over the business of the Corporation and over its several officers, assistants, agents and employees. SECTION 4.08 The Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board may from time to time prescribe. At the request of the President, or in case of the President's absence or inability to act upon the request of the Board, a Vice President shall perform the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. SECTION 4.09 The Secretary. The Secretary shall, if present, record the proceedings of all meetings of the Board, of the stockholders, and of all committees of which a secretary shall not have been appointed in one or more books provided for that purpose; he or she shall see that all notices are duly given in accordance with these Bylaws and as required by law; he or she shall be custodian of the seal of the Corporation and shall affix and attest the seal to all documents to be executed on behalf of the Corporation under its seal; and, in general, he or she shall perform all the duties incident to the office of Secretary and such other duties as may from time to time be assigned to him or her by the Board. SECTION 4.10 The Treasurer. The Treasurer shall have the general care and custody of the funds and securities of the Corporation, and shall deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected by the Board. He or she shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever. He or she shall exercise general supervision over expenditures and disbursements made by officers, agents and employees of the Corporation and the preparation of such records and reports in connection therewith as may be necessary or desirable. He or she shall, in general, perform all 10 11 other duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Board. SECTION 4.11 Compensation. The compensation of the officers of the Corporation shall be fixed from time to time by the Board. None of such officers shall be prevented from receiving such compensation by reason of the fact that he or she is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary corporation, in any other capacity and receiving such compensation by reason of the fact that he or she is also a director of the Corporation. Nothing contained herein shall preclude any officer from serving the Corporation, or any subsidiary corporation, in any other capacity and receiving proper compensation therefor. ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 5.01 Execution of Contracts. The Board, except as in these Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 5.02 Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such officer, assistant, agent or attorney shall give such bond, if any, as the Board may require. SECTION 5.03 Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of election for the account of the 11 12 Corporation, the President, any Vice President or the Treasurer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. SECTION 5.04 General and Special Bank Accounts. The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE VI SHARES AND THEIR TRANSFER SECTION 6.01 Certificates for Stock. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by him or her. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the President or a Vice President, and by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any of or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, 12 13 the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 6.04. SECTION 6.02 Transfers of Stock. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 6.03, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. SECTION 6.03 Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. SECTION 6.04 Lost, Stolen, Destroyed, and Mutilated Certificates. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do. SECTION 6.05 Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the 13 14 stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of any such meeting, nor more than 60 days prior to any such other action. If in any case involving the determination of stockholders for any purpose other than notice of or voting at a meeting of stockholders or expressing consent to corporate action without a meeting the Board shall not fix such a record date, the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. A determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VII INDEMNIFICATION SECTION 7.01 Action, Etc., Other Than by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was a director, officer or employee of the Corporation, or that, being such a director, officer or employee, he or she is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (all persons serving or having served in such capacities hereinafter referred to as "indemnitees"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct 14 15 was unlawful; provided, however, that, except as provided in Section 7.06 hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with any proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by two-thirds of the board of directors of the corporation. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. SECTION 7.02 Actions, Etc., by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was an indemnitee (as defined above) against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03 Expenses. To the extent that an indemnitee of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 7.01 or 7.02, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. 15 16 SECTION 7.04 Determination of Right of Indemnification. Any indemnification under Section 7.01 or 7.02 (unless ordered by a court) shall be made by the Corporation unless a determination is reasonably and promptly made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such person acted in bad faith and in a manner that such person did not believe to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe that his or her conduct was unlawful. SECTION 7.05 Advances of Expenses. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding if the Corporation shall have received an undertaking by or on behalf of the director or officer to repay any amounts so advanced in the event that he or she is ultimately determined not to be entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. SECTION 7.06 Right of Indemnitee to Indemnification Upon Application. Any indemnification pursuant to Sections 7.01 and 7.04 or 7.02 and 7.04, or any advance made pursuant to Section 7.05 of this Article shall be made promptly, and in any event within ninety (90) days, in the case of indemnification, and thirty (30) days, in the case of an advancement, of the receipt by the Secretary of the corporation of the written request of the indemnitee, unless with respect to applications under Section 7.01, 7.02 or 7.05, a determination is promptly made by the board of directors or by a majority vote of disinterested directors that the indemnitee acted in a manner set forth in such 16 17 Sections as to justify the Corporation's not indemnifying or making an advance to the indemnitee. In the event no quorum of disinterested directors is obtainable, the board of directors shall promptly direct that independent legal counsel shall decide whether the indemnitee acted in the manner set forth in such Sections as to justify the Corporation's not indemnifying or making an advance to the indemnitee. The right to indemnification or advances as granted by this Article shall be enforceable by the indemnitee in any court of competent jurisdiction, if the board or independent legal counsel denies the claim, in whole or in part, or if no disposition of such claim is made within ninety days. The indemnitee's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. SECTION 7.07 Other Rights and Remedies. The rights provided by or granted pursuant to this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an indemnitee's official capacity and as to action in another capacity while vested with such official capacity. All rights provided pursuant to this Article shall be deemed to be provided by a contract between the Corporation and the indemnitee who serves in such official capacity at any time while these bylaws are in effect and are intended to be retroactive and available with respect to actions taken in an official capacity or actions taken while vested with such official capacity prior to the adoption hereof. Any repeal or modification of any provisions hereof shall not affect any rights or obligations existing at the time of such repeal or modification. SECTION 7.08 Insurance. Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was an indemnitee against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article. The Corporation may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. SECTION 7.09 Constituent Corporations. For the purposes of this Article, references to "the Corporation" shall include in addition to the resulting corporation any constituent corporation 17 18 (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. SECTION 7.10 Other Enterprises, Fines, and Serving at Corporation's Request. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. SECTION 7.11 Beneficiaries of This Article. The rights provided by or granted pursuant to the provisions of this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VIII MISCELLANEOUS SECTION 8.01 Fiscal Year. The fiscal year of the Corporation shall end on the Friday nearest to the 31st day of July in each year unless changed by resolution of the Board. 18 19 SECTION 8.02 Seal. The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that the Corporation was incorporated in the State of Delaware and the year of incorporation. SECTION 8.03 Waiver of Notices. Whenever notice is required to be given by these Bylaws or the Certificate of Incorporation, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. SECTION 8.04 Amendments. These Bylaws, or any of them, may be altered, amended or repealed, and new Bylaws may be made, (i) by the Board, by vote of a majority of the number of directors then in office as directors, acting at any meeting of the Board, or (ii) by the stockholders holding shares of a class of stock entitled to vote for the election of directors, at any annual meeting of stockholders, without previous notice, or at any special meeting of stockholders, provided that notice of such proposed amendment, modification, repeal or adoption is given in the notice of special meeting. Any Bylaws made or altered by the stockholders may be altered or repealed by either the Board or the stockholders. 19 EX-10.3 5 DEFERRED EQUITY COMPENSATION PLAN FOR DIRECTORS 1 EXHIBIT 10.3 ACORN PRODUCTS, INC. DEFERRED EQUITY COMPENSATION PLAN FOR DIRECTORS SECTION 1. INTRODUCTION 1.1 ESTABLISHMENT OF PLAN. Acorn Products, Inc., a Delaware corporation (the "Company"), hereby establishes the Acorn Products, Inc. Deferred Equity Compensation Plan for Directors (the "Plan") for those directors of the Company who are not employees of the Company. The Plan provides the opportunity for Directors to defer receipt of all or one-half of their cash compensation on a pretax basis and to invest those deferrals in the Company's Stock. 1.2 PURPOSES. The purposes of the Plan are to align the interests of Directors more closely with the interests of other shareholders of the Company, to encourage the highest level of Director performance by providing the Directors with a direct interest in the Company's attainment of its financial goals and to help attract and retain qualified Directors. 1.3 EFFECTIVE DATE. The Plan shall be effective (the "Effective Date") upon the effective date of the registration statement filed in connection with the Company's initial public offering of the Company's Stock pursuant to the Securities Act of 1933, as amended. To the extent an investment or distribution of Stock may be made under the Plan, the Plan is intended to qualify for the exemption provided by Rule 16b-3 under the Exchange Act, as now in effect or hereafter amended, from short swing profit liability under Section 16(b) of the Exchange Act. SECTION 2. DEFINITIONS 2.1 DEFINITIONS. The following terms shall have the meanings set forth below: (a) "Administrative Committee" means the committee designated in Section 3 to administer the Plan. (b) "Affiliate" of any specified Person means (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any Person who is a director or officer (a) of such Person, (b) of any subsidiary of such Person or (c) of any Person described in clause (i) above. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meaning correlative to the foregoing. (c) "Board" means the Board of Directors of the Company or any committee thereof authorized by the Board to take action with respect to the Plan. 2 (d) "Change of Control" occurs upon any of the following events: (i) the acquisition by any Person (as defined in Section 13(d) of the Exchange Act) other than TCW or Oaktree of beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except such Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of securities of the Company (a) having 25% or more of the total voting power of the then outstanding voting securities of the Company and (b) having more voting power than the securities of the Company beneficially owned by Oaktree; (ii) during any 12 month period, a change in the Board of Directors occurs such that Incumbent Members (as defined below) do not constitute a majority of the Board of Directors; (iii) a sale by the Company of all or substantially all of the assets of the Company; or (iv) the consummation of a merger or consolidation of the Company with any other Person, provided, however, that no Change of Control shall have occurred pursuant to this clause (iv) if (A) after such merger or consolidation the voting securities of the Company prior to such merger or consolidation continue to represent more than 50% of the combined voting power of such Person or (B) if such merger or consolidation does not result in a material change in the beneficial ownership of the Company's voting securities. (e) "Common Stock Equivalent" means a hypothetical share of Stock which shall have a value on any date equal to the Fair Market Value of one share of Stock on that date. (f) "Deferred Stock Equivalent Account" means the bookkeeping account established by the Company in respect to each Director pursuant to Section 5.3 hereof and to which shall be credited the fees deferred by the Director as provided in the Plan and the Common Stock Equivalents into which such deferred fees are deemed invested pursuant to the Plan. (g) "Director" means a member of the Board who is not an employee of the Company or a subsidiary of the Company. For purposes of the Plan, an employee is an individual whose wages are subject to the withholding of federal income tax under Section 3401 of the Internal Revenue Code. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (i) "Fair Market Value" means as of any applicable date the average of the high and low sale prices of such Common Stock on the date such determination is required herein, or if there were no sales on such date, the average of the closing bid and asked prices, as reported on the principal United States securities exchange on which the Company's common stock is listed or, in the absence of any such listing, on the Nasdaq National Market or, if the common stock is not at the time listed on a national securities exchange or traded on the Nasdaq National Market, the value of such common stock on such date as determined in good faith by the Board. 2 3 (j) "Incumbent Members" means the members of the Board on the date immediately preceding the commencement of a twelve-month period, provided that any person becoming a Director during such twelve-month period whose election or nomination for election was approved by a majority of the Directors who, on the date of such election or nomination for election, comprised the Incumbent Members shall be considered one of the Incumbent Members in respect of such twelve-month period. (k) "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time. (l) "Oaktree" means Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts or other entities managed by Oaktree. (m) "Payment Date" means each of the dates each year on which the Company pays fees to Directors. (n) "Stock" means the $0.001 par value common stock of the Company. (o) "TCW" means: TCW Special Credits Plus Fund; TCW Special Credits Fund III; TCW Special Credits Fund IIIb; TCW Special Credits Fund IV; TCW Special Credits Trust; TCW Special Credits Trust IIIb; TCW Special Credits Trust IV; TCW Special Credits Trust IVa; TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund, Weyerhaeuser Company Pension Trust and The Common Fund for Bond Investments; Trust Company of the West; and any of their respective Affiliates. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definitions of any term herein in the singular shall also include the plural. SECTION 3. PLAN ADMINISTRATION The Plan shall be administered by the Administrative Committee, comprised of the Chief Financial Officer and the Secretary of the Company or such other officers of the Company as the Board may designate. Subject to the limitations of the Plan, the Administrative Committee shall have the sole and complete authority: (i) to impose such limitations, restrictions and conditions as it shall deem appropriate; (ii) to interpret the Plan and to adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan; and (iii) to make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. Notwithstanding the foregoing, the Administrative Committee shall have no authority, discretion or power to alter any terms or conditions specified in the Plan. The Administrative Committee's determinations on matters within its authority shall be conclusive and binding upon the Company, the Directors and all other persons. 3 4 SECTION 4. STOCK SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. There shall be authorized for issuance under the Plan, in accordance with the provisions of the Plan, [INSERT NUMBER EQUAL TO 1% OF THE OUTSTANDING STOCK IMMEDIATELY AFTER IPO ON A FULLY DILUTED BASIS] shares of Stock. This authorization may be increased from time to time by approval of the Board and by the shareholders of the Company if the Board determines that such shareholder approval is required. The Company shall at all times during the term of the Plan retain as authorized and unissued Stock at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. The shares of Stock issuable hereunder shall be authorized and unissued shares or previously issued and outstanding shares of Stock reacquired by the Company. 4.2 ADJUSTMENTS UPON CHANGES IN STOCK. If there shall be any change in the Stock, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, spin-off, split up, dividend in kind or other change in the corporate structure or distribution to the shareholders, appropriate adjustments shall be made by the Administrative Committee (or if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) in the aggregate number and kind of shares subject to the Plan and the number and kind of shares which may be issued under the Plan. Appropriate adjustments may also be made by the Administrative Committee in the terms of Common Stock Equivalents under the Plan to reflect such changes and to modify any other terms on an equitable basis as the Administrative Committee in its discretion determines. SECTION 5. DEFERRALS AND DISTRIBUTIONS 5.1 DEFERRAL ELECTIONS. A Director may elect to defer receipt of all or one-half of the annual fees payable to the Director for serving on the Board. A Director may make the elections permitted hereunder by giving written notice to the Company in a form approved by the Administrative Committee. The notice shall state: (i) whether all or one-half of such fees shall be deferred; (ii) the date as of which deferral is to commence; and (iii) subject to the limitations of this Section 5, the year in which distribution is to commence and the form (i.e., lump sum or installments over a stated number of years) of distribution. 5.2 TIME FOR ELECTING DEFERRAL AND CHANGE IN ELECTION. The election to defer fees shall be made in the first instance prior to the first meeting of the Board following the Effective Date of the Plan and, thereafter, prior to the latest to occur of the following: (i) the beginning of the calendar year for which the fees are to be earned; (ii) such Director's first day of Board service in that year; or (iii) the thirty-first day following the date the Director first becomes eligible to participate in the Plan; provided that, an election made on or after the first day of a calendar year shall only apply to fees earned after the date of the election. An election to defer, once made, is irrevocable for the first 4 5 calendar year with respect to which the election is made, except as provided in Section 5.11 hereof. An election to defer, once made, shall continue to be effective for succeeding calendar years until revoked or modified by the Director by written request to the Administrative Committee prior to the beginning of a calendar year for which fees would otherwise be deferred. 5.3 DEFERRED STOCK EQUIVALENT ACCOUNTS. A Deferred Stock Equivalent Account shall be established for each Director. Deferred fees shall be credited to such Account as of the date such amounts would have otherwise been paid in cash to the Director, and shall be converted into Common Stock Equivalents based on the Fair Market Value as of the date such amounts would have otherwise been paid in cash to the Director. Deferred fees shall be converted into Common Stock Equivalents by dividing (i) an amount equal to the dollar amount of the fees deferred by (ii) the Fair Market Value. A Director's Deferred Stock Equivalent Account also shall be credited with dividend equivalents and other distributions pursuant to Section 5.4. 5.4 DIVIDEND EQUIVALENTS. Dividends and other distributions with respect to Common Stock Equivalents shall be deemed to have been paid as if such Common Stock Equivalents were actual shares of Stock issued and outstanding on the respective record or distribution dates. Common Stock Equivalents shall be credited to a Director's Deferred Stock Equivalent Account in respect of cash dividends and any other securities or property distributed with respect to the Stock in connection with reclassifications, spin-offs and the like on the basis of the value of the dividend or other asset distributed and the Fair Market Value of the Common Stock Equivalents on the date of the announcement of the dividend or asset distribution, all at the same time and in the same amount as dividends or other distributions are paid or distributed with respect to the Stock. Fractional shares shall be credited to a Director's Deferred Stock Equivalent Account cumulatively, but the balance of shares of Common Stock Equivalents in a Director's Deferred Stock Equivalent Account shall be rounded to the next highest whole share for any distribution to such Director pursuant to this Section 5. 5.5 STATEMENT OF ACCOUNTS. A statement as to the balance of his or her Deferred Stock Equivalent Account will be sent to each Director at least once each calendar year. 5.6 PAYMENT OF ACCOUNTS. As soon as practicable following termination of service as a Director, a Director shall receive a distribution of his or her Deferred Stock Equivalent Account as directed by the Director in his or her most recent notice of distribution instructions, provided, however, that any such notice, other than the initial such notice, shall not be effective to direct the time and manner of distribution of the Director's Deferred Stock Equivalent Account unless such notice is received by the Administrative Committee at least two years prior to the effective date of the Director's termination of service. Either a lump sum or the first of a stated number of equal annual installments shall be paid in the year of such termination. Succeeding installments (if any) shall be paid on January 31 of each calendar year following the calendar year in 5 6 which the first payment was made. Such distribution(s) shall be made in shares of Stock on the basis of one share of Stock for each Common Stock Equivalent credited to such Director's Deferred Stock Equivalent Account as of the Payment Date immediately preceding the date of distribution. 5.7 PAYMENTS FOLLOWING THE DEATH OF A DIRECTOR. In the event of a Director's death before the balance of his or her Deferred Stock Equivalent Account is fully paid, payment of the balance of the Director's Deferred Stock Equivalent Account shall then be made to the beneficiary or beneficiaries, at such time or times and in such manner as shall be designated by the Director pursuant to Section 5.8 or, in the absence of a designation as to the time and manner of payment, in the time and manner selected by the Administrative Committee. The Administrative Committee may, in its discretion, take into account the application of any designated beneficiary and direct that the balance of the Director's Deferred Stock Equivalent Account be paid to such beneficiary in the manner requested by such application. 5.8 DESIGNATION OF BENEFICIARY. A Director shall file with the Administrative Committee a written designation of one or more persons as the beneficiary who shall be entitled to receive the amount, if any, payable hereunder after the Director's death. Such designation also shall specify the manner and the time or times at which such amount shall be paid. A Director may, from time to time, revoke or change his beneficiary designation without the consent of any prior beneficiary by filing a new designation with the Administrative Committee. The last such designation received by the Administrative Committee shall be controlling; provided, however, that no designation or change or revocation thereof shall be effective unless received by the Administrative Committee prior to the Director's death and in no event shall it be effective as of a date prior to its receipt. If no such beneficiary designation is in effect at the time of the Director's death, or if no designated beneficiary survives the Director, the Director's estate shall be deemed to have been designated his or her beneficiary and the executor or administrator thereof shall receive the amount, if any, payable hereunder after the Director's death. If the Administrative Committee is in doubt as to the right of any person to receive all or part of such amount, the Company may retain such amount until the rights thereto are determined, or the Company may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. 5.9 CHANGE IN CONTROL. Notwithstanding any provision of this Plan to the contrary, in the event of a Change in Control, each Director shall receive, within ten (10) days of the date of such Change in Control a lump sum distribution of the number of shares of Stock equal to the number of Common Stock Equivalents credited to such Director's Deferred Stock Equivalent Account as of the date of the Change in Control. 5.10 EMERGENCY PAYMENTS. In the event of an "unforeseeable emergency" as defined herein, the Administrative Committee may determine the amounts payable under Section 5 hereof and pay all or a part of such amounts in shares of Stock without regard 6 7 to the payment dates otherwise determined pursuant to Sections 5.6, 5.7 and 5.8, to the extent the Administrative Committee determines that such action is necessary in light of immediate and substantial needs of the Director (or his beneficiary) occasioned by severe financial hardship. For the purposes of this Section, an "unforeseeable emergency" is a severe financial hardship to the Director resulting from a sudden and unexpected illness or accident of the Director or beneficiary, or of a dependent (as defined in Section 152(a) of the Internal Revenue Code) of the Director or beneficiary, loss of the Director's or beneficiary's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director or beneficiary. Payments shall not be made pursuant to this Section to the extent that such hardship is or may be relieved: (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Director's or beneficiary's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or (c) by cessation of the Director's deferrals under the Plan. Such action shall be taken only if a Director (or a Director's legal representatives or successors) signs an application describing fully the circumstances which are deemed to justify the payment, together with an estimate of the amounts necessary to prevent such hardship, which application shall be approved by the Administrative Committee after making such inquiries as the Administrative Committee deems necessary or appropriate. 5.11 PAYMENT OF TAXABLE AMOUNT. Notwithstanding any other provision of this Section 5 or any payment schedule directed by a Director pursuant to Sections 5.6, 5.7 or 5.8 and regardless of whether payments have commenced under this Section 5, in the event that the Internal Revenue Service should finally determine that part or all of the value of a Director's Deferred Stock Equivalent Account which has not actually been distributed to the Director is nevertheless required to be included in the Director's or beneficiary's gross income for federal income tax purposes, then the balance of the Deferred Stock Equivalent Account or the part thereof that was determined to be includable in gross income shall be distributed in shares of Stock to the Director or beneficiary, as the case may be, in a lump sum as soon as practicable after such determination, without any action or approval by the Administrative Committee. A "final determination" of the Internal Revenue Service for purposes of this Section is a determination in writing by said Service ordering the payment of additional tax, reporting of additional gross income or otherwise requiring Plan amounts to be included in gross income, which is not appealable or which the Director or beneficiary does not appeal within the time prescribed for appeals. SECTION 6. GENERAL CREDITOR STATUS Each participating Director and beneficiary designated by a Director shall be and remain an unsecured general creditor of the Company with respect to any payments due and owing to such Director or beneficiary hereunder. All payments to persons entitled to benefits hereunder shall be made out of the general assets and shall be solely the obligation of the Company. The Plan is a promise by the Company to pay benefits in the future and it is the intention of the Company and participating Directors that the Plan be 7 8 "unfunded" for tax purposes (and for the purposes of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA")). 8 9 SECTION 7. CLAIMS PROCEDURES If a claim for benefits made by any person (the "Applicant") is denied, the Administrative Committee shall furnish to the Applicant, within 90 days after its receipt of such claim (or within 180 days after such receipt if special circumstances require an extension of time), a written notice which: (i) specifies the reasons for the denial; (ii) refers to the pertinent provisions of the Plan on which the denial is based; (iii) describes any additional material or information necessary for the perfection of the claim and explains why such material or information is necessary; and (iv) explains the claim review procedures. Upon the written request of the Applicant submitted within 60 days after receipt of such written notice, the Administrative Committee shall afford the Applicant a full and fair review of the decision denying the claim and, if so requested: (i) permit the Applicant to review any documents which are pertinent to the claim; (ii) permit the Applicant to submit to the Administrative Committee issues and comments in writing; and (iii) afford the Applicant an opportunity to meet with the Administrative Committee as a part of the review procedure. Within 60 days after its receipt of a request for review (or within 120 days after such receipt if special circumstances, such as the need to hold a hearing, require an extension of time) the Administrative Committee shall notify the Applicant in writing of its decision and the reasons for its decision and shall refer the Applicant to the provisions of the Plan which form the basis for its decision. SECTION 8. ASSIGNABILITY The right of a Director and his beneficiary to receive payments or distributions hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer (other than by will or the laws of descent and distribution), assignment, pledge, encumbrance, attachment, or garnishment by creditors of a participating Director or his beneficiary. SECTION 9. PLAN TERMINATION, AMENDMENT AND MODIFICATION The Plan shall automatically terminate at the close of business on the fifteenth anniversary of the effective date unless sooner terminated by the Board. The Board may at any time terminate, and from time to time may amend or modify the Plan, provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable the Plan to satisfy any applicable federal or state statutory or regulatory requirements, and, provided further that no termination, amendment or modification shall reduce the then existing balance of any Director's Deferred Stock Equivalent Account or otherwise adversely change the terms and conditions thereof without the Director's consent. SECTION 10. GOVERNING LAW/PLAN CONSTRUCTION The Plan and all agreements hereunder shall be construed in accordance with and 9 10 governed by the laws of the State of New York. Nothing in this document shall be construed as an employment agreement or in any way impairing the right of the Company, the Board or its committees or the Company's shareholders, to remove a Director from service as a director, to refuse to renominate or reelect such person as a director, or to enforce the duly adopted retirement policies of the Board. 10 EX-10.4 6 1997 STOCK INCENTIVE PLAN 1 EXHIBIT 10.4 ACORN PRODUCTS, INC. 1997 STOCK INCENTIVE PLAN 1. Establishment and Purpose of the Plan. This 1997 Stock Incentive Plan (the "Plan") is established by Acorn Products, Inc., a Delaware corporation (the "Company"), as of April , 1997. The Plan shall be effective upon the effective date of the registration statement filed in connection with the Company's proposed initial public offering. The Plan is designed to enable the Company to attract, retain and motivate members of the senior management and certain other officers and key employees of the Company, UnionTools, Inc., a Delaware corporation ("UnionTools"), and the Company's other direct and indirect subsidiaries by providing for or increasing their proprietary interest in the Company. The Plan provides for the grant of options ("Options") that qualify as incentive stock options ("Incentive Stock Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as Options that do not so qualify ("Non-Qualified Options"), for the grant of stock appreciation rights ("Stock Appreciation Rights") and for the sale or grant of restricted stock ("Restricted Stock"). 2. Stock Subject to the Plan. The maximum number of shares of stock that may be subject to Options or Stock Appreciation Rights granted hereunder and the number of shares of stock that may be sold as Restricted Stock hereunder, shall not in the aggregate exceed [INSERT NUMBER EQUAL TO 10% OF OUTSTANDING STOCK AFTER IPO ON A FULLY DILUTED BASIS] shares of common stock, $0.001 par value (the "Shares", and individually, a "Share"), of the Company, subject to adjustment under Section 12 hereof. Anything contained herein to the contrary notwithstanding, the aggregate number of Shares with respect to which options or stock appreciation rights may be granted during any calendar year to any individual shall be limited to . The Shares that may be subject to Options granted under the Plan, and Restricted Stock sold or granted under the Plan, may be authorized and unissued Shares or Shares reacquired by the Company and held as treasury stock. Shares that are subject to the unexercised portions of any Options that expire, terminate or are canceled, and Shares that are not required to satisfy the exercise of any Stock Appreciation Rights that expire, terminate or are canceled, and Shares of Restricted Stock that are reacquired by the Company pursuant to the restrictions thereon, may again become available for the grant of Options or Stock Appreciation Rights and the sale or grant of Restricted Stock under the Plan. If a Stock Appreciation Right is exercised, any Option or portion thereof that is surrendered in connection with such exercise shall terminate and the Shares theretofore subject to the Option or portion thereof shall not be available for further use under the Plan. 3. Administration of the Plan. The Plan shall be administered by the Compensation Committee (the "Committee") consisting of not less than two members appointed by the Board of Directors (the "Board") of the Company. Each member of the Committee shall be a member of the Board who qualifies both as an "outside director" within the meaning of Section 162(m) of the Code, and as a "non-employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If no persons are designated by the Board to serve on the Committee, the Plan shall be administered by the Board and all references herein to the Committee shall refer to the Board. From time to time, the Board shall have the 2 discretion to add, remove or replace members of the Committee and shall have the sole authority to fill vacancies on the Committee. All actions of the Committee shall be authorized by a majority vote thereof at a duly called meeting. The Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the rules and regulations, and the agreements and other instruments evidencing Options and Stock Appreciation Rights granted and Restricted Stock sold or granted under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Committee shall be final and conclusive upon the Eligible Employees, as hereinafter defined. Notwithstanding the foregoing, any dispute arising under any Agreement (as defined below) shall be resolved pursuant to the dispute resolution mechanism (if any) set forth in such Agreement. Subject to the express provisions of the Plan, the Committee shall determine the number of Shares subject to grants or sales and the terms thereof, including the provisions relating to the exercisability of Options and Stock Appreciation Rights, lapse and non-lapse restrictions upon the Shares obtained or obtainable under the Plan and the termination and/or forfeiture of Options and Stock Appreciation Rights and Restricted Stock under the Plan. The terms upon which Options and Stock Appreciation Rights are granted and Restricted Stock is sold or granted shall be evidenced by a written agreement executed by the Company and the Participant (as defined below) to whom such are sold or granted (the "Agreement"). 4. Eligibility. Persons who shall be eligible for grants of Options or Stock Appreciation Rights or sales or grants of Restricted Stock hereunder ("Eligible Employees") shall be employee directors of the Company or UnionTools or the Company's other direct and indirect subsidiaries and those employees of the Company, UnionTools or the Company's other direct and indirect subsidiaries who are members of a select group of management or other key employees that the Committee may from time to time designate to participate under the Plan ("Participants") through grants of Non-Qualified Options, Incentive Stock Options and, if applicable, Stock Appreciation Rights, and/or through sales or grants of Restricted Stock. 5. Terms and Conditions of Options. No Incentive Stock Option shall be granted for a term of more than ten years and no Non-Qualified Option shall be granted for a term of more than ten years and thirty days. Options may, in the discretion of the Committee, be granted with associated Stock Appreciation Rights or be amended so as to provide for associated Stock Appreciation Rights. The Agreement may contain such other terms, provisions and conditions as may be determined by the Committee as long as such terms, conditions and provisions are not inconsistent with the Plan. The Committee shall designate as such those Options intended to be eligible to qualify and be treated as Incentive Stock Options and, correspondingly, those Options not intended to be eligible to qualify and be treated as Incentive Stock Options. 6. Exercise Price of Options. The exercise price per share for each Non-Qualified Option granted hereunder shall be set forth in the Agreement. The exercise price per share of any Option intended to be eligible to qualify and be treated as an Incentive Stock Option shall not be less than the Fair Market Value of a Share on the date such Incentive Stock Option is granted, 2 3 except that if such Incentive Stock Option is granted to a Participant who on the date of grant is treated under Section 424(d) of the Code as owning stock (not including stock purchasable under outstanding options) possessing more than ten percent of the total combined voting power of all classes of the Company's stock, the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of a Share on the date such Incentive Stock Option is granted, and the option shall not be exercisable more than four years from the date of grant. Payment for Shares purchased upon exercise of any Option granted hereunder shall be in cash at the time of exercise, except that, if either the Agreement so provides or the Committee so permits, and if the Company is not then prohibited from purchasing or acquiring Shares, such payment may be made in whole or in part with Shares. The Committee also may on an individual basis permit payment or agree to permit payment by such other alternative means as may be lawful, including by delivery of an executed exercise notice together with irrevocable instructions to a broker promptly to deliver to the Company the amount of sale or loan proceeds required to pay the exercise price. 7. Determination of Fair Market Value. The Fair Market Value of a Share for the purposes of the Plan shall mean the average of the high and low sale prices of a Share on the date such determination is required herein, or if there were no sales on such date, the average of the closing bid and asked prices, as reported on the principal securities exchange on which the Shares are listed or, in the absence of such listing, on the Nasdaq National Market or, if Shares are not at the time listed on a national securities exchange or traded on the Nasdaq National Market, the value of a Share on such date as determined in good faith by the Committee. 8. Non-Transferability. Except to the extent provided otherwise in the Agreement, any Option granted under the Plan shall by its terms be nontransferable by the Participant other than by will or the laws of descent and distribution (in which case such descendant or beneficiary shall be subject to all terms of the Plan applicable to Participants) and is exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. 9. Incentive Stock Options. The provisions of the Plan are intended to satisfy the requirements set forth in Section 422 of the Code and the regulations promulgated thereunder (including the aggregate fair market value limits set forth in Section 422(d) of the Code) with respect to Incentive Stock Options granted under the Plan. For the purpose of this Section 9, the Fair Market Value of a Share shall be determined at the time the Incentive Stock Option is granted. 10. Stock Appreciation Rights. The Committee may, under such terms and conditions as it deems appropriate, grant to any Eligible Employee selected by the Committee, Stock Appreciation Rights, which may or may not be associated with Options. Upon exercise of a Stock Appreciation Right, the Participant shall be entitled to receive payment of an amount equal to the excess of the Fair Market Value of the underlying Shares on the date of exercise over the exercise price of the Stock Appreciation Rights. Such payment may be made in additional Shares valued at their Fair Market Value on the date of exercise or in cash, or partly in Shares and partly in cash, as the Committee may designate. The Committee may require that any Stock Appreciation Right shall be subject to the condition that the Committee may at any time, in its absolute discretion, not allow the exercise of such Stock Appreciation Right. The Committee may further impose such conditions 3 4 on the exercise of Stock Appreciation Rights as may be necessary or desirable to comply with Rule 16b-3 under the Exchange Act. 11. Restricted Stock. The Committee may sell or grant Restricted Stock under the Plan (either independently or in connection with the exercise of options or Stock Appreciation Rights under the Plan) to Eligible Employees selected by the Committee. The Committee shall in each case determine the number of Shares of Restricted Stock to be sold or granted, the price at which such Shares are to be sold, if applicable, and the terms or duration of the restrictions to be imposed upon those Shares. 12. Adjustments. If at any time the class of Shares subject to the Plan is changed into or exchanged for a different number or kind of shares or securities, as the result of any one or more reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends or similar events, or in the event of a rights offering to purchase Shares at a price substantially below Fair Market Value, an appropriate adjustment consistent with such change, exchange or offering shall be made in the number, exercise or sale price and/or type of shares or securities for which Options or Stock Appreciation Rights may thereafter be granted and Restricted Stock may thereafter be sold or granted under the Plan in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, participants in the Plan. Any such adjustment in outstanding Options or in outstanding rights to purchase Restricted Stock shall be made without changing the aggregate exercise price applicable to the unexercised portions of such Options or the aggregate purchase price of such Restricted Stock, as the case may be. 13. Change of Control. Notwithstanding any provision of this Plan to the contrary, in the event of a Change in Control (as defined below), all Options and Stock Appreciation Rights that have been granted by the Board as of the date thereof shall vest and become exercisable, as the case may be, immediately prior to the effective time of any Change in Control and all conditions to exercise thereof shall be deemed to have been met. For purposes of this Section 13, the following terms shall have the following meanings: "Affiliate" of any specified Person (as defined in Section 13(d) of the Exchange Act) shall mean (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any Person who is a director or officer (a) of such Person, (b) of any subsidiary of such Person or (c) of any Person described in clause (i) above. For purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meaning correlative to the foregoing. "Change of Control" shall mean: (i) the acquisition by any Person (as defined in Section 13(d) of the Exchange Act) other than TCW or Oaktree, of beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except such Person shall be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) of securities of the Company (a) having 25% or more of the total voting power of the then outstanding voting securities of the Company and (b) having more voting power than the securities of the Company beneficially owned by Oaktree; 4 5 (ii) during any 12 month period, a change in the Board occurs such that Incumbent Members (as defined below) do not constitute a majority of the Board; (iii) a sale by the Company of all or substantially all of the assets of the Company; or (iv) the consummation of a merger or consolidation of the Company with any other Person, provided, however, that no Change of Control shall have occurred pursuant to this clause (iv) if (A) after such merger or consolidation the voting securities of the Company prior to such merger or consolidation continue to represent more than 50% of the combined voting power of such Person or (B) if such merger or consolidation does not result in a material change in the beneficial ownership of the Company's voting securities. "Incumbent Members" shall mean the members of the Board on the date immediately preceding the commencement of a twelve-month period, provided that any person becoming a Director during such twelve-month period whose election or nomination for election was approved by a majority of the Directors who, on the date of such election or nomination for election, comprised the Incumbent Members shall be considered one of the Incumbent Members in respect of such twelve-month period. "Oaktree" shall mean Oaktree Capital Management, LLC and its Affiliates, including any partnerships, separate accounts or other entities managed by Oaktree. "TCW" shall mean: TCW Special Credits Plus Fund; TCW Special Credits Fund III; TCW Special Credits Fund IIIb; TCW Special Credits Fund IV; TCW Special Credits Trust; TCW Special Credits Trust IIIb; TCW Special Credits Trust IV; TCW Special Credits Trust IVa; TCW Special Credits, as investment manager of Delaware State Employees' Retirement Fund, Weyerhaeuser Company Pension Trust and The Common Fund for Bond Investments; Trust Company of the West; and any of their respective Affiliates. 14. Investment Representation. Each Agreement may provide that, upon demand by the Committee for such a representation, the Optionee shall deliver to the Committee at the time of any exercise of an Option a written representation that the Shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to the delivery of any Shares issued upon exercise of an Option shall be a condition precedent to the right of the Optionee or such other person to purchase any Shares. 15. Duration of the Plan. Options and Stock Appreciation Rights may not be granted and Restricted Stock may not be sold or granted under the Plan after April , 2007. 16. Amendment and Termination of the Plan. The Board may at any time alter, amend, suspend or terminate the Plan. The Committee may amend the Plan or any Agreement issued hereunder to the extent necessary for any Option or Stock Appreciation Right granted or Restricted Stock sold or granted under the Plan to comply with applicable tax or securities laws. No Option or Stock Appreciation Right may be granted or Restricted Stock sold or granted during any suspension or after the termination of the Plan. No amendment, suspension or termination of the Plan or of any Agreement issued hereunder shall, without the consent of the affected holder of such Option or Stock Appreciation Right or Restricted Stock, alter or impair any 5 6 rights or obligations in any Option or Stock Appreciation Right or Restricted Stock theretofore granted or sold to such holder under the Plan. 17. Nature of the Plan. The Plan is intended to qualify as a compensatory benefit plan within the meaning of Rule 701 under the Securities Act of 1933. The grant, exercise or sale of securities under the Plan is intended to qualify for the exemption from short swing profits liability under Section 16(b) of the Exchange Act, provided by Rule 16b-3 promulgated thereunder, as such Rule is now in effect or hereafter amended. 18. Cancellation of Options. Any Option granted under the Plan may be canceled at any time with the consent of the holder and a new Option may be granted to such holder in lieu thereof. 19. Withholding Taxes. Whenever Shares are to be issued with respect to the exercise of Options or amounts are to be paid or income earned with respect to Stock Appreciation Rights or Restricted Stock under the Plan, the Committee in its discretion may require the Participant to remit to the Company, prior to the delivery of any certificate or certificates for such Shares or the payment of any such amounts, all or any part of the amount determined in the Committee's discretion to be sufficient to satisfy federal, state and local withholding tax obligations (the "Withholding Obligation") that the Company or its counsel determines may arise with respect to such exercise, issuance or payment. Pursuant to a procedure established by the Committee, the Participant may (i) request the Company to withhold delivery of a sufficient number of Shares or a sufficient amount of the Participant's compensation or (ii) deliver a sufficient number of previously-issued Shares, to satisfy the Withholding Obligation. 20. No Rights as Stockholder or to Continuance of Employment. No Participant shall have any rights as a Stockholder with respect to any Shares subject to his or her Option or Stock Appreciation Right prior to the date of issuance to him or her of a certificate or certificate for such Shares. The Plan and any Option or Stock Appreciation Rights granted and any Restricted Stock sold or granted under the Plan shall not confer upon any Participant any right with respect to any continuance of employment by the Company, nor shall they interfere in any way with the right of the Company to terminate his or her employment at any time. 21. Compliance with Government Law and Regulations. The Plan, the grant and exercise of Options and Stock Appreciation Rights, and the grant and sale of Restricted Stock thereunder, and the obligation of the Company to sell and deliver Shares under such Options and Stock Appreciation Rights, shall be subject to all applicable laws, rules and regulations and to such approvals by any government or regulatory agency that may be required. The Company shall not be required to issue or deliver any certificates for Shares prior to (i) the listing of such Shares on any stock exchange on which Shares may then be listed and (ii) the completion of any registration or qualification of such Shares under any state or federal law, or any ruling or regulation of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable. 6 EX-10.5 7 STOCK OPTION AGREEMENT - STANDARD FORM 1 EXHIBIT 10.5 STOCK OPTION AGREEMENT PURSUANT TO THE ACORN PRODUCTS, INC. 1997 STOCK INCENTIVE PLAN THIS STOCK OPTION AGREEMENT (this "Agreement") is made as of (the "Effective Date"), between Acorn Products, Inc., a Delaware corporation ("API"), and Name (the "Optionee"). R E C I T A L S A. API has adopted the 1997 Stock Incentive Plan (the "Plan"), a copy of which is attached hereto as Exhibit A. B. API desires to grant the Optionee the opportunity to acquire a proprietary interest in the Company (as defined below) to encourage the Optionee's contribution to the success and progress of the Company. C. In accordance with the Plan, the Committee (as defined in the Plan) has, as of the Effective Date, granted to the Optionee an option to purchase shares of Common Stock, $0.001 par value, of API (the "Common Stock") subject to the terms and conditions of the Plan and this Agreement. Such option [is/is not] intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended. AGREEMENTS 1. Definitions. Capitalized terms used herein shall have the following meanings: "Act" is defined in Section 8(a). "Agreement" means this Stock Option Agreement. "Board" is defined in Section 4(a). "Cause" is defined in Section 4(a). "Committee" is defined in Section 3 of the 1997 Stock Incentive Plan. "Common Stock" is defined in recital C. "Company" means API and its Subsidiaries. With respect to the Optionee's employment, including but not limited to policies associated therewith and retirement or termination therefrom, the Company shall mean [INSERT NAME OF ACTUAL EMPLOYER]. 2 "Disability" means the failure by the Optionee to render services to the Company for an aggregate of sixty (60) business days in any continuous period of six (6) months on account of physical or mental disability. "Effective Date" is defined in the preamble. "Exercise Price" is defined in Section 2. "Fiscal Year" means the fiscal year of the Company. "Option" is defined in Section 2. "Optionee" is defined in the preamble. "Option Shares" is defined in Section 2. "Plan" is defined in recital A. "Retirement" means the Optionee's retirement from employment with the Company in accordance with the Company's retirement policy then in effect. The Optionee's Retirement shall not constitute resignation from employment with the Company. "Subsidiary" means any joint venture, corporation, partnership or other entity as to which API, whether directly or indirectly, has more than 50% of the (i) voting rights or (ii) rights to capital or profits. "Termination Date" means the date on which the Optionee ceases to be employed by the Company for any reason. 2. Grant of Option. API grants to the Optionee the right and option (the "Option") to purchase shares of Common Stock, on the terms and conditions hereinafter set forth, all or any part of the number of shares of Common Stock set forth below the Optionee's signature below (the "Option Shares"), at the purchase price of $ per Share (as such amount may be adjusted, the "Exercise Price"), on the terms and conditions set forth herein. 3. Exercisability. The Optionee's right to exercise the Option shall vest to the extent of one-quarter (1/4) of the number of Option Shares on the date (the "Vesting Date") that is the Effective Date, and one quarter (1/4) on each of the next three (3) succeeding dates that are the anniversary of the Effective Date provided that, on each such vesting date, Optionee is employed by the Company. 4. Expiration. (a) The vested portion of the Option shall expire upon the earlier of (1) the seventh (7th) anniversary of the Effective Date, or (2)(i) if the Optionee resigns from employment or is terminated from employment by the Company for cause, the Termination Date, (ii) if the Optionee ceases to be employed by the Company due to death or Disability, the one-year 3 anniversary of the Termination Date, or (iii) if the Optionee ceases to be employed by the Company due to Retirement or termination by the Company without cause, the ninetieth (90th) day following the Termination Date. For the purposes of the preceding sentence, "cause" shall mean the Optionee's (i) conviction of, or plea of guilty or nolo contendere to, a felony or a crime involving moral turpitude, (ii) embezzlement or misappropriation of funds or property of the Company or its Subsidiaries, (iii) continued use of alcohol or drugs to an extent that interferes with the performance by the Optionee of his or her employment responsibilities or (iv) willful failure or refusal to perform those duties reasonably assigned or delegated to him or her by the Board of Directors of the Company (the "Board") or his or her supervisor, which failure or refusal continues following (a) the Company giving the Optionee written notice setting forth the facts or events constituting such failure or refusal and (b) a reasonable opportunity to correct the deficiencies or other problems specified in such notice to the reasonable satisfaction of the Board or such supervisor. (b) The Optionee shall not be considered to have ceased to be employed by the Company for purposes of this Agreement if he or she continues to be employed by API or a Subsidiary. (c) The unvested portion of the Option shall expire on the Termination Date. 5. Nontransferability. The Option shall not be transferable by the Optionee otherwise than upon the Optionee's death to Optionee's spouse, child, estate, personal representative, heir or successor or to a trust for the benefit of Optionee's spouse, child or heir, as designated by Optionee in a form of Beneficiary Designation filed by Optionee with the Committee, and the Option is exercisable, during the Optionee's lifetime, only by him or her or, in the event of the Optionee's Disability, Optionee's guardian or legal representative. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred (except as aforesaid), pledged or hypothecated in any way (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Any assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, and the levy of any attachment or similar process upon the Option that would otherwise effect a change in the ownership of the Option, shall terminate the Option; provided, however, that in the case of the involuntary levy of any attachment or similar involuntary process upon the Option, the Optionee shall have thirty (30) days after notice thereof to cure such levy or process before the Option terminates. This Agreement shall be binding on and enforceable against any person who is a permitted transferee of the Option pursuant to the first sentence of this Section. 6. Adjustments. If the shares of the Common Stock are changed into or exchanged for a different number or kind of shares or securities, as the result of any one or more reorganizations, recapitalizations, mergers, acquisitions, stock splits, reverse stock splits, stock dividends or similar events, or in the event of a rights offering to purchase Common Stock at a price substantially below its fair market value, an appropriate adjustment shall be made in the number and kind of shares or other securities subject to the Option, and the price for each share or other unit of any securities subject to this Agreement, in accordance with Section 12 of the Plan. No fractional interests shall be issued on account of any such adjustment unless the Committee specifically 4 determines to the contrary; provided, however, that in lieu of fractional interests, the Optionee, upon the exercise of the Option in whole or part, shall receive cash in an amount equal to the amount by which the fair market value of such fractional interests exceeds the Exercise Price attributable to such fractional interests. 7. Exercise of the Option. Prior to the expiration thereof, the Optionee may exercise the vested portion of the Option from time to time in whole or in part, provided that unless the Committee in its sole discretion shall determine otherwise, each such exercise, other than an exercise for all remaining shares pursuant to this Agreement, shall be for no fewer than one hundred (100) shares. Upon electing to exercise the Option, the Optionee shall deliver to the Secretary of the Company a written and signed notice of such election setting forth the number of Option Shares the Optionee has elected to purchase and shall at the time of delivery of such notice tender cash or a cashier's or certified bank check to the order of the Company for the full Exercise Price of such Option Shares and any amount required pursuant to Section 13 hereof. Alternatively, if the Company is not at the time prohibited from purchasing or acquiring shares of its capital stock, and if the Committee, acting in its sole discretion, grants its approval, the Exercise Price may be paid in whole or in part by delivery of shares of the Common Stock owned by the Optionee. The value of any such shares delivered as payment of the Exercise Price shall be the average of the high and low sale prices of such Common Stock on the date such determination is required herein, or if there were no sales on such date, the average of the closing bid and asked prices, as reported on the principal national securities exchange on which the Company's common stock is listed or, in the absence of such listing, on the Nasdaq National Market or, if the common stock is not at the time listed on a national securities exchange or traded on the Nasdaq National Market, the value of such common stock on such date as determined in good faith by the Committee. The Committee further may, in its discretion, permit payment of the Exercise Price in such form or in such manner as may be permissible under the Plan and under any applicable law. 8. Compliance with Legal Requirements. (a) No Option Shares shall be issued or transferred pursuant to this Agreement unless and until all legal requirements applicable to such issuance or transfer have, in the opinion of counsel to the Company, been satisfied. Such requirements may include, but are not limited to, registering or qualifying such Shares under any state or federal law, satisfying any applicable law relating to the transfer of unregistered securities or demonstrating the availability of an exemption from applicable laws, placing a legend on the Shares to the effect that they were issued in reliance upon an exemption from registration under the Securities Act of 1933, as amended (the "Act"), and may not be transferred other than in reliance upon Rule 144 or Rule 701 promulgated under the Act, if available, or upon another exemption from the Act, or obtaining the consent or approval of any governmental regulatory body. (b) The Optionee understands that the Company intends for the offering and sale of Option Shares to be effected in reliance upon Rule 701 or another available exemption from registration under the Act and intends to file a Form 701 as appropriate, and that the Company is under no obligation to register for resale the Option Shares issued upon exercise of the Option. In connection with any such issuance or transfer, the person acquiring the Option Shares shall, if 5 requested by the Company, provide information and assurances satisfactory to counsel to the Company with respect to such matters as the Company reasonably may deem desirable to assure compliance with all applicable legal requirements, including without limitation, a representation that the Option Shares are being acquired for investment and not with a view to the sale or distribution thereof. 9. No Interest in Shares Subject to Option. Neither the Optionee (individually or as a member of a group) nor any beneficiary or other person claiming under or through the Optionee shall have any right, title, interest, or privilege in or to any shares of stock allocated or reserved for the purpose of the Plan or subject to this Agreement except as to such Option Shares, if any, as shall have been issued to such person upon exercise of this Option or any part of it. 10. Plan Controls. The Option hereby granted is subject to, and the Company and the Optionee agree to be bound by, all of the terms and conditions of the Plan as the same may be amended from time to time in accordance with the terms thereof, but no such amendment shall be effective as to the Option without the Optionee's consent insofar as it may adversely affect the Optionee's rights under this Agreement. 11. Not an Employment Contract. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto shall confer upon the Optionee any right to employment by API, the Company or any Subsidiary or shall affect the right of the Company to terminate the employment of the Optionee with or without cause (as defined in Section 4). 12. Governing Law. All terms of and rights under this Agreement shall be governed by and construed in accordance with the internal law of the State of New York, without giving effect to principles of conflicts of law. 13. Taxes. The Committee may, in its discretion, make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all federal, state, local and other taxes required by law to be withheld with respect to the issuance or exercise of the Option including, but not limited to, deducting the amount of any such withholding taxes from any other amount then or thereafter payable to the Optionee, requiring the Optionee to pay to the Company the amount required to be withheld or to execute such documents as the Committee deems necessary or desirable to enable it to satisfy its withholding obligations, or any other means provided in the Plan. 14. Notices. All notices, requests, demands and other communications pursuant to this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telexed or telecopied to, or, if mailed, when received by, the other party at the following addresses (or at such other address as shall be given in writing by either party to the other): If to the Company to: Acorn Products, Inc. 500 Dublin Avenue, P.O Box 1930 Columbus, Ohio 43216-1930 Attention: Secretary 6 If to the Optionee, to the address set forth below the Optionee's signature below. 15. Amendments and Waivers. This Agreement may be amended, and any provision hereof may be waived, only by a writing signed by both parties hereto. 16. Entire Agreement. This Agreement, together with the Plan, sets forth the entire agreement and understanding between the parties as to the subject matter hereof and supersedes all prior oral and written and all contemporaneous oral discussions, agreements and understandings of any kind or nature. 17. Separability. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. 18. Headings. The headings preceding the text of the sections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. 19. Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 20. Further Assurances. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement. 21. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. 22. Restrictions on Transfers During Lock-Up Period. Prior to [ , 1997], the expiration of the lock-up period in connection with API's initial public offering, Option Shares acquired upon exercise of an Option shall not be transferable or transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) except that the Optionee may transfer such Option Shares to his or her spouse, child, estate, personal representative, heir or successor or to a trust for the benefit of the Optionee or his or her spouse, child or heir. This restriction shall be binding on and enforceable against any person who is a permitted transferee of such Option Shares. The stock certificates issued to evidence such Option Shares upon exercise of the Option hereunder may bear a legend referring to this restriction. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. ACORN PRODUCTS, INC. By:_____________________________________ Name:___________________________________ Title:__________________________________ OPTIONEE ________________________________________ Name Address: Address EX-10.6 8 UNION TOOLS RETIREMENT PLAN FOR SALARIED EMPLOYEES 1 EXHIBIT 10.6 UNIONTOOLS, INC. (SUCCESSOR BY MERGER OF THE UNION FORK AND HOE COMPANY) RETIREMENT PLAN FOR SALARIED EMPLOYEES AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1996 (EXCEPT AS OTHERWISE PROVIDED HEREIN) 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I DEFINITIONS......................................................................... 1 II SERVICE............................................................................. 6 2.1 Hour of Service......................................................... 6 2.2 Years of Contributing Membership........................................ 10 2.3 Years of Membership..................................................... 10 2.4 Years of Vesting Service................................................ 11 2.5 Break in Service........................................................ 11 2.6 Records................................................................. 11 III MEMBERSHIP.......................................................................... 12 3.1 Time of Membership...................................................... 12 3.2 Transfer to Non-Covered Position........................................ 12 3.3 Transfer to Employee Position........................................... 12 IV ELIGIBILITY FOR PLAN BENEFITS....................................................... 12 4.1 Normal Retirement Benefit............................................... 12 4.2 Postponed Retirement Benefit............................................ 12 4.3 Early Retirement Benefit................................................ 13 4.4 Death Benefits before Retirement........................................ 13 4.5 Vested Deferred Benefit................................................. 13 4.6 Termination of Employment before Eligibility for a Vested Deferred Benefit........................................... 14 V BENEFITS............................................................................ 15 5.1 Benefit Accrual......................................................... 15 5.2 Benefit Accrual Before January 1, 1993, and 1996 ....................... 16 5.3 Amount of Normal Retirement Benefit..................................... 17 5.4 Amount of Postponed Retirement Benefit.................................. 17 5.5 Amount of Early Retirement Benefit...................................... 18 5.6 Amount of Vested Deferred Benefit....................................... 18 5.7 Maximum Amount of Benefit............................................... 18 5.8 Limitations on Member Contributions..................................... 21 5.9 Small Benefit Payments.................................................. 23 5.10 Benefits upon Reemployment of a Member.................................. 23 5.11 Benefit Payments to be No Less than Member's Accumulated Contributions............................................... 24 5.12 Amount of Qualified Preretirement Death Benefit ........................ 24
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VI METHOD AND MODE OF BENEFIT PAYMENTS................................................. 25 6.1 Qualified Joint and Survivor Annuity.................................... 25 6.2 Elections............................................................... 26 6.3 Cash Out of Certain Small Benefits...................................... 27 6.4 Elective Rollovers...................................................... 27 6.5 Determination of Marital Status......................................... 27 6.6 Methods and Modes of Distribution....................................... 27 6.7 Non-Married Member...................................................... 28 6.8 Distribution............................................................ 29 6.9 Limitation on Benefit Payments.......................................... 29 6.10 Prohibition Against More than Incidental Death Benefits ................ 30 VII CONTRIBUTIONS AND FUNDING........................................................... 30 7.1 Purposes of Funding..................................................... 30 7.2 Contributing Member's Contributions..................................... 30 7.3 Company Contributions................................................... 30 7.4 Funding Agency.......................................................... 31 7.5 Forfeitures............................................................. 31 7.6 Funding Standard Account................................................ 31 7.7 Funding Policy.......................................................... 31 7.8 Tax Deductibility of Contributions...................................... 31 7.9 Additional Payments..................................................... 31 VIII ADMINISTRATION...................................................................... 31 8.1 Plan Administrator...................................................... 31 8.2 Powers of Plan Administrator............................................ 31 8.3 Conclusiveness of Various Documents..................................... 32 8.4 Actions to be Uniform................................................... 32 IX AMENDMENT AND TERMINATION OF THE PLAN............................................... 32 9.1 Amendment of the Plan................................................... 32 9.2 Termination of the Plan................................................. 33 9.3 Allocation of Assets upon Plan Termination ............................. 33 9.4 Merger or Consolidation................................................. 34 X CONDITIONAL BENEFIT RESTRICTIONS.................................................... 34 10.1 Restrictions on Benefits Payable to Certain Members .................... 34
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XI MISCELLANEOUS PROVISIONS............................................................ 35 11.1 Evidence of Survival.................................................... 35 11.2 Non-Alienation of Benefits.............................................. 35 11.3 Payments to Incompetents................................................ 36 11.4 Misstated Information................................................... 36 11.5 Claims Procedure........................................................ 36 11.6 Ohio Law Applicable..................................................... 37 11.7 Plan Not an Employment Contract......................................... 37 11.8 Exclusive Benefit of Members and Beneficiaries ......................... 37 11.9 Headings................................................................ 37 11.10 Qualified Domestic Relations Orders..................................... 37 XII TOP HEAVY PROVISIONS................................................................ 39 12.1 Definitions............................................................. 39 12.2 Top Heavy Determination................................................. 40 12.3 General Rule............................................................ 42 12.4 Vesting Requirements.................................................... 42 12.5 Minimum Benefits........................................................ 42 12.6 Maximum Benefits........................................................ 43 12.7 Transition Rules When Plan Ceases to be Top Heavy ...................... 43 XIII MULTIEMPLOYER PROVISIONS............................................................ 43 13.1 Original Company ....................................................... 43 13.2 Adoption by Other Companies ............................................ 44 13.3 "Company" Further Defined .............................................. 44 13.4 Participation .......................................................... 44 13.5 Combined Service ....................................................... 44 13.6 Administration ......................................................... 45 13.7 Common Fund ............................................................ 45 13.8 Amendment of Plan ...................................................... 45 13.9 Withdrawal Termination ................................................. 45
5 UNIONTOOLS, INC. RETIREMENT PLAN FOR SALARIED EMPLOYEES UnionTools, Inc., successor by merger of The Union Fork and Hoe Company (hereinafter referred to as the Company), hereby adopts the following amended and restated defined benefit pension plan for the exclusive benefit of the Company's eligible Employees and, where applicable, the Designated Beneficiaries of such Employees. It is intended that this Plan, together with the Trust, shall comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act of 1974, as amended. The Plan as amended and restated reflects the elimination of Employee contributions effective as of January 1, 1996. The benefits provided in this Plan, as amended and restated effective January 1, 1996, shall apply only to an Employee who terminates employment with the Company on or after January 1, 1996 and no Employee or any person claiming through an Employee who terminated employment with the Company prior to January 1, 1996 shall have his benefits increased or otherwise altered as a result of this Plan. ARTICLE I DEFINITIONS The following words and phrases when used with the initial capital letter throughout this Plan and any subsequent amendment thereof shall have the meanings set forth below unless a different meaning is plainly required by the context. Words in the masculine gender shall connote the feminine gender as well as, and when appropriate, singular nouns may include the plural. "ACTUARIAL EQUIVALENT" or "ACTUARIALLY EQUIVALENT" means, in the case of monthly payments to a retiree or beneficiary, the equivalent value of the normal form of benefit, adjusted for the contingency and guarantee of the optional form elected, using the UP84 Mortality Table (20% Female) and an interest rate of 8%. In the case of a lump sum benefit payment to a terminated or retired Member, actuarial equivalency shall not be less than the benefit determined using: (a) the interest rate on 30-year Treasury securities as of the November 1 preceding the Plan Year that includes the date of distribution; and (b) the prevailing NAIC standard mortality table. "AFFILIATE" means any other employer which, together with the Company, is a member of a controlled group of corporations or of a commonly controlled trade or business [as defined in Code Sections 414(b) and (c) and as modified by Code Section 415(h)] or of an affiliated service group [as defined in Code Section 414(m)] or other organization described in Code Section 414(o). For purposes of applying any of the provisions of this Plan which impose requirements described in Section 415 of the Code, the phrase "more than 50%" shall be 6 substituted for the phrase "more than 80%" each place it appears in Section 1563(a)(1) of the Code. "ANNUITY STARTING DATE" means the first day of the first period for which an amount is paid as an annuity or any other form. "APPROPRIATE REDUCTION PERCENTAGE" means, with respect to a Member who: (i) terminates employment on or before December 31, 1992, 5/9ths of 1% for each of the first 60 months and 5/18ths of 1% for each month more than 60 months that his Benefit Commencement Date precedes his Normal Retirement Date; or (ii) terminates employment on or after January 1, 1993, 4/10ths of 1% for each month that his Benefit Commencement Date precedes his Normal Retirement Date. "BENEFIT COMMENCEMENT DATE" means the date on which a Member's benefit payments commence under the Plan. "CODE" means the Internal Revenue Code of 1986, as may be amended from time to time, and corresponding provisions of future federal internal revenue codes. "COMPANY" means UnionTools, Inc., successor by merger of The Union Fork and Hoe Company (or any corporate successor) and any other Affiliate which adopts the Plan as provided in Article XIII. "CONTRACT" means (i) the Group Annuity Contract or Contracts issued by The Equitable Life Assurance Society of the United States for the Plan; or (ii) any other group annuity contract or contracts that are issued for the Plan. "CONTRIBUTING MEMBER" means an eligible Employee who elected to make Employee contributions under the Plan for periods prior to January 1, 1996, under the terms of the Plan as in effect prior to January 1, 1996. "CONTRIBUTORY PENSION CREDITS ACCRUED" means, with respect to any Contributing Member who terminates employment with the Company prior to his Normal Retirement Date, the aggregate amount determined under Section 5.2(a) based upon such Contributing Member's Years of Contributing Membership to his date of termination. "DESIGNATED BENEFICIARY" means such person (who may be the Member's spouse) or persons, natural or legal, as may be designated by the Member as his beneficiary under the Plan to receive any benefits payable upon the death of the Member under a Non-Qualified Joint and Survivor Annuity or a Term Certain Annuity pursuant to Section 6.6 of Article VI, by written instrument signed by the Member and filed with the Plan Administrator before the Member's death; provided, however, that the Designated Beneficiary of a Member who is married within the meaning of Section 6.5 of Article VI shall be such Member's Eligible Spouse unless such Member's Eligible Spouse consents in writing pursuant to Section 6.2 of 2 7 Article VI to the designation of another person and such consent is notarized and provides that such designation may not be changed without such spouse's consent or that such right has been waived by such spouse. Subject to the foregoing, such designation may be revoked or changed (without the consent of any previously appointed Designated Beneficiary) only by written instrument signed by the Member and filed with the Plan Administrator before the earlier of the Member's death or his Benefit Commencement Date. In default of such designation and at any other time when there is no existing Designated Beneficiary designated by the Member, his Designated Beneficiary shall be his Eligible Spouse (or the estate of such Eligible Spouse if such Eligible Spouse does not survive for a sufficient time to receive all benefits payable to such Eligible Spouse on account of the death of the Member) or, if there is no Eligible Spouse, the issue of the Member, then living, per stirpes, or, if there are no living issue, the Member's estate. "EARLY RETIREMENT DATE" means the first day of the month (before a Member's Normal Retirement Date) coinciding with or next following the date such Member retires provided he has both (a) attained age 55; and (b) completed five Years of Vesting Service as of the date of retirement. "EARNINGS" shall mean basic compensation [whether for current services or for back pay described in Section 2.1(b) of Article II] paid to an Employee by the Company, including overtime pay, but excluding incentive pay, bonuses and similar forms of compensation and excluding benefit payments pursuant to the terms of this Plan or any other plan providing retirement benefits. Notwithstanding any provision contained herein, (a) effective for Plan Years beginning after December 31, 1988 and prior to January 1, 1994, Earnings shall not include any amount paid to an Employee during any such Plan Year in excess of $200,000.00 (as increased by regulations issued by the Secretary of the Treasury); and (b) effective for Plan Years beginning on or after January 1, 1994, Earnings shall not include any amount paid to an Employee during any such Plan Year in excess of $150,000.00 [as increased in accordance with applicable provisions of Code Section 401(a)(17)]. For Plan Years prior to January 1, 1997, in determining the Earnings of a Member for purposes of the $200,000 or $150,000 limit, the family aggregation rules of Code Section 414(q)(6) will apply, except in applying such rules, the term "family" will include only the spouse of the Member and any lineal descendants of the Member who have not attained age 19 before the close of the year. If, as a result of the application of such rules, Earnings would exceed the adjusted $200,000 or $150,000 limitation, then (except for purposes of determining the portion of Earnings up to the integration level) the limitation will be prorated among the affected persons in proportion to each such person's Earnings as determined under this paragraph prior to the application of this limitation. "ELIGIBLE SPOUSE" means the person to whom a Member has been legally married throughout the 12-month period ending on the earlier of the Member's Annuity Starting Date or the Member's date of death. "EMPLOYEE" means each person who is in the employ of the Company who is (a) compensated on a salary basis; or (b) is a buyer or a salesman; or (c) is designated by the Company as an administrative or supervisory employee. 3 8 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and regulations and rulings issued thereunder. "FINAL AVERAGE MONTHLY EARNINGS" shall mean the highest average monthly Earnings of a Member which can be derived from any period of 60 consecutive calendar months of Membership during the 120 consecutive calendar months immediately prior to such Member's date of retirement, date of other termination of employment or other date on which a computation is made of the Member's accrued benefit. In the event the Member shall not have completed 60 consecutive months of Membership with the Company before any given date, then his Final Average Monthly Earnings shall be determined using the average of his monthly Earnings during his latest period of consecutive calendar months of Membership. For purposes of this definition, two periods of Membership separated exclusively by a period of Company approved leave of absence shall be regarded as consecutive. "HIGHLY-COMPENSATED EMPLOYEE" means any Employee of the Company or an Affiliate who meets any of the following requirements in either the prior or current Plan Year: (a) is a more than 5% owner of the Company or an Affiliate; (b) has $75,000.00 or more in Earnings; (c) has $50,000.00 or more in Earnings and is a member of the top 20% of Employees of the Company, excluding employees described in Section 414(q)(8) of the Code, when ranked on the basis of Earnings paid during the year; (d) is an officer of the Company or an Affiliate [as described in Code Section 416(i)] who has Earnings of more than 50% of the amount in effect under Code Section 415(b)(1)(A) for such year; or (e) is a former Employee who was a Highly-Compensated Employee upon separation from service or was a Highly-Compensated Employee at any time after he attained age 55. In addition, the Earnings paid to any family member [as described in Code Section 414(q)(6)(B)] of a more than 5% owner or of one of the top 10 Employees by Earnings shall be aggregated with the Earnings of such Employee for the purposes of this definition. Notwithstanding the foregoing, an Employee will not be a Highly-Compensated Employee for the current year merely by compensation or officer status unless he is in the top 100 Employees by Earnings. The amounts indicated in (b) and (c) above shall be adjusted for cost-of-living by the Secretary of the Treasury at the same time and in the same manner as under Code Section 415(d). 4 9 "LATE RETIREMENT DATE" means the first day of the month coincident with or following a Member's actual retirement after his Normal Retirement Date. "MEMBER" means an eligible Employee who satisfies the requirements for membership pursuant to Article III. "MEMBER'S ACCUMULATED CONTRIBUTIONS" shall mean, at any given time, the contributions made to the Plan by a Member plus interest credited thereon at the rate of: (a) 2% per annum compounded annually until December 1, 1976; (b) 5% per annum compounded annually from December 1, 1976 to December 31, 1987; (c) 120% of the Federal mid-term rate (as in effect under Section 1274 for the first month of the Plan Year) compounded annually from January 1, 1988 to the date the determination is made; and (d) the rate which would be used under the Plan under Code Section 417(e)(3) as of the determination date, for the period starting on the determination date and ending on the Member's Normal Retirement Date, less any withdrawals made by, or other payments made to, such Member pursuant to the terms of the Plan. The crediting of interest hereunder shall cease upon the earlier of (i) the date of payment of any or all of such contributions to the Member, his Eligible Spouse, Designated Beneficiary or estate; (ii) the Member's Benefit Commencement Date; or (iii) the Member's Normal Retirement Date. "NON-CONTRIBUTING MEMBER" means an eligible Employee who satisfied the requirements for membership pursuant to Article III prior to January 1, 1996, but who did not timely elect to become a Contributing Member or who was not a Contributing Member on the date of determination prior to January 1, 1996. "NON-HIGHLY-COMPENSATED EMPLOYEE" means any Employee who is not a Highly-Compensated Employee. "NORMAL RETIREMENT DATE" means the first day of the month coinciding with or next following a Member's 65th birthday; provided, however, the right of a Member to his Normal Retirement Benefit shall be nonforfeitable upon attaining his 65th birthday if he is then in the employ of the Company. "PENSION CREDITS ATTRIBUTABLE TO COMPANY CONTRIBUTIONS" means for a Contributing Member, at any date, the difference between the Contributory Pension Credits Accrued on such date and the Pension Credits Attributable to Employee Contributions on such date. "PENSION CREDITS ATTRIBUTABLE TO EMPLOYEE CONTRIBUTIONS" means, at any date prior to Normal Retirement Date, computed in the form of a monthly benefit payable for the life of the Member commencing at Normal Retirement Date, the amount obtained by dividing the number 12 into an amount determined by multiplying 10% by the Member's Accumulated Contributions at the date of the determination with assumed interest on such amount being compounded: 5 10 (a) for the period ending December 31, 1987, at the rate of 5%; (b) for the period starting January 1, 1988 and ending on the date on which the determination is made, at the rate of 120% of the Federal mid-term rate (as in effect under Section 1274 for the first month of the Plan Year); and (c) for the period starting on the determination date and ending on the Member's Normal Retirement Date, at the rate which would be used under the Plan under Code Section 417(e)(3) as of the determination date. "PLAN" means the provisions of the UnionTools, Inc. Retirement Plan for Salaried Employees as set forth herein and as may be amended from time to time, which is a continuation of the plan formerly known as The Contributory Retirement Plan of The Union Fork and Hoe Company (the "Predecessor Contributory Plan") and which is the surviving plan of a merger effective January 1, 1984 of the Predecessor Contributory Plan, Basic Pension Plan No. 1 Established By The Union Fork and Hoe Company ("Plan No. 1") and of Basic Pension Plan No. 4 Established By The Union Fork and Hoe Company ("Plan No. 4"). "PLAN ADMINISTRATOR" means UnionTools, Inc. in its exercise of discretionary authority and control with respect to the administration and management of the Plan. "PLAN YEAR" means each calendar year. "PRE-1993 FINAL AVERAGE MONTHLY EARNINGS" means the highest average monthly Earnings of a Contributing Member which can be derived from any period of 60 consecutive calendar months of Contributing Membership during 120 consecutive calendar months immediately prior to January 1, 1993. In the event the Contributing Member shall not have completed 60 consecutive months of Contributing Membership as of January 1, 1993, then his Pre-1993 Final Average Monthly Earnings shall be determined using the average of his monthly Earnings during his last period of consecutive calendar months of Contributing Membership ending on that date. For purposes of this definition, two periods of Contributing Membership separated exclusively by a period of Company approved leave of absence shall be regarded as consecutive. "RETIREMENT DATE" means the Member's Normal Retirement Date or, if applicable, Late Retirement Date or Early Retirement Date. "TRUST" means the trust established to hold the assets of the Plan. ARTICLE II SERVICE 6 11 2.1 HOUR OF SERVICE. Hours of Service shall be determined from records maintained by the Company and shall be credited to Employees as follows: (a) Performance of Duties. Each hour for which an Employee is directly or indirectly paid, or entitled to payment by the Company or an Affiliate for the performance of duties. Each such Hour of Service shall be credited to the Employee to the Plan Year in which the duties were performed. (b) Back Pay. Each hour not credited in (a) for which back pay (irrespective of mitigation of damages) has been either awarded or agreed to by the Company or an Affiliate. Each such Hour shall be credited to the Employee to the Plan Year to which the award or agreement for back pay pertains rather than to the Plan Year in which the award, agreement or payment is made. (c) Non-Working Time Pay. Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Company or an Affiliate, irrespective of whether the employment relationship has terminated, on account of a period of time during which no duties are performed due to vacation, holiday, sickness, incapacity, disability, layoff, jury duty, military duty or compensated leave of absence and similar paid periods. Each such Hour of Service shall be credited to the Employee to the Plan Year in which the period during which no duties are performed occurs, on the following basis: (i) Units of Time. If the payments are calculated on the basis of units of time, such as hours, days, weeks or months, the number of Hours of Service to be credited shall be the number of regularly scheduled working hours included in the units of time on the basis of which the payments are calculated. In the case of an Employee without an actual regular work schedule, such Employee shall be deemed to have a regular work schedule of 40 hours per week and 8 hours per workday. Each such Hour of Service shall be credited to the Plan Year in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates. (ii) No Units of Time. If the payments referred to above are not calculated on the basis of units of time (such as a lump sum disability payment for an injury), the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employee's most recent hourly rate of compensation before the period during which no duties are performed. If an Employee's compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days, weeks or months, the Employee's hourly rate of compensation shall be his most recent rate of compensation for a specified period of time (other than an hour) divided by the number of hours regularly scheduled for the performance of duties during such period. If the Employee has no regular work schedule, the rate of compensation shall be 7 12 calculated on the basis of a 40-hour workweek or an 8-hour workday. If the Employee has no fixed rate of payment for specified periods of time, the rate of compensation shall be the lowest hourly rate of compensation paid to employees in the same job classification as that of the Employee. Each such Hour of Service shall be credited to the Plan Year in which the period during which no duties are performed occurs, except that if the period of nonperformance of duties extends beyond one Plan Year, such Hours of Service shall be allocated by the Plan Administrator, in its discretion, between not more than the first two such Plan Years on any reasonable basis which is consistently applied with respect to all employees within the same job classification, reasonably defined. (iii) Exclusions. Notwithstanding the foregoing, (A) an Employee shall not be credited on account of a period during which no duties are performed with a number of Hours of Service which is greater than the number of hours regularly scheduled for the performance of duties during such period; (B) in no event shall the number of credited Hours of Service attributable to a single continuous period (whether or not such period involves more than one Plan Year) for which no duties are performed exceed 501 Hours of Service; (C) an Hour of Service shall not be credited for a payment which reimburses an Employee solely for medical or medically related expenses incurred by the Employee; (D) an Hour of Service shall not include any hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purposes of complying with applicable workers' compensation, unemployment compensation or disability insurance laws. (d) No Duplication. An Employee shall not be credited with an Hour of Service under more than one of paragraphs (a), (b) and (c) above with respect to the same item. (e) Overlapping Payroll Period. In the case of Hours of Service attributable to a payroll period of no more than 31 days which overlaps two Plan Years, all such Hours of Service shall be credited to either the first Plan Year or to the second Plan Year as the Plan Administrator in its discretion may determine on a consistent basis with respect to all employees within the same job classification, reasonably defined. 8 13 (f) Period of Absence. Each hour for which an Employee is not directly or indirectly paid or entitled to payment by the Company or an Affiliate during a period of absence if such absence is (i) a layoff not in excess of 90 days; (ii) pursuant to a leave of absence granted in writing in advance by the Company or an Affiliate; or (iii) pursuant to the rules of the Company or an Affiliate or required to be treated by law or contract as periods during which employment continues. The period of time described in any of the preceding clauses shall be referred to herein as a "period of authorized absence." The number of hours to be credited to an Employee under this paragraph (f) for a period of authorized absence will be equal to the number of hours which would have been credited under paragraph (a) of this Section 2.1 if he had performed duties at his customary rate of hours throughout such period of absence; provided, however, that hours will not be credited under this paragraph (f) unless the person returns to active employment as an Employee within 30 days after the end of such period of authorized absence or, in the case of service in the United States Armed Forces, within the period during which he is legally entitled to reemployment. In no event shall the number of credited Hours of Service attributable to a single continuous period of authorized absence (whether or not such period involves more than one Plan Year) exceed 501 Hours of Service for general purposes under the Plan unless additional hours are required to be credited pursuant to law or contract or pursuant to rules of the Company or an Affiliate; provided, however, that Hours of Service shall continue to be credited under this paragraph (f) during such period of authorized absence beyond such limitation but solely for purposes of determining whether a One-Year Break in Service is incurred. Each such Hour of Service shall be credited to the Plan Year in which the period during which no duties are performed occurs for the reasons set forth in this paragraph (f), except that if the period of nonperformance of duties extends beyond one Plan Year, such Hours of Service shall be allocated by the Plan Administrator, in its discretion, between not more than the first two such Plan Years on any reasonable basis which is consistently applied with respect to all employees within the same job classification, reasonably defined. (g) Maternity and Paternity Absences. If an Employee is absent from work for any period (i) by reason of the pregnancy of such Employee; (ii) by reason of the birth of a child of such Employee; (iii) by reason of the placement of a child with such Employee in connection with the adoption of such child by such Employee; or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement, the Plan shall treat as Hours of Service, solely for purposes of determining whether a Break in Service has occurred, the following hours: (A) the Hours of Service which otherwise would normally have 9 14 been credited to such Employee but for such absence; or (B) in any case in which the Plan is unable to determine the hours described in clause (A), 8 Hours of Service per day of such absence; provided, however, that for purposes of both clauses (A) and (B), the total number of hours that shall be treated as Hours of Service by reason of any such pregnancy or placement shall not exceed 501 hours. For purposes of the foregoing, the hours described in the preceding sentence shall be treated as Hours of Service (1) only in the Plan Year in which the absence from work begins, if such Employee would be prevented from incurring a Break in Service in such Plan Year solely because the period of absence is treated as Hours of Service in accordance with the foregoing; or (2) in any other case, in the immediately following Plan Year. Notwithstanding the foregoing, however, no credit for Hours of Service shall be given pursuant to the foregoing unless the Employee furnishes to the Plan Administrator such information as the Plan Administrator may reasonably request to establish (I) that the absence from work is for any of the reasons referred to above; and (II) the number of days for which there was such an absence. 2.2 YEARS OF CONTRIBUTING MEMBERSHIP. The Years of Contributing Membership of a Contributing Member shall be the sum of full years and months of Contributing Membership [excluding all Years of Contributing Membership forfeited due to a Break in Service in accordance with Section 2.5 or due to a payment of any portion of the Member's Accumulated Contributions in accordance with Section 4.6(a) of Article IV] computed as follows: (a) For Service prior to December 1, 1976. As determined in accordance with the provisions of the Predecessor Contributory Plan as in effect prior to December 1, 1976, a Contributing Member shall be credited with a Year of Contributing Membership for each year of "continuous service" (as defined in the Plan as it was in effect prior to December 1, 1976) as a Member which he had accumulated under the Predecessor Contributory Plan prior to December 1, 1976. (b) For Service prior to January 1, 1984 but after November 30, 1976. As determined in accordance with the provisions of the Predecessor Contributory Plan as in effect prior to January 1, 1984, a Contributing Member shall be credited with a Year of Contributing Membership for each Year of Membership (as defined in the Predecessor Contributory Plan as it was in effect prior to January 1, 1984) as a Member which he had accumulated under the Predecessor Contributory Plan for the period commencing December 1, 1976 and ending December 31, 1983, including credit of 1/12th of a year for membership during the month of December, 1983. (c) For Service on and after January 1, 1984 and before January 1, 1996. A Member shall be credited with one full Year of Contributing Membership for each Plan Year commencing on or after January 1, 1984 but before January 1, 1996, in which he completed 1,000 or more Hours of Service and made any contributions to the Plan in accordance with the provisions of the Plan as in effect prior to January 1, 1996. 10 15 (d) Years of Contributing Membership shall be computed on the basis of full years and months during which a Member made contributions to the Plan. 2.3 YEARS OF MEMBERSHIP. A Member shall be credited with one full Year of Membership for: (a) each Plan Year after December 31, 1995, in which he completes 1,000 or more Hours of Service; and (b) each Year of Contributing Membership in 1993, 1994 and/or 1995. "Years of Membership" shall exclude: (i) service before the individual became a Member; (ii) service which is not required to be taken into account under the Break in Service rules; (iii) any Plan Year in which the Member has less than 1,000 Hours of Service; and (iv) any service during which the Member is not an eligible Employee. 2.4 YEARS OF VESTING SERVICE. The Years of Vesting Service of a Member shall be the sum of each year determined as follows: (a) For Service prior to January 1, 1976. As determined in accordance with the provisions of the Predecessor Contributory Plan (or Plan No. 1 or Plan No. 4, whichever may be applicable, in the case of a Non-Contributing Member) as in effect prior to January 1, 1976, an Employee shall be credited with a Year of Vesting Service for each year of credited service or fraction thereof which he had accumulated under the applicable plan as of December 31, 1975. (b) For Service on and after January 1, 1976. An Employee shall also be credited with one Year of Vesting Service for each calendar year commencing on or after January 1, 1976 in which he completes at least 1,000 Hours of Service with the Company or an Affiliate. (c) Years of Vesting Service shall be the sum of all Years of Vesting Service of an Employee excluding all of his Years of Vesting Service forfeited due to a Break in Service in accordance with Section 2.5. 2.5 BREAK IN SERVICE. (a) A Member who completes less than 501 Hours of Service during a Plan Year shall incur a One-Year Break in Service. (b) If an Employee incurs a One-Year Break in Service before he is eligible for a Vested Deferred Benefit pursuant to Section 4.5 of Article IV and if the number of consecutive One-Year Breaks in Service equals or exceeds the greater of (i) five; or (ii) his Years of Vesting Service prior to such Break in Service, he shall forfeit for all purposes his Years of Vesting Service credited prior to such Break in Service and his years of benefit accrual service accrued prior to such Break in Service. 11 16 2.6 RECORDS. Records of the plant in which an Employee claims Hours of Service shall be presumed to be conclusive of the facts concerning his employment or nonemployment unless shown beyond a reasonable doubt to be incorrect. 12 17 ARTICLE III MEMBERSHIP 3.1 TIME OF MEMBERSHIP. Every Employee shall become a Member of the Plan on the January 1st coinciding with or next following the three-month anniversary of his date of employment with the Company, provided that on such January 1st he is an Employee. A person in the employ of the Company who is rehired or who transfers to a position such that he first becomes an Employee hereunder upon such transfer shall immediately become a Member of the Plan upon such date of rehire or transfer, provided such person has completed three months of employment with the Company at the date of rehire or transfer. 3.2 TRANSFER TO NON-COVERED POSITION. A Member who remains in the employ of the Company but does not remain an Employee for purposes of this Plan shall: (a) continue as a Member and shall continue to be credited with Years of Vesting Service under this Plan for all purposes except accrual of benefits under Section 5.1 and 5.2 so long as he remains in the employ of the Company or an Affiliate; and (b) shall not continue to be credited with Years of Membership. 3.3 TRANSFER TO EMPLOYEE POSITION. An Employee who was in the employment of the Company before he became an Employee within the meaning of the Plan shall receive credit for purposes of determining Years of Vesting Service as though he had been an Employee within the meaning of the Plan throughout such period of employment with the Company or an Affiliate; provided, however, Years of Membership shall not be credited for any period during which the Employee was not a Member. ARTICLE IV ELIGIBILITY FOR PLAN BENEFITS 4.1 NORMAL RETIREMENT BENEFIT. When a Member retires at his Normal Retirement Date, he shall be entitled to receive his Normal Retirement Benefit specified in Section 5.3 of Article V, payable in the form as determined under Article VI. The Benefit Commencement Date of a Member who retires at his Normal Retirement Date shall be his Normal Retirement Date. 4.2 POSTPONED RETIREMENT BENEFIT. A Member who continues employment after his Normal Retirement Date shall be entitled to receive his Postponed Retirement Benefit specified in Section 5.4 of Article V when he terminates employment, payable in the form as determined under Article VI. The Benefit Commencement Date of a Member who retires after his Normal Retirement Date shall be his Late Retirement Date. 13 18 4.3 EARLY RETIREMENT BENEFIT. When a Member retires at an Early Retirement Date, he shall be entitled to receive his Early Retirement Benefit specified in Section 5.5 of Article V, payable in the form as determined under Article VI. The Benefit Commencement Date of a Member who retires at an Early Retirement Date shall be his Early Retirement Date. 4.4 DEATH BENEFITS BEFORE RETIREMENT. (a) Payment of Accumulated Contributions. If a Member dies while employed by the Company (i) before he completes five Years of Vesting Service; or (ii) after he completes five Years of Vesting Service, but he is not survived by an Eligible Spouse and no other benefit is payable on his behalf from this Plan, then the Member's Accumulated Contributions, if any, at the time of his death shall be payable in the form of a single sum within 90 days of receipt by the Plan Administrator of official notice of the death of such Member. This benefit shall be payable to the Member's Designated Beneficiary. (b) Preretirement Eligible Spouse Death Benefit. A Qualified Preretirement Death Benefit specified in Section 5.12 of Article V shall be payable to a Member's surviving Eligible Spouse if the Member dies before commencement of Normal or Early Retirement Benefits after becoming eligible for a Vested Deferred Benefit under Section 4.5 of Article IV. (c) Term Certain and Life Annuity. Subject to paragraph (b) of Section 6.2, if a Member who has made an effective election for the Term Certain and Life Annuity dies while employed by the Company after his Normal Retirement Date, his Designated Beneficiary shall be paid benefits in accordance with such election and no Qualified Preretirement Death Benefit shall be paid on behalf of such Member and, subject to Section 5.11 of Article V hereof, no separate payment of such Member's Accumulated Contributions shall be made. Benefits pay able hereunder shall be paid in monthly installments within five years of the Member's date of death in such total amount which is the commuted Actuarial Equivalent value of the term certain payments determined under Section 6.6. (d) Except as provided in this Section 4.4, no benefits under this Plan shall be paid to any person on account of the death of a Member who dies while in the employ of the Company or an Affiliate. 4.5 VESTED DEFERRED BENEFIT. (a) If a Member's employment with the Company or an Affiliate is terminated for a reason other than death or retirement and if such termination of employment occurs on or after the Member's completion of five Years of Vesting Service, he shall be entitled to a Vested Deferred Benefit, specified in Section 5.6 of Article V, payable in the form as determined under Article VI. Unless the Member elects otherwise pursuant to the provisions of paragraph 14 19 (b) of this Section 4.5, the Benefit Commencement Date of a Member entitled to a Vested Deferred Benefit shall be his Normal Retirement Date. (b) When a Member who is entitled to a Vested Deferred Benefit under paragraph (a) of this Section 4.5 attains the age of 55 years, he may elect, by written notice to the Plan Administrator, to receive a reduced benefit commencing on the first day of any month designated by him (but no later than his 65th birthday) in the amount determined under the applicable provisions of Section 5.6, payable in the form as determined under Article VI. The Benefit Commencement Date of a Member who elects to receive his Vested Deferred Benefit after attaining the age of 55 years shall be the first day of the month designated by such Member. (c) A Contributing Member who is entitled to a Vested Deferred Benefit under paragraph (a) of this Section 4.5 upon termination of his employment and is less than age 55 years at the time of termination of employment may elect to withdraw his Accumulated Contributions by delivery of an election to the Plan Administrator at any time prior to attainment of age 55 years by such Member, in which case such Accumulated Contributions shall be returned to him in the form of a single sum within 90 days of receipt of such election by the Plan Administrator and such Contributing Member's Vested Deferred Benefit shall be reduced by the amount of the Pension Credits Attributable to Employee Contributions corresponding to the Accumulated Contributions so withdrawn. (d) If a Contributing Member who is entitled to a Vested Deferred Benefit under paragraph (a) of this Section 4.5 dies before his Benefit Commencement Date, death benefits shall be payable under Section 4.4. 4.6 TERMINATION OF EMPLOYMENT BEFORE ELIGIBILITY FOR A VESTED DEFERRED BENEFIT. (a) If a Contributing Member's employment is terminated for a reason other than death or retirement and if such termination of employment occurs prior to the Contributing Member becoming eligible for a Vested Deferred Benefit pursuant to Section 4.5(a) of Article IV ("Terminated Contributing Member"), only his Accumulated Contributions shall be returned to him in the form of a single sum at such date elected by the Member, which shall be no earlier than 60 days following the date of his termination of employment. Such election shall be made by delivery to the Plan Administrator of request for payment and shall be irrevocable. Upon payment of any part of the Terminated Contributing Member's Accumulated Contributions, he shall thereupon forfeit for all purposes of the Plan thereafter his Years of Contributing Membership credited to the date of termination of employment; provided, however, subject to the forfeiture rules of Section 2.5 of Article II, if such Terminated Contributing Member (i) is reemployed by the Company or an Affiliate; (ii) again becomes a Member; and (iii) repays to the Plan the amount paid out to him under this Section 4.6 plus interest thereon at the rate of 5% per annum, compounded annually, within five years from the date he again becomes a Member under the Plan, then his Years of Contributing Membership to the date of termination shall be thereupon reinstated to his credit. 15 20 (b) If a Terminated Contributing Member dies and has Accumulated Contributions to his credit in the Plan, the amount of such Member's Accumulated Contributions then held by the Plan shall be paid in a single sum within 90 days of receipt by the Plan Administrator of official notice of the death of such Member to his Designated Beneficiary. (c) Except as may be provided in the foregoing paragraphs (a) and (b) of this Section 4.6, if a Member's employment is terminated for any reason other than death or retirement and if such termination of employment occurs prior to the Member becoming eligible for a Vested Deferred Benefit pursuant to Section 4.5(a) of Article IV, the Member or anyone claiming through the Member shall not be entitled to any benefits under the Plan. ARTICLE V BENEFITS 5.1 BENEFIT ACCRUAL. For Members who terminate employment with the Company on or after January 1, 1993, the amount of monthly benefits computed in the form of a Life Annuity, described in Section 6.4 of Article VI, commencing on Normal Retirement Date shall be: (a) 2.25% of the Member's Final Average Monthly Earnings multiplied by the lesser of twenty-five (25) or the total number of such Member's Years of Membership occurring after December 31, 1992; plus (b) for Members who were Contributing Members before January 1, 1993, the amount accrued for periods as a Contributing Member before January 1, 1993, under Section 5.2(a); plus (c) for Members who were Non-Contributing Members before January 1, 1996, the amount accrued for periods as a Non-Contributing Member before January 1, 1996, under Section 5.2(b). Notwithstanding any other provisions of this Plan, each Section 401(a)(17) Member's (as hereinafter defined) accrued benefit under this Plan will be the sum of: (i) such Member's accrued benefit as of December 31, 1993, frozen in accordance with Section 1.401(a)(4)-13 of the Department of Treasury Regulations; and (ii) such Member's accrued benefit determined under the benefit formula applicable for the Plan Year beginning on or after January 1, 1994, as applied to such Member's years of service credited to such Member for Plan Years beginning on or after January 1, 1994, for purposes of benefit accruals. As used in this Section, a "Section 401(a)(17) Member" means a Member whose current accrued benefit as of a date on or after January 1, 1994 is based on Earnings for a year beginning prior to January 1, 1994 that exceed $150,000.00. 16 21 5.2 BENEFIT ACCRUAL BEFORE JANUARY 1, 1993, AND 1996. For Members who terminate employment with the Company on or after January 1, 1989, the amount of monthly benefits computed in the form of a Life Annuity, described in Section 6.6 of Article VI, commencing on Normal Retirement Date shall be computed under paragraph (a) or (b) of this Section 5.2, whichever shall be applicable. (a) Contributing Member. If the Member was a Contributing Member before January 1, 1993: (i) 39% of the Contributing Member's Pre-1993 Final Average Monthly Earnings up to $750.00 plus 48% of his Pre-1993 Final Average Monthly Earnings in excess of $750.00 multiplied by a fraction, the numerator of which is the total number of such Contributing Member's Years of Contributing Membership as of December 31, 1992, and the denominator of which is the greater of fifteen (15) or the number of Years of Contributing Membership which the Contributing Member would complete if he continued as a Contributing Member until his Normal Retirement Date (but in no event shall such fraction exceed 1.0); plus (ii) the number obtained by multiplying 2% by the Contributing Member's actual contributions, if any, to the Predecessor Contributory Plan through November 30, 1979; plus (iii) the amount of any "Past Service" benefit (that is relating to service before January 1, 1951) to which the Contributing Member was entitled on November 30, 1979 pursuant to the terms of the Predecessor Contributory Plan in effect on that date. A Contributing Member who terminated his contributions under the Plan for any reason other than termination of status as an Employee or approved leave of absence as provided in Section 7.2(c) shall have his Contributory Pension Credits Accrued under the Plan finally determined as if he had then terminated employment. If at the time he terminated his contributions the Member has five or more Years of Contributing Membership, then his Accumu- lated Contributions shall be held by the Plan and paid as part of his benefit computed under this Section. If at the time he had less than five Years of Contributing Membership, then the Member may elect in a writing delivered to the Plan Administrator at any time thereafter to withdraw his Accumulated Contributions to the date of their termination and thereupon he shall forfeit all of his Contributory Pension Credits Accrued. Anything contained in the Plan to the contrary notwithstanding, the amount of normal monthly retirement benefit of a Contributing Member shall not be less than (1) the Contributing Member's normal monthly retirement benefit accrued to November 30, 1979 under the terms of the Predecessor Contributory Plan in effect on that date; or (2) the Contributing 17 22 Member's Contributory Pension Credits Accrued hereunder at any time after he has completed five Years of Vesting Service; or (3) the amount determined by multiplying the Appropriate Dollar Amount [as defined in 5.2(b) below] by the sum of such Member's Years of Vesting Service plus the Actuarial Equivalent of his Accumulated Contributions as of the date of the computation. (b) Non-Contributing Member; Former Contributing Member. If a Member was a Non-Contributing Member on December 31, 1995 (or the date of an earlier computation), such amount shall be determined by multiplying the Appropriate Dollar Amount (as hereinafter defined) by the sum of such Member's Years of Vesting Service before January 1, 1996. If a Member is a Non-Contributing Member at the date of computation but was a Contributing Member in the past, such amount shall be determined as the greater of (i) the amount determined by multiplying the Appropriate Dollar Amount by the sum of such Member's Years of Vesting Service before January 1, 1996, plus the Actuarial Equivalent of his Accumulated Contributions standing to his credit on that date; and (ii) his Contributory Pension Credits Accrued to the date his status as a Contributing Member ceased plus the amount determined by multiplying the Appropriate Dollar Amount by the sum of such Member's Years of Vesting Service computed only to include Plan Years which commence: (A) after the year in which his status as a Contributing Member ceased; and (B) before January 1, 1996, minus the Actuarial Equivalent of the amount of his Accumulated Contributions which may have been paid to him from the Plan. As used in this Section 5.2(b) and in Section 5.2(a), the term "Appropriate Dollar Amount" means (A) with respect to any Member who terminates employment on or before December 31, 1990, $9.25; and (B) with respect to any Member who terminates employment on or after January 1, 1991, $12.00. 5.3 AMOUNT OF NORMAL RETIREMENT BENEFIT. A Member's Normal Retirement Benefit shall be the amount determined in either (a) or (b), whichever is applicable. (a) A Member who retires and elects to receive his benefit in the Life Annuity form, described in Section 6.6(a) of Article VI, shall receive a monthly benefit equal to the total amount of monthly benefit determined under Section 5.1. (b) A Member who retires and elects to receive his benefit in a form of annuity other than the Life Annuity form shall receive a monthly benefit in an amount Actuarially Equivalent to the Life Annuity amount under Section 5.1. 5.4 AMOUNT OF POSTPONED RETIREMENT BENEFIT. A Member's Postponed Retirement Benefit shall be equal to the greater of (a) the increased amount Actuarially Equivalent on his Benefit Commencement Date to the amount of his Normal Retirement Benefit determined as of his Normal Retirement Date under Section 5.1; and (b) the amount of monthly benefit determined under Section 5.1 (and adjusted in accordance with Section 5.3 if the Member retires on a form of annuity other than the Life Annuity) as of such Member's Late Retirement Date. 18 23 5.5 AMOUNT OF EARLY RETIREMENT BENEFIT. (a) The monthly amount of Early Retirement Benefit, in the Life Annuity form, of a Member who retires at an Early Retirement Date shall be equal to his benefit determined at the time of his retirement under Section 5.1, reduced by the Appropriate Reduction Percentage. (b) The monthly amount of a Member's Early Retirement Benefit in a form other than the Life Annuity form shall be the Actuarial Equivalent of the amount determined under this Section. 5.6 AMOUNT OF VESTED DEFERRED BENEFIT. (a) A Member's monthly Vested Deferred Benefit in the Life Annuity form commencing at his Normal Retirement Date shall, subject to the provisions of Section 4.5(c) of Article IV, be equal to the benefit accrued to the date of his termination in accordance with Section 5.1. If such Member elects pursuant to Section 4.5(b) of Article IV to receive his Vested Deferred Benefit prior to his Normal Retirement Date, the amount determined under the preceding sentence shall be reduced by the Appropriate Reduction Percentage. (b) The monthly amount of a Member's Vested Deferred Benefit in a form other than the Life Annuity form shall be the Actuarial Equivalent of the amount determined under this Section. 5.7 MAXIMUM AMOUNT OF BENEFIT. (a) For purposes of this Section 5.7 and Section 5.8, the following terms shall have the meanings prescribed herein: (i) "Annual Benefit" shall mean a retirement benefit under the Plan which is payable annually in the form of a straight life annuity. Except as provided below, a benefit payable in a form other than a straight life annuity must be adjusted to an Actuarially Equivalent straight life annuity before applying the limitations of this section. The interest rate assumption used to determine Actuarial Equivalence will be the greater of the interest rate specified in the Plan or 5%. The Annual Benefit does not include any benefits attributable to Member contributions or rollover contributions or the assets transferred from a qualified plan that was not maintained by the Company. No actuarial adjustment to the benefit is required for (A) the value of a Qualified Joint and Survivor Annuity; (B) the value of benefits that are not directly related to retirement benefits; and (C) the value of postretirement cost-of-living increases made in accordance with Section 415(d) of the Code and Section 1.415-3(c)(2)(iii) of regulations promulgated by the Secretary of Treasury. 19 24 (ii) "Average Compensation" shall mean a Member's highest Average Compensation from the Company over a period of three consecutive calendar years. If a Member is employed for less than three calendar years, his Average Compensation shall be his Average Compensation over his calendar years of employment. Average Compensation shall include bonus payments and other taxable remuneration. (iii) "Compensation" shall mean compensation as defined in Treasury Regulation Section 1.415-2(d) and shall include wages, salaries, fees for professional services, percentage of profits, earned income in the case of a self-employed Member, disability payments under Code Section 105(d), paid or reimbursed moving expenses to the extent not deductible by the Member, medical reimbursement items and the value of a non-qualified stock option to the extent includable in an Employee's gross income upon making the election under Code Section 83(b). Specifically excluded are salary deferral contributions that are not included in the Participant's gross income for the year of contribution, distributions from most deferred compensation plans, amounts realized from the sale of a non-qualified stock option plan or from the sale, exchange or other disposition of stock acquired under a qualified stock option plan and most amounts which receive special tax benefits. (iv) "Limitation Year" shall mean the Plan Year. If the Limitation Year is amended to a different 12-consecutive-month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (v) "Projected Annual Benefit" shall mean the Annual Benefit to which the Member would be entitled under all Company sponsored defined benefit plans, assuming that the Member continues employment until his Normal Retirement Date, that the Member's Earnings continue until his Normal Retirement Date at the rate in effect during the current calendar year and that all other factors relevant for determining benefits under the plans remain constant at the level in effect during the current calendar year. (vi) "Social Security Retirement Age" shall mean, in the case of a Member attaining age 62 before January 1, 2000, age 65; in the case of a Member attaining age 62 after December 31, 1999 and before January 1, 2017, age 66; in the case of a Member attaining age 62 after December 31, 2016, age 67. (vii) "Year of Participation" shall mean each accrual computation period under the Plan in which a Member is (A) credited with 1,000 Hours of Service; and (B) is included as a Member under the eligibility provisions of the Plan for at least one day of the accrual computation period. If these two conditions are met, the portion of a Year of Participation credited to the Member 20 25 shall equal the amount of benefit accrual service credited to the Member for such accrual computation period. A Member who is Totally and Permanently Disabled within the meaning of Section 415(c)(3)(C)(i) of the Code for an accrual computation period shall receive a Year of Participation with respect to that period. In addition, for a Member to receive a Year of Participation (or part thereof) for an accrual computation period, the Plan must be established no later than the last day of such accrual computation period. In no event will more than one Year of Participation be credited for any 12-month period. (b) Subject to the remaining provisions of this Section, this Plan, when aggregated with the benefits from any other defined benefit plan ever maintained by the Company or an Affiliate (whether or not terminated), shall not provide Annual Benefits which exceed the lesser of $90,000.00 or 100% of a Member's Average Compensation. This limitation shall be hereinafter referred to as the "Maximum Annual Benefit." The Maximum Annual Benefit shall be increased by cost-of-living increases published in regulations by the Secretary of the Treasury. Any adjustments made as a result of this paragraph (b) shall not be effective prior to the first day of the calendar year for which the increase is effective as prescribed by the regulations. (c) Subject to the remaining provisions of this Section, if the Annual Benefit payable from this Plan or from this Plan and any other defined benefit plan maintained by the Company to a Member does not exceed $1,000.00 multiplied by the Member's Years of Vesting Service (or parts thereof) (not to exceed 10), the adjustment to the Annual Benefit in paragraph (b) above shall not be required, provided that the Member has never been covered by a defined contribution plan, a welfare plan as defined in Section 419(e) of the Code or an individual medical account as defined in Section 415(l)(2) of the Code, maintained by the Company. (d) If the Member has less than 10 Years of Participation with the Company, the defined benefit dollar limitation described in paragraph (b) shall be reduced by 1/10th for each Year of Participation (or part thereof) less than 10. To the extent provided in regulations or in other guidance issued by the Internal Revenue Service, the preceding sentence shall be applied separately with respect to each change in the benefit structure of the Plan. (e) If the Member has less than 10 Years of Vesting Service with the Company, the compensation limitation described in paragraph (b) shall be reduced by 1/10th for each Year of Vesting Service (or part thereof) less than 10. The adjustments of this paragraph shall be applied in the denominator of the defined benefit fraction based upon Years of Vesting Service. Years of Vesting Service shall include future years occurring before the Member's Normal Retirement Date. Such future years shall include the year which contains the date the Member reaches age 65, only if it can be reasonably anticipated that the Member will receive a Year of Vesting Service for such year. 21 26 (f) If the Annual Benefit of a Member commences prior to age 62, the defined benefit dollar limitation shall be the Actuarial Equivalent of an Annual Benefit beginning at age 62, as determined above, reduced for each month by which benefits commence before the month in which the Member attains age 62. To determine Actuarial Equivalence, the interest rate assumption is the greater of the rate specified in the Plan or 5%. Any decrease in the defined benefit dollar limitation determined in accordance with this provision shall not reflect the mortality decrement to the extent that benefits will not be forfeited upon the death of the Member. (g) If the Annual Benefit of the Member commences before the Member's Social Security Retirement Age, but on or after age 62, the defined benefit dollar limitation as reduced above, if necessary, shall be determined as follows: (i) If a Member's Social Security Retirement Age is 65, the dollar limitation for benefits, commencing on or after age 62, is determined by reducing the defined benefit dollar limitation by 5/9ths of 1% for each month by which benefits commence before the month in which the Member attains age 65. (ii) If a Member's Social Security Retirement Age is greater than 65, the dollar limitation for benefits, commencing on or after age 62, is determined by reducing the defined benefit dollar limitation by 5/9ths of 1% for each of the first 36 months and 5/12ths of 1% for each of the additional months (up to 24 months) by which benefits commence before the month of the Member's Social Security Retirement Age. (h) If the Annual Benefit of a Member commences after the Member's Social Security Retirement Age, the defined benefit dollar limitation as reduced in paragraph (d) above, if necessary, shall be adjusted so that it is the Actuarial Equivalent of an Annual Benefit of such dollar limitation beginning at the Member's Social Security Retirement Age. To determine Actuarial Equivalence, the interest rate assumption used is the lesser of the rate specified in the Plan or 5%. (i) If a Member has at any time participated in any defined contribution plan maintained by the Company or any Affiliate, then the Annual Benefit payable to such Member shall be reduced to the extent necessary so that the sum of such Member's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction shall not exceed 1.0. The limitation imposed by the preceding sentence shall be applied without taking into account any contribution which the trustee is required to return to such Member pursuant to Section 5.8. For purposes of this clause (i), (i) a Member's "Defined Contribution Plan Fraction" for a Limitation Year shall be a fraction, the numerator of which is the sum of such Member's Annual Additions, as defined in Section 5.8, for such Limitation Year, and the denominator of which is the amount determined pursuant to Section 5.8(a)(ii)(A); and (ii) a Member's Defined Benefit Plan Fraction shall be deter- mined in accordance with Section 5.8(b)(ii). 22 27 5.8 LIMITATIONS ON MEMBER CONTRIBUTIONS. For purposes of Section 415 of the Code, contributions made by Contributing Members are considered to be a separate defined contribution plan maintained by the Company (the "Subplan"). The following limitations shall apply to the Subplan: (a) With respect to the Subplan, for any Limitation Year, the Annual Addition, as defined below, of any Member shall not exceed the lesser of (i) and (ii), where (i) an amount is equal to the lesser of (A) 25% of the Member's Compensation for such Limitation Year; and (B) $30,000.00 (or if greater, one fourth of the defined benefit limitation set forth in Section 415(b)(1)(A) of the Code); and (ii) the amount results from the following steps: (A) determine the amount which is the sum of the lesser of the following amounts determined for such Limitation Year and for each prior Limitation Year during such Member's Years of Service: (1) the product of 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such Limitation Year; and (2) the product of 1.4 multiplied by 25% of the amount which may be taken into account under Section 415(c)(1)(B) of the Code with respect to such Member for such Limitation Year; (B) multiply the result in step (A), above, by one minus the Defined Benefit Plan Fraction, as defined below: (C) subtract the sum of such Member's Annual Additions for all prior Limitation Years from the result in step (B), above. (b) For purposes of this Section 5.8 and Section 5.9, the following terms have the definitions set forth below: (i) "Annual Addition" means for any Limitation Year (A) any of a Member's own contributions under the Subplan or any other defined contribution or defined benefit plan for the Member maintained by the Company or any Affiliate plus 23 28 (B) any forfeitures allocated to the Member's accounts under such plans plus (C) contributions made by the Company or any Affiliate under the Subplan or any other defined contribution plan maintained by the Company or any Affiliate for the Member. (D) Amounts allocated after March 31, 1984 to an individual medical account, as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Company or an Affiliate; and (E) Amounts derived from contributions paid or accrued after December 31, 1985 in taxable years ending after such date which are attributable to postretirement medical benefits allocated to the separate account of a key employee (as defined in Section 416(i) of the Code) under a welfare benefit fund (as defined in Section 419(e) of the Code) maintained by the Company or an Affiliate. (ii) "Defined Benefit Plan Fraction" means a fraction, the numerator of which is the Member's Projected Annual Benefit payable under any defined benefit plan maintained by the Company or any Affiliate, and the denominator of which is the lesser of (A) the product of 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such limitation year; or (B) the product of 1.4 multiplied by the amount which may be taken into account under Section 415(b)(1)(B) of the Code with respect to such Member under such plan for such Limitation Year; provided, however, that if a Member has not completed 10 Years of Service for purposes of such defined benefit plan, such denominator shall be multiplied by a fraction, the numerator of which is such Member's Years of Service and the denominator of which is 10. (c) If the Annual Addition limitation set forth in Section 5.6(a) is exceeded with respect to any Member by reason of the allocation of forfeitures, a reasonable error in estimating a Member's annual compensation or other limited facts and circumstances which the Commissioner of Internal Revenue finds justify the availability of the procedure described in this Section 5.8(c), the trustee shall return to such Member such portion or all of such Member's contribution to the Subplan until such Annual Addition limitation is not exceeded. 5.9 SMALL BENEFIT PAYMENTS. The Company may cause a benefit of $20.00 per month or less to be paid at such intervals as will make the payments amount to at least $20.00 each. 5.10 BENEFITS UPON REEMPLOYMENT OF A MEMBER. 24 29 (a) Suspension of Payments. Anything in this Plan to the contrary notwithstanding, benefit payments shall be suspended on the date of rehire of a former Employee by the Company or an Affiliate, provided that if the Member is rehired after his Normal Retirement Date, the benefit payment to such Member shall be suspended for a month only if he works for the Company or an Affiliate during eight or more days during the month and is given notice of the suspension of benefit payments in accordance with applicable regulations issued by the United States Department of Labor. (b) Benefit Computation after Reemployment. The benefits payable to a reemployed Member upon his subsequent retirement or termination of employment shall be in an amount as determined under whichever sections of this Article V shall apply at that time, based upon the total number of his Years of Membership and Years of Vesting Service. However, if such an Employee's previous retirement benefits were paid in the form of an Early Retirement Benefit or a Vested Deferred Benefit prior to his Normal Retirement Date, or if the Employee withdrew or was otherwise paid any of his Accumulated Contributions and did not repay them pursuant to the procedures of paragraph (a) of Section 4.6, then the amount of monthly benefit payable upon his subsequent termination shall be reduced by the Actuarial Equivalent of the total amount of such benefits and/or withdrawals previously paid to him. 5.11 BENEFIT PAYMENTS TO BE NO LESS THAN MEMBER'S ACCUMULATED CONTRIBUTIONS. In no event shall the total amount of payments from the Plan made to a Member and/or his Eligible Spouse, Designated Beneficiary, joint annuitant or his estate be less than the total amount of such Member's Accumulated Contributions, if any, to the earlier of (a) the date of his death; or (b) his Benefit Commencement Date. Upon the later death of (i) the Member; and (ii) in the case of benefits payable other than in the form of a Life Annuity, his Eligible Spouse or joint annuitant or other Designated Beneficiary, as the case may be, the amount, if any, by which such Member's Accumulated Contributions to the earlier of the date of his death or his Benefit Commencement Date exceeds total payments made to the Member, and/or his Eligible Spouse, joint annuitant, Designated Beneficiary or his estate, shall be paid to the Member's estate in a lump sum. 5.12 AMOUNT OF QUALIFIED PRERETIREMENT DEATH BENEFIT. The Qualified Preretirement Death Benefit payable to an Eligible Spouse of a Member with respect to whom such a benefit is payable under Section 4.4(b) of Article IV shall be equal to (a) in the case of a Member who dies while in the employ of the Company after becoming eligible for a Vested Deferred Benefit under Section 4.5 of Article IV and after the earliest date on which he could have elected to receive retirement benefits under the Plan (the "Earliest Retirement Date"), but before his Normal Retirement Date, the amounts which would have been payable to such Eligible Spouse as a survivor annuity under the Qualified Joint and Survivor Annuity had such Member retired with an immediate Qualified Joint and Survivor Annuity on the day before his death; 25 30 (b) in the case of a Member who dies after terminating employment with the Company after becoming eligible for a Vested Deferred Benefit under Section 4.5 of Article IV and after the Earliest Retirement Date, but before benefit payments have commenced and before his Normal Retirement Date, the amounts which would have been payable to such Eligible Spouse as a survivor annuity under the Qualified Joint and Survivor Annuity had such Member elected an Early Retirement Benefit commencing in the month of such Member's death; (c) in the case of a Member who dies while in the employ of the Company after becoming eligible for a Vested Deferred Benefit under Section 4.5 of Article IV, but before the Earliest Retirement Date, the amounts which would have been payable to such Eligible Spouse as a survivor annuity under the Qualified Joint and Survivor Annuity, had such Member terminated employment on the date of his death, survived until the Earliest Retirement Date, retired with an immediate Qualified Joint and Survivor Annuity at the Earliest Retirement Date and died on the day after the Earliest Retirement Date; (d) in the case of a Member who dies after terminating employment with the Company after becoming eligible for a Vested Deferred Benefit under Section 4.5 of Article IV, but before the Earliest Retirement Date, the amounts which would have been payable to such Eligible Spouse as a survivor annuity under the Qualified Joint and Survivor Annuity, had such Member survived until the Earliest Retirement Date, received at his Normal Retirement Date a Qualified Joint and Survivor Annuity and died on the day after the Earliest Retirement Date; and (e) in the case of a Member who dies while in the employ of the Company after his Normal Retirement Date, the amounts which would have been payable to such Eligible Spouse as a survivor annuity under the Qualified Joint and Survivor Annuity, had such Member retired with an immediate Qualified Joint and Survivor Annuity on the day before his death. For purposes of this Section, the earliest period for which such Eligible Spouse may receive a payment under the Qualified Preretirement Death Benefit shall not be later than the month in which such Member would have attained the Earliest Retirement Date; provided, however, that such Eligible Spouse may elect, on a form provided by the Plan Administrator, to defer commencement of the Qualified Preretirement Death Benefit, subject to the provisions of Section 6.9 of Article VI. ARTICLE VI METHOD AND MODE OF BENEFIT PAYMENTS 6.1 QUALIFIED JOINT AND SURVIVOR ANNUITY. The accrued benefit of a married Member who is eligible for benefits in accordance with Articles IV and V hereof shall be used to purchase a single premium annuity or to make distributions hereunder having the effect of an annuity (a "Qualified Joint and Survivor Annuity") (a) for the life of such Member with a survivor annuity for the life of his Eligible Spouse which is equal to 50% of the amount of the 26 31 annuity which is payable during the joint lives of such Member and his Eligible Spouse; and (b) which is the Actuarial Equivalent of the normal form of retirement benefit under Section 5.3(a) or (b) of Article V. The preceding paragraph shall apply to a Member who has been married for less than 12 months on his Annuity Starting Date, except that, if the Member does not remain married for at least one year: (i) the Member's spouse loses the survivor annuity under the Qualified Joint and Survivor Annuity; and (ii) the amount paid to the Member shall not be retroactively corrected. 6.2 ELECTIONS. (a) Each Member may elect at any time during the Applicable Election Period (as hereinafter defined) to waive the Qualified Joint and Survivor Annuity form of benefit. Any such election made by a Member may be revoked at any time during the Applicable Election Period. For purposes of this Section, the term "Applicable Election Period" means the time period which is not less than 30 days nor more than 90 days prior to the Annuity Starting Date. (b) No election may be made by a Member pursuant to Section 6.2(a) hereof unless (i) his spouse consents in writing to such election; (ii) the election designates a form of benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the Member without any further spousal consent); (iii) the consent acknowledges the effect of such election; and (iv) the consent is witnessed by a notary public. If it is established to the satisfaction of a Plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed to satisfy the requirements of this paragraph. Any consent by a spouse obtained under this provision (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Member without any requirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Member without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Member has received notice as provided in either paragraph (d) or (e). (c) If an effective waiver and any required consent are filed by a Member with the Plan Administrator with respect to a Qualified Joint and Survivor Annuity form of benefit in accordance with the preceding provisions of this section, his benefits will be paid in accordance with such waiver in the form of benefit such Member elects under Section 6.6. If such Member subsequently files a timely revocation of a waiver described in this Section 6.2, such Member shall be treated under Section 6.1 as if such waiver had never been filed. (d) In the case of a Qualified Joint and Survivor Annuity, the Plan Administrator shall, within the Applicable Election Period, provide each Member a written explanation of (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the 27 32 Member's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of a Member's spouse; (iv) the right to make and the effect of a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (v) the relative values of the various optional forms of benefit under the Plan. (e) The Qualified Preretirement Survivor Annuity is fully subsidized. The Qualified Preretirement Survivor Annuity cannot be waived and another beneficiary cannot be selected. 6.3 CASH OUT OF CERTAIN SMALL BENEFITS. Notwithstanding Sections 6.1 and 6.6, if a Member is eligible for benefits or has terminated employment and the Actuarial Equivalent of a Member's accrued benefit is $3,500 or less (as of the current and any prior distribution), then the Member (or if the Member dies prior to retirement, the Member's surviving spouse) shall receive a lump sum payment of the Actuarial Equivalent of his accrued benefit and no other retirement or death benefit shall be paid. Any lump sum payment shall be paid in accordance with Section 6.4. 6.4 ELECTIVE ROLLOVERS. A Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have all or any portion of an lump sum distribution (except to the extent such distribution is required under Section 401(a)(9) of the Code) paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. For purposes of this Section: (a) An "Eligible Retirement Plan" is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a) or a qualified trust described in Code Section 401(a) that accepts the Distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the Member's surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (b) A "Distributee" includes an Employee or former Employee. In addition, the Member's surviving spouse is a Distributee with regard to the interest of the spouse. (c) A "Direct Rollover" is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 6.5 DETERMINATION OF MARITAL STATUS. No provision in the Plan relating to the distribution of benefits in the form of a Qualified Joint and Survivor Annuity or in the form of a Qualified Preretirement Death Benefit shall be applicable to a Member and his spouse unless such spouse is an Eligible Spouse (as defined in Article I). 6.6 METHODS AND MODES OF DISTRIBUTION. With respect to a Member who is not married within the meaning of Section 6.5, and to a married Member whose benefit is not required to be paid pursuant to Section 6.1, such Member shall have the right to elect to receive 28 33 his benefit then held hereunder in any one of the optional forms set forth in this Section. Any optional form of benefit under this Section shall be the Actuarial Equivalent of the pension payment which it replaces. (a) Life Annuity. A monthly pension which shall commence and be paid to the Member on the same days his pension payments would have been made to him had he not elected this option, the last monthly payment to be made on the first day of the month in which the Member dies. (b) Non-Qualified Joint and Survivor Annuity. An annuity, payable monthly, during the lifetime of the Member and following his death a percentage as selected by the Member (not to exceed 100%) of such monthly benefit payable to his surviving joint annuitant for the joint annuitant's lifetime. Subject to paragraph (d) of this Section, if a Member who has elected the Non-Qualified Joint and Survivor Annuity form dies while employed by the Company after his Normal Retirement Date, his surviving joint annuitant shall receive the survivor portion of such form commencing on the first day of the month next following such Member's date of death. (c) Term Certain Annuity. An annuity, payable monthly during the lifetime of the Member and in the event of the Member's death prior to the end of the term certain (which shall be designated by the Member) monthly payments shall be continued to the Designated Beneficiary in the same amount as was paid to the Member until the end of the term certain. The term certain shall be designated by the Member under paragraph (d) hereof. (d) Subject to Section 6.2 of Article VI, election of the Non-Qualified Joint and Survivor Annuity or a Term Certain Annuity must be made in writing on forms provided by the Plan Administrator at any time prior to the applicable Benefit Commencement Date; provided, however, if made within the six-month period immediately prior to such Benefit Commencement Date, evidence satisfactory to the Plan Administrator of the Employee's (or former Employee's) good health at the time of filing the election will be required for the election to be effective. An election of the Non-Qualified Joint and Survivor Annuity must state the percentage of the Member's benefit to be payable to his Designated Beneficiary and proof satisfactory to the Plan Administrator of the age of the Designated Beneficiary must be furnished to the Plan Administrator at the time of filing the election. The election must state the percentage of the Member's benefit to be payable to his joint annuitant. The Member's benefit under this Non-Qualified Joint and Survivor Annuity form shall not be less than 51% of his benefit under the Life Annuity form, unless the Designated Beneficiary is the Eligible Spouse of the Member. An election of the Term Certain Annuity must state the number of months payment shall be certain under the Annuity. The election under this Section may be revoked by the Member at any time prior to his Benefit Commencement Date. 6.7 NON-MARRIED MEMBER. A Member who is not married to an Eligible Spouse at his Benefit Commencement Date shall receive his benefits in the Life Annuity form under Section 6.6 unless, subject to the conditions and restrictions of paragraph (d) of Section 29 34 6.6, he elects the Non-Qualified Joint and Survivor Annuity or Term Certain Annuity under Section 6.6. 6.8 DISTRIBUTION. Unless the Member elects otherwise, the payment of benefits shall begin no later than 60 days after the latest of the close of the Plan Year in which (a) the Member attains his Normal Retirement Date; (b) occurs the tenth anniversary of the year in which the Member commenced participation in the Plan; or (c) the Member terminates service with the Company. Notwithstanding the foregoing, the failure of a Member to consent to a distribution while a benefit is immediately distributable shall be deemed to be an election to defer commencement of the payment of any benefit sufficient to satisfy this Section. 6.9 LIMITATION ON BENEFIT PAYMENTS. (a) Notwithstanding any provision of the Plan which may be to the contrary, distribution of a Member's benefit shall commence no later than April 1 of the calendar year following the calendar year in which such Member attains age 70 1/2. (b) Notwithstanding any provision of the Plan which may be to the contrary, unless distributed as a lump sum, distribution of a Member's benefit must be made in one of the following forms: (i) over the life of such Member; (ii) over the lives of such Member and his Designated Beneficiary; (iii) over a period not extending beyond the life expectancy of such Member; or (iv) over a period not extending beyond the life expectancy of such Member and his Designated Beneficiary. For purposes of this Article VI, the life expectancy of such Member and his Designated Beneficiary may be redetermined as often as permitted by Section 401(a)(9) of the Code. (c) Notwithstanding any provision of the Plan which may be to the contrary, (i) if (A) distribution of Member's benefit has begun; (B) such distribution was not made in a lump sum; and (C) such Member dies before his entire benefit has been distributed to him, then the undistributed portion of his benefit shall be distributed to his Designated Beneficiary at least as rapidly as under the method of distribution in effect as of the date of such Member's death; and 30 35 (ii) if a Member dies before distribution of his benefit has begun, then such Member's entire benefit shall be distributed within five years after such Member's date of death; provided, however, that if the portion of such Member's benefit that is payable to (or for the benefit of) such Member's Designated Beneficiary is distributed over the life of such Designated Beneficiary or over a period not extending beyond the life expectancy of such Designated Beneficiary and distribution commences to such Designated Beneficiary not later than one year after the date of such Member's death (or such later date as the Secretary of the Treasury may by regulations prescribe), then the portion of such Member's benefit that is payable to (or for the benefit of) such Designated Beneficiary shall be treated as having been distributed within five years after such Member's date of death. (d) If a Member's Designated Beneficiary is his surviving spouse, then (i) for purposes of Section 6.9(c)(ii), distribution of benefits to such spouse shall not be required to begin earlier than the date on which such Member would have attained age 70 1/2 had he lived to such date; and (ii) if such spouse dies before distribution of benefits to such beneficiary has commenced, then the provisions of Section 6.9(c) shall be applied as if such spouse were the Member and the person(s) to whom benefits are payable after the death of such spouse were such spouse's Designated Beneficiary. 6.10 PROHIBITION AGAINST MORE THAN INCIDENTAL DEATH BENEFITS. Notwithstanding any provision of this Plan which may be to the contrary, in no event may a Member elect to receive his benefits in a form pursuant to which the present value of the payments to be made to such Member would be less than 50% of the present value of all payments to be made to such Member and his Designated Beneficiary. The determination of such present value shall be made as of the date benefit payments to such Member commence and shall be based on life expectancies as of such date. ARTICLE VII CONTRIBUTIONS AND FUNDING 7.1 PURPOSES OF FUNDING. The Plan shall be funded for the exclusive purpose of providing benefits to Members and their beneficiaries and for defraying reasonable expenses in administering the Plan. 7.2 CONTRIBUTING MEMBER'S CONTRIBUTIONS. For Plan Years before January 1, 1996, each Contributing Member was required to contribute to the Plan during each month in which he was a Contributing Member in accordance with the Plan as then in effect. 7.3 COMPANY CONTRIBUTIONS. The Company will contribute to the Plan from time to time such amounts in addition to a Contributing Member's contributions as will be 31 36 sufficient to keep the Plan on an actuarially sound basis and to meet the minimum funding requirements of ERISA. 7.4 FUNDING AGENCY. The amounts to be contributed for the purpose of the benefits shall be determined by the Plan Administrator and paid to the Trust. 7.5 FORFEITURES. All amounts arising as a result of forfeitures shall be used to reduce further contributions to the Plan and shall not be applied to increase the benefits of any Member or anyone claiming through any Member. 7.6 FUNDING STANDARD ACCOUNT. The Plan Administrator shall cause a funding standard account to be maintained. 7.7 FUNDING POLICY. This Article VII shall constitute the funding policy of the Plan. 7.8 TAX DEDUCTIBILITY OF CONTRIBUTIONS. The foregoing provisions of this article to the contrary notwithstanding, the Company shall not be required to make in any year any contribution in an amount which is greater than the amount deductible for tax purposes in that year. 7.9 ADDITIONAL PAYMENTS. The Company may also make from time to time such additional payments as it deems desirable. Such additional payments shall be credited against future payments which the Company would otherwise be required to make. ARTICLE VIII ADMINISTRATION 8.1 PLAN ADMINISTRATOR. The Plan will be administered by UnionTools, Inc. as Plan Administrator. The construction and interpretation of the Plan provisions are vested with the Plan Administrator, in its absolute discretion, including, without limitation, the determination of benefits, eligibility and interpretation of Plan provisions. All such decisions, determinations and interpretations shall be final, conclusive and binding upon all parties having an interest in the Plan. 8.2 POWERS OF PLAN ADMINISTRATOR. The Plan Administrator shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan. Without limiting the generality thereof, the Plan Administrator shall have the following duties and powers: (a) to determine the amounts of such contributions to the Plan based on appropriate information and consistent with the funding policy of the Plan; 32 37 (b) to determine the amounts and time of payment of benefits and the rights of Members and their beneficiaries to Plan benefits, to take any actions necessary to assure timely payment of benefits to any Member or beneficiary eligible to receive benefits under the Plan and to assure a full and fair review for any person who is denied a claim to any benefit under the Plan; (c) to maintain Plan records, to communicate appropriate information to the insurance company or the trustee, to communicate to Members and their beneficiaries and to submit required reports to appropriate regulatory authorities; (d) to employ other persons, including the employment of counsel, to render advice with respect to any responsibility or authority being carried out by the Plan Administrator and to assist in the administration of the Plan; (e) to employ, on behalf of the Plan Members, an enrolled actuary and an independent qualified public accountant; and (f) to take any action necessary or appropriate to assure that the Plan is administered for the exclusive purpose of providing benefits to Members and their beneficiaries in accordance with the Plan and defraying reasonable expenses of administering the Plan, subject to the requirements of any applicable law. 8.3 CONCLUSIVENESS OF VARIOUS DOCUMENTS. UnionTools, Inc. and its directors and officers will be entitled to rely upon all tables, valuations, certificates and reports furnished by any actuary, accountant, counsel or other expert appointed, employed or engaged by the Plan Administrator. 8.4 ACTIONS TO BE UNIFORM. Any discretionary actions to be taken under the Plan will be nondiscriminatory and uniform with respect to all persons similarly situated. ARTICLE IX AMENDMENT AND TERMINATION OF THE PLAN 9.1 AMENDMENT OF THE PLAN. (a) UnionTools, Inc. reserves the right to modify, alter or amend this Plan at any time and from time to time and to any extent (consistent with Code Section 411(d)(6) and the regulations thereunder) that it may deem advisable, including, but not limited to, any amendment deemed necessary to insure the continued qualification of this Plan under the provisions of the Internal Revenue Code. Any amendment shall be made pursuant to a resolution duly adopted by UnionTools, Inc.'s Board of Directors. 33 38 (b) A Plan amendment that changes the Plan's vesting schedule shall not be effective with respect to any Member with three Years of Service who makes an irrevocable election during the "election period" to have such benefit determined without regard to such amendment. For purposes of this paragraph (b) the "election period" shall begin on the date the Plan amendment is adopted and end on the latest of the following dates: (i) the date which is 60 days after the day the Plan amendment is adopted; (ii) the date which is 60 days after the day the Plan amendment is effective; or (iii) the date which is 60 days after the day the Member is issued written notice of the Plan amendment by the Plan Administrator. 9.2 TERMINATION OF THE PLAN. (a) UnionTools, Inc. reserves the right to terminate the Plan at any time by action of its Board of Directors upon written notice thereof being given to the Plan Administrator and the trustee of the Trust. (b) Upon termination of the Plan, or upon partial termination of the Plan, the rights of all affected Members to their benefits accrued in accordance with Section 5.1 to the date of termination or date of partial termination shall be nonforfeitable; provided, however, any Member or any person claiming benefits on account of a Member shall have recourse for the payment of any Plan benefit only against the assets of the Plan and Trust [or the Pension Benefit Guaranty Corporation ("PBGC"), where applicable] and shall not have any recourse against the Company or its directors, officers, employees or agents for the payment of any benefits under the Plan. 9.3 ALLOCATION OF ASSETS UPON PLAN TERMINATION. Upon termination or partial termination of the Plan, the assets thereof shall be allocated to the affected Members and their beneficiaries in the following order: (a) the portion of each Member's benefit which is derived from the Member's own contributions; (b) benefits payable as an annuity to (i) Members and their beneficiaries who began receiving benefits at least three years prior to the termination date of the Plan; and (ii) Members and their beneficiaries who could have been receiving benefits as of three years prior to the termination date of the Plan if they had retired prior to the beginning of the three-year period and if their benefits had commenced (in the Life Annuity form under this Plan) as of the beginning of such period, based on the provisions of the Plan (as in effect during the five-year period ending on such termination date) under which their benefits would be least; (c) all other benefits, which are insured by the PBGC, determined without regard to Section 4022(b)(5) of ERISA or which would have been so insured if Section 4022(b)(6) of ERISA did not apply. 34 39 (d) all other nonforfeitable benefits under the Plan; (e) all other benefits under the Plan. If the assets of the Plan available for allocation under (b) or (c) are insufficient to satisfy in full the benefits which are described, the assets shall be allocated pro rata among such individuals on the basis of the present value (as of the Plan's date of termination) of their respective benefits. If after the satisfaction of all liabilities, both fixed and contingent under the Plan, any assets then remain, such assets shall be returned to the Company. 9.4 MERGER OR CONSOLIDATION. No merger or consolidation with, or transfer of assets or liabilities to, any other Plan shall be made unless, in the event the Plan is terminated immediately after such merger, consolidation or transfer, each Member in this Plan would receive a benefit equal to or greater than the benefit he would have been entitled to receive if this Plan terminated immediately before the merger, consolidation or transfer, as determined under Treasury Regulations promulgated under Section 414(l) of the Internal Revenue Code (or the successor provision thereto). ARTICLE X CONDITIONAL BENEFIT RESTRICTIONS 10.1 RESTRICTIONS ON BENEFITS PAYABLE TO CERTAIN MEMBERS. (a) Subject to the provisions of Section 10.1(b), notwithstanding any provision of the Plan which may be to the contrary: (i) in the event of Plan termination, the benefit of any Highly-Compensated Employee (or any former Highly-Compensated Employee) will be limited to one that is nondiscriminatory under Section 401(a)(4) of the Code; and (ii) in any Plan Year beginning on or after January 1, 1994, the payment of benefits to, or on behalf of, a Restricted Employee (as hereinafter defined) shall not exceed an amount equal to the payments that would be made to, or on behalf of, the Restricted Employee in that Plan Year under: (A) a straight life annuity that is the Actuarial Equivalent of the accrued benefit and other benefits to which the Restricted Employee is entitled under the Plan (other than a Social Security supplement); and 35 40 (B) the amount of the payments that the Restricted Employee is entitled to receive under a Social Security supplement, if any. (b) The restrictions contained in Section 10.1(a)(ii) will not apply if anyone of the following requirements is satisfied: (i) after payment to, or on behalf of, a Restricted Employee of all benefits payable to, or on behalf of, such Restricted Employee under the Plan, the value of Plan assets equals or exceeds 110% of the value of current liabilities [as defined in Section 412(l)(7) of the Code]; (ii) the value of the benefits payable to, or on behalf of, the Restricted Employee is less than 1% of the value of current liabilities [as defined in Section 412(l)(7) of the Code]; or (iii) the value of the benefits payable to, or on behalf of, the Restricted Employee does not exceed the amount described in Section 411(a)(11)(A) of the Code. (c) As used in this Section 10.1: (i) "Restricted Employee" means any Highly-Compensated Employee or former Highly-Compensated Employee; provided, however, that a Highly-Compensated Employee or former Highly-Compensated Employee need not be treated as a Restricted Employee in the current Plan Year if he is not one of the 25 nonexcludable Employees or former Employees of the Employer with the largest amount of compensation in the current or any prior Plan Year; and (ii) "benefit" includes, among other benefits, loans in excess of amounts set forth in Code Section 72(p)(2)(A), any periodic income, any withdrawal values payable to a living Employee or former Employee and any death benefits not provided for by insurance on the Employee's or former Employee's life. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 EVIDENCE OF SURVIVAL. Where a benefit payment is contingent upon the survival of any person, evidence of such person's survival must be furnished which is satisfactory to the Plan Administrator. 36 41 11.2 NON-ALIENATION OF BENEFITS. (a) None of the benefits, payments, proceeds, claims or rights of any Member hereunder shall be subject to any claim of any creditor of any Member and in particular the same shall not be subject to attachment or garnishment or other legal process by any creditor of any Member nor shall any such Member have any right to pledge, encumber or assign or otherwise alienate any of the benefits, payments, proceeds, claims or other rights which he may expect to receive contingently or otherwise under this Plan. (b) If a Member or any person receiving or entitled to receive benefits under the Plan shall attempt to or shall sell, transfer, assign, pledge or otherwise encumber such benefits or any part thereof or if by reason of attachment, garnishment, insolvency, bankruptcy or any other such proceeding or event such benefits would devolve upon any other person, firm or corporation or would not be enjoyed by him, then the Plan Administrator, in its discretion, which shall be exercised uniformly by treating individuals in similar circumstances alike, shall terminate his interest in any such benefit and cause it to be held or applied for his benefit or the benefit of his spouse, children or other dependents, or any of them, in such manner as the Plan Administrator deems proper; and upon his death, any amount which would have been payable but for this provision, less amounts actually expended as hereinbefore provided, shall be paid to such Member's beneficiary or to his estate if he has not designated a beneficiary. The provisions of this paragraph (b) shall not apply if they violate any applicable law. 11.3 PAYMENTS TO INCOMPETENTS. If the Plan Administrator receives evidence satisfactory to it that (a) a payee entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment or is a minor; (b) another person or an institution is then maintaining or has custody of such payee; and (c) no guardian, Committee or other representative of the estate of such payee has been appointed, the Plan Administrator may direct that payments be made to such other person or institution. 11.4 MISSTATED INFORMATION. If any information has been misstated on which a benefit under the Plan with respect to a person was based, such benefit shall not be invalidated but the amount of the benefit shall be adjusted to the proper amount as determined on the basis of the correct information. Overpayments, if any, with interest as determined by the Plan Administrator shall be charged against any payments accruing with respect to the person. The Plan Administrator reserves the right to require proof of age of any person entitled to a benefit under this Plan. 11.5 CLAIMS PROCEDURE. All claims for benefits under the Plan shall be directed in writing to the attention of the Plan Administrator. If a claim for retirement benefits under the Plan is denied, in whole or in part, by the Plan Administrator, the claimant shall be notified in writing within 90 days of filing of the claim with the Plan Administrator of (a) the specific reasons for such denial; (b) the pertinent Plan provisions on which the denial is based; (c) any additional material or information necessary for the claimant to perfect his claim (with an explanation as to the reason such material or information is necessary); and (d) further steps 37 42 which the claimant can take in order to have his claim reviewed (including a statement that the claimant or his duly authorized representative may review Plan documents and submit issues and comments regarding the claim to the Plan Administrator). If the claimant wishes further consideration of his position, he may request a review of his claim by filing a written request with the Plan Administrator within 90 days after receipt of the written notification provided for in the preceding sentence. A final decision on the claim shall be made by the Plan Administrator within 60 days after the receipt of the request for review and shall be communicated in writing to the claimant with a statement of the specific reasons for any denial and the pertinent Plan provisions on which any such denial is based. 11.6 OHIO LAW APPLICABLE. The law of the State of Ohio shall be the controlling law in all matters relating to the Plan and shall apply to the extent it is not preempted by the laws of the United States of America. 11.7 PLAN NOT AN EMPLOYMENT CONTRACT. Nothing contained herein shall be construed as a commitment on the part of any Member to continue his employment with the Company and nothing contained herein shall be construed as a commitment on the part of the Company to continue the employment of any Member or to continue the rate of pay of any Member for any period. All Employees of the Company shall remain subject to discharge as fully as if this Plan had never been put into effect. 11.8 EXCLUSIVE BENEFIT OF MEMBERS AND BENEFICIARIES. Except as may be provided in Section 9.3 of Article IX, it shall be impossible for any contributions made by the Company under this Plan to be used for or diverted to purposes other than the exclusive benefit of the Members and their beneficiaries. 11.9 HEADINGS. The headings appearing herein are for convenience only and shall be disregarded entirely in the application and interpretation of this Plan. 11.10 QUALIFIED DOMESTIC RELATIONS ORDERS. (a) The provisions of Section 11.2 shall not apply to the creation or recognition of a right to any benefit payable with respect to a Member pursuant to a domestic relations order which is determined to be a Qualified Domestic Relations Order. For purposes of the foregoing, the term "Qualified Domestic Relations Order" has the meaning given to such term in Section 414(p)(1)(A) of the Code and the term "domestic relations order" has the meaning given to such term in Section 414(p)(1)(B) of the Code. (b) In the case of any payment before a Member has terminated his employment with the Company, a domestic relations order may require that payment of benefits be made to an Alternate Payee (as hereinafter defined): (i) on or after the date on which such Member attains (or would have attained) his Normal Retirement Date; 38 43 (ii) as if such Member had retired on the date on which such payment is to begin under such order (but taking into account only the present value of the benefits actually accrued using the interest rate assumption specified in the definition of Actuarial Equivalent in Article I and not taking into account any Company subsidy for early retirement); and (iii) in any form in which such benefits may be paid under the Plan to such Member (other than in the form of a joint and survivor annuity with respect to the Alternate Payee and his or her subsequent spouse). (c) To the extent provided in any Qualified Domestic Relations Order, (i) the former spouse of a Member shall be treated as a surviving spouse of such Member for purposes of Article VI; and (ii) if married for at least one year, the surviving spouse shall be treated as an Eligible Spouse. (d) In the case of any domestic relations order received by the Plan or the Plan Administrator, (i) the Plan Administrator shall promptly notify the Member and any other Alternate Payee of the receipt of such order and the Plan's procedures for determining the qualified status of domestic relations orders; and (ii) within a reasonable period after receipt of such order, the Plan Administrator shall determine whether such order is a Qualified Domestic Relations Order and notify the Member and each Alternate Payee of such determination. The Plan Administrator shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under Qualified Domestic Relations Orders. (e) During any period in which the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined (by the Plan Administrator, by a court of competent jurisdiction or otherwise), the Plan Administrator shall segregate in a separate account in the Plan or in an escrow account the amounts which would have been payable to the Alternate Payee during such period if the order had been determined to be a Qualified Domestic Relations Order and the following rules shall apply: (i) if within 18 months the order (or modification thereof) is determined to be a Qualified Domestic Relations Order, the Plan Administrator shall pay the segregated amounts (and any interest thereon) to the person or persons entitled thereto; 39 44 (ii) if within 18 months (A) it is determined that the order is not a Qualified Domestic Relations Order; or (B) the issue as to whether such order is a Qualified Domestic Relations Order is not resolved, the Plan Administrator shall pay the segregated amounts (and any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order; (iii) any determination that an order is a Qualified Domestic Relations Order which is made after the close of such 18-month period shall be applied prospectively only. (f) For purposes of this Section 11.10, the term "Alternate Payee" means any spouse, former spouse, child or other dependent of a Member who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Member. ARTICLE XII TOP HEAVY PROVISIONS 12.1 DEFINITIONS. FOR PURPOSES OF THIS ARTICLE XII, (a) "Aggregation Group" shall mean that group of plans which includes (i) each defined benefit and defined contribution plan maintained by the Company or an Affiliate in which a Key Participant is a participant (regardless of whether the plan has terminated); and (ii) each other defined benefit and defined contribution plan maintained by the Company or an Affiliate which enables any plan described in clause (i) to meet the requirements of Section 401(a)(4) or 410 of the Code. (b) "Determination Date" shall mean, with respect to any Plan Year, the last day of the preceding Plan Year. (c) "Key Participant" shall mean, with respect to the Plan (or any other defined benefit or defined contribution plan maintained by the Company or an Affiliate), any Member who, at any time during the Plan Year or any of the four preceding Plan Years, is (i) an officer of the Company if such individual's annual compensation exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A); (ii) 1 of the 10 employees owning (or considered as owning within the meaning of Section 318 of the Code) the largest interests in the Company if such individual's annual compensation exceeds the dollar limitation under Code Section 415(c)(1)(A); 40 45 (iii) a 5% owner of the Company; or (iv) a 1% owner of the Company having an annual compensation from the Company of more than $150,000.00. For purposes of clause (i), no more than 50 employees (or, if lesser, the greater of 3 or 10% of the employees) shall be treated as officers. The rules of Section 416(i) shall be applied for purposes of applying clauses (i) through (iv). (d) "Non-Key Participant" shall mean, with respect to the Plan (or any other defined benefit or defined contribution plan maintained by the Company or an Affiliate), any employee who is not a Key Participant. The rules of Section 416(i) shall be applied for purposes of making this determination. (e) "Valuation Date" shall mean, with respect to any Plan Year, the valuation date used for computing Plan costs for minimum funding, whether or not a valuation is actually performed that year. 12.2 TOP HEAVY DETERMINATION. (a) In General. The Plan shall be considered top heavy on a Determination Date if, as of such Determination Date, the present value of the cumulative accrued benefits under the Plan for Key Participants exceeds 60% of the present value of the cumulative accrued benefits under the Plan for all Members. (b) Aggregation Group. The Plan shall also be considered top heavy on a Determination Date if, as of such Determination Date, the Plan is part of an Aggregation Group which is a Top Heavy Group. An Aggregation Group shall be considered a "Top Heavy Group" if, as of any Determination Date, the sum of (i) the present value of the cumulative accrued benefits for Key Participants under all defined benefit plans included in such Aggregation Group; and (ii) the aggregate of the accounts of Key Participants under all defined contribution plans included in such Aggregation Group, exceeds 60% of a similar sum determined for all participants under all plans included in the Aggregation Group. If two or more plans which are part of an Aggregation Group have different Determination Dates, the following procedure will be followed to determine whether the Aggregation Group is a Top Heavy Group. First, with respect to any calendar year, determine the present value of the cumulative accrued benefits for Key Participants and all participants under each defined benefit plan separately as of the Determination Date for such plan which falls within such calendar year and determine the aggregate of the accounts of Key Participants and of all participants under each defined contribution plan separately as of the Determination Date for such plan which falls within such calendar year. Second, add the results for each plan in the 41 46 Aggregation Group as of the Determination Date for such plan that falls in the same calendar year and apply the 60% test set forth earlier in this paragraph (b). (c) Permissive Aggregation. A plan maintained by the Company or an Affiliate which would not otherwise be included in an Aggregation Group may be included, at the election of the Company, in such group for determining whether such group is a Top Heavy Group, provided that aggregation under this paragraph is permitted only if such group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code with such plan being taken into account. (d) Exception. Notwithstanding the provisions of Section 12.2(a), the Plan shall not be considered top heavy on a Determination Date if, as of said date, the Plan is part of a required or permissive Aggregation Group which is not a Top Heavy Group. (e) Determination of Present Value of Accrued Benefit. The present value of accrued benefits under the Plan shall be determined as of the most recent Valuation Date which is within the 12-month period ending on the Determination Date, subject to the rules set forth in paragraphs (f) and (g). The accrued benefit for a current Member shall be determined as if the Member had terminated service as of the Valuation Date. All benefits (whether attributable to Members' contributions or Company contributions) accruing under the Plan shall be taken into account. The applicable factors for use in determining the present value of accrued benefits shall be as set forth in the latest actuarial valuation certified by the enrolled actuary for the Plan. (f) Distributions within Five Years. The present value of the cumulative accrued benefit for any Member under the Plan shall be increased by the aggregate distribution made with respect to such Member under the Plan during the five-year period ending on the Determination Date, except that distributions made after the Valuation Date but before the Determination Date shall not be included to the extent that such distributions are included in the present value of the accrued benefits as of the Valuation Date. (g) Benefits of Members Who Cease to be Key Participants. If a Member is a Non-Key Participant with respect to the Plan for any Plan Year but was a Key Participant with respect to the Plan for any prior Plan Year, the accrued benefit for such Member shall not be taken into account for purposes of determining whether the Plan is top heavy (or whether any Aggregation Group of which the Plan is a part is a Top Heavy Group). (h) Determination of Aggregation Group Benefits and Accounts. With respect to any other defined benefit or defined contribution plan which is included in an Aggregation Group of which this Plan is a part, the present value of cumulative accrued benefits and the aggregate of the accounts of Key Participants and all participants thereunder shall be determined under the rules set forth in Section 416 of the Code and the regulations promulgated thereunder. 42 47 (i) Accrued Benefits of Certain Former Employees. The accrued benefit or account of any participant in any defined benefit or defined contribution plan maintained by the Company (including this Plan) or by an Affiliate shall not be taken into account for purposes of making any top heavy determination pursuant to this Section 12.2 if such participant has not performed any services for the company maintaining any such plan in which he is a participant (other than benefits under such plan) at any time during the five-year period ending on the Determination Date with respect to which a top heavy determination is being made. 12.3 GENERAL RULE. Notwithstanding any provision contained herein to the contrary, if, on any Determination Date, the Plan is top heavy (as determined under Section 12.2), the provisions of Sections 12.4 through 12.7 shall apply to the Plan for the Plan Year following such Determination Date. 12.4 VESTING REQUIREMENTS. (a) New Vesting Provision. Notwithstanding the provisions of Section 4.5(a) to the contrary, any Member who has three Years of Vesting Service shall be 100% vested in his accrued benefit. (b) Special Rule. The benefits of a Member who does not have an Hour of Service after the Plan becomes top heavy are not determined under the minimum vesting provision set forth in the preceding paragraph (a). 12.5 MINIMUM BENEFITS. (a) Minimum Normal Retirement Benefit. A Non-Key Participant who is eligible for a Normal Retirement Benefit under the provisions of Section 4.1 shall be entitled to a monthly benefit equal to the greater of (i) the monthly Normal Retirement Benefit to which such Non-Key Participant would be entitled under Section 5.3(a); or (ii) the product of his average compensation for years in the testing period (as hereinafter defined) and his applicable percentage (as hereinafter defined) determined as of such computation date. (b) Minimum Accrued Benefit. For purposes of determining a Non-Key Participant's early or deferred vested benefit under Article V hereof, a Member's accrued benefit, as of any computation date, should be equal to the greater of (i) the accrued benefit determined in accordance with Article V; or (ii) the benefit to which a Member would be entitled at his Normal Retirement Date computed in accordance with 12.5(a)(ii) hereof, based upon his average Earnings for years in the testing period and his applicable percentage determined as of said computation date. (c) Years in the Testing Period. For purposes of this section, "years in the testing period" shall mean the period of consecutive years (not exceeding five) accruing at any time before a computation date during which a Non-Key Participant had the highest aggregate compensation from the Company. Years ending in a Plan Year beginning before January 1, 43 48 1984, years beginning after the close of the last Plan Year in which the Plan is top heavy and years ending after a Member's Normal Retirement Date shall not be considered for purposes of the preceding sentence. Years taken into account under this paragraph (c) shall be properly adjusted for years not included in a top heavy Year of Credited Service. (d) Applicable Percentage. For purposes of this section, "applicable percentage" shall mean the lesser of (i) 2% multiplied by the number of Top Heavy Years of Credited Service [as defined in Section 12.5(e)] of a Member as of a computation date; or (ii) 20%. (e) Top Heavy Years of Credited Service. For purposes of this section, "Top Heavy Years of Credited Service" shall be equal to the number of Years of Vesting Service as determined pursuant to Section 2.4 reduced by (i) each Year of Vesting Service during which a Plan Year ends in which the Plan was not top heavy; and (ii) each Year of Vesting Service completed in a Plan Year beginning before January 1, 1984. 12.6 MAXIMUM BENEFITS. For purposes of determining the maximum limitation on annual benefits, all references in Section 5.8(a)(ii)(A)(1) and (b)(ii) to the number "1.25" shall instead be deemed to refer to the number "1.0." 12.7 TRANSITION RULES WHEN PLAN CEASES TO BE TOP HEAVY. If, on any Determination Date following any Plan Year in which the Plan is top heavy, the Plan ceases to be top heavy, the following transitional rules shall apply to the Plan thereafter during each Plan Year in which the Plan is not top heavy: (a) Vesting Requirements. The vesting shall revert to that provided in Sections 4.5 and 4.6, provided that no person who was a Member on such Determination Date shall have a vesting percentage applied to his accrued benefit which is less than the vesting percentage which applied to him on such Determination Date as a result of the application of Section 12.4. (b) Minimum Benefit. Normal, early and deferred vested benefits shall be determined pursuant to Article V, provided that any benefit which was accrued as of such Determination Date due to the application of Section 12.5 shall not be decreased by virtue of the application of these transition rules. (c) Distribution of Benefits. Distributions shall be made at such times as determined under Article IV and Section 6.6. ARTICLE XIII MULTIEMPLOYER PROVISIONS 44 49 13.1 ORIGINAL COMPANY. As used in this Article XIII, the term "Original Company" shall refer to The Union Fork and Hoe Company and its Successor by Merger, UnionTools, Inc. 13.2 ADOPTION BY OTHER COMPANIES. Effective as of January 1, 1991, any Affiliate may adopt the Plan with the approval of the Board of Directors of the Original Company. The adopting Affiliate and the Original Company shall execute an Adoption Agreement evidencing the Affiliate's adoption of the Plan. The Adoption Agreement shall specify whether the adopting Affiliate is adopting this Plan as a new plan or as the continuation of an existing plan. The Adoption Agreement may contain variations in Plan terms applicable to the adopting Affiliate and its Employees. However, the Original Company shall have the sole and exclusive right to amend the Plan or Trust in any other respect, as more fully described in Section 9.1. The Adoption Agreement shall become, as to the adopting Affiliate and its Employees, a part of this Plan. It shall not be necessary for the adopting Affiliate to execute the original or any amended Plan and Trust documents. The provisions of the Plan shall apply separately to each Affiliate except as provided in this article. 13.3 "COMPANY" FURTHER DEFINED. Except as otherwise provided in this Article XIII, the term "Company" shall be defined in accordance with Article I, provided, however, that it is intended that the provisions of the Plan shall apply separately to each participating Company and to the Members of each such participating Company; and the term "Company" as used throughout the Plan shall be so construed so that, except as otherwise provided in this Article XIII and except for the common investment of all assets of the Trust and the availability for the common investment of all assets of the Trust and the availability of all assets of the Trust to pay benefits to all Members as described below, the Plan shall constitute a separate Plan for each participating Company. 13.4 PARTICIPATION. The participation of any participating Company in the Plan shall become effective as of the date stated in its Adoption Agreement. A participating Company's participation in the Plan shall continue until terminated in accordance with the terms of the Plan; provided, however, that a Company's participation will automatically terminate effective as of the date of participation if the Internal Revenue Service denies initial qualification under Code Section 401 with respect to participation by the participating Company. If that happens, the Trustees, within one year of the denial of qualification, shall return to the participating Company all contributions made by that Company; and, notwithstanding any provision in the Plan to the contrary, no person shall have a right or claim to any benefit under the Plan with respect to that Company. If the Company's participation is a new plan, no benefits shall be paid with respect to Employees of that Company until a favorable initial determination has been received. Further, participation by any participating Company shall terminate if the Internal Revenue Service notifies the participating Company that such participation has failed to retain qualified status under the Internal Revenue Code. However, the participating Company's participation shall not terminate until the participating Company ceases to contest the disqualification, unless the Internal Revenue Service requires that participation terminate as of an earlier date. 45 50 13.5 COMBINED SERVICE. As of the effective date of a participating Company's Adoption Agreement, the term "service" or "employment" shall refer equally to service with any participating Company. A Member shall be deemed to have terminated employment for Plan benefit purposes only upon the termination of his employment with all of the participating Companies. Credit for Hours of Service and Years of Service completed prior to the effective date of any Adoption Agreement executed by a participating Company shall be determined in accordance with Article II and the terms of the applicable Adoption Agreement. If a Member is employed by more than one participating Company, either concurrently or successively, his benefits under the Plan shall be determined as if all service were with any one participating Company, but he will not receive credit for more than one Year of Service for any Plan Year. Any determination of the contributions to be made by each participating Company, or other portion of a Member's accrued benefit attributable to service with any particular Company, will be made by the Plan Administrator upon advice of the Plan's actuary. 13.6 ADMINISTRATION. The Original Company and the Plan Administrator shall have exclusive administrative authority over the Plan and Trust, although responsibility for those internal matters peculiar to a particular Company may be delegated to that Company. 13.7 COMMON FUND. The Trustees of the Plan need not earmark or keep separate the assets attributable to each Company, but may commingle them with assets attributable to other Companies. The Trust shall be available to pay benefits to Members and their beneficiaries without distinction as to the Company to which particular assets or amounts are attributable. 13.8 AMENDMENT OF PLAN. The term "Company" as used in Article IX, pertaining to amendment of the Plan, refers only to the Original Company, which shall be vested with the sole power to amend the Plan in any manner, except that, with the consent of the Original Company's Board of Directors, the Board of Directors of any other participating Company shall have the right to amend the Plan in any manner otherwise permitted by Article IX which affects the Plan only as to that participating Company and in no way affects the Plan as to any other participating Company and in no way affects the Plan as to any other participating Company; provided, however, that the Board of Directors of any participating Company shall have the right, without the necessity of obtaining the consent of any other participating Company, to amend the Plan in such a way as to transfer its participation in the Plan and the portion of the assets of the Trust attributable to it to a separate plan under an agreement established solely for the benefit of Employees of that participating Company. 13.9 WITHDRAWAL - TERMINATION. (a) Any Company, by action of its Board of Directors or other governing authority, and notice to the Plan Administrator and the Trustee, may withdraw from the Plan and Trust, or may terminate the Plan with respect to its Employees, without affecting any other Companies. A withdrawing Company may arrange for the continuation of this Plan and Trust in 46 51 separate form for its own employees, with such amendments as it may deem proper, and may arrange for continuation of the Plan and Trust by merger with an existing plan and trust, and transfer of Trust assets. The Original Company may, in its absolute discretion, terminate the entire Plan or a Company's participation at any time, without the consent of any Company, Member or beneficiary. (b) A Company which withdraws from or terminates this Plan, shall direct the trustee to liquidate the share of the Trust allocable to its Members or their beneficiaries, as determined by the Plan Administrator with the assistance of the actuaries for the Plan. If the Company is not terminating the Plan, such share shall be transferred to a successor trust upon receipt of evidence satisfactory to the trustee that the successor trust qualifies under Code Section 401(a). If the Company is terminating the Plan, such share shall be allocated as provided in Section 9.3. (c) A terminating or withdrawing Company shall give at least 90 days' prior written notice of its intention to terminate or withdraw to the Plan Administrator and the trustees unless the trustee and the Plan Administrator agree to shorter notice. IN WITNESS WHEREOF, the undersigned has caused this Plan to be executed by a duly authorized individual effective as of January 1, 1996. UNIONTOOLS, INC. Date: Nov. 11, 1996 By: /s/ Stephen M. Kasprisin ------------------------ ------------------------------------ Name (Print): Stephen M. Kasprisin --------------------------- Title: CFO --------------------------------- 47 EX-10.7 9 AMEND. #1 - RETIREMENT PLAN FOR SALARIED EMPLOYEES 1 EXHIBIT 10.7 AMENDMENT NO. 1 TO THE UNIONTOOLS, INC. RETIREMENT PLAN FOR SALARIED EMPLOYEES (RESTATEMENT EFFECTIVE AS OF JANUARY 1, 1996) WHEREAS, UnionTools, Inc. (the "Company") sponsors the UnionTools, Inc. Retirement Plan for Salaried Employees (the "Plan"); WHEREAS, the Company desires to amend the Plan to offer an early retirement window to eligible employees; NOW, THEREFORE, effective as of January 1, 1997, the Plan shall be amended as follows: 1. Section 5.13 shall be added to the Plan to provide as follows: 5.13 EARLY RETIREMENT WINDOW AT AGE 60. (a) Each Member who: (i) has at least five Years of Vesting Service and is at least 60 years old on January 1, 1997; (ii) is employed on February 1, 1997; and (iii) is a Non-Highly-Compensated Employee, shall receive the benefits described in paragraph (b), provided the Member notifies the Company on or before March 7, 1997 of his intention to retire, and actually retires on April 18, 1997. (b) A Member meeting the requirements of paragraph (a) shall receive: (i) his normal retirement benefit under this Article determined as of January 1, 1997 and commencing as of May 1, 1997, without reduction for early commencement under Section 5.5. (ii) a supplemental benefit equal to 50% of his Earnings for 1996. A Member (or, if married, a Member and his spouse) may elect, in accordance with the election procedures in Section 6.2, to have the supplemental benefit paid in a lump sum as of May 1, 1997. If a lump sum payment is not elected, the value of such benefit shall be added to the Member's normal retirement benefit under this Article. 2 2. Section 5.14 shall be added to the Plan to provide as follows: 5.14 EARLY RETIREMENT WINDOW AT AGE 57. (a) Each Member who: (i) has at least five Years of Vesting Service and is at least 57 but less than 60 years old on January 1, 1997; (ii) is employed on February 1, 1997; and (iii) is a Non-Highly-Compensated Employee, shall receive the benefits described in paragraph (b), provided the Member notifies the Company on or before March 7, 1997 of his intention to retire and actually retires on April 18, 1997. (b) A Member meeting the requirements of paragraph (a) shall receive: (i) his normal retirement benefit under this Article determined as of January 1, 1997 and commencing as of May 1, 1997, increased by an amount equal to 11.25% of his Earnings for 1996, and without reduction for early commencement under Section 5.5. (ii) a supplemental benefit equal to 50% of his Earnings for 1996. A Member (or, if married, a Member and his spouse) may elect, in accordance with the election procedures in Section 6.2, to have the supplemental benefit paid in a lump sum as of May 1, 1997. If a lump sum payment is not elected, the value of such benefit shall be added to the Member's normal retirement benefit under this Article. IN WITNESS WHEREOF, the Company has cause this Amendment to be executed as of the 23 day of January, 1997. UNIONTOOLS, INC. By: /s/ Stephen M. Kasprisin _____________________________________ Print Name: Stephen M. Kasprisin Title: CFO -2- EX-10.8 10 SUPPLEMENTAL PENSION PLAN FOR EXECUTIVE EMPLOYEES 1 EXHIBIT 10.8 VISION HARDWARE GROUP, INC. SUPPLEMENTAL PENSION PLAN FOR EXECUTIVE EMPLOYEES ARTICLE 1 - PURPOSE 1.1 This Plan has been established to provide retirement income for certain highly compensated executives of Vision Hardware Group, Inc. and its subsidiaries. The Plan is intended to supplement the benefits payable under the Union Fork and Hoe Company Retirement Plan for Salaried Employees to the extent those benefits are reduced by the limitations imposed on tax qualified pension plans by sections 415 and 401(a)(17) of the Internal Revenue Code. ARTICLE 2 - DEFINITIONS 2.1 "Beneficiary" means a person entitled to receive benefits under the Basic Plan on account of a Participant's death. 2.2 "Basic Plan" means the Union Fork and Hoe Company Retirement Plan for Salaried Employees. 2.3 "Board of Directors" or "Board" means the Board of Directors of Vision Hardware Group, Inc. 2.4 "Company" means (i) Vision Hardware Group, Inc. or any company which is a successor to Vision Hardware Group, Inc. as a result of merger, consolidation, liquidation, transfer of assets, or other reorganization and (ii) any subsidiary of Vision Hardware Group, Inc. which adopts this Plan by action of its Board of Directors. 2.5 "Participant" means any executive employee of the Company who is designated by the Board of Directors as a Participant in this Plan. 2.6 "Plan" means this Supplemental Pension Plan for Executive Employees. 2.7 "Qualified Plan Limits" means (i) the limits on benefits and annual additions under tax qualified pension and profit sharing plans imposed by section 415 of the Internal Revenue Code, and (ii) the limits imposed by section 401(a)(17) of the Internal Revenue Code of 1986, as amended, on the amount of compensation which may be considered under a tax qualified pension or profit sharing plan. ARTICLE 3 - RETIREMENT 3.1 Eligibility. A Participant who retires under the Basic Plan or who terminates employment with the Company with a vested benefit under the Basic Plan shall be entitled to receive a benefit under this Plan equal to the difference between the benefit payable to him under 2 the Basic Plan and the benefit which would have been payable to him under the Basic Plan in the absence of the Qualified Plan Limits. 3.2 Commencement and Form of Payment. A Participant's benefit under this Plan shall begin at the same time as his benefit under the Basic Plan and shall be paid to him (and to his Beneficiary if Basic Plan payments extend beyond his death) in the same form as his benefit under the Basic Plan. ARTICLE 4 - DEATH PAYMENTS 4.1 Qualification and Amount. If a Participant dies before beginning to receive benefits under this Plan, the Participant's Beneficiary or Beneficiaries shall be entitled to receive a benefit under this Plan equal to the difference between the benefit payable to such Beneficiary under the Basic Plan and the benefit which such Beneficiary would have received in the absence of the Qualified Plan Limits. 4.2 Duration of Payment. Benefits payable under Section 4.1 shall begin at the same time as the Beneficiary's benefit under the Basic Plan and shall continue until the Beneficiary's benefit under the Basic Plan terminates. ARTICLE 5 - DISABILITY 5.1 Eligibility. A Participant who receives a disability retirement benefit under the Plan shall be entitled to receive a benefit under this Plan equal to the difference between the benefit payable to him under the Basic Plan and the benefit which would have been payable to him under the Basic Plan in the absence of the 401(a)(17) Limits. 5.2 Commencement and Form of Payment. A Participant's benefit under this Plan shall begin at the same time as his benefit under the Basic Plan and shall be paid to him in the same form as his benefit under the Basic Plan. ARTICLE 6 - ADMINISTRATION 6.1 Board of Directors. The Board shall administer, construe, and interpret this Plan. No member of the Board shall be liable for any act done or determination made in good faith. No member of the Board who is a Participant in this Plan may vote on matters affecting his personal benefit under this Plan, but any such member shall otherwise be fully entitled to act in matters arising out of or affecting this Plan notwithstanding his participation herein. In carrying out its duties herein, the Board or any person or committee to whom the Board's duties have been delegated under Section 5.2, shall have discretionary authority to exercise all powers and to make all determinations, consistent with the terms of the Plan, in all matters entrusted to it, and its determinations shall be given deference and shall be final and binding on all parties. The Board shall determine, subject to the provisions of this Plan, the eligibility of employees to participate in the Plan and the amount, if any, due a Participant or surviving spouse under this Plan. 2 3 6.2 Delegation of Duties. The Board may, in its discretion, delegate some or all of its duties to an officer or employee or a committee composed of officers or employees of the Company. No person to whom the Board delegates its duties under this Plan shall be liable for any act done or determination made in good faith. 6.3 Claims Procedure. (a) The Board or a person or committee designated by the Board pursuant to Section 5.2, shall be responsible for determining any claims for benefits under this Plan by Participants or their Beneficiaries. Within 90 days after receiving a claim (or within up to 180 days, if the claimant is so notified, including the reason for the delay), the Board (or other person or committee responsible for determining the claim) shall notify the Participant or beneficiary of its decision. If the decision is adverse to the claimant, the claimant shall be advised of the Plan provision involved, of any additional information which he must provide to perfect his claim and why, and of his right to request a review of the decision. (b) A Participant or Beneficiary may request a review of an adverse decision by written request to the Board made within 60 days after receipt of the decision. The claimant, or his attorney, may review pertinent documents and submit written issues and comments. (c) Within 60 days after receiving a request for review, the Board or its designee shall notify the claimant in writing of (i) its decision, (ii) the reasons therefor, and (iii) the Plan provisions upon which it is based. (d) The Board may at any time alter the claims procedure set forth above, so long as the revised claims procedure complies with the Employee Retirement Income Security Act of 1974 and regulations issued thereunder. ARTICLE 7 - MISCELLANEOUS PROVISIONS 7.1 Limitation of Rights. Nothing contained in this Plan shall be construed to limit any rights the Company may have to terminate a Participant's employment at any time or be evidence of any agreement or understanding, express or implied, that the Company will employ a Participant in any particular position or at any particular rate of pay. 7.2 Alienation of Benefits Prohibited. Benefits under this Plan may not be assigned, pledged, mortgaged or hypothecated and, to the extent permitted by law, no such benefit shall be subject to legal process or attachment for the benefit of any claims against any person entitled to receive the same. 7.3 Amendment or Termination of Plan. The Board may amend this Plan from time to time in any respect, and may at any time terminate the Plan in its entirety or as it applies to any Company; provided, however, that once an employee has been designated a Participant, his entitlement to benefits under this Plan may not be terminated or reduced. 3 4 7.4 Construction of Plan. This Plan is unfunded. The obligations of the Company with respect to the benefits payable hereunder shall be paid out of the Company's general assets and shall not be secured by any form of trust, escrow or otherwise. This Plan shall be so construed that it will be maintained primarily for the purpose of providing deferred compensation for a "select group of management or highly compensated employees" as defined in the Employee Retirement Income Security Act of 1974. 7.5 Gender and Number. Wherever used in this Plan, the masculine shall be deemed to include the feminine and the singular shall be deemed to include the plural, unless the context clearly indicates otherwise. ARTICLE 8 - EFFECTIVE DATE 8.1 This Plan as amended shall become effective December 1, 1994. 4 EX-10.9 11 CREDIT AGREEMENT 1 EXHIBIT 10.9 - -------------------------------------------------------------------------------- CREDIT AGREEMENT DATED AS OF DECEMBER 27, 1996 Between UNIONTOOLS, INC. as Borrower and HELLER FINANCIAL, INC. as Agent and as a Lender - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
SECTION 1 AMOUNTS AND TERMS OF LOANS...................................................................................... 1 1.1 Loans................................................................................ 1 1.2 Interest and Related Fees............................................................ 7 1.3 Other Fees and Expenses.............................................................. 11 1.4 Payments............................................................................. 12 1.5 Prepayments.......................................................................... 12 1.6 Term of the Agreement................................................................ 13 1.7 Loan Accounts........................................................................ 14 1.8 Capital Adequacy and Other Adjustments............................................... 14 1.9 Taxes................................................................................ 14 1.10 Optional Prepayment/Replacement of Lender in Respect of Increased Costs................................................................... 16 SECTION 2 AFFIRMATIVE COVENANTS........................................................................................... 17 2.1 Compliance With Laws................................................................. 17 2.2 Maintenance of Properties; Insurance................................................. 17 2.3 Inspection; Lender Meeting........................................................... 18 2.4 Corporate Existence, Etc............................................................. 18 2.5 Further Assurances................................................................... 18 SECTION 3 NEGATIVE COVENANTS.............................................................................................. 19 3.1 Indebtedness......................................................................... 19 3.2 Liens and Related Matters............................................................ 19 3.3 Investments; Joint Ventures.......................................................... 21 3.4 Contingent Obligations............................................................... 22 3.5 Restricted Junior Payments........................................................... 23 3.6 Restriction on Fundamental Changes................................................... 24 3.7 Disposal of Assets or Subsidiary Stock............................................... 24 3.8 Transactions with Affiliates......................................................... 25 3.9 Management Fees and Compensation..................................................... 25 3.10 Conduct of Business.................................................................. 25 3.11 Changes Relating to Subordinated Indebtedness........................................ 25 3.12 Fiscal Year.......................................................................... 25 3.13 Press Release; Public Offering Materials............................................. 25 3.14 Subsidiaries......................................................................... 25 3.15 Bank Accounts........................................................................ 25 3.16 Non-Operating Expenditures........................................................... 26
(1) 3
SECTION 4 FINANCIAL COVENANTS/REPORTING................................................................................... 26 4.1 Capital Expenditure Limits........................................................... 26 4.2 Lease Limits......................................................................... 26 4.3 EBIDAT............................................................................... 26 4.4 Fixed Charge Coverage................................................................ 27 4.5 Total Interest Coverage.............................................................. 27 4.6 Total Indebtedness to Operating Cash Flow Ratio...................................... 28 4.7 [Intentionally Deleted.]............................................................. 29 4.8 [Intentionally Deleted.]............................................................. 29 4.9 [Intentionally Deleted.]............................................................. 29 4.10 Financial Statements and Other Reports............................................... 29 4.11 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement......................................................... 32 SECTION 5 REPRESENTATIONS AND WARRANTIES.................................................................................. 33 5.1 Disclosure........................................................................... 33 5.2 No Material Adverse Effect........................................................... 33 5.3 No Default........................................................................... 33 5.4 Organization, Powers, Capitalization and Good Standing............................... 33 5.5 Financial Statements................................................................. 34 5.6 Intellectual Property................................................................ 34 5.7 Investigations, Audits, Etc.......................................................... 34 5.8 Employee Matters..................................................................... 35 5.9 Solvency............................................................................. 35 SECTION 6 DEFAULT, RIGHTS AND REMEDIES.................................................................................... 35 6.1 Event of Default..................................................................... 35 6.2 Suspension of Commitments............................................................ 38 6.3 Acceleration......................................................................... 38 6.4 Performance by Agent................................................................. 39 SECTION 7 CONDITIONS TO LOANS............................................................................................. 39 7.1 Conditions to Initial Loans.......................................................... 39 7.2 Conditions to All Loans.............................................................. 39 SECTION 8 ASSIGNMENT AND PARTICIPATION.................................................................................... 40 8.1 Assignments and Participations in Loans and Notes.................................... 40 8.2 Agent................................................................................ 41 8.3 Amendments, Consents and Waivers for Certain Actions................................. 46 8.4 Set Off and Sharing of Payments...................................................... 46
(2) 4
8.5 Disbursement of Funds................................................................ 47 8.6 Disbursements of Advances; Payment................................................... 47 SECTION 9 MISCELLANEOUS................................................................................................... 49 9.1 Indemnities.......................................................................... 49 9.2 Amendments and Waivers............................................................... 50 9.3 Notices.............................................................................. 50 9.4 Failure or Indulgence Not Waiver; Remedies Cumulative................................ 51 9.5 Marshalling; Payments Set Aside...................................................... 51 9.6 Severability......................................................................... 52 9.7 Lenders' Obligations Several; Independent Nature of Lenders' Rights...................................................................... 52 9.8 Headings............................................................................. 52 9.9 Applicable Law....................................................................... 52 9.10 Successors and Assigns............................................................... 52 9.11 No Fiduciary Relationship............................................................ 52 9.12 Construction......................................................................... 52 9.13 Confidentiality...................................................................... 52 9.14 Consent to Jurisdiction and Service of Process....................................... 53 9.15 Waiver of Jury Trial................................................................. 53 9.16 Survival of Warranties and Certain Agreements........................................ 54 9.17 Entire Agreement..................................................................... 54 9.18 Counterparts; Effectiveness.......................................................... 54 SECTION 10 DEFINITIONS..................................................................................................... 54 10.1 Certain Defined Terms................................................................ 54 10.2 Other Definitional Provisions........................................................ 60
(3) 5 INDEX OF DEFINED TERMS
Defined Term Defined in Section ------------ ------------------ Acquisition Loan Commitment Section 1.1(D) Acquisition Loans Section 1.1(D) Affiliate Section 10.1 Agent Section 10.1 Agreement Section 10.1 Asset Disposition Section 10.1 Bankruptcy Code Section 10.1 Base Rate Section 1.2(A)(1) Base Rate Loans Section 1.2(A)(1) Borrower Preamble & Section 10.1 Borrowing Base Section 1.1(B)(1) Borrowing Base Certificate Section 1.1(B)(1) Business Day Section 10.1 Cash Equivalents Section 3.3 Closing Date Section 10.1 Collateral Section 10.1 Contingent Obligation Section 3.4 Default Section 10.1 Event of Default Section 6.1 Excess Cash Flow Exhibit 1.5(B) Expiry Date Section 10.1 Funding Date Section 7.2 GAAP Section 10.1 Heller Preamble Holdings 3rd Recital Indebtedness Section 10.1 Interest Period Section 1.2(A)(2) Investments Section 3.3 IRC Section 10.1 Lender(s) Section 10.1 Lender Addition Agreement Section 10.1 Lender Letter of Credit Section 1.1(C) LIBOR Section 1.2(A)(2) LIBOR Breakage Fee Section 1.3(B) LIBOR Loans Section 1.2(A)(2) Lien Section 10.1 Loan(s) Section 10.1 Loan Documents Section 10.1 Loan Party Section 10.1
(4) 6
Loan Year Section 10.1 Material Adverse Effect Section 10.1 Maximum Revolving Loan Balance Section 1.1(B)(1) Net Proceeds Section 10.1 Note(s) Section 10.1 Obligations Section 10.1 Operating Cash Flow Section 4.7 Permitted Acquisitions Section 3.3 Permitted Encumbrances Section 3.2(A) Person Section 10.1 Pro Forma Section 10.1 Pro Rata Share Section 10.1 Projections Section 10.1 Related Transactions Section 10.1 Related Transactions Documents Section 10.1 Requisite Lenders Section 10.1 Restricted Junior Payment Section 3.5 Revolving Loan Commitment Section 1.1(B) Revolving Loans Section 1.1(B) Risk Participation Agreement Section 1.1(C) Risk Participation Liability Section 10.1 Scheduled Term Loan Installments Section 1.1(A) Scheduled Acquisition Loan Installments Section 1.1(D) Security Documents Section 10.1 Subordinated Indebtedness Section 10.1 Subsidiary Section 10.1 Target Section 1.1(D) Term Loan Section 1.1(A) Total Indebtedness Section 4.7
(5) 7 LIST OF EXHIBITS AND SCHEDULES
Exhibits Exhibit 1.2(G) - LIBOR Loan Request Exhibit 1.5(B) - Excess Cash Flow Computation Exhibit 4.10(C) - Compliance Certificate Exhibit 4.10(F) - Borrowing Base Certificate Exhibit 10.1(A) - Notes Schedules Schedule 3.2(A)(10) - Liens Schedule 3.4 - Contingent Obligations Schedule 3.8 - Affiliate Transactions Schedule 3.10 - Business Description Schedule 3.16 - Non-Operating Expenditures Schedule 5.3 - Violations, Conflicts, Breaches and Defaults Schedule 5.4(A) - Jurisdictions of Organization Schedule 5.4(B) - Capitalization Schedule 5.4(D) - Foreign Qualifications Schedule 5.6 - Intellectual Property Schedule 5.7 - Investigations and Audits Schedule 5.8 - Employee Matters Schedule 7.1 - List of Closing Documents Schedule 10.1(A) - Pro Forma Schedule 10.1(B) - Indebtedness to be Repaid
(6) 8 CREDIT AGREEMENT This CREDIT AGREEMENT is dated as of December 27, 1996 and entered into by and between UNIONTOOLS, INC., a Delaware corporation ("Borrower"), with its principal place of business at 500 Dublin Avenue, Columbus, Ohio 43216 and HELLER FINANCIAL, INC., a Delaware corporation ("Heller"), with offices at 500 West Monroe Street, Chicago, Illinois 60661, in its capacity as a Lender (as hereinafter defined in Section 10), and in its capacity as Agent (as hereinafter defined in Section 10) for all Lenders. R E C I T A L S: WHEREAS, Borrower desires that Lenders extend a certain term credit facility, revolving credit facility and acquisition credit facility to Borrower, to fund the repayment of certain indebtedness of Borrower, to provide working capital financing for Borrower, to fund certain permitted acquisitions, and to provide funds for other general corporate purposes of Borrower; and WHEREAS, Borrower desires to secure all of its Obligations (as hereinafter defined in Section 10) under the Loan Documents (as hereinafter defined in Section 10) by granting to Agent, for the benefit of Agent and Lenders, a security interest in and lien upon substantially all of its personal and real property; and WHEREAS, Vision Hardware Group, Inc., a Delaware corporation ("Holdings"), which owns all of the issued and outstanding capital stock of Borrower, is willing to guaranty all of the Obligations of Borrower to Lenders under the Loan Documents and to pledge to Agent, for the benefit of Agent and Lenders, all of the capital stock of Borrower to secure such guaranty; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower, Heller and Agent agree as follows: SECTION 1 AMOUNTS AND TERMS OF LOANS 1.1 Loans. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Borrower contained herein: (A) Term Loan. Heller agrees to lend to Borrower, in one draw, on the Closing Date, the aggregate amount of $20,000,000 (the "Term Loan"). Borrower shall repay the Term Loan through periodic payments on the dates and in the amounts indicated below ("Scheduled Term Loan Installments"). Amounts borrowed under this subsection 1.1(A) and repaid may not be reborrowed. 9
Date Scheduled Installment ---- --------------------- June 30, 1997 $1,500,000 September 30, 1997 $1,000,000 December 31, 1997 $ 500,000 Each March 31st of calendar years 1998, 1999, 2000 and 2001 $ 250,000 Each June 30th of calendar years 1998, 1999, 2000 and 2001 $1,500,000 Each September 30th of calendar years 1998, 1999, 2000 and 2001 $1,000,000 Each December 31st of calendar years 1998, 1999 and 2000 $ 250,000 December 31, 2001 $5,250,000
(B) Revolving Loans. (1) Subject to the satisfaction of the terms and conditions set forth herein and in reliance upon the representations and warranties set forth herein, each Lender agrees, severally and not jointly, to lend to Borrower from the Closing Date to the Expiry Date its Pro Rata Share of the loans requested by Borrower to be made by Lenders under this subsection 1.1(B), up to an aggregate maximum for all Lenders of $30,000,000 (as the same may be reduced from time to time hereunder, the "Revolving Loan Commitment"). Advances or amounts outstanding under the Revolving Loan Commitment will be called "Revolving Loans". Revolving Loans may be repaid and reborrowed. The "Maximum Revolving Loan Balance" will be the lesser of (a) the "Borrowing Base" (as calculated on Exhibit 4.10(F), the "Borrowing Base Certificate") or (b) the Revolving Loan Commitment less outstanding Risk Participation Liability. If at any time the outstanding Revolving Loans exceed the Maximum Revolving Loan Balance (as it may be deemed increased from time to time pursuant to subsection 1.1(B)(2)), Lenders shall not be obligated to make Revolving Loans and issue Lender Letters of Credit and Risk Participation Agreements, and Revolving Loans must be repaid immediately, in an amount sufficient to eliminate any excess. Revolving Loans may be requested in any amount with one (1) Business Day prior notice required for amounts greater than $5,000,000. For amounts less than $5,000,000, written or telephonic notice must be provided by noon CT on the day on which the Loan is to be made. All LIBOR Loans require three (3) Business Days notice. All Loans requested telephonically must be confirmed in writing within twenty-four (24) hours. Neither 2 10 Agent nor any Lender shall incur any liability to Borrower for acting upon any telephonic notice that Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Borrower. (2) If Borrower requests that Lenders make, or permit to remain outstanding, Revolving Loans in an aggregate amount in excess of the Borrowing Base, Requisite Lenders may in their discretion elect to cause all Lenders to make, or permit to remain outstanding, such excess Revolving Loans (such Revolving Loans in excess of the Borrowing Base being referred to as "Excess Revolving Loans"), provided that, Requisite Lenders may not cause all Lenders to make, or permit to remain outstanding, aggregate Revolving Loans in excess of the Revolving Loan Commitment or Excess Revolving Loans in excess of 15% of the Revolving Loan Commitment. If Excess Revolving Loans are made, or permitted to remain outstanding, pursuant to the preceding sentence, then (a) the Maximum Revolving Loan Balance shall be deemed increased by the amount of such Excess Revolving Loans, but only for so long as Requisite Lenders allow such Excess Revolving Loans to be outstanding and (b) all Lenders that have committed to make Revolving Loans shall be bound to make, or permit to remain outstanding, such Excess Revolving Loans based upon their Pro Rata Shares in accordance with the terms of this Agreement. If Excess Revolving Loans remain outstanding for more than ninety (90) days during any 360-day period, Revolving Loans must be repaid immediately, in an amount sufficient to eliminate all of such Excess Revolving Loans. (C) Letters of Credit and Risk Participation Agreements. The Revolving Loan Commitment may, in addition to advances under the Revolving Loan, be utilized, upon the request of Borrower, for (i) the issuance of letters of credit for the benefit of Borrower by Agent, including without limitation a letter of credit issued for the account of Holdings in the amount of $1,000,000 with respect to certain insurance maintained for the benefit of Borrower (each such letter of credit, a "Lender Letter of Credit") or (ii) the issuance by Agent of risk participation agreements (each such agreement, a "Risk Participation Agreement") to confirm payment to banks which issue letters of credit for the account of Borrower. (1) Maximum Amount. The aggregate amount of Risk Participation Liability with respect to all Lender Letters of Credit and Risk Participation Agreements outstanding for the account of Borrower at any time shall not exceed $3,000,000. (2) Reimbursement. Borrower shall be irrevocably and unconditionally obligated forthwith without presentment, demand, protest or other formalities of any kind, to reimburse Agent for any amounts paid by Agent with respect to a Lender Letter of Credit or a Risk Participation Agreement issued for the account of Borrower, including all fees, costs and expenses paid by Agent to any bank that issues letters of credit. Borrower hereby authorizes and directs Agent, at Agent's option, to make a Revolving Loan in the amount of any payment made by Agent with respect to any Lender Letter of Credit or any Risk Participation Agreement. All amounts paid by Agent with respect to any Lender Letter of Credit or Risk Participation Agreement that are not immediately repaid by Borrower with the proceeds of a Revolving Loan or otherwise shall bear interest at the interest rate applicable to Revolving Loans 3 11 calculated using the Base Rate. Each Lender agrees to fund its Pro Rata Share of any Revolving Loan made pursuant to this subsection 1.1(C)(2). If no such Revolving Loan is made, each Lender agrees to purchase, and shall be deemed to have purchased, a participation in such Lender Letter of Credit or Risk Participation Agreement, as the case may be, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Lender Letter of Credit or Risk Participation Agreement, as the case may be, and each Lender agrees to pay to Agent such Lender's Pro Rata Share of any payments made by Agent under such Lender Letter of Credit and Risk Participation Agreement. The obligation of each Lender to deliver to Agent an amount equal to its respective Pro Rata Share pursuant to the preceding two (2) sentences shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in subsection 7.2. If any Lender fails to make available to Agent the amount of such Lender's Pro Rata Share of any payments made by Agent in respect of such Lender Letter of Credit or Risk Participation Agreement as provided in this subsection 1.1(C)(2), Agent shall be entitled to recover such amount on demand from such Lender together with interest at the Base Rate. (3) Conditions of Issuance of Letters of Credit or Risk Participation Agreements. In addition to all other terms and conditions set forth in this Agreement, the issuance by Agent of any Lender Letter of Credit or Risk Participation Agreement shall be subject to the conditions precedent that the Lender Letter of Credit, the Risk Participation Agreement or the letter of credit for which Borrower requests a Risk Participation Agreement shall support a transaction entered into in the ordinary course of Borrower's business and shall be in such form, be for such amount, and contain such terms and conditions as are reasonably satisfactory to Agent. The expiration date of each Lender Letter of Credit and each letter of credit to be issued under a Risk Participation Agreement shall be on a date which is the earlier of (a) one year from its date of issuance, or (b) the thirtieth (30th) day before the date set forth in clause (c) of the definition of the term Expiry Date. Each Risk Participation Agreement shall provide that the agreement terminates and all demand or claims for payment must be presented by a date certain, which date will be at least thirty (30) days before the date set forth in clause (c) of the definition of the term Expiry Date. (4) Request for Lender Letters of Credit or Risk Participation Agreements. Borrower shall give Agent at least three (3) Business Days prior notice specifying the date a Lender Letter of Credit or Risk Participation Agreement (or a letter of credit to be issued under a Risk Participation Agreement) is requested to be issued, identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. After the issuance of a Risk Participation Agreement in favor of a bank that will issue letters of credit on behalf of Borrower, Borrower shall give Agent at least two (2) Business Days prior written notice specifying the date a letter of credit is to be issued under a Risk Participation Agreement (five (5) Business Days in the case of the first letter of credit to be issued under a particular Risk Participation Agreement), identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. Any notice described in this paragraph shall be accompanied by the form of the Lender Letter of Credit or the letter of credit to which such Risk Participation Agreement relates. 4 12 (D) Acquisition Loans. Subject to the satisfaction of the terms and conditions set forth herein and in reliance upon the representations and warranties set forth herein, each Lender agrees, severally and not jointly, to lend to Borrower from the Closing Date to the second anniversary thereof its Pro Rata Share of the loans requested by Borrower (upon not less than thirty (30) days prior written notice to Agent) to be made by Lenders under this subsection 1.1(D) (the "Acquisition Loans"), up to an aggregate maximum for all Lenders of $15,000,000 (the "Acquisition Loan Commitment"). An Acquisition Loan shall be made only upon the acquisition by Borrower of all of the issued and outstanding capital stock of another Person, or of all or substantially all of the assets of another Person or of a division of another Person (a "Target") and shall be limited in amount to the purchase price of such acquisition, and the proceeds of the Acquisition Loan may be used only to fund such purchase price. Amounts borrowed under this subsection 1.1(D) and repaid may not be reborrowed. The obligations of Lenders to make any Acquisition Loan are further subject to the following conditions precedent: (1) At least ten (10) Business Days prior to the acquisition of the subject Target, Agent shall have received a certificate demonstrating compliance with subsections 1.1(D)(3), (4), (5), (6) and (7); (2) Agent shall have received such financial and other information concerning the subject Target as Agent may reasonably request; (3) Requisite Lenders shall have approved the acquisition of the subject Target, provided, however, that such approval shall not be required if the sum of the purchase price for the subject Target plus the purchase price(s) for any other Target(s) previously acquired by Borrower during the then current Loan Year, is not greater than $7,500,000; (4) The subject Target's EBIDAT (as defined in Exhibit 4.10(C)) during the twelve (12) months immediately preceding the acquisition of the subject Target, plus those expenses deducted in calculating such earnings that would be eliminated upon such acquisition (as agreed to by Requisite Lenders), shall have been positive; (5) Based upon the financial performance of both Borrower and the subject Target during the twelve (12) months immediately preceding the acquisition of the subject Target, the combined financial performance of Borrower and the subject Target would comply with the financial covenants set forth in Article 4 hereof after giving effect to the Acquisition Loan; (6) The Maximum Revolving Loan Balance as of the acquisition of the subject Target must exceed the Revolving Loans then outstanding by not less than the applicable amount set forth below (based upon the period in which such acquisition occurs), after giving effect to such acquisition:
Period Amount ------ ------
5 13
January 1 through March 31 of any calendar year $6,000,000 April 1 through June 30 of any calendar year $7,000,000 July 1 through September 30 of any calendar year $9,000,000 October 1 through December 31 of any calendar year $8,000,000
(7) Based upon the financial performance of both Borrower and the subject Target during the twelve (12) months immediately preceding the acquisition of the subject Target, the Pro Forma Total Indebtedness to Operating Cash Flow Ratio of Borrower and the subject Target on a pro forma combined basis would not be more than 4.25:1 as of the last day of any month in the first Loan Year and 4.00:1 as of the last day of any month in the second Loan Year. For the purposes of this subsection 1.1(D)(7), "Pro Forma Total Indebtedness to Operating Cash Flow Ratio" means the ratio of (i) the sum of (a) the average daily principal balance of the Revolving Loans during the twelve (12) month period ending on the last day of the subject month (for any month preceding the Closing Date, such average daily principal balance shall be deemed to be $13,000,000), plus (b) the aggregate outstanding principal balance of the Term Loan, the Acquisition Loans, the Lender Letters of Credit and Risk Participation Agreements as of the last day of such month plus (c) all other Indebtedness for borrowed money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of such month, to (ii) Operating Cash Flow (calculated as illustrated on Exhibit 4.10(C)) for the twelve (12) month period ending on the last day of such month; (8) The subject Target shall be in the same or similar type of business as Borrower; (9) No event shall have occurred and be continuing or would result from the acquisition of the subject Target or the Acquisition Loan which would reasonably be expected to cause a Material Adverse Effect; and (10) No event shall have occurred and be continuing or would result from the acquisition of the subject Target or the Acquisition Loan that would constitute an Event of Default or a Default. On the dates indicated below, Borrower shall repay the Acquisition Loans through periodic installments in the amounts equal to the applicable percentage of the Acquisition Loans outstanding as of the second anniversary of the Closing Date ("Scheduled Acquisition Loan Installments").
Date Percentage ---- ---------- Each March 31st of calendar years 1999 and 2000 2.083% Each June 30th of calendar years
6 14
1999 and 2000 12.50% Each September 30th of calendar years 1999 and 2000 8.333% Each December 31st of calendar years 1999 and 2000 2.083% March 31, 2001 1.563% June 30, 2001 9.375% September 30, 2001 6.25%
On December 31, 2001, the entire remaining principal balance of the Acquisition Loans, together with all accrued but unpaid interest thereon, shall be due and payable in full. (E) Notes. Borrower shall execute and deliver to each Lender (i) a Note to evidence the Revolving Loans, such Note to be in the principal amount of such Lender's Pro Rata Share of the Revolving Loan Commitment, (ii) a Note to evidence the Term Loan, such Note to be in the principal amount of such Lender's Pro Rata Share of the Term Loan, and (iii) a Note to evidence the Acquisition Loans, such Note to be in the principal amount of such Lender's Pro Rata Share of the Acquisition Loan Commitment. In the event of an assignment under subsection 8.1, Borrower shall, upon surrender of the assigning Lender's Notes, issue new Notes to reflect the interests of the assigning Lender and the Person to which interests are to be assigned. 1.2 Interest and Related Fees. (A) Interest. From the date the Loans are made and the date the other Obligations become due, depending upon Borrower's election from time to time, as permitted herein, to have portions of the Loans accrue interest based upon the LIBOR, the Loans and the other Obligations shall bear interest at the rates set forth in paragraphs (1) and (2) below: (1) If a Base Rate Loan, then at the sum of the Base Rate plus the Base Rate Margin then applicable. (2) If a LIBOR Loan, then at the sum of the LIBOR plus the LIBOR Margin then applicable. "Base Rate" means a variable rate of interest per annum equal to the rate of interest from time to time published by the Board of Governors of the Federal Reserve System in Federal Reserve statistical release H.15 (519) entitled "Selected Interest Rates" as the Bank 7 15 prime loan rate. Base Rate also includes rates published in any successor publications of the Federal Reserve System reporting the Bank prime loan rate or its equivalent. The statistical release generally sets forth a Bank prime loan rate for each business day. The applicable Bank prime loan rate for any date not set forth shall be the rate set forth for the last preceding date. In the event the Board of Governors of the Federal Reserve System ceases to publish a Bank prime loan rate or equivalent, the term "Base Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate," "reference rate," "base rate" or other similar rate as determined by Agent announced from time to time by any of Bankers Trust Company, The Chase Manhattan Bank, National Association and Citibank, N.A. (with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by such bank). "Base Rate Loans" means Loans bearing interest at rates determined by reference to the Base Rate. "Base Rate Margin" shall mean, (i) for the period commencing on the Closing Date and ending on the day immediately preceding such first Business Day of a calendar quarter that follows the first anniversary of the Closing Date, three quarters of one percent (0.75%) per annum, and (ii) for each period commencing on such first Business Day of a calendar quarter that follows the first anniversary of the Closing Date, or any subsequent first Business Day of a calendar quarter after Agent has received a new Compliance Certificate delivered by Borrower pursuant to subsection 4.10(C) (each such First Business Day being hereinafter referred to as an "Adjustment Date"), and ending on the day immediately preceding each subsequent Adjustment Date (each such period being hereinafter referred to as a "Calculation Period"), the applicable percent per annum set forth in the pricing table below opposite the Adjusted Total Indebtedness to Operating Cash Flow Ratio calculated for such Calculation Period. "LIBOR" means, for each Interest Period, a rate equal to: (a) the rate of interest determined by Agent at which deposits in U.S. dollars for the relevant Interest Period are offered based on information presented on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period, provided that if at least two such offered rates appear on the Reuters Screen LIBO Page in respect of such Interest Period, the arithmetic mean of all such rates will be the rate used, provided, further, that if fewer than two offered rates appear or if Reuters ceases to provide LIBOR quotations, such rate shall be the rate of interest at which deposits in U.S. dollars are offered for the relevant Interest Period by any of Bankers Trust Company, The Chase Manhattan Bank, National Association or Citibank, N.A. to prime banks in the London interbank market, divided by (b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) which are required to be 8 16 maintained by a member bank of the Federal Reserve System; such rate to be rounded upward to the next whole multiple of one-sixteenth of one percent (.0625%). "LIBOR Loans" means Loans bearing interest at rates determined by reference to the LIBOR. "LIBOR Margin" shall mean, (i) for all LIBOR Loans having an Interest Period commencing during the period commencing on the Closing Date and ending on the day immediately preceding the first Adjustment Date, two and three quarters percent (2.75%) per annum, and (ii) for all LIBOR Loans having an Interest Period commencing during a subsequent period commencing on an Adjustment Date and ending on the day immediately preceding the subsequent Adjustment Date (each such period being hereinafter referred to as a "Calculation Period"), the applicable percent per annum set forth in the pricing table below opposite the Adjusted Total Indebtedness to Operating Cash Flow Ratio calculated for such Calculation Period. For the purposes of this subsection 1.2(A), "Adjusted Total Indebtedness to Operating Cash Flow Ratio" means, for any Calculation Period, the ratio of (i) the sum of (a) the average daily principal balance of the Revolving Loans during the twelve (12) month period ending on the last day of the month for which the Compliance Certificate most recently delivered pursuant to subsection 4.10(C) was prepared, plus (b) the aggregate outstanding principal balance of the Term Loan, the Acquisition Loans, the Lender Letters of Credit and Risk Participation Agreements as of the last day of such month plus (c) all other Indebtedness for borrowed money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of such month, to (ii) Operating Cash Flow (calculated as illustrated on Exhibit 4.10(C)) for the twelve (12) month period ending on the last day of such month. PRICING TABLE
- -------------------------------------------------------------------------------------------------------------------------- Adjusted Total Indebtedness to Operating Cash Flow Ratio Base Rate Margin LIBOR Margin - -------------------------------------------------------------------------------------------------------------------------- Greater than 3.75:1 0.75% 2.75% - -------------------------------------------------------------------------------------------------------------------------- Equal to or greater than 3.00:1 but equal to or less 0.50% 2.50% than 3.75:1 - -------------------------------------------------------------------------------------------------------------------------- Less than 3:00:1 0.25% 2.25% - --------------------------------------------------------------------------------------------------------------------------
If Borrower shall fail to deliver a Compliance Certificate by the date required pursuant to subsection 4.10(C), effective as of the first Business Day of the immediately succeeding calendar month and continuing through the day preceding the next succeeding Adjustment Date, each applicable Base Rate Margin and each applicable LIBOR Margin shall be 9 17 conclusively presumed to equal the highest Base Rate Margin and the highest LIBOR Margin specified in the pricing table set forth above. Each LIBOR Loan may be obtained for a one (1), two (2), three (3), or six (6) month period (each being an "Interest Period"). With respect to all LIBOR Loans: (a) the Interest Period will commence on the date that the LIBOR Loan is made or the date on which a Base Rate Loan is converted into a LIBOR Loan, as applicable, or in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires, (b) if the Interest Period expires on a day that is not a Business Day, then it will expire on the next Business Day, and (c) no Interest Period shall extend beyond the date set forth in clause (c) of the definition of the term "Expiry Date." If the introduction of or the interpretation of any law, rule, or regulation would increase the reserve requirement or otherwise increase the cost to any Lender of making or maintaining a LIBOR Loan, then Agent, on behalf of all affected Lenders, shall submit a certificate to Borrower demonstrating the calculation of the increased cost and requiring payment thereof to Agent for the benefit of the affected Lenders within ten (10) days after the date of the certificate. There are no limitations on the number of times such certificate may be submitted. (B) Unused Line Fees. On the first day of each month, Borrower shall pay Agent, for the benefit of all Lenders committed to make Revolving Loans and Acquisition Loans (based upon their respective Pro Rata Shares), an unused line fee in an amount equal to one-half of one percent (0.5%) per annum of the sum of (1) the amount by which the Revolving Loan Commitment exceeded the average daily outstanding Revolving Loans, Lender Letters of Credit and Risk Participation Agreements during the immediately preceding month, plus (2) the amount by which $15,000,000 exceeded the average daily outstanding Acquisition Loans during the immediately preceding month. (C) Risk Participation Fee. From the Closing Date, Borrower shall pay Agent, for the benefit of all Lenders committed to make Revolving Loans (based upon their respective Pro Rata Shares), a fee for each Lender Letter of Credit and each Risk Participation Agreement, from the date of issuance to the date of termination, equal to (1) the average daily outstanding amount of the Risk Participation Liability, multiplied by (2) two and three quarters percent (2.75%) per annum. Such fee is to be paid monthly in arrears on the first day of each month. Borrower shall also reimburse Agent for any and all fees and expenses paid to the issuer of any letter of credit that is in any way related to a Risk Participation Agreement. (D) Computation of Interest and Related Fees. Interest on all Loans and all other Obligations and any fees set forth in this subsection 1.2 shall be calculated daily on the basis of a three hundred sixty (360) day year for the actual number of days elapsed in the period during which it accrues. The date of funding 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 10 18 it is made, one (1) days' interest shall be charged. Interest on all Base Rate Loans is payable in arrears on the first day of each calendar quarter and on the Expiry Date, whether by acceleration or otherwise. Interest on LIBOR Loans shall be payable on the last day of the applicable Interest Period, unless the Interest Period is greater than three (3) months, in which case interest will be payable on the last day of each three (3) month interval. In addition, interest on LIBOR Loans is due on the Expiry Date, whether by acceleration or otherwise. (E) Default Rate of Interest. At the election of Agent or Requisite Lenders, after the occurrence of an Event of Default and for so long as it continues, the Loans and other Obligations shall bear interest at a rate that is two percent (2%) in excess of the rates otherwise payable under this Agreement. Furthermore, during any period in which any Event of Default is continuing, as the Interest Periods for LIBOR Loans then in effect expire, such Loans shall be converted at Agent's discretion into Base Rate Loans and the LIBOR election will not be available to Borrower until all Events of Default are cured or waived. (F) Excess Interest. Under no circumstances will the rate of interest chargeable be in excess of the maximum amount permitted by law. If excess interest is charged and paid in error, then the excess amount will be promptly refunded. (G) LIBOR Rate Election. All Loans made on the Closing Date shall be Base Rate Loans and remain so for three (3) Business Days. Any LIBOR Loans made during the sixty (60) days immediately following such three (3) Business Days shall have an Interest Period of no more than thirty (30) days. Thereafter, Borrower may request, upon not less than three (3) Business Days' notice, that Revolving Loans to be made be LIBOR Loans and that outstanding portions of the Term Loan or the Acquisition Loans be converted to LIBOR Loans. Any such request, which will be made by submitting a LIBOR Loan request, in the form of Exhibit 1.2(G), shall pertain to Loans in an aggregate minimum amount of $500,000 and integral multiples of $10,000 in excess thereof. Once given, a LIBOR Loan request shall be irrevocable and Borrower shall be bound thereby. Upon the expiration of an Interest Period, in the absence of a new LIBOR Loan request submitted to Agent not less than three (3) Business Days prior to the end of such Interest Period, the LIBOR Loan then maturing shall be automatically converted to a Base Rate Loan. There may be no more than six (6) LIBOR Loans outstanding at any one time. Loans which are not the subject of a LIBOR Loan request shall be Base Rate Loans. 1.3 Other Fees and Expenses. (A) Certain Fees. Borrower shall pay to Heller, individually, on the Closing Date and on each anniversary thereof, the fees specified in that certain letter agreement dated November 20, 1996 between Borrower and Heller. (B) LIBOR Breakage Fee. Upon any payment of a LIBOR Loan on any day that is not the last day of the Interest Period applicable thereto (regardless of the source of such prepayment and whether voluntary, by acceleration or otherwise) or if for any reason (other than a default by Agent or Lenders) a borrowing or advance of, or conversion to or continuation of, a 11 19 LIBOR Loan does not take place on the date specified therefor, Borrower shall pay Agent, for the benefit of all affected Lenders, an amount (the "LIBOR Breakage Fee") equal to the amount of any losses, expenses and liabilities (including, without limitation, any loss (including interest paid) sustained by each such affected Lender in connection with the re-employment of such funds) that any such affected Lender may sustain as a result of the payment of such LIBOR Loan on a day that is not the last day of the Interest Period applicable thereto or as a result of a borrowing or advance of, or conversion to or continuation of, a LIBOR Loan not taking place on the date specified therefor. (C) Expenses and Attorneys Fees. Borrower agrees to promptly pay the reasonable fees, out-of-pocket costs and expenses (including those of attorneys) incurred by Agent in connection with any matters contemplated by or arising out of the Loan Documents, in connection with the examination, review, due diligence investigation, documentation, negotiation and closing of the transactions contemplated herein and in connection with the continued admini- stration of the Loan Documents including any amendments, modifications and waivers. Borrower agrees to promptly pay all fees, costs and expenses incurred by Agent and Lenders in connection with any action to enforce any Loan Document or to collect any payments due from Borrower or any other Loan Party. All fees, costs and expenses for which Borrower is responsible under this subsection 1.3(C) shall be deemed part of the Obligations when incurred, payable in accordance with the final two sentences of subsection 1.4 and secured by the Collateral. 1.4 Payments. All payments by Borrower of the Obligations shall be made in same day funds and delivered to Agent, for the benefit of Agent and Lenders, as applicable, by wire transfer to the following account or such other place as Agent may from time to time designate. ABA No. 0710-0001-3 Account Number 55-00540 The First National Bank of Chicago One First National Plaza Chicago, IL 60670 Reference: Heller Corporate Finance Group for the benefit of UnionTools, Inc. Borrower shall receive credit on the day of receipt for funds received by Agent by 1:00 p.m. CST. In the absence of timely receipt, such funds shall be deemed to have been paid on the next Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the payment may be made on the next succeeding Business Day and such extension of time shall be included in the computation of the amount of interest and fees due hereunder. Borrower hereby authorizes Lenders to make Revolving Loans, on the basis of their Pro Rata Shares, for the payment of Scheduled Term Loan Installments, Scheduled Acquisition Loan Installments, interest, commitment fees, Risk Participation Liability fees, 12 20 LIBOR Breakage Fees, and Risk Participation Liability payments. Prior to an Event of Default, other fees, costs and expenses (including those of attorneys) reimbursable to Agent pursuant to subsections 1.3(A) and (C) or elsewhere in any Loan Document may be debited to the Revolving Loan after fifteen (15) days notice. After the occurrence of an Event of Default, no prior notice will be required, but Agent will promptly notify Borrower of the amount of any such debit. 1.5 Prepayments. (A) Voluntary Prepayment of Term Loan and Acquisition Loans. At any time, Borrower may prepay the Term Loan and Acquisition Loans in whole or in part, in minimum amounts of $500,000, without penalty, but with LIBOR Breakage Fees, if applicable, after not less than five (5) Business Days' prior written notice to Agent specifying how such prepayment shall be applied. (B) Prepayments from Excess Cash Flow. On or before the first (1st) day of the December following the end of each of its fiscal years, commencing with the fiscal year ending July 31, 1998, Borrower shall prepay the Loans in an amount equal to fifty percent (50%) of the Excess Cash Flow for such fiscal year pursuant to the calculation on Exhibit 1.5(B). The calculation shall be based on the audited financial statements for Borrower. The payments shall be applied in accordance with subsection 1.5(E). (C) Prepayments from Asset Dispositions. Immediately upon receipt of the Net Proceeds in excess of $250,000 for any single transaction or series of transactions, or in excess of $500,000 in the aggregate during any fiscal year of Borrower, Borrower shall repay the outstanding principal balance of the Revolving Loan by the amount of any reduction in the Borrowing Base attributable to the Asset Disposition giving rise to such Net Proceeds. Borrower or any Subsidiary may, upon prior written notice to Agent, reinvest all remaining Net Proceeds of such Asset Disposition, within ninety (90) days, in productive replacement assets of a kind then used or usable in the business of Borrower. If Borrower does not intend to so reinvest such Net Proceeds or if the period set forth in the immediately preceding sentence expires without Borrower having reinvested such Net Proceeds, Borrower shall prepay the Term Loan in an amount equal to the remaining Net Proceeds of such Asset Disposition. The payments shall be applied in accordance with subsection 1.5(E). (D) Prepayment from Issuance of Securities. Unless otherwise agreed by Requisite Lenders, immediately upon the receipt by Holdings, Borrower or any of its Subsidiaries of the proceeds of the issuance of equity securities (other than (1) proceeds of the issuance of equity securities received on or before the Closing Date, (2) proceeds from the issuance of equity securities to members of the management of Borrower and (3) proceeds of the issuance of equity securities to Borrower or any Subsidiary), Borrower shall prepay the Loans in an amount equal to such proceeds, net of underwriting discounts and commissions and other reasonable costs associated therewith; provided, however, that with respect to any such net proceeds from the issuance of equity securities by Holdings during the first eighteen (18) months following the Closing Date, and so long as no Default or Event of Default has occurred and is 13 21 continuing or would result therefrom, such net proceeds may first be used to repay the existing Subordinated Indebtedness of Holdings and, upon the repayment of such Subordinated Indebtedness in full, may then be used to redeem or repurchase the preferred capital stock of Holdings issued and outstanding as of the date hereof, and any remaining balance shall be applied as a prepayment of the Loans. The prepayments under this subsection 1.5(D) shall be applied in accordance with subsection 1.5(E). (E) Application of Proceeds. With respect to the mandatory prepayments described in subsections 1.5(B), 1.5(C) and 1.5(D), such prepayments shall first be applied in payment of the Term Loan pro rata against all remaining Scheduled Term Loan Installments and, at any time after the Term Loan shall have been prepaid in full, such prepayments shall be applied in payment of the Acquisition Loans pro rata against all remaining Scheduled Acquisition Loan Installments and, at any time after the Term Loan and the Acquisition Loans shall have been prepaid in full, such prepayments shall be applied to reduce the outstanding principal balance of the Revolving Loans and as a permanent reduction of the Revolving Loan Commitment. 1.6 Term of the Agreement. All of the Obligations shall become due and payable as otherwise set forth herein, but in any event, all of the remaining Obligations shall become due and payable on the date set forth in clause (c) of the definition of the term "Expiry Date." Upon such date and following repayment in full of the Obligations, this Agreement will terminate. Notwithstanding any such termination, until all Obligations have been fully paid and satisfied, Agent, for the benefit of Agent and Lenders, shall be entitled to retain the security interests in the Collateral granted under the Security Documents and the ability to exercise all rights and remedies available to them under the Loan Documents and applicable laws. 1.7 Loan Accounts. Agent will maintain loan account records for (a) all Loans, interest charges and payments thereof, (b) all Risk Participation Liability, (c) the charging and payment of all fees, costs and expenses and (d) all other debits and credits pursuant to this Agreement. The balance in the loan accounts shall be presumptive evidence of the amounts due and owing to Lenders, provided that any failure by Agent to so record shall not limit or affect the Borrower's obligation to pay. Within five (5) days of the first of each month, Agent shall provide a statement for each loan account setting forth the principal of each account and interest due thereon. Borrower must deliver a written objection within sixty (60) days after receipt of the statement or the statement will be presumptive evidence of the Obligations absent manifest error. During the continuance of an Event of Default, Borrower irrevocably waives the right to direct the application of any and all payments and Borrower hereby irrevocably agrees that Agent shall have the continuing exclusive right to apply and reapply payments in any manner it deems appropriate. 1.8 Capital Adequacy and Other Adjustments. In the event that any Lender shall have determined that the adoption after the date hereof of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by any Lender or any corporation 14 22 controlling such Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from any central bank or governmental agency or body having jurisdiction does or shall have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Lender or any corporation controlling such Lender and thereby reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder, then Borrower shall from time to time within fifteen (15) days after notice and demand from such Lender (together with the certificate referred to in the next sentence and with a copy to Agent) pay to Agent, for the account of such Lender, additional amounts sufficient to compensate such Lender for such reduction. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by such Lender to Borrower and Agent shall, absent manifest error, be final, conclusive and binding for all purposes. 1.9 Taxes. (A) No Deductions. Any and all payments or reimbursements made hereunder or under the Notes shall be made free and clear of and without deduction for any and all taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto excluding such taxes imposed on net income, herein "Tax Liabilities"), excluding, however, taxes imposed on the net income of a Lender or Agent. If Borrower shall be required by law to deduct any such amounts from or in respect of any sum payable hereunder to any Lender or Agent, then the sum payable hereunder shall be increased as may be necessary so that, after making all required deductions, such Lender or Agent receives an amount equal to the sum it would have received had no such deductions been made. (B) Changes in Tax Laws. In the event that, subsequent to the Closing Date, (1) any changes in any existing law, regulation, treaty or directive or in the interpretation or application thereof, (2) any new law, regulation, treaty or directive enacted or any interpretation or application thereof, or (3) compliance by Agent or any Lender with any request or directive (whether or not having the force of law) from any governmental authority, agency or instrumentality: (a) does or shall subject Agent or any Lender to any tax of any kind whatsoever with respect to this Agreement, the other Loan Documents or any Loans made or Lender Letters of Credit or Risk Participation Agreements issued hereunder, or change the basis of taxation of payments to Agent or such Lender of principal, fees, interest or any other amount payable hereunder (except for net income taxes, or franchise taxes imposed in lieu of net income taxes, imposed generally by federal, state or local taxing authorities with respect to interest or commitment or other fees payable hereunder or changes in the rate of tax on the overall net income of Agent or such Lender); or 15 23 (b) does or shall impose on Agent or any Lender any other condition or increased cost in connection with the transactions contemplated hereby or participations herein; and the result of any of the foregoing is to increase the cost to Agent or any such Lender of issuing any Lender Letter of Credit or Risk Participation Agreement or making or continuing any Loan hereunder, as the case may be, or to reduce any amount receivable hereunder, then, in any such case, Borrower shall promptly pay to Agent or such Lender, upon its demand, any additional amounts necessary to compensate Agent or such Lender, on an after-tax basis, for such additional cost or reduced amount receivable, as determined by Agent or such Lender with respect to this Agreement or the other Loan Documents. If Agent or such Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify Borrower of the event by reason of which Agent or such Lender has become so entitled. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Agent or such Lender to Borrower and Agent shall, absent manifest error, be final, conclusive and binding for all purposes. (C) Foreign Lenders. Each Lender organized under the laws of a jurisdiction outside the United States (a "Foreign Lender") as to which payments to be made under this Agreement or under the Notes are exempt from United States withholding tax or are subject to United States withholding tax at a reduced rate under an applicable statute or tax treaty shall provide to Borrower and Agent (1) a properly completed and executed Internal Revenue Service Form 4224 or Form 1001 or other applicable form, certificate or document prescribed by the Internal Revenue Service of the United States certifying as to such Foreign Lender's entitlement to such exemption or reduced rate of withholding with respect to payments to be made to such Foreign Lender under this Agreement and under the Notes (a "Certificate of Exemption") or (2) a letter from any such Foreign Lender stating that it is not entitled to any such exemption or reduced rate of withholding (a "Letter of Non-Exemption"). Prior to becoming a Lender under this Agreement and within fifteen (15) days after a reasonable written request of Borrower or Agent from time to time thereafter, each Foreign Lender that becomes a Lender under this Agreement shall provide a Certificate of Exemption or a Letter of Non-Exemption to Borrower and Agent. If a Foreign Lender is not entitled to an exemption or reduced rate of withholding with respect to payments to be made to such Foreign Lender under this Agreement or if a Foreign Lender is entitled to an exemption with respect to payments to be made to such Foreign Lender under this Agreement (or to a reduced rate of withholding) and does not provide a Certificate of Exemption to Borrower and Agent within the time periods set forth in the preceding paragraph, Borrower shall withhold taxes from payments to such Foreign Lender at the applicable statutory rates and Borrower shall not be required to pay any additional amounts as a result of such withholding, provided that all such withholding shall cease upon delivery by such Foreign Lender of a Certificate of Exemption to Borrower and Agent. 16 24 1.10 Optional Prepayment/Replacement of Lender in Respect of Increased Costs. Within fifteen (15) days after receipt by Borrower of written notice and demand from any Lender (an "Affected Lender") for payment of additional costs as provided in subsection 1.8, Borrower may, at its option, notify Agent and such Affected Lender of its intention to do one of the following: (A) Borrower may obtain, at Borrower's expense, a replacement Lender ("Replacement Lender") for such Affected Lender, which Replacement Lender shall be reasonably satisfactory to Agent. In the event Borrower obtains a Replacement Lender within ninety (90) days following notice of its intention to do so, the Affected Lender shall sell and assign its Loans and its obligations under the Revolving Loan Commitment to such Replacement Lender, provided that Borrower has reimbursed such Affected Lender for its increased costs for which it is entitled to reimbursement under this Agreement through the date of such sale and assignment; or (B) Borrower may prepay in full all outstanding Obligations owed to such Affected Lender and terminate such Affected Lender's Pro Rata Share of the Revolving Loan Commitment, in which case the Revolving Loan Commitment will be reduced by the amount of such Pro Rata Share. Borrower shall, within ninety (90) days following notice of its intention to do so, prepay in full all outstanding Obligations owed to such Affected Lender (including such Affected Lender's increased costs for which it is entitled to reimbursement under this Agreement through the date of such prepayment), and terminate such Affected Lender's obligations under the Revolving Loan Commitment. SECTION 2 AFFIRMATIVE COVENANTS Borrower covenants and agrees that so long as the Revolving Loan Commitment is in effect and until payment in full of all Obligations and termination of all Lender Letters of Credit and Risk Participation Agreements, unless Requisite Lenders shall otherwise give their prior written consent, Borrower shall perform and comply with, and shall cause each of the other Loan Parties to perform and comply with, all covenants in this Section 2 applicable to such Person. 2.1 Compliance With Laws. Borrower will (a) comply with and will cause each of its Subsidiaries to comply with (i) the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including, without limitation, laws, rules, regulations and orders relating to taxes, employer and employee contributions, securities, employee retirement and welfare benefits, environmental protection matters and employee health and safety) as now in effect and which may be imposed in the future in all jurisdictions in which Borrower or its Subsidiaries are now doing business or may hereafter be doing business, and (ii) the obligations, covenants, and conditions contained in any Contractual Obligation of Borrower and/or such Subsidiary, other than those laws, rules, regulations, orders and Contractual Obligations the noncompliance with which could not be reasonably expected to have, either individually or in the 17 25 aggregate, a Material Adverse Effect, and (b) maintain or obtain and will cause each of its Subsidiaries to maintain or obtain, all licenses, qualifications and permits now held or hereafter required to be held by Borrower and its Subsidiaries, for which the loss, suspension, revocation or failure to obtain or renew, could have a Material Adverse Effect. This subsection 2.1 shall not preclude the Borrower or any Subsidiary from contesting any taxes, fees, assessments, charges, levies or other payments, if they are being diligently contested in good faith and if appropriate expense provisions have been recorded in conformity with GAAP. Borrower represents and warrants that as of the date hereof, it (i) is in compliance and each of its Subsidiaries is in compliance with the requirements of all applicable laws, rules, regulations and orders of any governmental authority as now in effect, and all Contractual Obligations, and (ii) maintains and each of its Subsidiaries maintains all licenses, qualifications and permits referred to above, except in each case as could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. "Contractual Obligations", as applied to any Person, means any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject including, without limitation, the Related Transactions Documents. 2.2 Maintenance of Properties; Insurance. Borrower will maintain or cause to be maintained in good repair, working order and condition all material properties used in the business of Borrower and its Subsidiaries and will make or cause to be made all appropriate repairs, renewals and replacements thereof. Borrower will maintain or cause to be maintained, with financially sound and reputable insurers, public liability and property damage insurance with respect to its business and properties and the business and properties of its Subsidiaries against loss or damage of the kinds customarily carried or maintained by corporations of established reputation engaged in similar businesses and in amounts acceptable to Agent and will deliver evidence thereof to Agent. Borrower will maintain business interruption insurance in an amount not less than $30,000,000. Borrower shall cause, pursuant to endorsements and assignments and assignments in form and substance reasonably satisfactory to Agent, Agent, for the benefit of Agent and Lenders, to be named as lender's loss payee in the case of casualty insurance, Agent for the benefit of Agent and Lenders, to be named as additional insured in the case of all liability insurance and Agent, for the benefit of Agent and Lenders, to be named as assignee in the case of all business interruption insurance. Borrower represents and warrants that it and each of its Subsidiaries currently maintains all material properties as set forth above and maintains all insurance described above. 2.3 Inspection; Lender Meeting. Borrower shall permit any authorized representatives of Agent to visit and inspect any of the properties of Borrower or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and business with its and their officers and certified public accountants, at such reasonable times during normal business hours and as often as may be reasonably requested. Representatives of each Lender will be permitted to accompany representatives of Agent during each visit, inspection and discussion 18 26 referred to in the immediately preceding sentence. Without in any way limiting the foregoing, Borrower will participate and will cause its key management personnel to participate in a meeting with Agent and Lenders at least once during each year, which meeting shall be held at such time and such place as may be reasonably requested by Agent. 2.4 Corporate Existence, Etc. Except as otherwise permitted by subsection 3.6, Borrower will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business. 2.5 Further Assurances. (A) Borrower shall and shall cause each Loan Party to, from time to time, execute such guaranties, financing statements, documents, security agreements and reports as Agent or Requisite Lenders at any time may reasonably request to evidence, perfect or otherwise implement the guaranties and security for repayment of the Obligations contemplated by the Loan Documents. (B) At Agent's or Requisite Lenders' request, Borrower shall cause any Subsidiaries of Borrower promptly to guaranty the Obligations and to grant to Agent, for the benefit of Agent and Lenders, a security interest in the real, personal and mixed property of such Subsidiary to secure the Obligations. The documentation for such guaranty or security shall be substantially similar to the Loan Documents executed concurrently herewith with such modifications as are reasonably requested by Agent. SECTION 3 NEGATIVE COVENANTS Borrower covenants and agrees that so long as the Revolving Loan Commitment is in effect and until payment in full of all Obligations and termination of all Lender Letters of Credit and Risk Participation Agreements, unless Requisite Lenders shall otherwise give their prior written consent, Borrower shall perform and comply with, and shall cause each of the other Loan Parties to perform and comply with, all covenants in this Section 3 applicable to such Person. 3.1 Indebtedness. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable with respect to any Indebtedness except: (A) the Obligations; (B) intercompany Indebtedness among Borrower, its Subsidiaries or Holdings; provided that the obligations of each obligor of such Indebtedness shall: (1) be subordinated in right of payment to the Obligations from and after such time as any portion of the Obligations shall become due and payable (whether at stated maturity, by acceleration or otherwise); (2) be 19 27 evidenced by promissory notes, which shall have been pledged to Agent, for the benefit of Agent and Lenders, as security for the Obligations; and (3) have such other terms and provisions as Agent or Requisite Lenders may reasonably require; and (C) Indebtedness not to exceed $2,000,000 in the aggregate at any time outstanding secured by purchase money Liens or incurred with respect to capital leases. 3.2 Liens and Related Matters. (A) No Liens. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create, incur, assume or permit to exist any Lien on or with respect to any property or asset (including any document or instrument with respect to goods or accounts receivable) of Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, except Permitted Encumbrances. "Permitted Encumbrances" means the following: (1) Liens for taxes, assessments or other governmental charges not yet due and payable; (2) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens imposed by law, which are incurred in the ordinary course of business for sums not more than thirty (30) days delinquent or which are being contested in good faith; provided that a reserve or other appropriate provision shall have been made therefor and the aggregate amount of liabilities secured by such Liens is less than $100,000; (3) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974 or any rule or regulation promulgated thereunder) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety, stay, customs and appeal bonds, bids, leases, government contracts, trade contracts, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (4) deposits, in an aggregate amount not to exceed $50,000, made in the ordinary course of business to secure liability to insurance carriers, excluding the Lender Letters of Credit and the letters of credit issued under the Risk Participation Agreements; (5) Liens for purchase money obligations; provided that: (a) the purchase of the asset subject to any such Lien is permitted under subsection 4.1; (b) the Indebtedness secured by any such Lien is permitted under subsection 3.1; and (c) any such Lien encumbers only the asset so purchased; (6) any attachment or judgment Lien not constituting an Event of Default under subsection 6.1(I); 20 28 (7) easements, rights of way, restrictions, and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of Borrower or any of its Subsidiaries; (8) any interest or title of a lessor or sublessor under any lease permitted by subsection 4.2; (9) Liens in favor of Agent, for the benefit of Agent and Lenders; (10) Liens existing on the date hereof and renewals and extensions thereof, which Liens are set forth on Schedule 3.2(A)(10) hereto; (11) Liens existing on any fixed assets acquired by Borrower or its Subsidiaries at the time of its acquisition; provided that the acquisition is a Permitted Acquisition hereunder and the Lien is confined solely to the fixed assets so acquired; and (12) Liens on fixed assets of corporations which become subsidiaries of Borrower after the date hereof; provided that such corporations become subsidiaries of Borrower under a Permitted Acquisition hereunder and such Liens existed at the time the respective corporations became Subsidiaries of Borrower and were not created in anticipation thereof. (B) No Negative Pledges. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to enter into or assume any agreement (other than the Loan Documents) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired. (C) No Restrictions on Subsidiary Distributions to Borrower. Except as provided herein, Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to: (1) pay dividends or make any other distribution on any of such Subsidiary's capital stock owned by Borrower or any Subsidiary of Borrower; (2) subject to subordination provisions for the benefit of Agent and Lenders, pay any Indebtedness owed to Borrower or any other Subsidiary; (3) make loans or advances to Borrower or any other Subsidiary; or (4) transfer any of its property or assets to Borrower or any other Subsidiary. 3.3 Investments; Joint Ventures. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to make or own any Investment in any Person except: (A) Borrower and its Subsidiaries may make and own Investments in Cash Equivalents; provided that such Cash Equivalents are not subject to setoff rights; 21 29 (B) Borrower and its Subsidiaries may make intercompany loans to the extent permitted under subsection 3.1; (C) Borrower and its Subsidiaries may make loans and advances to employees for moving, entertainment, travel and other similar expenses in the ordinary course of business not to exceed $100,000 in the aggregate at any time outstanding; (D) Borrower or a Subsidiary may make Investments of up to $750,000 in the aggregate in a United States corporation, limited liability company or limited liability partnership, for the purposes of a joint venture with Mexican investors for the purchase and sale of wheelbarrows. (E) Permitted Acquisitions. "Investment" means (i) any direct or indirect purchase or other acquisition by Borrower or any of its Subsidiaries of any beneficial interest in, including stock, partnership interest or other equity securities of, any other Person; and (ii) any direct or indirect loan (including the purchase of Indebtedness), advance or capital contribution by Borrower or any of its Subsidiaries to any other Person, including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "Cash Equivalents" means: (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year from the date of acquisition thereof; (ii) commercial paper maturing no more than one (1) year from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; (iii) certificates of deposit or bankers' acceptances maturing within one (1) year from the date of issuance thereof issued by, or overnight reverse repurchase agreements from, any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $500,000,000; (iv) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks having membership in the Federal Deposit Insurance Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of Borrower's deposits at such institution; and (v) deposits or investments in mutual or similar funds offered or sponsored by brokerage or other companies having membership in the Securities Investor Protection Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of Borrower's deposits at such institution. "Permitted Acquisitions" shall mean acquisitions by Borrower or any of its Subsidiaries of the stock or assets of any Person engaged in a business that is the same or similar to the 22 30 business of Borrower as of the Closing Date in a negotiated transaction; provided that such acquisition either is funded by an Acquisition Loan made pursuant to subsection 1.1(D) or is consented to in writing by the Requisite Lenders. 3.4 Contingent Obligations. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to create or become or be liable with respect to any Contingent Obligation except those: (A) resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (B) existing on the Closing Date and described in Schedule 3.4 annexed hereto; (C) arising under indemnity agreements to title insurers to cause such title insurers to issue to Agent mortgagee title insurance policies; (D) arising with respect to customary indemnification obligations incurred in connection with Asset Dispositions; (E) incurred in the ordinary course of business with respect to surety and appeal bonds, performance and return-of-money bonds and other similar obligations not exceeding at any time outstanding $25,000 in aggregate liability; (F) incurred with respect to Indebtedness permitted by subsection 3.1; and (G) not permitted by clauses (A) through (F) above, so long as any such Contingent Obligations, in the aggregate at any time outstanding, do not exceed $25,000. "Contingent Obligation", as applied to any Person, means any direct or indirect liability of that Person: (i) with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings; or (iii) under any foreign exchange contract, currency swap agreement, interest rate swap agreement or other similar agreement or arrangement designed to alter the risks of that Person arising from fluctuations in currency values or interest rates. Contingent Obligations shall also include (a) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement, and (c) any liability 23 31 of such Person for the obligations of another through any agreement to purchase, repurchase or otherwise acquire such obligation or any property constituting security therefor, to provide funds for the payment or discharge of such obligation or to maintain the solvency, financial condition or any balance sheet item or level of income of another. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if not a fixed and determined amount, the maximum amount so guaranteed. 3.5 Restricted Junior Payments. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to declare, order, pay, make or set apart any sum for any Restricted Junior Payment, except that if after giving effect thereto no Default or Event of Default would exist, Borrower may make the following Restricted Junior Payments (without duplication): (A) Borrower may make payments and distributions to Holdings to permit Holdings to pay federal and state income taxes then due and owing, franchise taxes and other similar licensing expenses incurred in the ordinary course of business; provided that Borrower's aggregate contribution to taxes as a result of the filing of a consolidated return by Holdings shall not be greater, nor the aggregate receipt of tax benefits less, than they would have been had Borrower not filed a consolidated return with Holdings; (B) Wholly-owned Subsidiaries of Borrower may make Restricted Junior Payments with respect to their common stock; (C) Borrower may make payments and distributions to Holdings for corporate expenditures in cash of up to a maximum aggregate amount of $1,500,000 per fiscal year; (D) Borrower may make payments and distributions to Holdings to enable Holdings to make payments on the Subordinated Indebtedness of Holdings provided that such payments by Holdings are permitted pursuant to that certain Subordination and Intercreditor Agreement of even date herewith among Agent, Holdings and the holders of such Subordinated Indebtedness; (E) Borrower may make payments and distributions to the extent provided in subsection 1.5(D); and (F) Borrower may make payments and distributions to Holdings to cover those non-operating expenses of Holdings set forth on Schedule 3.16. "Restricted Junior Payment" means: (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (ii) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding; (iii) any 24 32 payment or prepayment of interest on, principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Indebtedness; and (iv) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Borrower or any of its Subsidiaries now or hereafter outstanding. 3.6 Restriction on Fundamental Changes. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to: (a) amend, modify or waive any term or provision of its articles of incorporation, certificates of designations pertaining to preferred stock or by-laws unless required by law; (b) enter into any transaction of merger or consolidation except any Subsidiary of Borrower may be merged with or into Borrower (provided that Borrower is the surviving entity) or any other Subsidiary of Borrower; (c) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); or (d) acquire by purchase or otherwise all or any substantial part of the business or assets of any other Person, except for any Permitted Acquisition. 3.7 Disposal of Assets or Subsidiary Stock. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to: convey, sell, lease, sublease, transfer or otherwise dispose of, or grant any Person an option to acquire, in one transaction or a series of transactions, any of its property, business or assets, or the capital stock of or other equity interests in any of its Subsidiaries, whether now owned or hereafter acquired, except for (a) bona fide sales of inventory to customers for fair value in the ordinary course of business and dispositions of obsolete equipment not used or useful in the business and (b) Asset Dispositions if all of the following conditions are met: (i) the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $250,000 and the aggregate market value of assets sold or otherwise disposed of in any fiscal year of Borrower does not exceed $500,000; (ii) the consideration received is at least equal to the fair market value of such assets; (iii) the sole consideration received is cash; (iv) the Net Proceeds of such Asset Disposition are applied as required by subsection 1.5(C); (v) after giving effect to the sale or other disposition of the assets included within the Asset Disposition and the repayment of Indebtedness with the proceeds thereof, Borrower is in compliance on a pro forma basis with the covenants set forth in Section 4 recomputed for the most recently ended month for which information is available and is in compliance with all other terms and conditions contained in this Agreement; and (vi) no Default or Event of Default then exists or shall result from such sale or other disposition. 3.8 Transactions with Affiliates. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate or with any director, officer or employee of any Loan Party, except (a) as set forth on Schedule 3.8 or (b) transactions in the ordinary course of and pursuant to the reasonable requirements of the business of Borrower or any of its Subsidiaries and upon fair and reasonable terms which are fully disclosed to Agent and are no less favorable to Borrower or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person that is 25 33 not an Affiliate. Notwithstanding the foregoing, upon the election of Agent no payments may be made with respect to any items set forth on Schedule 3.8 upon the occurrence and during the continuation of a Default or Event of Default. 3.9 Management Fees and Compensation. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to pay any management, consulting or similar fees to any Affiliate or to any director, officer or employee of any Loan Party. 3.10 Conduct of Business. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to engage in any business other than businesses of the type described on Schedule 3.10. 3.11 Changes Relating to Subordinated Indebtedness. Borrower will not and will not permit any of its Subsidiaries or Holdings directly or indirectly to change or amend the terms of any Subordinated Indebtedness if the effect of such amendment is to: (a) increase the interest rate on such Indebtedness; (b) change the dates upon which payments of principal or interest are due on such Indebtedness; (c) change any event of default or add or change any covenant with respect to such Indebtedness; (d) change the prepayment provisions of such Indebtedness; (e) change the subordination provisions thereof (or the subordination terms of any guaranty thereof); or (f) change or amend any other term if such change or amendment would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner adverse to Borrower, any of its Subsidiaries, Holdings or Lenders. 3.12 Fiscal Year. Neither Borrower nor any Subsidiary of Borrower shall change its fiscal year. 3.13 Press Release; Public Offering Materials. Borrower will not and will not permit any of its Subsidiaries to disclose the name of Agent or any Lender in any press release or in any prospectus, proxy statement or other materials filed with any governmental entity relating to a public offering of the capital stock of any Loan Party, except as required by applicable law. 3.14 Subsidiaries. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to establish, create or acquire any new Subsidiary, except for Permitted Acquisitions. 3.15 Bank Accounts. Borrower will not and will not permit any of its Subsidiaries to establish any new bank accounts without prior written notice to Agent and unless Agent and the bank at which the account is to be opened enter into a bank agency agreement in form and substance satisfactory to Agent. 3.16 Non-Operating Expenditures. Borrower will not make any expenditures that are not related to its current or future business operations, except as described on Schedule 3.16. SECTION 4 26 34 FINANCIAL COVENANTS/REPORTING Borrower covenants and agrees that so long as the Revolving Loan Commitment or the Acquisition Loan Commitment is in effect, and until payment in full of all Obligations and termination of all Lender Letters of Credit and Risk Participation Agreements, unless Requisite Lenders shall otherwise give their prior written consent, Borrower shall perform and comply with, and shall cause each of the other Loan Parties to perform and comply with, all covenants in this Section 4 applicable to such Person. 4.1 Capital Expenditure Limits. The aggregate amount of all Capital Expenditures of Borrower and its Subsidiaries will not exceed $3,500,000 (the "Capex Limit") in any fiscal year of Borrower. Notwithstanding the foregoing, in the event Borrower and its Subsidiaries do not expend the entire Capex Limit permitted in any fiscal year, Borrower and its Subsidiaries may carry forward to the immediately succeeding fiscal year 50% of the unutilized portion of the Capex Limit. All Capital Expenditures made by Borrower and its Subsidiaries shall first be applied to reduce the applicable Capex Limit and then to reduce the carry forward from the previous fiscal year, if any. "Capital Expenditures" will be calculated as illustrated on Exhibit 4.10(C). 4.2 Lease Limits. Borrower will not and will not permit any of its Subsidiaries directly or indirectly to become or remain liable in any way, whether directly or by assignment or as a guarantor or other surety, for the obligations of the lessee under any operating lease (other than intercompany leases between Borrower and its Subsidiaries), if the aggregate amount of all rents paid by Borrower and its Subsidiaries under all such leases would exceed $3,000,000 in any fiscal year of Borrower. 4.3 EBIDAT. (a) Borrower shall not permit EBIDAT for any of the periods set forth below to be less than the amount set forth for such period.
Period Amount ------ ------ January 1, 1997 through April 30, 1997 $ 7,000,000 January 1, 1997 through July 31, 1997 $ 9,100,000 January 1, 1997 through October 31, 1997 $10,200,000
(b) Borrower shall not permit EBIDAT for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period.
Date/ Period Amount ------ ------
27 35
January 31, 1998 $11,100,000 April 30, 1998 $12,500,000 July 31, 1998 $13,200,000 October 31, 1998 $13,500,000 January 31, 1999 $14,000,000 April 30, 1999 $15,100,000 On or after July 31, 1999 $15,600,000
"EBIDAT" will be calculated as illustrated on Exhibit 4.10(C). 4.4 Fixed Charge Coverage. (a) Borrower shall not permit Fixed Charge Coverage for any of the periods set forth below to be less than the amount set forth below for such period.
Period Amount ------ ------ January 1, 1997 through April 30, 1997 1.1:1 January 1, 1997 through July 31, 1997 1.1:1 January 1, 1997 through October 31, 1997 1.1:1
(b) Borrower shall not permit Fixed Charge Coverage for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period.
Date/ Period Amount ------ ------ January 31, 1998 1.1:1 April 30, 1998 1.1:1 On or after July 31, 1998 1.2:1
"Fixed Charge Coverage" will be calculated as illustrated on Exhibit 4.10(C). 4.5 Total Interest Coverage. (a) Borrower shall not permit Total Interest Coverage for any of the periods set forth to be less than the amount set forth below for such period.
Period Amount ------ ------ January 1, 1997 through April 30, 1997 6.2:1 January 1, 1997 through July 31, 1997 4.7:1 January 1, 1997 through October 31, 1997 4.2:1
28 36 (b) Borrower shall not permit Total Interest Coverage for the twelve (12) month period ending on the last day of any fiscal quarter ending on the dates or during the periods set forth below to be less than the amount set forth below for such date or period.
Date/ Period Amount ------ ------ January 31, 1998 3.4:1 April 30, 1998 3.8:1 July 31, 1998 4.0:1 October 31, 1998 4.2:1 January 31, 1999 4.4:1 April 30, 1999 4.9:1 On or after July 31, 1999 5.2:1
"Total Interest Coverage" will be calculated as illustrated on Exhibit 4.10(C). 4.6 Total Indebtedness to Operating Cash Flow Ratio. (a) Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of any of the periods set forth below to Operating Cash Flow for such period to be greater than the amount set forth below for such period.
Period Amount ------ ------ January 1, 1997 through April 30, 1997 5.7:1 January 1, 1997 through July 31, 1997 3.4:1 January 1, 1997 through October 31, 1997 3.0:1
(b) Borrower shall not permit the ratio of Total Indebtedness calculated as of the last day of any fiscal quarter ending on the dates or during the periods set forth below to Operating Cash Flow for the twelve (12) month period ending on such day to be greater than the amount set forth below for such date or period.
Date/ Period Amount ------ ------ January 31, 1998 4.0:1 April 30, 1998 3.8:1 July 31, 1998 2.7:1 October 31, 1998 2.3:1 January 31, 1999 3.0:1 April 30, 1999 3.0:1
29 37
On or after July 31, 1999 2.0:1
"Total Indebtedness" and "Operating Cash Flow" will be calculated as illustrated on Exhibit 4.10(C). 4.7 [Intentionally Deleted.] 4.8 [Intentionally Deleted.] 4.9 [Intentionally Deleted.] 4.10 Financial Statements and Other Reports. Borrower will maintain, and cause each of its Subsidiaries and Holdings to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP (it being understood that monthly financial statements are not required to have footnote disclosures and are subject to changes resulting from normal year-end adjustments). Borrower will deliver each of the financial statements and other reports described below to Agent (and each Lender in the case of the financial statements and other reports described in subsections (A), (B), (C), (G), (I) and (K)). (A) Monthly Financials. As soon as available and in any event within thirty (30) days after the end of each month, Borrower will deliver (1) the consolidated and consolidating balance sheets of Holdings, Borrower and their Subsidiaries, as at the end of such month, and the related consolidated and consolidating statements of income, stockholders' equity and cash flow for such month and for the period from the beginning of the then current fiscal year of Borrower to the end of such month and (2) a schedule of the outstanding Indebtedness for borrowed money of Holdings, Borrower and their Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan. (B) Year-End Financials. As soon as available and in any event on or before the fifteenth (15th) day of the November following the end of each fiscal year of Borrower, Borrower will deliver (1) the consolidated and consolidating balance sheets of Holdings, Borrower and their Subsidiaries, as at the end of such year, and the related consolidated and consolidating statements of income, stockholders' equity and cash flow for such fiscal year, (2) a schedule of the outstanding Indebtedness for borrowed money of Holdings, Borrower and their Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan and (3) a report with respect to the financial statements from a firm of Certified Public Accountants selected by Borrower and reasonably acceptable to Agent, which report shall be prepared in accordance with Statement of Auditing Standards No. 58 (the "Statement") entitled "Reports on Audited Financial Statements" and such report shall be "Unqualified" (as such term is defined in such Statement). 30 38 (C) Borrower Compliance Certificate. Together with each delivery of financial statements of Holdings, Borrower and their Subsidiaries pursuant to subsections 4.10(A) and 4.10(B) above for periods ending on the last day of any fiscal quarter or fiscal year, Borrower will deliver a fully and properly completed Compliance Certificate (in substantially the same form as Exhibit 4.10(C)) signed by Borrower's chief executive officer or chief financial officer. (D) Accountants' Reliance Letter. Together with each delivery of consolidated financial statements of Borrower pursuant to subsection 4.10(B), Borrower will deliver a copy of a letter addressed to Borrower's certified public accountants informing such accountants that a primary intent of Borrower was for the professional services such accountants provided to Borrower in preparing their audit report was to benefit or influence Lenders and their successors or assigns, and identifying Lenders as parties that Borrower has indicated intend to rely on such professional services provided to Borrower by such accountants. (E) Accountants' Reports. Promptly upon receipt thereof, Borrower will deliver copies of all significant reports submitted by Borrower's firm of certified public accountants in connection with each annual, interim or special audit or review of any type of the financial statements or related internal control systems of Borrower made by such accountants, including any comment letter submitted by such accountants to management in connection with their services. (F) Borrowing Base Certificate. As soon as available and in any event within thirty (30) days after the end of each month, and from time to time upon the request of Agent, Borrower will deliver a Borrowing Base Certificate (in substantially the same form as Exhibit 4.10(F)) as at the last day of such period. (G) Management Report. Together with each delivery of financial statements of Borrower pursuant to subsections 4.10(A) and 4.10(B), Borrower will deliver a management report (1) describing the operations and financial condition of Holdings, Borrower and their Subsidiaries for the month then ended and the portion of the current fiscal year then elapsed (or for the fiscal year then ended in the case of year-end financials), (2) setting forth in comparative form the corresponding figures for the corresponding periods of the previous fiscal year and the corresponding figures from the most recent Projections for the current fiscal year delivered pursuant to subsection 4.10(J) and (3) discussing the reasons for any significant variations. The information above shall be presented in reasonable detail and shall be certified by the chief financial officer of Borrower to the effect that such information fairly presents the results of operations and financial condition of Holdings, Borrower and their Subsidiaries as at the dates and for the periods indicated, subject to normal year-end adjustments. (H) Collateral Value Report. Upon the request of Agent, which may be made not more than once each year prior to an Event of Default and at any time (but not more often than quarterly) while and so long as an Event of Default shall be continuing, Borrower will obtain and deliver to Agent a report of an independent collateral auditor satisfactory to Agent 31 39 (which may be, or be affiliated with, a Lender) with respect to the accounts and inventory components included in the Borrowing Base, which report shall indicate whether or not the information set forth in the Borrowing Base Certificate most recently delivered is accurate and complete in all material respects based upon a review by such auditors of the accounts (including verification with respect to the amount, aging, identity and credit of the respective account debtors and the billing practices of Borrower) and inventory (including verification as to the value, location and respective types). (I) Appraisals. From time to time, if Agent or any Lender determines that obtaining appraisals is necessary in order for Agent or such Lender to comply with applicable laws or regulations, Agent will, at Borrower's expense, obtain appraisal reports in form and substance and from appraisers satisfactory to Agent stating the then current fair market values of all or any portion of the real estate owned by Borrower or any of its Subsidiaries. In addition to the foregoing, from time to time, but in the absence of a Default or Event of Default not more than once during each calendar year, Agent may require Borrower to obtain and deliver to Agent appraisal reports in form and substance and from appraisers satisfactory to Agent stating the then current market values of all or any portion of the real estate and personal property owned by Borrower or any of its Subsidiaries. (J) Projections. As soon as available and in any event no later than September 30th of each of Borrower's fiscal years, Borrower will deliver Projections of Borrower and its Subsidiaries for the then current fiscal year and the forthcoming two (2) fiscal years, year by year, and for the then current fiscal year, month by month. (K) SEC Filings and Press Releases. Promptly upon their becoming available, Borrower will deliver copies of (1) all financial statements, reports, notices and proxy statements sent or made available by Holdings, Borrower or any of their respective Subsidiaries to their security holders, (2) all regular and periodic reports and all registration statements and prospectuses, if any, filed by Holdings, Borrower or any of their respective Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (3) all press releases and other statements made available by Holdings, Borrower or any of their respective Subsidiaries to the public concerning developments in the business of any such Person. (L) Events of Default, Etc. Promptly upon any officer of Borrower obtaining knowledge of any of the following events or conditions, Borrower shall deliver copies of all notices given or received by Borrower or Holdings with respect to any such event or condition and a certificate of Borrower's chief executive officer specifying the nature and period of existence of such event or condition and what action Borrower has taken, is taking and proposes to take with respect thereto: (1) any condition or event that constitutes an Event of Default or Default; (2) any notice that any Person has given to Borrower or any of its Subsidiaries or any other action taken with respect to a claimed default or event or condition of the type referred to in subsection 6.1(B); or (3) any event or condition that could reasonably be expected to result in any Material Adverse Effect. 32 40 (M) Litigation. Promptly upon any officer of Borrower obtaining knowledge of (1) the institution of any action, suit, proceeding, governmental investigation or arbitration against or affecting any Loan Party or any property of any Loan Party not previously disclosed by Borrower to Agent or (2) any material development in any action, suit, proceeding, governmental investigation or arbitration at any time pending against or affecting any Loan Party or any property of any Loan Party which, in each case, could reasonably be expected to have a Material Adverse Effect, Borrower will promptly give notice thereof to Agent and provide such other information as may be reasonably available to them to enable Agent and its counsel to evaluate such matter. (N) Supplemented Schedules; Notice of Corporate Changes. Annually, concurrently with Borrower's delivery of the Projections required by subsection 4.10(J), Borrower shall supplement in writing and deliver revisions of the Schedules annexed to this Agreement to the extent necessary to disclose new or changed facts or circumstances after the Closing Date; provided that subsequent disclosures shall not constitute a cure or waiver of any Default or Event of Default resulting from the matters disclosed. Borrower shall provide prompt written notice of (1) all jurisdictions in which a Loan Party becomes qualified after the Closing Date to transact business, (2) any material change after the Closing Date in the authorized and issued capital stock or other equity interests of any Loan Party or any of their respective Subsidiaries or any other material amendment to their charter, by-laws or other organization documents and (3) any Subsidiary created or acquired by any Loan Party after the Closing Date, such notice, in each case, to identify the applicable jurisdictions, capital structures or Subsidiaries, as applicable. (O) Other Information. With reasonable promptness, Borrower will deliver such other information and data with respect to any Loan Party or any Subsidiary of any Loan Party as from time to time may be reasonably requested by Agent. 4.11 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP. Financial statements and other information furnished to Agent pursuant to subsection 4.10 shall be prepared in accordance with GAAP as in effect at the time of such preparation. No "Accounting Changes" (as defined below) shall affect financial covenants, standards or terms in this Agreement; provided that Borrower shall prepare footnotes to each Compliance Certificate and the financial statements required to be delivered hereunder that show the differences between the financial statements delivered (which reflect such Accounting Changes) and the basis for calculating financial covenant compliance (without reflecting such Accounting Changes). "Accounting Changes" means: (a) changes in accounting principles required by GAAP and implemented by Borrower; (b) changes in accounting principles recommended by Borrower's certified public accountants and implemented by Borrower; and (c) changes in carrying value of Borrower's or any of its Subsidiaries' assets, liabilities or equity accounts resulting from (i) the application of purchase accounting principles (A.P.B. 16 and/or 17 and EITF 88-16 and FASB 109) or (ii) as 33 41 the result of any other adjustments that, in each case, were applicable to, but not included in, the Pro Forma. All such adjustments resulting from expenditures made subsequent to the Closing Date (including, but not limited to, capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made. SECTION 5 REPRESENTATIONS AND WARRANTIES In order to induce Agent and Lenders to enter into this Agreement, to make Loans and to issue Lender Letters of Credit and Risk Participation Agreements, Borrower represents and warrants to Agent and each Lender that the following statements are and, after giving effect to the Related Transactions, will be true, correct and complete: 5.1 Disclosure. No representation or warranty of any Loan Party contained in this Agreement, the financial statements referred to in subsection 5.5, the other Related Transactions Documents or any other document, certificate or written statement furnished to Agent or any Lender by or on behalf of any such Person for use in connection with the Loan Documents or the Related Transactions Documents contains any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. 5.2 No Material Adverse Effect. Since August 2, 1996, there have been no events or changes in facts or circumstances affecting any Loan Party which individually or in the aggregate have had or could reasonably be expected to have a Material Adverse Effect and that have not been disclosed herein or in the attached Schedules. 5.3 No Default. The consummation of the Related Transactions does not and will not violate, conflict with, result in a breach of, or constitute a default (with due notice or lapse of time or both) under any contract of any Loan Party except if such violations, conflicts, breaches or defaults have either been waived on or before the Closing Date and are disclosed on Schedule 5.3 or could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. 5.4 Organization, Powers, Capitalization and Good Standing. (A) Organization and Powers. Each of the Loan Parties is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation (which jurisdiction is set forth on Schedule 5.4(A)). Each of the Loan Parties has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into each Related Transactions Document to which it is a party and to carry out the Related Transactions. 34 42 (B) Capitalization. The authorized capital stock of each of the Loan Parties is as set forth on Schedule 5.4(B). All issued and outstanding shares of capital stock of each of the Loan Parties are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than those in favor of Agent, for the benefit of Agent and Lenders, and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The capital stock of each of the Loan Parties is owned by the stockholders and in the amounts set forth on Schedule 5.4(B). No shares of the capital stock of any Loan Party, other than those described above, are issued and outstanding. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Loan Party, of any shares of capital stock or other securities of any such entity, except as disclosed in Schedule 5.4(B). (C) Binding Obligation. This Agreement is, and the other Related Transactions Documents when executed and delivered will be, the legally valid and binding obligations of the applicable parties thereto, each enforceable against each of such parties, as applicable, in accordance with their respective terms. (D) Qualification. Each of the Loan Parties is duly qualified and in good standing wherever necessary to carry on its business and operations, except in jurisdictions in which the failure to be qualified and in good standing could not reasonably be expected to have a Material Adverse Effect. All jurisdictions in which each Loan Party is qualified to do business are set forth on Schedule 5.4(D). 5.5 Financial Statements. All financial statements concerning Holdings, Borrower and their respective Subsidiaries which have been or will hereafter be furnished to Agent pursuant to this Agreement, including those listed below, have been or will be prepared in accordance with GAAP consistently applied (except as disclosed therein) and do or will present fairly the financial condition of the corporations covered thereby as at the dates thereof and the results of their operations for the periods then ended, subject to normal year-end adjustments. (A) The consolidated balance sheets at August 2, 1996 and the related statement of income of Borrower and its Subsidiaries, for the fiscal year then ended, certified by Ernst & Young LLP. (B) The consolidated balance sheet at December 6, 1996 and the related statement of income of Borrower and its Subsidiaries for the four (4) months then ended. 5.6 Intellectual Property. Borrower and each of its Subsidiaries owns, is licensed to use or otherwise has the right to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of its business as currently conducted that are material to the condition (financial or other), business or operations of Borrower or its Subsidiaries (collectively called "Intellectual Property") and all such Intellectual Property is identified on Schedule 5.6 and fully protected and/or duly and properly registered, filed or issued in the appropriate office and jurisdictions for such registrations, filings 35 43 or issuances. Except as disclosed in Schedule 5.6, the use of such Intellectual Property by Borrower and its Subsidiaries does not and has not been alleged by any Person to infringe on the rights of any Person. 5.7 Investigations, Audits, Etc. Except as set forth on Schedule 5.7, none of Holdings, Borrower or any of their respective Subsidiaries, is the subject of any review or audit by the Internal Revenue Service or any governmental investigation concerning the violation or possible violation of any law. 5.8 Employee Matters. Except as set forth on Schedule 5.8, (a) no Loan Party nor any of their respective employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any Loan Party and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any Loan Party and (c) there are no strikes, slowdowns, work stoppages or controversies pending or, to the best knowledge of Borrower after due inquiry, threatened between any Loan Party and its respective employees, other than employee grievances arising in the ordinary course of business which could not reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 5.8, neither Borrower nor any of its Subsidiaries is party to an employment contract. 5.9 Solvency. Borrower: (a) owns and will own assets the fair saleable value of which are (i) greater than the total amount of liabilities (including contingent liabilities) of Borrower and (ii) greater than the amount that will be required to pay the probable liabilities of Borrower's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to Borrower; (b) has capital that is not unreasonably small in relation to its business as presently conducted or after giving effect to any contemplated trans action; and (c) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due. SECTION 6 DEFAULT, RIGHTS AND REMEDIES 6.1 Event of Default. "Event of Default" shall mean the occurrence or existence of any one or more of the following: (A) Payment. Failure to pay any installment of principal of any Loan when due, or to repay Revolving Loans to reduce their balance to the Maximum Revolving Loan Balance or to reimburse Agent for any payment made by Agent under or in respect of any Lender Letters of Credit or Risk Participation Agreements when due or failure to pay, within five (5) days after the due date, any interest on any Loan or any other amount due under this Agreement or any of the other Loan Documents; or 36 44 (B) Default in Other Agreements. (1) Failure of Holdings, Borrower or any of its Subsidiaries to pay when due or within any applicable grace period any principal or interest on Indebtedness (other than the Loans) or any Contingent Obligations or (2) breach or default of Holdings, Borrower or any of its Subsidiaries with respect to any Indebtedness (other than the Loans) or any Contingent Obligations, if the effect of such breach or default is to cause or to permit the holder or holders then to cause, Indebtedness and/or Contingent Obligations having an individual principal amount in excess of $250,000 or having an aggregate principal amount in excess of $500,000 to become or be declared due prior to their stated maturity; or (C) Breach of Certain Provisions. Failure of Borrower to perform or comply with any term or condition contained in that portion of subsection 2.2 relating to Borrower's obligation to maintain insurance, subsection 2.3, Section 3 or Section 4; or (D) Breach of Warranty. Any representation, warranty, certification or other statement made by any Loan Party in any Loan Document or in any statement or certificate at any time given by such Person in writing pursuant or in connection with any Loan Document is false in any material respect on the date made; or (E) Other Defaults Under Loan Documents. Borrower or any other Loan Party defaults in the performance of or compliance with any term contained in this Agreement or the other Loan Documents and such default is not remedied or waived within fifteen (15) days after receipt by Borrower of notice from Agent or Requisite Lenders of such default (other than occurrences described in other provisions of this subsection 6.1 for which a different grace or cure period is specified or which constitute immediate Events of Default); or (F) Involuntary Bankruptcy; Appointment of Receiver, Etc. (1) A court enters a decree or order for relief with respect to Holdings, Borrower or any of its Subsidiaries in an involuntary case under the Bankruptcy Code, which decree or order is not stayed or other similar relief is not granted under any applicable federal or state law; or (2) the continuance of any of the following events for sixty (60) days unless dismissed, bonded or discharged: (a) an involuntary case is commenced against Holdings, Borrower or any of its Subsidiaries, under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or (b) a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Holdings, Borrower or any of its Subsidiaries, or over all or a substantial part of its property, is entered; or (c) an interim receiver, trustee or other custodian is appointed without the consent of Holdings, Borrower or any of its Subsidiaries, for all or a substantial part of the property of Holdings, Borrower or any such Subsidiary; or (G) Voluntary Bankruptcy; Appointment of Receiver, Etc. (1) An order for relief is entered with respect to Holdings, Borrower or any of its Subsidiaries or Holdings, Borrower or any of its Subsidiaries commences a voluntary case under the Bankruptcy Code, or consents to the entry of an order for relief in an involuntary case or to the conversion of an involuntary case to a voluntary case under any such law or consents to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its 37 45 property; or (2) Holdings, Borrower or any of its Subsidiaries makes any assignment for the benefit of creditors; or (3) the Board of Directors of Holdings, Borrower or any of its Subsidiaries adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this subsection 6.1(G); or (H) Governmental Liens. Any lien, levy or assessment is filed or recorded with respect to or otherwise imposed upon all or any part of the Collateral or the assets of Holdings, Borrower or any of its Subsidiaries by the United States or any department or instrumentality thereof or by any state, county, municipality or other governmental agency (other than Permitted Encumbrances); or (I) Judgment and Attachments. Any money judgment, writ or warrant of attachment, or similar process (other than those described in subsection 6.1(H)) involving (1) an amount in any individual case in excess of $50,000 or (2) an amount in the aggregate at any time in excess of $100,000 (in either case not adequately covered by insurance as to which the insurance company has acknowledged coverage) is entered or filed against Holdings, Borrower or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) Business Days prior to the date of any proposed sale thereunder; or (J) Dissolution. Any order, judgment or decree is entered against Holdings, Borrower or any of its Subsidiaries decreeing the dissolution or split up of Holdings, Borrower or that Subsidiary and such order remains undischarged or unstayed for a period in excess of fifteen (15) days; or (K) Solvency. Borrower ceases to be solvent (as represented by Borrower in subsection 5.9) or admits in writing its present or prospective inability to pay its debts as they become due; or (L) Injunction. Holdings, Borrower or any of its Subsidiaries is enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business and such order continues for more than fifteen (15) days; or (M) ERISA; Pension Plans. (1) Borrower or any of its Affiliates fails to make full payment when due of all amounts which, under the provisions of any employee benefit plans or any applicable provisions of the IRC, any such Person is required to pay as contributions thereto and such failure results in or is likely to result in a Material Adverse Effect; or (2) an accumulated funding deficiency in excess of $25,000 occurs or exists in relation to the minimum funding requirements of the IRC, whether or not waived, with respect to any such employee benefit plans; or (3) any employee benefit plan loses its status as a qualified plan under the IRC which results in or could reasonably be expected to result in a Material Adverse Effect; or 38 46 (N) Environmental Matters. Holdings, Borrower or any of their respective Subsidiaries fails to: obtain or maintain any operating licenses or permits required by environmental authorities; begin, continue or complete any remediation activities as required by any environmental authorities; store or dispose of any hazardous materials in accordance with applicable environmental laws and regulations; or comply with any other environmental laws; if such failure could reasonably be expected to have a Material Adverse Effect; or (O) Invalidity of Loan Documents. Any of the Loan Documents for any reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and effect or is declared to be null and void, or any Loan Party denies that it has any further liability under any Loan Documents to which it is party, or gives notice to such effect; or (P) Damage; Strike; Casualty. Any material damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than fifteen (15) consecutive days, the cessation or substantial curtailment of revenue producing activities at any facility of Borrower or any of its Subsidiaries if any such event or circumstance could reasonably be expected to have a Material Adverse Effect; or (Q) Licenses and Permits. The loss, suspension or revocation of, or failure to renew, any license or permit now held or hereafter acquired by Borrower or any of its Subsidiaries, if such loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Effect; or (R) Failure of Security. Agent, for the benefit of Agent and Lenders, does not have or ceases to have a valid and perfected first priority security interest in the Collateral (subject to Permitted Encumbrances) or any substantial portion thereof, in each case, for any reason other than the failure of Agent to take any action within its control; or (S) Business Activities. Holdings engages in any type of business activity other than the ownership of stock of Borrower and McGuire-Nicholas Company, a California corporation, and performance of its obligations under the Related Transaction Documents to which it is a party; or (T) Change in Control or Ownership. (1) Oaktree Capital Management, LLC ("Oaktree") and Messrs. Howard S. Marks, Bruce A. Karsh, D. Richard Masson and Sheldon M. Stone together cease to exercise the exclusive management and control of at least fifty-one percent (51%) of the issued and outstanding shares of each class of capital stock of Holdings entitled (without regard to the occurrence of any contingency) to vote for the election of a majority of the members of the boards of directors of Holdings, (2) TCW Asset Management Company ("TCW") or any Person directly or indirectly controlling, controlled by, or under common control with, TCW shall be entitled, directly or indirectly, to receive more than twenty percent (20%) of the distributions that could be made on the issued and outstanding shares of 39 47 capital stock of Holdings, or (3) Holdings ceases to beneficially own, directly, one hundred percent (100%) of the issued and outstanding shares of capital stock of Borrower. 6.2 Suspension of Commitments. Upon the occurrence of any Default or Event of Default, Agent and each Lender without notice or demand, may immediately cease making additional Loans and issuing Lender Letters of Credit and Risk Participation Agreements and cause its obligation to lend its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment to be suspended; provided that, in the case of a Default, if the subject condition or event is waived, cured or removed by Requisite Lenders within any applicable grace or cure period, any suspended portion of the Revolving Loan Commitment and the Acquisition Loan Commitment shall be reinstated. Each Lender may alternatively suspend only a portion of its obligation to lend its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment. 6.3 Acceleration. Upon the occurrence of any Event of Default described in the foregoing subsections 6.1(F) or 6.1(G), the unpaid principal amount of and accrued interest and fees on the Term Loan, the Revolving Loans and the Acquisition Loans, payments under the Lender Letters of Credit and Risk Participation Agreements and all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other requirements of any kind, all of which are hereby expressly waived by Borrower, and the obligations of Agent and Lenders to make Revolving Loans and Acquisition Loans and issue Lender Letters of Credit and Risk Participation Agreements shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default, Agent may, and upon written demand by Requisite Lenders shall, by written notice to Borrower (a) declare all or any portion of the Loans and all or some of the other Obligations to be, and the same shall forthwith become, immediately due and payable together with accrued interest thereon, and the obligations of Agent and Lenders to make Revolving Loans and Acquisition Loans and issue Lender Letters of Credit and Risk Participation Agreements shall thereupon terminate and (b) demand that Borrower immediately deposit with Agent an amount equal to the aggregate outstanding Risk Participation Liability to enable Agent to make payments under the Lender Letters of Credit and Risk Participation Agreements when required and such amount shall become immediately due and payable. 6.4 Performance by Agent. If Borrower shall fail to perform any covenant, duty or agreement contained in any of the Loan Documents, Agent may perform or attempt to perform such covenant, duty or agreement on behalf of Borrower after the expiration of any cure or grace periods set forth herein. In such event, Borrower shall, at the request of Agent, promptly pay any amount reasonably expended by Agent in such performance or attempted performance to Agent, together with interest thereon at the highest rate of interest in effect upon the occurrence of an Event of Default as specified in subsection 1.2(E) from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly agreed that Agent shall not have any liability or responsibility for the performance of any obligation of Borrower under this Agreement or any other Loan Document. 40 48 SECTION 7 CONDITIONS TO LOANS The obligations of Lenders to make Loans and of Agent to issue Lender Letters of Credit and Risk Participation Agreements are subject to satisfaction of all of the applicable conditions set forth below. 7.1 Conditions to Initial Loans. The obligations of Lenders to make the initial Loans and of Agent to issue any Lender Letters of Credit and Risk Participation Agreements on the Closing Date are, in addition to the conditions precedent specified in subsection 7.2, subject to the delivery of all documents listed on Schedule 7.1, all in form and substance satisfactory to Agent, and the satisfaction of all other conditions precedent contained in Schedule 7.1. 7.2 Conditions to All Loans. The obligations of Lenders to make Loans and of Agent to issue Lender Letters of Credit and Risk Participation Agreements on any date ("Funding Date") are subject to the further conditions precedent set forth below. (A) Agent shall have received, in accordance with the provisions of subsection 1.1, a notice requesting an advance of a Revolving Loan or issuance of a Lender Letter of Credit or Risk Participation Agreement. (B) The representations and warranties contained in Section 5 of this Agreement and elsewhere herein and in the Loan Documents shall be (and each request by Borrower for a Loan or a Lender Letter of Credit and Risk Participation Agreement shall constitute a representation and warranty by Borrower that such representations and warranties are) true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the Schedules or Exhibits as a result of any disclosures made in writing by Borrower to Agent after the Closing Date and approved by Agent in writing. (C) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated (or notice requesting issuance of a Lender Letters of Credit and Risk Participation Agreement) that would constitute an Event of Default or a Default. (D) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making any Loan or Agent from issuing any Lender Letter of Credit or Risk Participation Agreement. SECTION 8 ASSIGNMENT AND PARTICIPATION 41 49 8.1 Assignments and Participations in Loans and Notes. Each Lender (including Heller) may assign, subject to the terms of a Lender Addition Agreement, its rights and delegate its obligations under this Agreement to another Person, provided that (a) such Lender (excluding Heller) shall first obtain the written consent of Agent and Borrower, which consent shall not be unreasonably withheld; (b) the Pro Rata Share of the Revolving Loan Commitment, the Acquisition Loan Commitment and Term Loan being assigned shall in no event be less than the lesser of (i) $5,000,000 and (ii) the entire amount of the Pro Rata Share of the Revolving Loan Commitment, the Acquisition Loan Commitment and Term Loan of the assigning Lender; and (c) upon the consummation of each such assignment the Lender accepting the assignment shall pay Agent an administrative fee of $3,000. The administrative fee referred to in clause (c) of the preceding sentence shall not apply to an assignment from a Lender to an affiliate of such Lender. In the case of an assignment authorized under this subsection 8.1, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were an initial Lender hereunder. The assigning Lender shall be relieved of its obligations hereunder with respect to its Pro Rata Share of the Revolving Loan Commitment and the Acquisition Loan Commitment or assigned portion thereof. Borrower hereby acknowledges and agrees that any assignment will give rise to a direct obligation of Borrower to the assignee and that the assignee shall be considered to be a "Lender". Each Lender (including Heller) may sell participations in all or any part of its Pro Rata Share of the Revolving Loan Commitment, the Acquisition Loan Commitment and the Term Loan to another Person, provided that (a) such Lender (excluding Heller) shall first obtain the prior written consent of Agent, which consent shall not be unreasonably withheld; and (b) any such participation shall be in a minimum amount of $5,000,000, and provided, further, that all amounts payable by Borrower hereunder shall be determined as if that Lender had not sold such participation and the holder of any such participation shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly effecting (i) any reduction in the principal amount, interest rate or fees payable with respect to any Loan in which such holder participates; (ii) any extension of the Expiry Date, any extension of the date on which any Scheduled Term Loan Installment or Scheduled Acquisition Loan Installment is to be paid or any change of any date fixed for any payment of interest or fees payable with respect to any Loan in which such holder participates; (iii) any change of the aggregate unpaid principal amount of the Loans; (iv) any change of the percentage of Lenders which shall be required for Lenders or any of them to take any action hereunder; (v) any release of Collateral (except if the sale or disposition of such Collateral is permitted under subsection 8.2 or any other Loan Document); (vi) any amendment or waiver of this subsection 8.1 or the definitions of the terms used in this subsection 8.1 insofar as the definitions affect the substance of this subsection 8.1; (vii) any consent to the assignment, delegation or other transfer by any Loan Party of any of its rights and obligations under any Loan Document; (viii) any change in the form in which interest is required to be paid; and (ix) any change of any advance rate set forth in the Borrowing Base Certificate. Borrower hereby acknowledges and agrees that any participation will give rise to a direct obligation of Borrower to the participant, and the participant shall for purposes of subsections 1.8, 1.9, 8.4 and 9.1 be considered to be a "Lender". 42 50 Except as otherwise provided in this subsection 8.1 no Lender shall, as between Borrower and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of a participation in, all or any part of the Loans, the Notes or other Obligations owed to such Lender. Each Lender may furnish any information concerning Borrower and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to the provisions of subsection 9.13. Borrower agrees that it will assist and cooperate with Agent and any Lender in any manner reasonably requested by Agent or such Lender to effect the sale of a participation or an assignment described above, including without limitation assistance in the preparation of appropriate disclosure documents or placement memoranda. Agent shall provide Borrower with written notice of the name and address of any new Lender after the date hereof. Notwithstanding anything contained in this Agreement to the contrary, so long as the Requisite Lenders shall remain capable of making LIBOR Loans, no Person shall become a "Lender" hereunder unless such Person shall also be capable of making LIBOR Loans. 8.2 Agent. (A) Appointment. Each Lender hereby designates and appoints Heller as its Agent under this Agreement and the other Loan Documents, and each Lender hereby irrevocably authorizes Agent to take such action or to refrain from taking such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. Agent is authorized and empowered to amend, modify, or waive any provisions of this Agreement or the other Loan Documents on behalf of Lenders subject to the requirement that certain of Lenders' consent be obtained in certain instances as provided in subsections 8.3 and 9.2. Agent agrees to act as such on the express conditions contained in this subsection 8.2. The provisions of this subsection 8.2 are solely for the benefit of Agent and Lenders and neither Borrower nor any Loan Party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, Agent shall act solely as agent of Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrower or any other Loan Party. Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees. (B) Nature of Duties. The duties of Agent shall be mechanical and administrative in nature. Agent shall not have by reason of this Agreement a fiduciary relationship in respect of any Lender. Nothing in this Agreement or any of the Loan Documents, express or implied, is intended to or shall be construed to impose upon Agent any 43 51 obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein or therein. Each Lender shall make its own independent investigation of the financial condition and affairs of Borrower in connection with the extension of credit hereunder and shall make its own appraisal of the creditworthiness of Borrower, and Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto (other than as expressly required herein). If Agent seeks the consent or approval of any Lenders to the taking or refraining from taking any action hereunder, then Agent shall send notice thereof to each Lender. Agent shall promptly notify each Lender any time that the Requisite Lenders have instructed Agent to act or refrain from acting pursuant hereto. (C) Rights, Exculpation, Etc. Neither Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by them hereunder or under any of the Loan Documents, or in connection herewith or therewith, except that Agent shall be liable with respect to its own gross negligence or willful misconduct. Agent shall not be liable for any apportionment or distribution of payments made by it in good faith and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Lender to whom payment was due but not made, shall be to recover from other Lenders any payment in excess of the amount to which they are determined to be entitled (and such other Lenders hereby agree to return to such Lender any such erroneous payments received by them). In performing its functions and duties hereunder, Agent shall exercise the same care which it would in dealing with loans for its own account, but Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Loan Documents or the transactions contemplated thereby, or for the financial condition of any Loan Party. Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of any Loan Party, or the existence or possible existence of any Default or Event of Default. Agent may at any time request instructions from Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Loan Documents Agent is permitted or required to take or to grant, and if such instructions are promptly requested, Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from Requisite Lenders or all of the Lenders, as applicable. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting under this Agreement, the Notes, or any of the other Loan Documents in accordance with the instructions of Requisite Lenders. (D) Reliance. Agent shall be entitled to rely, and shall be fully protected in relying, upon any written or oral notices, statements, certificates, orders or other documents or any telephone message or other communication (including any writing, telex, telecopy or telegram) believed by it in good faith to be genuine and correct and to have been signed, sent or 44 52 made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder, upon advice of counsel selected by it. Agent shall be entitled to rely upon the advice of legal counsel, independent accountants, and other experts selected by Agent in its sole discretion. (E) Indemnification. Lenders will reimburse and indemnify Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, attorneys' fees and expenses), advances or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Agent in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by Agent under this Agreement or any of the Loan Documents, in proportion to each Lender's Pro Rata Share; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements resulting from Agent's gross negligence or willful misconduct. If any indemnity furnished to Agent for any purpose shall, in the opinion of Agent, be insufficient or become impaired, Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The obligations of Lenders under this subsection 8.2(E) shall survive the payment in full of the Obligations and the termination of this Agreement. (F) Heller Individually. With respect to its obligations under the Revolving Loan Commitment and the Acquisition Loan Commitment, the Loans made by it, and the Notes issued to it, Heller shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "Lenders" or "Requisite Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include Heller in its individual capacity as a Lender or one of the Requisite Lenders. Heller may lend money to, and generally engage in any kind of banking, trust or other business with any Loan Party as if it were not acting as Agent pursuant hereto. (G) Successor Agent. (1) Resignation. Agent may resign from the performance of all its agency functions and duties hereunder at any time by giving at least thirty (30) Business Days' prior written notice to Borrower and the Lenders. Such resignation shall take effect upon the acceptance by a successor Agent of appointment pursuant to clause (2) below or as otherwise provided below. (2) Appointment of Successor. Upon any such notice of resignation pursuant to clause (1) above, Requisite Lenders shall, upon receipt of Borrower's prior consent which shall not be unreasonably withheld, appoint a successor Agent. If a successor Agent shall not have been so appointed within the thirty (30) Business Day period, referred to in clause (1) above, the retiring Agent, upon notice to Borrower, shall then appoint a successor Agent who shall serve as Agent until such time, if any, as Requisite Lenders, upon receipt of Borrower's 45 53 prior written consent which shall not be unreasonably withheld, appoint a successor Agent as provided above. (3) Successor Agent. Upon the acceptance of any appointment as Agent under the Loan Documents by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's resignation as Agent under the Loan Documents, the provisions of this subsection 8.2 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. (H) Collateral Matters. (1) Release of Collateral. Lenders hereby irrevocably authorize Agent, at its option and in its discretion, to release any Lien granted to or held by Agent upon any property covered by the Security Documents (i) upon termination of the Revolving Loan Commitment and payment and satisfaction of all Obligations (other than contingent indemnification Obligations not then due and payable); (ii) constituting property being sold or disposed of if Borrower certifies to Agent that the sale or disposition is made in compliance with the provisions of this Agreement (and Agent may rely in good faith conclusively on any such certificate, without further inquiry); (iii) constituting property leased to Borrower under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by Borrower to be, renewed or extended; or (iv) in accordance with the provisions of the succeeding sentence. Agent may release or compromise any Collateral and the proceeds thereof having a value not greater than ten percent (10%) of the total book value of all Collateral, either in a single transaction or in a series of related transactions, with the consent of Lenders owning an aggregate of at least eighty percent (80%) of the Revolving Loan Commitment, the Acquisition Loan Commitment and the outstanding Term Loan, provided that in no event will Agent, acting under the authority granted to it pursuant to this sentence, release or compromise Collateral or the proceeds thereof having a total book value in excess of twenty percent (20%) of the book value of all Collateral, as determined by Agent, during any calendar year. (2) Confirmation of Authority; Execution of Releases. Without in any manner limiting Agent's authority to act without any specific or further authorization or consent by Lenders (as set forth in subsection 8.2(H)(1)), each Lender agrees to confirm in writing, upon request by Agent or Borrower, the authority to release any property covered by the Security Documents conferred upon Agent under clauses (i) through (iii) of subsection 8.2(H)(1). Upon receipt by Agent of confirmation from the requisite percentage of Lenders required by subsection 8.2(H)(1), if any, of its authority to release or compromise any particular item or types of property covered by the Security Documents, and upon at least ten (10) Business Days prior written request by Borrower, Agent shall (and is hereby irrevocably authorized by Lenders to) execute such documents as may be necessary to evidence the release or compromise of the Liens granted to Agent, for the benefit of Agent and Lenders, upon such Collateral, provided that (i) 46 54 Agent shall not be required to execute any such document on terms which, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release or compromise of such Liens without recourse or warranty, and (ii) such release or compromise shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of any Loan Party, in respect of), all interests retained by any Loan Party, including (without limitation) the proceeds of any sale, all of which shall continue to constitute part of the property covered by the Security Documents. (3) Absence of Duty. Agent shall have no obligation whatsoever to any Lender or any other Person to assure that the property covered by the Security Documents exists or is owned by Borrower or is cared for, protected or insured or has been encumbered or that the Liens granted to Agent have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent in this subsection 8.2(H) or in any of the Loan Documents, it being understood and agreed that in respect of the property covered by the Security Documents or any act, omission or event related thereto, Agent may act in any manner it may deem appropriate, in its discretion, given Agent's own interest in property covered by the Security Documents as one of the Lenders and that Agent shall have no duty or liability whatsoever to any of the other Lenders, provided that Agent shall exercise the same care which it would in dealing with loans for its own account. (I) Agency for Perfection. Agent and each Lender hereby appoint each other Lender as agent for the purpose of perfecting Agent's security interest in assets which, in accordance with Article 9 of the Uniform Commercial Code in any applicable jurisdiction, can be perfected only by possession. Should any Lender (other than Agent) obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor, shall deliver such Collateral to Agent or in accordance with Agent's instructions. Each Lender agrees that it will not have any right individually to enforce or seek to enforce any Security Document or to realize upon any collateral security for the Loans, it being understood and agreed that such rights and remedies may be exercised only by Agent. (J) Dissemination of Information. Agent will use its best efforts to provide Lenders with any information received by Agent from Borrower or any other Loan Party which is required to be provided to a Lender hereunder, provided that Agent shall not be liable to Lenders for any failure to do so, except to the extent that such failure is attributable to Agent's gross negligence or willful misconduct. 8.3 Amendments, Consents and Waivers for Certain Actions. (A) Except as otherwise provided in this subsection 8.3, in subsection 9.2 or in any Lender Addition Agreement and except as to matters set forth in other subsections hereof or in any other Loan Document as requiring only Agent's consent, the consent of Requisite 47 55 Lenders and Borrower will be required to amend, modify, terminate, or waive any provision of this Agreement or any of the other Loan Documents. (B) In the event Agent requests the consent of a Lender and does not receive a written consent or denial thereof within ten (10) Business Days after such Lender's receipt of such request, then such Lender will be deemed to have denied the giving of such consent. (C) In the event Agent requests the consent of a Lender and such consent is denied, then Heller or the Lender which assigned its interest in the Loans to such Lender (the "Assigning Lender") may, at its option, require such Lender to reassign its interest in the Loans to Heller or the Assigning Lender, as applicable, for a price equal to the then outstanding principal amount thereof plus accrued and unpaid interest and fees due such Lender, which interest and fees will be paid when collected from Borrower. In the event that Heller or the Assigning Lender elects to require any Lender to reassign its interest to Heller or the Assigning Lender, Heller or the Assigning Lender, as applicable, will so notify such Lender in writing within forty-five (45) days following such Lender's denial, and such Lender will reassign its interest to Heller or the Assigning Lender, as applicable, no later than five (5) days following receipt of such notice. 8.4 Set Off and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender is hereby authorized by Borrower at any time or from time to time, with reasonably prompt subsequent notice to Borrower (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (A) balances held by such Lender at any of its offices for the account of Borrower or any of its Subsidiaries (regardless of whether such balances are then due to Borrower or its Subsidiaries), and (B) other property at any time held or owing by such Lender to or for the credit or for the account of Borrower or any of its Subsidiaries, against and on account of any of the Obligations; except that no Lender shall exercise any such right without the prior written consent of Agent. Any Lender exercising a right to set off shall, to the extent the amount of any such set off exceeds its Pro Rata Share of the amount set off, purchase for cash (and the other Lenders shall sell) interests in each such other Lender's Pro Rata Share of the Obligations as would be necessary to cause such Lender to share such excess with each other Lender in accordance with their respective Pro Rata Shares. Borrower agrees, to the fullest extent permitted by law, that any Lender may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and upon doing so shall deliver such excess to the Agent for the benefit of all Lenders in accordance with their Pro Rata Shares. 8.5 Disbursement of Funds. Agent may, on behalf of Lenders, disburse funds to Borrower for Loans requested. Each Lender shall reimburse Agent on demand for all funds disbursed on its behalf by Agent, or if Agent so requests, each Lender will remit to Agent its Pro Rata Share of any Loan before Agent disburses same to Borrower. If Agent elects to require that each Lender make funds available to Agent, prior to a disbursement by Agent to Borrower, Agent shall advise each Lender by telephone or telecopy of the amount of such Lender's Pro 48 56 Rata Share of the Loan requested by Borrower no later than 1:00 p.m. CST on the Funding Date applicable thereto, and each such Lender shall pay Agent such Lender's Pro Rata Share of such requested Loan, in same day funds, by wire transfer to Agent's account on such Funding Date. If any Lender fails to pay the amount of its Pro Rata Share forthwith upon Agent's demand, Agent shall promptly notify Borrower, and Borrower shall immediately repay such amount to Agent. Any repayment required pursuant to this subsection 8.5 shall be without premium or penalty. Nothing in this subsection 8.5 or elsewhere in this Agreement or the other Loan Documents, including without limitation the provisions of subsection 8.6, shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. 8.6 Disbursements of Advances; Payment. (A) Revolving Loan Advances, Payments and Settlements; Related Fee Payments. (1) The Revolving Loan balance may fluctuate from day to day through Agent's disbursement of funds to, and receipt of funds from, Borrower. In order to minimize the frequency of transfers of funds between Agent and each Lender notwithstanding terms to the contrary set forth in Section 1 or subsection 8.5, Revolving Loan advances and payments will be settled among Agent and Lenders according to the procedures described in this subsection 8.6. Notwithstanding these procedures, each Lender's obligation to fund its portion of any advances made by Agent to Borrower will commence on the date such advances are made by Agent. Such payments will be made by such Lender without set-off, counterclaim or reduction of any kind. (2) On the second (2nd) Business Day of each week, or more frequently (including daily), if Agent so elects (each such day being a "Settlement Date"), Agent will advise each Lender by telephone or telecopy of the amount of each such Lender's Pro Rata Share of the Revolving Loan balance as of the close of business of the (2nd) second Business Day immediately preceding the Settlement Date. In the event that payments are necessary to adjust the amount of such Lender's required Pro Rata Share of the Revolving Loan balance to such Lender's actual Pro Rata Share of the Revolving Loan balance as of any Settlement Date, the party from which such payment is due will pay the other, in same day funds, by wire transfer to the other's account not later than 3:00 p.m. CST on the Business Day following the Settlement Date. (3) For purposes of this subsection 8.6(A)(3), the following terms and conditions will have the meanings indicated: (a) "Daily Loan Balance" means an amount calculated as of the end of each calendar day by subtracting (i) the cumulative principal amount paid by Agent to a Lender on a Loan from the Closing Date through and 49 57 including such calendar day, from (ii) the cumulative principal amount on a Loan advanced by such Lender to Agent on that Loan from the Closing Date through and including such calendar day. (b) "Daily Interest Rate" means an amount calculated by dividing the interest rate payable to a Lender on a Loan (as set forth in subsection 1.2) as of each calendar day by three hundred sixty (360). (c) "Daily Interest Amount" means an amount calculated by multiplying the Daily Loan Balance of a Loan by the associated Daily Interest Rate on that Loan. (d) "Interest Ratio" means a number calculated by dividing the total amount of the interest on a Loan received by Agent with respect to the immediately preceding month by the total amount of interest on that Loan due from Borrower during the immediately preceding month. On the first (1st) Business Day of each month ("Interest Settlement Date"), Agent will advise each Lender by telephone, telex, or telecopy of the amount of such Lender's Pro Rata Share of interest and fees on each of the Loans as of the end of the last day of the immediately preceding month. Provided that such Lender has made all payments required to be made by it under this Agreement, Agent will pay to such Lender, by wire transfer to such Lender's account (as specified by such Lender on the signature page of this Agreement or the applicable Lender Addition Agreement, as amended by such Lender from time to time after the date hereof pursuant to the notice provisions contained herein or in the applicable Lender Addition Agreement) not later than 3:00 p.m. (Chicago time) on the next Business Day following the Interest Settlement Date, such Lender's Pro Rata Share of interest and fees on each of the Loans. Such Lender's Pro Rata Share of interest on each Loan will be calculated for that Loan by adding together the Daily Interest Amounts for each calendar day of the prior month for that Loan and multiplying the total thereof by the Interest Ratio for that Loan. Such Lender's Pro Rata Share of each of the commitment fee described in subsection 1.2(B) and the Risk Participation Liability fee described in subsection 1.2(C) shall be paid and calculated in a manner consistent with the payment and calculation of interest as described in this subsection 8.6(A). (B) Term Loan and Acquisition Loan Payments; Related Fee Payments. Payments of principal, interest and fees in respect of the Term Loan and the Acquisition Loans, and payment of all other fees and expenses not otherwise described in subsection 8.6(A) will be settled on the Business Day received by Agent in accordance with the provisions of Section 1. 50 58 (C) Availability of Lender's Pro Rata Share. (1) Unless Agent has been notified by a Lender prior to a Funding Date of such Lender's intention not to fund its Pro Rata Share of the Loan amount requested by Borrower, Agent may assume that such Lender will make such amount available to Agent on the Business Day following the next Settlement Date. If such amount is not, in fact, made available to Agent by such Lender when due, Agent will be entitled to recover such amount on demand from such Lender without set-off, counterclaim or deduction of any kind. (2) Nothing contained in this subsection 8.6(C) will be deemed to relieve a Lender of its obligation to fulfill its commitments or to prejudice any rights Agent or Borrower may have against such Lender as a result of any default by such Lender under this Agreement. (3) Without limiting the generality of the foregoing, each Lender shall be obligated to fund its Pro Rata Share of any Revolving Loan or Acquisition Loan made after any Event of Default or acceleration of the Obligations with respect to any draw on a Lender Letter of Credit or a Risk Participation Agreement. (D) Return of Payments (1) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind. (2) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other person pursuant to any solvency law or otherwise, then, notwithstanding any other term or condition of this Agreement, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. SECTION 9 MISCELLANEOUS 9.1 Indemnities. Borrower agrees to indemnify, pay, and hold Agent, each Lender and their respective officers, directors, employees, agents, and attorneys (the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits and claims of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Indemnitee as a result of its being a party to this Agreement; provided 51 59 that Borrower shall have no obligation to an Indemnitee hereunder with respect to liabilities arising from the gross negligence or willful misconduct of that Indemnitee as determined by a court of competent jurisdiction. This subsection and other indemnification provisions contained within the Loan Documents shall survive the termination of this Agreement. 9.2 Amendments and Waivers. Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement, the Notes or any of the other Loan Documents, or consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Requisite Lenders (or Agent, if expressly set forth herein, in any Note or in any other Loan Document) and the applicable Loan Party; provided, that except to the extent permitted by the applicable Lender Addition Agreement, no amendment, modification, termination or waiver shall, unless in writing and signed by all Lenders, do any of the following: (a) increase any Lender's Pro Rata Share of the Term Loan, Revolving Loan Commitment or the Acquisition Loan Commitment; (b) reduce the principal of, rate of interest on or fees payable with respect to any Loan; (c) extend the Expiry Date, extend the date on which any Scheduled Term Loan Installment or Scheduled Acquisition Loan Installment is to be paid or change any date fixed for any payment of interest or fees; (d) change the aggregate unpaid principal amount of the Loans; (e) change the percentage of Lenders which shall be required for Lenders or any of them to take any action hereunder; (f) release Collateral (except if the sale or disposition of such Collateral is permitted under subsection 8.2 or any other Loan Document); (g) amend or waive this subsection 9.2 or the definitions of the terms used in this subsection 9.2 insofar as the definitions affect the substance of this subsection 9.2; (h) consent to the assignment, delegation or other transfer by any Loan Party of any of its rights and obligations under any Loan Document; (i) change the form in which interest is required to be paid and (j) change the advance rates set forth in the Borrowing Base Certificate; and provided, further, that no amendment, modification, termination or waiver affecting the rights or duties of Agent under any Loan Document shall in any event be effective, unless in writing and signed by Agent, in addition to Lenders required hereinabove to take such action. Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver shall be required for Agent to take additional Collateral pursuant to any Loan Document. No amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the holder of that Note. No notice to or demand on Borrower or any other Loan Party in any case shall entitle Borrower or any other Loan Party to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 9.2 shall be binding upon each holder of the Notes at the time outstanding, each future holder of the Notes, and, if signed by a Loan Party, on such Loan Party. 9.3 Notices. Any notice or other communication required shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied, sent by overnight courier service or U.S. mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. CST; (c) if delivered by overnight courier, two 52 60 (2) days after delivery to the courier properly addressed; or (d) if delivered by U.S. mail, four (4) Business Days after deposit with postage prepaid and properly addressed. Notices shall be addressed as follows: If to Borrower: UNIONTOOLS, INC. 500 Dublin Avenue Columbus, Ohio 43216 ATTN: Chief Financial Officer Telecopy: (614) 222-4437 With a copy to: Gibson, Dunn & Crutcher 200 Park Avenue New York, New York 10166 ATTN: Conor D. Reilly, Esq. Telecopy: (212) 351-4035 If to Agent or Heller: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Portfolio Manager Corporate Finance Group Telecopy: (312) 441-7367 With a copy to: HELLER FINANCIAL, INC. 500 West Monroe Street Chicago, Illinois 60661 ATTN: Legal Department Corporate Finance Group Telecopy: (312) 441-7367 If to a Lender: To the address set forth in the applicable Lender Addition Agreement 53 61 9.4 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Agent or any Lender to exercise, nor any partial exercise of, any power, right or privilege hereunder or under any other Loan Documents shall impair such power, right, or privilege or be construed to be a waiver of any Default or Event of Default. All rights and remedies existing hereunder or under any other Loan Document are cumulative to and not exclusive of any rights or remedies otherwise available. 9.5 Marshalling; Payments Set Aside. Neither Agent nor any Lender shall be under any obligation to marshall any assets in payment of any or all of the Obligations. To the extent that Borrower makes payment(s) or Agent enforces its Liens or Agent or any Lender exercises its right of set-off, and such payment(s) or the proceeds of such enforcement or set-off is subsequently invalidated, declared to be fraudulent or preferential, set aside, or required to be repaid by anyone, then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and 55 62 continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred. 9.6 Severability. The invalidity, illegality, or unenforceability in any jurisdiction of any provision under the Loan Documents shall not affect or impair the remaining provisions in the Loan Documents. 9.7 Lenders' Obligations Several; Independent Nature of Lenders' Rights. The obligation of each Lender hereunder is several and not joint and no Lender shall be responsible for the obligation or commitment of any other Lender hereunder. In the event that any Lender at any time should fail to make a Loan as herein provided, the Lenders, or any of them, at their sole option, may make the Loan that was to have been made by the Lender so failing to make such Loan. Nothing contained in any Loan Document and no action taken by Agent or any Lender pursuant hereto or thereto shall be deemed to constitute Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt. 9.8 Headings. Section and subsection headings are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purposes or be given substantive effect. 9.9 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. 9.10 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns except that Borrower may not assign its rights or obligations hereunder without the written consent of all Lenders. 9.11 No Fiduciary Relationship. No provision in the Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty owing to Borrower by Agent or any Lender. 9.12 Construction. Agent, each Lender and Borrower acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review the Loan Documents with its legal counsel and that the Loan Documents shall be constructed as if jointly drafted by Agent, each Lender and Borrower. 9.13 Confidentiality. Agent and each Lender agree to exercise their best efforts to keep any non-public information delivered pursuant to the Loan Documents confidential from Persons other than those employed by or engaged by Agent or such Lender and those employed by or engaged by Agent's or such Lender's assignees or participants, or potential assignees or 56 63 participants. This subsection shall not apply to disclosures required to be made by Agent or any Lender to any regulatory or governmental agency or pursuant to legal process. 9.14 Consent to Jurisdiction and Service of Process. (A) BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY BORROWER AGAINST AGENT OR ANY LENDER OR ANY AFFILIATE THEREOF INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. (B) BORROWER DESIGNATES AND APPOINTS CT CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY BORROWER WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY BORROWER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO BORROWER AT ITS ADDRESS PROVIDED IN SUBSECTION 9.3 EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT APPOINTED BY BORROWER REFUSES TO ACCEPT SERVICE, BORROWER HEREBY AGREES THAT SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 9.15 Waiver of Jury Trial. BORROWER, AGENT AND EACH LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL 57 64 DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. BORROWER, AGENT AND EACH LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER, AGENT AND EACH LENDER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS OR THE LENDER LETTERS OF CREDIT OR RISK PARTICIPATION AGREEMENTS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. BORROWER, AGENT AND EACH LENDER ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF AGENT AND EACH LENDER. 9.16 Survival of Warranties and Certain Agreements. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans, issuances of Lender Letters of Credit and Risk Participation Agreements and the execution and delivery of the Notes. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrower set forth in subsections 1.3(C), 1.8 and 9.1 shall survive the payment of the Loans and the termination of this Agreement. 9.17 Entire Agreement. This Agreement, the Notes and the other Loan Documents referred to herein embody the final, entire agreement among the parties hereto and supersede any and all prior commitments, agreements, representations, understandings, whether oral or written, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous or subsequent oral agreements or discussions of the parties hereto. 9.18 Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which counterparts together shall constitute but one in the same instrument. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto. SECTION 10 58 65 DEFINITIONS 10.1 Certain Defined Terms. The terms defined below are used in this Agreement as so defined. Terms defined in the preamble and recitals to this Agreement are used in this Agreement as so defined. "Affiliate" means any Person: (a) directly or indirectly controlling, controlled by, or under common control with, Borrower; (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in Borrower; or (c) five percent (5%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by Borrower. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or by contract or otherwise. "Agent" means Heller in its capacity as agent for the Lenders under this Agreement and each of the other Loan Documents and any successor in such capacity appointed pursuant to subsection 8.2. "Agreement" means this Credit Agreement (including all schedules and exhibits hereto). "Asset Disposition" means the disposition whether by sale, lease, transfer, loss, damage, destruction, condemnation or otherwise of any of the following: (a) any of the stock of any of Borrower's Subsidiaries or (b) any or all of the assets of Borrower or any of its Subsidiaries other than sales of inventory in the ordinary course of business. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as amended from time to time or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect and all rules and regulations promulgated thereunder. "Borrower" shall have the meaning ascribed to that term in the preamble of this Agreement. "Business Day" means (a) for all purposes other than as covered by clause (b) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania or the State of Illinois, or is a day on which banking institutions located in any such states are closed, and (b) with respect to all notices, determinations, fundings and payments 59 66 in connection with Loans bearing interest at the LIBOR, any day that is a Business Day described in clause (a) above and that is also a day for trading by and between banks in Dollar deposits in the applicable interbank LIBOR market. "Closing Date" means December 30, 1996, or such later date on which all of the conditions precedent set forth in Section 7.1 have been satisfied in full. "Collateral" means, collectively: (a) all capital stock and other property pledged pursuant to the Security Documents; (b) all "Collateral" as defined in the Security Documents; (c) all real property mortgaged pursuant to the Security Documents; and (d) any property or interest provided in addition to or in substitution for any of the foregoing. "Default" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default if that condition or event were not cured or removed within any applicable grace or cure period. "Expiry Date" means the earlier of (a) the suspension (subject to reinstatement) of the Lenders' obligations to make Revolving Loans and Acquisition Loans pursuant to subsection 6.2, (b) the acceleration of the Obligations pursuant to subsection 6.3 or (c) December 31, 2001. "GAAP" means generally accepted accounting principles as set forth in statements from Auditing Standards No. 69 entitled "The Meaning of 'Present Fairly in Conformance with Generally Accepted Accounting Principles in the Independent Auditors Reports'" issued by the Auditing Standards Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination. "Indebtedness", as applied to any Person, means: (a) all indebtedness for borrowed money; (b) that portion of obligations with respect to capital leases that is properly classified as a liability on a balance sheet in conformity with GAAP; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six (6) months from the date the obligation is incurred or is evidenced by a note or similar written instrument; and (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. "IRC" means the Internal Revenue Code of 1986, as amended from time to time and all rules and regulations promulgated thereunder. 60 67 "Lender" or "Lenders" means Heller together with its successors and permitted assigns pursuant to subsection 8.1. "Lender Addition Agreement" means an agreement among Agent, a Lender and such Lender's assignee regarding their respective rights and obligations with respect to assignments of the Loans, the Revolving Loan Commitment, the Acquisition Loan Commitment and other interests under this Agreement and the other Loan Documents. "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind, whether voluntary or involuntary (including any conditional sale or other title retention agreement and any lease in the nature thereof), and any agreement to give any lien, mortgage, pledge, security interest, charge or encumbrance. "Loan" or "Loans" means an advance or advances under the Revolving Loan Commitment, the Acquisition Loans, or the Term Loan. "Loan Documents" means this Agreement, the Notes, the Security Documents and all other instruments, documents and agreements executed by or on behalf of any Loan Party and delivered concurrently herewith or at any time hereafter to or for the benefit of Agent or any Lender in connection with the Loans and other transactions contemplated by this Agreement, all as amended, supplemented or modified from time to time; but excluding all Capitalization/Acquisition Documents. "Loan Party" means, collectively, Holdings, Borrower and any other Person (other than Agent and each Lender) which is or becomes a party to any Loan Document. "Loan Year" means any period of twelve (12) consecutive months commencing on the Closing Date or any anniversary thereof. "Material Adverse Effect" means (a) a material adverse effect upon the business, operations, properties, assets or condition (financial or otherwise) either of Borrower or any of its Subsidiaries, taken as a whole, or of Holdings or (b) the impairment of the ability of any Loan Party to perform its material obligations under any Loan Document to which it is a party or of Agent or any Lender to enforce any Loan Document or collect any of the Obligations. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. 61 68 "Net Proceeds" means cash proceeds received by Borrower or any of its Subsidiaries from any Asset Disposition (including insurance proceeds, awards of condemnation, and payments under notes or other debt securities received in connection with any Asset Disposition), net of (a) the costs of such sale, lease, transfer or other disposition (including taxes attributable to such sale, lease or transfer) and (b) amounts applied to repayment of Indebtedness (other than the Obligations) secured by a Lien on the asset or property disposed. "Note" or "Notes" means one or more of the notes of Borrower substantially in the form of Exhibit 10.1(A), or any combination thereof. "Obligations" means all obligations, liabilities and indebtedness of every nature of each Loan Party from time to time owed to Agent or any Lender under the Loan Documents including the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable whether before or after the filing of a proceeding under the Bankruptcy Code by or against Borrower or any of its Subsidiaries. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof and their respective permitted successors and assigns (or in the case of a governmental person, the successor functional equivalent of such Person). "Pro Forma" means the unaudited consolidated balance sheet of Borrower and its Subsidiaries as of the Closing Date, based upon the financial statements dated as of December 6, 1996 prepared in accordance with GAAP, but after giving effect to the Related Transactions. The Pro Forma is annexed hereto as Schedule 10.1(A). "Pro Rata Share" means (a) with respect to a Lender's obligation to lend a portion of the Term Loan and receive payments of interest and principal with respect thereto, the percentage obtained by dividing (i) such Lender's commitment to make a portion of the Term Loan, as set forth on the signature page of this Agreement opposite such Lender's signature or in the most recent Lender Addition Agreement, if any, executed by such Lender, by (ii) all such commitments of all Lenders to make the Term Loan, (b) with respect to a Lender's obligation to make Revolving Loans and receive payments of interest 62 69 and principal with respect thereto and with respect to a Lender's obligation to share in Risk Participation Liability (and with respect to the related Risk Participation Liability fee described in subsection 1.2(C)), the percentage obtained by dividing (i) such Lender's commitment to make Revolving Loans, as set forth on the signature page of this agreement opposite such Lender's signature or in the most recent Lender Addition Agreement, if any, executed by such Lender, by (ii) all such commitments of all Lenders to make Revolving Loans and (c) with respect to the Acquisition Loan Commitment and all other matters (including without limitation the indemnification obligations arising under subsection 8.2(E)), the percentage obtained by dividing (i) the sum of the then outstanding portion of the Term Loan which was funded by such Lender, plus the commitment of such Lender to make Revolving Loans, as set forth on the signature page of this Agreement opposite such Lender's signature or in the most recent Lender Addition Agreement, if any, executed by such Lender, by (ii) the sum of the then outstanding Term Loan, plus the aggregate Revolving Loan Commitment. "Projections" means Borrower's forecasted consolidated: (a) balance sheets; (b) profit and loss statements; (c) cash flow statements; and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. The Projections represent and will represent as of the date thereof the good faith estimate of Borrower and its senior management concerning the most probable course of its business. "Related Transactions" means the funding of all Loans on the Closing Date, the repayment of the Indebtedness identified on Schedule 10.1(B) which is to be paid in full on the Closing Date, and the payment of all fees, costs and expenses associated with all of the foregoing. "Related Transactions Documents" means the Loan Documents, and all other agreements, instruments and documents executed or delivered in connection with the Related Transactions. "Requisite Lenders" means Lenders having (a) sixty-six and two-thirds percent (66-2/3%) or more of the sum of the Revolving Loan Commitment, the Acquisition Loan Commitment and the outstanding principal balance of the Term Loan or, (b) if the Revolving Loan Commitment has been terminated, sixty-six and two-thirds percent (66-2/3%) or more of the aggregate outstanding principal balance of the Loans. "Risk Participation Liability" means, as to each Lender Letter of Credit and each Risk Participation Agreement, all reimbursement obligations of Borrower to the issuer of the Lender Letter of Credit or to the issuer of the letter 63 70 of credit with respect to the transaction for which the Risk Participation Agreement was executed and delivered, consisting of (a) the amount available to be drawn or which may become available to be drawn; (b) all amounts which have been paid and made available by the issuing bank to the extent not reimbursed by Borrower, whether by the making of a Revolving Loan or otherwise; and (c) all accrued and unpaid interest, fees and expenses with respect thereto. For purposes of determining the outstanding amount of Risk Participation Liability, the maximum amount potentially owing under any Risk Participation Agreement will be considered outstanding unless the bank which is the beneficiary of such Risk Participation Agreement reports daily activity to Agent showing actual outstanding letters of credit subject to such Risk Participation Agreement. "Security Documents" means all instruments, documents and agreements executed by or on behalf of any Loan Party to guaranty or provide collateral security with respect to the Obligations including, without limitation, any security agreement or pledge agreement, any guaranty of the Obligations, any mortgage, and all instruments, documents and agreements executed pursuant to the terms of the foregoing. "Subordinated Indebtedness" means the "Junior Note" as defined in that certain Subordination and Intercreditor Agreement of even date herewith among Agent, Holdings and the holders of Subordinated Indebtedness set forth therein, the "Junior Note" as defined in that certain Subordination and Intercreditor Agreement of even date herewith among Agent, Borrower and Holdings, and all other Indebtedness of Borrower, Holdings or any of their Subsidiaries which is subordinated, in a manner satisfactory to Agent, in right of payment to the Obligations. "Subsidiary" means, with respect to any Person, any corporation, partnership, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. 10.2 Other Definitional Provisions. References to "Sections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 10.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. In this Agreement, "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include 64 71 the other gender; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Loan Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. 65 72 WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. UNIONTOOLS, INC. By: /s/ Stephen M. Kasprisin ------------------------ Title: Vice President ----------------------- HELLER FINANCIAL, INC., as Agent and a Lender By: /s/ Andrew W. Chidester --------------------------- Title: Assistant Vice President ------------------------- 66 EX-10.10 12 AMENDMENT NO. 1 TO CREDIT AGREEMENT 1 EXHIBIT 10.10 AMENDMENT NO. 1 TO CREDIT AGREEMENT This Amendment dated as of February 28, 1997 (this "Amendment"), is entered into by and among UnionTools, Inc., a Delaware corporation ("Borrower"), Heller Financial, Inc., a Delaware corporation, in its capacity as Agent ("Agent"), and each of the Lenders under the Credit Agreement (as defined below), with reference to the following facts: RECITALS A. Lenders are extending various secured financial accommodations to Borrower upon the terms of that certain Credit Agreement dated as of December 27, 1996 among Borrower, Agent and Lenders (the "Credit Agreement"). B. Borrower, Agent and Lenders desire to amend the Credit Agreement upon the terms and conditions set forth herein. AGREEMENT NOW THEREFORE, in consideration of the foregoing and for the other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged by each party hereto, Borrower, Agent and Lenders hereby agree as follows: 1. Defined Terms. Unless otherwise specified herein, any capitalized terms defined in the Credit Agreement shall have the same respective meanings as used herein. 2. Set Off. With respect to subsection 8.4 of the Credit Agreement, any Lender may exercise its set off rights as provided therein without the prior written consent of Agent, provided that such Lender shall give reasonably prompt subsequent written notice thereof to both Borrower and Agent. 3. Environmental and Other Regulatory Matters. With respect to the environmental and other regulatory matters identified in the reports prepared by GaiaTech, Borrower shall, in a timely manner, provide such information and obtain such reports as may be reasonably required by Agent, and otherwise comply with the provisions of subsection 2.1 of the Credit Agreement. 4. LIBOR Loan Request. With respect to any LIBOR Loan request received by Agent from Borrower pursuant to subsection 1.2(G) of the Credit Agreement, Agent shall provide a copy of such request to each Lender at least two (2) Business Days prior to the commencement of the subject Interest Period. 2 5. Assignments and Participations. In the event that Heller assigns all or a portion of its Pro Rata Share of the Revolving Loan Commitment, the Acquisition Loan Commitment and Term Loan, or sells participation(s) therein, pursuant to subsection 8.1 of the Credit Agreement, where the effect of such assignment(s) or participation(s) is to reduce Heller's Pro Rata Share (less the aggregate amount of any percentage participation interests held therein by another Person) to less than twenty-three percent (23%), Heller shall give reasonably prompt subsequent notice thereof to each Lender. 6. Events of Default, Etc. In the event that Agent receives a written notice or certificate from Borrower pursuant to subsection 4.10(L) of the Credit Agreement, Agent shall provide a copy thereof to each Lender in a reasonably prompt manner. 7. Amendments and Waivers. Agent shall provide a copy of any written amendments, modifications, terminations and waivers as provided in subsection 9.2 of the Credit Agreement to each Lender in a reasonably prompt manner. 8. Rubbermaid Product. With respect to the definition of "Permitted Encumbrances" in subsection 3.2 of the Credit Agreement, the interests of Rubbermaid Incorporated in the product it has delivered or may hereafter deliver to Borrower for processing, together with the products and proceeds thereof, and increases, substitutions, replacements, additions and accessions thereto, shall be deemed to be Permitted Encumbrances. 9. Representations and Warranties. Borrower reaffirms that the representations and warranties made to Agent or Lenders in the Credit Agreement and other Loan Documents are true and correct in all material respects as of the date of this Amendment as though made as of such date and after giving effect to this Amendment. In addition, Borrower makes the following representations and warranties to Agent and Lenders, which shall survive the execution of this Amendment: a. The execution, delivery and performance of this Amendment are within Borrower's powers, have been duly authorized by all necessary actions, have received all necessary governmental approvals, if any, and do not contravene any law or any contractual restrictions binding on Borrower. b. This Amendment is the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting the rights of creditors generally. c. No event has occurred and is continuing, or would result from the execution, delivery and/or performance of this Amendment, which constitutes a Default or Event of Default under the Credit Agreement or any other of the Loan Documents, or would constitute 2 3 such a Default or Event of Default but for the requirement that notice be given or time elapse or both, after giving effect to this Amendment. 10. Continuing Effect of Loan Documents. To the extent of any inconsistencies between the terms of this Amendment and the Credit Agreement, this Amendment shall govern. In all other respects, the Credit Agreement and other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. 11. References. Upon the effectiveness of this Amendment, each reference in any Loan Document to "the Agreement", "hereunder," "herein," "hereof," or of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. 12. Governing Laws. This Amendment, upon becoming effective, shall be deemed to be a contract made under, governed by, and subject to, and shall be construed in accordance with, the internal laws of the State of Illinois. 13. Effectiveness. This Amendment shall become effective upon its due execution and delivery by the parties hereto and the due execution and delivery of the following Consent of Guarantor to Agent. 14. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Amendment as of the date first set forth above, to become effective in the manner set forth above. UNIONTOOLS, INC. By: /s/ Stephen M. Kasprisin ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- HELLER FINANCIAL, INC., as Agent By: /s/ Elizabeth Price ------------------------------------- Name: Elizabeth Price ----------------------------------- Title: Vice President ---------------------------------- 3 4 HELLER FINANCIAL, INC., as a Lender By: /s/ Elizabeth Price ------------------------------------- Name: Elizabeth Price ---------------------------------- Title: Vice President --------------------------------- 4 5 SANWA BUSINESS CREDIT CORPORATION, as a Lender By: /s/ Lawrence J. Placek ------------------------------------- Name: Lawrence J. Placek ----------------------------------- Title: Vice President --------------------------------- FLEET CAPITAL CORPORATION, as a Lender By: /s/ Alisa G. Frederick ------------------------------------- Name: Alisa G. Frederick ----------------------------------- Title: Vice President --------------------------------- PNC BANK, OHIO, NATIONAL ASSOCIATION, as a Lender By: /s/ Warren F. Weber ------------------------------------- Name: Warren F. Weber ----------------------------------- Title: AVP --------------------------------- THE FIRST NATIONAL BANK OF BOSTON, as a Lender By: /s/ Timothy M. Sarns ------------------------------------- Name: Timothy M. Sarns ----------------------------------- Title: Division Executive --------------------------------- STAR BANK, N.A., as a Lender By: /s/ Richard W. Neltner ------------------------------------- Name: Richard W. Neltner ----------------------------------- Title: Vice President --------------------------------- 5 6 CONSENT OF GUARANTOR The undersigned, as guarantor of the Obligations of Borrower to Agent and Lenders pursuant to that certain Guaranty dated as of December 27, 1996 (the "Guaranty") hereby acknowledges receipt of a copy of the foregoing Amendment No. 1 and acknowledges, consents and agrees that (i) the Guaranty remains in full force and effect and is hereby reaffirmed, and (ii) the execution and delivery of the foregoing Amendment No. 1 and any and all documents executed in connection therewith shall not alter, amend, reduce or modify its obligations and liability under the Guaranty. Dated: As of February 28, 1997 VISION HARDWARE GROUP, INC., a Delaware corporation By: /s/ Stephen M. Kasprisin ____________________________________ Name:___________________________________ Title:__________________________________ 6 EX-10.12 13 LICENSE AGREEMENT 1 EXHIBIT 10.12 LICENSE AGREEMENT This License Agreement ("Agreement") is made and entered into as of the 1st day of August, 1992, by and between THE O.M. SCOTT & SONS COMPANY, a Delaware corporation ("Licensor"), and THE UNION FORK AND HOE COMPANY, a Delaware corporation ("Licensee"). W I T N E S S E T H: WHEREAS, Licensor is the owner of the common law trademarks "Scotts" and "Scotts and Oval Design" for lawn, turf and garden tools and equipment, a copy of which is depicted in the Exhibit A attached hereto and incorporated herein ("the Marks"); and WHEREAS, Licensee wishes to obtain a license to use the Marks in connection with the design, manufacture, marketing and distribution, through sale or otherwise, of certain garden and industrial tool products described more fully herein; and WHEREAS, Scotts desires to grant to Licensee a limited license to utilize the Mark in accordance with the terms of this Agreement: NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements of the parties hereto, the sufficiency of which is hereby acknowledged, each party does agree with the other as follows: 1. LICENSE GRANT. 1.1 Products. Upon the terms and conditions hereinafter set forth, Scotts hereby grants to Licensee and Licensee hereby accepts the exclusive right except as noted herein, license and privilege of utilizing the Mark solely in connection with the manufacture, sale and distribution of a line of high quality (non-power) garden and industrial tools designed to be sold in the middle to high end price range of the consumer product market and the high quality middle price range of the industrial/contractor market as specified in Exhibit B attached hereto and incorporated herein (the "Licensed Products"). 1.2 Territory. The license hereby granted is for the United States of America and Canada (the "Territory"). 1.3 Channels of Distribution. Licensed Products may be sold to mass merchandisers, department stores, home centers, warehouse or club retailers, wholesalers, co-ops, hardware stores, lawn and garden retailers and landscape/contractor suppliers or other channels as specifically and reasonably agreed to by the parties ("Channels of Distribution") within the Territory who intend to offer this line for sale in a manner consistent with the marketing positioning and strategy established by Licensee marketing plans further defined in Article 5.1 and brand segmentation/distribution strategy shown in Exhibit D. 2 1.4 Goodwill. Licensee recognizes the great value of the goodwill associated with the Marks and hereby acknowledges that the Marks and all of the rights therein and the goodwill pertaining thereto belong exclusively to Licensor, and that the Marks have acquired secondary meaning in the minds of the consuming public. 1.5 Sublicenses. Licensee may sublicense the rights granted hereunder to any affiliated or related entity but only with the prior written approval of Licensor which approval is at Licensor's sole discretion and on the condition precedent that each sublicensee agrees in writing to adhere to all of the terms and conditions of this License Agreement. Nothing herein shall preclude Licensee from subcontracting the manufacturing, advertisement or promotion of the Licensed products to a third party. In the event of such sublicense or subcontract, the Licensee shall remain fully liable for the fulfillment of all of the terms and conditions of this Agreement. 1.6 Limitation of Licensee. Licensee may engage in the manufacture and sale of products that perform similar functions to the Licensed Products, only if such other products do not have the same exclusive colors or features as the Licensed products set forth in Exhibit E attached hereto and incorporated herein. In addition Licensee shall not enter into any other license agreement or business arrangement that conflicts with this Agreement. 1.7 Limitation of Licensor. Licensor agrees not to license Marks to any other long handle or garden tool manufacturer, distributor or marketer except for those license agreements currently in effect for Licensed Products or Related Lines as set forth in Exhibits B and C respectively attached hereto and incorporated herein. Notwithstanding the foregoing: 1) Licensor has the right, however, to manufacture on its own, or have manufactured, Related Lines of products as defined in Exhibit C that utilize the Marks that may be sold by Licensor or its normal or established distribution channels, and 2) the parties acknowledge and agree that Licensor currently manufactures or has manufactured for it spreaders which it sells and/or distributes and Licensor may in the future license a third party to manufacture, sell and/or distribute spreaders bearing the Marks. 1.8 Special Promotions. Licensee will supply Licensor on such terms and conditions as agreed to by the parties from time to time certain Licensed Products which Licensor will sell (directly or indirectly) to the professional landscape, turf management or other commercial customers. 2. TERM AND TERMINATION. 2.1 Term. This Agreement shall commence on the date first written above (the "Commencement Date") and shall have an initial term of three (3) years, unless otherwise terminated as provided herein. This Agreement shall be renewed automatically for successive three (3) year periods thereafter, unless sooner terminated as provided for herein. 2.2 Material Breach: Opportunity to Cure. Either party may immediately terminate this Agreement by written notice and without judicial intervention, and without waiving any remedies or claims resulting from such termination, if the other party shall: 1) fail to comply 2 3 with or breach any of its material monetary obligations and covenants hereunder and shall not and make good such breach or failure within ten (10) business days from the receipt of a written notice to cure a monetary related breach; or 2) fail to comply with or breach any of its material non-monetary obligations and covenants hereunder and shall not remedy and make good such breach or failure, or has failed to take steps to cure the same, within twenty (20) business days from the receipt of a written notice of breach. In the case of an alleged breach for non-payment, there shall be no termination of this Agreement if the claim is based on payments, the amount of which is being disputed in good faith by the parties, until the parties resolve the dispute in good faith or until an action to resolve the dispute has been adjudicated in accordance with Section 16.1 below. 2.3 Termination for Insolvency. If: (i) a party shall file a petition in bankruptcy for liquidation of its business; (ii) a petition in bankruptcy is filed against a party and is not dismissed within a ninety (90) day period; (iii) a party makes an assignment for the benefit of its creditors or an arrangement pursuant to any bankruptcy law; (iv) a party discontinues its business with intention that it be permanent; or (v) a receiver is appointed for a party or its business and such appointment is not dismissed within a ninety (90) day period, this Agreement shall, at the option of the other party, be terminable immediately upon written notice. In the event this Agreement is so terminated by Licensor, Licensee, its receivers, representatives, trustees, agents, administrators, successors and/or assigns shall have no right to sell, exploit or in any way deal with or in the Licensed Products bearing the Mark, or any carton, container, packing material, wrapping material, advertisement, promotional material or display material pertaining thereto, except as indicated in Section 2.10. 2.4 Termination for Insufficient Sale by Licensee. Licensee may terminate this Agreement upon ninety (90) days written notice to Licensor prior to end of the first term in the event that Licensee has not generated sales levels necessary to meet at least eighty (80) percent of the Minimum Guaranteed Royalty Payments for Year Two (even though such Minimum Guaranteed Royalty has been paid) and the outlook for achieving the sales level for the Minimum Guaranteed Royalty in Year Three looks unfavorable. 2.5 Termination for Insufficient Sales by Licensor. Any time after the completion of first term, Licensor may terminate this Agreement based upon Licensee's royalties as follows:
Years ----- (1) 4-6 If actual royalties for Year Five and forecasted royalties for Year Six are: less than $750,000 and less than 65% of the average royalties for Year Four and Five; or (2) 7-9 If royalties for the current term average below $1,000,000; or (3) 10+ beyond If royalties for the current term average below $1,500,000
3 4 then Licensor shall give Licensee ninety (90) days written notice of termination prior to the end of the then current term, such termination shall be automatically effective without further notice at the end of the then current term. 2.6 Termination in Case of Infringement. Either Licensor or Licensee shall have the right to terminate this Agreement immediately if there is a bona fide third party claim or a final adjudication that the use of the Marks on the Licensed Products infringes the proprietary rights of any third party. In the event of a bona fide third party claim, before exercising any termination rights, Licensor, in consultation with Licensee, shall seek or negotiate in good faith to obtain the rights or use from the third party for Licensee to use the Marks on the Licensed Products. 2.7 Termination for Breach of Sub Distributor Agreement. Licensor may terminate this Agreement immediately upon written notice if the Licensee materially breaches the Sub Distributor Agreement attached hereto and incorporated herein as Exhibit F between Licensor and Licensee, provided the Licensee fails to cure pursuant to the terms of the Wolf Agreement, an Exhibit of the Sub Distributor Agreement. 2.8 Termination for Damage to Reputation, Business or Goodwill. In the event either Licensor or Licensee reasonably determines, in good faith, that continuation of this Agreement would materially damage its reputation, business (not including the fact that Licensor could derive more revenue from selling the Licensed Products itself or through a different Licensee), or goodwill collectively ("the Goodwill"), Licensor or Licensee, as the case may be, may terminate this Agreement at the end of any three-year term after giving ninety (90) days written notice of termination to the other and the other party has failed to cure the Goodwill of the terminating party. To exercise its rights hereunder, the party must demonstrate substantial evidence of damage to its Goodwill as follows: (a) For Licensor: documented material or a pattern of customer and/or retailer complaints regarding the quality of the Licensed Products, Licensee's service practices with respect to the Licensed Products, or its reputation as a result of adjudications or other findings of improper business conduct by Licensee. (b) For Licensee: documented material or a pattern of customer and/or retailer complaints regarding the quality of Licensor's products, or its service practices, or Licensor's reputation as a result of adjudications or other findings of improper business conduct by Licensor. 2.9 Payment Due Upon Termination. In the event of termination of this Agreement Licensee is obligated to pay Royalties earned except that if termination is pursuant to Section 2.2 if Licensee is the defaulting party, 2.3, 2.4 or 2.5, Licensee is still obligated to pay Minimum Guaranteed Royalty for the Year of termination (Year is defined in Section 3.2) or other Royalties earned, whichever is greater. 2.10 Sale of Inventory Upon Termination. Upon the date of termination, Licensee shall cease manufacturing Licensed Products. For a period of six months after termination, Licensee may continue to distribute by sale, lease or otherwise Licensed Products manufactured 4 5 prior to such date, provided that Royalty as set forth in Section 3 is paid on sale or disposal of such Licensed Products. Notwithstanding the above, a sale or disposal of Licensed Products shall not be allowed if termination resulted from contract breach based upon: (1) failure to properly utilize the Marks on Licensed Products or on related communications or packaging materials pursuant to the terms of this Agreement; (2) failure to substantially adhere to quality standards, design, or Annual Marketing Plan as outlined in Section 5, Marketing Plan, and Section 7, Performance and Product Quality; or (3) failure to comply with laws regarding manufacture or sale of Licensed Products. 2.11 Effect of Termination or Expiration. Sixty (60) days before the expiration of the term of this Agreement, or of any extensions thereof, and, in the event of its termination ten (10) days after receipt of notice of termination or the happening of the event which terminates this Agreement where no notice is required, a statement showing the number and description of units of the Licensed Products covered by this Agreement on hand or in work in process shall be furnished by Licensee to Licensor. Licensor shall have the right, upon reasonable notice, to take a physical inventory to ascertain or verify such inventory and statement, and refusal by Licensee to submit to such physical inventory by Licensor shall forfeit Licensee's right to dispose of such inventory pursuant to Section 2.10 of this Agreement. 3. PAYMENTS BY LICENSEE. 3.1 Royalty. During the term of this Agreement or any renewal terms, Licensee shall pay to Licensor a royalty which is the greater of: (i) five percent (5%) of the gross amount invoiced by Licensee for the sale or other disposition for value (directly or through affiliated or related entities) of all Licensed Products to third parties, less all applicable sales and use-type taxes, customer discounts, credits for returned or rejected articles, allowances, shipping charges, and insurance, provided gross to net sales calculation is consistent with Licensee's historical past business practices and GAAP standards (the "Net Price") or (ii) the Minimum Guaranteed Royalty set forth in paragraph 3.2 (collectively, the "Royalty"). 3.2 Minimum Guaranteed Royalty. For each year this Agreement is in effect, Licensee shall pay to Licensor a Royalty not less than:
First Year $250,000 Second Year $400,000 Third Year $500,000
Fourth and all subsequent years, Third year royalty base of $500,000 shall be adjusted by Consumer Price Index each year. For purposes of this Article 3, a "Year" is a period of twelve completed months, not a calendar year. The first year shall end on the last day of the twelfth month following the Commencement Date. Each year thereafter shall be the twelve-month anniversary of the first year. 3.3 Manner of Royalty Payment. All Royalty payments with respect to each Licensed Product shall be made by check or wire transfer, in U.S. Dollars. Royalty payments shall be at 5 6 Licensor's office as set forth below. Each Royalty payment shall be accompanied by documentation of how the Royalty was calculated, which shall be certified by an officer of Licensee. The first shall be equal to one-fourth of Minimum Guaranteed Royalty due and payable upon execution of the Agreement. The balance shall be paid quarterly until the annual Minimum Guaranteed Royalty is exceeded. Thereafter, the Royalty shall be paid monthly within thirty (30) days of month end. For each subsequent year, the Minimum Guaranteed Royalty shall also be paid quarterly with the first payment due of the first day of the year. Once the Minimum Guaranteed Royalty is exceeded, Royalty payment shall be made on a monthly basis as set forth above. 3.4 Licensing Records. For as long as a Royalty is due under this Agreement, Licensee will keep true and accurate records adequate to permit royalties due to Licensor to be computed and verified, which records shall be made available upon prior written request, during business hours (but not more than three times in any twelve month period), for inspection at Licensee's premises, by an independent accountant who is reasonably acceptable to Licensee and who shall be bound by a confidentiality agreement with the Licensee, to the extent necessary for the determination of the accuracy of the reports made hereunder. Monthly reports shall be submitted to Scotts of Licensed Products sold along with statement of earned royalty to date which shall be provided with each quarterly payment of Minimum Guaranteed Royalty and subsequent payments after the Minimum Guaranteed Royalty is exceeded. 4. ADVERTISING AND LABELING. 4.1 Licensee agrees that it will cause to appear on or within each of the Licensed Products sold by it under this License, and on or within all advertising, promotional or display material bearing the Marks, appropriate statutory notice of trademark registration or notice of common law trademark rights thereto as indicated in Exhibit A of this Agreement. Guidelines are set forth in Exhibit G attached hereto and incorporated herein. In the event that any of the Licensed Products are marketed in a carton, container and/or packing material or wrapping material bearing the Mark, such notice shall also appear upon said carton, container and/or packing material or wrapping material. A sample of each and every tag, label, imprint or other device containing any such notice and all advertising, promotional material or display material bearing the Marks shall be submitted by Licensee to Licensor and shall be subject to Licensor's written approval prior to any use of the Marks by Licensee, such approval shall not be unreasonably withheld or delayed. Any item submitted to Licensor shall not be deemed approved unless and until the same shall have been approved by Licensor in writing. Licensor shall direct all specimens for approval to the person indicated in Exhibit H attached hereto and incorporated herein, as it may be changed by Licensor upon written notice. After advertising, promotional materials or display materials have been approved pursuant to this Section 4, Licensee shall not depart therefrom in any material respect without Licensor's prior written consent which shall not be unreasonably withheld or delayed. From time to time after Licensee has commenced advertising or promoting the sale of the Licensed Products, and upon Licensor's written request, Licensee shall furnish to Licensor, without cost to Licensor, a reasonable number of samples of each advertisement, promotional material or display material bearing the Marks utilized by Licensee in connection with the sale of the Licensed Products for purposes of 6 7 reviewing compliance with this Agreement. Licensee reserves all copyright to any designs or works created by it in connection with the Licensed Products. 5. MARKETING. 5.1 Each year during the first term or renewal term then in effect, Licensee shall present Licensor with a copy of its preliminary marketing plan for Licensed Products for the next year in sufficient time to allow for review and input before a final annual marketing plan is developed. Licensee agrees to promote the Licensed Products substantially as outlined in the Annual Marketing Plan to the Channels of Distribution in the Territory covered in this Agreement. The initial marketing plan to be prepared by Licensee pursuant to this Agreement shall be submitted by Licensee within thirty (30) days following the execution of this Agreement. The marketing plan for the subsequent years during the term or renewal term, as the case may be, shall be submitted by Licensee to Licensor by March 1 for the following year. Such marketing plan shall include the following matters based on the previous season and future market outlook: the pertinent market overview; external factors affecting the market; the product line, including specifications and performance standards, product positioning, features/benefits, price/value versus competitive products; consumer research; sales strategy and target customers; merchandising programs and advertising programs; and a three (3) year sales forecast in units and dollars. Licensee anticipates using certain product designations set for in Exhibit H, which is attached hereto and incorporated herein, in connection with the marketing and sale of the Licensed Products. For the term of this Agreement and for three (3) years thereafter, Licensee shall not use such designations set forth in Exhibit H in connection with the marketing and sale of lawn and garden tools other than Licensed Products. The final marketing plan shall not be implemented by Licensee until the Licensor has had the opportunity to review the plan and identify any areas of concern. Licensor and Licensee will work in good faith to resolve any reasonable concerns of Licensor regarding the marketing plan or its execution. 5.2 In the event Licensor becomes aware of a use of the Marks or execution of the Annual Marketing Plan by Licensee which the Licensor believes in good faith violates the terms of this Agreement, Licensor shall have the right to request copies of the Licensee's then-current promotional literature, trade programs, advertising, labeling and other public materials bearing the Marks. Licensee shall endeavor in good faith to cure any improper use of the Marks of which it is notified by Licensor within thirty (30) days of the notice. 6. REPRESENTATIONS AND WARRANTIES. 6.1 Licensor represents and warrants to the Licensee as follows: (a) Licensor owns all the necessary rights and has all necessary power and authority to enter into this Agreement, perform its obligations hereunder, and license the Marks pursuant to the terms hereof. Licensor's performance under this Agreement does not conflict with any contract to which Licensor is bound, its certificate of incorporation or its by-laws. (b) To the best of the Licensor's knowledge (1) the use by the Licensor and by the Licensee of the Marks in connection with the design, manufacture, marketing and distribution 7 8 of the Licensed Products will not infringe upon any trademark, copyright or other proprietary rights of any third parties provided Wolf and Licensee sign and approve the Agreements as provided in 6.1(a) above, and (2) no other person or entity is infringing on the Licensor's or Licensee's rights to the Marks in connection with the Licensed Products. (c) The Licensor will use its best efforts to maintain the validity of the Marks and its ownership thereof. It will actively police infringing uses of the Marks by others and will not permit any other entity to use the Marks in connection with the Licensed Products except for Wolf. Any assignment by Licensor of the Marks to any third party for the same Licensed Products shall be subject to the License granted herein. 6.2 Licensee represents and warrants to the Licensor as follows: (a) Licensee will exercise best efforts to design, manufacture, market, sell, and distribute the Licensed Products. (b) Licensor shall not be responsible, in any manner whatsoever, for the repair, replacement or refund of the purchase price of the Licensed Products, or for any damage or loss suffered by any third party as a result of the use of the Licensed Product or any cost associated therewith regardless of whether claims or such repair, replacement, refund, damage or loss arise under Licensee's warranties to the purchaser and/or user of the Licensed Product or product liability claims. Licensee will ensure that finished Licensed Products manufactured, marketed, sold and distributed under this Agreement shall conform to the specification(s) and requirements included in this Agreement, that the Licensed Products are merchantable and fit for their intended purpose in accordance with labeling and printed direction for use and/or maintenance included with the Licensed Product. Licensee shall assume all responsibility without charge to Licensor for the repair or replacement obligations it undertakes with respect to the Licensed Products as well as all damages, costs, litigation, expenses, attorney's fees and the like for any claims for personal injury including death relating to the manufacture, sale and use of Licensed Products by its customers and the ultimate users. (c) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of Licensee and will be binding on Licensee. (d) Licensee will advise Licensor of any apparent infringement of the Marks in connection with Licensed Products of which it becomes aware and will reasonably cooperate with Licensor in the prosecution of any action in that regard brought by Licensor at Licensor's cost. Licensee shall not take any action with respect to any alleged infringement of the Marks unless so directed by Licensor. (e) Licensee has no rights to the Marks except those set forth herein and will not challenge or cause a third party to challenge the validity of the Marks or Licensor's ownership thereof, but that in the event of a finding of actual infringement and a lawful order to discontinue use of Marks, Licensee shall immediately cease all uses of the Marks. 8 9 (f) The Licensed Products will comply with all applicable laws and regulations, and Licensee shall employ such controls and inspections as are necessary to protect the environment from exposure to and injury from the raw materials, in-process materials, off-test product or finished Licensed Products handled pursuant to this Agreement with Licensor having no liability whatsoever therefor; and, Licensee warrants and agrees that it is solely responsible for complying with all federal, state and local laws, rules, and regulations with respect to the Licensed Products and the obligations under this Agreement including without limitation the treatment, storage or disposal of all wastes generated. 7. PERFORMANCE AND PRODUCT QUALITY. 7.1 Licensee agrees that the Licensed Products shall be of such superior and consistent quality as to protect and enhance the goodwill embodied in the Marks, and that all marketing and promotion of said goods shall be conducted in a dignified manner in keeping with the high standards and integrity of the Licensor and Licensee. Prior to execution of this Agreement, Licensor has become familiar with the Licensed Products and reviewed materials regarding Licensee's advertising and promotion of same. Licensee hereby covenants to maintain the same or higher level of quality throughout the term of this Agreement not to use the Marks in connection with goods that are inferior to the high standards established by Licensee for its other products, and to ensure that Licensed Products conform to the specifications set forth in Exhibit J hereto. Licensee agrees to maintain quality control, to provide adequate test of materials, to provide quality workmanship, and to do such other things as are necessary to assure high quality production and servicing of the Licensed Products, it being understood that Licensee shall be solely responsible for any failure of Licensed Products as manufactured herewith to meet the specifications in Exhibit J hereto. Licensee will assign all necessary employees to implement and oversee these quality assurance procedures. 7.2 Licensee shall not provide, sell or offer to sell under the Marks any goods the provision, sale or offer for sale of which violates any applicable federal, state or local law or regulation. 7.3 Subject to compliance with the quality assurance provisions above, during the term of this Agreement, Licensee may, in its discretion, modify and improve any of the Licensed Products and their containers, marketing literature, and related materials after consultation and written agreement from Licensor (unless the change is not material under Section 4.1 above), which agreement shall not be reasonably withheld or delayed. 8. LITIGATION. 8.1 Each party hereby agrees to give the other prompt written notice of any claim or legal proceeding which is threatened or actually instituted against either party by any third party and involving the Marks or this Agreement. 9 10 9. ASSIGNMENT. 9.1 This Agreement and the rights granted hereunder shall not be assignable, in whole or in part, by Licensee or Licensor, without the prior written consent of the other, which shall not be unreasonably withheld or delayed. Any such attempted assignment is null and void. 9.2 This Agreement shall be binding upon and inure to the benefit of the parties hereto, their permitted assigns and representatives, and their successors. 10. LIMITATION OF RELATIONSHIP BETWEEN PARTIES. 10.1 Neither party shall have power to bind the other by any guarantee or representation that either party may give, or in any other respect whatsoever, or to incur any debts or liabilities in the name of or on behalf of the other party, and for purposes of this Agreement, the parties hereto shall not be deemed partners, joint venturers, or to have created the relationship of agency or of employer and employee between the parties. 11. LIMITATION OF LIABILITIES. 11.1 WITH RESPECT TO CLAIMS ARISING UNDER THIS AGREEMENT AS BETWEEN THE PARTIES REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR IN TORT, INCLUDING NEGLIGENCE, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OF PROFIT OR REVENUE BY THE OTHER OR FOR CONSEQUENTIAL DAMAGES INCURRED OR SUFFERED BY THE OTHER, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGES. THIS PROVISION SHALL SURVIVE EXPIRATION OR TERMINATION OF THIS AGREEMENT. 12. INDEMNITY. 12.1 The provisions of Section 11.1 notwithstanding, with regards to claims made against Licensee by third parties and/or claims based on such third party claims, Licensor agrees to indemnify, protect, defend and hold harmless Licensee, its affiliates, servants, employees, direct or indirect customers, ultimate users, subcontractors, sublicensees and other agents and related or affiliated companies against any and all expenses (including reasonable attorneys' fees), claims, losses, damages or liabilities arising out of (1) any breach of this Agreement by Licensor and/or Licensor's representations and warranties contained herein, or (2) with respect to any action brought against Licensee, or its affiliates and related companies, by any third party related to a claim that the Marks, when applied to the Licensed Products, infringe any copyright or trademark of any third party or constitutes an unlawful trade practice provided Licensee gave Licensor timely notice as set forth in Section 6, or (3) the products of Licensor. Subsection (2) above does not apply to any such claim of infringement that results from Licensee's manufacture of the Licensed Products or from any other action or omission not envisioned by or performed pursuant to the terms of this Agreement. 10 11 12.2 The provisions of Section 11.1 notwithstanding, with regards to claims made against Licensor by third parties and/or claims based on such third party claims, Licensee agrees to indemnify, protect, defend and hold harmless Licensor, its affiliates, servants, employees, direct or indirect customers, ultimate users, subcontractors, sublicensees and other agents against any and all expenses (including reasonable attorney's fees), claims, losses, damages or liabilities arising out of (1) any breach of this Agreement by Licensee and/or Licensee's representations and warranties contained herein or (2) with respect to any claim that the Licensed Products manufactured for, by or under the direction of Licensee are defective or otherwise do not comply with any applicable law or regulation and/or claims for injury to or death of any person (including, without limitation, such person's agents, servants, employees, independent contractors, direct and indirect customers and ultimate users) relating to the Licensed Product or Licensee's acts or omission. 12.3 Sections 12.1 and 12.2 shall survive expiration or termination of this Agreement. 13. INSURANCE. 13.1 Licensee shall, at its own expense, carry and maintain the following insurance with an insurance company with at least an A plus rating as follows: (a) Comprehensive General Liability (Bodily Injury and Property Damage) Insurance, including Broad Form Property Damage Liability Insurance, Contractor Liability Insurance, and Product Liability. The limits of liability of such insurance shall be not less than Five Hundred Thousand Dollars ($500,000) per person and not less than One Million Dollars ($1,000,000) per occurrence. (b) All insurance shall be expressly endorsed to name Licensor as an additional insured and shall include the requirement that the insurer provide Licensor with not less that thirty (30) days advance written notice prior to the effective date of any cancellation or material change and a copy of this endorsement shall be delivered to Licensor with the execution of this Agreement. Licensor shall be continued to be listed as an additional insured on this insurance for a period of fifteen (15) years from the date of the last sale by Licensee of the Licensed Products. This provision shall survive expiration or termination of this Agreement. 14. EXCUSED PERFORMANCE. 14.1 Neither Licensor nor Licensee will be liable to the other for failure to provide services, non-performance, incomplete performance, delay or error under this Agreement if the cause of the same is beyond its reasonable control or caused by acts of other persons not under control of either party, governmental rules or orders, court orders, any labor or civil disturbance, embargoes, strike, boycott, riot, floods, shortages of materials, insurrection, war, or act of God. Any of these events will delay the required performance for a period equal to the length of the event plus a reasonable time thereafter to implement performance. The parties shall notify each other of an event of excused performance and cooperate in good faith to ascertain a possible solution of the situation. 11 12 15. EMPLOYEES. 15.1 During the term of this Agreement and for a period of one (1) year thereafter, both parties agree not to solicit or directly induce any employee to leave the employ of the other party or its parent organization without the prior written consent of the other party. 16. CONFIDENTIALITY. 16.1 The terms and conditions of Confidentiality as set forth in Exhibit K, attached hereto and incorporated herein by reference, shall survive the expiration or termination of this License Agreement. 17. MISCELLANEOUS. 17.1 This Agreement shall be construed and the respective rights of the parties shall be determined, under and pursuant to the laws of the State of Ohio. The parties agree that prior to initiating any litigation that they will submit the matter in good faith to negotiation through the Columbus Bar Association Mediation Program with each party sharing half the cost. 17.2 The invalidity of unenforceability of any particular provision(s) of this Agreement will not affect the other provision(s) of it, and this Agreement will be construed in all aspects as if such invalid or unenforceable provision had been omitted. 17.3 This Agreement may be modified only by a written instrument executed by both parties. A waiver of a breach or default under this Agreement shall not be a waiver of any subsequent default. 18. NOTICES. 18.1 Notices required under this Agreement shall be in writing and be sent by registered mail or by facsimile transmission with telephonic confirmation of receipt or hand delivery to the respective parties at the following addresses: Notice to Licensor: The O.M. Scott & Sons Company 14111 Scottslawn Road Marysville, OH 43041 Telecopy: 513-644- Attn: Bernie Ford With a copy to: The O.M. Scott & Sons Company 14111 Scottslawn Road Marysville, OH 43041 Telecopy: 513-644-7153 Attn: Legal Department Notice to Licensee: The Union Fork and Hoe Company 500 Dublin Avenue 12 13 Columbus, OH 43216-1540 Telecopy: 614-221-8397 Attn: Gavril Mihaly With a copy to: Piper & Marbury 36 Charles Center South Baltimore, MD 21201 Telecopy: 410-539-0489 Attn: Robert W. Smith, Jr., Esq. or to such other address as either party may designate by a notice given in compliance with this paragraph, and shall be deemed effective when received. 19. ENTIRE AGREEMENT. 19.1 This Agreement, including the Exhibits hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first written above. LICENSEE LICENSOR THE UNION FORK AND HOE COMPANY THE O.M. SCOTT & SONS COMPANY By: /s/ Gavril Mihaly By: /s/ Bernard R. Ford ------------------------------ ------------------------------- Title: President and CEO Title: Vice President, Strategy --------------------------- & Business Development ---------------------------- 13 EX-21.1 14 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF ACORN PRODUCTS, INC. UnionTools, Inc. McGuire-Nicholas Company, Inc. VSI Fasteners, Inc. EX-23.1 15 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated October 4, 1996 (except Notes 3, 4, 11 and 13 as to which the date is April , 1997) in the Registration Statement (Form S-1) and related Prospectus of Acorn Products, Inc. dated April , 1997. Columbus, Ohio April , 1997 The foregoing consent is in the form that will be signed upon the determination of the stock split as described in Note 13 to the financial statements. Ernst & Young LLP Columbus, Ohio April 17, 1997 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 1,000 U.S. YEAR 6-MOS JUL-28-1995 AUG-03-1996 AUG-02-1996 JAN-31-1997 1 1 502 0 0 0 11,226 18,721 556 708 23,433 31,787 37,703 51,469 15,955 16,842 5,397 (6,470) 98,895 95,646 29,160 33,275 45,854 48,354 0 0 8,596 8,596 14,406 14,494 (4,472) (14,425) 98,895 95,646 92,652 40,695 92,652 40,695 67,496 30,142 67,496 30,142 16,815 8,641 0 0 6,732 3,243 (1,086) (2,991) 582 0 (1,668) (2,991) (6,480) (7,082) 0 0 869 0 (7,279) (10,073) 0 0 0 0
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